The Clock is Ticking

After delaying Section 404 compliance for small companies at least four times since Sarbanes Oxley became law in 2002, the SEC has set a compliance deadline of June 15, 2010 for companies with market caps of less than $75 million. Section 404 requires that companies publicly report on the effectiveness of their internal control over financial reporting.

In a recent public statement, Mary Schapiro, the SEC’s new chairman, commented that, “Since there will be no further commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance.”

Section 404 compliance is both time consuming and expensive, so if you haven’t begun planning with your auditor, there’s no time like the present.

 

Laurie Berman, lberman@pondel.com

IROs Must Answer Market Anger

Published in IR Alert…
 
As a group, investors in publicly traded companies are still mad as hell. They don’t want to take it anymore, and… they aren’t.
 
The “it” reflects deep continuing pain from the protracted economic abyss—smaller paychecks, unrecovered losses in retirement savings, sustained near record unemployment and a litany of maladies that are redefining the role of capitalism.
 
Despite the market’s stellar performance so far this year, anger and angst abound among investors, be they professional money managers or individuals. They are flexing their muscles and reacting like never before.
 
They opined about executive compensation more loudly than ever. They supported measures to repeal board classification, separate the CEO from the chairman role and enact majority voting. If that wasn’t enough, investors continue to seek greater access to the proxy statement, and they are clamoring for the right to call special meetings.
 
Making things even more volatile, there is a strong anti-corporate sentiment among individual investors, plus more activists than ever among professional investors seeking to effect change (including a set of brand new activist investors, so challenging to identify because they have never been activists before).
 
Finally, insert the new leadership at the Securities and Exchange Commission as they seek to right the wrongs and laxity of the prior commission, and voila, we are experiencing unprecedented times and challenges for investor relations professionals.
 
With Q4 and the 2010 proxy season right around the corner, IROs have an opportunity to take an early lead and be heroes within their companies, learning what’s on their shareholders’ minds, along with what specific proposals—friendly or otherwise—may lurk ahead.
 
Aside from event-driven issues, corporate governance proposals will continue to dominate the landscape, with “Say on Pay” at the forefront. Golden parachutes will be going by the wayside. Investors will be looking at restricting post-retirement stock sales and requiring claw-back provisions. Most important of all, board members should be prepared to clearly communicate how senior management performance is measured and how it is rewarded.
 
IROs should comb the websites of advisory firms such as RiskMetrics Group, Glass, Lewis & Co. and PROXY Governance to be cognizant of last season’s proposals and results, which could serve as a preview of proposals to come. They should be certain that appropriate defense measures are in place, and they should review and update their companies’ corporate governance policies, many of which were put into place and filed in 2002, when Sarbanes-Oxley was first enacted.
 
Closely monitoring all regulatory and legislative developments is critical. Be on the lookout for comprehensive legislation introduced last May by U.S. Senators Charles E. Schumer, D-N.Y., and Maria Cantwell, D-Wash, in a bill called the “Shareholder Bill of Rights.”
 
The legislation, in one fell swoop, incorporates many of the proposals already being considered by the SEC and being offered by shareholders for inclusion in proxies. It requires that all public companies hold an advisory shareholder vote on executive compensation; that directors receive at least 50% of the vote in uncontested elections in order to remain on the board; that all directors face re-election annually; that a risk committee be established; and that the jobs of CEO and chairman of the board be split, with the chairman being an independent director.
 
The bill also instructs the SEC to issue rules allowing shareholders to have access to the proxy statement if they want to nominate directors to the board, as long as they have owned at least 1% of a public company’s shares for at least two years.
 
While the odds seem slim that the bill will become law, partially because it includes too many contradictions to state law, some pundits believe that if another scandal emerges, Congress can push this one through as it pushed SOX through following the Enron debacle.
 
But legislation aside, components and variations of the bill already are reaching boardrooms in droves in the form of individual shareholder proposals. When that happens, remember:
 

  • First, not every proposal is bad, so thoroughly review and understand it, assess its consequences to the company, the likelihood of it passing, its origin and the viability of engaging with the proponent; and determine management’s time and potential expense.
     

  • Second, particularly if it’s a proposal management and the board does not like, have legal counsel verify the procedural viability and whether a substantial basis exists for exclusion.
     

  • Third, depending on the degree of controversy, get ready to assemble the team: in-house and outside legal counsel; CEO; CFO; corporate secretary; IRO and outside IR/communications counsel; proxy solicitor; and in some event-driven situations such as M&A proposals, an investment banker.
     

  • Lastly, develop a communications plan and start explaining management’s position through in-person meetings with the largest institutional holders; letters to shareholders, and depending on the proposal, possibly to employees and customers; in-person presentations to RiskMetrics and Glass, Lewis; communications through the news media; a telephone campaign to record holders; and for large companies in contested situations, selected paid advertising.

 
As Sen. Schumer stated in a press release when announcing the proposed Shareholder Bill of Rights legislation, “When you buy stock in a company, it should come with some peace of mind that the business is being run responsibly. During this recession, the leadership at some of the nation’s most renowned companies took too many risks and too much in salary, while their shareholders had too little say. This legislation will give stockholders the ability to apply the emergency brakes the next time the company management appears to be heading off a cliff.”
 
The proposed legislation is giving management and directors major headaches just thinking about it. And while investors these days may have a right to be mad as hell and are reacting in ways they never have before, all IROs understand that the best defense against defeating unwanted shareholder proposals and winning desired ones is to foster sound shareholder relationships year round through continuous transparency and ongoing outreach.

 

Roger Pondel, rpondel@pondel.com
 
 

Environmental, Social and Governance Issues

Join NIRI LA for a free webinar Tuesday, October 6 at 1 p.m. PDT to discuss how companies are prioritizing sustainability, environmental and social issues.  An increasing number of companies are embracing environmental, social and governance (ESG) issues to meet the expectations of investors and possible SEC mandates.  Find out what you need to know about upcoming requirements and hear from top experts in the field who will provide you with practical and useful insights.