ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

To quote the old Virginia Slims ad, we’ve come a long way, baby.

As we close out a very eventful year, it’s interesting to look back on how far corporate governance and executive compensation reforms have come since the end of 2009. I pulled out a copy of the December 23, 2009 version of the ON Securities Cheat Sheet (PDF) and was reminded that, a year ago, there were almost as many reform bills suspended in Congressional committees as there are members of Congress. That version of the Cheat Sheet summarized the provisions of the “Schumer Bill,” the “Frank Bill” (which was a repackaged version of the Obama Bill), and several other bills. The bills contained diverse but overlapping restrictions and limitations, responding to the fact that the near-collapse of the banking system and the worldwide economy was still fresh in everyone’s mind.

As we all know, after a long and tangled legislative process, what resulted was the Dodd-Frank Act. [For a musical lesson on how a bill makes its way through the legislative process, see this previous post, which in turn links to the “I’m Just a Bill” episode of the Schoolhouse Rock television show.]

In turn, the Act resulted in a long laundry list of anticipated SEC rulemaking projects, continuing into 2011. For a status report on the SEC’s rulemaking progress, see the latest version of the Cheat Sheet (PDF) (always available by clicking the box at the right side of the home page). As the Cheat Sheet shows, we’re waiting for proposed and final SEC rules on a variety of Dodd-Frank Act provisions. We’re also waiting for the results of the legal challenge to the proxy access rule, as described in this previous post.

I just updated the Cheat Sheet to reflect that the SEC did not meet its announced timetable for proposing independence standards for compensation committees and their advisors. These proposed rules were scheduled for December, but the Dodd-Frank rulemaking timetable on the SEC web site has been changed and now lists the proposed rules in the January-March 2011 time frame.

One More Frequency Vote Scoreboard in 2010

One last time in 2010, here is an updated scoreboard of the proxy statements filed so far that include the shareholder advisory votes required under the Dodd-Frank Act, including the ‘Say When on Pay” frequency vote. Based on Mark Borges’ updated tally (as of December 23) of 58 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site), here’s the score:

Triennial Say-on-Pay vote recommendation: 32 companies
Biennial Say-on-Pay vote recommendation: 6 companies
Annual Say-on-Pay vote recommendation: 14 companies
No recommendation: 6 companies

The above tally included thirteen smaller reporting companies (7 triennial recommendations, 2 biennial recommendations and 4 annual recommendations).

Happy New Year

I want to wish all of you a safe New Year’s celebration and a happy and prosperous year in 2011!
 

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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (PDF), signed by President Obama on December 17, extended existing tax rates through 2010. The Act avoided changes that would have caused a flurry of planning activity at year end. Still, this is the last chance for a last-minute consideration of any year-end tax planning considerations.

The subscription service mystockoptions.com recently came out with two helpful web articles:

“What impact does the new 2010 Tax Relief Act have on stock compensation and year-end financial planning?”

“Ten Ideas For Year-End Tax Planning With Stock Options And Company Stock”

I found these articles to be a useful and comprehensive checklist for stock plan professionals – good for issue-spotting, if nothing else (even though some of the links represent content that can’t be viewed without a subscription). The discussion of alternative minimum tax (AMT) rates is especially helpful.

By the way, the new tax law is only 30 pages long. After all the times I have linked to the 800 page-plus Dodd-Frank Act, a 30 page law is a pleasant surprise.

ISS Issues FAQs on Frequency Vote and Other Policies

Last week, the shareholder advisory service ISS issued Frequently Asked Questions on its 2011 compensation policies, including several questions on the frequency vote. As reported in this previous post, ISS is recommending that shareholders vote in favor of an annual Say-on-Pay vote. Mark Borges of Compensia, in his Proxy Disclosure Blog on compensationstandards.com (subscription site), offers some useful observations on the FAQs:

Question No. 2: Would a management recommendation of a two-year or three-year frequency trigger a negative recommendation from ISS on other proxy items? Answer: We have no policy concerning management's recommendation for the say on pay frequency. [Borges] Observations: In other words, during the 2011 proxy season (or, at least, the next four or five months) a recommendation of the board of directors for a biennial or triennial ‘Say on Pay’ vote will not have adverse collateral consequences on other compensation-related proposals (or the election of directors) that are slated for consideration at the annual meeting of shareholders. . ..

Question No. 4: In the event that a company's board decides not to adopt the say on pay vote frequency supported by a plurality of the votes cast, what are the implications in terms of ISS' voting recommendations at subsequent meetings? Answer: This policy has not been determined. The policy will be decided after review of the first year of voting results and after consultation with ISS's clients, and will be included in the policy updates for 2012. [Borges] Observations: . . . While ISS could go in many different directions, I expect that, where a board of directors selects a frequency for future "’Say on Pay’ votes that differs from the frequency supported by a plurality of the votes cast, it will consider that a basis for recommending a "withhold" or "against" vote for compensation committee members (and, potentially, all directors). Of course, the analysis of the board's decision may not always be that straightforward. . . . Ultimately, I suspect that whether ISS considers this important enough to warrant a formal policy will depend less on the vote results themselves, but on how companies respond to those results.

Happy Holidays from Maslon!

Here is the Holiday greeting from Maslon Law Firm - I wanted to share it with all of you. Have a wonderful holiday season, and safe travels!

Image: flikr

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The Minnesota State Bar Association’s PracticeBlawg just released its list of the “Top 25 Minnesota Blawgs,” and I am honored that the editors of the MSBA blog included ON Securities on the list. Thanks to the readers who nominated this blog. The PracticeBlawg editors said:

. . . Despite being a partner in the 80+ attorney Maslon firm, there’s no team of attorneys behind the scenes. It’s just Martin, writing timely content about issues facing public companies. On top of that, he offers an extremely useful ‘cheat sheet’ that he characterizes as a ‘one stop shop’ for the latest developments in executive compensation and governance. We call this one the best blawg by a lone attorney at a big time firm.

Well, I do produce the content of ON Securities on my own, but I’m far from being a “lonely guy”. I appreciate the support from the other attorneys in the Maslon firm and our marketing team. And thanks to the subscribers who rely on this blog as a source for up-to-date information on legal issues facing public companies.

Check out the other legal blogs on the list – it’s an interesting and eclectic group.
 

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Melissa Gleespen, Senior Counsel, Securities and Corporate Law at Owens Corning has created this great computer-animated video as part of an internal training program on compliance with Regulation FD, the SEC’s prohibition against selective disclosure of material non-public information:

In a podcast interview with Broc Romanek on thecorporatecounsel.net (content by subscription), Gleespen reported that the video was very easy and inexpensive to create on xtranormal.com – she simply made some selections from a menu and typed in a script. This seems like an easy way to enhance a compliance training program, on Regulation FD or any other topic.

Compliance training is even more important now than ever, given the SEC’s expanded enforcement activity. In an article in insideinvestorreletions.com, “Office Depot case highlights value of Reg FD policies,” Tim Human points out that Office Depot recently received a steep fine from the SEC for Regulation FD violations. The SEC cited Office Depot’s lack of a Regulation FD policy and failure to provide training on Regulation FD. By contrast, Human reports that the SEC let American Commercial Lines off the hook in a Regulation FD action against its CFO, with the SEC commending that the company had cultivated a culture of compliance through training.

With tools like the animated video above, you don’t have to be a Fortune 50 company to provide effective training.

Updated Scoreboard on the Frequency Vote (“Say When on Pay”)

In last week’s post, I provided a scoreboard of the proxy statements filed so far that include the shareholder advisory votes required under the Dodd-Frank Act, including the ‘Say When on Pay” frequency vote. Based on Mark Borges’ updated tally of 15 companies’ proxy statements in his Proxy Disclosure Blog on compensationstandards.com (subscription site), here’s the score:

Triennial Say-on-Pay vote recommendation: 9 companies
Biennial Say-on-Pay vote recommendation: 1 company
Annual Say-on-Pay vote recommendation: 4 companies
No recommendation: 1 company

I wouldn’t be surprised if the final score at the end of proxy season is in the same proportions shown above. Fortunately, this is one scoreboard we can keep watching from the safety of our offices, without the risk of an inflatable dome collapsing above our heads. . . .
 

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I’m getting a lot of questions from public companies lately that involve “keeping score.” In Say-on-Pay votes, what are other companies doing about drafting the resolution and the corresponding section in the proxy statement? In the frequency vote, are other companies recommending that shareholders approve holding the Say-on-Pay vote every one, two or three years? Of course, companies recognize that they need to make their own decisions. But no one wants to be an outlier. Plus, many companies with a calendar fiscal year end are holding board meetings in December, and management and in-house counsel want to be prepared if the directors ask, “What’s the score so far?”.

I know of at least six companies so far that have filed proxy statements (mostly preliminary proxies) that include the resolutions for Say-on-Pay and the frequency vote required under the Dodd-Frank Act: Johnson Controls, Inc., Visa Inc., Beazer Homes USA, Tyco Electronics, Woodward Governor Company and Ashland, Inc. And here’s the score.

Say-on-Pay: I don’t think there is anything unexpected in these six proxy statements. Pretty much all of the companies included some bullet points in the Say-on-Pay proposal describing some of the positive aspects of their pay practices, or the changes they have made in the past year to improve their programs. I’m sure there will be a lot of variations as more companies file in the next few months. However, I’ll bet a lot of the Say-on-Pay proposals will end up looking a lot like the ones already filed by these companies.

Frequency vote: The score for management recommendations is, three companies recommending a triennial vote; two companies recommending an annual vote. Interestingly, one company (Tyco) declined to take a position, stating that the Board “. . . has decided to consider the views of the company's shareholders before making a determination.” I think most companies will choose to recommend either a triennial or an annual vote. I think fewer companies will recommend biennial votes, which some perceive to have the appearance of a compromise.

Thanks to Mark Borges, who has been keeping track of proxy filings in his comprehensive Proxy Disclosure Blog on CompensationStandards.com (subscription site).

Broadridge Says It’s “Prepared” to Include Four Choices on the Proxy Card

In its proposing release for the frequency vote rules (PDF), the SEC reported that some service providers might not be prepared to accommodate a proxy card with four choices (annual, biennial, triennial or abstain). Currently, IT systems for shareholder votes are set up for three choices (for, against or abstain). In response to concerns expressed by Broadridge Financial Solutions, Inc. and other vendors, the SEC indicated in the release that companies could include three choices on the proxy card (annual, biennial or triennial) if their vendors’ systems could not yet accommodate four choices.

Broadridge recently filed a comment letter (PDF) on the SEC’s proposed frequency vote rules. The letter says that modifications to the Broadridge systems to accommodate four choices are “well underway.” Broadridge says it estimates that the initial effort will require an investment of over 18,400 people hours, and that is prepared to support use of the new rules for shareholder meetings that occur on or after the January 21, 2011 effective date.

Of course, even the investment of 18,400 hours won’t guarantee that the vote will go off without a hitch. I have heard transfer agent representatives express concern that the data received by the transfer agent from Broadridge may be in a different format or difficult to tabulate. This should be an interesting year.
 

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