Securities and Exchange Commissioner Roel Campos recently sketched out his views on the principles of good compensation policies corporate directors should follow, even as he warned that directors could also face liability for sloppy stock option programs tarnished by backdating.
In an Aug. 15 speech to the Hispanic Association on Corporate Responsibility, Campos said that while the SEC so far has charged executives at only two companies for backdated option grants, others are likely to be ensnared as well. What’s more, he said, “If the facts permit … it wouldn’t surprise me to see charges brought against outside directors.”
Campos
Campos also offered some pointers for directors: “Don’t use ‘as of’ dates unless you’ve carefully thought about the consequences and have explicit approval from legal counsel that it’s acceptable to use an ‘as of’ date; and don’t assign critical board functions to a ‘committees of one,’ unless you’re extremely careful to adopt procedures to ensure that there are appropriate checks and balances in place.”
Lipman
Frederick Lipman, a partner at the law firm Blank Rome, says Campos “is giving a warning that should be heeded … Certain practices have been very loose partly in connection with some compensation committee actions. They haven’t been as formal as some other committees. Compensation committees have to tighten their procedures, not only because of the backdating cases, but also because of the SEC’s compensation disclosure release.”
Besides backdating, Campos noted that signing a contract in one quarter, but dating it “as of” a date in the previous quarter and recognizing the revenue in that past quarter, is improper. “There must be persuasive evidence that an arrangement exists in order to recognize revenue,” he said. “If there was no arrangement in place during a quarter, backdating a contract with an ‘as of’ date doesn’t get you there.”
“I think the problem is that using ‘as of’ dates has become so pervasive that few directors question them any more, even in situations where it’s not legitimate to use them,” Campos continued.
And while committees of one are permitted (under Delaware law, for instance) Campos described such committees as “at best, far from being a ‘best practice’ in good corporate governance. And at worst, it’s a signal to the company’s officers that directors are not taking their obligations as a director seriously and are willing to let expediency guide their decision-making.”
He also highlighted one “do.” Campos said directors should pay attention to procedures and processes—such as properly signing and dating Actions by Unanimous Written Consent— “because simple logistics can get you into trouble.”
SEC Allows NYSE Rule On Web Posting
Moving the “access equals delivery” concept another step into the Internet age, the SEC has approved the New York Stock Exchange’s plan to jettison a 19th-century rule that its listed companies deliver paper copies of their annual reports.
The SEC approved a NYSE proposal that eliminates the requirement that listed companies physically distribute their annual reports and audited financial statements to shareholders, if companies make their annual financial statements available on their Web sites. The delivery requirement, contained in Section 203.01 of the Listed Company Manual, dated back to 1895. NYSE contended that Rule 14a-3 of the Securities Exchange Act of 1934 made the requirement redundant for most NYSE-listed U.S. companies, since it requires companies subject to the proxy rules to distribute annual audited financials to shareholders with, or prior to the distribution of, the annual meeting proxy statement.
The rule amends Section 203.01 of the Listed Company Manual to allow a listed company to satisfy the annual financial statement distribution requirement by making its annual report on Form 10-K, 20-F, 40-F or N-CSR available via its corporate Web site. NYSE also modified the proposal to provide that closed-end funds or companies that don’t maintain their own Web sites can use a related Web site.
Companies must also issue a press release informing investors that their annual report filed with the Commission is available online, and must inform shareholders that they can receive a paper copy of the company’s complete audited financial statements free of charge upon request.
While the change on its own won’t have much effect on domestic companies subject to the proxy rules, NYSE-listed foreign private issuers exempt from the proxy rules stand to benefit. Many of those issuers are required by their home country law to distribute home country financial statements to shareholders months in advance of the completion of U.S. GAAP or U.S. GAAP-reconciled financials, so they had to distribute two annual reports: one to satisfy their home country requirements, another to satisfy the NYSE requirement.
Still, domestic issuers could also benefit if the SEC adopts its so-called e-proxy delivery rule. The SEC in December proposed amendments to its proxy rules that would allow issuers to furnish proxy materials to shareholders by posting them on a Web site, and providing shareholders with notice of the proxy’s availability (with copies available to shareholders on request, at no cost). The comment period on that proposal ended in February. No final action has been taken.
“When these rules were first proposed, the relief they provided was only to foreign issuers since under the SEC rules, you needed to provide hard copy of the annual report with the proxy statement, unless you went through all the requirements to effect electronic delivery with each stockholder,” says Barbara Lange, a partner at law firm Orrick, Herrington & Sutcliffe. “Now that the SEC has proposed a notice and access model, for which the public comment period ended in February, the reduced paper annual meeting is coming closer to a reality.”
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