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

I just watched the new HBO movie Too Big to Fail, based on the book by Andrew Ross Sorkin about the events behind the financial crisis. In just over 90 minutes, the film has to gloss over some of the details, but it’s surprisingly entertaining. The film brought back memories of following the unfolding events of late 2008 - the Lehman Brothers collapse, the AIG bailout and many others that were happening every day. There are some classic scenes, such as Treasury Secretary Henry Paulson, played by William Hurt, basically locking the chairmen of the biggest banks in a conference room until they accepted TARP funds (whether they needed it or not).

The film is really well acted. Hurt’s performance as Paulson and Paul Giamatti as Fed Chairman Ben Bernanke are both great. But the film is especially worth watching for the performance of James Woods as Richard Fuld, the Chairman and CEO of Lehman Brothers. Whether he’s flatly dismissing Paulson’s demands that Lehman raise capital, or barging into the negotiation of the failed sale of Lehman to the Koreans, Woods paints a fascinating picture of an officer who can’t read the writing on the wall.

HBO also produced a companion documentary, Too Big to Fail: Opening the Vault on the Financial Crisis, featuring interviews with commentators and the actors. There’s a message in this commentary for everyone who sets compensation policy. Sorkin says the following about Fuld:

Dick Fuld had a billion dollars of stock in the company. He had more skin in the game than anyone else. He had every incentive to always do what you would think would be the right thing. He rode his billion dollars of stock down to $56,000.

Certainly, it’s helpful when executives have “skin in the game”. When executives receive a significant amount of their compensation in the form of equity, and they are required to hold much of the equity until after requirement, these features probably do help the company discourage excessive risk-taking behavior. This only goes so far, however - many Wall Street executives like Fuld had huge amounts of equity at risk, and it still didn't prevent the financial collapse.
 

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Effective communication. Engagement. Getting constituents to ignore the “noise” and buy in to your message. These are all important challenges faced by public companies this year as they prepare for the two new shareholder advisory votes required at their annual meetings under the Dodd-Frank Act: Say-on-Pay and the frequency vote.

These challenges are also important themes of the two best films of 2010: “The Social Network” and “The King’s Speech”. I loved both movies, although I agreed with the Golden Globes voters who gave “Social Network” the Best Picture nod last night. But I hadn’t focused on the connection between the two films until I read “Top Two Films Offer Lessons on Life and Media”, a very insightful commentary in the Minneapolis StarTribune by editorial writer and media commentator John Rash. As Rash points out, both films address the challenges of connecting with people in a new age of media:

In “Social Network”, the main character’s personality and his approach to relationships create difficulties in his business and personal dealings. Nevertheless, he finds a way to tap into the basic human desire for connection, creating a medium that has been adopted by 500 million (and counting) people.

In “King’s Speech”, the advent of radio presents a daunting challenge to a new king afflicted with a stammer. His ability to communicate with the masses ultimately depends on his personal friendship with a commoner from Australia.

As Rash puts it:

The Internet, and in particular social networks, have accelerated the rise of personality over policy. . . .

Ultimately both films are fundamentally about friendship - about how it's human, not wireless, connections that count. . . . Both films show how human bonds can be built or broken by the new challenges and opportunities of the new media age. Either way, the results are often consequential . . . .

Interesting observations. So can the films teach any lessons to public companies facing shareholder advisory votes for the first time? Maybe that, even in an age of new media, personal connections will continue to be important - possibly more important than ever. I’m working with numerous companies that are starting to worry about convincing large shareholders to support the company’s recommendations. Much of this process will be done one-on-one, through meetings and phone calls rather than over the Internet. The personal touch may be one way to combat negative feelings about corporate governance and executive compensation, fueled by the new media in the past couple of years.

One way or another, if you haven’t seen both films, don’t miss them.

The Big 1-0-0!

As I enter this post into the ON Securities website, the site tells me that this is the 100th post! The past year and a half has been an eventful period in securities law, corporate governance and executive compensation for public companies, and I have enjoyed the opportunity to comment on these events and get feedback from readers. During the time frame for the next 100 posts, and beyond, the developments should be just as interesting.

In this earlier post, I commented on another very good film: “Julie and Julia”. This was not only a well-acted portrait of Julia Child and a modern day follower, but it was also the first mainstream movie about blogging. As I said in that post, I welcome your continued feedback and hope the blogging process can be a two-way street.

Thank you for reading.
 

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I 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.

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Preview of Coming (Regulatory) Attractions

The 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.

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ABA Releases Exposure Draft of Model Bylaw for Shareholder Access

TheCorporateCounsel.net 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."

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