Tag Archives | SVNACD

SVNACD Event – Corporate Boards: Strategy, Not Just Operations Review

Bob Frisch photoBob Frisch is the managing partner of Strategic Offsites Group. He has more than 29 years of experience working with executive teams and boards worldwide on their most critical strategic issues. He has published three articles on teams and decision making in the Harvard Business Review: “Who Really Makes the Big Decisions in Your Company” (12/11), “When Teams Can’t Decide” (11/08) and “Off-Sites That Work” (6/06). Bob’s work has been profiled in publications from Fortune to CFO to the Johannesburg Business Report. He is a regular contributor to Bloomberg Business Week and The Wall Street Journal and his blog appears at HBR.org. Continue Reading →

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SVNACD Event: M&A Pitfalls for Directors

M&A activity is on the rise, and recent decisions by the Delaware Chancery Court make the stakes for directors higher than ever. The businesspersons and lawyers on this panel offered plenty of insights about the life-cycle of a current M&A transaction from initial market check to consummation and then follow-up litigation, pointing out the all-too-frequent pitfalls for directors. Continue Reading →

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Controlled Companies Carry Negatives

A new study finds that controlled companies – particularly those with multiple classes of shares – generally underperform over the long term. As compared to companies with dispersed ownership, controlled companies experience more stock price volatility, increased material weakness in accounting controls, more related party transactions, and offer fewer rights to unaffiliated shareholders. The study results challenge the notion that multiclass voting structures benefit a company and its shareowners over the long term. Continue Reading →

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Video Friday: China: Handle With Care — What Boards Need to Know

China presents enormous opportunities for Silicon Valley companies, but it also offers a very different regulatory, cultural, financial and operational paradigm for boards and executives. What should you know when contemplating investments, operations or acquisitions in China? How should you balance the often conflicting requirements of U.S. and Chinese regulators? What do best practices look like? How can you comply with the Foreign Corrupt Practices Act in a culture where acceptable norms can be very different than in the U.S.? Watch this video from a recent SVNACD event.

CHINA: HANDLE WITH CARE — WHAT BOARDS NEED TO KNOW from WMS media Inc. on Vimeo.

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The Governance Ombuds: SVNACD & Stanford's Rock Center

Why are corporate employees unwilling to report serious misconduct? Why are they also frequently unwilling to share good ideas for improving products, services and business processes? Fear of retaliation is most often cited for the failure to report misconduct; a sense of futility for the failure to suggest improvements. All too often, employees have a low level of trust in both management and the board.

The panel, which met in the morning at SVNACD and in the afternoon at Stanford’s Rock Continue Reading →

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When the CEO Really Must Go

It is often said that “the most important function of a board is to hire and fire the CEO.” Yet the experience of many is that boards do a pretty good job on the hiring front and a not-so-good job on the “exit.” An exciting SVNACD session in Palo Alto focused on the pitfalls of CEO changes and how to avoid them. The panel couldn’t have been more timely. (Bartz fired at Yahoo…may have violated disparagement clause: Kathleen Peratis, Outten & Golden)

This program, like all SVNACD programs, was subject to the Chatham House Rule: “Participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.” In this case, the panelists had already been identified publicly.

As with many SVNACD events, the audience was frequently as informative as panelists. My report will give you just a flavor of what went on. To get the whole meal, you’ll have to Continue Reading →

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When the CEO Really Must Go

It is often said that “the most important function of a board is to hire and fire the CEO.” Yet the experience of many is that boards do a pretty good job on the hiring front and a not-so-good job on the “exit.”

The Silicon Valley Chapter of the National Association of Corporate Directors will hold a session on September 15, 2011 focusing on the pitfalls of CEO changes and how to avoid them. There will be a candid discussion between an experienced CEO and an experienced chairman of a board, facilitated and led by Rich Moran, a member of our board of directors.

Location: Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304. This program, like all SVNACD programs, is subject to the Chatham House RuleRegister Now!

7:30-8:00 a.m. Continental Breakfast; 8:00-9:30 a.m. Program

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Enhancing Shareholder Value: What's Hot in M&A and IP

Wilson, Sonsini, Goodrich & Rosati

It had been months since I’d attended an SVNACD breakfast meetings. Top talent was on hand, both among the panelists and in the audience. The facility at Wilson, Sonsini, Goodrich & Rosati was great. Sorry about photo quality… first time working with a new camera that I may not keep.

As usual, my notes are cryptic, without much of an attempt to thread coherent sentences. I’m tempted to say the following is for entertainment purposes only, but that would be too escapist. Corrections, comments and better photos are welcome.

My purpose is to provide readers with a sense of what was discussed and highlight a few areas. It may help you know what to investigate further and you’ll be that much more incentivised to attend in person to get answers to your concerns.  Continue Reading →

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SVNACD: New Proxy Rules on Executive Compensation

Networking Before SVNACD Meeting

What are the new SEC disclosure rules for executive compensation, especially the “risk” to the corporation of their compensation plans? How are companies dealing with these new rules — what do the early returns from this proxy season indicate? Are these new SEC requirements more of an annual risk assessment of compensation than disclosure rules — is any company really going to make a disclosure that its compensation policies create a risk to the entity? Will the RMG/ISS guidelines have as much, or more, impact than the SEC rules? How will these rules relate to pay for performance? Exactly what compensation programs are “unduly risky”? What mitigation practices will companies adopt? What are the “best practices” that should be considered?

Those were some of the issues taken up by panelists bright and early at 7:30 am at a monthly meeting of the Silicon Valley chapter of the NACD:

  • Lon Allan, Chairman of the Silicon Valley chapter of the NACD.
  • Katie Martin, Senior Partner at Wilson Sonsini Goodrich & Rosati’s Palo Alto office, where she practices corporate and securities law. 
  • Tom LaWer, Senior Partner at Compensia, a management consulting firm providing executive compensation advisory services.
  • John Aguirre, Senior Partner at the law firm of Wilson Sonsini Goodrich & Rosati, specializing in executive compensation and employee benefits, including tax, ERISA and federal and state securities laws.

I’m certainly no expert in this area but I’m sure it was paradise for actual practitioners in the trenches. What follows are a few items that struck me as an interested observer. Although I know I got the order of panelists right, who said what is less certain. The links are to sites I think readers might find useful. I didn’t run them by the speakers for endorsement.

Katie Martin

Katie Martin started with some discussion on changes to required disclosures. For example, directors must disclose seats held at any time during last five years.  Legal proceedings: 10 year look back, rather than 5. Disclosure is expanded to include judicial proceedings relating to mail or wire fraud, violations of state securities, disciplinary sanctions.

Disclose experience, qualifications, attribute and skill that led to selection. Most are placing disclosures right below the biography. She discussed the new RiskMetrics Group Risk Indicators GRId (their new gov scoring system). The old CGQ scores will be frozen on March 17, 2010 and retired completely at the end of June 2010. Here’s an SEC FAQ for issuers.

My own impression, reinforced at the meeting, is that the SEC rules are largely non-prescriptive, whereas the substance of disclosures will mean more when graded by RMG. Verify the facts. Look at ways to improve. Use new D&O questionnaires, which ask directors to self-identify their particular experience, qualifications, attributes and sills.

Diversity considerations. Whether, if so, and how. The SEC rules include no mandates and the definition of diversity is being interpreted broadly.

Board leadership structure. Whether and why CEO and Chair are same or separate. If same, description of Lead Independent Director is critical. Review governance policies with respect to the role of lead independent director to consider whether further clarity is needed. Discuss and document the rationale for your current leadership structure.

Risk management oversight. Disclose the board’s responsibility for risk-management oversight. For example, is it the responsibility of entire board or is the function assigned to one or more committees for different categories of risk? This is a good opportunity to discuss these issues with the board and/or appropriate committees. Discussion will normally bring some changes and more formality. There is a trend toward having a separate risk management committee, not so much in the tech sector, but in larger firms.

With the new rules regarding 8-K requirements, we’re talking close to real-time disclosure, within 4 business days after meeting. File preliminary results, if final results not known.

Non-GAAP Financial Measures: Recent SEC Interpretations. Historically, restrictive approach by SEC to non-GAAP financial measures. Recent changes have not led to full blown non-GAAP report but anything that flushes out trends would be positive. SEC filings should be consistent with other public communications. If doing an offering, get comfort from auditors. (Revised SEC Interpretations Regarding Non-GAAP Financial Measures, Cooley Godward Kronish LLP, 2/26/10)

Focus on process aspects, risk and possible litigation. Don’t let your board get blind-sided.

John Aguirre

John Aguirre – New Compensation Disclosure Rules: Policies and Practices Relating to Risk Management — Requires narrative disclosure regarding compensation policies and practices for all employees to the extent that risks arising from such policies and practices are “reasonably likely to have a material adverse effect on the company.” Reasonably likely is the same disclosure threshold used in the Management Discussion & Analysis. Whether disclosure is required is a facts and circumstances test for each company and its compensations programs (e.g., the program features and goals). Dodd bill may require comp committee to have their own attorney. Focus on process.

Risk disclosure, grants, and consultant fee disclosure… Forward-looking statements that don’t create risk.

SEC examples of practices that may have risk requiring disclosure included business unit that:

  • carries a significant portion of company’s risk profile.
  • has compensation structured significantly different from other units within the company.
  • is significantly more profitable than other units.
  • has compensation expenses as a significant percentage of unit’s revenues or compensation that varies significantly from the overall risk and reward structure of the company, such as when bonuses are awarded upon accomplishment of a task, while income and risk to company from task extend over a significantly longer period of time.

If disclosure is required, the SEC noted possible areas for discussion:

  • General design philosophy and manner of implementation of compensation policies and practices for employees whose behavior is most affected by incentives created, as related to risk-taking on behalf of company.
  • Risk assessment or incentive considerations, if any, in structuring compensation policies and practices in awarding and paying compensation.
  • How compensations policies and practices relate to realization of risks resulting from employee actions in both short and long term, such as policies requiring clawbacks or imposing holding periods.
  • Policies regarding adjustments to compensation policies and practices to address changes in risk profile. Material adjustments that have been made to compensation policies and practices as a result of changes in risk profile. Extent of monitoring of compensation policies and practices.

List of SEC’s examples is not exhaustive. SEC expects principles-based approach in the disclosure, similar to CD&A requirements. Avoid generic or boilerplate discussion. SEC does not require an affirmative statement that a company’s risks arising from its compensation policies and practices are not reasonably likely to have a Material Adverse Effect. If a company does not disclose any material adverse risks, the SEC likely will, in the course of its review, issue a comment asking the company to explain the nature of the internal analysis that was conducted in making its determination that no disclosure was required.

What should you do? Update board or comp committee on new rules. Consider whether compensation policies need updated. In addition to the examples John provided, which I expect may be referenced on the SVNACD site, here are some examples from Holme Roberts & Owen LLP.

Must disclose aggregate “grant date fair value” of awards computed in accordance with FASB ASC Topic 718. Whole value of the award, even if they may never get it. This effects who is covered in your table.

Tom LaWer

Tom LaWer – The SEC has set a very high bar for disclosure. If disclosures are made, expect disclosure of past issues along with disclosure of how the issue has been fixed. The rules provide a fresh opportunity to focus in on the risk assessment of compensation policies and practices. The examination will likely influence compensation plan design… Revising compensation programs to improve design based on issues uncovered in the risk review. You might indicate, for example, that policies are reviewed annually.

No generally accepted compensation principles. Best practice guidance is sometimes conflicting. Most guidance is conventional wisdom. Standards may evolve over time based on empirical research. SEC examples tend to focus on the issues for financial companies.

Again, RMG risk guidelines might be a more important driver than the SEC.  He went over several practices that will get further scrutiny and possible mitigating factors. It is a good time to review and assess for correct goals, mix, use, and design flow. For example, did the person who was demoted still got their bonus because there was no discretion built into the compensation plan?  Are you doubling up, because long-term and annual incentive plans are based on the same metrics? Tell shareowners how your actions ensured these problems don’t arise again.

Here are some handouts from a similar panel meeting of the Twin Cities Chapter of the National Association of Stock Plan Professionals and brief overviews from O’Melveny & Myers, Grant Thornton LLP , Seyfarth Shaw LLP., Jenner & Block, Dorsey & Whitney LLP, Ulmer & Berne LLP, Thomson Reuters, and TheCorporateCounsel.net.  I hope readers find these links helpful. The panel did a great job on a rather technical topic and brought home in many examples how requirements might be addresses, especially by the predominately high tech companies of Silicon Valley. Also be sure to see SVNACD’s page with handouts and interviews, as well as a podcast from KPMG/NACD, New SEC Proxy Disclosure Rules for 2010: What Boards Are Doing to Prepare.

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How Technology Impacts the Boardroom

As an exercise to contemplate before the session, SVNACD asked prospective attendees to “consider the following question: what would a skeptical activist shareholder think if they knew exactly how many emails you sent and how many minutes you spent reading on your blackberry during your last board committee meeting?”LonAllen

Lionel M. (Lon) Allan (right), Board Chair of the Silicon Valley Chapter of the National Association of Corporate Directors, introduced the panelists, F. Daniel Siciliano and Eric Finseth. Although he retreated to the back of the room, Lon peppered the panelists with informative chatter, adding a bit of informality and humor to what some directors may have viewed a scary topic. Electronic breadcrumbs could document more than you ever dreamed. Better start thinking a little more like a plaintiff’s attorney.

DanSicilianoGetting right to the homework assignment, Dan informed us that litigation might well ensue around the issue of how much attention you paid when the big decision the board got wrong was made. Yes, you were pretending to pay attention, but you were using your smart phone during the meeting and the ability to multi-task is a myth. A recent Stanford study by Eyal Ophir, Clifford Nass and Anthony Wagner provides what Dan believes might be admissible scientific evidence. People who are regularly bombarded with several streams of information do not pay attention, control their memory or switch from one job to another as well as those who complete one task at a time. Dan suggests, “if you aren’t 100% engaged, then leave the room.”

Recent developments in Delaware law (perhaps brought about in part through papers such as Elizabeth Nowicki’s) now provide that directors acting in bad faith don’t have the protections of business judgment law. Inattention = bad faith. That could throw you to the mercies of your D&O insurance, which might be already be tapped out. Simple negligence isn’t a problem. However, recklessness is an aggravated form of negligence and amounts to acting in bad faith. Red flags put you on a higher duty of inquiry. Failure to follow-up might be considered “conscious disregard of a known and unjustifiable risk.”

Deliberately not wanting to know. That’s when you shift out of the innocent category to reckless disregard. SVNACDaudienceTechnology now makes it easier to document. So much more is now discoverable. It becomes very easy to assemble the evidence through a trail of electronic breadcrumbs because we know when the Fedex was delivered, when you opened an e-mail and and when or if you opened attachments. Secured systems may offer some protection against hackers, but because every step of the way is documented through logs, really good security might yield less privacy in discovery.

Maybe it is better to have video conferences, rather than phone conferences, because those on the call might be less likely to multitask when people see them. There was some discussion around the widely known cases of Enron and Worlcom where directors had to pay out of their own pockets. The real case to look to might be Just for Feet, where the out of pocket expense to directors was $41.5 million. D&O insurance was exhausted by shareholder class action litigation filed two years before the bankruptcy trustee’s lawsuit commenced. Directors with particularized skill sets are more vulnerable to a higher expectation regarding diligence in their specialized field.

What constitutes a red flag? Not so much a pure business decision but clear violations of law (such as option back dating, false claims, payments to doctors for referrals). Where the board learns of such violations but fails to shut it down is the main problem…. not making reasonable efforts to avail yourself of information flow. Did they ChrinstineRussellput a system in place to inform themselves? To actually get stung, it appears that not only do you have to nap at the board meeting, you have to know you were napping and that the meeting was important. However, those electronic records, even the meta data that’s left after you thought you erased it, can provide evidence of virtual napping through inattention.

Discussion shifted to the fact that with majority voting at many companies, directors might engage in more discussions with institutional investors to ensure reelection. You obviously have an incentive to keep those folks happy. Watch out for the record re Reg FD (not publicly available information), inconsistency between what you say and what the company’s SEC filings say. Inadvertent disclosure, can be cured by filing a form 8-K. Immediate disclosure must be made public within 24 hours. Map out your communications in advance. It is often better to listen to shareowner concerns and ask questions about there questions, rather than answering and running perhaps running afoul. (CorpGov.net: reference The SEC’s Reg FD: some lessons for public company executives after nine years of practice, The Deal, 10/18/09)panel

The panelists discussed deliberate violations to conceal violations but shifted to failure to discharge duties… like a member of the audit committee who didn’t know they were on the audit committee… another example of acting in bad faith, I think. They can go after you on basic pieces of knowledge that everyone on a given committee should know. Did you ask anyone how it works? Did you ask the expert to explain it to you? Not being allowed to accidentally do stupid things might be the next bar. Not bad faith now but might be in the future.

Permanence is an assumed part of electronic information. The 20th century’s gift to law enforcement is e-mail. Pick up the phone and talk, rather than e-mail. Instant messaging isn’t secure. Some systems keep lots of records, including what you didn’t send, by keeping a record of everything you type, even if you erase it. Voice mail. If you delete it, the system may keep it for 90 days in some corporate backup. Some videoconferencing systems capture meta data. On some, theEricFinseth host can tell if you’re not on their screen during the meeting. On the other hand, you might accidentally have records destruction cycles that are inappropriate. Ask and find out what your system features. Set some policies and pay attention on a recurring basis.

At some point in the conversation, Eric dropped the real e-discovery nightmare… SOX, section 802, codified as 18 USC 1519. Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

F. Daniel Siciliano is the Faculty Director of the Arthur and Toni Rembe Rock Center for Corporate Governance, Associate Dean for executive education and special programs at Stanford Law School, and co-director of Stanford’s Directors’ College. He is also the co-originator of the OSCGRS (Open Source Corporate Governance Reporting System) Project and the senior research fellow with the Immigration Policy Center. His work has included expert testimony in front of both the U.S. Senate and House of Representatives. Dan has launched and led several successful businesses, including the software automation and design company LawLogix Group—named three times to the Inc. 500/5000 list. Dan was recently named to the Directorship 100, a list of the most influential people in corporate governance. He holds a BA from University of Arizona and a JD from Stanford Law School.

Eric Finseth is a corporate and securities partner with Mayer Brown LLP. In addition to a broad spectrum of transactional types, his practice includes particular emphasis on technical securities law compliance matters and disclosure obligations applicable to publicly traded companies, their insiders, and other participants in the public markets such as banks and hedge funds. Eric is a Lecturer in Corporate Governance at the law school at UC Berkeley, covering Sarbanes-Oxley, the stock exchange corporate governance listing standards, shareholder activism, the duties of directors, officers and so-called “gatekeepers,” as well as DOJ criminal and SEC civil enforcement actions. Prior to joining Mayer Brown, Eric was an Attorney Fellow with the Securities and Exchange Commission in Washington, D.C., in the Division of Corporation Finance, Office of Chief Counsel. In that capacity, he oversaw and administered the agency’s shareholder proposal review program for the 2006 proxy season, the central corporate governance battleground between institutional shareholders and incumbent boards of directors.

CorpGov.net’s supplemental reading list in no particular order or citation style:

 

Behind the scenes Thomas Wohlmut Thomas Wohlmutvideotapes Lon Allen questioning Dan Siciliano for a brief overview of the meeting.DanielSiciliano

 

LonAllenBehindScenes

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