The White House announced yesterday that Troy Paredes, a law professor from the University of Washington in St. Louis, would be appointed to the SEC in place of Paul Atkins.  For a quick overview of the articles he has written, his SSRN page is here.  He is, by the way, ranked #211 in the rankings of the top 1500 law faculty by SSRN (based upon downloads of articles/papers over the previous 12 months). 

His appointment got this Blog to thinking about the role of law professors on the Commission.  They actually have a long history of serving on the Securities and Exchange Commission, including two of the early chairmen, William O. Douglas (Yale) and James Landis (Harvard).  Bill Cary, appointed chair by Kennedy, came from academia (Columbia), as did Harold Williams, appointed by Jimmy Carter, although he was teaching in the  Graduate School of Management at the University of California.  More recent examples include Harvey Goldschmid (Columbia), Isaac Hunt (Akron), and David Ruder (Northwestern).  Chairman Cox took a year off from practice to teach at the Harvard Business School.  Others have gone on to law teaching careers, including Joe Grundfest (Stanford) and Roberta Karmel (Brooklyn).     

We are quick to criticize the Delaware courts for decisions that reflect an excessively pro-management bias, something that harms shareholders and opens the jurisdiction to criticism and to calls for preemption.

Less often do we have an opportunity to complement decisions so when an opportunity arises, it behooves this Blog to take it.  The decision by VC Lamb in Weiss v. Swanson is a spring-loading/bullet-dodging options case.  Using reasoning in Tyson, and following the reasonable approach articulated in Ryan, he refused to dismiss the case, either on the demand issue or on a motion to dismiss.  Essentially, he found that the pleadings were sufficient to show that the practices had occurred and that the board was not disinterested, mostly for having received the options.  We have a student post on the subject below.

The opinion allows the case to proceed to discovery.  It is altogether possible that after discovery the case will not survive a motion for summary judgment.   But in this instance, the court did not use excessively high pleading standards to prevent the plaintiff from getting at the information he needs to determine what actually happened and whether a fiduciary duty violation occurred.  It is a thoughtful, well reasoned decision. 

We discussed the calculated timing of option grants in an earlier series of posts on option grant practices and the Delaware courts. In an unpublished opinion dated March 7, 2008, Vice Chancellor Lamb of the Delaware Court of Chancery denied a motion to dismiss a claim for breach of fiduciary duty against former and current directors and officers of Linear Technology Corporation who issued and received timed option grants. Weiss v. Swanson, C.A. No. 2828-VCL, 2008 WL 623324 at *1 (Del.Ch. Mar. 7, 2008).

Weiss alleged that on 22 occasions between July 1996 and July 2005, Linear Technology Corporation’s board of directors set the strike price of option grants below fair market value to the financial advantage of the defendant directors and officers without disclosing the practice to shareholders. Specifically, Weiss claimed that the board used material, inside information of which they had advanced knowledge to grant options before quarterly earnings releases when the news was good (“spring-loading”), and after quarterly earnings releases when the news was bad (“bullet-dodging”).

As Professor Erik Lie of the University of Iowa points out, timed option grants are not illegal per se when the following conditions are met: 1) none of the documents are fraudulent; 2) the practice is clearly communicated to shareholders; 3) the timing is properly reflected in earnings; and 4) the timing is properly reflected in taxes. Business Week adds that for many companies, the plan’s charter or the company’s bylaws may explicitly prohibit option grant timing.

The court agreed that plaintiff pled sufficient facts to show that the practice of spring-loading and bullet-dodging was material, becoming the first Delaware court to conclude that bullet dodging can be material information.  Weiss, at 13 ("Taking Weiss's allegations in this case as true, it is reasonable to infer that stockholders would consider the practice of timing options described in the complaint to be important in deciding whether to approve the option plans or to reelect board members.").  Nondisclosure of the practices "give rise to an inference that the Director Defendants, in violation of their fiduciary duties, intended to circumvent the restrictions found in the plans." 

In addition, the court found that demand was excused because all of the directors considering demand actually received the challenged options and, as a result, were not disinterested.  In addition, the court noted that the company conducted an internal investigation and concluded that there was "no evidence of fraud or misconduct" in connection with the challenged options.  As the court noted:  "Given the contrary inferences from the complaint, 'the court questions how it is that the interests of the corporation are not, or at least do not appear to be, adverse to the interests of the individual defendants." 

In considering a motion to dismiss in addition to demand excusal, the court concluded that the complaint sufficiently alleged a breach of fiduciary duty in connection with the improper disclosure of the option practices.  Moreover, the plaintiff adequately alleged a claim for waste.  "Weiss alleges that the defendants should not have received any of the timed options at all, and that the grants were approved without any valid corporate purpose."  

The primary materials for this post are available on the DU Corporate Governance website.

Celia Taylor writes:

On Monday, Aflac shareholders made history by being the first group of shareholders in United States corporate history to vote in a non-binding advisory capacity on executive compensation. In the historic action, shareholders voted 93.05% in support of the company’s executive compensation policies. Only 2.52% voted against the executive compensation policies; the remaining votes were abstentions.

How much of a victory for say on pay does this action represent? On one hand, companies who worry about shareholder actions being adverse to executive interests may breathe a sigh of relief. However, Aflac’s shares were at an all time high last year, and its CEO Dan Amos is very popular with shareholders. So Aflac may not be the best indicator of what may happen with say on pay initiatives in corporations where shareholders have stronger incentives to admonish executives. This year, more that 90 say on pay resolutions were filed. Companies such as Verizon and Blockbuster who are facing similar shareholder action may not find the results so favorable. The Aflac action shows that say on pay need not be problematic for a corporation, but it does not put an end to the concerns.

For the last ten days or so, we have been running student posts that examine the stock exchange definition of director independence and the fees paid to members of the board.  As we have noted a number of times on this Blog, the exchanges apparently take the position that director fees do not count in the determination of director independence.  This is true even though the NYSE provides that directors are not independent if they have a "material relationship" with the company and does not explicitly exclude from this analysis consideration of the amount of fees paid.  The same is true, by the way, of the state law definition of independence, which almost categorically excludes consideration of fees (something discussed at length in my piece, Disloyalty without Limits). 

Most of the directors in the survey received total compensation in the $200,000 to $300,000 range.  A few, particularly those serving on the board of Goldman Sachs, received almost $700,000 in total compensation.  There are several observations that can be made about this data.  The first is that when companies have independent boards, what they really mean is that they have directors who meet a stock exchange definition of independence that does not by any stretch ensure that the directors are independent in fact. 

Second, the size of the fees for some directors no doubt provide an incentive to want to stay on the board.  As we have noted on this Blog, the only real way to remove a director is to have him or her not be renominated by the board.  Proxy contests where shareholders oust existing directors and withhold campaigns where they seek to deny a director a majority of the votes cast rarely occur and when they do, usually fail.  As a result, directors wanting to maintain their position have an incentive to side with management rather than shareholders.  While their fiduciary obligation runs to shareholders, state (read Delaware) law has largely eliminated these obligations, making it easy as a legal matter for directors to take a pro-management stance.  The results of this can be seen most clearly from the rise in CEO compensation. 

Without state law exercising any real restraint and with the exchanges turning a blind eye to the relationship between compensation and independence, the solution looks likely to come from other sources.  The Democratic contenders for president have become proponents of say on pay, suggesting a growing likelihood of increased federal involvement and, frankly, an increased role in the corporate governance process for the SEC.  In this regard, federal involvement must be seen as arising entirely out of the failure of the traditional regulators of corporate governance to adequately ensure that boards act in the best interests of shareholders. 

Finally, the data in these posts demonstrate once again the need for access.  Only when shareholders have access to the company's proxy statement for their nominees and incumbents confront the possibility of losing an election will their attention be more likely to turn to the interests of shareholders. 

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company's 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Occidental Petroleum (OXY-NYSE) 2008 proxy statement.

Director Compensation . Occidental Petroleum board met six times last year. Although six directors received more than $100,000 in director’s fees paid in cash, the non-employee directors as a group averaged $392,514 in total compensation for their services. As can be seen in the table, much of the directors’ compensation came in the form of stock awards and “other compensation,” which are considered director’s fees for purposes of complying with exchange rules.

Director Tenure . Mr. Syriani, the lead director, has a tenure of twenty four years, so there is concern as to whether he remains independent. Additionally, Mr. Syriani chaired the key Audit Committee, despite him not being an Audit Financial Expert. Three Directors have 23 to 27 years tenure each, and there are concerns of independence and succession.

CEO Compensation . The compensation paid to the CEO, Ray R. Irani, was $77,628,745 last year; a relatively small portion of which came in the form of cash ($1,300,000). $1,891,414 of Mr. Irani’s compensation was "other compensation." Roughly half of his compensation was tied to stock awards, and while most of the remaining compensation was in the form of options awards.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company’s 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges have each adopted their own standards for director independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Johnson & Johnson’s (JNJ-NYSE) 2008 proxy statement.

Director Compensation . Five directors received more than $100,000 in director’s fees paid in cash, and the non-employee directors as a group averaged $194,304 in total compensation for their services. As can be seen in the table, much of the directors’ compensation came in the form of stock awards, which are considered director’s fees for purposes of complying with exchange rules.

Director Tenure . On average, the non-employee directors have served on the board for 6.5 years. Arnold G. Lango has the longest tenure at seventeen years. Eight of the directors also sit on other boards. One director alone sits on the boards at American Express, Exxon Mobil, and Marriot International.

CEO Compensation . The CEO, William C. Weldon, received $31,916,566 in total compensation last year, a relatively small portion of which came in the form of cash ($1,725,000). Over $3,000,000 of his compensation came from "other compensation," which mostly included dividends equivalents earned as part of a non-equity compensation plan. Almost one third ($9,188,120) of his compensation was tied to non-equity performance incentives and another third ($9,8954,532) was in the form of stock and options awards, the value of which was dependent upon company performance. Change in pension value and other deferred compensation comprised the remaining $7,888,757 of Mr. Weldon’s pay.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company’s 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges have each adopted their own standards for director independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from State Street's (STT- NYSE) 2008 proxy statement.

Director Compensation. The board met thirteen times during 2007. The average attendance was 75%. Three directors received more than $100,000 in director’s fees paid in cash, and the non-employee directors as a group averaged $228,575 in total compensation for their services. As can be seen in the table, much of the directors’ compensation came in the form of stock awards, which are considered director’s fees for purposes of complying with exchange rules. Providing such a large portion of director’s fees in stock allows State Street to pay its directors handsomely while saving cash and complying with the exchange rules at the same time.

Director Tenure. On average, the non-employee directors have served on the board for over 9.5 years. Robert E. Weissman, the lead independent director, has an nineteen year tenure. Several of the directors also sit on other boards. One director alone sits on the boards at Stone Panels, Nanoscale Components, and Worcester Municipal Research Bureau.

CEO Compensation. One final point of interest is the compensation paid to the CEO, Ronald E. Logue. Mr. Logue recieved $28,344,955 last year, a relatively small portion of which came in the form of direct salary ($1,000,000). The majority of his compensation was stock and options awards worth $16,072,913 and a bonus of $3,750,000. Additionally, Mr. Logue benefitted from the increase in pension value and nonqualified deferred compensation earnings of $7,414,697, and "other compensation" of $107,345.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company’s 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges have each adopted their own standards for director independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Disney's (DIS-NYSE) 2008 proxy statement.

Director Compensation. The board met seven times during fiscal 2007. Average attendance was approximately 93%. Although no directors received more than $100,000 in director’s fees paid in cash, the non-employee directors as a group averaged $221,504 in total compensation for their services. As can be seen in the table, much of the directors’ compensation came in the form of stock awards and options grants, which are considered director’s fees for purposes of complying with exchange rules. Providing such a large portion of director’s fees in stock and options allows Disney to pay its directors handsomely while saving cash and complying with the exchange rules.

Director Tenure . On average, the non-employee directors have served on the board for just 4.5 years. Many of the directors also sit on other boards. One director alone sits on the boards at Nike, Inc., Washington Mutual, and Conservation International.

CEO Compensation. One final point of interest is the compensation paid to the CEO, Robert A. Iger. He was paid $27,699,201 last year, a relatively small portion of which came in the form of direct salary ($2,000,000). The majority of his compensation was a cash bonus of $13,670,686, with combined stock and options awards of $10,174,840. Additionally, Mr. Iger benefitted from the increase in pension value and nonqualified deferred compensation earnings of $1,108,498 and "other compensation" of $739,852. This included personal air travel, security, and "other," which can include vehicle benefits, health club membership, an annual physical exam and financial consulting.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company's 2008 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have adopted their own standards for independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Baxter’s (BAX-NYSE) 2008 proxy statement.

Director compensation – Fees earned in cash for directors averaged $81,000, with one director receiving over $100,000. Stock and option awards, which are considered director’s fees for purposes of exchange rules, were a uniform $121,564.

Director tenure – Most directors have been on this board since 2003, with one director’s tenure going back to 1997 and one to 2000. Two directors are also on three other boards; six directors are on one or more boards; two directors are executives with other corporations and do not serve on additional boards other than that of their employer. The board met nine times in 2007, with the usual additional committee meetings, having 84% overall attendance.

CEO compensation – Robert Parkinson’s 2007 compensation was $17.6 million, of which $1,296,153 was salary and another $3 million in cash per the company’s incentive plan. The stock and option bonus was $10,842,624, with much of the remaining compensation ($2,461,223) coming from the change in value of previous stock awarded but not issued. As with many corporations, Baxter compares its executive compensation plan to other health care firms, and has a policy of maintaining its salary payments within 50% of all firms, and incentive payments within 60%. Since the company’s $1.7 billion net income was up 22% over the previous year, and its share price rose 27% (against an industry average of 7%), executive bonuses were fully paid.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company's 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Goodyear Tire & Rubber Co.’s (GT-NYSE) 2008 proxy statement.

Director Compensation. During 2007, Goodyear’s board held eight meetings. Each director attended at least seventy-five percent of all Board meetings. The non-employee directors as a group averaged $321,965 in total compensation for their services. This figure excludes Mr. Firestone who joined the board in December 2007. As seen in the third column of the table, a large percentage of the directors’ compensation came from stock awards, which are considered director’s fees for purposes of compliance with exchange rules.

Director Tenure. The majority of non-employee directors began serving after 2004, with two directors joining in 2007. The average director tenure is about five years. The longest serving director to date is Steven A. Minter, who started in February 1985. Over half of the directors sit on boards with other companies. For example, James C. Boland serves as director of Invacare Corporation and The Sherwin-Williams Company.

CEO Compensation. Robert J. Keegan, CEO and Chairman, earned $20,451,008 in total compensation, with $1,176,667 from salary. Over $12 million of Mr. Keegan’s total compensation came from performance incentives and bonus based on company performance.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation. We are including companies from 2007’s Fortune 100 and using information disclosed in each company's 2008 proxy statements. In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence. Meeting stock exchange requirements is mandatory for most listed companies.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards. Directors are not independent if they received over $100,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii). This is a looser restriction than the equivalent NASDAQ Rule, 4200(a)(15), which includes all compensation. Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Merrill Lynch’s (MER-NYSE) 2008 proxy statement: