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The
Corporate Reform Weekly
Vol
V, #29 July 31, 2006
In
This Issue…
Executive
Pay
1.
SEC approves new executive pay disclosure rules
2.
Options backdating investigations continue, but will criminal charges be
widespread?
3.
WSJ suggests companies took advantage of 9/11 in stock options granting
Lobbying
and Ethics Reform
4.
Sens. Obama, Fiengold ask fellow Senators: why not implement new ethics rule
Corporate
Taxes
5.
Another corporate tax cut bill stalls – for now
Corporate
Scandal
6. Judges
uphold Ebbers conviction and 25-year prison sentence
This
Week’s Action Item
Tell
your Senators: it’s time to adopt lobbying and ethics rules for real
Executive
Pay
1.
SEC approves new executive pay disclosure rules
The Securities
and Exchange Commission last week approved new executive pay disclosure rules
that will require companies to be clear and up-front about executive
compensation packages and provide complete explanations of stock options
granting.
The 372-page
proposal, which received 20,000 comments, comes in response to widespread
complaints by shareholders, who say that current corporate financial reports
make it very difficult to construct an accurate picture of executive
compensation because the reports scatter benefits and perks like retirement
packages and paid travel everywhere and often cloak them in abstruse legalese.
The new rules
will require a “Compensation Discussion and Analysis” in the company’s proxy
statement, where the company will have to explain its executive compensation
decisions. (However, companies can beg out of this requirement if they can
prove that such disclosure would reveal competitive information, a potentially
gaping loophole). The rules also tackle the granting of stock options,
responding to a growing scandal involving what appears to be rampant backdating
of options. Now companies must be up front about the date of the grant and the
decisions that go into the granting on that date.
While the
rules are expected to make the CEO salaries more transparent, it is unclear
whether the rules will be able to bring runaway executive salaries under
control. Critics note that the new rules do nothing to empower shareholders to
hold directors accountable for approving outsize pay packages. The law also
does not require companies to disclose whether or not pay consultants and legal
advisors to the compensation committee are independent of management.
The rules fit
with the philosophy of SEC Chairman Christopher Cox, who has frequently
suggested that more information – as opposed to direct regulation – is
generally the best solution. "Shareholders and their representatives need
intelligible disclosure . . . without the need for an advanced degree,"
Cox told reporters upon announcing the rules.
For more, see:
“Pay Rules
Adopted by S.E.C.,” By ERIC DASH
of the New York Times:
http://www.nytimes.com/2006/07/27/business/27pay.html
“SEC Rules
Tightened On Pay Disclosure: Firms Must Detail Total Compensation Of 5 Top
Executives,” By Terence O’Hara Washington Post:
http://www.washingtonpost.com/wp-dyn/content/article/2006/07/26/AR2006072601929_pf.html
2.
Options backdating investigations continue, but will criminal charges be
widespread?
One week after
federal prosecutors charged executives at Brocade Communications with
securities fraud for illegal backdating of stock options, questions abounded.
Would Brocade be the first of many to be charged criminally? After all, at
least 80 companies are under federal investigation for stock options
backdating. And the Justice Department has issued subpoenas at 35 companies.
A report in
the New York Times suggests that more criminal prosecutions are coming, but not
that many.
According to
the Times:
“Given the
number of companies now under scrutiny — more than 80 — and how varied were
their practices in granting options, it is unclear where investigators will
draw the line. Some practices may turn out to be perfectly legal, others simply
overly aggressive or sloppy and still others may be found to have been
fraudulent.”
“Government
investigators seem to be focusing their efforts now on cases involving
falsified documents and similar accusations. A result may be that the vast
majority of the options-backdating cases will wind up being pursued and settled
on a civil basis with the Securities and Exchange Commission, lawyers say.”
However, the Times notes that much of the backdating took
place prior to 2002, when the Sarbanes-Oxley Act required more timely reporting
of companies’ stock options grants.
Companies that
engaged in backdating also face potential IRS scrutiny. Reports indicate that the
Internal Revenue Service is investigating about 40 companies embroiled in
options backdating probes. IRS officials say that options backdating may have
allowed companies to take improper tax deductions and misreport income.
For
more, see: “I.R.S. Reviewing Companies in Options Inquiries,”
By ERIC DASH
of the New York Times:
http://www.nytimes.com/2006/07/28/business/28options.html
“Investigations
Are Sifting Good, Bad and Only Ugly,”
By JULIE
CRESWELL of the New York Times:
http://www.nytimes.com/2006/07/25/business/25options.html
“Turning Back
the Clock on Backdating,” By DAVID LEONHARDT, of the New York Times:
http://www.nytimes.com/2006/07/26/business/26leonhardt.html
3.
WSJ suggests companies took advantage of 9/11 in stock options granting
Almost 200
companies took advantage of the sinking stock market in the days following 9/11
to issue hundreds of millions dollars worth of stock options grants to top
executives, according to an investigation by the Wall Street Journal. Because the stock option grants were
made at a stock market low, the value of the options was ultimately much higher
than it would have been otherwise in most cases, benefiting top executives.
(Option sellers get the difference between the stock price on the day of the
sale and the stock price on the day of the grant, so granting options on a low
stock price day is an easy way to make more money on option sales).
According to
the Journal:
“Some
companies rushed, amid the post-9/11 stock-market decline, to give executives
especially valuable options. A review of Standard & Poor's ExecuComp data
for 1,800 leading companies indicates that from Sept. 17, 2001, through the end
of the month, 511 top executives at 186 of these companies got stock-option
grants. The number who received grants was 2.6 times as many as in the same
stretch of September in 2000, and more than twice as many as in the like period
in any other year between 1999 and 2003.”
“Ninety-one
companies that didn't regularly grant stock options in September did so in the
first two weeks of trading after the terror attack. Their grants were
concentrated around Sept. 21, when the market reached its post-attack low. They
were worth about $325 million when granted, based on a standard method of
valuing stock options.”
“There's
nothing illegal about granting options after the market plunges. But acting so
quickly after a national tragedy drove down stocks shows the eagerness of some
companies to increase their executives' potential wealth. These grants also
offer important new fodder for an already fractious debate over what
constitutes the proper use of options in executive compensation.”
The Journal article also outrightly asks the
question: “Did companies take unseemly advantage of a national tragedy?”
Lobbying
and Ethics Reform
4.
Sens. Obama, Fiengold ask fellow Senators: why not implement new ethics rules
It has been
almost five months since the Senate approved a weak lobbying reform bill by a
90-8 vote. But that bill continues to languish in a House-Senate conference,
and with each passing day, the chance of it becoming law continues to drop.
But that
doesn’t mean that the Senate can’t adopt the new lobbying reform rules – such
as those limiting privately-funded travel and accepting gifts – without the
President signing the rules into law.
Last week,
Senators Barack Obama (D-Ill.) and Russ Feingold (D-Wisc.) introduced a
resolution that would put the lobbying and ethics reform rules approved back in
March into effect immediately.
“The Senate
congratulated itself for passing new travel and gift rules back in March, but
those rules aren’t yet in effect because the lobbying reform bill has stalled,”
Feingold said in a press release. “Lobbyists can still buy meals for members,
despite what the public has been led to believe. It is time for the Senate to
start living by the rule changes it adopted with such fanfare three months
ago.”
“Let me be
clear – while I don’t believe the ethics reforms passed by the Senate are
strong enough, they’re certainly better than no reform at all,” Obama said in a
press release. “Even if this bill doesn’t become law, the Senate should adopt
these modest rules to put an end to lobbyist-paid lunches and gifts and start
to change the culture in Washington that led to the rise of Jack Abramoff and
Duke Cunningham.”
To take action
on this, see This Week’s Action Item
For full
details, see: “Obama, Feingold Push Resolution to Implement New Senate Ethics
Rules,” press release:
Corporate
Taxes
5.
Another corporate tax cut bill stalls – for now
Last week, the
House of Representatives postponed (for now), a vote on yet another corporate
tax-cutting bill. This bill, the Business Activity Tax Simplification Act,
would have meddled in the state-tax system by preventing states from imposing
taxes on companies that do not have a physical presence in the state’s borders,
even if the company conducts business in that state. The bill would mainly
benefit Internet firms and service firms, like banks and credit card companies.
The bill is opposed
by the National Governors Association, which estimates it could reduce state
tax revenues by $6.6 billion a year, resulting in likely cuts to social and
health services that states provide.
"This
legislation essentially would shift the tax burden to small businesses and
locally owned stores, while favoring out-of-state corporations and larger
in-state companies with the means to exploit loopholes," David Quam, the
director of federal relations for the National Governors Association, told reporters.
“This is a federal corporate tax cut using state tax dollars…If you take $6
billion from the states, that is $6 billion that has to be found by either
raising revenues or cutting services.”
Quam warned
that the long-term effects could be even worse, since the bill would create
opportunities to concentrate operations in certain states and set up shell
companies in offshore locations.
According to
the Congressional Budget Office, 70 percent of the losses will fall on just 10
states: California, Florida, Illinois, Michigan, New Jersey, New York,
Pennsylvania, Tennessee, Texas and Washington.
Kevin Madden,
spokesman for House Majority Leader John Boehner, told reporters: “There were
some misperceptions about its effect on states, and it has been postponed in an
effort to clear up those misperceptions.”
For more, see:
“US House delays vote on state corporate tax bill,” Reuters
http://today.reuters.com/investing/financeArticle.aspx?type=governmentFilingsNews&storyID=2006-07-25T234118Z_01_N25233146_RTRIDST_0_ECONOMY-TAXES-STATES.XML
“States Oppose
Federal Bid to Curb Business Tax,” by Bloomberg News:
http://www.bloomberg.com/apps/news?pid=20601103&sid=ajFn_0O7e.Vw&refer=us
“Another
Corporate Tax Break? A federal tax cut using state dollars is a bad idea,”
Washington Post editorial:
http://www.washingtonpost.com/wp-dyn/content/article/2006/07/24/AR2006072400980.html
Corporate
Scandal
6. Judges
uphold Ebbers conviction and 25-year prison sentence
A federal
appeals court last week threw out an appeal by former WorldCom CEO
Bernard Ebbers, who claimed that he had not been given a fair trial. This
clears the way for Ebbers to begin serving the 25 year prison sentence that he
had argued was unreasonable.
While Judge
Ralph K. Winters acknowledged that 25 years was a long time, it was not
“longer than the sentences routinely imposed by many states for violent crimes,
including murder.”
“The
securities fraud here was not puffery or cheerleading or even a misguided
effort to protect the company, its employees, and its shareholders from the
capital-impairing effects of what was believed to be a temporary downturn in
business,” Judge Winter wrote. “The methods used were specifically intended to
create a false picture of profitability even for professional analysts that, in
Ebbers’s case, was motivated by his personal financial circumstances.”
Ebbers was
convicted last year of orchestrating an $11 billion accounting fraud – the
largest ever – while CEO of WorldCom.
For more, see:
“Conviction of Ex-WorldCom Chief Is Upheld,”
By THE
ASSOCIATED PRESS: http://www.nytimes.com/2006/07/29/business/29ebbers.html
This
Week’s Action Item
Tell
your Senators: it’s time to adopt lobbying and ethics rules for real
It has been
almost five months since the Senate approved a weak lobbying reform bill by a
90-8 vote. But that bill continues to languish in a House-Senate conference,
and with each passing day, the chance of it becoming law continues to drop.
But that
doesn’t mean that the Senate can’t adopt the new lobbying reform rules – such
as those limiting privately-funded travel and accepting gifts – without the
President signing the rules into law.
Last week,
Senators Barack Obama (D-Ill.) and Russ Feingold (D-Wisc.) introduced a
resolution that would put the lobbying and ethics reform rules approved back in
March into effect immediately.
As THIS WEEK’S
ACTION ITEM, tell your senators that it’s time to adopt ethics rules for real.
If they are serious about curbing down on ethics and lobbying abuses, they will
support the Obama-Feingold resolution and adopt the rules that they already
approved five months ago.
For full
details on the Obama-Feingold resolution, see: “Obama, Feingold Push Resolution
to Implement New Senate Ethics Rules,” press release:
