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The Corporate
Reform Weekly
Vol.
V, #31 September 11, 2006
In
this Issue…
Corporate
Governance
1.
SEC to revisit corporate proxy access rules
Executive
Pay
2.
Congress considers revisiting executive pay rules
Stock
Options
3.
Cox says SEC doesn’t need any extra help on stock options scandal
4.
Report estimates costs of stock options scandal at $500 million per company
Corporate
Crime Prosecution
5.
Former U.S. attorney generals ask for government to go easier on corporations
6.
Justice Department wants new law to help recover Lay’s assets
7.
“Is corporate fraud endemic in America?”
This
Week’s Action Item:
Help save the
Corporate Reform Weekly
Corporate
Governance
1.
SEC to revisit corporate proxy access rules
The
Securities and Exchange Commission has announced plans to revisit the issue of
corporate proxy access, following on a U.S. Court of Appeals ruling that the
SEC was wrong in allowing American International Group Inc. to reject a
shareholder proposal on proxy access last year.
In 2005,
the SEC told AIG that it was okay if the company rejected a shareholder
resolution from the American Federation of State, County and Municipal
Employees, which proposed that shareholders owning at least 3 percent of AIG's
stock be allowed to submit their own nominee for a board seat.
Last
week, the U.S. Court of Appeals for the Second Circuit said that based on
current federal regulations, shareholders should be able to nominate candidates
for the board of directors.
"If
this stands, it is the most significant change to shareholder rights in 30
years," said Richard Ferlauto, a spokesman for the American Federation of
State, County and Municipal Employees pension plan. "This is the Holy
Grail that we have always sought — to be able to easily and cost-effectively
nominate a director who could stand on the proxy card, along with the company
nominees."
In
response, the SEC says it will address rules governing proxy access at its
October 18 meeting.
Proxy
access is a hotly contested issue. In 2003, then-chairman William Donaldson
proposed that the SEC change corporate governance rules to allow minority
shareholders access to corporate proxy statements to nominate directors.
However, business groups like the Chamber of Commerce jumped all over the SEC
and the proposal never made it very far.
Allowing
minority shareholders to nominate directors is widely seen by investor advocates
as a reasonable solution to a number of corporate governance problems. Under
current rules, directors are nominated by management. Almost all shareholder
elections consist of one and only one slate of directors – shareholders have,
in effect, no choice. Since directors are nominated by management, they are
only accountable to management, which means they often go lightly on their
oversight functions. Many blame the rise of executive compensation on the fact
that directors – which approve pay packages – are not held accountable to
shareholders.
For more, see:
“SEC will offer new rules for nominating corporate directors,” By Jesse
Westbrook and Vineeta Anand, Bloomberg News:
http://www.stltoday.com/stltoday/business/stories.nsf/0/ADA7A6F53A3326C6862571E3000C26C9
Executive
Pay
2.
Congress considers revisiting executive pay rules
In 1993,
attempting to deal with executive pay, Congress adopted a law that forced
companies to pay taxes on all senior executive compensation above $1 million –
unless it was performance-based.
That 1993 law
was a hot topic of discussion last week at a Senate Finance Committee hearing
on executive pay and stock options. Senators and witnesses blamed it for the
stock options backdating scandal, because it encouraged companies to parcel out
compensation in nominally performance-based forms like stock options.
Senate Finance
Committee Chairman Charles Grassley (R-Iowa) the 1993 law has "failed and
to some extent it might be creating this options industry."
"The idea
was to discourage companies from paying their CEOs too much.” Sen. Robert
Bennett, R-Utah, said. “I won't go so far to say that is responsible for the
manipulation that occurred at Enron or the temptation to backdate option grants
... Well, we're now here talking about companies that have manipulated stock
options in order to maximize compensation and perhaps get around the unintended
consequence from what Congress did."
Bennett was
among those suggesting a repeal of the 1993 law: "We should remove the
limit on the deductibility for cash paid to a chief executive,” he said. “We
may in the Congress have created an unintended incentive to cheat."
If Congress
were to repeal the 1993 law, the expectation is that corporate taxes would go
up, since corporations get deductions for compensation that it tied to
performance, at least nominally.
However,
corporate governance experts doubted whether changing tax laws would make much
of a difference, since compensation is agreed upon by corporate directors who
are not held accountable to shareholders.
"There
are better ways [to address CEO pay] than through the tax code," said Nell
Minow, editor of The Corporate Library. "As long as you have directors
picked by the CEO and compensation committees picked by the CEO, the problem is
not going to go away."
Similarly,
Charles M. Elson, the director of the Weinberg Center for Corporate Governance
at the University of
Delaware said: “As long as boards are under the thumb of management,
it has no impact.”
For more, see:
“Senators Cite Law's Failure to Curb Pay Excess: They say a 1993 measure meant
to limit salaries may have spurred the use of stock options,” By Jonathan
Peterson, of the Los Angeles Times:
http://www.latimes.com/business/la-fi-options7sep07,1,5933939.story
Stock
Options
3.
Cox says SEC doesn’t need any extra help on stock options scandal
With more than
100 companies under investigation for stock options backdating, Securities and
Exchange Commission Chairman Christopher Cox last week told Senators that he
didn’t need any new legislation or even any additional resources.
“The approach
I heard the committee taking today is the right one, which is, keep a [sharp]
eye to the question of whether our existing laws work,” Cox told the Senate
Finance Committee at a hearing last week. “So far, my experience at the agency
is that they do and they are adequate. We are not here today asking for new
legislation."
Last month, a
USA Today report found that enforcement activity at the Securities and Exchange
Commission was falling behind. According to USA Today,
the SEC is on pace to file 590 cases for the current fiscal year, down from 630
last year and 679 in fiscal 2003. However, the report notes that the SEC is
increasing its enforcement case filings by deregistering companies.
The Internal
Revenue Service is also investigating stock options backdating, and similarly,
the IRS
commissioner Mark W. Everson said existing rules were fine. “I think ultimately
the issues will not need to be reformed by Congress,” Everson told the Senate
Finance Committee. “They will have to be reformed by American businesses.”
For more, see:
“SEC
enforcement activity lags,” By Greg Farrell, USA TODAY
http://www.usatoday.com/money/companies/regulation/2006-08-20-cox-usat_x.htm
“Congress Is
Urged to Hold Off Acting on Options and Pay,” By ERIC DASH
of the New York Times: http://www.nytimes.com/2006/09/07/business/07options.html
4.
Report estimates costs of stock options scandal at $500 million per company
Researchers at
the University of Michigan have estimated that stock options backdating between
2000 and 2004 has cost investors $500 million per company. Their calculations
are based on estimates that corporations beset by stock options backdating
scandals have seen an 8 percent decline in their stock prices.
By comparison,
executives gained on average $600,000 from the illegal backdating of stock
options.
“From a
shareholder’s perspective, it’s not just the extra compensation the executives
got, it’s not just the extra taxes they have to pay,” said H. Nejat Seyhun, a
University of Michigan finance professor and one of the study’s co-authors.
“There may be additional payouts for class-action lawsuits as well as worrying
about the quality of the top management.”
More than 100
companies are currently under investigation for stock options backdating.
For more, see:
“Report Estimates the Costs of a Stock Options Scandal,” By ERIC DASH
of the New York Times: http://www.nytimes.com/2006/09/06/business/06options.html
Corporate
Crime Prosecution
5.
Former U.S. attorney generals ask for government to go easier on corporations
Several former
U.S. attorney generals have sent a letter to the Justice Department asking that
federal prosecutors go easier on corporations during criminal investigations.
Following complaints from the U.S. Chamber of Commerce and the American Bar
Association, the former attorney generals and other Justice department
officials want the Justice Department to stop forcing companies to waive legal
protections, including attorney-client privileges, during criminal
investigations.
The practice
is based on a 2003 memo drafted by then Deputy Attorney General Larry Thompson.
The so-called Thompson Memorandum set up tough guidelines for prosecutors going
after corporations, many of whom had been uncooperative in the past. The memo
encouraged prosecutors to go after confidential material in order to more
effectively investigate corporations suspected of breaking the law and are
being otherwise uncooperative. Justice Department officials say the practices
have been helpful in corporate prosecutions.
The authors of
the letter, who served under Presidents Jimmy Carter, Ronald Reagan, George H.
Bush, Bill Clinton and the current Bush administration, argue that the
hard-nosed approach does more harm than good and is “flawed.” Next week, the
Senate Judiciary Committee will hold hearings on lawyer-client communication
disclosure.
For more, see:
“Ex-Officials of Justice Dept. Oppose Prosecutors’ Tactic in Corporate Criminal
Cases,” By LYNNLEY
BROWNING of the New York Times
http://www.nytimes.com/2006/09/07/business/07legal.html
6.
Justice Department wants new law to help recover Lay’s assets
With the death
of Enron founder Ken Lay in July just months after his criminal conviction,
federal prosecutors may have lost their chance to recover more than $40 million
in ill-gotten gains.
Justice
Department officials have run up against the “doctrine of abatement,” which
allows federal courts to toss out convictions of criminal defendants who die
before they have a chance to appeal their conviction.
Last week, the
Justice Department asked Congress to amend the criminal code and remove the
“doctrine of abatement.” The Justice Department also wants Congress to make the
law retroactive to July 1.
“We anticipate
that Congress will have a great deal of interest in the proposed legislation,”
Jackie Lesch, a Justice Department spokeswoman, told reporters.
It is unclear
whether or not Congress will actually act on the request.
For more, see:
“U.S. Seeking Shift in Law in Lay’s Case,” By ALEXEI
BARRIONUEVO of the New York Times: http://www.nytimes.com/2006/09/07/business/07lay.html
7.
“Is corporate fraud endemic in America?”
An article
from wire service Agence-France Presse asks a pressing question: “Is corporate
fraud endemic in America?”
AFP’s Justin
Cole writes: “Almost five years after the Enron scandal first came to light,
corporate crime involving major American companies appears to show no sign of
abating, despite a government crackdown on corporate malfeasance.”
The article
quotes a senior Justice Department official, who notes that "From July 2002
to March 2006, we've had more than 1,000 guilty pleas; more than 160 of those
have been chief executive officers and (company) presidents.”
The article
also notes that in recent months, AT&T, Boeing, Comverse Technology,
Prudential Financial, Medtronic, Schering-Plough and Tenet Healthcare, have all
been charged with fraudulent conduct by the US Justice Department's Corporate
Fraud Task Force, or with serious misconduct by government prosecutors
“Among other
charges,” Cole writes, “the companies were accused of deceptive stock trading,
improper billing, falsification of drug prices, kickbacks to doctors and the
creation of a stock options slush fund. The total cost of their misconduct in
fines and effective penalties to shareholders? A cool 2.6 billion dollars.”
For full
article, see: “Is corporate fraud endemic in America?” by Justin Cole:
http://www.fin24.co.za/articles/companies/display_article.aspx
This
Week’s Action Item:
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Please don’t
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