Responding to the Yahoo Resume Debacle

As reported by Bloomberg this week, Scott Thompson, the CEO of Yahoo since January, was forced to resign after it was discovered that he did not in fact obtain one of the college degrees listed in Yahoo’s reports. To make matters worse, a discrepancy was also discovered in the reported educational background of Patti Hart, the Chair of Yahoo’s Governance Committee and the search committee that evaluated Thompson. She will not seek re-election at the Yahoo annual meeting this summer.

Not only has this episode caused huge embarrassment to Yahoo, but it may have tipped the balance in the Yahoo Board’s proxy fight with dissident shareholder Third Point LLC, the group that blew the whistle on the academic discrepancies involving Thompson and Hart. On Sunday, Yahoo’s Board announced that it was giving Third Point three Board seats as part of a settlement.

It sounds like it didn’t take much detective work for the hedge fund to uncover the Thompson discrepancy. Yahoo’s Form 10-K amendment, proxy statement and web site had disclosed that Thompson had a degree in accounting and computer science, when in fact he only had a degree in accounting. As Third Point described in a press release:

A rudimentary Google search reveals a Stonehill College alumni announcement stating that Mr. Thompson’s degree is in accounting only. That announcement is consistent with other documents (including filings with the SEC) that reflect Mr. Thompson received a degree in accounting, but not computer science. . . . [W]e were . . . informed by Stonehill College that Mr. Thompson did indeed graduate with a degree in accounting only. Furthermore, Stonehill College informed us that it did not begin awarding computer science degrees until 1983 — four years after Mr. Thompson graduated. We inquired whether Mr. Thompson had taken a large number of computer science courses, perhaps allowing him to justify to himself that he had “earned” such a degree. Instead, we learned that during Mr. Thompson’s tenure at Stonehill only one such course was even offered – Intro to Computer Science. Presumably, Mr. Thompson took that course.

Painful. [Of course, it may just as painful that Yahoo’s largest shareholder thought first to run a Google search. Why not a Yahoo search?]

Does this episode mean that all public companies have to check up on the resumes of all of their directors and officers? Unfortunately, it may not be a bad idea – an expert in this 2006 Forbes article reported discrepancies in around 40% of resumes, and there are many reports of similar numbers. Maureen Mackey of the Fiscal Times just published this list of high profile cases of resume fraud. Here are a few tips for companies:

  • At the very least, the Yahoo experience teaches that public companies should revisit their procedures for gathering and compiling information in director and officer questionnaires for the proxy statement and Form 10-K. If any questions arise, it’s very important to be able to demonstrate that the information was tracked carefully and consistently. See the letter from Third Point to the Yahoo Board last week, requesting detailed information on everything the company looked at in connection with hiring Thompson and drafting the disclosures.
  • Further, it’s a good idea to cross-check the proposed disclosures with disclosures about the same individual in the filings of different companies. In the quote above, Third Point stated that other companies’ SEC filings had reported only that Thompson had a degree in accounting, not computer science.
  • In hiring new executive officers, it’s a good idea to do a background check, and the cost can be modest compared to the risk. The background check should include verifying academic and professional credentials – including whether licenses are current (CPA, etc.).
  • In the event of a proxy fight or threat by a dissident shareholder, it’s important to be even more vigilant in determining that the disclosed information is accurate.

It’s unfortunate that we can’t all trust what we hear – but a little healthy skepticism could have saved the Yahoo folks a lot of anguish.

LegalCORPS Provides Unique and Valuable Services

In “Can’t afford a lawyer? Check out LegalCORPS,” Nancy Crotti of Finance and Commerce provided a great summary of the benefits provided by a great organization. LegalCORPS is a Minnesota nonprofit that provides pro bono business legal services to low-income businesses and nonprofits. I serve on LegalCORPS’ Board.

In the article, I am quoted as describing why I enjoy volunteering for LegalCORPS’ brief advice clinics, and the article does a good job of describing the benefits to small start-up businesses who would not be able to afford a business lawyer and would not know where to find a good one. Also, as Chair of Maslon’s Pro Bono Committee, I appreciate LegalCORPS’ role in helping to broaden business lawyers’ involvement in pro bono services.

In a companion article, “LegalCORPS patent program to serve as national model,” Crotti also describes a unique new LegalCORPS program providing pro bono patent law services to low-income inventors.

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

Should Goldman Sachs Have Disclosed the Possibility of an SEC Lawsuit Sooner?

The SEC’s lawsuit against Goldman Sachs for securities fraud has been big news in the past few days. One interesting aspect of that lawsuit has implications for all public companies – should Goldman have disclosed the existence of the SEC investigation before the SEC announced the lawsuit last Friday? Whatever the answer, Goldman’s public disclosure practices are sure to generate a lot of commentary as the case proceeds.

In a Bloomberg story, “Goldman Sachs Said to Have Been Warned of SEC Suit”, Josha Gallu and David Scheer reported that Goldman received the Wells notice in the case in July 2009, and the company issued a lengthy response in September. Goldman did not mention the investigation in any of its public disclosures. Its 2009 Form 10-K filed on March 1, 2010 disclosed only that Goldman had received “requests for information from various governmental agencies and self-regulatory organizations” relating to CDOs and related instruments, and that the company and its affiliates were “cooperating with the requests.”

Given its size, Goldman might have been able to exclude the possible lawsuit from the 10-K – technically, there is a disclosure threshold of ten percent of current assets (see Instruction 2 to Item 103 of Regulation S-K). However, if it considered the possible lawsuit to be material to investors any time after it received the Wells notice, Goldman arguably should have made the disclosure anyway. In a blog post, “On Goldman and disclosure . . .”, Michelle Leder pointed out that, in contrast to Goldman’s silence, several other large financial companies have elected to disclose the existence of Wells notices. Leder asks, “If disclosing a Wells Notice was material enough for these companies, why was it not material enough for Goldman?”

The Goldman situation highlights one of the most difficult disclosure decisions for a public company. A public company arguably is not always required to make a disclosure as soon as an event becomes “material”, but then insiders must be restricted from trading until the information is disclosed. Goldman clearly based its non-disclosure on a conclusion that the information was not material. In a WSJ MarketBeat post, “Goldman Sachs Conference Call: Any Other Wells Notices?”, Matt Phillips reported that Goldman’s in-house counsel stated Tuesday, in Goldman's investor conference call:

Whether there is a wells or not a wells, if we consider it to be material we go ahead and we disclose it; and that is our policy. To get to your question, we do not disclose every wells we get simply because that just not — that wouldn’t make sense. Therefore we just disclose it if we consider it to be material.

Goldman’s advisors are certainly on the hot seat, given that, as Phillips points out, the announcement of the lawsuit “lopped some $12 billion [15 percent] in market capitalization off the stock on Friday”. And Goldman will continue to be under the microscope for some time, given the publicity that’s likely to accompany the Goldman case for months to come.

Proxy Statements Report that Bonuses Come Back in 2009; Announcing a Great Conference for Minnesota Public Companies

Many public companies have recently filed their proxy statements including a description of executive compensation in 2009, and we are starting to see some analyses in the media of trends in executive compensation. In an article in the St. Paul Pioneer Press on April 8, “For Target's CEO, bonuses are back”, Christopher Snowbeck reported on Target Corporation’s disclosure of its CEO’s compensation in 2009 compared to 2008. Snowbeck reported that, like many companies, Target’s executives received much higher incentive compensation in 2009 than in 2008. In fact, a number of financial services firms, such as U.S. Bancorp and TCF Financial, paid hefty bonuses in 2009, compared to no bonuses in 2008.

Snowbeck asked for my opinion on whether this shift suggested that public companies are moving  toward greater emphasis on bonuses or other short term incentives. He quoted me as attributing the higher bonuses mainly to a different factor, which I called the "under-promise and over-deliver" principle:

For 2008, the year started out with high expectations, which were dashed by the end of the year. . . In 2009, compensation committees were careful to set realistic goals and [performance] targets to give executives a real incentive to turn things around, and many were able to meet or exceed more modest expectations.

By using the term "under-promise and over-deliver,” I wasn’t suggesting that executives or compensation committees are deliberately suppressing goals to boost bonuses. Instead, I just wanted to make the point that financial expectations at the beginning of the year (or other performance period) are a huge factor in ultimately determining bonuses.

In addition to the levels of incentives discussed in Snowbeck's article, there was another interesting aspect of the Target executives’ incentive compensation. Those incentives were actually based on two performance periods – for the first six months and last six months of the year. In an article in the Wall Street Journal on March 15, “Semiannual Bonuses Gain Traction”, Joann S. Lublin reported that many retail and high-tech companies have tried these semiannual bonuses, to help “. . . retain key players by dangling the carrot of two targets a year, while giving boards a chance to raise those goals quickly if economic conditions improve.” The article noted that at least 50 companies have recently disclosed plans to pay semiannual bonuses. [Note: a subscription may be required to read the entire Journal article.]

In his Advisors’ Blog (subscription required), Broc Romanek reported this feedback from his expert consultants about semiannual bonuses:

Semi-annual bonuses were adopted by a small fraction of companies due to those companies' inability (or unwillingness) to set 12 month financial targets due to the uncertainty of the economy. I've seen companies adopt the semi-annual approach and they seem to only pay the bonus when the calendar year is over. I imagine the compensation committees made sure the goals were stretch-based on the best available information at the time the goals were set. Some of these same companies retained the discretion to reduce bonuses prior to payment after taking stock of the year as a whole.

. . . This too shall pass, as compensation committees hate negotiating bonus targets two times per year (or even four times if you count the end-of-the-period negotiations on what to include - or exclude - in the final performance calculations).

SEC Accounting, Compliance & Legal Issues Conference Announced

Bowne of Minnesota has announced the 2010 SEC Accounting, Compliance & Legal Issues Conference, which will be held on Thursday, May 27, 2010 in the IDS Center in Minneapolis. The Conference is always a great way to get timely guidance and practical insights into the latest developments in corporate governance and SEC rules, regulations and initiatives. The faculty always includes experts from top Minnesota law firms and accounting firms, and the program is always well received.

I am one of the co-chairs of the Conference, as I have been for the past several years. I will be leading the Disclosure Update panel discussion, in which my partner Paul Chestovich will also participate. In that panel, we will provide information on new SEC disclosure requirements (including guidance on climate change disclosure), an update on securities litigation and SEC enforcement activity and practical tips on how to avoid liability. As the Conference approaches, I will be blogging about these topics further. Other panels will provide helpful updates on proxy statement disclosures, M&A developments and great information on accounting requirements.

To make it even better, the Conference is free! You are welcome to register here. Also, feel free to e-mail this post to anyone else you know who might be interested – use the “Send to a Friend” feature below or click on the envelope icon.

Talkin' Baseball, Joe Mauer and Proxy Statements: Hypothetical Disclosures of Compensation Risk and Qualifications

In the spring, a securities law blogger’s fancy turns to thoughts of . . . proxy season. And baseball season. Wouldn’t it be great to combine the two?

Earlier this spring, the Minnesota Twins made news headlines by signing All-Star catcher and 2009 American League MVP Joe Mauer to a new 8-year, $184 million contract extension. As Joe Christensen of the StarTribune put it, “Relax, Twins Fans: Joltin’ Joe Stays”.

But what if Mauer were an executive at a public company? Based on new rules adopted by the SEC, as summarized in the ON Securities Cheat Sheet (PDF), after dealing with Mauer’s agent, the Twins (and their securities lawyers) would now have to deal with several newly required disclosures in the proxy statement for the team’s annual shareholders’ meeting. One new item requires public companies to discuss the risk aspects of their compensation policies and practices for employees, if these risks are reasonably likely to have a material adverse effect on the company. Speculating on how the Twins might approach such a discussion, the proxy statement might include the following:

[Hypothetical] Disclosure of Compensation-Related Risk. The compensation committee of the Minnesota Twins Baseball Club (herein the “company”) regularly conducts a risk assessment of the company’s compensation policies and practices for its executive officers and other employees. The committee’s assessment for the current year focused in large part on the company’s recent amendment to its employment agreement with Chief Offensive Officer and Chief Defensive Officer (COO/CDO), Joseph P. Mauer. The committee has determined that Mr. Mauer’s new compensation package, which guarantees him cash payments totaling $184 million through the 2018 Major League Baseball season, is reasonably likely to create a material risk for the company. The long-term and guaranteed nature of Mr. Mauer’s compensation eliminates meaningful performance-related compensation incentives that generally apply to whose contracts are incentive laden or for shorter terms. However, the committee believes that risks resulting from elimination of monetary incentives are substantially offset by Mr. Mauer’s highly competitive personality and desire to bring a World Series Championship to his home state of Minnesota. There is also a risk that Mr. Mauer’s high levels of annual compensation will hinder the Twins’ ability to employ the talent at other positions necessary to compile a winning team in the future. However, the committee believes it has appropriately balanced the risks arising from amending Mr. Mauer’s contract against the risk of recurring decreases in annual revenue from ticket sales that might have resulted had the company failed to do so.

And elsewhere in our hypothetical proxy statement, you might read the following:

[Hypothetical] Disclosure of Director Qualifications. The following is a narrative disclosure regarding the experience, qualifications, attributes or skills which, in light of the company’s business and structure, led the company’s board of directors to conclude that the company’s COO/CDO, Joseph P. Mauer, should serve on the board of the company, i.e., should be maintained in a leadership position. Such experience, qualifications, attributes and skills can appropriately be summarized as follows: ‘HE’S JOE MAUER.’

Let the proxy season begin. And Play Ball!

Thanks to my Maslon partner and Twins fan and securities lawyer extraordinaire, Alan Gilbert, for his assistance in drafting the above disclosures.

Image: Wikimedia Commons


Repo Men - How Lehman Used "Repo 105" to Manipulate Its Balance Sheet

In “The Origins of Lehman’s ‘Repo 105’”, a recent post from the New York Times DealBook Blog, authors Michael J. de la Merced and Julia Werdigier discuss the so-called Repo 105 technique. Repo 105 came to light in the 2,200-page report of the court-appointed examiner in the bankruptcy case. Using this technique, Lehman was able to move $50 billion in debt off its balance sheets just before the end of each of the last several quarters leading up to the company’s collapse. The techniques used by Lehman are reminiscent of the types of misleading accounting practices I thought had ended after the Enron and WorldCom scandals:

"Like all repos, short for 'repurchase agreements,' it involved what amounts to a short-term loan, exchanging collateral for cash up front, and then unwinding the trade as soon as overnight. . . . Unlike other repos, the value of the securities Lehman pledged in Repo 105 transactions were worth 105 percent of the cash it received. . . . Yet the beauty of Repo 105 was that, . . . . the firm could book the transactions as a 'sale' rather than a 'financing,' as most repos are regarded. That meant that for a few days — and by the fourth quarter of 2007 that meant end-of-quarter — Lehman could shuffle off tens of billions of dollars in assets to appear more financially healthy than it really was."

The DealBook post goes on to describe that Lehman could not get any U.S. law firms to give a legal opinion that the transaction was a “true sale” rather than a loan. So Lehman went opinion-shopping and got the U.K.-based law firm Linklaters to give the “sale” opinion under English law. To accomplish this, Lehman moved the transactions offshore, to its European subsidiary (even though it still used a large amount of U.S.-originated securities). Even though Martin Kelly, a former financial officer, had questioned whether there was any purpose for the transactions other than to manipulate the balance sheet, Lehman’s top officers and advisors seemingly did not ask the hard questions. As described in this additional DealBook post on the topic, the examiner’s report leaves the door open for lawsuits and enforcement proceedings against all of these parties. We will be hearing about “Repo 105” for a long time to come.

A word for Repo 105 comes to mind that I always thought originated, like Lehman’s legal opinion, in the U.K.: “Shenanigans”. It turns out that its origin is uncertain, but it sounds Irish, so I guess that’s close enough.

Image: Wikimedia Commons

Fun With Numbers - Equity Awards Under the New Proxy Disclosure Amendments

Dollar SignAt our last seminar on the new proxy disclosure amendments, the attendees expressed interest in the change in reporting equity compensation awards in the Summary Compensation Table. I’ve included a modified version below of the example we included in the course materials (PDF), to highlight the difference between the old rules and the new rules.

Our example involved a CEO named Favre (consistent with our football theme). He received stock options in most of the past several years, but in 2008 he received a sizable restricted stock grant in lieu of an option grant:


Stock Options (3 Year Vesting)
Year Shares Grant Date Fair Value Expense/Year from the Grant
2009 50,000 $200,000 $66,667
2008 0 - -
2007 25,000 $90,000 $30,000
2006 100,000 $300,000 $100,000


Restricted Stock (5 Year Vesting)

Year Shares Grant Date Fair Value Expense/Year From the Grant
2009 0 - -
2008 50,000 $250,000 $50,000
2007 0 - -
2006 0 - -

The right hand column above represents the financial statement expense the company would recognize during each year of vesting. Under the old rules, the reported equity compensation amount for Mr. Favre in each year would have reflected the amount expensed in that year for all of the officer’s awards:


Summary Compensation Tables - Old Rules
  Year Stock Awards Option Awards
Brett Favre, CEO 2009 $50,000 $96,667
  2008 $50,000 $130,000
  2007 $0 $130,000

The dollar amounts reported in the table reflect portions of awards granted in multiple years, and therefore the impact of individual grants is smoothed out. For example, the “Option Awards” amount for 2008 ($130,000) reflects portions of the value of the options granted in 2006 and 2007.
By contrast, see the treatment under the new rules of the same awards to our intrepid CEO. The amounts reported for each year reflect the full grant date fair value of the awards granted in that year:

Summary Compensation Table - New Rules
Stock Awards Option Awards
Brett Favre, CEO 2009 $0 $200,000
  2008 $250,000 $0
  2007 $0 $90,000


Note that the smoothing out effect is gone – the impact of a large grant will be magnified in the year of grant. Therefore, a big equity grant will cause compensation levels for that individual to “bounce” in the year of grant. Companies need to plan for the possibility that there may be more changes in the “roster” of NEOs from year to year than under the old rules. Also, note that the amendments require that the previous years (2008 and 2007) be restated from the way they were reported in the proxy statement in previous years.

There are some other interesting aspects of the new reporting method, which I’ll describe in a future post.

New SEC Interpretations

The SEC staff just provided some interpretive guidance on some of the new proxy amendments to its Compliance & Disclosure Interpretations on Regulation S-K. Questions 116.05, 116.06, 117.04, 119.20, 128A.01, 133.10 and 133.11 relate to the new rules. For example, Question 117.04 relates to the Summary Compensation Table: if a named executive receives a grant in a particular year but forfeits the award in the same year, the grant date fair value of the award is still reported for that year.

The staff also added new questions on the the Form 8-K amendments to Compliance & Disclosure Interpretations on transition issues – see Questions 6 and 7.

Never Mind!

After all the speculation about effective dates of the new amendments to the proxy disclosure rules, the SEC on Tuesday published a set of Compliance & Disclosure Interpretations that clarifies the effective date of the new amendments. The C&DIs clarify that the effective dates are indeed in line with the statements made at the public hearing at which the amendments were adopted.

The most important clarification is that companies with a fiscal year ended before December 20, 2009 will not have to comply with the new rules this year. A company with a fiscal year ended on or after December 20, 2009 will be required to comply, unless the definitive proxy materials and the Form 10-K are filed before February 28, 2010. The C&DIs also clarify some of the transition rules in connection with IPOs and other special situations.

Of course, the section of the ON Securities Cheat Sheet discussing the amendments has been updated consistent with the C&DIs.

Next week, I will discuss some examples of risk-based compensation analysis. In the meantime, you might review this previous post that includes insights from a recent Deloitte program on compliance with the new rules.

Again, Happy Holidays! For those of you in the Upper Midwest, if you have to drive, drive carefully.

Cheat Sheet Updated!

The ON Securities Cheat Sheet has now been updated to provide a summary of the SEC's proxy disclosure amendments at the top of the second page. Descriptions of the some of the pending legislation and other regulatory developments have also been updated. The Cheat Sheet continues to put the new legislative and regulatory developments in context by providing short summaries in one short handy reference (never more than two pages).

Stay tuned for other updates in the coming weeks.

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.

A Little Holiday Cheer from the SEC [Updated Post From 12/10/09]

SEC LogoAs many of you know, the SEC announced yesterday [December 9] that it will hold an open meeting on Wednesday, December 16 for the purpose of adopting its proposed amendments to the proxy disclosure rules. For a short summary of these amendments, see the ON Securities Cheat Sheet. The two questions on everyone's mind: When will the rules be effective? And what changes will the SEC make to the proposals? Most people I talk to believe the rules will apply to 2010 proxy season for companies with a December or later fiscal year end. However, that could certainly change. Assuming the final rules are similar to the proposals, many public companies will be busy over the next few weeks preparing for the new disclosures. Many people have focused on the requirements to include a risk disclosure in the CD&A section, the changes to the equity calculations in the Summary Compensation Table and the required disclosure of compensation consultant conflicts. But there are some "sleepers" too, such as the requirement to elaborate on the qualifications of each individual director nominee - drafting might be trickier than people think. We'll all be watching the SEC on Wednesday.

Other Updates

A few other thoughts:

  • In the Corporate Counsel Blog this week, Broc Romanek gave a great report on the Supreme Court arguments in a case challenging the constitutionality of the PCAOB.
  • Thanks to Mike Melbinger in the Melbinger Compensation Blog for pointing out this Chicago Tribune article, quoting U of Chicago business professor Steven Kaplan for his interesting perspective on why CEOs are not overpaid. Kaplan obviously is trying to be controversial - check it out. I especially like the comparison between the earnings of the 20 largest hedge funds in 2007 ($20 billion) and that of the S&P 500 CEOs combined in the same year ($7.5 billion).
  • The Maslon Holiday E-Card came out this week, and it's outstanding. Please check it out and accept my wishes for a very happy holiday season and a great 2010!

Busted Again: More SEC Enforcement Developments

BustedAs I reported previously, the SEC enforcement staff is "loaded for bear," stepping up its enforcement activities to go after violations of the securities laws. Some recent stories reinforce that it is more important than ever to guard against these violations: The Wall Street Journal reported on Wednesday that the SEC has greatly expanded its insider trading investigations of broker-dealers and hedge funds (subscription required to view complete article). According to the report, the staff has sent at least three dozen subpoenas in the past month, including investigating the role of Goldman Sachs bankers. The staff is using sophisticated technology to examine the webs of relationships among traders, investment bankers, attorneys and others.

    Comment: There is no reason to think that the current investigations are limited to broker-dealers and hedge funds, and the trail could easily lead the SEC staff to company personnel. It is more important than ever for companies to monitor and enforce their insider trading policies.

The SEC last month reported that it entered into a consent decree with former officers and accountants at SafeNet in the first enforcement action by the Commission under Regulation G. Reg G regulates the use (and abuse) of "non-GAAP financial measures" by reporting companies. The complaint accused the personnel of engaging in a scheme to meet or exceed quarterly EPS targets through improper accounting adjustments. The company represented that it was excluding "non-recurring" expenses from its results, when in fact it was excluding recurring operating expenses to make its earnings look better.

    Comment: SafeNet obviously was engaged in outright fraud, and Reg G gave the SEC staff another means to go after bad people. However, it's no coincidence that the first Reg G proceeding is in late 2009 - again, the enforcement staff is actively looking for perceived wrongdoing, in part to justify the agency's continued existence. Public companies should be more careful than ever in complying with Reg G - for example, be careful about characterizing any excluded expenses as "non-recurring," which is a real hot-button issue with the SEC staff.

Westlaw Business Currents reported last week that there has been a "noticeable uptick" in companies disclosing Wells Notices relating to enforcement proceedings.

    Comment: Be careful out there. And don't get caught cheating.

No News. I keep checking the SEC calendar to see whether the Commission has scheduled a meeting to consider adoption of the new proxy disclosure rules. Nothing posted yet. It's hard to predict whether anything will be adopted this year, or whether the new rules will be effective for the 2010 proxy season.

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.

What's Up?

question3Early November finds us in a kind of limbo - those of us who advise public companies on governance and compensation matters are waiting for something big to happen. But there's plenty of smaller stuff to report on - although most of these items present more questions than answers:

    Proxy Disclosure Rules. On November 4, SEC Chairman Schapiro gave a speech addressing current regulatory developments. She described the proxy disclosure rules but did not address when they would be adopted or considered. The Corporate Counsel Blog reports that the rules will not be adopted on November 9, as previously rumored. However, there is still a chance that the rules will apply for the 2010 proxy season. If so, there won't be much time to evaluate the rules, or to hold a compensation committee meeting to address the new disclosures. Stay tuned. . . .

    Proxy Access. Rep. Maxine Waters has proposed an amendment to the Investor Protection Act of 2009 (the current provisions of the Act are described in the ON Securities Cheat Sheet). The amendment would require the SEC to adopt rules permitting large shareholders to nominate directors in the company's proxy statement (proxy access). If added to the Act and ultimately adopted, this provision would enhance the SEC's position in adopting its proposed Rule 14a-11 granting proxy access.

    Say-On-Pay and Shareholder Surveys. Companies continue to conduct annual advisory votes on compensation on a voluntary basis. Meanwhile, as reported by the Corporate Counsel Blog, some companies, including Schering-Plough, have begun to survey their shareholders. This will provide more detailed data on shareholders' opinions about compensation practices and may emerge as an alternative or supplement to simple yes-or-no advisory votes.

    New York Power of Attorney Law. You may have read about the amendments to the New York power of attorney laws, effective September 1, 2009. See this Forbes article. The amendments impose strict requirements (font size, notarization, etc.) for powers of attorney, particularly those signed in New York by New York residents. The amendments have prompted a flood of articles and analyses, including speculation that the requirements could affect the validity of powers of attorney for SEC registration statements, Section 16 filings, etc. I agree with this analysis, indicating that, even though there is no definitive guidance, the validity of powers of attorney for SEC filings should be governed by SEC rules and not state law.

I should get updates on some of these items next week - I'll be attending the NASPP Annual Conference in San Francisco. Of course, I can't wait to share the information with the ON Securities readers. There may even be a tweet or two, if you can't wait for the Blog.

Risky Business - Evaluating the Risk Components of Compensation

risk1Last week, the Twin Cities Chapter of the National Association of Stock Plan Professionals hosted a presentation on hot topics in executive compensation, led by Tara Tays and Rive Rutke of Deloitte Tax. I have included their PowerPoint under the Resources section of this blog, and in a future post I will discuss some of the compensation trends they reported.

One of the hot topics covered by the presenters was compensation risk analysis. They presented a very high-level summary of steps a company should consider - see pages 12 and 13 of the PowerPoint. Financial institutions receiving TARP funds are already required to do this analysis; for other types of companies, they may not yet have initiated a formal risk analysis process, monitored at the Compensation Committee level.

As I discussed previously, if the SEC adopts its proposed amendments to the proxy rules, each public company will be required to disclose in its proxy statement how its overall compensation policies for employees (including compensation of non-executives) create incentives that can affect the company's risk level, and its management of risk. The disclosure is required if the compensation policies create risks that may have a "material adverse effect" on the company.

    Comment: The bottom line is that the proxy rule amendments requiring this risk disclosure may be effective in the upcoming proxy season. Public companies should start thinking about the analysis that must be completed by then, in order to be able to make a well-founded statement in the proxy statement. The recommended steps in Deloitte's flow charts will not apply to all companies, but at least they provide a benchmark for companies that have already started the process, or a starting point for those that have not.

What do you think of Deloitte's recommended approach? Do you have any tips to share? Send me an e-mail, or post a comment below. And be careful out there - it's a risky world.

Memories of a Meltdown - and Lessons in Executive Compensation in Bad Times

dollarsign2The news today was filled with reports on the first anniversary of the collapse of Lehman Brothers. That event represented the first time most of us realized the extent of the financial disaster that played out over the following few months. Not exactly cause for nostalgia.

At around the same time, our local chapter of the National Association of Stock Plan Professionals (NASPP) produced a webcast/conference call entitled "Troubled Company, Workout and Bankruptcy Issues: A little 'gloom and doom' with your morning java." I moderated the panel discussion, which featured very topical discussions by Mike Meyer, a bankruptcy attorney with the Ravich Meyer firm, and Scott Feraro and Kathy Bonneville, compensation consultants with Seabury OCI Advisors, LLC. Obviously, this topic is just as relevant today as it was then. Just to keep on sharing the "gloom and doom", we have made the transcript available - it makes interesting reading. Topics included:

    The role of compensation and risk management in the financial meltdown, and ways to structure compensation in a troubled company situation

    Executive hiring, employment arrangements and retention in workout and bankruptcy situations - including the types of retention arrangements that will "fly" in bankruptcy court

    Strategies in dealing with underwater stock options

Let's hope for a better year ahead.

SEC Enforcement Follow-Up

The SEC just got another incentive to ratchet up its newly aggressive enforcement posture another notch. On Monday, as described in this New York Times article, Federal District Judge Jed Rakoff issued a scathing order (see the link in the Times article) that voided Bank of America's $33 million settlement with the SEC. The enforcement proceeding related to Bank of America's failure to disclose the approval of Merrill Lynch bonus payments in the merger proxy statement. The judge was especially hard on the SEC's failure to go after the individual officers of Bank of America, accusing the parties of using the shareholders' money to reach a settlement that absolves the individuals of responsibility. If a new settlement is not reached and the case goes to trial, the judge will have plenty more opportunity to chastise executives, lawyers and public officials alike. It will be interesting to see whether the negative publicity causes the SEC to take its enforcement activity to yet another new level.

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.

"Busted" - Don't Be Blindsided by the SEC's New Enforcement Posture

busted1I spoke this week at a Minnesota CLE Conference on the topic of how public companies can avoid liability for their disclosures. In preparing my remarks, it struck me that the SEC is "loaded for bear" in going after public companies and their officers with investigations and enforcement proceedings. The SEC has increased and reorganized its enforcement staff and is trying to raise its profile - really, an attempt to justify the agency's continued existence. Recent examples, just during July and August of 2009:

    A recent accounting fraud case against General Electric, where GE agreed to pay a $50 million fine.

    The SEC's $33 million settlement with Bank of America for failure to disclose the approval of Merrill Lynch bonus payments in the merger proxy statement. The District Court is considering rejecting the settlement as too lenient, which the SEC is disputing.

    The SEC's "clawback" action to recover $4 million in incentive compensation from the CEO of CSK Auto, reported here. It's not clear whether the SEC will be successful in this case. However, clearly, the SEC is trying to send a message to corporate officers that, if the officers are not vigilant to preventing accounting fraud and disclosure violations, their own compensation may be at risk.

This is all happening at a time when private lawsuits for securities fraud are getting more difficult for plaintiffs' attorneys to bring - a point of agreement for the plaintiffs' attorneys and defense attorneys on the panel. This does not mean company officials can relax, due to the increased scrutiny from the SEC and, probably, increased skepticism from judges and juries about public company practices. As I said in this prior post, this atmosphere should lead public companies to carefully consider their disclosure processes, including the disclosure controls and procedures required under SOX.

In other words, once again, "Don't Get Caught Cheating." Or, make sure you're not "BUSTED" by the SEC.

If you would like a copy of my PowerPoint presentation from this week, send me an e-mail. If you have any tips on disclosure procedures, or just want to weigh in on the SEC's newly found "mojo", post a comment below.

Have a great Labor Day weekend!

Say-on-Pay Play-by-Play

footballAs I've said before, some version of a requirement for shareholder advisory votes on compensation (Say-on-Pay) is likely to be adopted in the next few months. The Say-on-Pay requirement will probably be similar to the Corporate and Financial Institution Fairness Act of 2009, recently adopted by the House and described in the ON Securities Cheat Sheet. In other words, Say-on-Pay has become a political football lately.

    [Editor's Note: You may have noticed veiled references to "football" in the title and the first paragraph of this post. The Editor of the ON Securities Blog categorically denies ANY relationship between these references and Brett Favre's announcement Tuesday that he signed a contract with the Minnesota Vikings.]

It looks like shareholder advisory votes will not be required until the 2011 proxy season. Still, it makes sense to keep track of the results of recent advisory votes to see how various companies have fared. Several hundred financial institutions that received TARP funds were required to hold advisory votes last spring, and their recently filed Form 10-Q reports disclose many of the results.

So, what does the scoreboard look like in Say-on-Pay season? Generally, the non-binding proposals to approve executive compensation did very well. Here is a sampling of the results from financial institutions with strong ties to the Twin Cities:

US Bancorp: 92.0% in favor
Wells Fargo Company: 92.8% in favor
TCF Financial Corporation: 69.5% in favor

If the SEC adopts its recent rule proposals, we will no longer have to wait several months to see the results of shareholder votes. Companies will generally have to report them on Form 8-K within four business days. It will practically be possible to follow the results on your BlackBerry, along with football scores.

    [Editor's Further Note: Did I mention that Brett Favre is joining the Vikings? All right, maybe I did have football on my mind.]

Watch Out For Those Claws!

The SEC's recent clawback action against Maynard Jenkins, the former CEO of auto supplier CSK Auto Corporation, has gotten more commentary than just about any other recent enforcement proceeding I can think of. The SEC is seeking reimbursement of $4 million in Jenkins' bonuses and profits from his stock sales during years when CSK's financial results were inflated by accounting fraud. What's getting all the attention? The SEC has not charged Jenkins individually with any wrongdoing. claws2

The SEC is seeking the clawback under Section 304(a) of the Sarbanes-Oxley Act of 2002, which allows recovery of incentive compensation following a financial restatement "as a result of misconduct." Section 304 doesn't specify that the misconduct be tied directly to the individual from whom the recovery is sought. However, the SEC, in its press release announcing the action, reported:

It is the first action seeking reimbursement under the SOX 'clawback' provision . . . from an individual who is not alleged to have otherwise violated the securities laws. . . . . 'Jenkins was captain of the ship and profited during the time that CSK was misleading investors about the company's financial health,' said Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office. 'The law requires Jenkins to return those proceeds to CSK.'

Much of the negative commentary accuses the SEC of overreaching, in a situation where it could not state an accounting fraud case directly against Jenkins. However, this case is an extreme one - Jenkins collected $4 million in bonuses and stock profits at a time when the company was committing massive accounting fraud. The COO, CFO, controller and another responsible officer were all indicted, and the latter two individuals have already pled guilty. Even if the SEC couldn't make a direct case against Jenkins for the fraud, this is the perfect test case for the extension of a Section 304 clawback beyond the responsible individuals to the "captain of the ship".

Regardless of the result in the case, the SEC has sent another signal that it is "loaded for bear" - as we reported in this post, the agency has a beefed-up enforcement staff and new energy. Regardless of the result in the Jenkins "no fault clawback" case, the SEC will be putting more heat on executives in the coming months.

"Don't Get Caught Cheating"

I've been working on my outline for an upcoming continuing legal education program on how in-house practitioners can avoid or minimize securities fraud liability. I talked to Maslon's securities litigation partner extraordinaire, Rich Wilson, about the topic, and we came up with the following tips:

    justiceThe simple rule is to disclose material information in a way that's not misleading. However, Rich cautions that a higher standard of disclosure may be required now. As Rich puts it, "There is a growing public skepticism that will make its way into the jury pool and even into the judiciary. In a dispute, a tie may no longer go to the company." SEC enforcement also poses new dangers, because the agency has a beefed-up enforcement staff and new energy. In other words, business as usual may not be the best course in the current atmosphere.
    Also, in the current climate, process and consistency become increasingly important. Companies should take a fresh look at their disclosure controls and procedures. The CEO and CFO have to certify the adequacy of these procedures every quarter in the 10-K and 10-Qs, but now is the time to make sure the procedures still make sense and are being followed consistently. This increased emphasis on compliance has to be maintained, even at a time when a lot of companies are cutting back on their in-house legal and compliance staffs due to economic considerations.

    It is also important to minimize the possibility of inconsistent disclosures by multiple individuals, and leaks of material non-public information. The company should have a clear written communications policy to ensure that corporate disclosures are made consistently by authorized spokespersons, and to prevent leaks. Again, the company should monitor and enforce consistent compliance with the policy.

    It is also very important to consistently monitor and enforce compliance with the company's insider trading policy. If insiders appear to be trading in the company's stock before allegedly material information is disclosed, this will greatly increase the risk of a lawsuit or SEC enforcement proceeding, compared to a disclosure-based claim alone.

All good tips. Although, maybe not as good as the tip my law school buddy used to give me: "Don't get caught cheating". Yes, he was kidding. Or maybe not - he ended up getting elected to Congress.

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.

More on the Proposed SEC Rules, including Compensation Consultant Disclosures; The Color of Blogging

More on the SEC's Proposed Amendments to Disclosure Rules

As described previously, the SEC's newly proposed amendments to its disclosure rules, issued on July 10, 2009, would require significant new proxy disclosures - disclosure of compensation policies and their impact on risk and risk management, and a new method for reporting of the value of equity awards in the Summary Compensation Table. The proposals include other notable requirements as well. Here is a description of what is covered and what is not covered in the proposals:

Compensation Consultant Information. The amendments, if adopted, would require additional disclosures about compensation consultants, if they play any role in determining or recommending executive or director compensation. The proxy statement would need to include information about the fees paid to the consultant and any affiliates of the consultant during the last fiscal year; the additional services provided to the company by the consultant and its affiliates; and whether the consultant was recommended by management.

    Comment. When it considered the compensation disclosure rules in 2006, the SEC received public comments of institutional investors and others, who claimed that the fees paid to compensation consultants for other services created conflicts of interest and should be disclosed. The SEC declined to require this disclosure in the final rules. Just before the rules went into effect, a group of large institutional investors sent a letter to the 25 largest U.S. public companies, requesting that they include such information, and many companies complied voluntarily with the request.

    Since that time, the issue of consultant conflicts has surfaced numerous times. A 2007 study commissioned by a House committee found that the data "suggested" a correlation between the levels of CEO pay and percentage of the consultant's fees derived from services other than executive pay advice. However, a 2008 academic study coauthored by professors at the Wharton School found "no compelling evidence" that consultants with higher level of non-executive services were engaging in "rent extraction" (i.e., giving executives higher pay to keep the non-executive business). In any event, the SEC is proposing to mandate the enhanced disclosures, which seem likely to "chill" compensation committees' use of consultants that provide other services to the company.

Other Proposed SEC Disclosure Requirements. The SEC's proposed amendments would also require:

  • new disclosures about the qualifications of directors and director nominees, including a statement about the specific skills they possess that qualify them to be directors and committee members;

  • disclosure of the company's leadership structure, including the identity and role of a lead director, if the company has one;

  • disclosure of the board's role in the risk management process; and

  • current reporting of the results of shareholder votes on Form 8-K.

The release also proposes technical amendments to the proxy solicitation rules.

What the Proposed Amendments DO NOT Do. Notably, the SEC's proposed amendments do change or clarify the compensation disclosure rules in their most problematic area - the extent to which the company must disclose the performance target levels upon which compensation is based, and whether the target levels may continue to be excluded based on competitive harm. This issue is certainly the source of the most frequent SEC comments on proxy disclosures. However, the SEC's proposing release requests public comment on whether the exclusion based on competitive harm should be eliminated. The release, on page 65, also encourages any interested person to suggest additional changes to the rules. Stay tuned, and look for final rules this fall, so they can be effective for the 2010 proxy season.

"Love the Orange"

In launching the ON Securities Blog, one of my major decisions was the color environment (after all, if the site looks great, who cares about the content?). WordPress software has some cool choices, and I really liked the color scheme called "Love the Orange" - in fact, I loved it. After I had taken decisive action and made this selection, one of my partners validated my choice by telling me that "orange is the new power color." Who knew? Of course this selection has made a big impact on my life - see the picture of my new, powerful identity.

[caption id="attachment_255" align="alignnone" width="222" caption="Blogger a L'Orange"]Blogger a L'Orange[/caption]

SEC Release Provides Detail on Proposed Compensation Disclosure Amendments; Podcasts Available!

Proposed Compensation Disclosure Amendments Affect Risk Disclosures and Summary Compensation Disclosure Table Values

Last Friday, the SEC issued its release that details the proposed amendments to the compensation disclosure requirements for public companies, which the SEC approved on July 1. If adopted, the changes would generally be effective for the 2010 proxy season. Two of the most important proposed changes:

CD&A. The SEC proposes to add a new instruction to the requirements for the Compensation Discussion and Analysis section of the proxy statement. A company would be required to disclose how its overall compensation policies for employees create incentives that can affect the company's risk level, and its management of risk. The disclosure is required if the compensation policies (including compensation of non-executives) create risks that may have a "material adverse effect" on the company. The new CD&A instruction includes a laundry list of situations that might require disclosure, such as the payment of bonuses based on short-term goals, in situations where the risk to the company extends over a longer period of time.

    Comment: The examples in the instruction seem like they are lifted right out of the pre-meltdown playbooks of Lehman Brothers and other financial institutions - the bonus practices of these institutions clearly encouraged risky practices that brought down some of the institutions and nearly brought down the world economy. In other industries, it's hard to imagine that companies will come to the conclusion that their compensation practices create "material risks" for the company.


    Assuming the SEC adopts the new instruction, I would guess that very few companies other than financial institutions will disclose anything but a generic sentence stating that the company has done the risk assessment and found nothing material. For the financial institutions that have accepted TARP funds, the American Recovery and Reinvestment Act of 2009 and the related Interim Treasury Regulations already require specific risk assessment in their compensation practices. For other companies, does the SEC really need to add two pages of instructions to CD&A, for such a limited result for most companies? My guess is that the Commission was responding to public pressure to do something about the risky behavior that led to the current economic mess.

Summary Compensation Table (SCT). The SEC proposes to change the calculation method for stock awards and option awards in the SCT to require disclosure of the grant date fair value of the aggregate awards to each individual. Currently, the SCT requires disclosure of the dollar amount recognized for financial statement reporting purposes for the individual for the relevant year under FAS 123R. This change will affect the total compensation line for each individual and may have a major impact on total compensation in some years and could change the individuals to be included in the SCT for the year. 

    Comment: This change reverses the last-minute change the SEC made in the SCT disclosures in December 2006, without public comment and just as the compensation disclosure rules were going into effect. The 2006 SEC release that implemented the "December surprise" stated the SEC's belief that "this disclosure ultimately will be easier for companies to prepare and investors to understand." In fact, the effect was just the opposite - the current amounts are difficult to calculate and confusing to investors, as each year's dollar amount includes a variety of equity awards that have been granted in different years and are amortized over time. As famously reported by Gretchen Morgenson of the New York Times, the current calculation method can actually lead to negative compensation numbers for some executives in some years. The new method, if it is adopted, will be more predictable and will relate more closely to the equity grants made in the year in question.

And that's not all. The proposed rules would make a number of other changes, which will be discussed in a future posting.What do you think of the proposed amendments? Post a comment below or send me an e-mail and let me know.

You Don't Have to Work at a Small Public Company to Enjoy These Podcasts!

Our June 24 program for the Small Public Company Forum is now available as a series of downloadable podcasts. The Forum program contains valuable insights from experienced professionals at several firms on:

    • Detection of financial fraud, and Section 404 internal controls compliance.
    • Raising money in the current economic environment.
    • How to deal with underwater stock options (yes, this was my program with the singing fish!).

Unfortunately, the podcast does not come with the delightful breakfast hosted by the Forum sponsors. If you want to get notice of future programs, subscribe to RSS e-mail updates in the top gray box on the right side of the Forum website.

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!"

XBRL Affects Form 10-Q, Even If It Doesn't Apply to Your Company Yet

The SEC's adopting release for its mandatory XBRL rules was effective on April 13, 2009. The very largest public companies have been scrambling to comply with these rules, which apply to them starting with the first 10-Q containing financial statements for a period ending on or after June 15, 2009 - they will need to be ready to provide their financial statements in interactive data format using eXtensible Business Reporting Language (XBRL). But other companies are not subject to the rules until mid-2010 (2011 for smaller reporting companies). Do these other companies need to be concerned with the XBRL rules right now?

The answer is yes, at least in the cover page of Forms 10-Q and 10-K. The release adds a "check the box" paragraph for the issuer to indicate whether it has submitted Interactive Data Files required to be posted during the preceding 12 months (or for such shorter period that it was so required)."  There was a lot of discussion among practitioners regarding whether the new language for the cover page is required to be included for all filings on and after April 13, 2009 (the effective date of the Release), or only after the issuer is subject to the phased-in rules to submit an XBRL file with those filings. 
The answer is that all issuers need to include the new language for all 10-Q and 10-K filings on and after April 13, 2009, but the issuers should leave the boxes unchecked because the interactive data files are not yet required to be filed. The SEC's Division of Corporation Finance has confirmed this in a Compliance & Disclosure Interpretation, CD&I 105.04 . The boxes should remain unchecked (blank) until the issuer becomes subject to the XBRL rules, generally in 2010 or 2011.

For those wanting more basic information on XBRL, see the Small Entity Compliance Guide  recently released by the SEC.


The adoption of XBRL may be the principal legacy of Christopher Cox as Chairman of the SEC. You can still witness one of Cox's many "road show" speeches, touting the virtues of XBRL, on YouTube. Almost makes you forget the criticism of Cox for his laissez faire approach to regulation, leading to John McCain's pledge to fire him.

Will XBRL be the revolution touted by Cox, or just a pain?  Email Marty