Koehler on the Foreign Corrupt Practices Act

Mike Koehler (Butler University College of Business) has posted Revisiting a Foreign Corrupt Practices Act Compliance Defense on SSRN with the following abstract:

This article asserts that the current FCPA enforcement environment does not adequately recognize a company’s good faith commitment to FCPA compliance and does not provide good corporate citizens a sufficient return on their compliance investments. This article argues in favor of an FCPA compliance defense meaning that a company’s pre-existing compliance policies and procedures, and its good faith efforts to comply with the FCPA, should be relevant as a matter of law when a non-executive employee or agent acts contrary to those policies and procedures and in violation of the FCPA. This article further argues that a compliance defense is best incorporated into the FCPA as an element of a bribery offense, the absence of which the DOJ must establish to charge a substantive bribery offense. 

Mike currently edits the FCPA Blog, and his expertise on the FCPA is extensive.  For FCPA fans or foes, the article is worth the read.

Call-for-Papers: National Business Law Scholars Conference

The National Business Law Scholars Conference (NBLSC), formerly known as the Midwest Corporate Legal Scholars Conference, will be held on Wednesday, June 27th and Thursday, June 28th at University of Cincinnati College of Law in Cincinnati, Ohio.  This is the third annual meeting of the NBLSC, which has been renamed this year to reflect its national scope and the widely varied interests of its participants.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  We will also attempt to assign a commentator for each paper presented.  Junior scholars are especially encouraged participate, and we will hold a special “how-to” panel for prospective business law scholars discussing the job market and transitioning into the legal academy. 

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by April 15, 2012.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in early June.

Conference Organizers:

Barbara Black
Eric C. Chaffee
Steven M. Davidoff

On Scholarship

Thanks to Jay and his colleagues for inviting me to join the conversation.  I've read this blog for a long time, and I am excited to be a part of it.  For my contribution, I'm going to spend a lot of my time talking about and promoting scholarship. 

This morning, I watched an interview of David Segal, the reporter from The New York Times, who has been very critical of legal education.  Although I agreed with some of his points, I was troubled by the fact that he faulted law schools for using tuition dollars to support research and scholarship.  I do admit that the model for legal education should and must evolve and that funding for research and scholarship has to be considered in the process.  With that said, however, I think it's important to remember that research and scholarship improves teaching, the practice of law, and the human experience. 

If high quality writing is meant to be free, I look forward to my free copy of The New York Times tomorrow.  I also hope that Mr. Segal will consider donating his salary to this site.

The New York Times

The ABA and the Readers’ Choice: Voters’ Top Blawg 100 Picks

The ABA has published The Readers’ Choice: Voters’ Top Blawg 100 Picks.  The list includes the most popular for each blog categories.  The list includes The Race to the Bottom as the Readers' Choice in the  Business Law category.    

Sterling v. Nestlé: Defendant Lacked Injury and Therefore, Lacked Standing

In Sterling Merch., Inc. v. Nestlé, S.A., 656 F.3d 112 (1st Cir. 2011), the First Circuit Court of Appeals upheld summary judgment in favor of Nestlé, S.A. (“Nestlé”) for lack of standing. Sterling Merchandising Inc. (“Sterling”) sued Nestlé and its subsidiaries for violating the Clayton Act, 15 U.S.C. §§ 12-27, the Sherman Act, 15 U.S.C. §§ 1-7, antitrust laws, and various Puerto Rican laws.  On June 23, 2010, the United States District Court of Puerto Rico granted summary judgment in favor of Nestlé. Sterling subsequently filed this appeal.

In the complaint, Sterling alleged that Nestlé engaged in anti-competitive conduct from June 2003 through October 2009. Sterling contested the Nestlé merger with Payco Foods Corporation (“Payco”) in 2003 that made Nestlé the largest ice cream distributor in Puerto Rico and making Sterling the second largest distributor.  The Puerto Rico Office of Monopolistic Affairs approved the merger upon stipulated conditions. Sterling did not allege breach of any of those conditions.  Instead, Sterling presented a two-part injury and damages theory.  First, Sterling alleged that but-for Nestlé’s exclusivity agreements with a multitude of grocery stores, Sterling missed out on an additional $21-29 million in gross sales.  Second, Sterling alleged that Nestlé’s merger limited Sterling’s market share and caused a decrease in efficient operations.

The district court found that the Puerto Rico ice cream distribution market expanded during the relevant time period, the merger did not restrict output, consumer prices did not increase, and on certain products consumer prices actually decreased. The record also showed that before the merger, Payco and Nestlé had a combined 85% market share, and by 2007, the combined market share fell to 70%.  Sterling’s market share on the other hand, increased from 14.7% in 2003 to 22% in 2008.  Sterling’s sales, which declined $1.06 million from 2001 to 2003, increased after the merger at an average of 11% a year.  

To determine whether Sterling had standing, the court considered “(1) the causal connection between the alleged antitrust violation and harm to the plaintiff; (2) an improper motive; (3) the nature of the plaintiff’s alleged injury and whether the injury was of a type that Congress sought to redress with the antitrust laws (‘antitrust injury’); (4) the directness with which the alleged market restraint caused the asserted injury; (5) the speculative nature of the damages; and (6) the risk of duplicative recovery or complex apportionment of damages.”

The First Circuit applied the Supreme Court’s six-factor standing test, and emphasized causation of the injury.  The court reinforced that, “absence of ‘antitrust injury’ will generally defeat standing” and measured injury by a decrease in output and an increase in prices in the relevant market.  Sterling’s expert failed to show evidence that output within the Puerto Rico ice cream market declined or that consumer prices increased after the merger.  In addition to the findings that the Puerto Rico ice cream market statistics did not support Sterling’s argument, Sterling could not attribute any injury directly caused by Nestlé.  Sterling argued that a “plaintiff’s post-violation successes do not necessarily preclude compensation.” However, the First Circuit disagreed with Sterling’s alternatives to the classic evidence of antitrust injuries.

Sterling also failed to show the requisite injury. Under §2 of the Sherman Act, Sterling must show that Nestlé’s monopoly power prevented competitors from entering the market.  However, new competitors entered the Puerto Rico ice cream market after the merger.  Without establishing any injury to itself or to the competiveness of the market, Sterling’s claims lacked standing.

The primary materials for this case may be found on the DU Corporate Governance website.

Dennis v. Hart: Say on Pay and the Appropriate Forum for Resolving Fiduciary Duty Issues

In the aftermath of the last proxy season, shareholders at approximately 38 companies voted down the executive compensation package submitted to them, with eight of the companies in the S&P 500.  A flurry of law suits (at least eight) followed in which the say on pay vote figured prominently.  For the most part, the cases alleged a breach of fiduciary duty by the board in connection with compensation.  Primary materials in some of these cases has been posted on the DU Corporate Governance web site. 

Of the eight cases, one has been dismissed and one has survived a motion to dismiss (and challenge to demand excusal).  The latest decision occurred in Dennis v. Hart, 2012 US Dist. Lexis 1893 (SD CA Jan. 6, 2012).  The derivative action was originally filed by shareholders of  PICO Holdings in state court but was eventually removed to federal.  Plaintiffs sought to trigger federal jurisdiction by seeking declaratory relief and asserting that, because the case involved allegations arising from the negative say on pay vote, the Complaint "pose[d] substantial federal questions" that "necessarily arise under federal law." 

Shareholders, among other things, argued that the negative say on pay was "evidence that the 2010 pay hikes were irrational and unreasonable under the circumstances, and were not primarily motivated by a desire to protect PICO's interest."  As a result, they asserted that the "presumption of business judgment has been rebutted, and the burden of proof ... now rests with the PICO Board."

The court, however, dismissed the claim for declaratory relief.  The opinion noted the language in the statute providing that say on pay "may not be construed ... to create or imply any change to fiduciary duties" and does not "create or imply any additional fiduciary duties." 15 USC 78n-1(c).  As a result, the "Dodd-Frank Wall Street Reform Act did not change state law regarding fiduciary duty or the business judgment presumption." 

The court did not, however, resolve whether "say on pay" could rebut the presumption of the business judgment rule.  Instead, the court noted that the matter was a matter of state law.  "To the extent that Plaintiff seeks to use the negative say on pay vote as evidence that the business judgment presumption was rebutted, resolution of the issue depends on California state law."  As a result, the case was remanded to the California Superior Court "where it was originally filed". 

The court focused on one of the interesting anomalies of the say on pay provision.  The statute does in fact include rules of construction providing that the advisory vote shall not "create or imply any change to the fiduciary duties" of the board of directors.  See Section 951 of Dodd Frank.  To the extent this language was intended to prevent say on pay from having any impact on fiduciary duties, it was ineffective.  As we have noted on this Blog:

• Fiduciary duties are matters of state law.  Whatever limits Congress intended to impose on federal regulators, the provision was not designed to limit states and their right to develop fiduciary obligations.  Nor did the provision prohibit courts from taking notice of the results of an advisory vote when considering alleged fiduciary violations.  

This case is an example.  The federal court did not view the case as raising a federal question but did not hold that the issue raised by shareholders was somehow foreclosed by the say on pay provision.  Instead, it was a matter for a state court, relying on state law, to resolve.

The SEC, the Business Roundtable and an Appropriate Alliance

The Business Roundtable sought permission to file an amicus brief on the side of the SEC in the Citigroup case.  We have posted the brief on the DU Corporate Governance web site. 

At first glance, this may seem to be the case of strange bedfellows.  After all, it was the Business Roundtable that challenged the SEC’s shareholder access rule and essentially helped generate an opinion from the DC Circuit that will bedevil rulemaking endeavors for years to come. For an article criticizing that decision, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. 

But in fact the connection is a natural one.  To see the two as strange bedfellows is to see the role of the SEC as anti-business.  It is not.  The Commission’s goal of ensuring efficient capital markets benefits all participants.  It may be the case that in ensuring an appropriate regulatory regime the Commission sometimes tilts in favor of investors and shareholders.  But this is in large part a consequence of a shareholder unfriendly regulatory environment in Delaware.  It is a restoration of a necessary balance. 

Still, it seems as if the Business Roundtable and the SEC often find themselves on opposite sides.  Shareholder access is an obvious example.  What explains this?  It is not that one has a pro and the other an anti -business approach to regulation.  The difference is horizon. 

In the shareholder access case, those challenging access essentially sought to preserve the status quo.  The status quo is that directors are nominated by the board (often with considerable influence from the CEO, something chronicled in Essay: Neutralizing the Board of Directors and the Impact on Diversity) and elected by shareholders in a Soviet style contest (this is true even with majority vote provisions). 

As a result, directors often do not represent the interests of shareholders.  Under this electoral approach, there have been repeated breakdowns at the board level that have spurred calls for additional regulation, whether the failure to monitor for fraud that contributed to the pressure for Sarbanes Oxley or the failure to monitor for risk that contributed to the adoption of Dodd Frank. 

The status quo leaves in place a system that has resulted in a cycle of board failure followed by federal intervention and increased regulation.   Certainly this can be seen most clearly in the area of executive compensation, with the SEC now regulating compensation committees, overseeing say on pay, policing clawbacks, and banning practices that induce excessive risk taking.

Access alters the status quo but it also likely alters the cycle of board failure followed by increased federal regulation.  Access, under the model put forward by the SEC, limited the authority to long term investors and only permitted the election of a minority of directors on the board.  The presence of these directors in the boardroom would likely result in increased oversight of critical areas such as risk management and executive compensation.  Access challenges would also provide shareholders with an outlet for their frustration with management and reduce the need to seek a regulatory solution. 

Finally, the presence of shareholder nominated directors would probably stiffen the spine of the remaining directors and, at least in some cases, increasing the degree of oversight.  Under the current configuration, no one on the board wants a reputation as a trouble maker or someone who can be counted on to oppose the CEO.  This no doubt stifles genuine disagreement.  But if the disagreement is initiated by shareholder nominated directors, the others have more room to participate.

In other words, access holds the promise that by changing the status quo the inevitable dynamic of board failure followed by increased regulation will be allayed.  It is a long term benefit but one that trumps the short term consequences.  For now, however, the status quo remains in place and, as a result, so does the cycle of breakdown and regulation. 

Shareholder Access, Private Ordering and the Prescient Views of a Delaware Vice Chancellor

There is no question that one of the most unique and independent voices on the Delaware Chancery Court has come from Vice Chancellor Laster.  As a longstanding practitioner in Delaware, he knows the players and the plays.  His opinions often reflect a common sense understanding of the actual dynamics of shareholder litigation. 

This could be seen, for example, in La Mun. Police Emples. Ret. Syst. v. Morgan Stanley, 2011 Del. Ch. LEXIS 42 (Del. Ch. March 4, 2011).   This was an inspection case where shareholders sought documents that would look into the reasons why the special litigation committee of the board declined to bring a derivative suit in a "demand refusal" context. 

In the opinion, the context mattered.  He noted that when directors are asked to consider demand in a derivative context, it "typically happens" that they "refuse" to bring the action.  Moreover, plaintiffs are stuck with an almost impossible standard of review.  "[A] decision to refuse a litigation demand is reviewed under the business judgment rule, which forces a plaintiff to overcome the rule's powerful presumptions before a court will examine the merits of the directors' decision."  As a result, they are entitled to reasonable inspection rights.  "The highly deferential standard for reviewing a demand-refusal decision makes it critical that an accountability mechanism exist in the form of a limited right to information under Section 220."

This approach was also apparent in the Vice Chancellor's common sense remarks about the current debate on shareholder access.  The SEC adopted a shareholder access rule, only to see it struck down by the DC Circuit.  Whatever one thinks of shareholder access, the approach taken by the DC Circuit was analytically weak.  For an analysis of the decision, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. 

The decision eliminated mandatory access but purportedly left in place a system of "private ordering."  Shareholders are allowed to submit access proposals under Rule 14a-8.  So far this season, approximately 16 have been submitted. 

Yet the likely outcome of this "private ordering" approach is that management will resist and oppose access proposals, largely ensuring that they are not adopted.  This is because shareholders have little actual authority to "bargain" with management over corporate governance reforms.  See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom. 

In other words, the outcome of "private ordering" in the shareholder access area will probably result in a categorical approach that does not permit access.  Access, however, is inevitable.  To the extent that the "private ordering" dynamics does not allow it to happen, shareholders will be forced to lobby regulators (the Commission and Congress) for reform. 

Vice Chancellor Laster recognizes these dynamics.  According to BNA, the Vice Chancellor, speaking on a panel at the AALS conference in Washington earlier this morning, "urged corporate America to take advantage of the Securities and Exchange Commission's new shareholder proposal approach to proxy access, or prepare for the return of a federal mandatory access rule." As he further stated, according to the BNA article:

• “You asked for it, you got it, you better use it,” Laster continued. If not, institutional investors will lobby Congress for the return of a federal rule, he said. “In a Democratic administration, you're going to get something more detailed that won't have the same type of outcome” that Rule 14a-11 faced.

It is a common sense and correct view.  To the extent companies implement access provisions in a private ordering context, it will take pressure off the need for a Commission or congressional alternative, one that will likely be categorical and mandatory.  Yet this advice notwithstanding, the pattern so far has been for management to resist access rights.  The result has been greater SEC and congressional involvement in the area (witness the provision of Dodd-Frank that clarified the SEC's authority in the area). 

Perhaps this time matters will be different.  With the advice coming from a Vice Chancellor of Delaware, those in the boardroom may be more likely to listen.   

For more insight into the Vice Chancelor's perspective on Delaware law, there is a nice eight minute interview worth watching.

SEC v. Shields: Colorado District Court Denies SEC’s Motion for Injunctive Relief

In SEC v. Shields, No. 11cv02121REB, 2011 WL 3799061 (D. Colo. Aug. 26, 2011), the District Court for the District of Colorado denied the Securities and Exchange Commission’s (“SEC”) motion for temporary restraining order and other emergency relief.

According to the SEC’s Complaint, Jeffory Shields (“Shields”) formed Geodynamics in September of 2009. Shields and Geodynamics created several joint ventures with Geodynamics as the “Managing Venturer” of each joint venture. The SEC alleged that the interests in the joint ventures were securities and that the securities were unregistered, in violation of federal securities laws.  According to the SEC, Shields and Geodynamics defrauded investors by promising each investor an annual return of 548%. The SEC also alleged that Shields spent over $2 million for personal expenses including a personal aircraft, luxury vehicles, and other items.

The SEC filed its Motion for a Temporary Restraining Order and Other Emergency Relief on August 15, 2011.  To obtain injunctive relief, the SEC was required to show that the Defendants violated a securities law “and that there is a likelihood of future violations.” The SEC was not required to show irreparable injury or the inadequacy of other remedies.   

The court relied on a three-part test to determine if an investment is an “investment contract,” and therefore, a security. For an investment to be an investment contract, it must be: “(1) an investment, (2) in a common enterprise, (3) with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”  The court focused on the third element. During a hearing on the issue, the Defendant presented evidence from Glenn Carroll, one of the joint venture’s partners. Mr. Carroll essentially testified that he did not rely on the efforts of the promoters.

The court considered both the credibility of the witnesses, the law presented by the parties, the parties’ briefs, documentary evidence, including affidavits, declarations, and exhibits, and live testimony in making its decision. The court considered several factors to evaluate witness credibility, including “the witness's means of knowledge, ability to observe, and strength of memory; the manner in which the witness might be affected by the outcome of the litigation; the relationship the witness had to either side in the case; and the extent to which the witness was either supported or contradicted by other witnesses or evidence presented.”

Ultimately, the court found Mr. Carroll to “be a particularly cogent, credible, and persuasive witness. . . .” Focusing on the third element of the “investment contract” test, the court held there was not enough evidence to establish that the Defendants’ investment was an “investment contract.” Therefore, the SEC failed to make a prima facie showing that the Defendants violated a federal securities law.  

Although the court denied the SEC’s motion for injunctive relief, it restrained and enjoined the Defendants from “destroying, mutilating, concealing, altering, or disposing of any document referring or relating in any manner to any transactions described in the Compliant.”  The Defendants are also prohibited from destroying any evidence of communications between themselves.  

The primary materials for this case may be found on the DU Corporate Governance website. 

Citizens United is about speech AND corporations

Noting the pending two-year anniversary of Citizens United, Kent Greenfield recently published an opinion piece in The Washington Post (HT: Gordon Smith) bemoaning the fact that, as he sees it, “the most prevalent critique of the decision — Corporations are not people! — is simplistic and dangerous.”  He notes that even if you dislike the opinion, the costs of stripping corporations of all their rights as constitutional “persons” would be too high.  Rather, he suggests focusing on alternative ways to lessen the impact of the decision:

The key flaw of American corporations is that they have become a vehicle for the voices and interests of an exceedingly small managerial and financial elite — the notorious 1 percent. That corporations speak is less a concern than whom they speak for and what they say. The cure for this is more democracy within businesses — more participation in corporate governance by workers, communities, shareholders and consumers. If corporations were themselves more democratic, their participation in the nation’s political debate would be of little concern and might even be beneficial.

I don’t feel any great need to contest either of these claims.  I do, however, want to comment on a couple of other statements Kent makes in the piece.  Kent notes that the reasoning behind Citizens United was that “the political speech of corporations was as important to the marketplace of ideas as the voices of human citizens.”  While I may seem to be nitpicking here, I believe it is important to add: “and there was nothing about corporations qua corporations to alter this conclusion.”  The reason I believe it is important to add this element is that, among other things, it calls into question Kent’s later proposition that:

The question in any given case is whether protecting the association, group or, yes, corporation serves to protect the rights of actual people. Read fairly, Citizens United merely says that banning certain kinds of corporate expenditures infringes the constitutional interests of human beings. The court may have gotten the answer wrong, but it asked the right question.

I would argue that the Court in fact failed to ask at least one of the right questions, which is: Given that there is a great deal of debate about what corporations are (or, perhaps more precisely, how best to conceptualize corporations), which theory of the corporation are you adopting in order to be so confident that there is nothing about corporations that justifies subjecting them to the established First Amendment exception for status-based restrictions on speech?  (In the interest of full disclosure, I have discussed this issue with Kent previously and I think I can fairly say that he was willing to grant that there was at least some merit to this point.)  I have argued previously (here and here) that there was essentially a silent corporate theory debate raging in Citizens United, and I am currently working on a project reviewing the key precedents leading up to Citizens United in order to see whether a similar debate can be found in those opinions.  Given that it is likely the Court will continue to be confronted with cases concerning the constitutional rights of corporations, I believe the justices will eventually have to affirmatively adopt a particular theory of the corporation to justify their conclusions or else begin to lose credibility for failing to do so.  Stay tuned.

Director’s Compensation Project: Oracle

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2011's Fortune 500 and using information found in their 2011 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting. 

NYSE Rule 303A.01, requires that each listed company’s board of directors be comprised of a majority of independent directors. A director is considered independent under NYSE Rule303A.02(b)(ii) if the director received less than $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years. The NYSE “direct compensation” standard is less restrictive than the corresponding NASDAQ Rule, 5605(a)(2)(B), which includes "any compensation."  NYSE Rule 303A.06 requires a listed company’s audit committee members to comport with the requirements of Rule 10A-3 (C.F.R. §240.10A-3).

Independent directors are compensated for their service on the board.  The amount of compensation can be seen from examining the director compensation table from the Oracle (NYSE:ORCL) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Jeffrey S. Berg	143,959	0	413,366	0	557,325
H. Raymond Bingham	222,500	0	688,943	0	911,443
Michael J. Boskin	186,500	0	688,943	0	875,443
Bruce R. Chizen	179,193	0	654,495	0	833,688
George H. Conrades	105,764	0	413,366	0	519,130
Hector Garcia-Molina	137,223	0	413,366	0	550,589
Donald L. Lucas	196,500	0	826,731	0	1,023,231
Naomi O. Seligman	120,500	0	413,366	0	533,866

Director Compensation.  During fiscal year 2011, Oracle held 6 Board of Directors meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  Each non-employee director was paid an annual retainer of $52,500 plus additional fees for meeting attendance, committee membership, and committee chair positions.  Each non-employee director was also granted a base of stock options for 60,000 shares plus additional stock options for committee chair positions.  Directors who were also executives of Oracle were not paid separately for performance of their duties as director.

Director Tenure.  Lawrence J. Ellison is a director and Chief Executive Officer for Oracle, he started at these positions in June 1977.  Mark V. Hurd is the newest member of the board, elected in September 2010.  Several directors also sit on other boards.  Mr. Bingham sits on the boards of General Atlantic LLC, Flextronics International, Spansion Inc., Dice Holdings, Inc., STMicroelectronics N.V., and Fusion-io, Inc.  Mr. Conrades sits on the boards of Harley-Davidson, Inc. and Ironwood Pharmaceuticals, Inc. 

CEO Compensation.  Mark V. Hurd, who currently serves as a director and president of Oracle earned $78,362,540 in total compensation in fiscal year 2011.  Mr. Hurd’s compensation included $698,106 in base salary, $68,349,000 in option grants, and $7,299,368 in incentive-based pay.  Mr. Ellison, the second highest paid officer, earned $ 77,556,015 in total compensation in fiscal year 2011.  Mr. Ellison’s compensation included $1 in base salary, $62,668,200 in option grants, $13,341,994 in incentive based pay, and $1,531,233 in security related expenses for Mr. Ellison’s residence.

Director’s Compensation Project: Symantec

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2011's Fortune 500 and using information found in their 2011 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

NYSE Rule 303A.01, requires that each listed company’s board of directors be comprised of a majority of independent directors. A director is considered independent under NYSE Rule 303A.02(b)(ii) if the director received less than $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years. The NYSE “direct compensation” standard is less restrictive than the corresponding NASDAQ Rule, 5605(a)(2)(B), which includes "any compensation."  NYSE Rule 303A.06 requires a listed company’s audit committee members to comport with the requirements of Rule 10A-3 (C.F.R. §240.10A-3). 

Independent directors are compensated for their service on the board.  The amount of compensation can be seen from examining the director compensation table from the Symantec (NYSE:SYMC) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Stephen M. Bennett	15,009	249,991	0	0	265,000
Michael A. Brown	95,001	199,999	0	0	295,000
William T. Coleman**	70,001	199,999	0	0	270,000
Frank E. Dangeard	85,001	199,999	0	0	285,000
Geraldine B. Laybourne	15,009	249,991	0	0	265,000
David L. Mahoney	85,001	199,999	0	0	285,000
Robert S. Miller	115,001	199,999	0	0	315,000
Daniel H. Schulman	95,001	199,999	0	0	295,000
John W. Thompson(1)*	500,000	0	0	0	500,000
V. Paul Unruh	110,001	199,999	0	0	310,000

(1) Represents Mr. Thompson’s compensation as an employee of Symantec.  Mr. Thompson receives no additional compensation as Chairman and a director of Symantec.

*Will not stand for re-election.

**Not nominated for re-election 

Director Compensation.  During fiscal year 2011, Symantec held 11 Board of Directors meetings and 19 Board Committee meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  Pursuant to the 2004 Symantec Equity Incentive Plan, each director received a grant of fully vested restricted stock having a pre-determined value of $200,000.

Director Tenure.  In 2011, Mr. Miller, who began his position as a member of the Board of Directors in 1994, held the longest tenure.  Mr. Bennett, the board member with the shortest tenure, began his position in February 2010.  Several directors also sit on other boards.  Mr. Bennett sits on the board of Qualcomm and a private company.  Mr. Dangeard is currently the Chairman of Atari and sits on the boards of Moser Baer, Sonaecom SGPA, and Telenor.  Ms. Laybourne sits on the boards of Electronic Arts, Inc. and J.C. Penney Company.  Mr. Miller is currently the Chairman of both American International Group (AIG) and MidOcean Partners, and sits on the boards of two private companies.  Mr. Unruh sits on the boards of Move, Inc., Heidrick & Struggles International, Inc., and two private companies. 

CEO Compensation.  Enrique Salem, Symantec’s Chief Executive Officer since April 2009, earned $8,509,683 in total compensation, including $3,444,458 in stock based grants, for fiscal year 2011.  James A. Beer, Executive Vice President and Chief Financial Officer since February 2006, earned $2,740,142 in total compensation, including $903,460 in stock based grants, for fiscal year 2011.

Director’s Compensation Project: Proctor and Gamble

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2011's Fortune 500 and using information found in their 2011 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

NYSE Rule 303A.01, requires that each listed company’s board of directors be comprised of a majority of independent directors. A director is considered independent under NYSE Rule303A.02(b)(ii) if the director received less than $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years. The NYSE “direct compensation” standard is less restrictive than the corresponding NASDAQ Rule, 5605(a)(2)(B), which includes "any compensation."  NYSE Rule 303A.06 requires a listed company’s audit committee members to comport with the requirements of Rule 10A-3 (C.F.R. §240.10A-3). 

Independent directors are compensated for their service on the board.  The amount of compensation can be seen from examining the director compensation table from the Proctor & Gamble (NYSE:PG) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Angela F. Braly	106,000	160,000	0	15,262	281,262
Kenneth I. Chenault	106,000	160,000	0	109	266,109
Scott D. Cook	117,750	160,000	0	117	277,867
Susan Desmond-Hellmann	58,333	0	0	11,898	70,231
Rajat K. Gupta*	72,667	0	0	0	72,667
W. James McNerney, Jr.	136,500	160,000	0	123	296,623
Johnathan A. Rodgers	102,000	160,000	0	12,566	274,566
Margaret C. Whitman	41,667	0	0	107	41,774
Mary Agnes Wilderotter	104,000	160,000	0	16,679	280,679
Patricia A. Woertz	124,750	160,000	0	107	284,857
Ernesto Zedillo	117,750	160,000	0	11,825	289,575

*Resigned effective March 1, 2011

Director Compensation.  During fiscal year 2011, Proctor & Gamble held 8 Board of Directors meetings and 21 Board Committee meetings.  Each director attended at least 86% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  Each Director was paid an annual retainer of $100,000 and was given an annual grant of $160,000 in restricted stock units.  Directors who did not serve on the board for all of fiscal year 2011 were paid a prorated portion of their annual retainer and forfeited their annual stock grant.

Director Tenure.  Mr. Cook, on the Board of Directors since 2000, holds the longest tenure on the board.  Ms. Desmond-Hellmann and Ms. Whitman are the newest members of the board, elected in December 2010 and February 2010, respectively.  Ms. Whitman is the former President and Chief Executive Officer of eBay Inc. and lost her bid in 2010 for the Governor of California.  Several directors also sit on other boards.  Mr. Chenault is Chairman and Chief Executive Officer of the American Express Company and sits on the board of IBM.  Mr. Cook sits on the boards of Intuit Inc. and eBay Inc.  Mr. McNerney is Chairman of the Board, President, and Chief Executive Officer of the Boeing Company and sits on the board of IBM.  Mrs. Wilderotter is Chairman of the Board, President, and Chief Executive Officer of Frontier Communications Corporation and sits on the board of Xerox.  Ms. Woertz is Chairman, Chief Executive Officer, and President of Archer Daniels Midland Company.  Mr. Zedillo served as President of Mexico from 1994 to 2000, and sits on the board of Alcoa Inc., Citigroup, Inc., and Grupo PRISA. 

CEO Compensation.  Mr. MacDonald, who currently serves as Proctor and Gambles’ Chairman of the Board, President, and Chief Executive Officer, earned $16,188,037 in total compensation in fiscal year 2011.  Mr. MacDonald’s compensation included $1,600,000 in base salary, $2,632,000 in bonuses, $11,771,613 in stock based grants, $51,747 in retirement plan contributions, and $97,670 in personal use of corporate aircraft.  Werner Geissler, Proctor and Gambles’ Vice Chairman of Global Operations and the second highest paid officer, earned $6,304,942 in total compensation.  Jon R. Moeller, Proctor and Gambles’ Chief Financial Officer, earned $4,962,459, the lowest amount of any of the six named executive officers.  All of Proctor and Gambles’ named executive officers received financial counseling including tax preparation, use of a company car, secure workplace parking, and home security and monitoring.

Professor Chaffee Joins The Race to the Bottom

We are pleased to announce that Eric Chaffee, Associate Professor of Law and chair of the Project for Law & Business Ethics at University of Dayton School of Law will be joining us at The Race to the Bottom.  He comes to us via the Business Law Prof Blog. 

He brings to the Blog expertise in business law (including the federal securities laws), criminal law and nonprofit organizations.  A graduate of the University of Pennsylvania Law School, Professor Chaffee practiced at Jones Day before joining the academy.  His teaching load includes, in addition to business organizations and securities regulation, courses on white collar crime, small business planning, ethics, and nonprofit organizations.

Professor Chaffee’s scholarship currently focuses on financial regulatory reform with an emphasis on international regulation and regulation of the Internet.  He also researches and writes about the application of moral psychology, neuroscience and behavioral economics to business ethics.  His SSRN page is here.

We are happy to have Professor Chaffee joining us at The Race to the Bottom.

Director’s Compensation Project: News Corp.

This post is part of an ongoing series that examines the way stock exchange independence rules influence director compensation.  We are including companies from 2011's Fortune 500 and using information found in their 2011 proxy statements.  In addition to state standards and the requirements of SOX, the stock exchanges each have their own standards for independence.  While substantially the same, there are some minor differences between NYSE and NASDAQ rules that are worth noting.  

NYSE Rule 303A.01, requires that each listed company’s board of directors be comprised of a majority of independent directors. A director is considered independent under NYSE Rule 303A.02(b)(ii) if the director received less than $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years. The NYSE “direct compensation” standard is less restrictive than the corresponding NASDAQ Rule, 5605(a)(2)(B), which includes "any compensation."  In addition, NYSE Rule 303A.06 requires a listed company’s audit committee members to comport with the requirements of Rule 10A-3 (C.F.R. §240.10A-3). 

Independent directors are compensated for their service on the board.  The amount of compensation can be seen from examining the director compensation table from the News Corporation (NYSE:NWS) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
José María Aznar	100,000	130,000	0	0	230,000
Natalie Bancroft	100,000	130,000	0	0	230,000
Peter L. Barnes	116,000	130,000	0	0	246,000
Kenneth E. Cowley*	111,000	130,000	0	0	241,000
Viet Dinh	138,000	130,000	0	0	268,000
Sir Roderick I. Eddington	154,000	130,000	0	0	284,000
Mark Hurd	32,376	37,917	0	0	70,293
Joel Klein	0	0	0	3,000,000	3,000,000
Andrew S.B. Knight	162,072	130,000	0	0	292,072
Lachlan K. Murdoch	100,000	130,000	0	274,000	504,000
Thomas J. Perkins*	138,000	130,000	0	0	268,000
Arthur M. Siskind	0	1,200,000	0	1,426,754	3,322,454
John L. Thornton	122,000	130,000	0	0	252,000

*Not nominated for re-election

According to the proxy statement, "the Board affirmatively determined that Sir Roderick Eddington, Ms. Bancroft and Messrs. Aznar, Barnes, Breyer, Dinh, Knight, and Thornton are independent of the Company and its management under the standards adopted by the Company and set forth in the NASDAQ listing rules." 

Director Compensation.  During fiscal year 2011, News Corporation held 6 Board of Directors meetings and 17 Board Committee meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  Each Director was paid an annual retainer of $100,000 and was given an annual grant of $130,000 in deferred stock units.  Directors who were executives of News Corporation were not paid separately for performance of their duties as director. 

Director Tenure.  K. Rupert Murdoch holds the longest tenure as a director, he was elected Chief Executive Officer in 1979 and Chairman of the Board in 1991.  Mr. Klein is the newest member of the board, elected in 2011.  Mr. Aznar served as the President of Spain from the 1996 to 2004.  Several directors also sit on other boards.  Mr Breyer is Chief Executive Officer of Breyer Capital and sits on the boards of Wal-Mart Stores, Inc., Dell Inc., Facebook, Brightcove, and Legendary Pictures. Mr. Thornton sits on the boards of Ford Motor Company, China Unicom (Hong Kong) Limited, and HSBC Group Holdings. 

CEO Compensation.  K. Rupert Murdoch, who currently serves as News Corporation’s Chairman of the Board and Chief Executive Officer, earned $ 33,292,753 in total compensation in fiscal year 2011.  Mr. Murdoch’s compensation included $8,100,000 in salary, $ 12,500,000 in bonuses, $8,527,321 in stock based grants, $287,070 in personal use of corporate aircraft, and $8,575 in retirement plan contributions.  Chase Carey, New Corporation’s Deputy Chairman, President, and Chief Operating Officer and the second highest paid officer, earned $30,150,485 in total compensation, including $15,243,303 in stock based grants.

U.S. v. Reyes: Defining Prosecutorial Misconduct

In United States v. Reyes, 2011 No. 10-10323 (9th Cir. Oct. 13, 2011), the Ninth Circuit Court of Appeals affirmed the defendant’s conviction for securities fraud, falsifying corporate books, and making false statements to auditors.

The defendant, Gregory Reyes, was the CEO of Brocade, a publically traded company that offered stock options to employees.  Mr. Reyes approved option grants to all employees, except for option grants for corporate officers.  In 2005, Brocade altered these policies and announced Mr. Reyes’ resignation.  These actions sparked an investigation by the SEC.  Ultimately the criminal authorities became involved and charged the defendant with having made false filings with the SEC under 15 U.S.C. §§ 78j(b) and 78ff, falsifying corporate records under 15 U.S.C. §§ 78m(b)(2)(A) and 78ff, and making false statements to auditors under 15 U.S.C. § 78ff.

After the first trial, the Ninth Circuit found prosecutorial misconduct and vacated the defendant’s conviction.  The court found the prosecution knowingly made false statements to the jury stating:

…the prosecution knew that several employees of Brocade’s Finance Department had given pre-trial statements to the Federal Bureau of Investigation acknowledging that the Finance Department knew about Reyes’s and the Company’s stock option backdating practices, but that during closing argument, the prosecution knowingly and falsely claimed that the Finance Department did not know about the stock option backdating.

After a second trial, the defendant claimed his conviction should be vacated because of additional prosecutorial misconduct and insufficient material evidence to support his conviction. 

Prosecutorial misconduct occurs when the government presents evidence to the jury that it knows is false or that it has strong reason to doubt.  This is designed to prevent the government from misleading the jury.  If the evidence introduced is not false and the prosecutor does not ask the jury to make false inferences from the evidence, there is no prosecutorial misconduct.

The defendant argued that the government introduced a false theory in the second trial when it asserted the defendant granted options for his own personal gain.  The court determined this theory was admissible because it was introduced to show the defendant’s motivation for granting the options. 

The defendant also claimed prosecutorial misconduct through the testimony of two witnesses, who the defendant claimed were only testifying to the backdating of options, which the government already knew was occurring.  The court determined that these witnesses were correctly allowed to testify because their testimony was not false, it was not used to mislead the jury, and it regarded their own experiences at the company.

The defendant argued his failure to disclose the option grants to investors was not material because it would not have altered their choice to invest.  Materiality is an element of securities fraud.  In order “for an omission to be material, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”  The court disagreed and found that the general investor would consider accurate accounting of a company material when deciding whether or not to invest.  The court therefore affirmed the defendant’s conviction.

The primary materials for this case may be found on the DU Corporate Governance website.

A Race to the Bottom?

First of all, I’d like to thank Jay for giving me the opportunity to blog here.  I’ve been a big fan of this blog for a number of years, and I look forward to hopefully making some positive contributions.  Given the name of the blog, I thought I’d start by addressing where I personally stand on the issue of whether the development of modern corporate law constitutes a race to the bottom or top.

The phrase “race to the bottom” is most commonly identified as tracing its roots to Justice Louis Brandeis in the 1933 case of Ligget Co. v. Lee:

The race was one not of diligence but of laxity. Incorporation under [competing state] laws was possible; and the great industrial States yielded in order not to lose wholly the prospect of the revenue and the control incident to domestic incorporation.

A fair starting point for the analysis is asking what we would expect to see if in fact the race for corporate charters constitutes a race to the bottom.  One fair answer is that we would expect the evolving laws to more and more favor the individuals making the decision of where to incorporate—that is to say, management.  And in fact, most commentators would agree that the state currently winning the race for corporate charters—Delaware—does in fact have what can fairly be described as manager-friendly law.

However, we clearly can’t end the analysis there because even though director-primacy looks suspiciously like what we would expect from a race to the bottom, it may in fact nonetheless also represent the most efficient allocation of power under corporate law.  A strong argument in favor of this proposition is that the market would not support an inefficient allocation of power.  That is to say, the cost of capital for managers incorporating in inefficient manager-friendly states should rise to the level of making incorporation there prohibitively costly.

The response of those who remain suspicious despite this rebuttal is often that markets simply aren’t efficient enough to impose the suggested sanctions.  One might point to various cognitive biases that have been identified by the adherents of behavioral economics, and argue that the typical investor is going to be overly optimistic, for example, in assessing whether the corporate law of the particular state of incorporation warrants discounting the expected rate of return. One may add that this should be particularly so in the case of retail investors as opposed to sophisticated investors, since sophisticated investors are often in a much better position to contract around many of the “overly” manager-friendly default rules.

Proponents of a race-to-the-top view might then respond that even if there are inefficiencies in the market, they do not rise to the level of invalidating the status quo.  That is to say, bluntly, do you have a proven better alternative?  While the recent financial crisis has led at least some to respond with, “Anything is better than this,” the more recent struggles of more socialist regimes, and the historic collapses of various communist and totalitarian regimes, do make it a fair question.  (I realize it’s a bit of a jump to go from director-primacy to socialism, but I hope you will take my meaning.  If one views the various constituency statutes out there as a form of socialism, the criticism holds because it is hard to rebut the contention that those statutes do little more than provide additional cover for management.)

So, where does all this leave me?  I guess I’m currently an agnostic believer in a race to the bottom.  That is to say, I don’t claim to know as a matter of fact that the evolution of corporate law in the U.S. has left management with so much power as to be objectively inefficient, but my reading of the relevant cases (along with what I view as the excessive political influence of corporations and the ever-widening gap between rich and poor) makes me suspicious enough to happily come on board a blog called, “The Race to the Bottom.”

Professor Padfield Joins The Race to the Bottom

We are pleased to announce that Stefan Padfield, Associate Professor of Law from the University of Akron School of Law and formerly with the Business Law Prof Blog, will be joining The Race to the Bottom. 

Professor Padfield brings extensive expertise in a number of business law areas.  He teaches the key courses, including Basic Business Associations, Corporations, Securities Regulation, and Mergers and Acquisitions.  A graduate of Brown University, with his J.D. from the University of Kansas School of Law, Professor Padfield clerked for The Hon. John R. Gibson of the U.S. Court of Appeals for the Eighth Circuit, and The Hon. William E. Smith of the U.S. District Court in Providence, R.I. and, in between the clerkships, worked in New York for Cravath, Swaine & Moore. 

His scholarship includes the articles "Is Puffery Material to Investors? Maybe We Should Ask Them," 10 U. Pa. J. Bus. & Emp. L. 339 (2008) (selected by the Akron Law Alumni Association for the Thomas G. Byers Memorial Award for Outstanding Faculty Publication), and "Who Should Do the Math? Materiality Issues in Disclosures That Require Investors to Calculate the Bottom Line," 34 Pepp. L. Rev. 927 (2007) (selected for inclusion in the Securities Law Review 2008).  Professor Padfield also contributes to the Akron Law Café blog.

We are happy to have him with us at The Race to the Bottom.  

Director's Compensation Project: FedEx Corp.

This post is part of an ongoing series that examines the compensation paid to independent directors of public companies. We are using information found in the 2011 proxy statements of the selected companies.

In addition to state standards and Sarbanes-Oxley (“SOX”) requirements, the major U.S. stock exchanges each have their own standards for independence. While the NYSE and NASDAQ rules are substantially the same, there are some minor differences between the two that are worth noting.

NYSE Rule 303A.01, requires that each listed company’s board of directors be comprised of a majority of independent directors. A director is considered independent under NYSE Rule 303A.02(b)(ii) if the director received less than $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years. The NYSE “direct compensation” standard is less restrictive than the corresponding NASDAQ Rule, 5605(a)(2)(B), which includes "any compensation."

NYSE Rule 303A.06 requires a listed company’s audit committee members to comport with the requirements of Rule 10A-3 (C.F.R. §240.10A-3).  SOX Section 301 imposes similar requirements.

Independent directors are compensated for their service on the board.  The amount of compensation can be seen from examining the director compensation table from the FedEx Corporation (NYSE:FDX) 2011 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
J.A. Edwardson	131,750	—	129,488	—	261,238
J.L. Estrin*	38,624	—	—	3,362	41,986
J.R. Hyde, III	102,250	—	129,488	—	231,738
S.A. Jackson	128,250	—	129,488	—	257,738
S.R. Loranger	123,750	—	129,488	—	253,238
G.W. Loveman	116,750	—	129,488	—	246,238
S.C. Schwab	102,250	—	129,488	—	231,738
J.I. Smith	107,250	—	129,488	—	236,738
D.P. Steiner	107,750	—	129,488	—	237,238
P.S. Walsh	103,750	—	129,488	—	233,238

*Mr. Estrin retired from the board before the 2010 annual meeting. 

Director Compensation  During 2011 fiscal year, the Board of Directors held six regular meetings and two special meetings.  Each director attended at least 75% of the meetings of the Board and any committees on which he or she served.  In 2011, outside directors received a quarterly retainer of $19,375 for the first two quarters and a quarterly retainer of $20,000 for the second two quarters.  Outside directors received  $2,000 for each board and committee meeting they attended in person and $1,500 for meetings attended via telephone.  Employee directors did not receive additional compensation.  FedEx’s retirement benefit plan is based on the annual retainer fee for outside directors at the time the plan was frozen in 1997, which was $40,000, and the years of service of an outside director on the Board. The benefit is calculated as an annual amount equal to 10% for each year of service up to 100% of $40,000.  An outside director’s annual benefit is payable for no less than ten years and no more than fifteen years based on the director’s years of credited service. On September 27, 2010, each outside director elected at the 2010 annual meeting received a stock option for 4,600 shares of common stock. Ms. Estrin received $3,362 as a tax reimbursement relating to her retirement gift.

Director Tenure  CEO Fredrick W. Smith, a director since 1971, has the longest tenure of any board member. Elected in 2009, both Mr. David Porter and Ms. Susan Schwab are the shortest serving board members. Several directors also sit on other boards.  Ms. Jackson is a director of International Business Machines Corporation, Marathon Oil Corporation, Medtronic, Inc. and Public Service Enterprise Group Incorporated.  She is also a member of the President’s Council of Advisors on Science & Technology (PCAST), serves as a trustee of M.I.T. (member of the M.I.T. Corporation), and she is a member of the International Security Advisory Board to the United States Secretary of State (since July 2011).  Mr. Smith is a director of The Allstate Corporation, Caterpillar Inc., and Comprehensive Care Corporation.

CEO Compensation  Fredrick W. Smith, FedEx’s Chief Executive Officer since 1998, received $7,260,750 in total compensation during the 2011 fiscal year. This represents an increase of 3.61% in Mr. Smith’s base salary for 2011, bringing that amount to $1,190,029.  Mr. Smith received an additional $428,061 in other compensation, of which $333,304 was for security services and equipment, $5,805 was for personal use of corporate aircraft, $43,750 was for tax return preparation, and $32,164 was for financial counseling services.  The Board of Directors requires Mr. Smith to use FedEx corporate aircraft for all travel, including personal travel; however Mr. Smith and other executives must pay FedEx when using company aircraft for personal use.  Mr. Smith’s family may accompany him at no charge if he is using the aircraft for business travel.  The FedEx Corporate Security Executive Protection Unit provides physical and personal security services for Mr. Smith, including on-site residential security at his primary residence.  

David J Ronczek, President and Chief Executive Officer of FedEx Express, received $4,548,525 in total compensation in 2011.  This represents an increase of 3.34% in Mr. Ronczek’s base salary for 2011, bringing that amount to $908,749.  Mr. Ronczek received an additional $508,597 in other compensation, of which $ 464,889 was as a tax reimbursement, and $25,500 was for financial counseling services. Alan B. Graf Jr., Chief Financial Officer of FedEx, received $3,862,935 in total compensation in 2011. This represents an increase of 3.34% in Mr. Graf’s base salary for 2011, bringing that amount to $870,831.  Mr. Graf received an additional $473,022 in other compensation, of which $ 358,776 was as a tax reimbursement, $75,731 was for personal use of corporate aircraft, and $11,969 was for financial counseling services.

Director's Compensation Project: Motorola Mobility Holdings Inc.

This post is part of an ongoing series that examines the compensation paid to independent directors of public companies. We are using information found in the 2011 proxy statements of the selected companies.

In addition to state standards and Sarbanes-Oxley (“SOX”) requirements, the major U.S. stock exchanges each have their own standards for independence. While the NYSE and NASDAQ rules are substantially the same, there are some minor differences between the two that are worth noting.

NYSE Rule 303A.01, requires that each listed company’s board of directors be comprised of a majority of independent directors. A director is considered independent under NYSE Rule 303A.02(b)(ii) if the director received less than $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years. The NYSE “direct compensation” standard is less restrictive than the corresponding NASDAQ Rule, 5605(a)(2)(B), which includes "any compensation."

NYSE Rule 303A.06 requires a listed company’s audit committee members to comport with the requirements of Rule 10A-3 (C.F.R. §240.10A-3).  SOX Section 301 imposes similar requirements.

Independent directors are compensated for their service on the board.  The amount of compensation can be seen from examining the non-management director compensation table from Motorola Mobility Holdings (NYSE:MMI) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)	All Other Compensation ($)	Total ($)
Jon E. Barfield*	—	—	—	—	—
William R. Hambrecht	6,250	—	—	—	6,250
Jeanne P. Jackson**	—	—	—	—	—
Keith A. Meister	6,875	—	—	—	6,875
Thomas J. Meredith	6,875	—	—	—	6,875
Daniel A. Ninivaggi	6,250	—	—	—	6,250
James R. Stengel	7,500	—	—	—	7,500
Anthony J. Vinciquerra	8,333	—	—	—	8,333
Andrew J. Viterbi	6,250	—	—	—	6,250

*Mr. Barfield joined Motorola’s Board January 4, 2011

** Ms. Jackson joined Motorola’s Board January 8, 2011

Director Compensation  In preparation for the separation of Motorola Mobility from Motorola Solutions on January 4, 2011, the Board of Directors held one meeting during 2010, and director attendance was 100%.  The table above shows how much Motorola compensated each director for that meeting.  MMI has not released the compensation for 2011 as of November 15^th, 2011, however, the Board of Directors approved an annual retainer of $75,000 with an annual equity award of $150,000. Furthermore the different chairpersons and committee members will each receive additional compensation.  The lead director receives an additional $25,000, the Audit Committee Chair receives $25,000, the Compensation and Leadership Chair receives $15,000, and the Governance and Nominating Chair receives $10,000.  Members of the Audit committee receive an additional $12,500, members of the Compensation and Leadership committee will receive $7,500, and members of the Governance and Nominating committee will receive $5,000.

Director Tenure  Chairman and CEO, Dr. Jha and CFO, Mr. Rothman served as interim management members of the board of directors during 2010 until November 30, 2010, when seven non-employee directors were elected by MMI’s former parent, Motorola Solutions, replacing Mr. Rothman in preparation for the separation on January 4, 2011. Dr. Jha was previously Co-CEO at Motorola Inc.  Mr. Daniel A Ninivaggi, serves as Interim President and Interim Chief Executive Officer and as a director of Tropicana Entertainment Inc., since January 2011.  He also serves as a director of CIT Group Inc., XO Holdings, Inc., and Federal Mogul Corporation.  Of the nine directors of MMI, six served on the board of MMI’s parent company, Motorola Inc., within the last five years.

CEO Compensation CEO Dr. Sanjay Jha received $13,016,126 in total compensation in 2010.  Dr. Jha voluntarily elected to take a decrease of 63% in his base salary for 2010, bringing that amount to $900,000.  Dr. Jha also chose to forego all bonuses due to him under the Motorola Incentive Plan, including a contractually guaranteed cash bonus of $2,400,000.  Dr. Jha received $388,623 in other compensation, of which $186,189 was for personal use of company aircraft, $61,243 was for temporary housing benefits, $50,633 was for personal use of car and driver, and $25,348 was for legal fees.  

CFO Mr. Mark E. Rothman received $1,733,070 in total compensation in 2010.  Mr. Rothman’s base salary remained at its 2009 level of $430,000 in 2010.  Mr. Rothman received $186,868 in other compensation, including relocation benefits, costs for personal use of Company aircraft, financial planning and income imputed for guest attendance at Company events, totaling $149,913.