Twitter's IPO Filing Shows Simple Governance Structure

Twitter has created a governance structure so simple that it can be described in 140 characters or less. Maybe something like, “$TWTR has single-class stock but staggered Board. #notpushingtheenvelope.”

Last week, Twitter filed the first publicly available version of its Form S-1 registration statement for its long-awaited IPO. I was anxious to see whether Twitter used a dual-stock class structure, like Facebook, Google, Groupon and other social media companies whose IPOs represented hot investments. In contrast, Twitter has chosen a simple structure that doesn’t necessarily lock the founders into a control position. As described in this DealBook post, Twitter does have a staggered board and other antitakeover protections. However, those protections are still fairly common for public companies, unlike multiple voting classes of stock.

As noted in this prior post, Facebook used a fairly elaborate dual-class structure in connection with its 2012 IPO to make sure Mark Zuckerberg maintained control, even after his death.  The shares held by the founders carry 10 votes per share, compared to 1 vote per share for the class of shares sold to the public. There were other built-in protections that allow Zuckerberg to control the fate of the company, even after his death. Google started with a more basic dual-class structure in 2004, but as described by Professor Steven Davidoff in this 2012 DealBook post, Google went so far as to create a third class of stock last year when it looked like even the dual-class structure might not keep the founders in control.

Investors and commentators were critical of the Facebook arrangement, as indicated in “Facebook Ownership Structure Should Scare Investors More Than Botched IPO” by Dan Bigman in Forbes. But they had only two choices – accept the founders’ unfettered control, or don’t buy the stock. But before Twitter made its filing, there were indications that investors were starting to raise their voices against the dual class structure – as Gina Chon phrased it in a post on Quartz, “Investors are tired of giving money to tech founders with strings attached.”

Therefore, even though Twitter is likely to be a hot stock, investors won’t be faced with the choice of accepting a dual-class structure or skipping the investment. As Davidoff put it in this DealBook post yesterday, "the fact that Twitter is simply pursuing an I.P.O. on relatively friendly shareholder terms rather than trying to transform the markets" is a sign of "a start-up that has matured."

Watch My LXBN TV Video Interview on Pay Ratio Disclosure Rule

Following my recent post about the SEC’s proposed pay ratio disclosure rule (PDF), Colin O’Keefe of Lexblog Network (LXBN TV) asked for my thoughts in a video interview on the proposed rule. In my six-minute commentary titled "The SEC's CEO Pay Ratio Disclosure Rule: Does It Accomplish Anything?" I explain the significant challenges the rule will present for public companies, including the exercise of finding the median compensated employee of a large company, which I call a game of "Where's Ralph." I also discuss why the proposed rule is controversial, and I comment that the required disclosures likely will not be very helpful to investors. 

By the way, we recently updated the ON Securities Cheat Sheet (PDF) to include information on the proposed pay ratio disclosure rule. The Cheat Sheet, always available through a link at the right side of this blog, provides up-to-date information on the latest compensation and governance rules and listing standards.

ISS Weighs In On Public Company Hedging and Pledging Activities

Over the past few years, there has been an increasing focus on public company insider hedging and pledging activities. Institutional shareholders and proxy advisory firms have been pressuring public companies to disclose their policies on hedging and pledging. Under the Dodd Frank Act, enacted in 2010, Congress charged the SEC with adopting rules regarding disclosure of this activity in SEC filings.  However, the SEC has not yet proposed or adopted rules implementing this mandate.  The SEC has eliminated its expected rulemaking timetable for this and certain other Dodd-Frank provisions and, instead, the SEC’s website now indicates that the rulemaking is “pending action.”

Taking matters into its own hands, the shareholder advisory firm Institutional Shareholder Services (ISS) specifically addressed hedging and pledging activity its 2013 U.S. corporate governance policy updates, which were posted on November 16, 2012. Among other policy updates, ISS added a footnote to its policy on voting for director nominees in uncontested elections in circumstances where there are perceived governance failures. Currently, ISS will recommend that shareholders vote “against” or “withhold” votes from directors (individually, committee members, or the entire board) due to, among other things, “[m]aterial failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company”. The new footnote cites hedging and significant pledging of company stock as examples of activities that will be considered failures of risk oversight. Other cited examples of risk oversight failures include bribery; large or serial fines or sanctions from regulatory bodies, and significant adverse legal judgments or settlements.

By identifying the existence of hedging and significant pledging as a risk oversight and corporate failure, ISS will attempt to hold directors accountable for permitting that practice to exist. “Against” or “withhold” recommendations may not be limited solely to individuals that actually engage in hedging or pledging activity.

As rationale for this update, ISS states that director and executive stock ownership, whether resulting from equity compensation grants or open market purchases, should serve to align executives' or directors' interests with the interests of shareholders. ISS asserts that hedging severs the alignment of these interests and, therefore, any amount of hedging will be considered a problematic practice warranting a negative voting recommendation.

Pledging is treated differently. As noted by the Society of Corporate Secretaries & Governance Professionals in a comment letter on the proposals (PDF), ISS’ initial proposal was to consider pledging by executives as a problematic practice in all cases. In its comments, the Society argued that “an across the board policy was inappropriate, and that it could affect many smaller, founder-led companies where company stock constitutes the majority of an executive's (or other director's) net worth and such pledging has been used judiciously for an appropriate reason such as purchasing a home.” In response to these and other comments, ISS revised its policy to state that only “significant” pledging will be considered a problematic practice warranting a negative voting recommendation. What constitutes “significant” pledging will be determined on a case-by-case basis.  In making voting recommendations for election of directors of companies who currently have executives or directors with pledged company stock, ISS will take the following factors (in additional to “other relevant factors”) into consideration:

  • Whether the company has an anti-pledging policy that prohibits future pledging activity;
  • The magnitude of aggregate pledged shares in relation to the total shares outstanding, market value or trading volume;
  • The company’s progress or lack of progress in reducing the magnitude of aggregate pledged shares over time; and
  • Whether shares subject to stock ownership and holding requirements include pledged company stock.

ISS’ 2013 policy updates will be in effect for shareholder meetings on or after February 1, 2013.

Comment. Companies who currently have executives or directors with pledged company stock will likely include disclosures regarding these matters in the proxy statements for their meetings even in the absence of SEC rules mandating such disclosure. I would also expect to see companies without insider hedging or pledging activity call that out in their filings.  As Dave Lynn pointed out in his September 2012 InsideCounsel article, policies governing hedging and pledging activity are often included in a company’s insider trading policy, and companies will no doubt be reviewing their existing policies to assess the potential impact of ISS’ new policy recommendations.

Conflict Minerals Rules May Foster Corporate Social Responsibility

Last week, the SEC adopted final rules (PDF) under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF), requiring reporting companies to disclose their use of so-called “conflict minerals” that originated in the Democratic Republic of the Congo (DRC) or a nearby country. These minerals, which include tantalum, tin, gold and tungsten, are used in computers, cell phones, cameras, automotive and aerospace components, medical devices, jewelry and many other products. The rules were controversial, passing by a 3-2 margin.

Companies that file reports with the SEC will be required to file a new SEC form called Form SD to disclose the use of conflict minerals that originated in the DRC. All issuers will report on a calendar year basis on May 31 of the following year, with the first report, covering 2013, due on May 31, 2014. Smaller reporting companies and foreign issuers are subject to the reporting requirement, although smaller reporting companies get a longer transition period for reporting about products where the origin is uncertain – four years vs. two years for larger companies. Companies that manufacture products with conflict minerals in the supply chain need to study the new rules and formulate an action plan to satisfy the due diligence and audit requirements. Since the first period covered by the disclosure rules starts in four months, time is of the essence.

I won’t try to summarize the entire 356 page SEC release. As usual, the SEC has provided a very useful Fact Sheet as part of its press release announcing the rule. And the release includes a handy one-page decision tree chart (PDF) that maps out the various reporting issues under the rules.

Comment. The SEC release describes that Congress, in enacting Section 1502,

“. . . intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC. . . . Congress chose to use the securities laws disclosure requirements to bring greater public awareness of the source of issuers’ conflict minerals and to promote the exercise of due diligence on conflict mineral supply chains. . . .”

The disclosures are intended to reduce the use of conflict minerals that help fund the armed groups, and thus put pressure on the groups to end the conflict.

In reading the commentary and analyses on the new rules, I focused on the reactions of various groups. The rules have sparked an interesting debate about the role of disclosure requirements in shaping policy and changing corporate and governmental behavior, with both sides of the debate make valid points. However, even more fascinating, several very large electronics manufacturers, rather than fight the rules, have gone beyond mere compliance with the disclosure requirements. They have used the pendency of the rules as an opportunity to demonstrate leadership in corporate social responsibility.

Criticism and Counterpoint. Critics of the rules raise persuasive concerns about the rules’ value compared to the cost of compliance. SEC Commissioner Daniel Gallagher, who voted against adoption, released a Public Statement detailing why he could not support the rules. After deploring the violence in the DRC, Gallagher states that the benefits of the disclosure requirements in reducing the conflict cannot be quantified. On the other hand, the costs of the disclosure and audit requirements are very real, estimated by the SEC at $3 to $4 billion initially and around $200 to $600 million per year on an ongoing basis. Many commentators believe this cost is vastly underestimated. Gallagher acknowledged that Congress, not the SEC, mandated the disclosure requirement, but he could not support the final rules because the SEC did not use its discretion to exempt smaller reporting companies or create a de minimis exemption for products with incidental use of the minerals.

The statement of the other dissenting Commissioner, Troy Paredes, expressed his concern that the Commission did not determine “ . . . whether and, if so, the extent to which the final rule will in fact advance its humanitarian goal as opposed to unintentionally making matters worse.” As Professor Steven Davidoff wrote this week in a DealBook commentary, “These new rules could lead to manufacturers simply refusing to buy any of these minerals from Congo and surrounding area. This would be a de facto boycott that could harm the populace more than it would help.” Or the rules could provide a greater competitive advantage for foreign companies that do not report in the U.S.

On the other hand, the supporters of the rule respond that the SEC worked hard to craft final rules that minimize the costs to issuers and will be effective. Chairman Mary Schapiro said in her statement introducing the rules, “. . . [W]e incorporated many changes from the proposal that are designed to address concerns about the costs. I believe the rule we are considering today faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner.”

The Social Responsibility Opportunity. In reading much of the commentary on the conflict minerals rules, I was struck by the statements of a “multi-stakeholder network” that included issuers, socially responsible investor groups and non-governmental organizations. The group was really part of the process, participating in the SEC roundtable, submitting four comment letters and attending several meetings with the SEC staff. The companies in the group included major corporations: Advanced Micro Devices (AMD), Ford, General Electric, Hewlett-Packard, Microsoft, Philips and Sprint. This group submitted a letter to the SEC (PDF) supporting the disclosure rules and applauding the work of the agency.

The Co-Chair of the multi-stakeholder network was Tim Mohin, Director, Corporate Responsibility of AMD. On the day the SEC adopted the final rules, Mohin wrote a compelling piece in the Huffington Post, “How Electronics Companies Plan to Comply With the SEC’s New Conflict Minerals Rule.” He reported that an industry group not only supported the rules, but also went beyond the disclosure requirements to explore new ways to track the source of conflict minerals:

At first blush, this sounds like an impossible requirement. . . . But, after some time and thought, we, in the electronics industry -- specifically, the member companies of the Electronics Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) -- are confident we have found a way. And, more importantly as this rule ripples through the economy, we are willing to share our ideas with others. . . .

Mohin describes some of the nuts and bolts of their process for identifying smelters and the subset of “conflict free smelters” and continues:

. . . While the conflict free smelter list stands at just 13 so far, we anticipate that many more will be added as implementation of the rule progresses. . . . [Also,] [w]hile the law itself does not require any of these steps, the electronics industry has worked on a couple of programs aimed at avoiding a minerals embargo of the region [and thus harming legitimate mining enterprises]. AMD and several other companies joined the U.S. State Department to found the Public-Private Alliance (PPA) for Responsible Minerals Trade. This a joint initiative among governments, companies, and civil society aims to demonstrate that it's possible to secure legitimate, conflict-free minerals from this region. . . .

By partnering across the electronics industry and applying the spirit of innovation that created the tech revolution, we went from "it can't be done," to "we think we have a solution," to "we need to go beyond the law to make sure that our solution actually helps the people of the DRC."

In this case, a group of  companies, rather than challenging the validity of the rules, put their minds and resources into efforts to go beyond mere compliance. Consistent with the corporate social responsibility movement, their approach tries to address the problem in sophisticated ways, and they want to share their wisdom with other companies. And maybe, if their approach really works, their use of “conflict free” suppliers could actually help their sales – something like “dolphin-free” tuna. At the very least, it’s a commendable effort.

I’d really like to hear what readers think about the approach described by Mohin, and about the disclosure rules in general. Send me an e-mail, which I will keep confidential, and I can summarize the thoughts on an anonymous basis in a follow-up post.

Honored to Be Recognized for Pro Bono Work

I was honored to be recognized recently as Maslon’s 2012 Pro Bono Attorney of the Year. As Chair of our Pro Bono Committee for the past five years, I have been very proud of our firm’s commitment to the community. Also, as a Board member of the non-profit group LegalCORPS, it has been enjoyable to help LegalCORPS develop new ways to deliver business law pro bono services to low-income businesses and non-profits in Minnesota. I am currently working on an exciting project, in partnership with the in-house attorneys at a large company, to expand LegalCORPS’ reach in a novel way. After the launch of this program, I’ll share the news.

Risky Business: What If the CEO Has a Risky Hobby?

The death of Steven Appleton, the CEO of Micron Technologies, in the crash of his experimental plane last month highlighted the issues faced by companies whose CEOs have risky hobbies. What are the board’s duties in that situation? And what disclosure issues are presented?

In a Wall Street Journal article last week, “Executive No-Fly Zone?”, Joann Lublin pointed out that, in these cases, many boards of directors would like to prevent the CEOs from flying stunt planes. In the case of Appleton, who had previously been seriously injured in a crash in 2004, it’s not hard to imagine that the board had at least considered the issue.

My partner, Bill Mower, was interviewed for the Journal article and stated:


The Micron tragedy should be a wake-up call for boards, . . . . [Many boards now will discuss whether the boss's hobby] is something the directors should be worried about.


As Lublin points out, it’s difficult to restrict the CEO’s activities without a clause in an employment contract. And the desire to fly airplanes or drive fast cars may be the type of attribute associated with the personalities of many CEOs. However, especially after the publicity surrounding Appleton’s death, if the CEO is involved in these types of activities, the board should at least consider whether any action is merited.

Mower also raised another great point about legal considerations in these situations. Boards "should consider tucking a CEO's highly dangerous recreational behavior into their risk-factor disclosures,” he told the Journal. Not a bad idea - if the CEO’s hobbies put him or her at enhanced risk, it’s not hard to imagine a class action lawsuit if the CEO is killed or seriously injured and the company’s stock drops.

As 10-K season reaches its peak, it will be interesting to see whether any companies make this disclosure.

Image: Wikimedia Commons

Incentive Design Study Sheds Light on Compensation Practices

As we approach the second proxy season featuring Say-on-Pay votes, public companies are under increasing pressure to describe how executive pay is tied to company performance. The compensation consulting firm James F. Reda & Associates recently issued its “Study of 2010 Short- and Long-Term Incentive Design Criterion Among Top 200 S&P 500 Companies” (PDF). This study provides a good snapshot of the types of practices large companies used in 2010 (reported in 2011 proxy statements) to provide the proper incentives to executives. Among the findings:

  • Although stock options remain popular, for the first time, the prevalence of grants of performance-based awards (performance shares, performance units, etc.) exceeded the prevalence of stock options (including stock appreciation rights).
  • For short-term incentive plans (generally annual bonus plans), earnings per share and income were the most common performance measures, followed by revenue, capital efficiency ratios and cash flow. For these plans, 72% of companies used two or more financial measures. Over the past several years, the percentage of companies using only one measure declined.
  • For long-term incentive plans, earnings per share and income were the most popular measures, followed by total shareholder return (TSR) and capital efficiency ratios (return on invested capital, etc.). For these plans, 40% of companies used only one measure, with this number declining. Almost the same percentage used two measures, with a smaller number using three or more measures.

The study also provides a lot of detail on target levels, maximum payouts, disclosure practices, etc. As companies are finalizing their 2012 compensation programs and preparing their proxy disclosures, the study should provide a useful reference.

Facebook’s Governance Structure: Not Everyone “Likes” It

As reported in this recent post, Facebook, Inc., which is preparing for its IPO, has a dual-class voting structure that gives founder Mark Zuckerberg a lock on controlling the company, now and for the foreseeable future. Now, certain shareholder groups are expressing their disapproval.

Earlier this week, the shareholder advisory service ISS published a research note that criticizes Facebook’s governance structure, as described in this DealBook post. One of ISS’s statements: “This is a governance profile with a defense against everything [but] hubris.”

Further, as reported by Bloomberg, the California State Teachers’ Retirement System (CalSTRS), which is an existing investor in Facebook, is planning to send a letter to the company questioning the governance provisions.

Of course, one of the features of Zuckerberg’s super-voting stock is that he is not required to listen to any outside parties who might criticize these practices. And if investors don’t like these governance provisions, they don’t have to invest. But it will be interesting to see whether there is so much criticism that the underwriters have to press for some changes in order to attract investors. The way it looks right now, this will be a hot stock no matter what. But stay tuned . . . .

Facebook IPO Includes Insider-Friendly Corporate Governance Provisions

As nearly everyone knows by now, Facebook, Inc. filed its initial registration statement yesterday with the SEC, leading toward an initial public offering. As the filing reveals, Facebook’s corporate structure includes some corporate governance provisions that founder Mark Zuckerberg and other insiders are certain to “Like”.

In a post on the DealBook Blog, “A Big Bet on Zuckerberg,” Steven Davidoff reports that Facebook, Inc. is structured to give Zuckerberg a lock on controlling the company, now and for the foreseeable future. The existing Class B shares carry 10 votes per share, compared to 1 vote per share of the Class A stock being offered to the public. Because Zuckerberg obtained voting agreements from many other early stockholders, he essentially has complete power to select and remove members of the board of directors. Professor Davidoff points out that investors in Facebook are placing a major bet that Zuckerberg will manage the company effectively.

Zuckerberg’s control even extends past his death. According to the "Risk Factors" section of the prospectus, “ . . . in the event that Mr. Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor.” Can you say “dynasty”?

Facebook also has other management-friendly governance provisions built into its structure. For example, the registration statement reveals that, once the Class B shares no longer control the company, the board will be classified into staggered terms, and directors will only be able to be removed for cause. Further, at that time, vacancies on the board will only be able to be filled by the board and not by the stockholders, and amendments to the charter or bylaws will require a supermajority vote.

Some of these governance practices, which would be next to impossible for an existing public company to implement, are common for companies doing IPOs in the past few years. As shown in this Conference Board study (PDF), companies that recently did IPOs have a much higher incidence of practices such as classified board, which are unpopular with many institutional investors. The practices differ even more at “controlled companies” like Facebook, in which a group retains voting control.

All of this seems fine – when a company like Facebook goes public, any investors who don’t like the ground rules can simply refrain from buying the stock. But it’s interesting that this recent trend in IPO companies’ governance is creating a group of companies that, going forward, will feature fewer investor-friendly governance practices than companies that went public in earlier times.

If you are not used to scouring through prospectuses and you want a guide to Facebook’s, check out this great interactive DealBook feature, “Documents: Understanding the Facebook Prospectus,” which includes the editors’ comments on notable parts of the document.

“The Social Network” Shines

Looking at the Facebook prospectus reminded me of how much I loved the film “The Social Network”. And seeing Sean Parker’s name in the prospectus, I can’t help but think about Justin Timberlake’s great performance in that movie, including the following line, which should have been included in the prospectus:

Sean Parker: You don't even know what the thing is yet. How big it can get, how far it can go. This is no time to take your chips down. A million dollars isn't cool, you know what's cool? . . . . A billion dollars.

Try $100 billion, speculated to be the top of the valuation range for the company once it is public, according to this Wall Street Journal report.

See this prior post, with some comments on what the film says about the changes in our society.

Report Sheds Light on Stock Ownership Guidelines

Stock ownership guidelines have become a common governance tool for encouraging stock ownership by executives and directors. A recent post on the NASPP Blog by Executive Director Barb Baksa provided useful insight and data on public companies’ stock ownership guidelines. The Blog is sponsored by the National Association of Stock Plan Professionals, and the post reported results from the NASPP’s 2011 Domestic Stock Plan Administration Survey, co-sponsored by Deloitte. The survey included around 600 U.S. companies, with all but a small percentage included on the New York Stock Exchange or Nasdaq.

Highlights included:

  • 73% of 2011 respondents reported having stock ownership guidelines, compared to 54% of respondents in the 2007 survey, a 35% increase.
  • Of the 2011 respondents that don’t currently have guidelines, 25% said they are considering implementing them in the next three years, which would bring the percentage close to 80%. As Barbara said, “All the cool kids are doing it, is your company one of them?”
  • All respondents count shares owned outright in the guidelines, whether the shares were purchased or received as compensation. Regarding other forms of equity ownership, 70% of the respondents count unvested restricted stock and 60% count unvested RSUs and phantom stock and 31% count unvested performance shares.
  • Stock option practices vary widely: 72% of the companies do not count stock options; 15% count only vested in-the-money options, 9% count any vested options and 5% (around 30 companies) count even unvested options.
  • Required ownership levels are based on a multiple of compensation at 78% of the respondents, with 68% allowing up to five years to meet the guidelines, and another 13% percent requiring guidelines to be met in three years. 74% of respondents require the CEO to own stock equal in value to five or more times his/her compensation. For the CFO and other named executives, 78% of respondents indicated a range of two to four times their compensation.

NASPP is a great source of information on compensation and disclosure-related topics like stock ownership guidelines. NASPP’s subscription website provides very valuable information on plan drafting and other topics. At the 19th Annual NASPP Annual Conference coming up in San Francisco November 1-4, NASPP is providing cutting-edge presentations on these topics.

Disclosure: I am currently the President of the Twin Cities Chapter of NASPP.

Death, Taxes and Senior Executives

I am excited to report that I will be part of a panel discussion at the Annual Conference on the topic of “Death, Taxes and Senior Executives”. The panel will focus on trends in estate planning and wealth management for public company executives who have a great deal of wealth tied up in their company’s equity. The purpose is to educate stock plan administrators and other professionals on these techniques so they are better able to anticipate the issues that might be presented by the transfer of equity to family and charitable trusts. We will try to demystify the alphabet soup of techniques used by estate planners: GRATs, CRUTs, CRATs, IDGTs (intentionally defective grantor trusts) and many more.

The panel also will discuss the current regulatory and governance trends that tend to create additional restrictions on the equity held by executives. The stock ownership guidelines described above are an example of restrictions that make it more difficult for executives to diversify their holdings.

My fellow panelists are John Provo, my partner from Maslon’s Estate Planning Group; Eddie Adkins of Grant Thornton LLP; and Will Thoms of UBS Financial Services. I will share the course materials and thoughts from the Conference on this blog.

Shareholders Can Submit Proxy Access Proposals Starting on September 13; Will They?

Last week, the SEC disclosed that it would not appeal the opinion of the D.C. Circuit Court that struck down Rule 14a-11, the proxy access rule that would have allowed shareholders to nominate members of the board of directors and required the company to include these nominees in its proxy statement. Therefore, Rule 14a-11 will not go into effect unless the SEC readopts the rule using procedures that will satisfy the courts.

At the same time, the SEC announced that it will allow a companion change to Rule 14a-8 (PDF) to go into effect. The amended Rule 14a-8 allows shareholders to submit proxy access proposals at individual companies and would prevent the companies from excluding those proposals. This process is known as "private ordering." The SEC issued a stay of effectiveness of Rule 14a-8 at the same time it stayed the effectiveness of Rule 14a-11. In its release last week, the SEC confirmed that the stay will expire without further SEC action on the date when the court’s decision will be finalized, expected to be September 13, 2011. The ON Securities Cheat Sheet, always available on this site, has been updated to provide more detail on amended Rule 14a-8.

In a recent post on the Conference Board Blog, “2012 Proxy Access Shareholder Proposal Wave Can Commence Next Week,” Gary Larkin reports that many commentators are recommending that proxy access proposals should be on the radar screens of boards of directors for the 2012 proxy season. This is true – of course, boards should be familiar with the operation of the amended rule.

But should companies expect a flood of shareholder proposals demanding or requesting proxy access? Probably not, at least not right away. Ted Allen in the ISS Governance Blog provides a very useful perspective on the advent of private ordering. In “Will Proxy Access Appear on Corporate Ballots in 2012?”, Allen reports:

At this point, it appears unlikely that investors will submit dozens of access proposals for 2012 meetings, as they have done in past seasons to seek board declassification, majority voting bylaws, or "say on pay" votes. There is concern among some activists that corporate advocates will argue that federal access standards are not needed if investors file a large number of access resolutions next year.

Amy Borrus, CII's [the Council of Institutional Investors’] deputy director, said she expects to see "probably not more than a handful" of access proposals in 2012. "I expect that shareowners will file proxy access proposals selectively at companies where boards have a history of not being responsive to shareowners or have been asleep at the switch," she said.

Allen also points out a variety of factors that will discourage proxy access proposals, especially binding votes on bylaws amendments, or make it more difficult for shareholders to get support for the proposals. See this previous post for further discussion of binding vs. non-binding votes.

In other words, once again to paraphrase Bob Dylan (a/k/a Bobby Zimmerman from Minnesota), it may be a while before shareholders are “knock-knock-knockin’ on the boardroom’s door.” But this delay doesn’t change the fact that, in terms of shareholder relations, “the times they are a-changin’.”

Steve Jobs' Legacy Includes Lessons on Disclosure Practices and Succession Planning

A couple of years ago, when I taught a series of seminars on public company disclosure issues, I started things off with a riddle:

Q: What do you get when you cross a piece of fruit with a liver and a pancreas?

A: An SEC investigation – IF the fruit is an Apple, and the liver and pancreas belong to Apple CEO Steve Jobs.

Of course, I was referring to Apple’s disclosures about Jobs’ health over the past several years, which led to widespread criticism and a well-publicized SEC investigation. After the announcement of Jobs’ resignation as CEO of Apple Inc. last week, I was reminded of the controversy. Unfortunately these mishandled communications are part of the legacy of Jobs’ years at Apple, but they do teach some lessons about good (and not-so-good) disclosure practices for public companies. Here are some of the relevant events:

2004 – Jobs has surgery for pancreatic cancer, leading to years of speculation about his ongoing health.

June 2008 – Apple spokesperson to Wall Street Journal: Jobs looks thin due to a “common bug.”

January 5, 2009 – Jobs posts a letter on the company web site, and company issues a press release saying that Jobs is undergoing “relatively simple” treatment for a “hormone imbalance.” Jobs vows, “I’ve said . . . all that I am going to say . . . .”

January 14, 2009 – Jobs posts a new letter on the company web site – his health issues are “more complex”, and he is taking a six-month leave.

June 2009 – There is a leaked report that Jobs has had a liver transplant, which occurred in April 2009.

July 2009Bloomberg reports on an SEC investigation into the January 2009 disclosures by Apple.

I couldn’t find any subsequent reports of SEC enforcement proceedings resulting from the investigation of Apple. However, the publicity was embarrassing, and most people would agree that Apple’s practices were not optimal, possibly as a result of trying to balance Jobs’ well-known desires for privacy with the media frenzy surrounding his every move.

The Apple experience is a reminder of the importance to public companies of following good disclosure practices. For example:

  • Consider a formal communications policy to control the flow of information to analysts, media, etc. This will reduce the risk of inconsistent or misleading statements and help promote compliance with Regulation FD. Make sure the policy is updated to deal with social media issues.
  • Once the communications policy is in place, make sure there is ongoing training and monitoring of compliance with the policy.
  • Make sure disclosure controls and procedures are formalized (written and compiled), and that the internal disclosure committee keeps proper records.

For a more complete list of disclosure tips for public companies, see this prior post.

A Further Lesson – Succession Planning is Critical

The Steve Jobs saga also teaches lessons about the importance of succession planning, especially CEO succession planning, as an element of corporate governance. Apple has been criticized for its lack of disclosure about its succession plan. However, the smooth hand-off to former CEO Tim Cook has certainly helped Apple’s share price stay stable in the aftermath of the announcement.

A recent study entitled “‘Home-Grown’ CEO” (PDF) by the A.T. Kearney consulting firm and the Kelley School of Business dramatically illustrates the benefits of good succession planning. As summarized by A.T. Kearney, the research of S&P 500 companies found that “ . . . the 36 non-financial companies with exclusively ‘home-grown’ CEOs – those developed and selected from within their ranks – consistently outperformed the remaining companies that went outside for their CEOs. . . .” The results reported in the study are striking, and are a wake-up call to boards that have not given sufficient attention to succession planning.

Image: Flikr

Proxy Access Proposals: What Can We Expect to See Next Year?

 In “Will Investors File Proxy Access Proposals in 2012?”, in the RiskMetrics Blog, Ted Allen analyzes the possible impact of the D.C. Circuit Court’s ruling (discussed in this prior post) that struck down the SEC’s proxy access rule, Rule 14a-11. Rule 14a-11 grants to large shareholders of public companies the right to nominate directors and have the nominees included in management’s proxy statement.

Allen points out that the SEC may lift its stay on the related amendment to Rule 14a-8, which would allow shareholders to introduce proxy access proposals in 2012. He reports that there may not be a flood of proxy access proposals next year, due to institutional investors’ mixed feelings on these proposals and some complex dynamics:

Several investors said this week they are looking into submitting access proposals next season . . . . So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don't want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues.

One interesting issue is whether the shareholder access proposals would likely be votes on binding amendments to the bylaws or non-binding precatory votes that are merely recommendations to the board. Allen states: “Investors could file binding or non-binding resolutions, but some states require higher ownership thresholds for binding bylaw proposals.” Individual companies also may have bylaws that would require a supermajority vote by shareholders. Allen points to three examples of proxy access proposals in 2007, before the SEC stopped allowing such proposals under Rule 14a-8:

  • A binding access proposal involving Hewlett-Packard Corporation that won a high percentage of approval but did not pass. This proposal would have required a two-thirds positive vote under H-P’s bylaws.
  • Non-binding access proposals involving UnitedHealth Group, Inc. and Cryo-Cell International, Inc. The UnitedHealth proposal won a high percentage of approval but did not pass; the Cryo-Cell proposal passed.

Therefore, if the SEC lifts its stay on the amendment to Rule 14a-8, the resulting proposals are likely to include a mix of binding and non-binding proposals.

Cheat Sheet Updated for Changes in Dodd-Frank Rulemaking Timetable

As Broc Romanek pointed out in Blog, the SEC has modified its timetable for rulemaking under the Dodd-Frank Act. The ON Securities Cheat Sheet has been updated to include the additional dates. Most of the changes consist of adding a proposed time frame for final rules that have not yet been adopted, in many cases giving a range of January to June 2012. This makes it very unlikely that some of these rules, including the disclosure of pay relative to performance and the ratio of CEO pay to median non-CEO employee pay, will apply to the 2012 proxy season.

Stock Market Woes? Blame the Blue Guys!

We’re all still reeling from the stock market plunge this week so far. In his CNN show this evening, Piers Morgan showed footage of the New York Stock Exchange’s opening bell being rung on July 29 by . . . the Smurfs! He points out that, since that time, the Dow Jones Industrial Average has plunged by almost 1,000 points. Obviously, there must be a connection.

See the video below, if you want to know who’s to blame for the crummy stock market. You’ll be singing the blues!

Circuit Court Strikes Down Proxy Access Rule; What Will the SEC Do?

 It’s going to be quite a while longer before, to paraphrase Bob Dylan, large shareholders are “knock-knock-knockin’ on the boardroom’s door.” As has been widely reported, last Friday the D.C. Circuit Court of Appeals struck down the SEC’s Rule 14a-11 (127-page PDF), adopted in August 2010, which grants to large shareholders of public companies the right to nominate directors and have the nominees included in management’s proxy statement. The Court’s opinion, using very harsh language, found that the SEC’s process was deficient in adopting the rule and held that the adoption of the rule was arbitrary and capricious.

The SEC’s statement about the decision expresses disappointment and states that the agency is “considering our options going forward.” What might this mean for proxy access?

  • Reconsideration/Rehearing or Appeal. As reported by Ted Allen in “U.S. Appeals Court Strikes Down Proxy Access” in the RiskMetrics Blog, “The SEC now has 45 days to decide whether to ask the three-judge panel to reconsider its ruling or seek a rehearing by the full nine-judge D.C. Circuit.” Presumably, depending on further action of the D.C. Circuit, the agency could further appeal to the U.S. Supreme Court.
  • Re-Adoption of the Rule. Allen also reports, “If the commission doesn’t seek additional judicial review, it would then have to decide whether to redo its economic analysis and try to revive Rule 14a-11. Given the SEC’s heavy workload of Dodd-Frank Act rulemakings, it appears unlikely that the commission would move quickly to resurrect the rule.” I agree that it is unlikely in the short term that the SEC will go through the process of reconsidering the rule and re-adopting it with a more deliberate process. However, the agency has put a huge amount of time and effort into the rule already, and the Dodd-Frank Act specifically authorized the adoption of the rule. Therefore, in the long run, I wouldn’t rule out another attempt by the SEC.
  • Removal of Stay on Rule 14a-8. The more immediate question in the short term is what the SEC will do about a companion amendment to Rule 14a-8 that was adopted in the same release (127-page PDF) as Rule 14a-11. This amendment allows shareholders to submit proxy access proposals at individual companies and would prevent the companies from excluding those proposals. The SEC issued a stay of effectiveness of Rule 14a-8 at the same time it stayed the effectiveness of Rule 14a-11. The SEC’s statement regarding the Court of Appeals’ decision specifically points out that the Rule 14a-8 amendment “is unaffected by the court’s decision . . . . ” The SEC could quickly lift the stay relating to Rule 14a-8, regardless of what it does with Rule 14a-11. Allen predicts, “ . . . [the stay on the Rule 14a-8 amendment] likely will be lifted before the filing deadlines for most 2012 meetings.”

The bottom line: there is a consensus that it is highly unlikely that proxy access will be in effect for the 2012 proxy season. However, if the stay on Rule 14a-8 is lifted, then a large number of companies may be dealing with shareholder proposals in 2012 to provide proxy access to large shareholders in future years.

What should companies do now? For those companies with advance notice bylaws, there is probably no rush to amend those bylaws to conform to the requirements of Rule 14a-11. However, companies without advance notice bylaws should consider adopting them, to provide adequate notice of shareholder proposals and to provide the board with additional information about the shareholders making the proposal, their shareholdings, and their relationships with each other and with the company.

Image: Picasa Web

The Impact of "Sue-on-Pay" Lawsuits on Proxy Statement Disclosures

Six companies so far have faced shareholder derivative lawsuits based on a negative Say-on-Pay vote – what I’m calling “Sue-on-Pay” lawsuits. As described in this prior post, I believe there are good defenses to these cases on the merits. However, it will take months, or longer, to get a final determination on the merits of these cases, and in the meantime, there may well be more claims.

Steve Seelig of Towers Watson in this blog post has provided a good analysis of the possible impact of the Sue-on-Pay cases on companies’ proxy disclosures. His main point is that the disclosures in the Compensation Discussion and Analysis section of many companies’ proxy statements have tended to make the general point that the company has a “pay for performance” philosophy, without providing a lot of detail. This type of general language has opened the door to lawsuits attacking the board’s compensation decisions as being inconsistent with pay for performance. The complaints point out that total compensation went up in the last year while total shareholder return (TSR) declined, generally using simple charts to dramatize the point. As Seelig points out, this is an overly simplistic argument by plaintiffs, but it may help the plaintiffs survive a quick motion to dismiss and make a settlement more likely.

This heightens the need for companies to take additional care to demonstrate how they pay for performance and in a manner that reflects the consideration the compensation committee gave to the matter before making its pay decisions. Certainly, this should mean looking at what pay versus performance would look like for the company as it attains various levels of TSR. But, more importantly, it should take into account:

1. How the company measures pay

2. What it means by “performance”

3. Whether the company believes pay and performance should be measured absolutely or in relative terms (by comparison to peers), or in some combination

4. The time period over which they should be measured.

Good advice, especially because such disclosures will help set the stage for future years, when relative TSR may not look so good, but the compensation committee may still feel it is justified to increased total compensation to its executives. As Seelig says, “Enhancing the CD&A with this information can facilitate shareholder support for a favorable vote on say on pay — and a more proactive defense than not making the case at all.”

Image: Flikr

Social Enterprise: A New Way to Enhance Corporate Social Responsibility

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

Checklist for the Board: How to Respond to a Say When on Pay Vote

In the next few weeks, more public companies will hold their annual meetings, which will include the shareholder advisory votes on compensation required under the Dodd-Frank Act. One of these votes allows the shareholders to select the desired frequency of Say-on-Pay votes. Under this frequency vote, sometimes called “Say When on Pay,” shareholders may express a non-binding preference for whether Say-on-Pay votes should be held on an annual, biennial or triennial basis. After the annual meeting, the company will be required to report on the frequency with which it will actually hold Say-on-Pay votes, in light of the results of the shareholder vote – see new Item 5.07(d) of Form 8-K (PDF).

Therefore, once the annual meeting is held, the board of directors will need to report their response to the non-binding shareholder vote. So, what steps should the board of directors take following the Say When on Pay vote? Of course, if the shareholders chose the alternative that the board had recommended in the proxy statement, the determination is pretty easy. If the shareholders chose a different alternative, it’s a little more complicated. The process will be different for every company, but here is a checklist of governance steps and tips to consider:

  • The rule gives you five months – take it. Item 5.07(d) gives the company 150 days to file the 8-K that includes the response (but no longer than 60 days before the deadline for submission of shareholder proposals for the next year’s annual meeting under Rule 14a-8). The consideration of this determination should be put on the agenda for a future board meeting in advance of the deadline for reporting.
  • Consider the factors listed in the proxy statement. Many companies included in their proxy statement a list of factors they considered that caused them to conclude that the recommended frequency was in the best interests of the company and it shareholders. At the meeting, the board should discuss these factors once again, and balance them against the will of the shareholders expressed in the vote.
  • Consider the strength of the views expressed in the shareholder vote. Presumably, a strong majority vote in favor of one of the alternatives should be given more weight than a close vote where none of the three alternatives received a majority. In either case, it is perfectly appropriate for the board to follow the preference of the shareholders despite the board’s prior recommendation of a different alternative.
  • Consider having the compensation committee make a recommendation. Especially if the compensation committee initially recommended to the board the frequency expressed in the proxy statement, it may be appropriate to have the committee recommend the ultimate frequency of the Say-on-Pay vote to the board for its approval.
  • Document the deliberations carefully. Make sure the minutes reflect the matters considered by the board and/or the compensation committee in making its determination.

Frequency Vote Update

Mark Borges just published his updated tally (as of April 15) of 1,976 companies’ proxy statements in his Proxy Disclosure Blog on (subscription site). According to Borges’ tally, these companies recommended as follows in their “Say When on Pay” shareholder advisory votes on frequency:

Triennial Say-on-Pay vote recommendation: 839 companies (includes 36 smaller reporting companies)
Biennial Say-on-Pay vote recommendation: 66 companies (includes two smaller reporting companies)
Annual Say-on-Pay vote recommendation: 1,009 companies (includes 11 smaller reporting companies)
No recommendation: 62 companies (includes six smaller reporting companies)

As for the results of the votes to date, Borges provided a good summary:

. . . . 252 companies [have] reported the voting results from their annual meeting of shareholders.
Here are the shareholder preferences for the frequency of future "Say on Pay" votes:

- Of the 15 companies that have recommended a biennial vote, 11 have seen their shareholders express a preference for annual votes.

- Of the 145 companies where the Board of Directors has recommended that future "Say on Pay" votes be held every three years, 63 (or 43%) have seen their shareholders indicate a preference for annual "Say on Pay" votes. That number decreases to 42% - 52 of 125 companies) when you exclude smaller reporting companies.

- Of the nine companies where the Board of Directors has made no recommendation at all with respect to the frequency vote (excluding smaller reporting companies), eight have seen their shareholders state a preference for annual "Say on Pay" votes.

And, at one company, Qualstar Corporation, where the Board of Directors had recommended annual "Say on Pay" votes, shareholders expressed a preference for a triennial vote.


ISS Releases Its 2011 Policy Updates, Including Say-on-Pay Vote Policies

On November 19, the shareholder advisory group Institutional Shareholder Services (ISS) released its 2011 Corporate Governance Policy Updates (PDF). This is ISS’s annual list of policies indicating how it will recommend that shareholders vote on various matters. The 2011 policies shed light on ISS’s likely recommendations regarding the new Say-on-Pay vote and frequency vote (“Say When on Pay”) required at 2011 annual shareholders meetings under the Dodd-Frank Act. Among the important policies are the following:

  • As expected, in connection with frequency votes, ISS indicated that it will recommend a vote for annual Say-on-Pay votes (rather than biennial or triennial votes). ISS believes Say-on-Pay is most effective as a communication vehicle if the vote occurs every year.
  • If ISS concludes that a company has “problematic” compensation practices, ISS will generally recommend a vote against the Say-on-Pay proposal, but won't necessarily recommend a “withhold” vote relating to compensation committee members. However, ISS will recommend withhold votes on compensation committee members when there is no Say-on-Pay vote. For example, if a company adopts triennial Say-on-Pay vote frequency, in the “off years” between votes, ISS would react to problematic practices by recommending withhold votes on committee members.
  • If ISS concludes that a company has some pay practices that are “egregious” (i.e., worse than problematic), it may recommend withhold votes on compensation committee members, regardless of whether there is a Say-on-Pay vote that year. ISS includes on this list (i) extraordinary relocation benefits (including home buyouts), (ii) change in control payments in excess of three times base salary and target bonus, (iii) new or materially amended agreements that provide for excise tax gross-ups and (iv) repricing or replacement of underwater options without shareholder approval.

The Say-on-Pay era definitely increases the clout of ISS and other shareholder advisory groups. In fact, I heard an unsubstantiated rumor that “ISS” actually stands for “Influence Surpassing Senators”.

Proposed SEC Rules Become More Portable

I noticed that two sets of lengthy SEC proposed rules have now been published in the Federal Register. These versions have smaller type and fewer pages, making them much easier to carry around with me everywhere. The proposed SEC rules on shareholder advisory votes (including Say-on-Pay) (PDF) print out on 31 pages (compared to 122 for the original SEC version). The proposed whistleblower rules (PDF) print out on 69 pages (compared to the original 181).

This is great news! Now I can easily bring the proposals to the family Thanksgiving dinner – and if I spill gravy on them, it’s easy to print out new copies.

Happy Thanksgiving, everyone!

SEC Delays the Effective Date of Proxy Access Rule

It looks like it will be another year, at least, before large shareholders will be “knock knock knockin’ on the boardroom’s door.” Today, the SEC issued an order (PDF) delaying the effective date of the rule pending the results of a legal challenge.

As reported in this previous post, last week the U.S. Chamber of Commerce and the Business Roundtable filed a petition with the U.S. Court of Appeals challenging the SEC’s adoption of Rule 14a-11, the proxy access rule. This rule grants large shareholders the right to nominate directors in certain circumstances and have these nominees included in the company’s proxy statement. The Chamber and the Roundtable requested that the effectiveness of the rule be delayed until the court had a chance to rule. In today’s order, the SEC agreed to the delayed effective date and joined the two groups in requesting expedited review by the court.

Ted Allen, in the RiskMetrics blog published by ISS, posted “The SEC Puts Proxy Access Rule on Hold,” discussing the anticipated impact of the SEC’s order:

. . . . Even if the appeals court acts quickly and upholds the controversial rule [14a-11], it’s not likely that proxy access would take effect until at least the 2012 proxy season.

The SEC also said it would delay an amendment to Rule 14a-8, which would have allowed investors to file bylaw proposals that seek more permissive access procedures. That rule change was not challenged by the corporate groups, which have argued that companies and investors should be able to adopt issuer-specific provisions instead of being subject to uniform federal standards. The SEC said it decided to delay the implementation of this rule change, ‘because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.’

The SEC's decision, especially its move to also delay the Rule 14a-8 amendment, surprised both investors and corporate advisers. The Dodd-Frank Act, which was enacted in July, included authorization for the SEC to adopt a proxy access rule, so many SEC observers expected that the commission would move forward to implement the rule after obtaining that legal support.

Image: Picasa Web


SEC Approves Proxy Access Rules For Large Shareholders

As I said in my previous post, to paraphrase Bob Dylan, large shareholders are closer than ever to “knock-knock-knockin’ on the boardroom’s door.” And now, we know more about who gets to knock, and when they might be let in.

On August 25, 2010, the SEC adopted Rule 14a-11 (451-page PDF), the shareholder access rule that was originally proposed on June 10, 2009. The SEC approved a revised version of the rule by a 3-2 vote, with the Republican Commissioners voting against approval. The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (848-page PDF) on July 21, 2010 clarified the SEC’s authority to order proxy access and thus removed a major legal concern about enforcement of the rule (Act Section 972).

Rule 14a-11 grants to large shareholders of public companies the right to nominate directors and have the nominees included in management’s proxy statement. The SEC’s press release provides some useful information about the new rule. However, the best capsule summary I have seen so far is contained in today’s post by Broc Romanek on Blog, “The SEC Adopts Proxy Access,” including the following practical points:

- What are the thresholds for a Rule 14a-11 access right? - Shareholders (or groups) must have 3% of the voting power (so it doesn't vary by company size as proposed) and have have held their shares for three years (up from one year as proposed) when they give notice of the nomination on Schedule 14N. When calculating the 3%, shareholders will be able to pool assets and include securities loaned to a third party as long as they can be called back - but securities sold, shorted or not held through the company's annual meeting will need to be deducted.

- Who can be nominated as a shareholder candidate? - Shareholder nominees must satisfy the applicable stock exchange's independence standards - and the shareholder exercising the right must not have the intent of changing control of the company. If a company wants to challenge a nominee's qualification, it can use the Staff's no-action process.

- How many nominees can be placed on the ballot by shareholders? - Greater of one director or 25% of the entire board. If the number of shareholder nominees exceeds the number permitted under Rule 14a-11, then preference will be given to the larger holder - not the first to nominate as the SEC had proposed.

- Is there any "opt-out" of the process rules? - Nope, it's mandatory and neither companies nor shareholders are not permitted to opt out or select a more restrictive mechanism. Rule 14a-8 was amended so that companies may not exclude shareholder proposals that seek to establish less restrictive proxy access procedures.

- When do the new rules take effect? - 60 days after their publication in the Federal Register, which is expected to happen next week. However, the deadline for submitting a nominee is 120 days before the anniversary of this year's proxy mailing. So access essentially applies for an annual meeting next year only if the first anniversary of the mailing of this year's proxy materials occurs 120 days or more after effectiveness. The example given during the open meeting: if the rules are effective on November 1st, then shareholders have a proxy access right if the company mailed their proxy materials on or after March 1st during 2010.

- How are smaller companies treated? - They get a three-year delay in effectiveness if the company has a public float of less than $75 million.

- How are foreign private issuers treated? - They aren't subject to the new access rules, just like the other proxy rules.

Image: flikr

SEC Reportedly Set to Approve Proxy Access For Large Shareholders

To paraphrase Bob Dylan, large shareholders are closer than ever to “knock-knock-knockin’ on the boardroom’s door.”

In a Wall Street Journal report today, “SEC Set to Open Up Proxy Process”, Kara Scannell reports that the SEC has scheduled a meeting on August 25, 2010 for approval of proposed Rule 14a-11 (PDF), the shareholder access rule that was originally proposed on June 10, 2009. Scannell reports that the Commission is expected to approve a revised version of the rule by a 3-2 vote, with the Republican Commissioners voting against approval. The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (848-page PDF) on July 21, 2010 clarified the SEC’s authority to order proxy access and thus removed a major legal concern about enforcement of the rule (Act Section 972).

Rule 14a-11 will grant to large shareholders of public companies the right to nominate directors and have the nominees included in management’s proxy statement. Scannell reports that under the language currently being negotiated (still subject to change), shareholders would be required to beneficially own at least 3% of the outstanding stock for at least two years before having the right to nominate directors. Under the original proposal, the threshold was 1%, 3% or 5% depending upon the size of the company, with a one year ownership requirement. The company would be required to include shareholder nominees for up to 25% of the board positions. If nominees are received above the 25% limit, access is granted on a first-come-first-served basis.

In an interesting post on the Altman Group’s Governance & Proxy Review, “Dog Days of Pre-Proxy Access Summer”, Francis H. Byrd discusses the stated intention of the CalSTRS pension fund and hedge fund Relational Investors to team up to seek four boards seats at the Occidental Petroleum 2011 annual meeting. The funds stated that the issues driving their intended contest are executive compensation and succession planning, not financial performance. Byrd points out that the joint 1% holdings of the funds will not be sufficient under the rumored 3% standard in the final proxy access rule, so it’s not clear that the funds will ultimately seek the board seats.

Byrd describes these lessons from the Occidental situation:

First, don’t let corporate governance issues – especially on compensation – fester. . . . The goal should be to limit surprise issues, and be proactive with both your largest holders and the governance influencers like CalSTRS or the NYS Common Fund.

Second, companies . . . . that have [received a majority vote or large vote in favor of non-binding shareholder proposals but] ignored such votes in the past – especially if their stock performance has struggled – will be prime targets for short slate campaigns. This also holds true for companies whose directors have been targeted in Vote No campaigns. Substantial withhold votes from directors could also serve as a beacon for activists seeking to run a potential short slate.

Lastly, your Say on Pay vote matters on more than compensation. Many investors, especially the activist institutions, view compensation as a window for judging the quality of board oversight and determining whether a CEO is ‘imperial’. . . . In that context, a failed Say on Pay vote could be viewed as a signal to an activist that there is at least some lack of confidence in the board and management.

As the proxy access rules quickly approach reality, public companies should plan accordingly – and listen for the knockin' on the boardroom’s door.

The "Say When on Pay" Vote Under Dodd-Frank - As Easy As 1-2-3?

Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (848-page PDF) requires that any public company, at its first shareholders meeting on or after January 21, 2011, hold two shareholder votes:

  • a shareholder advisory (non-binding) vote on the executive compensation disclosed in the proxy statement (Say-on-Pay), which must be held no less frequently than once every three years, and
  • a separate resolution “to determine whether Say-on-Pay votes will occur every 1, 2 or 3 years”.

The latter resolution has been called the Say-on-Pay frequency vote, or “Say When on Pay”. The Say When on Pay vote must be held no less frequently than once every 6 years. The SEC may adopt rules to exempt certain companies (including smaller companies) from these requirements.

The mechanics of implementing of the Say-on-Pay requirement are pretty clear. The shareholders get a yes-or-no advisory vote on all executive compensation disclosed in the proxy statement, which includes the compensation discussion and analysis section and the compensation tables.

The Say When on Pay vote raises a lot more mechanical issues and has created fierce debate among corporate lawyers. For example:

  • The language of the statute requires that all three choices (i.e., one, two or three years) be presented to shareholders. Can a vote with three choices (as opposed to a vote for or against a resolution) be accomplished consistent with state corporate law and the bylaws of particular companies?
  • If all three choices are presented, no one choice may get a majority. Can the bylaws specify  a plurality vote, just as director elections are decided?
  • Rule 14a-4(b) under the Securities Exchange Act of 1934 requires that a public company proxy card allow shareholders to specify approval, disapproval or an abstention with respect to each matter being voted on, other than elections to office. Does this rule prohibit a single vote on all three choices and if so, will the SEC amend the rule to allow for such a vote?
  • Can a company consistent with the Act adopt a “default” frequency for Say-on-Pay in its bylaws (e.g., every three years) and provide that this frequency can only be overridden by a majority vote for one of the other alternatives?

The SEC may clarify the situation, but public companies should start reviewing their bylaws and state corporate law and think about how to deal with the Say When on Pay vote. As the SEC weighs in or there are further developments, I will report them here. Companies should also consider what frequency they are going to recommend for Say-on-Pay votes – annual, biennial or triennial. This issue needs to be considered carefully, as I will discuss in a future post.

Of course, there could be more interesting ways to decide among choices of “1, 2 or 3” than to have a shareholder vote. If only annual meetings could be held on the old “Let’s Make a Deal” set, with costumed shareholders being given the chance to select Door Number 1, 2 or 3 to decide Say When on Pay:

You don’t need to watch the whole seven minute video to get the idea – but if you don’t, you’ll miss some great 1970s-era prizes, like a refrigerator with a built-in tape player!

New ON Securities Cheat Sheet Describes Provisions of the Dodd-Frank Act

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (final text of the Act, 848-page PDF). As previously reported, the Act includes numerous governance and compensation provisions that will affect all public companies, as well as comprehensive reform of the nation’s financial system.

I have updated the ON Securities Cheat Sheet (PDF) to reflect the final provisions of the Dodd-Frank Act. The front page of the Cheat Sheet now includes a complete summary of the governance and compensation provisions of the Act. For each provision summarized, the Cheat Sheet provides the section number for reference to the full section.

The back page of the Cheat Sheet includes a summary of some other provisions of the Dodd-Frank Act that affect many public companies or otherwise have an impact on the securities laws, including a whistleblower “bounty” program and an exemption, effective immediately, for smaller issuers from the attestation report requirements under Section 404(b) of the Sarbanes-Oxley Act. The back page also summarizes the SEC’s previously proposed proxy access rules, as well as some of the important changes in the SEC compensation and corporate governance rules adopted in 2009.

An up-to-date version of the Cheat Sheet will always be available by clicking on the box at the right side of the ON Securities Blog home page. I’ll continue to update the document to reflect the waves of SEC rulemaking that we can expect over the next few months. If you have any suggestions for ways to make the Cheat Sheet more useful or for other resources that might be helpful, please post a comment below or send me an e-mail.

Over the next few weeks, I will be posting on the various new requirements of the Act and the steps public companies should be taking to prepare for the new requirements. 

Note: If you want to print out the pages of the Act that contain the governance and compensation provisions, print out pages 466-496 and 524-540 in the PDF file.



SEC Gears Up for Flood of Rulemaking To Follow Passage of Dodd-Frank Act

The Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act today and sent it to President Obama for his signature, expected next week. The Act includes numerous governance and compensation provisions that will affect all public companies, as well as comprehensive reform of the nation’s financial system.

In the Wall Street Journal, Kara Scannell reported this week that the SEC is gearing up for a heavy dose of rulemaking. In a story titled “SEC Enters Overdrive to Prepare for Overhaul” (subscription required for entire article), Scannell reported that the SEC is “on a tight deadline to write more than 90 new rules and complete nearly 20 studies.”

The story reports that the rulemaking process will be “burdensome” and will delay other initiatives the SEC considers important. For example, the SEC staff was engaged in a comprehensive review of public companies’ disclosure requirements, a process that will likely have to be put on hold. However, SEC officials say that they “remain committed” to adopt the proposed proxy access rules, as well as dozens of rules for which the timing is mandated by the Act. To prepare for the rulemaking, “ . . . the SEC’s divisions have assembled teams to tackle the various issues, and 50 to 100 staffers are involved in the preparations.”

The situation reminds me of the time after passage of the Sarbanes-Oxley Act of 2002, when we were waiting for new SEC rules issued every few weeks. The next several months promise to be very interesting.

What’s on a Page? Right Now, Not Much . . .

I’m getting a little tired of dealing with the Dodd-Frank Act (currently available as a 2,323 page PDF file) and various alternative Congressional bills that have been more than 1,000 pages each. Of course, it’s easy to run up a lot of pages when each page has huge margins and one narrow column of text down the middle of the page. Who came up with that system anyway – do people really write lots of margin notes on each of 2,323 pages? Hopefully, after the Act is finally passed, there will be a version with more text on each page. Who knows – maybe it will only take up 800 or 900 pages.

Image: flikr

Just Released: Text of Dodd-Frank Act; Also Released: Video of My Singing Act!

In this post, I report on the final financial reform bill from the Conference Committee in Washington. And then I start to sing (see video link below)!

After an all-night session last week, the Conference Committee passed the final version of what is now called the “Dodd-Frank Wall Street Reform and Consumer Protection Act”. Title IX of the Act (362-page PDF) includes the corporate governance and executive compensation provisions (contained in Subtitle E, starting on page 207). The Act still needs to be passed by both houses and signed into law. In the coming days, I'll be blogging about specific provisions, including mandatory Say-on-Pay and granting authority to the SEC to adopt proxy access rules. The final version of the Act gives the SEC the authority to exempt certain companies (possibly including smaller companies) from these requirements, and the SEC will be “filling in the blanks” in these and other provisions. It promises to be an interesting year of rulemaking.

I Sing “My Attorney Bernie”

Last week, I performed as part of the “Lawyers With (More Than Legal) Talent” competition, which capped off the Minnesota State Bar Association Convention. I didn’t win (the winners were two Minnesota District Court judges). But I had a great time, and so did everyone else. My song was the hilarious “My Attorney Bernie”, written by Dave Frishberg. In my introduction, I said that this song is about the greatest “client testimonial” ever received by an attorney:

Tax attorney David Haynes of the Leonard Street firm provided the piano accompaniment. And speaking of great Frishberg songs, see this previous post for an animated video of “I’m Just a Bill”, which educates listeners about how a bill becomes law.

Video: YouTube

New Version of ON Securities Cheat Sheet Provides More Detail on Financial Reform Bill

The new version of the ON Securities Cheat Sheet gives more detail on the Dodd Bill, the Restoring American Financial Stability Act of 2010 (1,600 page PDF). The Dodd Bill includes more extensive governance and compensation reforms than the Frank Bill, also described in the Cheat Sheet. The differences will need to be worked out in conference committee.

One interesting feature of the Dodd Bill is a requirement for majority voting for directors in uncontested elections (Section 971 of the Dodd Bill, at page 1103). The requirement applies to companies listed on securities exchanges (including Nasdaq). If the director does not receive a majority of votes cast in the election, the director must tender his or her resignation. The Board can choose to accept the resignation or can reject it by a unanimous vote. Within 30 days after the vote, the Board must disclose the specific reasons that the Board did not accept the resignation, and that this decision was in the best interests of shareholders, along with a discussion of the analysis used in reaching the conclusion.

The majority voting provision is not included in the Frank Bill, so the conference committee must decide whether it will be included in the final bill. As reported in a Reuters article, “Wall Street Critic Frank to Shepherd Final Reform Bill”, the committee could have a final bill ready for signature by the President by July 4. In a post in the RiskMetrics Blog, “Majority Voting May Not Appear in Final Reform Bill”, Ted Allen reports that Representative Frank is “unsure” whether the majority voting provision will appear in the final bill. One way or another, by July 4 there could be "fireworks" on Capitol Hill for public companies.

Announcing the Return of the ON Securities Blog - Just in Time to Address the New Dodd Bill

I am very pleased to announce the return of the ON Securities Blog. The blog is now part of the LexBlog network of legal blogs, and it features improved design as well as better functionality and support. I hope you will notice the difference.

As always, I will do my best to provide topical, useful and, if possible, entertaining commentary on securities compliance, corporate governance and executive compensation. The second part of this post, below, discusses the latest reform legislation being proposed by Senator Dodd, and places it in context with other proposed reforms in governance and compensation.

Occasionally, this blog will also cover other aspects of the world of private practioners and in-house counsel, or the new world of social networking – such as these previous posts:

  • “I Am Not a Crook” described useful lessons learned from a legal ethics program taught by Bud Krogh, a former assistant counsel in the Nixon White House who served jail time for his role in the break-in of Daniel Ellsberg’s psychiatrist’s office.
  • "The Color of Blogging", which described the "very important" choice of a color scheme for the first version of this blog (and told the story of the picture of me above).

I appreciate the support of the readers who made the blog a success the first time around. I will try to find new ways to reach out to readers in the near future. Let me know if you have any suggestions or other comments. 

The New Dodd Bill: A Preview of Possible Governance and Compensation Reforms

On March 15, Senator Christopher Dodd released a new 1,300+ page discussion draft of his proposed comprehensive financial reform legislation, the Restoring American Financial Stability Act of 2010 (PDF). In addition to the provisions designed to reform the banking industry, the draft bill includes a variety of corporate governance and executive compensation reforms. For all public companies, the bill would

  • require Say-on-Pay, a non-binding annual stockholder vote on executive compensation;
  • authorize the SEC to require proxy access, which would enable major stockholders to nominate director candidates and have the nominees included in management’s proxy statement;
  • authorize compensation committees to hire consultants and counsel, and establish standards for independent advisors to compensation committees;
  • require proxy disclosure of executive pay vs. performance (including a chart); and
  • require disclosure of whether the company permits hedging by directors and employees, and why the company chose to (or not to) separate the positions of chair and CEO.

For all listed companies, the draft bill would

  • require majority voting for directors (with standards for accepting or rejecting the resignation of directors);
  • establish independence standards for compensation committees; and
  • require a clawback policy for all executive officers in the event of financial restatements.

I have reflected these features of the Dodd bill in a newly updated version of the ON Securities Cheat Sheet (PDF). The Cheat Sheet is a two-page summary of recent and proposed reforms affecting corporate governance and executive compensation, including SEC rules and proposed legislation. It’s meant to be an antidote for the dizziness and disorientation caused by diving into 1,300 page documents. To make it an even more handy reference, you can always find a link to the most up-to-date version on the home page of this blog, in the orange box at the right side cleverly captioned “ON Securities Cheat Sheet”.

The Dodd bill includes many of the same governance reforms as the Shareholder Bill of Rights Act of 2009 (PDF), introduced by Senator Charles Schumer in May 2009 and also described in the Cheat Sheet. Like the Schumer bill, the draft Dodd bill includes corporate governance reforms, with some variations. For example, the Dodd bill authorizes, but does not require, the SEC to provide proxy access to facilitate stockholder nomination of director candidates. Also, both bills require majority voting for directors for uncontested elections of listed companies. However under the Dodd bill, if a director does not receive a majority of affirmative votes, the board of directors may elect to accept that directors resignation or, by a unanimous vote, reject the resignation. This is different from the Schumer bill, under which the board is required to accept the director’s resignation.

Over the next several months, the provisions of the various bills in Congress will continue to be reconciled, and the SEC will continue to consider its proposed rules. The pace of reform has slowed somewhat, but as I have said before, the various reforms are still jockeying for position like horses in an arcade game making their way around a race track, with the lead constantly shifting – similar to the game in this video:


SEC Adopts Proxy Amendments; Communication of Effective Date Is Not So Effective

SEC LogoOn December 16, 2009, the SEC adopted its amendments to the proxy disclosure rules - see the press release and the full 129-page release that includes the text of the rules. The release has led to some confusion about when the new rules are effective - the release mentions an effective date of February 28, 2010, but it does not specify exactly what that means. I agree with Mark Borges in the Proxy Disclosure Blog (subscription site), who assumes that the amendments apply to proxy statements and other applicable filings on or after that date.

Part of the confusion about the effective date resulted from a comment during the open meeting/webcast, to the effect that the rules apply to companies with fiscal years ending on or after December 20, 2009. That's not the correct test. The December 20 date does appear in the final release, but only as a separate effective date for new calculation of the dollar amount of equity compensation reported in the Summary Compensation Table. Let's hope someone provides some clarification soon about effective dates.

I'll blog further about the rules themselves, and I'll post a new version of the ON Securities Cheat Sheet soon that reflects the new rules. In my last post, I mentioned one of the "sleepers" in the rules. But I think there may be another one. The Commission added a requirement to discuss the nominating committee's policy on diversity of Board nominees and, if there is a policy, to assess its effectiveness. The Commission declined to define "diversity" for this purpose. This is another area where some companies will be scrambling to figure out what to disclose, and may find it difficult to come up with a consensus on this sensitive topic with virtually no lead time.

Compensation Turkeys of the Year, and a RiskMetrics Update For Dessert

turkeys3Just In Time For Thanksgiving - The Compensation Turkeys of the Year!

At Thanksgiving, our thoughts naturally turn to gluttony of all sorts. So it seems like a fitting time to recognize a few companies for granting awards to their executives that look so ridiculous they practically beg Congress to speed up compensation reform. A great place to look for these examples is the blog, which prides itself on posting the interesting stories "found in the footnotes" of SEC filings.

So pass the cranberry sauce and gravy, here are my nominees for the "Compensation Turkeys of the Year", all reported by in the past few weeks:

    Of course, Goldman Sachs makes the list for its announcement that it is setting aside around $17 billion for compensation and bonuses, calculated to be more than $700,000 on average for each of the company's 31,700 employees. I blogged about this last month. The bonuses are based on Goldman's financial results for the current year, and commentators disagree on how much the results were enhanced by the government bailout of AIG and other financial companies.
    Allis-Chalmers reported recently that healthcare benefit premiums and expenses for its CEO exceeded $72,000 last year. (That buys a lot of aspirin.)
    Microsoft announced that, for one new executive, they paid a relocation allowance of $4.1 million, and a related tax gross-up of $1.2 million.

These aren't the only examples of compensation that grab your attention, but they are just the most recent obvious ones. As Mark Borges pointed out at the NASPP Annual Conference and other presentations, when companies eventually are required to have advisory votes on executive pay (Say-on-Pay), most companies' compensation will be approved. However, to prevent a "no" vote, they will need to think about the compensation practices that appear the most excessive - personal use of corporate jets, tax gross-ups, etc. It will be interesting to see whether, in a couple of years, after compensation reform, the Compensation Turkeys of the Year will be extinct birds. Don't count on it.

If you have any other Compensation Turkeys of the Year you would like to report, send me an e-mail. (As with any other good whistleblower policy, I won't use your name unless you give permission.)

By the way, the picture above shows the family of wild turkeys that hung out in our back yard for the past few months. Leading up to Thanksgiving, though, I haven't seen them lately. Times are tough.

Anyway, have a fantastic Thanksgiving!

RiskMetrics Update

Last week I reported that RiskMetrics Group came out with its 2010 updates to its proxy voting guidelines, summarized here. The compensation policy has changed more in form than in substance from last year, integrating separate policies into a single policy. RiskMetrics also clarified its methodology when it has compensation-related recommendations for a company based on its analysis. If that company has a Say-on-Pay proposal on the ballot, RiskMetrics will generally apply its recommendations to that resolution. However, if egregious practices are identified, or if a company previously received a negative recommendation on a Say-on-Pay resolution and the issue is not resolved, RiskMetrics may recommend a withhold vote with respect to compensation committee members.

The new governance policy also changes RiskMetrics' standards when making recommendations with respect to shareholder rights plans and revises its director independence standards.

"What's Goin' On"?

informationSeveral new reports have been published that provide valuable information about what's going on in the public company world. Here are two that just came out:

    Pearl Meyer & Partners released a survey report covering companies' attitudes toward Say-on-Pay, which is currently required for TARP recipients but will not be required for other public companies until at least 2011. The survey found that most respondents were not very concerned about Say-on-Pay and are not yet taking specific steps to plan for shareholders advisory votes. The Pearl Meyer firm reports that virtually all advisory votes have passed, mostly by a sizeable majority. However, the firm cautions that institutional shareholders may get tougher on Say-on-Pay votes in the future. The survey report recommends some specific steps companies can take over the next several months to plan for Say-on-Pay.

    Frederick W. Cook & Co. released a report of its study of non-employee director compensation at the 100 largest New York Stock Exchange companies and the 100 largest Nasdaq companies. The study found that compensation levels generally stabilized in 2009 after several years of increases, which had tracked increased director responsibilities under the Sarbanes-Oxley Act of 2002. The study also found that the compensation mix changed, with more companies moving director equity awards out of stock options and into stock awards. Also, the declines in the equity markets had a significant impact on equity award values, especially at Nasdaq companies. The study outlines median compensation levels at these companies and examines a number of compensation practices.

One more update - hot off the presses: I noticed that RiskMetrics today published some of its 2010 policy information, which applies to all shareholder meetings occurring on or after February 1, 2010. The more comprehensive proxy voting guidelines will be published in December. However, the just-released documents shed some light on RiskMetrics' evaluation of compensation and governance practices for the 2010 season. It appears that RiskMetrics will make some changes to its approach in making recommendations on Say-on-Pay votes and other compensation-related votes. I will report further on this next week.

What's Up in San Francisco?

bridge1I've just finished three and a half very interesting days at the NASPP Annual Conference and the Proxy Disclosure Conference sponsored by in San Francisco. Aside from an unexpectedly big crowd and some great food, attendees encountered some interesting updates:

    Proxy Disclosure Rules. Shelley Parratt, Director of Corporation Finance of the SEC, addressed the group, and there were two main news items. First, she previewed the currently proposed amendments to the proxy disclosure rules. She didn't address when the amendments would be considered, but stated that the new rules "may well" be in place for the 2010 proxy season. The SEC staff still clearly wants to accomplish this goal. Since the rules probably won't be considered until early December, this will likely put proxy drafters and compensation committees in a bind.

    Second, apart from the new rules, Parratt discussed compliance with the proxy disclosure rules adopted in 2007 and indicated that the SEC staff will take a more assertive (aggressive?) posture in its comment process. The staff has observed that companies that have already responded to comments on these rules are doing a pretty good job of compliance, although they can always do better. On the other hand, companies that have not yet received the comments seem to be waiting to receive comments before complying with the staff's guidance. She indicated that companies should be more proactive in changing their practices before they get comments, because the SEC will be taking a "no more Mr. Nice Guy" approach. Instead of "futures comments" (amend your filings in the future to comply), the staff will now be requiring many companies to go back and amend their prior filings. The main areas to focus on: (1) make sure your CD&A contains real analysis of "how" and "why" compensation decisions were made, and (2) disclose the performance targets underlying incentive compensation, unless there is a really compelling case to support competitive harm.

    New Governance Reform Bill. There was some discussion of the financial reform bill released this week by Senator Christopher Dodd - the "Restoring American Financial Stability Act of 2009". Buried in the 1,136 page bill, which would reform the financial regulatory system, are numerous governance reforms that would apply to all public companies. These are very similar to the provisions of the Schumer bill, described in the ON Securities Cheat Sheet. See this description of the Dodd bill provisions in the Corporate Counsel Blog. The Dodd bill is significant to governance reform, because it may give momentum to the provisions of the other reform bills, which can now be reconciled and carried forward as part of financial institution reform.

    A New Ball Game. I bumped into well known compensation attorney and blogger Mike Melbinger, but he was rushing out to the Fox News affiliate to give an interview. It's very entertaining - he talked about AIG CEO Robert Benmosche's statement that he may leave the company because of the government's limitations on executive pay. Melbinger likened the Treasury to a baseball owner. He said that if you want your team to be successful (i.e., if you want AIG to pay back the $180 billion in government aid), you pay whatever it takes to hire C.C. Sabathia, rather than hiring a journeyman pitcher for a low price and hoping for the best. Even Melbinger, however, admitted that if everyone at AIG is driving around in Lamborghinis, you might have a PR problem.

"I Am Not a Crook"

budkroghphoto1I attended a compelling legal education program this week, taught by Egil "Bud" Krogh. Political junkies know that Krogh was a young assistant White House counsel in the Nixon years. As a leader of the "Plumbers" unit, he authorized the 1971 break-in of the offices of Daniel Ellsberg's psychiatrist after the leak of the Pentagon Papers. After the break-in came to light in the Watergate hearings, Krogh pleaded guilty, served time in prison, was disbarred and later reinstated.

Bud now lectures on the topic of legal ethics, based on his recent book, Integrity: Good People, Bad Choices, and Life Lessons from the White House. His premise: in a pressure-filled environment such as the White House, intense loyalty to individuals can blind you to your higher principles. This is compounded by fear, inexperience, pride and other factors.

Krogh's description of an environment that can put pressure on decision-making is familiar to anyone called on to say yes or no to any proposal by a corporate officer. Whether the proponent is the client of an outside attorney or the boss of an in-house attorney, there is a lot of pressure just to nod approval, as Bud Krogh nodded to Howard Hunt when the Plumbers break-in was discussed. I think the situation is especially acute for in-house attorneys. Of course, most proposed actions are legal, and the advice is often about the level of risk involved in two alternatives. And most in-house attorneys do a great job of balancing the competing pressures of giving sound advice while also being part of the team. But how do some decisions, even decisions by good people, go astray?

A great example can be found in the options backdating scandals. An article in the Financial Times in November 2006 reported that the backdating scandals had resulted in at least twelve major US companies replacing their general counsel, and a March 2008 speech by the SEC's Director of Enforcement reported that at least seven former general counsel had been charged by the SEC in connection with the scandals. Backdating, even though not necessarily illegal in itself, in these cases represented falsification of documents and involved misleading accounting and tax fraud. I know many attorneys said "no" to the practice, but these counsel simply nodded as backdating was pushed by other corporate officers. It might not have seemed like such a big deal at the time.

I asked Krogh how to advise an attorney (maybe a younger in-house attorney) how to avoid the pitfalls of losing perspective in a pressure-filled situation. He steered me toward a Top Ten List provided by Hank Shea, a former Assistant U.S. Attorney in Minnesota who teaches ethical leadership at the University of St. Thomas Law School, including the following two lessons learned from the misconduct of others:

    When faced with a right versus a wrong decision, guard against that first intentional misstep.

    When faced with an ethical dilemma, seek advice and counsel from others.

After an interesting program, Bud entertained us with a great Nixon impression, including, at the request of one of my colleagues, the famous phrase "I am not a crook". Bud proved that we can all learn lessons about how to be able to make that statement, and mean it.

It's Just An IP Thriller - One More Comment

Bud Krogh also told a great story about Elvis, the King of Rock and Roll, who came to visit President Nixon in a meeting engineered by Bud. I just saw a great film about another King - the King of Pop. "This Is It" chronicles the rehearsals for Michael Jackson's planned comeback concert tour. I recommend it to anyone who wants to see the combination of pure genius and meticulous attention to detail shown by MJ. If you didn't see it before, it's worth reading my previous post, reporting that Jackson was actually one of the named inventors in an issued patent.

Getting Ready for Reform

congressMark Borges, the well known compensation consultant with Compensia, gave a very interesting talk this week at a joint meeting of the Society of Corporate Secretaries and Governance Professionals and the Twin Cities Compensation Network. Mark was gracious enough to give me permission to post his presentation, which is full of useful updates on governance and compensation reform and tips on how to get ready. One of the interesting features is a time line showing the dates of adoption and introduction of various legislative and regulatory initiatives, as well as a preview of what's to come. As I've said before, watching the progress of these initiatives through Congress and the SEC reminds me of the arcade game where you can watch the little mechanical horses race around and around the track, with the lead constantly changing - as in this great video.

Mark made these points, among many others:

    Given the amount of attention Congress is giving to health care reform, it is very possible that governance and compensation reform will be pushed to 2010 - unless there is some unforeseen crisis before then, which is always possible.

    Mark, like me, had thought the Shareholder Bill of Rights Act (the Schumer Bill) introduced in the Senate had probably been swept aside or at least delayed by the passage by the House of the Corporate and Financial Institution Compensation Fairness Act (the Frank Bill). Now, he believes that the Schumer Bill may be getting new traction. The Schumer Bill is heavier on governance reform than the Frank Bill, and some of these provisions may be grafted onto a financial institutions reform bill.

    Even though a shareholder advisory vote (Say-on-Pay) requirement likely will be part of any reform bill, it almost certainly will not be effective for the 2010 proxy season. Meanwhile, some major companies have voluntarily adopted other advisory vote models - in September, Microsoft adopted a triennial advisory vote, and in October, Prudential adopted a biennial advisory vote. If one of these approaches gains support, Congress may mandate one of these approaches rather than an annual vote on compensation.

I will mention some of Mark's other observations in a future post.

"Wanna Buy Some (D&O) Insurance?"; More Trends in Compensation

"Psst - Wanna Buy Some (D&O) Insurance?" This Survey Will Help.

umbrellaI was interested to read the most recent Towers Perrin survey of D&O insurance practices of around 2,600 public and private companies and non-profits. One of the purposes of the survey is to provide companies with information about the structure and cost of D&O insurance practices of a broad cross-section of companies. Towers Perrin emphasizes that the companies surveyed do not represent a scientific sampling. However, it is helpful to have a reference point for the range of coverage amounts and retention amounts for companies of various sizes.

This survey also reports on various insurance trends, including an increasing number of public companies purchasing only "Side A" coverage, which covers directors and officers only in situations where indemnification from the company is not available. This trend was especially apparent in very large organizations.

More From the Deloitte Executive Compensation Trends Presentation

Last week I mentioned the excellent materials prepared by Deloitte Tax for a presentation on trends in executive compensation, for the Twin Cities Chapter of the National Association of Stock Plan Professionals. A few other compensation trend observations worth noting:

    Around 40% of the largest companies changed their long-term incentive (LTI) plans or granting practices for 2009, including modifying performance measures, reducing LTI grant values, introducing intermediate goals, etc.

    The authors predict a significant decline in LTI grant values for 2009 - in light of lower stock prices, some companies had to reduce grant values in order to manage equity dilution.

    Surveys noted significant increases in executive compensation "clawback" arrangements for large companies.

More Thoughts on Proxy Access: "Knock-Knock-Knockin' on the Boardroom Door"

doorknocker1I just went through some of the hundreds of comment letters on the SEC's controversial proposal to adopt Rule 14a-11 on proxy access. The rule would grant large shareholders the ability to include director nominees in management's proxy statement - see the description at the end of the ON Securities Cheat Sheet. A companion rule, a proposed amendment to Rule 14a-8, would explicitly allow shareholders to include proposals in the proxy statement to approve various forms of proxy access.

Several comment letters, including the letter from the U.S. Chamber of Commerce, describe explicit theories about why the proposed rule should be struck down by the courts if adopted. Generally, these letters claim that the rule exceeds the SEC's authority or preempts state law. One of the most interesting letters is from Stanford Professor Joseph Grundfest, a former SEC Commissioner. Grundfest focuses on the major contradictions he perceives between the SEC's stated goals in its proposing release and the provisions of the rule itself:

. . . Like Charles Barkley's claim that he was misquoted in his autobiography, contradictions spawn skepticism as to the credibility of an entire enterprise.

Professor Grundfest then describes how these inconsistencies could be the basis of a legal challenge to the rule.

It seems apparent that, if the SEC adopts Rule 14a-11, the enforcement of the rule will be tied up in court, and the rule could eventually be struck down. This leads to a couple of likely scenarios involving Rule 14a-8:

    The SEC could adopt both Rule 14a-11 (with the same 3-2 vote as for the proposal) and the amended Rule 14a-8, risking a legal challenge. The amended Rule 14a-8 will serve as a backup that will almost certainly not be subject to a legal challenge. As described in this post, Delaware law was recently amended to specifically permit such bylaw amendments.

    On the other hand, the SEC could back down and just adopt the proposed amendment to Rule 14a-8 (possibly with a 5-0 vote). This is the compromise suggested by the National Association of Corporate Directors, which opposes Rule 14a-11 but supports the amendment to Rule 14a-8.

Either way, the amendment to 14a-8 is likely to be effective long before Rule 14a-11. This will give activist shareholders an avenue to start the process of demanding shareholder access through shareholder proposals at annual meetings to amend company bylaws. One way or another, it won't be long before we hear the big shareholders "knock-knock-knockin' on the boardroom door".

Preview of Coming Attractions, and a Movie Review

Preview of Coming (Regulatory) Attractions

movie1The past few weeks have been fairly slow in terms of new developments in securities law, corporate governance and executive compensation. However, summer's over, and I'm expecting a flurry in the next few weeks. Take a look back at the ON Securities Cheat Sheet - a lot of these developments are likely to change as we head into the fall:

    Congress is back in session, and we are likely to see action on the Corporate and Financial Institution Compensation Fairness Act of 2009, passed by the House in July. Congress will likely try to reconcile that bill with the other legislation described in the Cheat Sheet, and I would expect that something will be enacted by the end of the year. Virtually every bill would require Say-on-Pay for public companies, but we don't know when the requirement will go into effect.

    Comment periods are ending for the SEC's proposed proxy disclosure and solicitation rules and the proposed shareholder access rules. The SEC will almost certainly adopt the disclosure and solicitation rules this fall. As described in this post, action on the shareholder access rules is more uncertain.

    The SEC and Treasury Department may further clarify compensation standards for financial institutions that received TARP funds - including the SEC's proposed rules to clarify Say-on-Pay standards for TARP recipients (maybe a preview of what Say-on-Pay will look like for other public companies).

    Companies preparing their proxy statements for annual meetings held starting on January 1, 2010 will be dealing with the reality of the elimination of broker discretionary voting, described in this post.

We'll be watching carefully - as Siskel and Ebert used to say, "The Balcony Is Open".

Mastering the Art of American Blogging - and Begging

Last weekend I saw my all-time favorite film about blogging - okay, maybe the only film I have seen about blogging. "Julie & Julia" follows two parallel true stories - Julia Child's authorship of "Mastering the Art of French Cooking", and Julie Powell's creation of a blog that chronicles her quest to prepare all 524 recipes in the Julia Child book in one year.

I agree with the critics who said that the Julia Child story is much more compelling, and Meryl Streep is wonderful as Julia. But I watched Julie's story with my "blogger hat" on, and I tried to figure out what made her blog successful. Aside from a good concept and great writing, she found a way to create a community among readers with a common interest, and she fed off their support and feedback.

Which leads me to the begging - I am gratified by the number of subscribers to the ON Securities blog, but I'd like to hear from you a little more often. I know it's not always easy - as expressed in an e-mail I received from one subscriber who provided a great comment but then said:

I need a trip to the Wizard of Oz before summoning up enough courage to post a response.

I've paraphrased his/her comment anonymously in the "Comments" section of my last post.

So my request is that you not hesitate to give me feedback - let me know when I'm right or wrong or off base, or if there's any information you would like me to provide in this space. My promise: reading my blog won't leave you as hungry as watching "Julie & Julia" or reading Julie's blog.

Shareholder Access Update: Who's that knockin' at the boardroom door?

There have been several recent articles on the SEC's proposed proxy access rule, Rule 14a-11. If adopted, this rule would allow large shareholders to nominate director candidates and have the candidates included in management's proxy statement for the company's annual meeting. doorknocker2

A Wall Street Journal article last week (subscription required for full article) reported that ". . . the measure looks like it will be passed by the Securities and Exchange Commission in November." The article describes efforts by the U.S. Chamber of Commerce and others to block the measure, but reports that ". . . most opponents expect the measure to pass." The article states that many corporate comment letters are suggesting a weakened version of the measure rather than opposing it altogether.

However, this post by Dave Lynn in the Corporate Counsel blog last Friday puts the proposal's status in perspective and raises doubts that shareholder access is a "done deal". Lynn refers to several interesting comment letters, including this comment letter from several prominent former SEC staff members, urging the Commission to focus on other, more pressing regulatory matters. The Corporate Counsel post points out that "this is a road that we have all been down before", basically stating that it's too soon to know where this will end up. We all need to stay tuned.

As always, you can refer to the ON Securities Cheat Sheet for information on this and other proposals before the SEC, as well as pending legislation.

Say-on-Pay Bill Passes the House; Cheat Sheet Updated!

On Friday, the House of Representatives passed the Corporate and Financial Institution Fairness Act of 2009. The Senate still needs to consider similar legislation, and any differences will need to be resolved.congress

For most public companies, the bill will (1) require an annual advisory vote on executive compensation ("Say-on-Pay") and (2) for exchange-traded companies, increase the independence requirements for compensation committee members. The bill also would, if enacted, regulate pay at the largest financial institutions. Blog in its August 3, 2009 post contains an excellent summary of the bill. As that blog points out, Say-on-Pay almost certainly will not be a reality during the 2010 proxy season.

The bill allows the SEC to exempt certain companies from both the Say-on-Pay requirement and the compensation committee requirements. Therefore, the SEC might exempt smaller companies from either or both provisions.

We have updated the ON Securities Cheat Sheet to include the revised status and content of this bill. As you can see, there are still several other bills making their way through the Senate and the House, as well as several proposed regulations that would impact governance and compensation. These bills and rules continue to jockey for position, like the toy arcade horses in the video that amuses me so much.

Say-on-Pay - Oy Vey!; More Cheat Sheeting

How to Play Say-on-Pay

It's a pretty good bet that non-binding shareholder advisory votes on executive compensation ("Say-on-Pay") will be adopted this year and will become mandatory for public companies, probably starting with the 2010 proxy season. There are several different pieces of proposed governance reform legislation in Congress, and virtually every one of them would, if adopted, require Say-on-Pay. See the ON Securities Cheat Sheet for details. If Say-on-Pay becomes a reality, this would be in line with the prediction I made in my StarTribune Business Forum commentary last April.


So, what does Say-on-Pay look like in practice, and what is the likely outcome of the shareholder vote? A recent alert by Compensia, a compensation consulting firm, gives a good summary of the proxy statement language used by various companies and the reported results to date. So far, very few companies have reported the results of advisory votes, but in most cases the resolutions approving compensation have passed by wide margins. We should see the reported results of many more votes soon - hundreds of financial institutions that received TARP funds were required to conduct advisory votes in the past few months. The results of most of these votes will be reported in 10-Qs over the next few weeks, and we should get a clearer picture of the atmosphere for these proposals, especially within the financial services industry.

Assuming Say-on-Pay is required to be on the ballot in 2010, what should companies do now? At the very least, companies should start planning early to review their proxy statement disclosures, including CD&A, to address concerns that institutional investors are likely to raise. I recommend reading the RiskMetrics 2009 report, "Evaluating U.S. Management Say On Pay Proposals" (note: you will need to create a free RiskMetrics account if you don't already have one). This report outlines a set of factors that RiskMetrics advises investors to consider in evaluating an advisory vote. Expect RiskMetrics to come out with a more specific set of guidelines in preparation for the 2010 proxy season. Compensia, in its alert, also recommends planning a program of shareholder communications regarding compensation matters.

Another resource is the Say-on-Pay web forum, sponsored by Corporate Secretary magazine, which looks like it will be providing ongoing analysis of Say-on-Pay votes.

What is your company doing to get ready for Say-on-Pay? How much of a pain will it be? Post a comment below or send me a confidential e-mail.

Updated Cheat Sheet Posted

We have just posted an updated version of the ON Securities Cheat Sheet under the Resources listing on the home page of this Blog. The updated document describes the Corporate Governance Reform Act of 2009 introduced by Minnesota's own Rep. Keith Ellison. The Cheat Sheet also reflects the actual introduction of the bill previously proposed by Treasury Secretary Geithner and now introduced by Rep. Barney Frank.

Be Afraid, Be Very Afraid - Preparing for the Elimination of Broker Discretionary Voting

As described previously, on July 1, 2009, the SEC approved by a 3-2 vote an amendment to New York Stock Exchange Rule 452 to eliminate broker discretionary voting in uncontested elections of directors. Of all the recent proposals (see the ON Securities Cheat Sheet), this was the first to be adopted, and this change may have the biggest practical impact on corporate governance for most companies. The rule change is effective for shareholder meetings held on or after January 1, 2010, and it is likely to make it more difficult to get affirmative votes in favor of management's slate of directors.


So for management of a public company, is this your worst nightmare? Maybe it's a little early to start screaming. But at the very least, it's not too early to do some advance planning to avoid surprises for the board. And for the in-house attorneys I work with, it's always a good idea to avoid surprises for the board. Or you WILL have something to scream about.

So what should a company do to prepare? Georgeson, a leading proxy solicitation firm, recently did a good explanation of the possible impact of the amendment, including three main tips:

    Analyze - run some numbers to determine the possible impact of the amendment on your next election, including the possible impact of factors that might lead proxy advisory firms like ISS/RiskMetrics to recommend a vote against the incumbents.

    Communicate - develop a communication plan to educate retail investors on the importance of voting and a last-minute "get out the vote" campaign, just in case.

    Prepare - develop a damage control plan in case of a large percentage of negative votes (or a failed election, in the case of a company that has adopted majority voting for directors).

I talked to one in-house attorney who has started to run analyses of historical vote patterns to predict how the next election will come out. What is your company doing? And how much impact do you think the amendment to the broker voting rules will have? Post a comment below or send me an e-mail.

Announcing the ON Securities Cheat Sheet on New Developments - A Prescription for What Hurts


Is your head spinning from the number of new developments in corporate governance and compensation reform? Are you dizzy from trying to remember whether "say-on-severance" is part of the Schumer Bill or the Treasury Department's white paper? Is your heart racing from trying to keep track of the progress of shareholder access proposals?

We have just the answer - the ON Securities Cheat Sheet will cure what ails you. The Cheat Sheet is a one stop shop for "capsule summaries" of each bill and regulatory proposal being considered. These capsules are sure to make you feel better - and in the spirit of health care reform, this remedy is ABSOLUTELY FREE!

We can't promise that the Cheat Sheet contains the most in-depth analysis available of each bill and regulatory proposal. But it's helpful just to be able to scan the different proposals. For example, it's helpful to see that Say-on-Pay for all public companies is proposed as part of the Schumer bill, the Peters bill, and the Treasury Department's legislative proposal. At the same time, the SEC's proposals issued on July 1 included proposed Say-on-Pay standards for TARP recipients, which have previously been subject to Say-on-Pay requirements under the recovery bill.

We will continue to include the Cheat Sheet in the "Resources" section featured on the home page of this blog, and we will do our best to keep the document up to date. Since you'll be able to put the developments in context, your head should stop spinning. However, I can't make any promises about dizziness. Watching progress of the various proposals making their way through Congress and the regulatory agencies reminds me of the arcade game where you can watch the little mechanical horses race around and around the track, with the lead constantly changing. Here's a great video that shows you what I mean.

Model Bylaw for Shareholder Access; It's Just an IP Thriller

ABA Releases Exposure Draft of Model Bylaw for Shareholder Access Blog reports that the ABA's Task Force on Shareholder Proposals has released an exposure draft of a model bylaw for Delaware corporations to grant shareholder access - giving significant shareholders the ability to nominate one or more director candidates and have the candidates included in management's proxy statement. The model bylaw provides a company with flexibility in its provisions, including the percentage of the company's outstanding stock the stockholder must hold, and the length of time the stockholder must have owned the shares. The Task Force has asked for comments on the model bylaw.

It's not clear how many companies will voluntarily adopt the Task Force's model bylaw without being required to do so. The Delaware General Corporation Law was amended in April 2009 to add a new Section 112 to facilitate bylaws such as the model bylaw. Before 2007, numerous companies faced shareholder proposals supporting shareholder access. The SEC in 2007 determined that management could refuse to include these shareholder proposals in their annual meeting proxy statements. However, there may still be pressure on public company boards to allow shareholder access.

The SEC's proposed rules on shareholder access, if adopted, will make shareholder access mandatory and will eliminate much of the flexibility incorporated into the model bylaw. The Task Force clarified that the model bylaw does not take the SEC's proposed rules into account. However, assuming the SEC's rules become effective, public companies will move to adopt bylaws to clarify the procedures and standards for shareholder access, and the Task Force's draft will be a useful starting point.

The King of Pop - and IP

Working with companies and entrepreneurs gives you an appreciation for innovative business leaders. And whatever you think about Michael Jackson, the guy was a genius within the entertainment business. Some of his business ventures are well known - like his purchase of most of the Beatles' music catalog in the mid-1980s. But until I read his Wikipedia profile, I didn't realize that he was the named inventor on an issued patent. Michael developed an illusion for dancers performing "Smooth Criminal" to lean far forward, as if defying gravity. The trick was originally done with wires, but the Gloved One helped develop special shoes for the trick, and in 1992 he and two co-inventors were granted U.S. Patent 5,255,452: "Method and Means For Creating Anti-Gravity Illusion". Unbelievable - see the video in this article.

If only he had survived long enough to develop "Method and Means for Creating an Economic Comeback."

The SEC's July 1 actions in context; Singing Fish is a hit

The SEC takes action on July 1, but that's not the whole story.

On July 1, 2009, the SEC voted to take several actions:

    The Commission proposed rules that would clarify the statutory requirement that TARP recipients hold annual stockholder votes on compensation ("Say-on-Pay").

    The Commission proposed revisions to the compensation disclosure rules that, among other things, would (1) disclose the relationship to risk of a company's overall compensation policies (not just policies covering top executives) and (2) disclose potential conflicts of interest of compensation consultants.

    In probably the most important move, the Commission approved the New York Stock Exchange's proposal to eliminate discretionary voting in elections of directors. Therefore, brokers must receive instructions from the beneficial owner before voting. The conventional wisdom is that brokers acting without instructions generally vote in favor of management's slate, and that this change will reduce the percentage of shares voting for the director candidates in routine elections. The Wachtell Lipton law firm presented an interesting analysis of this issue in March, taking the position that the current broker votes in favor of management are a pretty good proxy for the votes of retail stockholders, who generally support management's candidates.

However, to understand the impact of the July 1 actions, it is necessary to understand other current developments, some of which would have an even greater impact on a broader segment of companies:
    The Commission's Say-on-Pay proposals covered only TARP recipient companies. However, the Shareholder Bill of Rights Act introduced in the Senate by Senator Schumer, if adopted, would mandate Say-on-Pay for all public companies, as would two other bills currently being considered by Congress.

    The Commission did not require that public companies adopt a specific structure to assess risk and ensure that compensation practices are consistent with the company's risk profile. However, the ARRA and the Treasury's interim final rules currently require the compensation committees of TARP recipients to perform specific risk management functions. Also, the Schumer bill would require that the board of directors of all public companies form a risk committee of independent directors to report to the board about the company's risk profile and the appropriateness of its compensation practices.

    The elimination of discretionary voting by brokers takes on added importance because it could alter the balance of power between management and activist stockholders, especially for companies that have adopted majority vote standards in director elections. This shift would compound the potential increase in power by institutional investors that would result from the Commission's controversial proxy access proposal, reported here, which would allow large stockholders to nominate director candidates who would be included in management's proxy statements.

The bottom line: you need a scorecard to keep everything in context. The ON Securities Blog is working on a scorecard that will cover the SEC proposals, the Schumer bill, other pending bills and the Treasury regulations under TARP and the stimulus bill. What would you like to see covered? Send me an e-mail and let me know.

Maslon Small Public Company Forum's Inaugural Event is a success (singing fish and all).

On June 24, 2009, I participated in the inaugural event of the Maslon Small Public Company Forum, which included presenters from Maslon, Baker Tilly Virchow Krause, Carver Moquist & O'Connor, Feltl and Company and Internal Control & Anti-Fraud Experts, LLC. Course materials and podcasts of the presentations are available at the Small Public Company Forum website, which we hope will be a great resource for small public companies across the region.

For my presentation on underwater options entitled "Underwaterworld", I presented the "world's leading expert on underwater options": Big Mouth Billy Bass, the famous singing fish. You can watch Billy's full performance here. In his immortal words, once you solve your company's underwater options problem, you can take his advice: "Don't Worry, Be Happy!"