2011 is the Year of Corporate Board Accountability-Executive Compensation

By: Tracy Levine, Managing Director – Renaissance Executive, President – Advantage Talent Inc.

2011 is the year of Corporate Board Accountability to the shareholders, the SEC and the Courts. This is not the theoretical accountability of the past but hard facts transparent accountability. The Dodd-Frank Wall Street Reform and Consumer Protection Act will come into play in 2011. Most people have heard the saying, “What gets counted, gets done.” In this case, Congress and the SEC are taking this philosophy a little further, “If you don’t record your actions with transparency for the shareholders, then you are done.” Not only is the SEC calling for accountability but Shareholders are suing in greater numbers.

“This law (Dodd-Frank) creates a new, more effective regulatory structure, fills a host of regulatory gaps, brings greater public transparency and market accountability to the financial system and gives investors important protections and greater input into corporate governance.”
SEC Chairman Mary L. Schapiro (http://sec.gov/spotlight/dodd-frank.shtml)

Executive Compensation pay approved by the Board will come under increased scrutiny. Gone is the era where Board Members can rubber stamp compensation packages that are not based on increasing the bottom line or facilitating long-term growth. For example, CEO compensation packages that pay on “return on invested assets” in high sales, low margin companies with almost no invested assets will now come under scrutiny by the shareholders. Board members need to truly understand the Key Performance Indicators (KPI) that are relevant and be able to clearly and concisely explain to the shareholders why certain KPI are appropriate benchmarks.

Section 951 of the Dodd-Frank Act (proposed rule) calls for:

  • Shareholder Approval of Executive Compensation and Golden Parachute Agreements: Shareholders will have the opportunity to give advisory opinions through voting on Executive Compensation. The Board gets to decide whether the shareholder vote is binding or not.
  • Shareholder Approval of the Frequency of Shareholder Votes on Executive Compensation: Starting January 21, 2011, a corporation must allow shareholders an Advisory Vote on Executive Compensation at least once every 3 years. Corporations are required to hold a nonbinding shareholder frequency vote every 6 years to vote on how often the shareholders would like to cast a say-on-pay vote, namely: every year, every other year, or once every three years.
  • Enhanced Disclosure on Executive Compensation: Companies would be required to disclose in the Compensation Discussion and Analysis, whether, and if so, how the companies have considered the results of previous say-on-pay votes.
  • Institutional Investment Manager Reporting of Votes: Investment managers would be required to identify securities voted, describe the executive compensation matters voted on, disclose the number of shares over which the manager held voting power and the number of shares voted, and indicate how the manager voted.

Section 953 of the Dodd-Frank Act (proposed rule) calls for:

  • Disclosing Executive Compensation Relative to the other company Employees: A company must disclose the ratio between the CEO’s total compensation and the median total compensation for all other company employees.

Section 954 of the Dodd-Frank Act (proposed rule) calls for:

  • Boards must address Compensation Claw-back Policies: Prohibits the listing of securities of issuers that have not developed and implemented compensation claw-back policies.

While some of the votes are nonbinding, ignoring the shareholders in the current environment is risky for Board Members. With many Baby Boomers finding themselves in a position of unemployment, underemployment or delayed retirement, they are not in a forgiving mood.

UPDATE:  The new rules take effect April 2011.  See the final rule. (http://sec.gov/rules/final/2011/33-9178.pdf)

SEC Approves Shareholder Proxy Access: Have you reviewed your by-laws?

By: Tracy Levine, President, Advantage Talent, Inc.

On August 25, 2010, the Securities and Exchange Commission voted 3-to-2 to adopt a controversial proxy access rule to facilitate shareholders’ ability to nominate a limited number of candidates for election as directors.

SEC Chairman Mary Schapiro stated, “As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own………….Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice.”

The new SEC rules do not change any state or foreign corporate law rules governing the nomination and election of directors, they do provide for the inclusion of nominees properly nominated in accordance with state law in the company’s proxy statement. The shareholders claimed victory and the U.S. Chamber of Commerce declared it was against Federal Law and immediately filed suit. The U.S. Chamber of Commerce has been successful in using Federal Courts to strike down SEC efforts to allow shareholder proxy access. These successes came at a different time in history and were before the recent Dodd-Frank overhaul. The SEC has prepared a 450 page response to the lawsuit while the U.S. Chamber of Commerce has asked the courts to temporary delay the rule going into effect. Only time will tell who will win.

The response has been quick and harsh against the U.S. Chamber of Commerce this time around. The Council of Institutional Investors, a group representing approximately $3 Trillion in investments, was quick to put out their own statement, “The Council of Institutional Investors regards the business community’s legal challenge to the Securities and Exchange Commission’s (SEC) “proxy access” rules as an assault on a fundamental shareowner right.” (http://www.cii.org/UserFiles/file/09-29-10%20proxy%20access%20legal%20challenge.pdf) Considering the mood of the country, the fight might not be as clear cut and easy for the U.S. Chamber of Commerce this time around. Shareholders are looking at the decline of their personal wealth while Corporate Executives and Wall Street continue to pay out huge bonuses. Corporations are going to have to be prepared for an uphill battle or a possible loss in the Federal Courts. Good Corporate Governance may require Boards to review their Corporate By-Laws related to Director Elections before the 2011 Proxy season. As stated before, the SEC ruling does not supersede state or foreign laws. A Corporation’s By-Laws will set the backdrop of how the new ruling will affect their Corporate Board.

UPDATE:  SEC puts on hold Shareholder Proxy Access until courts make a decision.

http://online.wsj.com/article/SB10001424052748704631504575532691876953852.html?mod=dist_smartbrief

Will IFRS Make CPAs a Requirement for SOX Compliant Boards?

By: Tracy Levine, President, Advantage Talent, Inc.

Most articles about IFRS have been technical in nature. The focus has been on what items will be accounted for differently under IFRS versus GAAP. Little attention has been given to how the switch to IFRS will affect corporate governance. While the SEC supports the switch to IFRS, they have expressed concern that the switch will cause a short term SOX compliance issue as it relates to financial experts on the audit committee. Under SOX at least one member of the Audit Committee must be defined as an Audit Committee Expert. The SEC defines an Audit Committee Financial expert as a person who has the following attributes:

An understanding of generally accepted accounting principles and financial statements;………………..Under the final rules, a person must have acquired such attributes through any one or more of the following:

(1) Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;

(2) Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;

(3) Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or

(4) Other relevant experience.

Under the final rules the SEC makes it clear that just because someone was already serving on an Audit Committee did not mean they could automatically be grandfathered in as the Audit Committee Financial Expert. It further states that the fact that a person has experience as a public accountant or auditor, a principal financial officer, controller or principal accounting officer or experience in a similar position would not, by itself, justify the board of directors in deeming the person to be an Audit Committee Financial expert.

(http://www.sec.gov/rules/final/33-8177.htm)

The rules of the game are changing. An understanding of GAAP is no longer going to be the starting benchmark. IFRS knowledge is going to be the starting benchmark. Audit Committee Financial Experts familiar with IFRS are going to be in short supply. Very few financial experts have the prerequisite experience to qualify as the expert under SOX. One of the groups actively preparing for and educating their members about the switch to IFRS is Certified Public Accountants (CPA). Starting in 2011, the CPA Exam will include testing on IFRS. A CPA is required to finish a predetermined amount of Continuing Professional Education (CPE) each year to keep their licenses current. For the last couple of years they have been able to take numerous CPE Classes on IFRS. Putting a CPA with IFRS training on the Audit Committee may be one of the steps companies may have to take to protect themselves from litigation.

Shareholders have become very litigious. Many feel the gatekeepers have failed miserably and left the shareholders with diminished assets. The Security Police and Fire Professionals of America are suing Goldman Sachs and Morgan Stanley over large bonuses and losses sustained by investors. The Atlanta Firefighters’ Pension Fund is suing their custodian, Chicago-based Northern Trust, over risky investments. These are just a few examples of shareholders lashing out.  Corporate Boards run the risk of finding themselves the next group of gatekeepers subject to shareholder litigation. If the company loses money or fraud is discovered, shareholders might put forth litigation challenging the competence of the Audit Committee Expert, the Audit Committee members and of corporate decisions approved by audit committees who are alleged to have lacked the necessary competence.

The Securities and Exchange Commission is soliciting comments on this issue and several others related to IFRS and Corporate Governance. If you are interested in commenting on this issue, the SEC requests the following:

DATES: Comments should be received on or before October 18, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

•Use the Commission’s Internet comment form

(http://www.sec.gov/rules/other.shtml);

•Send an e-mail to rule-comments@sec.gov. Please include File Number 4-608 on the

subject line; or

•Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

•Send paper comments in triplicate to

Elizabeth M. Murphy, Secretary

Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549–1090.

All submissions should refer to File No. 4-608. This file number should be included on the subject line if e-mail is used.

Click the following link to read about all of the Coporate Governance Issues being addressed by the SEC:   http://www.sec.gov/rules/other/2010/33-9134.pdf

SEC States CEO Succession Planning a Key Board Responsibility

By: Tracy Levine, President, Advantage Talent Inc.

In 2009, corporations saw executives exiting as their corporations’ economic health were failing and corporate sustainability questionable. These abrupt departures during a critical time in the corporations’ fight for survival magnified the adverse affect of minimal or no succession planning. Corporate Boards found themselves in the position of focusing on finding a leader rather than focusing on the immediate financial problems at hand. If any company should be the poster child of poor succession planning in 2009, it would be the Bank of America Corporation. CEO Kenneth Lewis resigned at a time when the company was in the process of paying back TARP money which ultimately resulted in a 2009 fourth quarter loss of $5.2 billion. It took the Board three months to find a successor. Time that would have been better spent focusing on improving corporate performance.

In the past the SEC has supported the exclusion of shareholder proposals calling for succession planning transparency. Corporate Boards have been able to Rely on Rule 14a-8(i)(7) to exclude this type of information in the proxy. Rule 14a-8(i)(7) allows corporations to exclude information relating to the day-to-day management of the workforce.

Shareholder proposals for strategic succession planning are now getting support from the SEC. The SEC has changed its stance of classifying succession planning as part of the day-to-day operations. Succession Planning is now considered a risk item that needs to be addressed.

SEC Staff Legal Bulletin No. 14E (CF)

“One of the board’s key functions is to provide for succession planning so that the company is not adversely affected due to a vacancy in leadership. Recent events have underscored the importance of this board function to the governance of the corporation. We now recognize that CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day to-day business matter of managing the workforce. […] Going forward, we will take the view that a company generally may not rely on Rule 14a-8(i)(7) to exclude a proposal that focuses on CEO succession planning.”  (http://www.sec.gov/interps/legal/cfslb14e.htm)

Laborers’ International Union of North America (LiUNA) a long time proponent of succession disclosure had tried unsuccessfully in the past to have their CEO succession disclosure proposals included in the proxy of numerous companies for shareholder vote. In 2010, corporations such as Whole Foods, Bank of America and Verizon were forced to include LiUNA’s proposals for shareholder vote. Approximately 30% of the Whole Foods shareholders, 40% of the Bank of America shareholders, and 33% of the Verizon shareholders voted for the proposal. Even though the proposals were defeated the first time around, Corporate Boards can expect shareholder support for the proposals to grow if the issue is not voluntarily addressed.

2010 Proxy Season Voting Rule Changes and impact to the CFO

By: Tracy Levine, President, Advantage Talent, Inc.

The big news this proxy season is the SEC’s vote to prohibit brokers from discretionary voting of stock the firm holds for their clients, in Board Elections.  Shareholder Advocates see this as a hard won victory that has been in the works since 2006.  Corporations worry that the new rule will be disruptive to the functioning of Corporate Boards and the Proxy Process.  For many years there has been a fight brewing with large activist shareholders and corporations.  Corporations have been mostly successful in keeping shareholder activists’ candidates out of the Proxy and off of the Director Slate.  Campaigns to change the rules have mostly been unsuccessful.  With the SEC approving the amendment to NYSE Rule 452, the activist groups may have achieved their goal in a roundabout way. 

A.) What does this new rule mean to a CFO?  In most companies the CFO is ultimately responsible for all SEC filings, including making sure that the proxy is mailed out to shareholders on time for the Annual Board Meeting.  This process has been getting easier with the advent of e-Proxy Voting.  In the past, the proxy votes were tallied to see if there was a quorum to elect the typically unopposed slate of Directors.  With the success of blocking non-management nominees from the slate, the activist shareholders were left with two choices: (1) Wage an expensive legal battle or (2) Vote no or withhold votes for the proposed slate.  Voting No or withholding votes most of the time did not effectuate change.  Brokers typically cast their clients’ votes with management.  It was not their job to be activists.  Therefore, the corporation was able to fairly easily reach a quorum for their chosen slate.

With the amendment of NYSE Rule 452, corporations may not be able to get a quorum as easily as before when activist shareholders choose to vote no or withhold votes.  Corporations can no longer depend on the Brokers to be the deciding vote and the votes used to reach a majority quorum.  CFOs may have to start to budget more money to send out more notices to garner shareholder votes in order to reach a quorum.  It could be a very expensive exercise.  Complicating this issue is the new access to E-Proxy voting.  It is cheaper for the company but so far shareholder voting has not gone up but instead has gone down with the transition to E-Proxy Voting.

 B.) What does this new rule mean to a CFO?   Numbers, Numbers, Numbers.  Now all shareholders will be holding management more accountable on a quarter to quarter basis.  Management may be in the untenable situation of being afraid to carryout good long term strategic plans because in the short term the plan does not produce immediate results or has a temporary negative impact due to implementation costs.

C.) What does this new rule mean to a CFO?   On the positive side, CFOs who have been in the position of having to tell the CEO and Board of Directors….NO, now have a powerful ally in the shareholders.

For a good summary of how the Amendment to NYSE Rule 452 may affect your corporation read:  Willkie, Farr, & Gallagher, LLP: Discretionary Voting by Brokers Prohibited in Director Elections

Read the SEC Announcement at http://edgar.sec.gov/rules/sro/nyseamex/2010/34-61292.pdf