Tag Archives | Dodd-Frank

Take Action: Comments on SEC Pay Ratio Rule Due 12/2/2013

The deadline for submitting comments on the SEC’s proposed pay ratio disclosure is coming up quickly on December 2, 2013. SEC general comment instructionsSubmit Comments on S7-07-13 Pay Ratio Disclosure. Get your comments in soon, before Thanksgiving. Another advantage to earlier submittal is that those who wait for the deadline are likely to borrow from previous submission. The earlier you submit, the more likely you are to influence others. For example, I am impressed by comments from the following: Continue Reading →

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Take Action: Comments on SEC Pay Ratio Rulemaking Due December 2

I-Want-Your-OpinionLast week the SEC finally proposed rules to require public companies to disclose the pay ratio between their CEO and their employees, as mandated by Dodd-Frank. Companies would have to disclose the ratio between CEO compensation and the median pay of their employees. Update: Comments due December 2nd.

As reported by the WSJ,  the ratio of “average” pay jumped from 51.6 in 1981 to 319.7 in 2011, according to data compiled by Kevin Murphy of the University of Southern California. The AFL-CIO sampled S&P 500 firms and claims the ratio went from 42 in 1980 to 380.

In response to complaints from multinationals that tallying pay for workers around the globe would be prohibitively expensive, the SEC’s draft largely leaves estimating and sampling methodology up to individual companies. Continue Reading →

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2013 Millstein Forum: Deconstruction of SIFIs and Capital Allocation


Ira Millstein

Deconstruction of SIFIsThe following are cryptic notes and a few photos taken at the 2013 Millstein Forum held June 24 & 25 at Columbia Law School. Be sure to check out the Forum’s photo gallery for more photos, agenda, notes, etc.

Moderator: Ira M. Millstein, Chair, Center for Global Markets and Corporate Ownership at the Columbia Law School; Counsel, Systemic Risk Council; Senior Partner, Weil, Gotshal & Manges. Panelists were as follows: Continue Reading →

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Noteworthy Proposal to Cap Pay Ratio at Microsoft (MSFT)

qube-logomicrosoftA proposal by Qube Investment Management, which owns 10,208 shares of Microsoft ($MSFT), to cap pay has been challenged through the “no-action” process. See incoming correspondence to the SEC. The resolved clause of Qube’s proposal reads as follows:

Resolved: The the Board of Directors and/or the Compensation Committee limit the average individual total compensation of senior management, executives and all other employees the board is chanted with determining Continue Reading →

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Review: Whistleblower Laws

In The Successes and Failures of Whistleblower Laws, Robert G. Vaughn puts his life-long interest in perspective. A background with Nader’s Raiders studying federal agencies, work as an attorney representing whistleblowers, academic research and insights gained through study abroad facilitate Vaughn’s ability to evaluate the laws through theory and practice, stories and themes.

From Stanley Milgram to the Stanford prison experiments, My Lai Massacre and civil rights cases, Vaughn explores those who actually took up the adage, ‘question authority’ and the laws that evolved to protect them. He delves into famous cases, such as that of Frank Serpico and Daniel Ellsberg, as well as those far more obscure but also important. We also see how protections largely started in the civil service Continue Reading →

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Corporate Directors Forum: Day 1, Part 2

Below are some relatively quick notes I took at the Corporate Directors Forum 2013, held on the beautiful campus of the University of San Diego, January 27-29, 2013. See materialsCorporate Directors Forum 2013: Bonus Session, and Corporate Directors Forum 2013 – Day 1, Part 1.

The program was subject to the Chatham House Rule, so there will be little in the way of attribution below but I hope to provide some sense of the discussion. I throw in a lot of opinions. Some are those of panelists, some are mine, and some came from the audience.  I still get a little lost in some of the financial discussions but think we need to raise public understanding, so I don’t shy away from trying to learn or from offering opinions. I had fun, learned from various perspectives, renewed acquaintances and made some new ones. If corporate governance is your thing, I hope to see you there in 2014. Continue Reading →

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Event: The Role of Proxy Advisory Firms

The U.S. Chamber Center for Capital Markets Competitiveness (CCMC) will hold a half-day event on Wednesday, December 5, 2012 in Washington DC to take an in-depth look at the influence of proxy advisors and the state of corporate governance in the U.S. It would be nice to get some shareowners out to at least listen and report back to CorpGov.net. I would love to learn of their plans. Continue Reading →

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Corporate Governance Bites

Continuing challenges to exclusive forum bylaw provisions - Lexology

An increasingly popular trend in recent years has been the adoption by Delaware public companies of an exclusive forum provision in their bylaws. An exclusive forum provision generally provides for the Delaware Court of Chancery to be the exclusive forum for certain disputes (including derivative actions, breach of fiduciary duty claims, claims arising pursuant
to the company’s charter or bylaws and other shareholder litigation) against the company — and prohibiting such suits in other jurisdictions. Expected benefits cited by companies of adopting exclusive forum bylaw provisions include decreased litigation costs, avoiding parallel litigation in multiple jurisdictions and the predictability of Delaware courts. Continue Reading →

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Video Friday: Clawback Invoked

With the passage of the Dodd-Frank and the Sarbanes Oxley Acts, clawback policies have become increasingly prevalent among public companies. However, it is rare to find a company actually put a clawback policy into effect. Citing Equilar’s findings from the 2012 Clawback Policies Report, we review what a clawback policy is and we examine what triggered one major U.S. bank to put their clawback policy into action. Continue Reading →

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1st Dodd-Frank Whistleblower Report

Even thought the SEC’s final regulations for the Dodd-Frank whistleblower program just became effective on August 12, 2011, the agency has already filed its first report on the whistleblower program. During the first seven weeks of the program, the agency received 334 whistleblower tips.

The SEC itself cautions that “due to the relatively recent launch of the program Continue Reading →

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Pay Ratios and Ratcheting

Daniel F. Pedrotty, AFL-CIO, posted Why CEO-to-Worker Pay Ratios Matter to Investors to the Harvard Law School Forum on Corporate Governance and Financial Regulations on Thursday August 11. I’ve been meaning to mention it since then, mostly so that I have it file on my blog for future reference. I’ve got almost 16 years of corporate governance history on my blog (and more from my old site on my laptop, still waiting to migrate). This is one document I think people will be coming back to in the future.

Pedrotty’s post references Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires public companies to disclose the ratio of Continue Reading →

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The Role of Independent Directors in Corporate Governance: A "Must Have" Reference for Every Corporate Director

When I reviewed the first edition of The Role of Independent Directors after Sarbanes-Oxley by Bruce F. Dravis I called it an entire reference library in a thin volume. For the second edition, entitled The Role of Independent Directors in Corporate Governance, the number of pages has gone up from about 170 to 250 and the typefont is slightly smaller but the guidance remains the most readable I have encountered for providing directors, their advisors, and shareowners with a solid understanding of the primary legal and governance issues faced by independent directors.

The accompanying CD links to legal source material underlying the text, so those interested in drilling deeper are certainly given the resources. Upload the CD to your iCloud account so that you don’t have to go looking for it. Of course one thin volume and a CD can’t cover the entire universe of materials and the field is ever evolving, so minor sections, such as that on proxy access, are already slightly out-of-date. However, Dravis’ succinct coverage of a broad range of topics is unparalleled.

Here’s one I never noticed before: NYSE rules use the term immediate family member to include, as a disqualifying relationship for independence, “a person’s spouse, parents, children, siblings, mother and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person’s home.” Thank god you can still appoint your live-in maid to the board and have them be considered independent. Something Rupert Murdoch might want to consider? However, maybe such a person would be Continue Reading →

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Say-on-Pay Voting Standards Released

Yesterday, the United States Proxy Exchange (USPX) released standards for shareowners to use in making say-on-pay voting decisions.  “Say-on-pay” rules mandated by Dodd-Frank allow shareowners to express an opinion on executive compensation at annual meetings. But to make informed voting decisions, shareowners must first assess the compensation packages boards propose. That is not easy, since they tend to be very complex. Even sophisticated business professionals have a difficult time evaluating them, so how can average shareowners hope to do so?

This is not an idle issue. In the 2011 proxy season, institutional investors acted with breathtaking irresponsibility, collectively approving 98.3% of compensation packages. They did this as executive compensation continues to skyrocket. In 1965, CEO pay at large companies was 24 times the average worker’s wages. In 2010, that ratio was a staggering 343 to 1. Responding to the irresponsibility of institutional investors, John Harrington of Harrington Investments commented:

… if fiduciary duty, including ERISA, were truly enforced, lots of trustees, directors, administrators and managers would be in jail.

If shareowners — individual investors as well as small, medium and large institutional investors — do not start voting down the majority of compensation packages, we will have become part of the problem with executive compensation. A simple approach would be to vote against all executive compensation packages, but that would be self-defeating. If boards know compensation packages will be voted down no matter what they contain, they will have no incentive to make changes. Since say-on-pay votes are advisory, they would have no impact.

The USPX guidelines propose easy ways shareowners can review firms’ compensation packages and make reasonable say-on-pay voting decisions. The guidelines are predicated on the belief that some levels of compensation are so outlandish as to be unreasonable irrespective of a firm’s or CEO’s performance. The guidelines assist shareowners in deciding how and where to draw that line.

On November 11, 2010, the USPX released draft guidelines. We received many comments and we made several modest changes prompted by the feedback we received. Drafting the guidelines has been difficult. We have had to balance the inherent complexity of the compensation issue with the need for guidelines that are both simple and relevant.

The current guidelines apply only for compensation at large corporations. (Although during the 2011 season, I have been extending the logic of the Guidelines to small and medium corporations as well by voting down pay where NEO’s received more than median pay last year.) In future releases, we hope to extend the guidelines to small and medium corporations with more precise algorithms. In the mean time, we encourage shareowners to experiment with the guidelines and provide us with feedback on your own application and/or variation of our methodology. Please post feedback directly on the USPX website. Again, here is a direct link to the guidelines.

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Video Friday: Say-On-Pay Lawsuits, Crazy? + Daily Show Bonus

This Week in the Boardroom: 7/14/11 TK Kerstetter, President, Corporate Board Member; Scott Cutler, Executive Vice President, NYSE Euronext; and Stephen Lamb, Partner, Paul Weiss discuss the fact that losing a say-on-pay vote increases the likelihood of a shareowner lawsuit. See also Frivolous Say on Pay Lawsuits: Another Unintended Consequence.

This seems like a no-brainer to me. Over 98% of company say on pay votes passed. Isn’t it highly likely that those that fail such votes are more likely to be targeted? I think it is difficult for any company to truly show a direct link between CEO pay and performance. For those companies where Continue Reading →

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What Would Proxy Access Look Like if Done Right?

The Business Roundtable and Chamber of Commerce made their case and the Court found the SEC rulemaking on proxy access arbitrary and capricious “for having failed once again… to adequately assess the economic effects of a new rule.”

The SEC rules certainly didn’t come out the way Les Greenberg and I envisioned when we petitioned back in the summer of 2002. Ours was a simple proposal, summed up in one sentence:

The intended effect of the suggested modifications is that the solicitation of proxies for all nominees for Director positions, who meet the other legal requirements, be required to be included in the Company’s proxy materials.

I didn’t realize Just how bad the actual language is that got adopted until I read an illuminating paper by Jill E. Fisch of the University of Pennsylvania, The Destructive Ambiguity of Federal Proxy Access. I urge everyone who cares about this critical issue to read Fisch’s paper.

Yes, I had noticed the SEC’s rule requires an awful lot of disclosures and the three percent/three year holding requirements certainly eliminate any involvement I might have had in any nomination process. But I didn’t notice all the other possible triggers re various required schedules and filings and I hadn’t read all the requirements of schedule 14N and other impediments Fisch explains so well.

I was actually pinning my hopes on the amendments to Rule 14a-8 and hadn’t noticed users of that rule must comply with the complete filing and disclosure requirements of Regulation 14A in a similar manner to shareowners who mount a proxy contest.

Fisch argues, like many who advocate “private ordering,” the SEC is poorly suited for regulating corporate governance and that existing state regulation offers a preferable, more flexible framework. Unlike some others, at least part of her rationale is that SEC rules impede, rather than facilitate, shareowner participation.

Interesting is Fisch’s analysis of the possible reasons why the SEC went ahead with a rulemaking that is largely unusable. I’ll list them here but urge you to read her full explorations:

  • Rule 14a-11 may simply reflect caution. Draw the rule as tightly as possible to “test the waters” with very few cases.
  • Not doing something may have been viewed as a “sign of weakness.”
  • Making it more restrictive may have reduced the incentive for business interests to sue… they did anyway.
  • It isn’t a tool to increase the direct effectiveness of shareowners but is more of a communication device for sounding displeasure, providing another platform whereby shareowners can speak to each other.
  • Raise the level of director discomfort without presenting a real threat.
  • Maybe the SEC simply lost perspective on what they were trying to do by responding to critics with additional requirements that yielded unintended consequences.

The SEC’s efforts to avoid all possible bad effects or “unintended consequences,” may have led it to choose instead a rule that has no consequences, intended or otherwise…

Any debate over proxy access that fails to evaluate its effect on the allocation of power between shareholders and managers is, over proxy access is, however, destructively ambiguous, because the best argument in favor of proxy access – increasing board accountability – requires that proxy access increase shareholder power.

As those of us committed to proxy access start over again, difficult but not impossible in the current political climate, we would do well to take Fisch’s advice on an alternative approach:

  1. The SEC should amend Regulation 14a to require the issuer to disclose, in its proxy statement, all properly-nominated director candidates, regardless of whether the nomination is made by a nominating committee, a shareholder or some other mechanism. Provide for comparable disclosures, regardless of the source of the nomination.
  2. Amend Rule 14a-4 to require the issuer’s proxy card to give shareholders the opportunity to vote for any of the candidates included in the proxy statement. The proxy card would thus constitute a universal ballot for all properly-nominated candidates.
  3. Encourage firm-specific experiments by retaining the recently adopted amendments to the election exclusion under Rule 14a-8 authorizing the inclusion of shareholder proposals concerning the process by which directors are selected.

There was no need for the SEC to try to determine the optimal level of shareholder nominating power. The area would have been free for state law and issuer-specific experimentation if the SEC had simply held, seventy years ago, that issuers were required to disclose the existence of all properly nominated director candidates on the issuer’s proxy statement and to provide shareholders with a chance to vote on the election of such candidates.

Given how long debate has raged on, it wouldn’t hurt to step back and get it right. In this case, simple is certainly better. The first step is to reexamine 14a-8, which was also stayed by the SEC because the amendment was “designed to complement” the proxy access rule and the SEC viewed its changes as “intertwined.” We must now unwind the two rules to see what is left in the 14a-8 amendments. I will probably be urging the SEC to lift the stay on 14a-8 amendments and will likely ask for additional amendments to provide for a robust form of private ordering, as discussed above. More to come. Please send me your thoughts and analysis.

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Regulatory Reforms on Board Composition Have Been a Plus

New research from Cesare Fracassi of the Department of Finance at the University of Texas at Austin and Geoffrey Tate of the Department of Finance at the University of California, Los Angeles finds that board composition should be a continuing target of regulatory reforms.

Our results suggest that having directors with external network ties to the CEO may undermine the effectiveness of corporate governance.

We find that firms in which a high percentage of independent directors have external network ties to the CEO make more frequent acquisitions than firms with fewer CEO-director connections. Moreover, these acquisitions destroy shareholder value on average, particularly in firms which also have weak shareholder rights..

We find evidence that external governance mechanisms can substitute for weak internal governance. The negative reaction to merger bids among firms with many network ties between independent directors and the CEO and the reduction in Tobin’s Q are strongest in firms with weak shareholder rights.

More at External Networking and Internal Firm Governance, HLS Forum on Corporate Governance and Financial Regulation, June 29, 2011.


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Directors Should Thank Dodd-Frank

Eleanor Bloxham, a contributor to Fortune magazine, tells readers Why corporate directors should thank Dodd and Frank. With investors focused on “say-on-pay,” ISS recommendations against directors are down substantially.

Ture, but this isn’t likely to last. Most institutional investors seem to be taking a year off from voting against compensation committee members, giving them a free pass this year. Personally, I haven’t joined them. In fact, this is the first year I’ve been conscientiously voting against pay enabling compensation committee members. Expect an increase in such votes by institutional investors next year if companies ignore “say-on-pay” votes this year.

Directors should thank Dodd-Frank, not for temporarily distracting investors but for bringing better focus to their jobs… requiring that compensation committees be composed solely of independent directors and reducing conflicts of interest in compensation consultants, among many other reforms.

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CorpGov and Exec Pay

GovernanceMetrics International recently sampled large corporations and found that CEO pay jumped 27% in 2010 to a median of $9 million.

According to William Lazonick, professor at the University of Massachusetts, in 2010 the S&P 500 jumped 12.8%, capping a two-year gain of 39.3%. Companies in the S&P 500 boosted profits by 47% in 2010, not from boosting sales of goods and services, which rose only 7%, but by cost-cutting and layoffs, says Lazonick. (CEO pay soars while workers’ pay stalls, USA Today 4/1/2011) ) Continue Reading →

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SWOP Reaches Tipping Point

The debate over the best frequency for “say on pay” votes has reached a tipping point, as a majority of S&P 500 and Russell 3000 firms have urged their investors to support annual advisory votes on executive compensation.

As required by the Dodd-Frank Act, this year’s corporate proxy statements include a “say when” vote that asks investors to express their views on whether advisory votes on compensation should be held every year, every two years, or every three years. The percentage of annual recommendations has been growing in recent weeks, as more boards have heeded the large majority votes by investors for annual votes at early season meetings.

So far, 105 (60.7 percent) of the 173 large-cap firms that have filed proxy materials had endorsed annual votes, as compared to the 56 companies (32.4 percent) where management endorsed triennial votes, according to ISS data as of March 22. Seven firms have favored a biennial frequency, while five issuers made no recommendation.

via A Tipping Point on Pay Vote Frequency – Governance.

See also Shareowners Going “Off the Reservation” on SWOP and Addressing CEO Pay.

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Deregulation of Derivatives Caused the Crisis

Lynn A. Stout argues the credit crisis was not due primarily to changes in the markets, it was due to changes in the law, specifically the Commodities Futures Modernization Act (CFMA) of 2000’s sudden and wholesale removal of centuries-old legal constraints on speculative trading in over-the-counter (OTC) derivatives.

Derivative contracts are probabilistic bets on future events. They can be used to hedge, which reduces risk, but they also provide attractive vehicles for disagreement-based speculation that increases risk. Thus the social welfare consequences of derivatives trading depend as an empirical matter on whether the market is dominated by hedging or speculative transactions. The common law recognized the differing welfare consequences of hedging and speculation through a doctrine called “the rule against difference contracts” that treated derivative contracts that did not serve a hedging purpose as unenforceable wagers. Speculators responded by shifting their derivatives trading onto organized exchanges that provided private enforcement through clearinghouses in which exchange members guaranteed contract performance. The clearinghouses effectively cabined and limited the social cost of derivatives risk.

These traditional legal restraints on OTC speculation were systematically dismantled during the 1980s and 1990s, culminating in the 2000 enactment of the CFMA. That legislation set the stage for the 2008 crises by legalizing, for the first time in U.S. history, speculative OTC trading in derivatives. The result was an exponential increase in the size of the OTC market, culminating in 2008 with the spectacular failures of several systematically important financial institutions (and the near-failures of several others) due to speculative derivatives losses. In the wake of the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Title VII of the Act is devoted to turning back the regulatory clock by restoring legal limits on speculative derivatives trading outside a clearinghouse. However, Title VII is subject to a number of possible exemptions that may limit its effectiveness, leading to continuing concern over whether we will see more derivatives-fueled institutional collapses in the future.

Stout concludes, “the hypotheses that legalizing OTC derivatives trading reduced systemic risk, or provided significant liquidity benefits, should be rejected as at best wishful thinking.” Stout, Lynn A., The Legal Origin of the 2008 Credit Crisis (February 25, 2011). UCLA School of Law, Law-Econ Research Paper No. 11-05.

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Corporate Governance Legal Requirements

Morgan, Lewis & Bockius LLP produced a good legal primer, Corporate Governance: An Overview of Public Company Requirements, last month. Read it now before it is out of date. Covers Sarbanes-Oxley, Dodd-Frank, and listing requirements in eleven sections:

  1. Director Independence
  2. Audit Committees
  3. Compensation Committees
  4. Nominating Committees
  5. Compensation
  6. Codes of Conduct
  7. Certifications
  8. Directors/Officers
  9. Disclosure
  10. Foreign Issuers
  11. Miscellaneous

Great resource for any corporate governance library. Hat tip to long-time stakeholder Ralph Ward and his Boardroom Insider for bringing to our attention myCorporateResource.com, which compiles client alerts.

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SEC Proposes Whistleblower Regulations

SEC Proposes New Whistleblower Program Under Dodd-Frank Act (Press Release No. 2010-213; November 3, 2010. Section 922 of the Dodd Frank bill gives the SEC the authority to make awards to whistleblowers under regulations prescribed by the SEC of  not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions. See proposed rule and soon comments here under 34-63237.

Under the proposed rules, a whistleblower is a person who provides information to the SEC relating to a potential violation of the securities laws. To be considered for an award, a whistleblower must

Voluntarily provide the SEC …

  • In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it.

… with original information …

  • Original information must be based upon the whistleblower’s independent knowledge or independent analysis, not already known to the Commission and not derived exclusively from certain public sources.

… that leads to the successful enforcement by the SEC of a federal court or administrative action …

  • A whistleblower’s information can be deemed to have led to successful enforcement in two circumstances: (1) if the information results in a new examination or investigation being opened and significantly contributes to the success of a resulting enforcement action, or (2) if the conduct was already under investigation when the information was submitted, but the information is essential to the success of the action and would not have otherwise been obtained.

I understand that some in the business community had asked for much more restrictive rules.

  1. Require informants to have first told the company hotline of the problem before the SEC;
  2. Once the employee has provided the SEC information, they should be prohibited from providing any further information within the company; and
  3. Prohibit a fiduciary such as a director from informing the SEC of fraudulent behavior.

Basically, they were telling the SEC that if employees have information related to a fraud being perpetrated on investors, that the person should be silenced. Some hotlines link back to the company’s general counsel, the very person responsible for defending the company.  Will they really protect innocent employees who report a potential fraudulent activity?

Once information has been provided, agencies might want the employee to wear a wire tap to gather additional information. Will this be prohibited?

If a director, who has a fiduciary obligation to investors, is aware of fraud, why is that something that should be kept from the SEC and stockholders?

Yes, these whistleblower regulations will make it difficult to operate meaningful company hotline programs, which aren’t going to offer anywhere near the monetary rewards of the SEC program. I’m not sure what the answer is, but it is not caving to suggestions like those listed above. Shareowners should carefully review the proposed regulations and should monitor comments as they are submitted.

For more information, see SEC Proposes Rules For Whistleblower Program (WSJ, 11/3/2010).

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Bainbridge Guide to Dodd-Frank

In his paper, The Corporate Governance Provisions of Dodd-Frank, Stephen M. Bainbridge  provides a brief overview of the seven principal corporate governance provisions of The Wall Street Reform and Consumer Protection Act of 2010 (better known as “The Dodd-Frank Act”).

  1. Section 951 creates a so-called “say on pay” mandate, requiring periodic shareholder advisory votes on executive compensation.
  2. Section 952 mandates that the compensation committees of reporting companies must be fully independent and that those committees be given certain specified oversight responsibilities.
  3. Section 953 directs that the SEC require companies to provide additional disclosures with respect to executive compensation.
  4. Section 954 expands Sarbanes-Oxley Act’s rules regarding clawbacks of executive compensation.
  5. Section 971 affirms that the SEC has authority to promulgate a so-called “proxy access” rule pursuant to which shareholders would be allowed to use the company’s proxy statement to nominate candidates to the board of directors.
  6. Section 972 requires that companies disclose whether the same person holds both the CEO and Chairman of the Board positions and why they either do or do not do so.
  7. Section 989G affords small issuers an exemption from the internal controls auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act.

The paper elaborates further on each provision and provides a useful guide.

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Don't Miss Opportunity to Level Playing Field in Corporate Elections

As many of you know, I petitioned the SEC last year to change the rule that allows blanks on a partially filled proxy or voter instruction forms (VIFs) to go to management and have also complained to the SEC about Broadridge’s failure to impartially identify proxy proposals on VIFs (see Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration and “Corrected” Ballot at Altrea Tips Votes to Management).

At every turn, the deck seems stacked against retail shareowners, in favor of entrenched managers and boards. Now, with the enactment of Dodd-Frank, the SEC is seeking comments on provisions that require rulemaking by the Commission. Additionally, the SEC issued a Concept Release on the U.S. Proxy System with comments due October 20. These opportunities for comment offer our best chance to finally level the playing field in these areas.

Attached (at bottom of post) is a copy of the letter I sent to rule-comments@sec.gov twice yesterday, under two subject fields. One subject was “DF Title IX – Executive Compensation – voting by brokers.” The other subject line was “S7-14-10.” I hope some of you will also object to blanks fields going to management and VIFs that do not impartially identify proxy proposals. Remember, comments are due tomorrow, October 20th.

SEC. 957 of Dodd-Frank prohibits granting discretionary authority to brokers with respect to directors and executive compensation or “any other significant matter, as determined by the Commission.” If beneficial owners fail to provide instructions on how their proxies should be marked with respect to “significant” matters, no one should be empowered to vote on their behalf. The intent of that prohibition should extend to management in the case of blanks items on a partially completed proxy or VIF, as well as  brokers completing a totally blank proxy or VIF.  The SEC should use its rulemaking powers, not only to conform the provisions of Rule 14a-4 to the mandated and implied intent of Dodd-Frank but should also make a determination that all proxy matters are “significant.” After the complicity of auditors in abusive practices, such as those uncovered at Enron, no proxy item is insignificant.

The integrity of the voting system is critical. The SEC’s current rules send the wrong message to shareowners. They say, “don’t worry about voting. If you fail to submit a vote at all or you leave an item blank, we will allow your votes to be assigned to someone else… but not to someone of your choosing” regardless of possible conflicting or nonaligned interests of brokers, banks and corporate management.

The current rule does not reinforce a robust market or vigilance by shareowners. It does not send a message that voting is important. It is no wonder that shareowners then become shareholders, with only entitlements and no responsibilities, much like gamblers with betting slips. The Commission should encourage responsible ownership, not gambling.

The SEC should regulate the power relationships between actors in the market to provide a level playing field, not tip the balance to one party when the other fails to act. Instead, the SEC should remind each party of the importance of their respective roles. The current Rule 14a-4 misaligns interests by yielding disproportionate control to brokers, bankers, managers and boards, instead of educating and engaging shareowners.

(Thanks to the many individuals who reviewed and provided comments on the attached recommendations to the SEC.) blankvotesVIFs10-18

It should be noted that you can avoid much of the blank vote issue right now by always voting on MoxyVote.com. They use  Broadridge’s electronic voting platform too and can’t submit a VIF back to Broadridge without populating (gathering a vote from a user) every item on a ballot.  However, their system lets you set up your own default, instead of automatically having your blank vote go to management.

To do so, simply log in to your account at MoxyVote, go to:

  1. My Profile
  2. Down the left column, hit the button that says “Prioritize and Manage”
  3. In about the middle of the page, you’ll see “Default Voting Positions” with the choice of voting
    1. abstain
    2. with the board’s recommendation
    3. against the board’s recommendation

I’ve got mine set to abstain whenever I leave an item blank. You may want to set yours differently. Using MoxyVote, at least you have a choice right now. You won’t find that at ProxyVote.com, the platform that most brokers send you to. Since most shareowners still use ProxyVote, we still need a change in the rules by the SEC regarding how blank votes are counted. Additionally, VIFs still need to follow the rules applicable to proxies, like providing an unbiased description of each item to be voted on. These descriptions will continue to slant votes to management unless the SEC requires a level playing field, so it is important to comment to the SEC about these issues.

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Financial Sustainability: Restoring Market Stability, Corporate Value & Public Trust (ICGN Mid-Year 2010)

Disclaimer: Given Dodd-Frank, proxy plumbing and all those comments I want to provide the SEC, the report below doesn’t do the ICGN Mid-Year Conference justice.  I wrote this up more than a week later with poor notes and memory. Comments, corrections and substitute photos are solicited.

Sharing Perspectives Across the Atlantic. Phil Angelides, Lord McFall and moderated by David Pitt-Watson.

The Financial Crisis Inquiry Commission will report in December to give an unbiased historical accounting of the causes of financial crisis. It will be out in book form but will also be available through download.

Phil Angelides

$11 trillion in wealth was wiped away. The market took until 1954 to get back to the levels of 1929. Let’s hope this one doesn’t take as long but, more importantly will we learn the lessons necessary to prevent or minimizes future bubbles?

It was a failure of accounting and deregulation. Too many were rewarded based on volume not on performance and their was no continuity in risk (they thought) after all the slicing, dicing and creative complexity.

Lord McFall

Rewards can’t be asymmetric and function properly. This was not a natural storm; the clouds were seeded. Signs were there, such as a 2004 warning from the FBI about a housing fraud epidemic, but they were glossed over. Now, our remaining investment banks are largely trading banks, not focused on generating capital but on gaming the markets. The betting market is much larger than the real economy… with more than 85% of transactions being synthetic.

Dodd-Frank requires the investment banks to hold 5% of the securities they sell but I’m not sure what good that does since that portion of their business is now minor. We need to rethink the role of finance in our economy. Continue Reading →

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Dodd-Frank and Proxy Plumbing Offer Opportunity to Keep Blank Votes from Going to Management

As many of you know, I petitioned the SEC last year to change the rule that allows blanks on a partially filled proxy or voter instruction forms (VIFs) to go to management. (see 4-583 at http://www.sec.gov/rules/petitions.shtml)

The way I read Dodd-Frank SEC.957, it appears to prohibit broker voting for say on pay, directors and “any other significant matter, as determined by the Commission, by rule.” I think that language gives an additional impetus for the SEC to deny both broker votes and blank votes that go to management for all proxy items. After Enron, who can say that even voting on the auditor isn’t significant?

With proxy plumbing and Dodd-Frank, this is the perfect time to ask the SEC to amend Rule 14a-4(b)(1) to do away with both broker and blank votes going to management altogether and to require VIFs to meet the same requirements as proxies.

I’ve attached a draft of my comments below but would very much appreciate scrutiny by others. Are there other rules that need to be changed to accomplish this? Are my suggested amendments reasonable? I don’t want to jeopardize the ability of shareowners to be able to assign proxies or to implement an open client directed voting system, such as that being developed by MoxyVote.com. Does my saving clause protect those abilities?

Please e-mail me at jm@corpgov.net with suggestions and/or leave comments here. If we can get rid of blank votes going to management, we’ll win more elections. This is one more change needed to create a level playing field.

Attachment: Draft Letter blankvotes&VIFs10-9.doc

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Section 342 of the Dodd Frank Act — Office of Minority and Women Inclusion

The following is from a speech by SEC Commissioner Luis A. Aguilar. Hat tip to Broc Romanek for bringing it to our attention.

Congress has made clear that efforts to recruiting and promote employees from all backgrounds are efforts that the SEC, and all other financial regulators, should be undertaking. In particular, Section 342 of the Dodd-Frank Act contains a clear Congressional mandate for the SEC to establish a new Office of Minority and Women Inclusion. This Office will be responsible for “all matters of the agency relating to diversity in management, employment, and business activities.” The Director of this Office is tasked by statute with a broad mandate to develop standards for:

  • equal employment opportunity and racial, gender, and ethnic diversity of workforce and senior management;
  • increased participation of minority-owned and women-owned businesses in programs and contracts of the agency; and
  • assessing diversity policies and practices of regulated entities.

The new legislation specifically directs the agency to take affirmative steps to seek diversity in the workforce at all levels and includes steps that the SEC must undertake as a part of its outreach efforts. This new Office must be established within six months after the legislation went into effect — which means that this Office will have to be up and running in a matter of months. The SEC must by law undertake to increase diversity at every level of the agency’s workforce and I look forward to this new Office leading the charge.

In addition to government agencies needing to do better, financial market participants in the private sector also need to do more to achieve diversity in the workplace. The lack of diversity in the financial services industry is particularly acute. A 2006 Equal Employment Opportunity Commission report on employment in the financial services industry found that the percentage of African American and Hispanic managers and professionals was lowest in the securities sector (4 % and 3%, respectively).

Even more troubling, the GAO recently published a study finding that overall diversity at the management level in the financial services industry did not change substantially from 1993 through 2008. According to EEOC data cited by the GAO, in 2008 white males held 64% of senior positions, African-Americans held 2.8%, Hispanics 3%, and Asians 3.5%.

Clearly, the industry must do substantially better. Moreover, the financial services industry serves as an important pipeline into corporate boardrooms across this country. Improving the diversity statistics in the industry will significantly expand the pool of candidates for board seats.

For additional information on the mandate, see Wolters Kluwer’s Dodd-Frank Act requires Office of Minority and Women Inclusion for covered agencies, 8/24/2010.

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SEC Access and Dodd-Frank Calendar

The SEC published Rule 14a-11 providing proxy access in the Federal Register (.pdf).  The rule is effective 60 days after being published in the Federal Register, or November 15, 2010. Any issuer whose one year anniversary for mailing date is prior to March 15, 2011 will not be subject to a proxy access campaign in 2011. (Hat tip to The Murninghan Post and commentators) Application of the new access rules to the smallest public companies (“smaller reporting companies” under SEC rules) will be deferred for three years from the effective date. From the release (2010 proxy season transition rules):

Rule 14a-11 contains a window period for submission of shareholder nominees for inclusion in company proxy materials of no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting. Shareholders seeking to use new Rule 14a-11 would be able to do so if the window period for submitting nominees for a particular company is open after the effective date of the rules. For some companies, the window period may open and close before the effective date of the new rules. In those cases, shareholders would not be permitted to submit nominees pursuant to Rule 14a-11 for inclusion in the company’s proxy materials for the 2011 proxy season. For other companies, the window period may open before the effective date of the rules, but close after the effective date. In those cases, shareholders would be able to submit a nominee between the effective date and the close of the window period.

Here’s a Compliance Week article on the SECIAC, SEC Committee to Get a Makeover Due to Dodd-Frank, 9/13/2010.

From the SEC, Implementating Dodd-Frank Wall Street Reform and Consumer Protection Act — Upcoming Activity. (Hat tip to Doug Chia via Twitter)

The deadline for comments on proxy plumbing is fast approaching, Concept Release on the U.S. Proxy System. See language and comments here.

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How I Voted at ACAS + How ProxyVote and MoxyVote Handle Blank Votes

Before voting American Capital Ltd. (ACAS) I checked at ProxyDemocracy.org and saw how CalSTRS is voting. I voted with them against Harper, Lundine, Peterson, Puryer, stock option plan and against the issuance of convertible securities. CalPERS did not post how they are voting. I found no “advocates” at MoxyVote.com. Although I would be happier knowing how others are voting or why CalSTRS is voting the way they are, I still trust their judgment with respect to how to vote than I do the soliciting committee at ACAS.

I also checked to see if the blank vote problem with respect to director elections had been modified at Broadridge’s ProxyVote. It hasn’t. Dodd-Frank requires the rules of the exchange to “prohibit any member that is not the beneficial owner of a security… to vote the security in connection with a shareholder vote…(with respect to the election of directors)… unless the beneficial owner of the security has instructed the member to vote the proxy…”  I don’t know if this lapse is because this provision of Dodd-Frank only takes effect when the Exchange changes its rules and they are approved by the SEC or what. (see Open eMail to NYSE Re Blank Votes)

When using Broadridge’s ProxyVote system, if I vote but fail to indicate how I’m voting on a director (or any other issue), the next screen shows that I’m voting for the director with a little asterisk next to my new vote and a note elsewhere on the screen indicating votes left blank are voted per the “soliciting committee.”

Voting on MoxyVote.com is slightly different, even though my understanding is that Broadridge still process the votes. At MoxyVote.com my ballot was pre-marked, all in favor of management. (I presume if one of my selected “advocates” recommended how to vote on the proxy that would override the default.).  At least on the MoxyVote.com system you can clearly see how your vote will be recorded on both the first and second screens and that there will be no blank votes, since if you don’t change the vote, it will be voted for management (per the soliciting committee).

I wonder if MoxyVote.com could legally set the default at Abstain, even though SEC Rule 14a-4(b)(1) says that “a proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the beneficial owner or security holder”? It seems to me that  MoxyVote.com could consider that a “choice” specified by the beneficial owner, since they are warned and must check a box before finally approving their correctness of their vote before it is recorded.

Before going live with this post, I contacted MoxyVote.com and learned what I had forgotten when I set my preferences. Actually, their system does allow users to set defaults to vote with or against management or to abstain. I went back in and set mine to “abstain.”

How to: Login and go to “preferences.” At your preferences  page, look down the left hand side at the bottom under your priority cue – it says “Prioritize and manage” in a big red button – hit that button.  Then at the bottom of that page you will see a drop down menu; select always vote with, against or abstain. You get to choose.

While I wouldn’t want to set these limited preferences and forget them, I like this option much better than what Broadridge offers on ProxyVote.  At MoxyVote.com is is harder to space out because on the first screen I see everything filled out.  If I do space out, my “blank” votes no longer go to management, since I set my default to abstain.

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Video Friday

For humor, view Life After Death by Powerpoint 2010 by Don McMillan. I haven’t read the book but here’s the trailer for Freakonomics. (Not much content in the trailer… even they end saying something like total BS… I guess that’s hip.) Rules of the Board – Corporate Board Rules (PBS), how much shareholders can expect a board to know about the company it oversees. US pay law branded ‘logistical nightmare’ (FT, 8/31/10) Hat-tip to Gary Lutin. Target Under Fire.

Jeffrey W. Ubben, Founder, CEO & CIO of ValueAct Capital. Hat-tip to Simoleon Sense.

And finally, here’s a little toilet humorfrom sociological research for Friday.

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Boardroom Insider

Ralph Ward’s Boardroom INSIDER, August 2010 edition, offers boards quick analysis and advice on what they should be doing now with regard to the Dodd-Frank Act.

While no one in business likes more regulation, Dodd-Frank should be no new Sarbanes-Oxley. On its governance provisions, at least, there’s a sense that the law isn’t trying to lead a crusade, but rather catch up with one already on the march.

One tip for selling your pay plan is to focus less on peer pay levels and more on the actual results an exec has delivered for your company. “A lot of boards go to shareholders using comparables,” notes Dian Greisel, founder of the Investor Relations Group. Instead, show “how we set performance, and that shareholders should want a CEO who is incentivized.”

Ralph Ward authored of the following books: The New Boardroom Leaders: How Today’s Corporate Boards Are Taking Charge, Saving the Corporate Board: Why Boards Fail and How to Fix Them, Improving Corporate Boards: The Boardroom Insider Guidebook and 21st Century Corporate Board. If your board isn’t getting his newsletter, you’re losing out. Each issue offers news you can use.

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