Governance Center Blog

Jan
27
2010

Worth Reading … SEC Proxy Disclosure Rules

The second wave of post-financial-crisis regulations (let’s not forget the elimination of broker discretionary voting that was effective Jan. 1) comes just in time for the 2010 proxy season when the SEC’s new enhanced proxy disclosure rules go into effect Feb. 28. While they won’t have the impact of “Say on Pay” or “Proxy Access,” these rules will prepare boards and management for issues that will most likely be addressed in further regulatory or legislative action.

The enhanced disclosure rules, which were approved on Dec. 16, 2009, focus on corporate governance and compensation matters. Specifically, they would require disclosures in the proxy and financial statements on:
•    The relationship of a company’s compensation policies and practices to risk management.
•    The background and qualifications of directors and nominees.
•    Legal actions involving a company’s executive officers, directors and nominees.
•    The consideration of diversity in the process by which candidates for director are considered for nomination.
•    Board leadership structure and the board’s role in risk oversight.
•    Stock and option awards to company executives and directors.
•    Potential conflicts of interests of compensation consultants as well as the fees paid to consultants and their affiliates.

Additionally, the SEC on Jan. 20 issued a number of interpretative guidance on the new disclosures. You can go to the SEC page or check out Broc Romanek’s TheCorporateCounsel.net blog from Jan. 21. He has separate links to each Compliance Disclosure Interpretation (CDI). Read the rest of this entry »

- Gary Larkin

Jan
25
2010

Best to Keep Eyes Peeled on SEC Agenda

As President Obama continues to propose more stringent bank regulations in light of the financial crisis – a hefty tax on 50 of the largest banks and a plan to allow regulators to limit the size and scope of those banks’ risk-taking activities (Read press release, Jan. 21) – it’s hard to imagine those gaining in any traction based on what has happened in the Senate.

The election of Scott Brown to the late Sen. Ted Kennedy’s seat gives the Republicans the power to filibuster since the Democrats will have only 59 votes, one vote short of what they need. With that said, many on the Hill believe it will be difficult, if not impossible, to approve such legislation as the financial reform package. And when you consider the proponent of the companion Senate bill, Sen. Chris Dodd, is now a lame duck, prospects for passage wane.

The uncertainty of any Obama proposal that needs Congressional approval leaves the SEC as the major corporate regulatory rule-maker for at least this year. So that is why I think it is prudent for directors and corporate management to keep an eye on the body’s rule-making and regulatory decisions over the next six-to-nine months.

Here are the most important SEC proposed and final rules I think many of you should be concerned with in 2010: Read the rest of this entry »

- Gary Larkin

Jan
20
2010

Q&A With Bill George: Corporate Leadership

As almost every U.S. public board continues a post-mortem on the financial crisis, many are looking for sobering answers from their own. And one director who has been making the rounds is Bill George, former Chair and CEO of Medtronic and director of Goldman Sachs and ExxonMobil who is a professor of management practice at Harvard Business School.

Bill George, Goldman Sachs director and HBS professor

George, who was selected in 2002 as one of “The 25 Most Influential Business People of the Last 25 Years” by PBS Nightly News, has written and taught extensively on corporate leadership. In addition to his recent book, 7 Lessons for Leading in Crisis, Jossey-Bass (Aug. 2009), he has written Finding Your True North: A Personal Guide, Jossey-Bass (June 2008).

I came across a video of an interview he granted to The Economist on Jan. 6. In that 12-minute interview, he emphasized that the biggest lesson not learned by CEOs during the financial crisis is that they have not yet faced reality. He said, “this crisis has morphed into a jobs crisis, a health care crisis. A lot of leaders don’t want to face the problem.” While he acknowledged Goldman Sachs has become the lightning rod for the compensation debate, he did say there has to be some restraint.

I spoke with George following The Economist interview to get his take on what U.S. corporations should be doing to improve the leadership at their companies and what they should expect for this year. Read the rest of this entry »

- Gary Larkin

Jan
12
2010

FDIC Takes Page Out of G-20, Executive Compensation Task Force Playbooks

The FDIC’s decision Tuesday on a new insurance premium model for banks falls in line with what many are saying about executive compensation: It makes sense to tie executive compensation to risk alignment.

Specifically, the decision reflects some of the tenets of the G-20 and The Conference Board Task Force on Executive Compensation executive compensation principles.

The FDIC, led by Chairman Bair, voted 3-2 Tuesday during a contentious meeting to require those banks that don’t align their compensation system with risk management to pay a higher insurance premium to the regulator. (Read Wall Street Journal blogger Damian Paletta’s coverage of that meeting.) “The FDIC is exploring whether the design of employee compensation programs should be considered as a factor in the risk-based pricing system,” according to a FDIC staff memo. The memo refers to Section 7 of the Federal Deposit Insurance Act, which requires the FDIC to establish a “risk-based” assessment system for depository institutions. (Read FDIC proposal, Incorporating Employee Compensation Criteria Into The Risk Assessment System.)

“The FDIC seeks to provide incentives for institutions to adopt compensation programs that align employees’ interests with those of the firm’s stakeholders, including the FDIC, and that reward employees for internalizing the focus on risk management,” the memo states.

As I said, not all five FDIC commissioners are on board with this measure, which is being pitched more as a way to replenish the bank insurance fund than a way to limit banker’s compensation. The vote itself calls for a 30-day comment period before the FDIC takes any action. Read the rest of this entry »

- Gary Larkin

Jan
08
2010

Top 10 Issues Facing Directors in 2010

As part of my required reading during the first full week of the New Year, I can’t help but notice how many Top 10 board issue lists there are. And when I think about how critical 2010 is to the future of U.S. businesses and the recovery from the current recession, I realize how important it is to pore over those lists and determine whose advice is the most appropriate.

That is exactly what I will attempt to do with this post. Consider this the best of the Top 10 corporate governance lists for 2010. While it is by no means exhaustive, it is pretty thorough. I focused on annual memos from Weil Gotshal (Ten Thoughts for Ordering Governance Relationships in 2010), Financial Executives International (CEO Marie N. Hollein’s Top Challenges for 2010) and KPMG’s Audit Committee Institute (Ten To-Do’s for Audit Committees in 2010).

Another good source of advice, which I already featured in a recent post on good corporate governance, is the annual client memo from Wachtell, Lipton, Rosen & Katz (Some Thoughts for Boards of Directors in 2010) by partners Steven A. Rosenblum and Marty Lipton and associate Karessa L. Cain. Among many issues facing boards in 2010, Wachtell, Lipton believes succession planning is key as shareholder pressure builds. The memo reads: “CEOs and senior management have been under tremendous pressure from shareholders, employees, customers and other constituencies to manage difficult market conditions, and not surprisingly, continuity of executive leadership throughout the economic crisis has increasingly been the exception rather than the norm.”

Here are the best of the Top 10 lists for 2010 (OK, the FEI list only listed nine items, but you get the idea) in order of importance:

10.) Global Convergence of U.S. GAAP and IFRS: While it is true the United States is the last of the industrialized countries to embrace IFRS, that doesn’t mean boards shouldn’t be concerned about mandatory adoption in the near future. The SEC, whose IFRS roadmap hit a roadblock in 2009 in the midst of the financial crisis, seems ready to move ahead with setting a definitive date for adoption possibly by 2014. (FEI 2010 Top Challenges for Financial Executives) Read the rest of this entry »

- Gary Larkin

Jan
07
2010

The Latest on Executive Compensation Research

There have been some developments on the executive compensation research front at The Conference Board. First, we have updated our Task Force on Executive Compensation Web site to include information about endorsing the Guiding Principles and secondly we have just this week released our Key Findings for the 2009 Top Executive Compensation Report.

The Top Executive Compensation Report found, among many things, that the median CEO of the largest companies made $11.3 million in total compensation, more than 10 times that of the median CEO of the smallest companies. It also found that on average bonuses and stock options were down significantly in all but two industries. (The average share of compensation received in incentive pay increased in Energy and Food and Tobacco.) The Conference Board Governance Center members can access the Key Findings for free by clicking here. Non-Center members can purchase a copy here. The full report is also available for purchase by clicking here.

As for the executive compensation task force Web site, in addition to pages on endorsing the Guiding Principles, we have included a list of endorsing organizations, a list of Task Force members, how to request a briefing on the Task Force report and endorsement process and media coverage. Of course, there is a link to the report itself. The home page for the executive compensation task force is www.conference-board.org/knowledge/govern/executivetask.cfm. Read the rest of this entry »

- Gary Larkin

Jan
05
2010

Worth Reading…IFRS

While many of my posts have focused on corporate governance reform and executive compensation, I thought it made sense in the new year to touch upon an issue all public U.S. companies will have to deal with sooner than later: international financial reporting standards.

A piece in the December edition of CFO magazine (IFRS: Convergence vs. Conversion, December 2009), points out that no matter what the SEC decides on mandating the switch from U.S. GAAP to IFRS, U.S. companies are going to move toward “overarching principles and away from more easily manipulated rules.” Quoting Financial Accounting Standards Board (FASB) Chair Robert Herz, the CFO article goes on to differentiate between convergence and conversion. For the most part, convergence allows some form of U.S. GAAP rules to exist in a hybrid form that is similar to IFRS. However, most of the convergence (FASB-IASB convergence project) is done on a rule by rule basis (i.e. lease accounting, fair value measurement). Conversion is the adoption of principles-based IFRS by companies using rules-based U.S. GAAP.

Since the height of the international financial crisis in late 2008, many U.S. companies (including the Big 4 accounting firms) have stopped exploring efforts to adopt IFRS for the time being. In fact, a survey of CFOs at oil and gas exploration and production companies by BDO Seidman released Tuesday found that 59 percent of respondents are “not thinking about IFRS at all” in 2010 and 33 percent intend not to do anything with IFRS until things become clearer or a changeover from U.S. GAAP is mandated. By the way, 3 percent are actively planning a transition to IFRS.

That doesn’t necessarily mean U.S. public companies shouldn’t be thinking about IFRS. The issue is among the Top Challenges for Financial Executives, according to Financial Executives International.

Here’s a sample of what I am reading on the topic of IFRS:

SEC: No IFRS Yet, Marie Leone, CFO.com, Dec. 9, 2009 http://www.cfo.com/article.cfm/14460972/c_14461841?f=home_todayinfinance. Key findings: The SEC’s chief accountant isn’t dropping any hints about whether the regulator favors a move to international reporting standards. SEC Chief Accountant James Kroeker said issuers will hear more from the SEC about international financial reporting standards in the near term. CFO.com took that to mean it will be early next year when the SEC will decide as promised whether to require U.S. public companies to file financial results using IFRS.
Abuse of Revised IFRS Standards ‘Inevitable,’ Laurie Carver, Life & Pensions magazine, Jan. 5, 2010. www.risk.net/life-and-pensions/news/1567422/abuse-revised-ifrs-standards-inevitable. Key findings: The new International Financial Reporting Standard (IFRS) 9 for financial instruments’ accounting will “inevitably lead to abuses and accounting arbitrage”, according to Jim Leisenring, a member of the International Accounting Standards Board (IASB). The new directive, approved at the end of 2009, would allow the valuation of financial products at amortised cost, rather than fair value, in management of businesses whose “objective…is to hold [it] to collect the contractual cash flows”, regardless of whether they sold it before term. Read the rest of this entry »

- Gary Larkin

Dec
21
2009

Worth Reading … Good Corporate Governance

A recent online discussion on good corporate governance I had with members of Dan Swanson’s Yahoo corporate governance discussion group I belong to got me thinking. It’s a good time to start looking at what thought leadership there is on corporate governance principles.

There is quite a lot of good white papers, articles and online discussion e-mail threads. While I won’t share the e-mail threads for obvious reasons, I would suggest joining some of the groups out there. Now is the time for people in the corporate governance space to talk to each other and share ideas.

I must admit that as I started reading material for this post, I noticed most of what is out there on corporate governance principles is from overseas (namely the United Kingdom, other European countries and Australia). As for what I am going to share with you this week, here it is:

• Some Thoughts for Boards of Directors in 2010, Martin Lipton, partner; Steven A. Rosenblum, partner; and Karessa L. Cain, associate, Wachtell, Lipton, Rosen & Katz. Nov. 30, 2009. http://www.directorship.com/media/2009/12/Some-Thoughts-for-Boards-of-Directors-in-2010-1.pdf. Key findings: This annual outlook is a 32-page report that stresses there is no one-size-fits-all approach to crafting a successful board. It also offers recommendations for key areas of concentration including CEO Succession Planning, Long-Term Strategy and Monitoring Performance and Compliance. “Some are perennial themes that remain relevant and deserve to be re-emphasized from year to year, whereas others have recently come into particular focus,” the authors say. Read the rest of this entry »

- Gary Larkin

Dec
18
2009

SEC Wants More Concise Disclosure That is Material

The SEC has three messages for public boards and management next proxy season when it comes to disclosing policies and practices regarding executive compensation, risk and corporate governance: the Compensation Discussion and Analysis (CD&A) should be used to tell their story, all disclosures should take risks into account and should have a threshold for materiality.

In so many words, SEC Chair Mary Schapiro and a majority of commissioners want disclosures, especially the CD&A, to be less voluminous, easier to read and full of content the investors can truly use. The commission is trying to instill in public companies the idea that disclosures should be treated like a “memo” to investors and not just another compliance document.

That is what I believe directors and management should take away from the SEC’s 4-1 approval Wednesday of new rules for disclosures in proxy and information statements. The proxy disclosure enhancements, which go into effect Feb. 28, 2010, would require disclosures in the proxy and financial statements on:

•   The relationship of a company’s compensation policies and practices to risk management.
•   The background and qualifications of directors and nominees.
•   Legal actions involving a company’s executive officers, directors and nominees.
•   The consideration of diversity in the process by which candidates for director are considered for nomination.
•   Board leadership structure and the board’s role in risk oversight.
•   Stock and option awards to company executives and directors.
•   Potential conflicts of interests of compensation consultants as well as the fees paid to consultants and their affiliates.

Read the rest of this entry »

- Gary Larkin

Dec
15
2009

Executive Compensation Reform Taking Some Baby Steps

The Obama Administration is using good old-fashioned peer pressure and more targeted disclosure to change the way executive compensation policies are carried out by public companies in the U.S. (How else can you explain that only days after the House narrowly approved an historic financial reform package (NYT, Dec. 12) that the SEC is meeting to approve new compensation disclosure rules?)

As part of his peer pressure campaign, the President met with 12 of the CEOs from the largest U.S. financial institutions Monday morning to drive home the message that after these banks received help from the taxpayers, it’s time for them to give back. (Thanks to the tip from Pete Davis of Pete Davis Capital Investment Ideas)

“Now, I should note that around the table all the financial industry executives said they supported financial regulatory reform,” the President said in an official statement following the meeting. “The problem is there’s a big gap between what I’m hearing here in the White House and the activities of lobbyists on behalf of these institutions or associations of which they’re a member up on Capitol Hill. I urged them to close that gap, and they assured me that they would make every effort to do so.”

Does Corporate Governance Matter?

That begs the question, “Should U.S. boards even care about corporate governance reform, especially any change to executive compensation policies, in the near future?” The short answer, as I see it, is a resounding YES! Based on discussion at The Conference Board Governance Center Fall Investor Summit, which focused on The Conference Board Task Force on Executive Compensation report, some of the issues investors are concerned about for 2010 are compensation committee composition, executive long term incentive plans and how executive bonuses will be paid. Read the rest of this entry »

- Gary Larkin

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Worth Reading … SEC Proxy Disclosure Rules

Best to Keep Eyes Peeled on SEC Agenda

Q&A With Bill George: Corporate Leadership

FDIC Takes Page Out of G-20, Executive Compensation Task Force Playbooks

Top 10 Issues Facing Directors in 2010

The Latest on Executive Compensation Research

Worth Reading…IFRS

Worth Reading … Good Corporate Governance

SEC Wants More Concise Disclosure That is Material

Executive Compensation Reform Taking Some Baby Steps