Is Aligning Executive Pay with Stock Performance A Good Thing?

According to a recent article in the Wall Street Journal, “CEO pay during 2011 was more firmly correlated to how well companies fared in the stock market, a change from 2010, when pay and performance were not directly related.”

New York Stock Exchange

The New York Stock Exchange, the world’s largest stock exchange by market capitalization (Photo credit: wikipedia.com)

 
Indeed, the 2010 Dodd-Frank financial-reform law, which gave shareholders an advisory vote on executive-pay plans, caused many companies to alter how, and how much, they pay CEOs.  One would think this is good news to investors, who have long clamored for the interests of senior management to be aligned with shareholders.
 
However, Lynn A. Stout, a Cornell Law School professor and author of “The Shareholder Value Myth,” believes this has inadvertently empowered hedge funds that push for short term solutions. She notes that the average holding period of stock was eight years in 1960; today, it is four months.  Ms. Stout argues that the directive to “Maximize Shareholder Value” has led to an epidemic of accounting fraud, short term thinking by management and myopic trading strategies by investors.
 
Because of the pressure exerted by hedge funds to push stock prices higher, which often comes at the expense of the organization’s long term value, Ms. Stout advocates limiting the role of investors so that executives and boards of directors are freed up to think about customers and employees, allowing them to invest in the company’s future and act socially responsible.
 
Ms. Stout and corporate governance advocates appear to have diametrically opposed beliefs on how corporations are best managed.  Perhaps a blending of the two views is appropriate: empower shareholders to safeguard their investments by actively preventing manager conflicts of interest and self-dealing, and lock investors into their investments so they do not push for short-term strategies.

 

PondelWilkinson, investor@pondel.com
 
 

Rudyard Kipling and the SEC

Rudyard Kipling.jpg

Logging on to the Securities and Exchange Commission’s website this week to check on a client’s filing, I took a brief detour to peruse other parts of the site. 
 
You wouldn’t know by looking at the home page or by clicking on the news section that the market was gyrating and  people were panicked.  In fact, it seemed like business as usual.  And maybe that’s a good thing.
 
I looked at the bios of the five commissioners, including chair Mary Schapiro. They all have impressive backgrounds, but interestingly enough, none ever worked in a publicly traded company.  Hmmm.
 
Last Friday, the day investors were recovering from the previous day’s  512-point stock market drop, the SEC issued a press release announcing that Commissioner Kathleen L. Casey was stepping down, having completed her five-year term.  No mention of the market’s volatility. Other SEC news that day included the Commission’s insider trading charge against a public company board member and his son. Baseball great Doug DeCinces got the same kind of charge the day before.  That was really a bad day for Doug.
 
Again this  week, with unprecedented market gyrations, four unrelated SEC news releases have been issued:  an announcement of a meeting in China regarding audit oversight cooperation; broker fraud involving the sale of investments to a school district in the mid-west; insider trading prior to a Disney deal; and today’s announcement of a new whistleblowerprogram.
 
By the way, press releases aside, there’s other interesting information on the SEC’s website, from special studies, interesting complaints and even job postings.
 
The SEC has been around since 1934, formed during the peak years of the Great Depression, just after passage of the Securities Act of 1933 and the Securities Exchange Act of 1934–both of which were designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and “clear rules of honest dealing.”
 
The Commission’s stated mission is “to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.”
 
The website states that “As more and more first-time investors turn to the markets to help secure their futures, pay for homes and send their children to college, our investor protection mission is more compelling than ever.”
 
The SEC’s steady, business-as-usual approach to news is refreshing and symbolic of Rudyard Kipling’s famous poem, “If,” which reminds us all to keep our heads while others are losing theirs.

 

— Roger Pondel, rpondel@pondel.com
 
 

Board Diversity in the News

Last week, SEC Commissioner Luis Aguilar said that women and minorities remain “woefully underrepresented” on corporate boards, despite numerous studies that show “diversity in the boardroom results in real value for both companies and shareholders.”
 
Despite the best of corporate intentions over many years, the SEC adopted a new rule, which began applying to proxy solicitations on February 28, requiring a company to disclose:
 

  • whether diversity is a factor in considering candidates for nomination to the board of directors;
  • how diversity is considered in that process; and
  • how the company assesses the effectiveness of its policy for considering diversity.

 
Recently, the SEC completed a review of the filings it received and found a broad spectrum of compliance with the rule.  Some companies have done a very good job, others have room for improvement, and still others provided only a brief statement indicating that diversity was something considered as part of an informal policy.
 
The SEC has now begun to act on the continuing lack of board diversity, and Commissioner Aguilar suggests that companies prepare disclosure with an eye toward it being useful to investors – especially since the rule was originally adopted at investors’ requests.  Specifically, he recommends that the disclosure indicate whether the company has a policy of:
 

  • interviewing one or more candidates who are a minority and/or a woman;
  • retaining a search firm that has been specifically instructed to seek candidates who are minorities and/or women; and/or
  • soliciting recommendations from organizations that have a reputation for identifying candidates with diverse backgrounds.

 
The SEC also recommends that the company indicate how many candidates were interviewed who were women and/or minorities and highlight the diversity of the existing board of directors.
 
Board diversity is an issue that has stimulated much discussion, but with not enough results.  Given its importance, it’s time for businesses to make board diversity a priority.

 

PondelWilkinson, investor@pondel.com
 
 

The Wrong ‘Signal’

PondelWilkinson spoke to Steve Cooke, Corporate Law Partner at Paul Hastings, about the SEC’s latest Reg FD enforcement action against a company that “signaled” to analysts, prior to making a public announcement, that its results would be worse than expected.

 


 
 

Mitigating Risk: Who’s in the Room?

The SEC, rightfully so and perhaps long overdue, is flexing its enforcement muscle with regard to Reg FD and how companies disclose material non-public information.
 
We all know the drill by now and what public companies are supposed to do. Yet sometimes at private meetings with analysts and investors, management inadvertently says something it shouldn’t, and violates Reg FD. If there’s any unusual trading the next day, watch out.
 
While it is perfectly acceptable and even good practice for management to meet with analysts and investors from time to time, one way to mitigate the risk of Reg FD violation is to have an IR professional present at every meeting, or at least at the group meetings.
 
I know what you are thinking…”What a self-serving statement.”  Nevertheless, competent, experienced IR professionals know how to counsel management on what to say. More importantly, they can be right there, ready to intercede, when sensitive questions come up or to prepare a press release should the accidental comment be made that should really be disclosed widely.
 
Recently, the SEC began an investigation into Reg FD violation by generic drug maker Mylan, Inc., following a private meeting it held. I do not know if an IR professional was in the room, and even if there was, there would be no guarantee that harmful comments would not be made. However, at least in theory, if an IR pro was there, the risk of a disclosure violation would have been significantly reduced. And mitigating risk is really what it’s all about. Just ask your D & O insurance broker.
 
Reg FD has been around since the year 2000, and up to now, there have been few cases involving its enforcement.  Word on the Street and from Washington D.C., however, is “Beware.”  With financial reform now underway, things are about to change.

 

Roger Pondel, rpondel@pondel.com
 
 

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

SEC at Your Door? Invite Them In.

You know that feeling.  A letter sitting on your desk.  Return address, 100 F Street, NE Washington, DC 20549.  Your heart sinks to your stomach.  You open it slowly.  Yup, there it is.  An SEC comment letter.
 
What’s the best way to handle this bit of assumingly unwanted news?  According to Steven Jacobs, an associate chief accountant with the SEC’s Division of Corporation Finance, you should engage the SEC in dialogue to determine exactly what they are looking for rather than rushing to restate your financial results.  At a conference sponsored by the New York State Society of Certified Public Accountants, Jacobs said that picking up the phone makes it easier to “assure that the issuer’s response addresses the staff’s concerns.”
 
For other great tips for dealing with the SEC, check out CFO.com’s recap of Jacob’s speech.  Sarbanes-Oxley calls for an SEC review of the financial filings of publicly traded companies at least once every three years.  Last year, the SEC reviewed the filings of nearly 5,000 issuers, up from the prior two years.  It’s bound to happen sooner or later, so be prepared and don’t be afraid to talk to your friendly neighborhood SEC officer.  It might be easier than you think.

 

Laurie Berman, lberman@pondel.com
 
 

XBRL – It’s Closer Than You Think

Within the next month or two, the SEC will finalize rules that mandate XBRL-based submissions for collecting financial reporting information for all domestic and foreign SEC reporting companies.  For those of you wondering, XBRL stands for Extensible Business Reporting Language.  Proponents of  XBRL believe it will allow for more accurate, relevant and scalable analysis of financial information, as well as create greater transparency that can result in a lower cost of capital.  To read more about the SEC’s phase-in plan, click here to access Bowne & Co’s plain English summary.

 

PondelWilkinson, investor@pondel.com
 
 

Are Web Sites a Suitable Disclosure Outlet?

According to the Securities and Exchange Commission, the answer is…maybe.  The SEC’s new interpretive guidance states that posting material information on a corporate Web site may satisfy Regulation FD, but that the facts and circumstances of each case must be weighed first.
 
According to law firm, Cravath, Swaine & Moore LLP, several factors must be determined before a Web site can be used as the sole means of disseminating material information.  These include:
 

  • whether the Web site is a recognized channel of information distribution;
  • how, where and when the information is posted and becomes broadly accessible to the public; and
  • the Web site’s capability to meet the “simultaneous or prompt” timing requirements of Regulation FD’s Rule 100 as well as the Web site’s capability to meet reasonable usage demands.

 
At this point, it’s probably a safer more shareholder friendly bet to continue utilizing the wire services to disclose important information.

 

Laurie Berman, Senior Vice President, lberman@pondel.com
 
 

New SEC Financial Agent

The U.S. Department of Treasury’s Financial Management Service has designated U.S. Bank of St. Louis, Missouri as the new Financial Agent for General Lockbox Services for the Securities and Exchange Commission. US Bank assumed responsibility from Mellon Bank on February 4, 2008. All fee payments (wires and checks) must be submitted to US Bank on and after this date. No payments should be submitted to Mellon Bank after February 1, 2008.
 
Click here for general information on filing fee procedures, or refer to 17CFR 202.3a, Instructions for Filing Fees.
 
For other questions or additional information, contact the Fee Account Services Branch in the Office of Financial Management at (202) 551-8989.

 

— PondelWilkinson, investor@pondel.com