It was a busy couple of days in New York last week. I hadn’t planned on splitting my time between two conferences. But when one of my Twitter contacts said he would be at the Directorship Boardroom Leaders Forum and I looked at their agenda, I knew I had to do both.
Monday night was spent at a Tweet-up organized by Edith Orenstein at the FEI. One of the bloggers who showed up took a picture of a few of us, since he remains anonymous. Also present were a variety pack of journalists, bloggers and other interested parties.
I started Tuesday with the keynote speech given at the Directorship Forum by Chief Justice Myron Steele of the Delaware Supreme Court. More about this speech later, since it was full of information and soundbites.
Here’s a couple of tweets.
Justice Steele really played to his audience, members of corporate boards and the lawyers who support them, so you can imagine there was quite a bit I disagreed with. I’m quite surprised actually, now that I focus on judges and their opinions so much, how often many of them express what I consider to be very biased opinions in private – if you can call a speech in front of two hundred professionals at the Metropolitan Club in New York a non-official appearance.
The next panel at the Directorship Forum was entitled, “The Counselors and the Litigation Outlook.” Three outside counsels and one professor of law, the famous John Coffee, gave board members an update on top litigation concerns. Yes, you are not imagining it. That’s two panels, to start the day, all about lawyers and litigation. It’s telling of what’s first and foremost on these guys’ minds.
From a recent Op-Ed by Professor Coffee in the New York Times on executive compensation:
“Free market ideologues may call Mr. Feinberg’s new rules the end of capitalism as we know it. That’s nonsense. His edict is probably better described as an experiment in general deterrence.
Executives at seven firms (and the broader market) are learning that if financial irresponsibility at a firm that is “too big to fail” necessitates a taxpayer-financed bailout, its executives will collectively bear the costs. Yes, there will be cases in which this seems unfair, but life is always somewhat unfair. More importantly, teams generally win or lose as a group…”
During the panel in New York, Professor Coffee mentioned activist lawsuits initiated by plaintiff’s firms such as Coughlin Stoia, whereby letters have been sent threatening shareholder derivative suits to recover “ill-gotten gains.” In other words, we are referring to bonuses and incentive payments to executives of companies that had restatements or where fraud or accounting manipulation distorted results. Incentive compensation clawbacks are a very hot issue, whether you’re talking about TARP recipients or just plain old companies that paid out incentive compensation to executives who manipulated results.
To raise profits.
So they could hit their incentive compensation goals.
And raise the stock price to make stock options valuable.
Executive compensation, and the clawback issue specifically, was discussed at both the Directorship Forum and the FEI CFRI conference. Just that day, the WSJ reported a new SEC action against the CEO of Beazer Homes. You remember Beazer. I have written about them. We haven’t seen any action on companies like Dell, yet, but I’ve been encouraging the SEC to step up Sarbanes-Oxley Section 304 enforcement since 2007.
“The Securities and Exchange Commission may move to claw back a portion of the compensation Beazer Homes USA paid its chief executive during a period for which the company later restated earnings. The Atlanta builder disclosed Monday that Ian J. McCarthy received a Wells notice from the SEC, indicating that the agency’s staff is recommending civil action against the executive.
Such a move would mark the first time the agency has tried to claw back pay from a sitting CEO who wasn’t alleged to have participated in a corporate fraud. But in recent months it has sued at least two former executives for back pay even though they weren’t implicated in wrongdoing, a sign the agency is using the tactic more aggressively.”
Over at the FEI CFRI Conference, I raised issue with Jim Kroeker, Chief Accountant of the SEC and Wayne Carnall, Chief Accountant in the Division of Corporation Finance at the SEC. Mr. Kroeker agreed that the stepped up activities on Sarbanes-Oxley 304 enforcement were interesting, in particular for the choice of going after executives who had not personally been accused of any wrongdoing. He seemed surprised to hear of private actions in this regard and expressed curiosity about those details, which I hope to provide him with.
We also discussed the necessity for improved disclosure with regard to incentive compensation programs if these actions are to be enforceable and an effective deterrent to “asleep at the switch” behavior by executives and board members in the future. Unfortunately, the average proxy statement is already 80% about executive and director compensation programs. As if that didn’t tell you how far off management’s priorities are. But what proxies don’t tell us is how exactly these awards are determined – the exact matrices and targets – so one can go back and determine if executives actually hit the targets or were awarded incentives anyway, retroactively, and perhaps handily in spite of later evidence that the basis for these payments was manipulated or fraudulent.
Specifically, if the details of a compensation plan and its metrics are not public, how can the impact of restatements, manipulations of earnings, and frauds be accurately calculated? Are incentive compensation programs run as loosey-goosey at some companies as we saw stock option grants were during the hey-day of stock option backdating? Are the programs and the payments rubber stamped, often retroactively when these same executives who are receiving the awards are the ones who decide on accounting treatments and make the top-side entries that help them hit their marks?
I predicted almost three years ago that incentive compensation would come under the microscope due to the Computer Associates scandal. That was such an egregious example of ill-gotten gains distributed on the back of a proven fraud by corporate executives. Some restitution will be made by the CA CEO as part of his plea agreement but not nearly enough given the amounts at stake.
In my book, that’s a crime.
Main page art from the Morgan Library’s William Blake exhibit.