Category: Corporate Governance

AIG Bonus – My Thoughts

AIG

I have not said much about the AIG bonus hullabaloo. Frankly, I thought the outrage was ill-informed and silly. AIG wanted to keep some people around to help fix the mess it was in. Any sensible person would have one foot out the door of AIG looking around for a more stable employment opportunity. So AIG did what companies in bankruptcy typically do. They offered retention bonuses to entice people to stick around.

I understand it looks bad that taxpayer money is going to bonuses for a company at the epicenter of the financial meltdown. But a company is only as good as its employees.

I assume the bad idea of taxing these bonuses passed by the House of Representatives will die in the more sensible Senate discussions. (The Senate may also have read the Constitution and noticed that section prohibiting Bills of Attainder.)

If you still have a pitchfork in your hand and want the AIG bonuses revoked, take a look at this letter of resignation from Jake DeSantis: Dear A.I.G., I Quit!. It was published in the Op-Ed Section of the New York Times.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

Does that sound like a guy who is “stealing” taxpayer money?

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Investor Relations 2.0

ebay_logo

eBay took a bold move yesterday, using Web 2.0 tools for investor relations. During its first analysts’ meeting in three years, eBay management had a live twitter stream with live coverage of the meeting and bloggers with just less than live coverage of the meeting.

The securities industry seems to be struggling with Web 2.0 tools. (In fairness, most industries are struggling to with Web 2.0 tools.) Blame uncertainty about these relatively new tools. Blame securities class action law suits. Blame the SEC for a lack of guidance. It looks like eBay was tired of excuses and decided to jump into the world of Investor Relations 2.0.

An article from Dominic Jones of the IR Web Report caught my eye: SEC Disclaimers in the Age of Twitter. Was eBay really going to use Twitter as part of its investor relations? YES.

Apparently Richard Brewer had already been live-tweeting eBay’s quarterly earnings conference calls. Management knew he been using his eBay Ink Blog to report the quarterly earnings results, but were unaware of his use of Twitter. He was called in to meet with the lawyers. But rather than shut him down, they worked out some best practices.  They came up with New Social Media Guidelines for Reporting Company Information.

“Plain and simple, eBay Inc. is a public company and, as such, must comply with SEC regulations. We feel that these guidelines will make that compliance more transparent. What follows is by no means a final set of micro-blogging/live-blogging best practices for companies but it is a step – and a very significant one at that. Something that I realize I will have to refine and evolve over time.”

That seems very sensible. The SEC’s Guidance on the use of company web sites (SEC Release 34-58288) does not give the clearest guidance but certainly opens the way for public companies to use 2.0 tools as part of their investor relations.

Richard kicked off his live Twitter coverage of the meeting with the new disclaimer crafted just for Twitter:

ebay twitter disclaimers

Which included a link to the a longer legal disclaimer. Its more than 140 characters, but still very concise.

An interesting thing about Twitter is the ability to tag the updates, allowing others to follow on that same topic. Richard used #ebayinc. This allowed you to follow not just Richard’s updates, but all of the reactions to Richard’s updates.

Richard also compiled the twitter updates into a traditional blog post: eBay Inc. Portfolio Roadmap Preview by John Donahue. (Did I just call a blog post traditional?)

With all of that live information and feedback, eBay’s regular investor relations page looks very cold and lifeless. It does not seem to have as much information. Perhaps it is even less relevant?

In the end, Web 2.0 tools are just communication tools. They are not that different than traditional read-only web pages or email. They do allow for easier, faster and more robust communications. You can see the difference in the comparison between the traditional eBay Investor Relations website and the eBay Ink 2.0 website.

How is your company using web 2.0 tools for investor relations?

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Corporate Ethics in a Devilish System

kent greenfield of Boston College Law SchoolThere is a mismatch between the law and corporate ethics. According to Boston College Law School’s Kent Greenfield it can only be addressed by changing the law itself, and aligning it better with ethics. In his paper Corporate Ethics in a Devilish System, Journal of Business & Technology Law 3: issue 2 (2008): 427-435, Greenfield talks about companies behaving unethically but within the bounds of the law.

“In essence, a corporation should consider the cost of illegality as the penalty, fine or other costs discounted by the chance of the exposure of the corporation’s illegality. The law, in other words, merely imposes a price for illegal behavior. If the corporation is willing to pay, then no problem with illegality.”

The mismatch comes from the confusion that complying with the law is the same as behaving ethically.  Ethics means more than obeying the law.

Greenfield argues that the limited liability of corporate law is “inconsistent with the ethical norm of taking responsibility for one’s own actions since it shields people from liability that arises from their wrongful conduct.” I don’t agree. Actions of a corporation happens through the individuals in the corporation. Corporate law has evolved over the last few years, holding executives personally responsible for illegal actions. The limited liability of a corporation shields investors from losing more than their invested capital. It does not shield the actors within the corporation.

Greenfield proposes changing rules of governance where companies would be required to give stakeholders who don’t own stock – like for example employees and communities – to make their views  part of the firm’s governance.

“Bringing the views of non-shareholder stakeholders into the governance of the firm would not only make it more likely that the corporation will consider broadly the impacts of its decisions, it also will – because shareholders tend to have a very short time horizon – necessarily cause the firm to take a longer term view of its decisions and strategies. Such inclusion will also cause corporations to internalize more the costs of their decisions.”

I agree that the movements in price of a public companies stock can influence corporate decision-making. Many people have argued about setting the proper incentives for management to look to the long term and not pay attention to the short-term gyration of stock prices.

But Greenfield ignores private corporations. One of the arguments for private equity is that ownership and management can look to the long-term goals of the firm rather than focusing on short-term stock price gyrations. Everyone is focused on creating the long term value of the company.

Thanks to Leon Gettler of  SOX First for pointing out the article: Corporate Ethics and Law.

SEC Requirements for Online Annual Reports and Proxy Statements

The SEC is trying to move investors further into the internet era with its new regulations on the ability to furnish proxy materials to shareholders by posting them on an Internet Web site and providing shareholders with notice of the electronic availability of the proxy materials. [SEC Release 34-56135] This is amendment to the original electronic delivery regulations in SEC Release 34-55146.

I am confused with a statement on page 11:

The materials must be presented on the Web site in a format, or formats, convenient for both reading online and printing on paper.[FN35]
footnote 35:
We believe that requiring readable and printable formats is important so that shareholders have meaningful access to the proxy materials. When determining the readability and printability of formats, issuers should consider the size of the files because many shareholders do not have broadband connections. Although some types of files may be suitable for persons with high-speed Internet access, the readability and printability of a document may be affected significantly by the time that it takes to download the document.

I expect that most people expected they post a .pdf version of their annual report and proxy statement on their website. This seems to indicate that you can’t if it would take a long time to download.  Personally, I though .pdf files would be the way to go. This leaves some doubt in my mind. Pdf files tend to be big which would result in a long time to download.

You can read more in this summary by John F. Olson, Partner, Gibson, Dunn & Crutcher LLP and Visiting Professor, Georgetown Law Center on The Harvard Law School Corporate Governance Blog: E-Proxy Rules Take Effect for All Public Companies.

The 2008 Year in Review from Securities Docket

This panel joined Securities Docket’s Bruce Carton to look back at the most important and interesting developments in 2008, and offer their predictions for 2009.

Kevin started off noting that the number of securities class action lawsuits in 2008 is a 33% increase over last year and the highest since 2004. He sees the increase as a result of the credit crisis, starting with the sub-prime loan programs and them spreading.

Kevin predicted that 2009 will see even more securities class action lawsuits.

Tom focused on SEC enforcement actions. He started with the Siemens FCPA case. He then mentioned the Faro Technologies case involving payments in China (Admin File No. 3-13059, June 5, 2008). Last he mentioned the UnitedHealth Group option back-dating case. Of course the big case is the Madoff scandal.

Tom expects to see a big re-shaping of the SEC and its enforcement division.

Francine looked at auditor litigation. Either the public accountants fell down while acting as the watchdogs against fraud on the public or that it is that they were also duped by management. The Big 4 has escaped sub-prime exposure so far but will likely get hit in Madoff. She sees BDO Seidman as having significant exposure from the Banco Espiritu Santo judgment. All of the Big 4 are subject to wage/overtime suits. Deloitte has sued their former vice chairman for insider trading.

Francine predicts that a Big 4 firm will take a significant hit for failing to make a “going concern” opinion prior to a big failure.

Walter sees the federal government’s bailout amplifying the effect of the financial markets meltdown. This was not just a Wall Street problem; it is now a taxpayer problem. Walter also expects to see more criminal prosecutions against individuals. He points out that the cutting edge risk methods blew up. CDSs and CDOs caused explosive damage. Also low-tech methods failed. The personal relationships of Madoff still failed investors. peopel are looking for lessons as to whether more regulations would have prevented the financial meltdown.

Walter predicts another AAA rated firm will have its executives indicted or be revealed as insolvent.

Bruce sees the Madoff case as the biggest development in 2008. He also sees the SEC getting worked over by Congress. The SEC admitted that they ignored credible evidence about Madoff.

Bruce predicts 90% of big law firms will begin to use Twitter for public relations.

A public vote found that Tom’s prediction was most likely to happen (41%) with Kevin following close behind (40%).

Cornerstone Research 2008 Review of Securities Class Action Filings

Cornerstone Research released their Cornerstone Press Release: 2008 Activity Is at Its Highest Level Since 2004 (.pdf)

  • D&O Diary commentary by Kevin M. LaCroix
  • WSJ Law Blog: Securities Suits Up in 2008, But Might They be Uphill Battles?

    • Institutional Investors Taking A Proactive Stance With President- Elect Obama

    A group of 60 institutional investors send a letter to President-Elect Obama.  More than 60 institutional investors were signatories to this letter encouraging President-Elect Obama to improve financial risk disclosures by U.S. corporations.

    The letter encourages President-Elect Obama to Work in First 100 Days to Reverse Recent SEC Roadblocks to Shareholder Proxy Resolutions Inquiring About Risks.

    The letter specifically calls for a reversal of Staff Legal Bulletin No. 14C (June 28, 2005). In that Bulletin, the staff indicated that companies could exclude proposals to the extent they called for some type of internal assessment of risks or liabilities faced by the company as a result of the practices. They were, however, permitted to include the proposals if they were limited to calls to minimize or eliminate operates that could adversely affect the environment or the public’s health.

    Imposing Caremark Fiduciary Duty on Corporate Officers

    I previously posted on the Midland Grange case [Delaware Imposing Same Fiduciary Duty on Officers as Directors] where the Delaware Chancery Court imposed the same obligations on officers as directors, including the duty of loyalty and the duty of care.

    In Miller v. McDonald, et al., ( D. Del., Bankr., April 9, 2008), the Bankruptcy Court for the District of Delaware ruled on corporate governance issues related to the fiduciary duties of officers and directors. The Bankruptcy Court denied a motion to dismiss in the course of ruling that Caremark duties would be imposed on an officer (who was not a director), that was on the management team when the President of the company committed fraud and other actions and omissions that ultimately led to the bankruptcy filing of the company.

    It is correct that Delaware law does not impose fiduciary duty on “employees” generally, but it is incorrect that it does not impose failure of oversight (fiduciary duty) as to officers. . . . While it is true that all of the cases relied upon by the Trustee involved directors’ conduct, not officers’, I believe the Caremark decision itself suggests that the same test would be applicable to officers.

    The corporate entity in Miller v. McDonald is a Florida corporation, so the court is exporting this concept of similar duties between officers and directors from Delaware to Florida.

    Thus, it is clear that under both Delaware and Florida law both officers and directors owe fiduciary duties to the corporation.

    Thanks to the Harvard Law School Corporate Governance Blog and Francis G.X. Pileggi of Fox Rothschild LLP and the Delaware Corporate and Commercial Litigation Blog for pointing out this case: Court Imposes Caremark Fiduciary Duty on Corporate Officer.

    Delaware Imposing Same Fiduciary Duty on Officers as Directors

    In Stone v. Ritter, we saw the Delaware courts imposing a duty on corporate directors to attempt to assure that a corporate information and reporting system exists, and that failure to do so may, under some circumstances, render a director liable for losses caused by the illegal conduct of employees. See The Implications of Stone v. Ritter.

    In Midland Grange No. 27 Patrons of Husbandry v. Walls, 2008 WL 616239 (Del. Ch., Feb. 28, 2008) the Delaware Chancery Court was reviewing a potential breach of fiduciary by a fraternal non-profit organization. The key statement in the decision is that regardless of whether the defendants were considered officers or directors, their fiduciary duties would be the same:

    Thus, regardless of whether the Officer Respondents are properly characterized as “officers” of the Grange or “directors” of the Grange, “[t]he fiduciary duties an officer owes to the corporation ‘have been assumed to be identical to those of directors.’ “ Ryan v. Giford, 935 A.2d 258, 269 (Del. Ch.2007) (quoting In re Walt Disney Co., 2004 WL 2050138, at *3 (Del. Ch. Sept. 10, 2004))

    Thanks to the Delaware Corporate and Commercial Litigation Blog for pointing out the Midland Grange case: Chancery Imposes Same Fiduciary Duty on Officers as Directors