Monday November 24, 2014

Need To Know

Debate Continues Over Auditor Independence, Proxy Access Attempts Denied, Yahoo Sues Facebook, more

Debate Continues Over Auditor Independence, Audit Rotation
In late March, the Public Company Accounting Oversight Board convened a public meeting to collect commentary on its concept release relating to auditor independence and audit firm rotation. The two-day meeting assembled nearly 50 experts in the fields of audit and accounting, including audit firm executives, audit committee chairs, former Securities and Exchange Commission members and investors. There is a range of viewpoints on this issue. Those supporting mandatory audit firm rotation were primarily concerned with a perceived lack of independence in audit engagements and contend that long-term engagements have the potential to weaken the auditor’s work performance. What’s more, audit firms may try to please their clients in order to keep the engagement instead of remaining objective. As panelist Richard Kaplan, professor of law at the University of Illinois at Urbana-Champaign, put it, “Auditors are prone to bias their conclusions to best preserve the client relationship that pays their bills.”

Alex Mandl in a 2010 photo

Panelists opposed to tenure limits for auditors dismiss this argument for lack of clear and convincing evidence. While the NACD supports the PCAOB’s initiative to improve audit quality, it has issued a comment letter to outline why a term-limit system may be the wrong approach. Alex Mandl, chairman of the audit committee at Dell, shared the director’s perspective on behalf of the NACD, stressing that audit committees have dramatically improved their performance since the passage of Sarbanes-Oxley. While there remains room for improvement, mandatory audit firm rotation is not the appropriate method, he said.

Catherine Lego, chairman of the audit committee at SanDisk, suggested that audit quality improvement might lie in the education and training of directors. Greater audit committee engagement with the PCAOB and director education groups such as NACD may be the most effective route in maintaining proper oversight of audit firms, she asserted.

The PCAOB accepted comment letters until April 22.

A Call for Academic Papers
NACD has joined with BlackRock to issue an invitation to undergraduate and graduate students, PhD researchers and university faculty to participate in a global challenge to apply the latest in academic theory to develop innovative corporate governance practices. Papers will be judged based on how effectively the presented ideas can be implemented to improve investment business practices and corporate governance. In addition to cash awards, winners will be recognized at NACD’s 2013 Spring Forum where they will have an opportunity to present their winning ideas to corporate directors. “This is a great opportunity for the next generation of corporate leaders—college students and faculty—to articulate their ideas to strengthen corporate trust and confidence,” said NACD President and CEO Ken Daly.

Yahoo Sues Facebook Over Patents
Facebook knowingly and improperly violated Yahoo’s intellectual property rights, according to a lawsuit filed in Federal District Court in San Jose, Calif., alleging violations of 10 of the company’s advertising, privacy, customization, social networking and messaging patents. The amount of damages remains unspecified, though the company called for any potential damages to be tripled “in view of the willful and deliberate nature of the infringement,” a company spokesman said in a statement. The suit is the first major one of its kind in the social-networking realm and follows an escalation in patent suits in the smart phone and tablet computing sectors.

Proxy Access Attempts Denied
The SEC has allowed a half dozen attempts to add proxy access provisions to companies’ bylaws to be removed from voting ballots this year, after shareholders made more than one proposal in their requests or were not specific enough about eligibility requirements, The Wall Street Journal reported. Textron, Bank of America, Goldman Sachs, Chiquita Brands, Sprint Nextel and MEMC Electronic Materials were allowed to remove the proxy access provisions from their ballots, now surviving as a possible amended bylaw following the U.S. Court of Appeals’ rejection of the SEC’s rule that would require all public companies to allow shareholders who own at least 3 percent of stock for at least three years to nominate directors to the company’s distributed proxy materials. The 2012 proxy season so far has seen 20 such individualized proposals, exceeding expectations.

Sprint Board Seeks Distance
The Sprint board of directors has increased its presence in talks with major shareholders and in “day-to-day” operations, joining Sprint Chief of Strategic Planning Keith Cowan in negotiations with potential partners, The Wall Street Journal reports. The board’s move is seen as a possible attempt to defend themselves from unhappy investors, following five years of losses, by distancing themselves from CEO Dan Hesse, who does not attend the meetings with investors. A number of institutional investors have questioned Hesse’s management abilities, including hedge-fund manager David Einhorn, the WSJ reported.

Repeat Filers Explore Chapter 22
Four of the 17 companies that filed for bankruptcy in the first two months of 2012 are repeat filers, with Hostess Brands, Buffets, TBS International and Fountain Powerboats Industries making a second trip through Chapter 11—sometimes dubbed “Chapter 22”—compared with six companies that entered bankruptcy in all of 2011. “There is too much emphasis on getting out, and getting on with business rather than whether it is going to work,” Ed Altman, the Max L. Heine Professor of Finance at the Stern School of Business at New York University, told Reuters. Though bankruptcy judges must approve a feasible reorganization plan before allowing the company to exit bankruptcy, an uncertain economy can create unforeseen circumstances leading to an additional filing.

Fannie, Freddie CEOs See Pay Limited
Congress capped Fannie Mae and Freddie Mac’s chief executives’ compensation at $500,000 per year, and annual bonuses for all employees of the two government agencies have been nixed. The Federal Housing Finance Agency, which oversees the organizations, has pledged to cut pay for 50 other executives, though they are still eligible for salaries higher than the cap. In 2009 and 2010, Fannie Mae CEO Michael J. Williams received $9.3 million in compensation, while his Freddie Mac counterpart Edward Haldeman Jr. earned $7.8 million. Both are expected to be paid $5.4 million this year, the last of their employment. Officials note the salary cap will be applied to their successors.

‘Buffett Tax’ Popular Across Party Lines
Individuals earning $1 million or more per year should be subject to a minimum 30 percent tax rate, said 64 percent of Americans surveyed in a recent Reuters/Ipsos poll on a proposed “Buffett tax,” named for Berkshire Hathaway Chairman Warren Buffett, who has advocated for the wealthiest Americans to pay a larger share to the federal government. Democrats were largely in favor of the increase, at 76 percent, along with 46 percent of stereotypically tax-increase-opposed Republicans. The survey, which polled 1,084 adults across the nation, also found that 57 percent of respondents would support eliminating a mortgage interest tax deduction if it resulted in a lower tax rate overall.

Business Judgment for Officers
The oft-cited “business judgment rule,” which protects directors who perform a reasonable amount of due diligence, is raising questions in the California court system, where former Indy Mac Bank CEO Michael Perry is testing whether the rule’s protection extends to corporate officers in the state. A federal district judge ruled that the line ends at directors, but Perry, facing a lawsuit brought by the FDIC over a pool of $10 billion in risky home loans, has appealed the decision to the 9th U.S. Court of Appeals.

Anti-Smoking Images Violate Free Speech
Federal Judge Richard Leon ruled that a provision in the Family Smoking Prevention and Tobacco Control Act of 2009 that would have required both written and graphic warnings on cigarette packs, including images of corpses and smoke-damaged lungs, is unconstitutional and violates tobacco companies’ First Amendment right to free speech. “Unfortunately, because Congress did not consider the First Amendment implications of this legislation, it did not concern itself with how the regulations could be narrowly tailored to avoid unintentionally compelling commercial speech,” said Leon in his 19-page ruling. The images, he said, did not serve to dispel confusion or increase consumers’ awareness of the risks of smoking, but rather to “evoke a strong emotional response calculated to provoke the viewer to quit or never start smoking.”

Groupon Recruits Directors
Groupon is reportedly seeking to add at least two directors to its board in a bid to regain investor confidence after a restatement of revenue last month, the Los Angeles Times reports. The daily deals website is apparently trying to recruit a new director to eventually lead its audit committee. The LAT reports potential candidates include CFOs at publicly traded companies.

NACD Exclusive: Public vs. Private Practices
With the JOBS Act and the widely discussed Facebook IPO, the governance practices of private companies are squarely in the news. In response, NACD’s Research Department compared trends in governance between private and public companies, using the data from the 2011 NACD Private Company Governance Survey and the 2011 Public Company Governance Survey as well. The most interesting data points were found in board operations and processes.

Under listing exchange standards, all public companies have to conduct full board evaluations. However, private companies are not far behind their public counterparts, nearly three-quarters conduct full board evaluations.

Public company directors generally commit more hours on average to their board than their private company peers, 227.5 hours vs. 179 hours, respectively. However, private company directors are more likely to make on-site visits to the company more than once a year—slightly more than half vs. one-third of public company directors. —Kate Iannelli

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Need To Know

Roundup: Executive Bonuses Scrutinized; Losing Face on Diversity; Hacker Exposes Boardroom Vulnerability

Roundup: Executive Bonuses Scrutinized
The U.S. Senate has voted 96-3 to ban executives at government-controlled mortgage companies Fannie Mae and Freddie Mac from receiving bonuses, a measure introduced after the Federal Housing Finance Agency approved nearly $13 million in bonuses to 10 executives. “There are many examples of intelligent, well-qualified, patriotic individuals working in our federal government who make significantly less than the top executives at Fannie and Freddie with just as much responsibility,” said Senator John McCain (R-AZ), who proposed the bill with John Rockefeller (D-WV).

Royal Bank of Scotland CEO Stephen Hester, one of many top executives whose bonus was challenged. (David Moir/Reuters)

Bonuses in 2011 at some of the country’s largest public companies were also scrutinized and decreased. Morgan Stanley CEO James Gorman’s stock-based bonus was cut by about half over 2010, to $5.1 million. JPMorgan Chase CEO Jamie Dimon received the same stock bonus, valued at $17 million, in 2011 as in 2010, despite record profits. The cuts even hit below the executive suite, with some Goldman Sachs bankers and traders receiving no bonus at all. Goldman CEO Lloyd Blankfein was awarded a $7 million restricted- stock bonus, down from $12.6 million in 2010. Bank of America opted to freeze base salary levels and limit some bankers’ cash bonuses to $150,000.

Overseas banks are feeling a similar pinch. Marking the first time a British bank exercised a clawback provision, Lloyds Banking Group took away portions of 13 directors’ bonuses totaling about £2 million ($3.16 million) as punishment for their role in selling payment protection insurance, a scandal which cost the company £3.2 billion ($5.05 billion). This included former CEO Eric Daniels, who had to forfeit 40 percent of his £1.45 million ($2.29 million) 2010 salary. Senior bankers at Credit Suisse were told total compensation would be 30 percent lower, on average, compared to 2010. Royal Bank of Scotland’s plans to give CEO Stephen Hester a $1.5 million bonus drew extensive criticism in Britain, and within days Hester opted not to accept the bonus. The controversy led to a number of politicians calling for binding say-on-pay provisions in the United Kingdom.

“Shareholders need new powers to hold the board (of companies) to account and I will consult shortly on specific proposals to reform the current voting arrangements and give shareholders a binding vote, enabling them to exert more pressure on boards,” U.K. Business Secretary Vince Cable told Parliament.

Losing Face on Diversity
Facebook filed its long-awaited IPO, providing a glimpse into the notoriously secretive company’s executive suite and board. California State Teachers’ Retirement System (CalSTRS) penned a letter to Chief Executive Mark Zuckerberg urging him to add women to the all-male board, currently populated by Zuckerberg, technology executive Marc Andreessen, venture capitalist Jim Breyer, Washington Post CEO Donald Graham, Netflix CEO Reed Hastings, former White House Chief of Staff Erskine Bowles and venture capitalist Peter Thiel. “This is particularly glaring at a time when there is clear evidence that companies with diverse boards perform far better than the companies with more homogenous boards,” CalSTRS Director of Corporate Governance Anne Sheehan wrote.

The IPO, projected to put the social network’s market value as high as $100 billion, will create enormous benefits for long-time employees and investors. An estimated 900 people stand to become millionaires in stock value alone. Research firm PrivCo finds that 11 executives and investors will hold half of the company’s value after it goes public. Zuckerberg holds 57 percent control of the voting power, and has requested a $1-per-year salary starting Jan. 1, 2013. The IPO filing reports the company’s 2011 revenue at $3.7 billion, with $1 billion in profit.

Hacker Exposes Boardroom Vulnerability
HD Moore found a path into the Goldman Sachs boardroom in early January, but not by becoming a director. Moore is a hacker and chief security officer at Rapid7, a Boston-based security systems purveyor. Moore discovered that a number of videoconferencing systems are vulnerable to hackers, who could use the systems to both see and hear what happens in the boardroom, with enough picture quality to zoom in and read reports on the tables in front of participants. “The entry bar has fallen to the floor,” Mike Tuchen, chief executive of Rapid7, told The New York Times. “These are literally some of the world’s most important boardrooms—this is where their most critical meetings take place—and there could be silent attendees in all of them.”

Oracle of Omaha Says Successor Is In Sight
Warren Buffett, chief executive officer of Berkshire Hathaway Inc. for more than four decades, revealed the board has picked his eventual replacement. Buffett didn’t identify the choice in his annual letter to shareholders Feb. 25, saying instead that directors were “enthusiastic” and have had “a great deal of exposure” to the person designated to take over as CEO. Buffett, 81, didn’t specify a timeline for the switch.

Apple Adopts Majority Voting
In response to investor demands, Apple told shareholders at the company’s annual meeting on Feb. 23 that the board had agreed to adopt majority voting in director elections. Apple originally opposed a majority voting resolution filed by the California Public Employees’ Retirement System. A similar CalPERS proposal received 73.6 percent support at Apple in 2011.

CalPERS, which has been an active proponent of majority voting, has called on 17 other large-cap firms to implement this reform. Overall, 79 percent of S&P 500 companies have adopted a majority vote standard for uncontested board elections, usually in conjunction with a director resignation policy, according to Institutional Shareholder Services’ (ISS) 2012 Board Practices study, which includes data through June 30, 2011.

There has been a nine-percentage point increase in majority voting among large-cap firms since 2010. This practice remains far less common at smaller companies. As of June 30, 2011, 34 percent of S&P Mid Cap companies and 15 percent of S&P Small Cap firms had adopted a majority vote standard—with or without a director resignation policy—according to the ISS study.

Exodus From Yahoo! Board
Following in the footsteps of departed Yahoo! CEO Jerry Yang, four board members, including Chairman Roy Bostock, will not standing for re-election at the company’s annual meeting. “The board has concluded that in order to accelerate the company’s transformation, the combination of a new chief executive officer with an enhanced team of independent directors would provide Yahoo! with the expertise and perspectives necessary to drive innovation and growth going forward,” Bostock said in a letter to shareholders. Also leaving the board are Vyomesh Joshi, Arthur Kern and Gary Wilson.

DoJ Investigates Purported Collusion of Tech Firms
The U.S. Justice Department has launched a probe into at least seven companies who kept “do not call” lists to avoid recruiting former employees of competitors, alleging a conspiracy to keep salaries low by blacklisting other companies’ employees. The investigation alleges that senior executives from Adobe, Apple, Google, Intel, Intuit, Lucasfilm and Pixar used the lists to decrease employee compensation by 10 to 15 percent, and seeks restitution for lost compensation and treble damages for salaried employees from the companies between 2005 and 2010.

Shareholders Approve Jacobs Engineering Pay
Jacobs Engineering’s shareholder vote was closely watched this year to see how investors would respond to a reformed compensation plan from the first company to fail a say-on-pay vote since they were established under the Dodd-Frank Act. Shareholders overwhelmingly approved the company’s compensation plans this year, with 82 percent of votes cast “yes,” up from 45 percent approval at last year’s meeting. Following the 2011failed vote, Jacobs engaged with investors and revamped its compensation plans, tying pay more closely to performance and decreasing total CEO pay.

An Alliance in Exec Comp
Glass, Lewis & Co., an independent governance services firm, and Equilar, the executive compensation benchmarking firm, forged a strategic partnership to provide institutional investors and corporate issuers with enhanced analysis of executive compensation and corporate governance matters. As part of the partnership, Glass Lewis’ Proxy Paper research will be available to corporate issuers on the Equilar platform. In addition, Glass Lewis will work with Equilar to integrate its “market-based peer groups” and realizable pay data into Glass Lewis’ new version of P4P, a proprietary analysis of pay for performance at public companies. Glass Lewis’ P4P model examines seven indicators of shareholder wealth and business performance and analyzes two compensation data points (the chief executive’s total compensation and the top five executives’ total compensation). Each of these nine metrics is compared against those of the company’s peers to create a weighted-average executive compensation and performance scores. Glass Lewis’ P4P will begin incorporating market-based peer groups developed using Equilar’s algorithm to create a network of peers.

Corporate Taxes Fall Lower Than 1972 Levels
Corporate tax receipts as a share of profits have fallen to their lowest levels in 40 years, the Congressional Budget Office reports, with total corporate federal taxes paid amounting to 12.1 percent of U.S. profits in the fiscal year ending Sept. 30, 2011. Between 1987 and 2008, companies paid an average of 25.6 percent of profits in taxes. Companies paid $181 billion in federal corporate taxes in 2011, in contrast to the $1.1 trillion individuals paid in income taxes. The “bonus depreciation” tax break, which allows companies to write off investments on significant supplies, was cited by The Wall Street Journal as a key component in the drop.

Carbon Disclosures Fuel Stocks
Companies who voluntarily issued press releases disclosing carbon emissions information saw an average of just under half a percent increase in stock price in the five-day span around the release, finds a University of California study. The smallest of the 172 companies studied between 2000 and 2010 saw the greatest benefits, with price increases of 2.32 percent.

Geithner Plans to Leave by 2013
Treasury Secretary Timothy F. Geithner said in a recent interview with Bloomberg Television that he is “confident” current President Barack Obama will be staying on for a second term, but that he is also “pretty confident” that Obama will not ask him to remain as secretary. In August, an administration official said Geithner would remain in his current role at least through the election after Geithner told White House officials that he was considering leaving following contentious debt-limit negotiations. In the same interview, Geithner also expressed confidence in Congress and the administration to successfully reform the corporate tax system.

2012 The World’s Most Sustainable Corporations (The top 20 of 100)

1. Novo Nordisk
2. Natura Cosmeticos
3. Statoil
4. Novozymes
5. ASML Holding
6. BG Group
7. Vivendi
8. Umicore
9. Norsk Hydro
10. Atlas Copco
11. Sims Metal Management
12. Koninklijke Philips Electronics
13. Teliasonera
14. Westpac Banking
15. Life Technologies
16. Credit Agricole
17. Henkel AG & Co.
18. Intel Corp.
19. Neste Oil Oyj
20. Swisscom

Greenpeace Approved
Each year, Greenpeace International pitches global IT companies against each other to find who comes out on top in the fight to stop climate change. The 5th edition of Leaderboard compares firms on their IT climate solutions, IT energy impact and political advocacy, and publishes a ranking.

1. Google
2. Cisco
3. Ericsson (tie)
3. Fujitsu (tie)
5. Vodafone
6. Alcatel-Lucent
7. Sharp (tie)
7. Softbank (tie)
9. IBM
10. Hewlett-Packard
11. Wipro
12. Dell
13. Microsoft (tie)
13. SAP (tie)
15. AT&T
16. HCL
17. NTT
18. NEC
19. Telefónica (tie)
19. TCS (tie)
21. Oracle
Source: Greenpeace International

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Need to Know

GMI’s new risk list, AFSCME Targets Goldman, CEO Turnover Spikes, and more.

GMI Singles Out ESG Underperformers
While prospective investors will always look to a company’s financial performance before making decisions, a growing number are considering nontraditional, nonfinancial factors before a stock purchase to avoid sudden value loss caused by environmental, social or governance (ESG) crises. GovernanceMetrics International (GMI), which launched a research platform that provides corporate stakeholders with ratings of public company ESG risks, has published a list of the 10 worst-performing companies in the inaugural edition of the GMI Risk List.


“The number of firms using ESG disclosure is fairly rapidly increasing, they’re taking a very proactive stance,” said GMI CEO Jack Zwingli. “All they have to do is look at BP, at NewsCorp, at Massey, to see that it’s not just the finances that pose very serious risks. They need to recognize that ESG concerns do impact risk in the long term.” NewsCorp, in fact, appeared on GMI’s Risk List along with Apollo Group, Comstock Resources, Comtech Telecommunications, Discovery Communications, EZCORP, K-Swiss, M.D.C. Holdings, SandRidge Energy and Scientific Games. The GMI Analyst platform currently offers risk analyses for more than 20,000 corporations, including most large and mid-cap firms and some small cap companies, with 4,200 of those containing a more specific research-based ESG risk rating. The organization identified and tracks over 50 ESG+ (with the plus sign standing for “accounting transparency”) metrics that are most likely to affect performance.

In addition to the GMI Analyst, the research firm also launched its Diverse Director Data- Source (3D). The database, commissioned by CalPERS and CalSTRS, includes profiles of 130,000 global directors and officers. Candidates can nominate themselves for free and build out their own profiles; recruiting firms and nominating committees may subscribe to search for candidates.—Elizabeth Mullen

Funds Want SEC to Retry Proxy Access Rulemaking
Institutional shareholders are expressing frustration with the Securities and Exchange Commission (SEC) following its decision not to fight the rejection of its proxy access rule, which would have given shareholders the right to nominate their own candidates to boards on the distributed proxy materials. Ann Yerger, executive director of the Council of Institutional Investors, said in a statement, “The SEC’s decision not to request an en banc rehearing of the D.C. Court of Appeals’ opinion is disappointing to shareowners.” The proxy access rule was overturned in a challenge brought to the courts by the U.S. Chamber of Commerce and the Business Roundtable on the grounds that the Commission did not consider the financial effects of the rule. A new similar rule still stands, however, allowing investors who hold at least $2,000 in stock for over a year to submit proposals on how a firm should open board elections to shareholder nominees.

AFSCME Targets Goldman
The AFSCME Employees Pension Plan has filed a shareholder proposal calling upon Goldman Sachs to remove CEO Lloyd Blankfein from his role as chairman of the board in favor of an independent chair. Blankfein is also facing an investigation from the Justice Department on allegations he perjured in a 2010 testimony before the Permanent Senate Subcommittee on Investigations. AFSCME holds more than $850 million in assets and is a long-time Goldman shareowner. In addition to Blankfein’s perjury investigation, AFSCME criticized Goldman for amassing large amounts of risk and contributing to the financial crisis by transitioning from a traditional investment bank to become primarily a Wall Street trading house.

Clinton Named to First Board
The daughter of Former U.S. President Bill Clinton and Secretary of State Hillary Clinton, Chelsea Clinton has been named to the board of directors at IAC/ InterActiveCorp. Clinton formerly worked at McKinsey & Co. and Avenue Capital, and is now a doctoral candidate at Oxford University while working with the Clinton Foundation, where she is a director, and the Clinton Global Initiative. Also joining the board is Sonali De Rycker of Accel Partners, who works with internet and software investments.

CFOs Beneficial as Directors
Companies are less likely to need to file earnings restatements and tend to have higher earnings quality if the CFO is also a member of the board of directors, finds a new survey from Jean C. Bedard and Rani Hoitash of Bentley University’s Department of Accountancy and Udi Hoitash of Northeastern University. The study examined the effects of a CFO’s presence on the board; of the 7,034 public companies examined, 549 had a CFO director. While the communication lines could be assisted by the CFO’s board presence, the study also notes that those performing the dual roles were paid 34.5 percent more in total cash and compensation.

NACD Elects Horn to Board of Directors
Karen N. Horn, lead director and compensation committee chairman at Eli Lilly, has been named to the NACD board of directors. Horn is also a director at Simon Property Group, Norfolk Southern Corp. and T. Rowe Price Mutual Funds. She is vice chairman of the U.S.-Russia Foundation for Economic Development and the Rule of Law, and a partner of Brock Capital Group.

“I am proud to be a part of an organization as dedicated to director education programs and director professionalism as NACD,” said Horn. An active NACD member, Horn served on the Blue Ribbon Commission on the Effective Lead Diretor and participated in a plenary session on the subject at NACD’s annual conference.

“I already have the great privilege of working with wonderful and highly qualified people on our board of directors, and now we have added another excellent leader whose experience is a testament to her abilities,” said Barbara Hackman Franklin, chair of the NACD board. “NACD will continue to provide effective director education for all our members and we look forward to Karen’s continued guidance as she joins the board.”

Ken Daly, president and CEO of NACD, said, “Karen’s background and expertise will be an invaluable asset to NACD and to other directors who want to learn from her vast experience. We look forward to gleaning insights from Karen as NACD becomes the center of gravity for the corporate boardroom community, expands its membership and furthers its director credentials, board benchmarking and diversity in the boardroom initiatives.”

No More Campaign Donations, Say 100 CEOs
More than 100 CEOs have followed the lead of Starbucks CEO Howard Schultz in pledging to withhold political donations in the wake of this summer’s debt limit debates until they “stop the partisan gridlock in Washington, D.C.,” said Schultz. The Center for Responsive Politics notes that Schultz’s $183,650 in previous donations will be missed mostly by Democrats, as he has only given $1,000 to Republican candidates. Joining Schultz in withholding funding is AOL Chairman and CEO Tim Armstrong, Whole Foods co-CEO Walter Robb and Maggie Wilderotter, chairman and CEO of Frontier Communications.

CEO Turnover Rate Highest in Six Years
Companies who held off on executive changes during the financial crisis are fueling the highest CEO turnover rate since 2005, with 13 percent of corner office positions turning over this year. In 2010, the CEO turnover rate hit a 15-year low of 10 percent, according to Crist|Kolder Associates, an executive search firm which studied executive transitions at Fortune 500 and S&P 500 companies. Crist|Kolder Corporate Governance Practice Chief Matt McGreal noted the higher turnover rate signifies a growing confidence in economic growth opportunities. The firm’s study also found that almost half the companies studied used the COO position as a trial for possible CEO appointment.

Directors Receive More Restricted Stock
Non-employee directors were paid more in restricted stock and other full-value equity awards in 2010 as stock options lost popularity in the financial crisis, finds a new study from Compensation Advisory Partners. Some 89 percent of directors received full-value equity awards last year, up from 79 percent in 2009. Only 2 percent received equity compensation solely in stock options compared with 4 percent the previous year, the study found.

Happiness Rising
Companies with the highest increase in employee happiness, according to employee surveys:


American Express






Home Depot

Wipro Technologies

Fidelity Investments

Pitney Bowes

Abbott Laboratories

Merrill Lynch

Cardinal Health

BlueCross BlueShield

Bank of America





Source: CareerBliss. com 2011 Bliss Leap Award Winners (top 20 of 50 companies listed)

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Need to Know

Murdoch Arms for Battle, Google Probed Again, CFO/CEO Pay Gap Widens, and more

Armed for Battle on Multiple Fronts
News Corp.’s embattled chief executive, Rupert Murdoch, has the full support of the company’s board of directors amid a phonehacking scandal in Britain. News Corp. Director Thomas Perkins denied reports that independent directors were considering the company’s succession plan. The 79-year-old Perkins, who has been an independent News Corp. director since 1996, told The Washington Post, “There has been no discussion at the board level in connection with this current scandal of making any changes. The board supports top management totally. The board has been misled, as has top management been misled, by very bad people at a very low level in the organization.”

Associated Press

News Corp. has appointed U.K. attorney Anthony Grabiner to head an internal investigation. Grabiner is non-executive chairman of the privately owned clothing retailer Arcadia Group. Perkins told reporters he would “personally make damn sure” that the probe would be independent. News Corp. said it also has hired Sard Verbinnen & Co. to help with investor relations and the Glover Park Group—the powerful D.C.-based lobbying group managed by Clinton White House notables Dee Dee Myers, Joe Lockhart and Susan Brophy—to assist with policy. The board has retained the law firm Debevoise & Plimpton to advise it on the crisis.

Meanwhile, shareholders involved in a class-action suit against News Corp. have expanded their allegations in light of the scandal. The plaintiffs accuse the publishing billionaire and the board of having knowledge of the unethical information-gathering techniques. The original suit was filed in March in Delaware’s Court of Chancery following News Corp.’s purchase of the TV film and production company Shine Group—which is owned by daughter Elisabeth Murdoch—a move shareholders assert had no strategic value and was simply a nepotistic deal. News Corp. also dropped its bid for control of British Sky Broadcasting Group under pressure from lawmakers in relation to the hacking scandal. In addition to the shareholder class action, News Corp. executives face investigation by law enforcement and market regulators in the U.K. and the U.S.; experts suggest a raft of additional legal action could be likely.

For Jobs, The Day Arrives; Cook Steps Up As CEO
While on his third medical leave, Apple cofounder Steve Jobs resigned from the CEO position Aug. 24, and will remain chairman. As widely expected, current COO Tim Cook took the reins as chief executive. In a letter of resignation, Jobs recommended the company follow its previously established succession plan for Cook’s promotion. “I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately, that day has come,” he wrote to the board. The Wall Street Journal reported that some Apple directors had discussed succession plans informally with executive recruiters in the weeks leading up to Jobs’ resignation. “For individuals to hold these conversations outside of the official scope of the board is rare at a company where board members have been handpicked by Jobs,” one source told the newspaper.

Two Heads Better Than One
Richard Branson’s Virgin Group has restructured top management as it plans to move from a defensive position designed for the recession to a period of expansion. Stephen Murphy, chief executive since 2004 and a 17-year Virgin veteran, will step into an advisory position and be replaced by two co-chief executives— David Baxby, head of both Virgin Asia-Pacific and the aviation business, and Josh Bayliss, general counsel. The move is part of a long-term plan devised by Murphy and Virgin Group Chairman Peter Norris. Though the cochief arrangement has drawn criticism at other companies, Virgin says it is appropriate for a group that is more a manager of assets than an operating firm.

Google Probed, Again
Though Google has faced M&A antitrust probes in the past, federal regulators have expanded their inquiries to examine the company’s web search success. The Federal Trade Commission is expected to subpoena the Internet giant to glean more information about whether Google search results are unfairly biased to boost its own services. The inquiry is expected to be as precedential as the 1990s Justice Department lawsuit against Microsoft. The Associated Press reported that Google’s quarterly lobbying expenses surpassed $2 million for the first time during the second quarter as it pleaded its case to lawmakers and regulators— a 54 percent increase over the same period a year ago.

FDIC Expands Clawbacks
The Federal Deposit Insurance Corp. has established a new executive compensation clawback rule for failed banks, allowing the agency to recover up to two years of pay if the executive is deemed to have been “substantially responsible” for the failure. The new “substantially responsible” clause means the rules are more aggressive than the business judgment rule, placing the burden of proof on executives to show that they exercised “the degree of skill and care required by the position.”

CFO/CEO Pay Gap Widens
While CFO pay in general has been rising to pre-financial crisis levels, one study shows the pay gap between CFOs and CEOs to be widening, at least among middle market companies. Accounting firm BDO found that the gulf was largely due to changes in CEO pay-for-performance compensation structures. Middle market CFOs typically earn between 55 percent and 60 percent of their chief executive’s pay. Last year, though, they earned only 40 percent on average. BDO studied 600 public companies with annual revenues ranging from $25 million to $1 billion for its results.

An analysis of 55 proxy statements for non-financial services companies with median revenues of $10 billion by Compensation Advisory Partners found that movement in pay among CFOs and CEOs was, on average, directionally similar. However, CAP’s analysis revealed that over the last three years CFO actual total direct compensation was generally 30-35 percent of CEO actual total direct compensation.

Ousted Director Wants Tighter London Listing Rules
London’s ERNC mining giant boardroom coup victim Sir Richard Sykes is calling for the Financial Services Authority to strengthen its governance listing standards following his ouster. Sykes was allegedly removed from the board, along with fellow independent director Ken Olisa, after the founding shareholders felt the two were excessively interfering. Sykes has urged regulators to institute a standard whereby a minimum of 25 percent of a company’s shares must be listed in order to avoid executive shareowners using their votes to control the board.

Beware the ‘Distort and Short’
Convicted con man Barry Minkow was sent back to prison for five years for involvement in a scam that cost homebuilder Lennar Corp. some $580 million in lost stock value. Minkow, who admitted to being part of a scheme, used his high-profile status and access to national media in 2009 to issue press releases, send emails and post YouTube videos claiming Lennar was beset by faulty accounting, misappropriation of corporate funds and other wrongdoing. Minkow’s scheme—the opposite of a “pump and dump”—was to “distort and short,” betting that Lennar’s stock would go down while at the same time releasing negative reports on the company.

SEC Warns on Reverse Mergers
Having suspended trading in more than a dozen reverse merger companies, the Securities and Exchange Commission cautioned investors about purchasing shares in companies that enter U.S. markets through so-called “reverse mergers” or backdoor listings. The bulletin warns of the potential risks of investing in such companies, and identifies some of the recent enforcement actions that the SEC has brought against a number of listed reverse-merger companies, including many Chinabased companies that became domestic issuers through the reverse-merger process. A reverse merger is often perceived to be a quicker and cheaper method of going public than a traditional IPO.

A Haven for Good Governance?
Established in the aftermath of the global financial crisis, Singapore’s Corporate Governance Council is recommending changes to regulate director independence and board oversight. The Council for the city-state has called for more directors who are not employees, family members of executives, or who have served on the board for more than nine years. “Good corporate governance plays an important role in ensuring the effective functioning of Singapore’s capital markets,” a council member was quoted as saying.

Top Priorities of Directors

  1. Strategic planning 72.1%
  2. Corporate performance and valuation 40.6%
  3. Risk and crisis oversight 27.1%
  4. Executive talent management 25.8%
  5. CEO succession 25%

Source: NACD 2011 Public Company Governance Survey

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Need To Know

Judge rules directors cannot decide venue, governance experts merge, budget crunch delays creation of SEC whistleblower units, and more important director news.

Judge Rules Directors Can’t Decide Venue
San Francisco Federal District Court Judge Richard Seeborg ruled that a provision in a company’s bylaws restricting the venue in which a firm can be sued does not give corporate directors the right to dismiss a case against them for reasons of improper venue. The ruling nixed the Oracle board’s hope of dismissing

Oracle's headquarters in Redwood City, Calif.

Oracle's headquarters in Redwood City, Calif.

two derivative suits brought against the business software and hardware company because they were not filed in the Chancery Court of Delaware.

In the first ruling of its kind, Seeborg wrote that specifying where a lawsuit could be brought is permissible in a contract, in which both the defendant and the plaintiff would have had a say. “A bylaw unilaterally adopted by directors, however, stands on a different footing,” he wrote in the January 3 order denying the motion to dismiss on the grounds that the shareholders had no say in the bylaw, which was passed after the suit was filed.

“Particularly where, as here, the bylaw was adopted by the very individuals who are named as defendants,” Seeborg wrote in the decision.

It is alleged in the suits that Oracle, between 1998 and 2006, utilized fraudulent and improper practices to apply discounts on the sale of software and licenses to the U.S. government. The sales totaled $1.08 billion and the suit alleges that the breach of fiduciary duty and abuse of control resulted “in millions of dollars of overcharges.”

Governance Experts Merge
The Corporate Library and GovernanceMetrics International (GMI) announced they will merge with Audit Integrity, operating collectively under the GMI name. The combined firm will continue to provide investors and share-owners with objective governance ratings and research. Jack Zwingli, former CEO of Audit Integrity, will become CEO of GMI, and Richard A. Bennett, former CEO of The Corporate Library, will serve as executive chairman. The combined firm’s board will consist of The Corporate Library cofounders Nell Minow and Robert A.G. Monks and James A. Kaplan, Ric Marshall, Howard Sherman, Gavin Anderson, John Higgins and Laurie Adami.

Farient, Patterson to Align On Pay for Performance
Two independent compensation consultants have joined forces to publicly disclose how executive compensation is aligned with performance. The founding partners —U.K.-based Simon Patterson of Patterson & Associates and U.S.-based Robin A. Ferracone of Farient Advisors—first worked together at Booz Allen and more recentlly at SCA Consulting and Mercer—started their own firms in 2007. A five-year study of executive pay at FTSE100 companies conducted by Patterson’s firm shows that during a period of “enormous value destruction for shareholders,” overall executive pay levels remained high. Even so, the relationship between pay and performance is improving, reports Patterson. Patterson’s analysis has been useful at highlighting overall trends, but cannot be used in the same way as the Farient’s approach, which is increasingly being used for official reporting to shareholders. “This alliance will ensure that our clients are provided with the most reliable compensation solutions wherever they do business,” said Ferracone.

Budget Crunch Delays Creation of SEC Whistleblower Units
Budget limits have caused the SEC to delay the creation of an independent whistleblower office as detailed in the Dodd-Frank Act, which required that the SEC implement new rules by April 12, 2011. In the meantime, current SEC officials will be handling the expected influx of whistleblower tips. In addition to the whistleblower office delay, the agency has also delayed creation of the Office of Women and Minority Inclusion, the Investor Advisory Committee, the Office of Investor Advocate, the Office of Credit Ratings and the Office of Municipal Securities.

More Women at the Top At Big Banks
Women hold 17.4 percent of executive positions at the top 50 commercial banks in the United States, a five-percent increase from 2004 when women made up 12.6 percent of the executive suite, according to a recent Women at the Top (WATT) survey. At the time the companies were sampled, there were no female CEOs (down from one in the 2009 study), three COO women and four female CFOs. WATT, a network of women in or aspiring to be in the C-suite, is opting to wait two or three years before conducting the next survey to allow time to determine if the Dodd-Frank Act, which mandates the creation of the Office of Minority and Women Inclusion in the financial services industry, has any effect.

CEOs Differ From VCs On Prospects for Cash
CEOs and venture capitalists have not been seeing eye-to-eye in regards to raising funds in the coming year, finds a survey from the National Venture Capital Association and Dow Jones & Co. Sixty-four percent of CEOs surveyed planned to raise funding from VCs, with 58 percent believing venture investments will increase and just 14 believing that figure would decrease. Of the group of VCs surveyed, 24 predicted a decrease in investments, while 51 percent believed there would be an increase. The VCs were also confident that more companies would go public, with 67 percent anticipating an increase in IPOs.

FASB Names Seidman Chairman
Leslie F. Seidman has been named chairman of the Financial Accounting Standards Board (FASB). Robert H. Herz, the previous chairman, retired from the organization on Sept. 30, and Seidman had served as acting chairman in the interim. Seidman was a member of the FASB staff from 1994-1999 and then rejoined the organization in 2003 after founding and managing a financial- reporting consulting firm.

Letter Grade ‘C’ For Corporate America
Americans believed Corporate America conducted itself poorly over the past year, according to a study from Strategy-One, a research division of PR firm Edelman. Only 17 percent of respondents gave Corporate America an ”A” or “B” grade when asked to rate how well they met expectations and 82 percent gave a grade of “C’” or lower, with 40 percent assigning a “D” or “F.” Although there was widespread dissatisfaction, the survey found that a majority of people have higher expectations for next year, most believing that those expectations will be met. Respondents noted that companies can improve by assisting in reducing unemployment, investing in the economic recovery, promoting ethical corporate behavior, paying back TARP funds and improving product quality. “With consumers highly dissatisfied with U.S. businesses, the 2011 strategy for Corporate America needs to be ‘back to basics’,” said Bradley Honan of Strategy-One in a statement. “Explaining not only ‘what’ they do for the country, but ‘how’ and ‘why’ they do it needs to be the game plan for how to rebuild corporate reputation.”

Lip Service To Succession
The majority of global companies don’t have a CEO succession plan in place, despite valuing the importance of succession planning, finds a Korn/Ferry Executive Survey. Some 98 percent of those surveyed believe succession plans are an important part of the corporate governance process, but only 35 percent reported having a plan in place if their CEO were to leave. Almost half of the respondents’ companies had no succession plan in place in the past three years.

“Given the number of abrupt, high-profile executive departures this year, it’s surprising that more companies are not acting with greater urgency to put a CEO succession plan in place,” said Joe Griesedieck, vice chairman and managing director of Korn/Ferry Board & CEO Services Practice.

Women Plateau
Despite an ever-increasing call for greater diversity, 2010 was a relatively stagnant year for women in the boardroom, according to two recent and separate reports from Catalyst. The women’s business-advocacy nonprofit conducts an annual census of Fortune 500 women board directors and a second census of F500 women executive officers and top earners. The studies found that in 2010, women held 15.7 percent of board seats, an increase of 0.5 percent from 2009, and 14.4 percent of executive officer positions, a 0.9 percent increase. Consistent with other surveys, Catalyst reports that pay for women directors and officers also remained relatively flat. Women executive officers held 7.6 percent of top earner positions, an increase of just 1.3 percent over 2009.

Dividend Payments on Rise
Just over half of S&P 500 companies increased dividend payments in 2010, with 255 increases, as compared to 157 in 2009. Only four firms reduced their dividends, reported Howard Silverblatt, a senior index analyst at S&P. During 2008 and 2009, 140 firms reduced dividends. “The problem, at this point, is that the dividend commitment is long-term, and the prospects for economic stability over the next year or two are not at a comfort level that encourages strong long-term commitment,” Silverblatt explained to the International Business Times. “So we believe we’re more likely to see smaller increases that correspond to actual improving conditions.”

Business Roundtable: CEOs Optimistic, Engler Appointed
CEOs are more optimistic this quarter, planning to increase hiring, sales and capital expenditures in the coming months, according to the Business Roundtable’s fourth quarter 2010 CEO Economic Outlook Survey. The CEO Economic Outlook Index increased to 101, up from 86 in the third quarter of 2010. Meanwhile, Business Roundtable named former Michigan Governor John Engler president, effective January 15. Engler was most recently president and CEO of the National Association of Manufacturers. Engler succeeds John J. Castellani, who left the organization of CEOs at leading U.S. companies in September 2010 to become president and CEO of the Pharmaceutical Research and Manufacturers of America.

Hay Group Finds Only Modest Salary Increases Expected
Companies are planning slight increases in salary budgets for 2011, according to a survey conducted by the Hay Group, which reported that salary budgets would increase by a median of 2.4 percent. The proportional salary-increase percentage was similar for executives and lowerranked employees. Four percent of companies are either in the process of performing or are considering performing salary cuts, while 18 percent have or are considering pay freezes. Financial services firms planned for the smallest raises, at 2.9 percent, with energy and life-sciences industries planning to increase employee rewards at 3.6 and 3.3 percent, respectively.

Securities Class Actions May Hurt Shareholder Value
Few securities class-action lawsuits improve the value of the underlying security for investors, according to a new study published in the Financial Analysts Journal that examined the effects on stock value at 650 companies after they faced suits. Insider trading cases were the only examples of improved shareholder value after the suit had closed. The study noted that this was most likely because those executives would also be removed from the company, thereby improving corporate governance. Most cases are settled for a fraction of damages claimed in the suit and do not result in a statistically higher return on investment for shareowners.

Succession Issue Raised Anew As Jobs Withdraws from Apple
Apple CEO Steve Jobs is taking medical leave for the third time since 2004. Apple, which disclosed the news early on the Martin Luther King holiday when U.S. markets were closed, did not specify why its visionary leader would be absent. The computer maker had record sales and revenues through the holiday season driven largely by iPad and iPhone sales. Apple also did not say when Jobs would return, driving up the worst fears about Jobs’ medical condition. Jobs, a survivor of pancreatic cancer, said in an email to employees that Chief Operating Officer Tim Cook would again be responsible for day-to-day operations. Jobs said he would remain CEO and be involved “in major strategic decisions.”

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