Politics & Legislation

Holistic Grail of Pay Disclosure

Showing the bigger picture—including pay-for-performance connections—in compensation reports

By Stephen Deane

Stephen DeaneIt is easy to point to bad examples of executive compensation practices and disclosure. But where are the good examples? And how will best practices continue to evolve?

The 2007 proxy season unveiled the first executive compensation reports under sweeping new disclosure regulations for publicly traded companies. The U.S. Securities and Exchange Commission (SEC), which adopted those rules, is keeping the spotlight trained on disclosures with its ongoing review of hundreds of reports. The SEC’s efforts will play a major role in shaping the debate on disclosure best practices.

Meanwhile, three key producers and users of those reports—corporate executives, boards and investors—are still at an early stage in developing a market consensus on best practices.

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SEC Turns Back Shareholder Proposals on Director Nominations

Critics say decision limits challenges to insular corporate boards

By James Hyatt

The U.S. Securities and Exchange Commission (SEC) rejected “proxy access” proposals Nov. 28, delighting corporate officials and dismaying shareholder activists and some influential members of Congress.

By a 3-1 vote, the commission declared that companies could block shareholder proposals seeking to nominate directors without drawing SEC criticism. At the same time, the commission moved to encourage “electronic shareholder forums” by declaring that participants in such forums wouldn’t be viewed as soliciting proxies and that shareholders or companies operating such forums wouldn’t be liable under federal securities laws for statements made there by third parties.

The SEC took no action Nov. 28 on a proposal to limit nonbinding shareholder resolutions.

The SEC set off the furor earlier this year by concocting a stew of proposals--some of them contradictory--that Chairman Christopher Cox wanted to resolve in time to prepare for the 2008 proxy season.

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Edwards Campaign Tackles ‘Culture of Greed’

Kara Doughman, www.flickr.com/photos/forallofusPresidential candidate Edwards focuses on executive compensation, shareholder rights in corporate responsibility proposals

By Danielle Lee

Democratic presidential candidate John Edwards announced new executive-compensation and shareholder-rights reforms Friday that go beyond Sarbanes-Oxley law as a part of his larger “Restoring Corporate Responsibility and Rebuilding the Middle Class” proposal.

These reforms would give long-term shareholders the right to render an advisory vote on executive compensation; call a shareholders' meeting; recall a limited number of directors; and have proxy access to the candidate slate for boards of directors.

He also advocates a “Corporate Citizenship” law that would require businesses to disclose "the pay and demographics of directors and top officers," as well as publish annual social-impact reports.

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Investors Petition SEC for Climate Risk Disclosure

Coalition asks SEC to recognize financial risks of climate change under current material information regulation.

By Danielle Lee

A 22-member coalition of U.S. and European investors, state government officials and organizations, including nonprofit Environmental Defense and investor network Ceres filed a petition with the U.S. Securities and Exchange Commission (SEC) Tuesday seeking to require publicly traded companies to assess and fully disclose financial risks from climate change.

Specifically, the petition calls for the SEC to affirm that climate change is covered under the current regulations concerning material information disclosure, said Sean Donahue, counsel for Environmental Defense.

Petition signers include California State Treasurer Bill Lockyer, Florida Chief Financial Officer Alex Sink, Maine State Treasurer David G. Lemoine, New York State Comptroller Thomas P. DiNapoli, North Carolina State Treasurer Richard Moore and Oregon State Treasurer Randall Edwards, in addition to state officials from Kentucky, Maine, Maryland, New Jersey, Rhode Island and Vermont.

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SOX Update: U.S. House and SEC

Extensions, amendments and new auditing standards for section 404

By Danielle Lee

The U.S. House of Representatives approved an amendment June 28 to an appropriations bill that would give smaller firms more time to comply with the internal controls of the Sarbanes-Oxley Act.

The amendment passed by a 267-154 vote.

If passed by the Senate and signed by President George W. Bush, the current deadline for small companies to start complying in their first fiscal year that ends on or after Dec. 15, 2007 would be extended to Sept. 30, 2008.

Additionally, July 25 the U.S. Securities and Exchange Commission approved a new auditing standard encouraging a less costly approach to Section 404 compliance.

The SEC’s Public Company Accounting Oversight Board's Auditing Standard No. 5 passed by a 5-0 vote and gives guidance on a more risk-based implementation of compliance.

This standard comes on the heels of new management guidance approved by the SEC in May calling for companies to scale their reviews to the size and complexity of their company, as well as focus on the controls most susceptible to misstatements.

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“Say on Pay” Gets Its Day

Executive compensation is still the talk of the boardroom as legislation goes to the Senate.

By James Hyatt

"Say-on Pay” legislation, which passed the House in April by a 2-1 margin, faces a less certain fate in the Senate. The “Shareholder Vote on Executive Compensation Act” would require companies to allow a nonbinding vote on compensation disclosed in proxy statements, starting in 2009.

The legislation calls for a separate advisory vote if a company gives a new, not yet disclosed, “golden parachute” while simultaneously negotiating to buy or sell a company.

Rep. Barney Frank of Massachusetts, Chairman of the House Financial Services Committee, calls it “a bill to further the workings of the capitalist system of the United States. It has one very specific provision; it says that the shareholders, the owners of public corporations, will be allowed to vote every year in an advisory capacity on the compensation paid to their employees who run the companies.

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Legislating Corporate Social Change

PlankWalk the walk, before they make you walk the plank.

By Michael A. Levine

If you are reading this, your company may already be voluntarily implementing substantial corporate social responsibility (CSR) and corporate citizenship programs. If not, take note: legislators are attempting to pass a bill that would, in effect, require corporations to affirmatively engage in CSR efforts.

In this climate, corporations need to review their existing CSR efforts and consider whether they are at risk of being sued or subjected to governmental oversight. Corporations should consider the extent to which they wish to become part of the legislative process. Otherwise, they may find themselves subject to compulsory CSR guidelines and left with no say or meaningful input into their own CSR programs.

What CSR and supply chain professionals need to know is that the pending legislation would expose those companies importing or selling products made in “sweatshops” to litigation, monetary penalties and governmental investigation.

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How Broad is EU’s REACH?

Europe has led on climate change. Now, it is staking out leadership on chemicals with the new REACH regulations.EU flag

By Ken Stier

The December adoption by the European Union of a new community-wide chemicals regulatory regime is still reverberating through the $2.56 trillion global industry, which is struggling to grasp the enormity of the coming changes. The principal aim of the new regime—known as REACH (Registration, Evaluation, Authorisation, Restriction of Chemicals), which comes into force in June—is to enhance environmental and public health protection. Although no hegemonic notion of extraterritoriality is asserted, the new provisions apply to chemicals (and products made from chemicals) manufactured in Europe, as well as those imported into Europe, effectively raising standards internationally. The U.S. industry exported $186 billion worth of chemicals to Europe in 2005.

Robert Donkers, a founding REACH co-author, and presently the environmental counselor at the European Commission office in Washington, says the agreement represents a “paradigm shift”—moving the burden of establishing that chemicals can be used safely from public authorities to industry.

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The Future of the Global Compact

Does the new UN Secretary General have the commitment—and corporate experience—to drive the compact?

By Andrew Savitz and Moses Choi

When the CEO of Novartis met with the Secretary General of the United Nations in the summer of 2000, neither suspected that the result would be to reinvent the very way the Swiss pharmaceutical giant does business. Kofi Annan was merely trying to entice Dr. Daniel Vasella and other corporate leaders to join his new Global Compact.

Since then, more than 3,000 CEOs have signed the Compact, making it the world’s largest voluntary corporate citizenship initiative. Annan’s objective was to bring companies together with labor, civil society and UN agencies “to unite the power of the market with the authority of universal ideals.”

Half the companies have reported changing their policies to harmonize with the Compact’s 10 principles for corporate behavior, which address human rights, labor standards, environment and corruption.

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Corporate Political Spending

Company contributions are becoming increasingly transparent.

By James C. Hyatt

Disclosure of corporate political spending, expected to get increased discussion in the 2007 proxy season (see CRO Trends, Winter 2006 Issue), is gaining some traction.

Three major companies, Verizon Communications, Monsanto and General Dynamics, have committed to disclose some or all of their political spending made with corporate funds, according to the Center for Political Accountability and several groups helping press the issue.

Twelve other companies previously had adopted political transparency and accountability policies in 2005 and 2006.

Each company will post a complete list of corporate political contributions on its website and disclose the guidelines for its political giving. In addition, Monsanto and General Dynamics will join Verizon in establishing annual oversight of the corporate political contributions process at the board level.

General Dynamics has agreed to report and have board oversight of its payments to trade associations that are used for political purposes.

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