Nothing Succeeds Like Excess

No, I'm not talking about the Kardashians or a Franco Zeffirelli production at the Metropolitan Opera (though the term could apply to both).  Rather, I'm talking about a recent Towers Watson report on perquisites.  

The report has good news and bad news, though which is which may depend upon your perspective.  The good news is that fewer companies provide any perquisites and those that do seem to have cut back on the types of perks offered to their executives.  The bad news is that, at least according to Towers Watson, (1) perks continue to play a "meaningful role" and (2) the value of perks has not changed much.  So, if I'm reading the report right, the perks that remain are getting richer.  

But the report is a bit murky in some respects.  It says that club dues, personal use of corporate aircraft and company car programs have been the hardest hit, while programs "like" company-paid physicals have increased.  Does that mean that the costs of all those physicals offset the drop in plane and car usage?  Given the relative costs of these items, I tend to think not.  Also, the report says that despite the cuts, "company car allowances and personal use of corporate aircraft were the most prevalent perquisites in both 2008 and 2013."  How this all sorts out is a bit mysterious.  

And lest you think the report is devoid of humor, I call your attention to the following line relating to planes and automobiles (trains are notably absent): "These perquisites are...seen as important to ensure that executives can focus on their duties and be efficient in their roles"   (the italics are mine).  Ha!

In all this, it's important to remember that the SEC rules on disclosing perquisites only require disclosure of their "incremental" costs, which more or less means only those additional costs relating to personal usage.  In other words, what I'll refer to as "embedded" costs are not reported.  That may bring a smile to some of us as well.

Zombies in the Boardroom!

No, I'm not talking about the sequel to World War Z.  This is about so-called "zombie" directors - I love the term - who receive more "against" votes than "for" votes but who nonetheless remain in office.  That sounds plain un-American!

Thanks to my friends at the Council of Institutional Investors, I got a list of the 45 directors that the Council regards as being, or having been, zombies.  For starters, four zombies have been replaced, which brings the total down to 41.  Now it gets interesting, because of those 41, 33 are directors of companies that have plurality voting rather than majority voting (or some variant).  Now I hate to get technical, but when a company has plurality voting for directors, a director who receives a plurality of the votes - even if more votes are withheld from his/her election - is validly elected.  Thus, 33 of the so-called zombies are not zombies.  At least not from a technical standpoint.  So if people are upset about these 33 folks staying in office, it seems to me that they need to push (or keep pushing) for majority voting.

Which brings us to the eight "true" zombies who lost their elections at majority-voting companies.  Now I believe that in certain circumstances it may be appropriate for a director who loses an election to stay on, but in those circumstances it's incumbent upon the company to explain why.  In fact, in my experience, the by-laws of companies with majority voting require disclosure on this point.  So I looked at the companies' disclosures to see what they said.

I'm disappointed.  First, the good news: one company explained that the zombie in question had had poor attendance due to special circumstances but had committed to improve his attendance, thus meriting his staying on the board.  Could they have provided a bit more explanation - for example, why it was important for him to stay on the board notwithstanding his poor attendance?  Sure.  But this is still helpful disclosure.  

Now for the bad news.  Two companies (with five of the eight zombies) said nothing.  And I mean zilch, nada, zip.  And the remaining two companies told us that their zombies stayed on the board because it was "in the company's best interest."  Really?  Yes; I wish I were joking, but that's what they said.  I don't even begin to know what this means, which I suspect is precisely why the companies used this phrase; they didn't really know the reason either.

So I come back to my point above - if you're going to keep a zombie on the board, I think you owe it to your owners to at least give a reason why.  And it shouldn't be something meaningless like the company's "best interest" with nothing more.

Companies should know by now that if they don't voluntarily provide good disclosure, someone else will make them do it.  Wouldn't it be better to provide good information than to force the SEC to act by adopting more rules - or, much worse, forcing Congress to get in the act?

My First "Lammbaste" - Having It Both Ways (or A Tale of Red Journalism)

When I started telling people about my plans to write a blog, my buddies Sylvia Groves and Brendan Sheehan suggested that from time to time I include a "Lammbaste."  So here goes.

A few days ago, The Wall Street Journal had a story on the first page entitled "SEC's Hunt for Crisis-Era Wrongdoing Loses Steam".  The story concerned the SEC's decision not to pursue a case against a hedge fund that the Journal says created some of the mortgage-backed securities that led to the financial crisis.  In effect, the story says that the SEC is giving up the fight on hedge funds' role in causing the crisis.  

However, further back in the same day's paper, the Journal ran another story about a major joint SEC/DOJ action against Bank of America relating to - you guessed it - MBS deals.  The story also noted that UBS had just settled a claim concerning collateralized debt obligations, another culprit in causing the financial crisis.  So perhaps the hunt for crisis-era wrongdoing is not losing steam after all, but you wouldn't know that from the headline on page 1.

I have been noticing that, over time, the Journal has increasingly reflected the slightly-to-the-right-of-Attila-the-Hun editorial policy of its current owner, Rupert Murdoch.  That's fine when it's limited to the editorial pages (actually, it's not fine, but I can - and frequently do - skip those pages so as to avoid a major attack of indigestion).  But when the editorial policy seeps into what purports to be news, that's another story.  And the placement of these two stories, with the troubling headline on the far more prominent one, is typical of how the Journal slants the news to make regulators, including good and earnest people at the SEC (and by implication the Obama administration), look bad.

And then on Tuesday, the Journal ran a story with the headline "The Other Targeting Scandal" concerning an alleged plot by the Democrats to get the SEC to "discourage public companies from supporting independent organizations, while applying no such regulation to labor unions" (which are, of course, more liberal).  

Aside from the fact that the allegations are being made by that paragon of investigative integrity, Darrell Issa, the story has so many errors in it that I don't know where to begin.  The underlying issue is whether the SEC should require disclosure of political contributions and, possibly, other political-related expenses (such as lobbying expenses).  While I'm personally opposed to imposing a requirement in this area, there continues to be lots of healthy discussion on the point - and many companies have voluntarily made robust disclosure of these expenses.  And, for the information of the writer of the story, with extremely limited exceptions, labor unions are not subject to the type of disclosure referred to in the story.  For the many people who only know what they read in the paper, this story is misleading, to put it mildly.

I'd like to coin the term "red journalism" (as in "red state," not red as in the commie-pinkos whose interests the Journal seems to think the SEC is supporting).  Where is Edward R. Murrow when you need him?

Inside Out (More on Insider Trading)

In my last posting, I discussed some issues surrounding insider trading.  Here's more:

First, I violated my own view that "insider" trading isn't really the right term.  While there have certainly been many instances of trading by "insiders" (i.e., corporate executives and other employees), many cases - and certainly the more notorious ones - are those where "trusted" outside advisors - investment bankers, lawyers, etc. - traded or leaked it to others who traded.  So maybe we should stick to "trading on inside information," unless someone can come up with a better term.

Second, whenever we read or discuss this topic, we should remember that it's an area where, I regret to say, the SEC made a couple of mistakes.  Specifically, it went after Ray Dirks and Vincent Chiarella, in both cases individuals who probably shouldn't have been prosecuted, regardless of whether or not they were nice guys or behaved well.  Without going into all the details, their cases led to such mysteries as the "misappropriation" theory and having to analyze whether the tipper/tippee had a fiduciary duty with respect to the inside information.  I remember the good old days when Stanley Sporkin was Director of the SEC's Division of Enforcement, when he said that if you are in a plane flying over a company's plant and see that it's on fire, you'd be engaging in insider trading if you called your broker with a sell order when you landed.  This view was surely too extreme on the other side, but it at least had the virtue of clarity.

And on a personal note...

In case you're interested, my buddy Broc Romanek has posted a podcast in which he interviews me on the topic of speaking to the media.  You can find that podcast here.

Stop the Insanity and Other Tales of Insider Trading

I've noticed a lot of chatter in the blogs and elsewhere to the effect that maybe we should think about legalizing insider trading, and a recent book (see below), while not going quite that far, suggests that efforts to prosecute insider trading were misguided and distracted from going after the real culprits of the financial crisis.

I'm always willing to listen to arguments for changes in the law, but thus far none has persuaded me.  The classic argument is that allowing it would expedite the flow of information into the marketplace, but I don't see that.  Rather, I can see lots of executives not only trading while in possession of insider trading but also finding reasons to delay disclosure of material information.  (I'm sort of assuming that the advocates of legalization would also do away with reports of insider transactions, but why would you care about them in the brave new world these advocates seem to envision?)  Another justification that recently reared its very ugly head is that despite all the laws and regulations prohibiting insider trading, it still continues.  On that theory, we should also think about legalizing murder and rape and goodness knows what else.  What am I missing?

The only justification that makes any sense to me is that legalization might actually scare off uninformed retail investors, who perhaps shouldn't be in the market in the first place.  If that's the case, however, shouldn't that problem be addressed by more robust disclosure and reminding people of the old line "caveat emptor?"

On the other hand, there's also increasing chatter about the horribles of so-called Rule 10b5-1 plans (or, for the technically persnickety among us, 10b5-1(c) plans).  The Wall Street Journal, presumably in an effort to persuade us that they don't only report the news the way the fat cats see it, has launched something of a campaign against these plans, with a series of articles implying that they are really thinly veiled mechanisms for facilitating insider trading.   Reacting to these articles, The Council of Institutional Investors, among others, has called for making them more restrictive.  So far, the SEC has not taken any action or indicated that it plans to do so.  

While I'm not a big fan of these plans (largely because of the perception problems they create), if they are structured properly and are accompanied by appropriate disclosure, they are generally all right.  And even the Journal has recently reported that companies are tightening up their plans to reduce the likelihood that they can be manipulated so as to get around insider trading concerns.  So my advice is let's leave them alone and get on to more important things.

Lamm's Literary Lyceum

I just finished reading Charles Gasparino's latest book, Circle of Friends.  Rather than go into a fresh rant, I'll just refer you to the review I posted yesterday on Amazon.com, which you can find here.

I've Got Some Explaining To Do - Director Tenure and Other Tweets

I recently tweeted that  "I’m beginning to think that [director] term limits aren’t such a bad idea." Let me explain. I'm not a fan of age limits; for reasons of enlightened self-interest or otherwise, I object to the notion that a person ceases to be a valuable board member when he/she reaches a certain age. And this seems to be borne out by the fact that companies' retirement ages vary all over the lot. Moreover, some companies waive retirement ages when it's deemed to be "in the best interests of the company" (whatever that means), so they don't necessarily work.

At the same time, I don't buy the approach of some European investors that once a director has served for some period of time, he/she ceases to be independent. How can you be independent on Monday and not independent on Tuesday?

So maybe term limits provide a way for companies to ease out directors who become superannuated for one reason or another? I'm not sold on it, but in the absence of robust disclosure as to why Ms. X continues to be a great board member after 15 years of service (and, in fairness, that kind of disclosure is extremely difficult to provide), maybe it's worth thinking about. Surely a discussion wouldn't hurt?

I also tweeted that I oppose efforts to legalize insider trading. I know it's legal in some jurisdictions, and I've heard arguments that it's going to happen anyway so why not legalize it, but that's like saying that people still commit murder so why not legalize that too. Just saying....

Lamm's Lyrical Library

I've been looking for years for a satisfying recording of Don Giovanni. It's a difficult opera, because it is very dark at times and very funny at others and very beautiful throughout. I'd almost given up, but I recently came upon a recording conducted by John Eliot Gardner with Luba Orgonasova as Donna Anna, Rodney Gilfry as the Don and Ildebrando D'Arcangelo (don't you love that name?) as Leporello, among others. It's a lovely recording and comes as close to being a perfect recording of this classic as I've ever heard.

Lamm's Literary Lyceum

I just finished reading Sarah Dunant's novel about the Borgias. It's called Blood & Beauty. Unfortunately, I learned that the combination of the two yields boredom. The book is atmospheric but flat. Sorry!

The Devil in the Details - What's a Majority of "Votes Cast" and Other Musings on Shareholder Votes

Michael Dell continues to try to void the deal he and his investor group previously agreed to - namely, that the votes cast for his buyout deal must exceed not only votes against the deal but also abstentions.  In an earlier post, I found his request reasonable, and I still do.  My friend Ann Yerger of the Council of Institutional Investors informs me that "sometimes an abstention is a considered vote", but in my experience it's just as often a cop-out that an institution may use when it doesn't want to be perceived as supporting management.

Ann also decries some companies' practice of counting abstentions differently for shareholder proposals than for company proposals.  Sounds right to me!

Finally (for now), Broc Romanek's blog comments on a recent proposal from two professors at the University of Chicago that would permit the purchase and sale of votes.  I couldn't disagree more; despite the view that everything is a commodity (so typical of Chicago!), I believe that there needs to be a connection between ownership and voting.  This idea seems to rear its ugly head every so often; isn't it time to drive a stake through its heart?  (Broc also reports that Senator Warren wants to impose a new one share-one vote standard on listed companies - possibly more on that later.)

Lammentations

I understand (also from Broc) that Tom Kim is leaving the SEC staff after six years.  Tom is an incredibly smart and diligent man who typifies the high quality of the SEC staff.  He will be missed by those of us who continue to work with the SEC.  Good luck, Tom!