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

The SEC today adopted its final whistleblower rules (302 page PDF) under Section 21F of the Securities Exchange Act of 1934 (Section 922 of the Dodd-Frank Act), which provides a bounty to whistleblowers who disclose securities law violations leading to large monetary sanctions. This SEC press release summarizes the new rules.

The whistleblower bounty can range from 10% to 30% of the amount of the sanctions. To qualify, a whistleblower must “voluntarily” provide the SEC with “original information” that “leads to” successful enforcement in which the SEC obtains monetary sanctions totaling more than $1 million. The final rules track the proposed rules fairly closely on these concepts. See this previous post for a description of the general nature of the rules and some commentary on corporate compliance. The post also describes the creative use of commercials by a whistleblower lawyer who directs viewers to go to his website, SECSnitch.com, to get information about whistleblower reporting and possible bounties.

The big news is that, after months of extensive lobbying by business groups and whistleblower advocates, the SEC declined to change the proposed rules to require that a whistleblower use the company’s internal reporting system as a condition to receiving the bounty. Large companies and the US Chamber of Commerce had pushed for this change, as described in the SEC release (pages 96-97). However, the SEC did alter its rule in several ways in an attempt to further encourage employees and other potential whistleblowers to use internal reporting systems, as described at the end of the press release. For example, the rules “. . . make a whistleblower eligible for an award if the whistleblower reports internally [consistent with the company’s internal policies] and the company informs the SEC about the violations. . . .”

Comment. In light of the bounty program, as I said in the previous post, public companies will need to continue to refine their whistleblower policies and training programs. This is only one of the aspects of Dodd-Frank in which we corporate lawyers will need to partner with our colleagues who specialize in employment law (i.e., clawbacks under Dodd-Frank are on their way!).

The Current Tally on Say When on Pay Votes

Semler Brossy Consulting Group recently published Say on Pay Results (PDF), a report of its a study of the Russell 3000 companies that had filed results of shareholder advisory votes under the Dodd-Frank Act as of May 11, 2011. The report indicates the following results, of the 628 companies in the Russell 3000 that had supported the various frequencies:

• Shareholders supported an annual Say-on-Pay vote at a total of 82% of the companies.
• Of the companies that recommended an annual Say-on-Pay vote, not surprisingly, shareholders supported an annual vote at more than 99% of these companies.
• Of the companies that recommended a triennial vote, shareholders at 43% of these companies supported a triennial vote (the number fell to 22% out of the largest companies included in the S&P 500). In his Proxy Disclosure Blog on CompensationStandards.com (subscription site), Mark Borges reports a similar number – of the companies that recommended a triennial vote, shareholders at around 48% of these companies followed the recommendation.

Comment. Certainly, shareholders supported annual Say-on-Pay votes at a large majority of companies, especially the larger companies. However, even among Fortune 500 companies, in a significant number of cases shareholders have been willing to go along with a triennial vote. Therefore, for companies that have not yet filed their proxy statements, if the board of directors believes a triennial vote is the best choice for the company and can articulate the reasons for that decision, it is certainly a supportable decision to make this recommendation. If the shareholders disagree, however, the board will then be in a position of evaluating whether to follow the preference of the shareholders despite its recommendation. See this previous post for steps to follow in dealing with this situation.
 

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Occasionally, we include guest columns with topics of interest to public companies and those that serve them. Here is a guest column by my partner, Terri Krivosha. Terri is the Chair of our Business & Securities Practice Group and leads Maslon’s innovative social enterprise practice.

Many public companies are developing policies of Corporate Social Responsibility (CSR) as a means to encourage a positive impact through a company’s activities on the environment, consumers, employees, communities, stakeholders and other persons. CSR is a means to include the public interest in corporate decision-making. Often companies focus on a double or triple bottom-line approach, meaning “profit, planet and people”.

The burgeoning field of “social enterprise” complements these efforts by public companies. Social enterprises are organizations that combine mission and market-based strategies to achieve a social purpose. They can be organized as non-profits, for-profits or hybrids of the two. The cover story of the May edition of Inc. Magazine, “How a Business Can Change the World,” features several companies that are at the cutting edge of this sector.

Many such companies combining money and mission are organizing as for-profit entities and seek investors with “patient capital” who are willing to invest but also understand the social mission of these projects. In many cases, public companies would have the opportunity to provide funding to these projects, and after the initial phase, many of these projects could become self-sustaining and might even pay a return on the investment of the parties that provide funding. Such investments can represent the best kind of partnership between for-profit enterprises and non-profit motives. This type of relationship can be more organic to the company than simply making donations through a private foundation.

On April 29, I participated in a conference sponsored by Maslon called “Social Enterprise: Structure and Story”. The purpose of the conference was to explain the various structures that can be used in the area of social enterprise and give attendees an opportunity to hear the stories of those who have successfully organized social enterprises. For example, one participant, Jeff Tollefson, the executive director of the Twin Cities branch of Genesys Works, a national non-profit organization that is more than 95% funded by earned income. Genesys coaches at-risk 11th graders to become IT employees. In their senior year of high school they are employed by Genesys, and Genesys contracts with companies to place the youth in paid internships. At the end of their senior year, these students have work experience that has helped them to better understand that they can succeed in the workplace.

This area is evolving, and social enterprises are rightly struggling with the tensions between mission and money, etc. The CSR effort involves similar tensions, and companies should be involved in this ongoing dialogue. Using the Genesys Works model described above as an example, a public company might choose to support Genesys through its foundation, but then could use Genesys as a source for expanding its talent pool by hiring interns to assist in its IT department.

Public companies can get involved in the developing area of social enterprise in several ways. Two organizations with chapters in the Twin Cities, Social Venture Partners and the Social Enterprise Alliance, offer assistance in connecting companies to social enterprises with missions that align with their corporate goals. These organizations sponsor events, such as the Engaged Philanthropy Conference to be held in Minneapolis on June 16, 2011. Investigating what these organizations have to offer is a perfect place to start to better understand this new field.

 - Terri Krivosha
 

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