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Friday
Jun292012

Corporate Governance and the Problem of Executive Compensation: The Source of the Problem and the Consequences (Part 1)

Boards are the front line of the executive compensation issue.  They have the authority to determine compensation and to adopt standards that minimize abuse. 

Compensation decisions are, like all matters, tested under the board's fiduciary obligations.  The duties are broadly divided into a duty of care and a duty of loyalty.  The duty of care is a process standard.  If the process is done correctly, the substance of the decision, for the most part, is irrelevant.  The duty of loyalty on the other hand imposes on the board the burden of showing that the transaction was fair.  In these circumstances, substance matters.  

With respect to CEO compensation, the default standard is the duty of loyalty.  In the US, the CEO sits on the board.  As a result, the board is determining compensation for someone inside the board room.  This creates an obvious conflict of interest and, to protect shareholders, directors must show that the compensation was fair. 

Were fairness to be the applicable standard, boards would have greater difficulty showing that personal use of the aircraft or total compensation measured in nine or more figures was fair.  Moreover, since directors are personally liable for breaches of their fiduciary obligations, they would likely take a rigorous approach to fairness.  The benefit of applying a fairness standard can be seen in few cases where it has been applied.  For a discussion of cases applying this standard, see Returning Fairness to Executive Compensation.

Yet for the most part, fairness and substance are not part of any review of CEO compensation.  The Delaware courts have interpreted fiduciary duties in a manner that results in the application of the duty of care rather than duty of loyalty to CEO compensation.  The courts have done so by finding that the duty of care applies where the board is informed and consists of a majority of independent directors (a requirement for all listed companies). 

In those circumstances, the "taint" of any conflict (the presence of the CEO inside the boardroom) is deemed to have been expunged.  It doesn't matter for the most part that the CEO is present when the decision is made or participates in the discussion.  For more on this, see Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty.

What is a recent example of this approach?  In re Goldman Sachs, a case we will address in the next post.

Wednesday
Jun272012

Diversity, Italy and the Dearth of Women in the Boardroom

Yesterday, Facebook announced that it was appointing a woman to its board.  As noted, women make up somewhere between 12-16% of the directors serving on boards of public companies.  (A study by ISS put the number at 12.7% of the top 1500 largest public companies).  It is not because there are an inadequate number of qualified candidates.  For a possible explanation, see Essay: Neutralizing the Board of Directors and the Impact on Diversity

The problem of inadequate representation of women on corporate boards is not limited to the US, but global in nature.  Some countries in Europe addressing the issue have taken a more top-down approach.  Norway now requires boards of listed companies to have at least 40% of each gender.  As a result, Norway has the highest percentage of women on boards.  

Spain and France have tried this approach.  Italy has now decided to join them.  With only around 6% of women on the boards of Italian companies, a recent law requires that the percentage be increased to one-third by 2015.  Labeled the "pink quota," the provision goes into effect in August.  Those companies that do not comply will apparently face "progressive sanctions, including fines of up to €1 million ($1.25 million)."

Such an approach would not work in the US.  This type of government intervention is viewed as excessive interference in the market.  Nonetheless, as these laws become more common and the percentage of women on boards increase in other countries, the US will increasingly appear to be a laggard.  That will put additional pressure on the businesses in this country to increase the number of women on their boards. 

Wednesday
Jun272012

Board Diversity, Facebook, and the Dearth of Women in the Boardroom

Facebook, with its 20 something CEO, went public with no women on the board.  It was, as a result, big news when Facebook opted to add a woman to the board, Sheryl Sandberg, the company's COO. According to the Facebook website, the board now consists of:

Mark Zuckerberg, Founder, Chairman and CEO, Facebook
Marc Andreessen, Co-founder and General Partner, Andreessen Horowitz
Jim Breyer, Partner, Accel Partners
Donald E. Graham, Chairman and CEO, The Washington Post Company
Reed Hastings, Chairman and CEO, Netflix
Erskine Bowles, President Emeritus, the University of North Carolina
Peter Thiel, Partner, Founders Fund
Sheryl Sandberg, COO, Facebook

The elevation of Sandberg to the board, rather than a progressive step, is little more than a reaffirmation of the status quo.  The number of women serving on the boards of public companies in the U.S. is somewhere around 12-16%.  Facebook, by adding one woman, now meets the average (one of eight).  

What is the explanation for the dearth of women on boards?  The most common is the absence of adequate candidates.  This mistaken argument focuses on the fact that boards often want current and former CEOs to serve, a category that includes few women.  

But that presupposes that boards are mostly made up of current and former executive officers.  In fact, companies often have other categories of directors represented on their board. Politicians are one example. Chesapeake Energy had a former Senator (Nickles) and Governor (Keating) on its board.  Apple has Al Gore. 

One study of large companies noted the following examples:  (Chuck Hagel, Senator, Nebraska), General Electric (Sam Nunn, Senator, Georgia), Ford (Richard Gephardt, Representative, Missouri & Jon Huntsman, Governor, Utah), JP Morgan (William Gray, Representative, Pennsylvania), Pfizer (William Gray, Representative, Pennsylvania), Dell (William Gray, Representative, Pennsylvania), Prudential (Gaston Caperton, Governor, West Virginia), Purdential (William Gray, Representative, Pennsylvania),  and Honeywell (Judd Gregg, Senator, New Hampshire). 

The list shows that companies commonly consider individuals who are not executive or former executive officers for the board but when they do, they commonly pick men, not women.  This is not because there are no women politicians (for a list of women who have served in the Senate go here; for a list of women in the House, go here).

So the reason is not an absence of qualified candidates.  For a more likely explanation, see Essay: Neutralizing the Board of Directors and the Impact on Diversity

Wednesday
Jun272012

The Director Compensation Project: A Conclusion of Sorts

We have spent the last two weeks examining compensation paid to directors.  The information has only been available in recent years.  The Director Compensation Project is entirely student run and all of the posts are entirely student written. 

The accessibility of the information has significantly increased in recent years.  In 2006, the SEC reformed the disclosure requirements for executive compensation under Item 402.  For the first time, disclosure was required for "total compensation" paid to directors.  Some of the amounts, as the posts illustrate, are substantial. 

Marketwatch provided a list of the most highly paid directors, some of whom appeared in the Director Compensation Project.  Here are some of the conclusions from the article:

  • More than a dozen public company boards had directors whose compensation averaged more than $500,000 in 2011. That is greater than the compensation of some S&P 500 CEOs - CEOs who work full-time while board members do not.
  • In many other cases, the companies on this list have one board member who received an extremely large compensation in 2011. Often, these are former CEOs or other high-ranking executives who now serve as chairman, do part-time consulting work with their former employer or both.
  • just because a company pays its board a lot does not necessarily mean it is excelling financially. Of the top 12 companies, six have lower stock prices compared to two years ago (as of June 4). Seven of the companies had lower profits in 2011 compared to the year earlier.

The article listed the 12 companies with the highest paid board of directors based upon the average compensation paid to directors.  These included:

  • Chesapeake Energy:  Average Compensation: $533,163
  • Freeport-McMoRan Copper & Gold:  $541,836
  • Tyson Foods:  $542,013
  • Alpha Natural Resources: $549,445
  • Ball: $563,954
  • Occidental Petroleum:$645,242
  • Salesforce.com: $690,053
  • Northrop Grumman: $696,717
  • Oracle: $725,589
  • Fidelity National Information Services: $849,691
  • Amazon.com > Average Compensation: $898,993
  • Hewlett-Packard > Average Compensation: $941,802

Averages can be skewed in either direction.  Some boards have directors who have only served a portion of the year and therefore bring the average down.  Others can have a director paid an amount much larger than the other directors, bringing the average up.  This might occur, for example, where the board pays the lead director additional compensation.

The report put out by Federic W. Cook & Co. Inc. on Director Compensation placed median total compensation among large cap companies (over $5 billion) at $225,000.  Moreover, the trend is likely upward.  As the report noted:  "we anticipate that director compensation levels may increase at more rapid pace over the next several years."  Id. at 4. 

The issue of director compensation will remain an important one.  Shareholder proposals have sought an advisory vote on the matter (say on director pay), with some receiving significant support.  A significant number (although not a majority) of shareholders casting votes supported such a proposal at Chesapeake Energy last year.  We on this Blog (particularly students) will continue to follow the issue and provide posts on Director Compensation. 

Tuesday
Jun262012

The Director Compensation Project: ConocoPhillips

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 ConocoPhillips (NYSE: COP) 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
($)

Richard L. Armitage

115,000

170,012

--

--

285,012

Richard H. Auchinleck

150,345

170,012

--

13,639

333,996

James E. Copeland, Jr.

135,000

170,012

--

25,358

330,370

Kenneth M. Duberstein

115,000

170,012

--

26,213

311,225

Ruth R. Harkin

125,000

170,012

--

7,000

302,012

Mohd H. Marican***

10,208

--

--

--

10,208

Harold W. McGraw III

120,375

170,012

--

--

290,387

Robert A. Niblock

122,500

170,012

--

15,000

307,512

Harald J. Norvik

122,924

170,012

--

16,200

309,136

William K. Reilly

115,000

170,012

--

16,859

301,871

Bobby S. Shackouls

47,917

170,012

--

21,778

239,707

Victoria J. Tschinkel

122,500

170,012

--

10,164

302,676

Kathryn C. Turner

120,000

170,012

--

15,000

305,012

William E. Wade, Jr.

130,441

170,012

--

5,000

305,453

*This includes voluntary deferrals to ConocoPhillip’s Key Employee Deferred Compensation Plan.

**This column includes directors’ personal use of company aircraft and automobiles, a home security system, annual physicals, life insurance premiums and tax reimbursements.

***Mr. Marican was elected to the board in December 2011, and the amounts in the table represent his prorated compensation for December 2011 only.

 

Director Compensation.  During the 2011 fiscal year, the board of directors met 10 times. Each director attended at least 75 percent of the aggregate of the total number of board meetings and the total number of meetings held by all board committees on which he or she served. The Human Resources and Compensation Committee is responsible for determining performance-based standards for all Senior Officers, including all Named Executive Officers. The executive compensation program utilizes a number of measurement methods, such as comparisons to marketplace compensation, pay equity within the company, and the skills and experience of individual executives, resulting in a unique compensation package for each individual.

Director Tenure.  Directors Duberstein, Harkin, Reilly, Turner, and Tschinkel concurrently hold the title of longest tenure on the board, each having begun their tenure in August 2002. Mr. Marican is the newest director, having joined the board in December 2011. A number of directors also hold membership on other boards. For example, Mr. Copeland serves on the boards of Equifax and Time Warner Cable. Mr. Duberstein sits on the boards of Dell Inc.; The Boeing Company; Mack-Cali Realty Corporation; and The Travelers Companies, Inc.

CEO Compensation.  James Mulva, who has served as ConocoPhillips’ Chief Executive Officer since 2002, earned $27,713,594 during the fiscal year. Mr. Mulva became eligible for retirement on December 31, 2011, and he intends to retire in 2012, provided that the company’s planned repositioning occurs before the 2012 annual meeting. Mr. Mulva received access to company aircraft and automobiles for both personal and business use, accruing $15,298 worth of automobile expenses during 2011, but he reimbursed the company for certain personal uses of these assets. Mr. Mulva and Al Hirshberg, Vice President of Planning and Strategy, both received company-paid premiums of life insurance policies and reimbursements for taxes accrued. Mr. Hirshberg received $9,934,084 in total compensation in 2011. Furthermore, Mr. Hirshberg received $113,761 in relocation expenses as an incentive to accept the company’s offer of employment, consistent with the company’s policy on paying relocation costs for executives.

Monday
Jun252012

The Director Compensation Project: General Electric Company

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 General Electric Company (NYSE: GE) 2011 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

 

Name

Fees Earned of Paid in Cash*
($)

Stock Awards
($)

Option Awards**
($)

All Other Compensation***
($)

Total
($)

W. Geoffrey

Beattie

0

278,643

0

34,500

313,143

James I. Cash, Jr.

120,000

182,385

0

50,000

352,385

William M. Castell

62,500

56,962

0

1,000,000

1,119,462

Ann M. Fudge

100,000

151,987

0

39,233

291,220

Susan Hockfield

100,000

151,987

0

5,250

257,237

Andrea Jung

110,000

167,186

0

27,199

304,385

Alan G. Lafley

100,000

151,987

0

50,000

301,987

Robert W.

Lane

120,000

182,385

0

0

302,385

Ralph S.

Larsen

0

278,643

0

60,022

338,665

Rochelle B.

Lazarus

0

253,312

0

50,046

303,358

James J.

Mulva

0

278,643

0

75,000

353,643

Sam Nunn

0

278,643

0

34,150

312,793

Roger S. Penske

0

253,312

0

56,344

309,655

Robert J.

Swieringa

44,000

234,060

0

48,500

326,560

James A.

Tisch

50,000

228,087

0

50,000

328,087

Douglas A.

Warner III

120,000

182,385

0

53,054

355,439

*This includes salary and bonus amounts.

**Non-management directors are not entitled to non-equity incentive compensation.

***This column includes the total of nonqualified deferred compensation earnings and change in pension value, payments to employee savings plans, expatriate tax benefits, life insurance premiums and miscellaneous other benefits.

Director Compensation.  During the 2011 fiscal year, the board held 15 meetings, including three meetings of the non-management directors of the board. Every director attended 75 percent or more of the board or committee meetings according to his or her respective membership on each committee. The current compensation and benefit program for non-management directors has been in effect since 2003. During 2011, non-management directors received $250,000 in annual compensation, paid incrementally at the conclusion of each quarter. Forty percent was paid in cash, and 60 percent was paid in deferred stock units. Non-management directors could participate in several equity compensation programs, but they received no other non-equity incentive compensation for their services.

Director Tenure.   All of the current Named Executive Directors have held positions with General Electric for over 25 years, with Mr. Warner holding the longest tenure as a director since 1992. Mr. Tisch has the shortest tenure, having joined the board in 2010. Each director has held numerous high-level leadership positions within the company. Most directors hold positions as directors or trustees in other organizations. For instance, Mr. Lane is a director at both Verizon Communications and Northern Trust Corporation and a member of the supervisory board of BMW AG. Mr. Nunn is a director of The Coca-Cola Company.

CEO Compensation.   As part of his total compensation of $21,581,228 in 2011, Chairman of the Board and Chief Executive Officer Jeffrey Immelt received a $4 million cash bonus in both 2010 and 2011 after meeting or exceeding almost all financial objectives. The remaining Named Executives each received bonuses of at least $2.8 million in 2011. Directors received extensive benefits, such as use of both company aircraft and cars for personal use, financial counseling and tax preparation services, and other miscellaneous benefits, such as home alarm and security systems installation and maintenance. In the 2011 fiscal year, Vice Chairman John Rice received $349,651 in expatriate tax benefits according to the company’s policy regarding employees who are temporarily placed in international assignments and $1,375,186 in total value for the “other benefits” named above.

Monday
Jun252012

The Director Compensation Project: Microsoft Corporation

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 Microsoft Corporation (NYSE: MSFT) 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
($)

Dina Dublon

115,000

135,000

--

--

250,000

William H.

Gates III

90,000

135,000

--

--

225,000

Raymond V.

Gilmartin

103,723

135,000

--

--

238,723

Reed Hastings

96,277

135,000

--

--

231,277

Maria Klawe

90,000

135,000

--

--

225,000

David F.

Marquardt

102,500

135,000

--

--

237,500

Charles H.

Noski

115,000

135,000

--

--

250,000

Helmut Panke

115,000

135,000

--

--

250,000

*Microsoft does not award stock options to its executive officers.

**This column includes the company’s matching contributions to 401(k) plans and imputed income received from broad-based benefits programs, which includes life insurance, disability insurance and athletic club memberships.

Director Compensation.  Microsoft’s board of directors met eight times during the 2011 fiscal year. All directors attended 75 percent or more of the total number of all board and committee meetings of which they were members. Five directors attended Microsoft’s annual shareholders’ meeting in 2010. Microsoft strives to pay directors close to the market median for similar director positions, but most compensation was conferred through equity. Director compensation had remained stable for five years but dropped to lower than the Dow 30 median by 15 to 20 percent. To bring compensation back in line with company goals, the board raised its base director compensation from $200,000 to $250,000.

Director Tenure.  Mr. Ballmer has headed several Microsoft divisions during the past 31 years, including operations, operating systems development, and sales and support. In July 1998, he was promoted to President. He was subsequently named Chief Executive Officer in January 2000. Mr. Gates and Mr. Marquardt hold the longest director tenures, having served as directors since 1981, while Ms. Klawe joined the board most recently in 2009. Mr. Hastings is also the Chief Executive Officer and founder of Netflix, Inc. and continues to serve as a director in that company. Ms. Dublon simultaneously serves on the boards of Accenture Ltd. and Pepsico, Inc. Microsoft’s Corporate Governance Guidelines provide that a substantial majority of directors must be independent; therefore, the independent directors annually appoint a lead independent director to coordinate their activities. Mr. Hastings has served as lead independent director since December 2010.

CEO Compensation.  Microsoft’s compensation philosophy seeks to encourage executive success through competitive base salaries and extensive stock ownership with purchase options based upon executive tenure and position-specific performance metrics. The company believes that this compensation structure aligns the interests of executives with maximizing profit for shareholders while reducing unnecessary risk taking. B. Kevin Turner, Chief Operating Officer, and Steven Sinofsky, President of the Windows and Windows Live Divisions, were the highest paid executive officers at $9,277,141 and $7,207,758, respectively. Mr. Gates, as founder and Chairman, owns the most shares of common stock at 540,979,055, representing a 6.41 percent ownership of the company. Chief Executive Officer Steven Ballmer holds 333,252,990 shares of Microsoft common stock, representing a 3.95 percent ownership of the company. Based on his personal request, Mr. Ballmer is not paid for serving as a director, choosing instead hold a substantial number of shares of stock, tying his personal wealth to Microsoft’s value.

Saturday
Jun232012

Law and Society (Part 3): Questioning the Legitimacy of the Supreme Court

On June 7th, I attended a roundtable discussion entitled, "Beyond the Realists and the Crits: Is the Supreme Court Even a Court?"  The discussion was in reality a "author meets reader" event.  The author was Eric Segall, and the book was "Supreme Myths: Why the Supreme Court Is Not a Court and Its Justices Are Not Judges."  The discussion was very interesting, and I came away from it convinced that this book is relevant to my own work on the Supreme Court's Citizens United decision.  For example, Prof. Segall notes that "judges have an important obligation to be candid about the actual reasons for their decisions."  Meanwhile, my primary criticism of the Citizens United decision has been that the majority ignores, and the dissent expressly disavows, any role for corporate theory in their fight over the majority's ultimate conclusion that "the Government cannot restrict political speech based on the speaker's corporate identity," 130 S.Ct. 876, 902, when in fact it is seemingly impossible to reach that conclusion without adopting particular views about what corporations are.  (Go here for my latest draft on this topic.)  Furthermore, Prof. Segall notes that when judicial conclusions about the Constitution change seemingly solely because the composition of the Court changed, the very legitimacy of the Court is implicated:

The problem with this back and forth, in addition to the instability it causes, is that the Supreme Court’s legitimacy stems in part from its intended role as a traditional court whose judges apply the “law.”  But … “if changing judges changes law,” then it is uncertain whether the law controls judges of the other way around.

Of course, one can argue that the only thing that really changed between Austin/McConnell and Citizens United was the composition of the Court, and I have further argued that the failure to deal with the corporate theory issue likewise implicates the Court's legitimacy.  Relatedly, a recent poll found that the public approval rating of the Court has hit what I believe is an all-time low of 44% recently, with further grumbling expected in connection with the pending health care ruling.

Segall's book supports its dramatic claim with detailed analysis of numerous well-known Supreme Court cases and, while I'm sure many will find much to criticize, I can easily recommend it. 

Saturday
Jun232012

The Director Compensation Project: International Business Machines Corporation

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 International Business Machines (NYSE: IBM) 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
($)

Alain Belda

250,000

0

0

17,078

267,078

William Brody

250,000

0

0

22,418

272,418

Kenneth Chenault

250,000

0

0

47,884

297,884

Michael Eskew

275,000

0

0

34,681

309,681

Shirley Jackson

250,000

0

0

30,734

280,374

Andrew Liveris

250,000

0

0

5,456

256,456

W. James McNerny, Jr.

250,000

0

0

28,357

278,357

James Owens

250,000

0

0

48,404

298,404

Joan Spero

250,000

0

0

43,596

293,596

Sidney Taurel

270,000

0

0

55,081

325,081

Lorenzo Zambrano

270,000

0

0

37,533

307,533

Director Compensation.  In 2011, non-management directors received a retainer of $250,000 to attend ten meetings of the board of directors.  Attendance at those meetings was greater than 75%.  Under the company’s Deferred Compensation and Equity Award Plan, at least 60% of the annual retainer was required to be paid in Promised Fee Shares (“PFS”), which are the equivalent of one unit of common stock.  When the company issued a dividend, the amount of the dividend was credited to the directors’ PFS accounts and disclosed under the “All Other Compensation” column above.  Mr. Eskew received an additional $25,000 in cash for chairing the Audit Committee.  Messrs. Zambrano and Taurel each received an additional $20,000 in cash for chairing the Directors and Corporate Governance Committee and the Executive Compensation and Management Resources Committee, respectively.  

Director Tenure.  Mr. Chenault is the longest tenured director, holding his position since 1998. Due to IBM’s commercial relationship with American Express, Mr. Chenault does not qualify as an independent director.  Virginia Rometty and David Farr both are the newest members of the board after joining in 2012; hence, they are not listed on the compensation chart above.  Many of the directors sit on other boards.  For instance, Samuel Palmisano, the former Chief Executive Officer and current Chairman of the Board, also sits on the board of Exxon Mobil.  Mr. Owens sits on the boards of Alcoa, Inc. and Morgan Stanley.

Executive Compensation.  Mr. Palmisano was paid $31,798,918 for his roles as Chairman, President, and CEO.  Company aircraft usage of $489,327 is included in this figure.  After departing from his role as CEO on January 1, 2012, Mr. Palmisano also became entitled to an exit package valued at roughly $113,697,548 in stock options, deferred compensation, performance share units, and 401K contributions.  Michael Daniels, the Senior VP and Group Executive of Services, was paid $8,686,835 in 2011.  Ms. Rometty, the newly appointed CEO, will be compensated $1,500,000 in base salary with a target bonus of $3,500,000 in 2012.  Additionally, she will receive $10,000,000 worth of Performance Share Units as a long-term incentive.  In 2011, Ms. Rometty received $8,342,270 in total compensation as Senior Vice President & Group Executive of Sales, Marketing, and Strategy. 

Friday
Jun222012

The Director Compensation Project: American International Group, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 American International Group, Inc. (NYSE: AIG) 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
($)

W. Don Cornwell

101,538

49,990

0

0

151,528

John H. Fitzpatrick

101,538

49,990

0

0

151,528

Laurette T. Koellner

179,000

49,990

0

0

219,990

Donald H. Layton

160,000

49,990

0

0

209,990

Christopher S. Lynch

180,000

49,990

0

0

229,990

Arthur C. Martinez

170,577

49,990

0

0

220,567

George L. Miles, Jr.

170,577

49,990

250

0

220,567

Henry S. Miller

160,000

49,990

0

0

209,990

Robert S. Miller

650,000

49,990

0

0

699,990

Suzanne Nora Johnson

160,000

49,990

0

0

209,990

Morris W. Offit

170,000

49,990

250

0

219,990

Ronald A. Rittenmeyer

161,731

49,990

0

0

211,721

Douglas M. Steenland

360,000

49,990

0

0

409,990

Director Compensation. Non-management directors were compensated with an annual retainer of $150,000 plus $50,000 in deferred stock units (“DSUs”).  Each DSU entitled directors to one share of common stock upon departure from the board.  Directors also received dividend payments in the form of DSUs.  Directors were granted an extra $5,000 for sitting on a committee and an extra $15,000 for chairing a committee, except for the chair of the Audit Committee, who received an extra $25,000.  Robert Miller received an additional $500,000 as Chairman of the Board and ex officio member of all standing committees.  Robert Benmosche, AIG’s Chief Executive Officer, did not receive any compensation for his position on the board.  AIG held fifteen board meetings during 2011.  All directors attended at least 75% of the meetings of the board and of the committees for which they served.  All directors attended the 2011 annual shareholders’ meeting. 

Director Tenure. Mr. Miles is the longest tenured director, having held his position since 2005.  Messrs. Cornwell and Fitzpatrick are the newest members, having just been elected in 2011.  Many of the directors hold positions on other boards, including Ms. Koellner, who sits on the board of Sara Lee Corporation.  Mr. Martinez sits on the boards of PepsiCo; Liz Claiborne, Inc.; IAC/InterActiveCorp; International Flavors and Fragrances, Inc.; and HSN, Inc. 

Executive Compensation. AIG’s CEO, Mr. Benmosche, received $13,984,181 in total compensation for 2011.  Due to limitations placed on AIG for accepting federal TARP money in 2008, Mr. Benmosche received only $3,000,000 in cash and did not receive a bonus.  TARP standards require compensation plans that discourage excessive risk taking and promote long-term value instead of short-term results.  Nearly $11,000,000 of the CEO’s compensation was in restricted stock units (“RSU”) that will not vest for at least two years.  Furthermore, after the RSUs vest, they are only payable in 25% increments up to the level AIG has repaid its TARP obligations.  Jay Wintrob, the Executive Vice President of Domestic Life and Retirement Services, made $7,336,879, which included a cash payment of $495,000.  Messrs. Benmosche and Wintrob each received $22,318 and $10,985 worth of company car services, respectively. 

 

Friday
Jun222012

The Director Compensation Project: Wells Fargo & Company

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 Wells Fargo & Company (NYSE: WFC) 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
($)

John D. Baker II

151,000

140,025

0

0

291,025

Elaine L. Chao

49,500

116,675

0

0

166,175

John S. Chen

111,000

140,025

0

0

251,025

Lloyd H. Dean

166,000

140,025

0

0

306,025

Susan E. Engel

143,000

140,025

18,117

0

301,142

Enrique Hernandez, Jr.

166,000

140,025

0

0

306,025

Donald M. James

119,000

140,025

0

0

259,025

Richard D. McCormick

55,250

0

0

0

55,250

Mackey J. McDonald

115,000

140,025

0

0

255,025

Cynthia H. Milligan

199,000

140,025

18,303

0

357,328

Nicholas G. Moore

163,000

140,025

0

0

303,025

Federico F. Peña

18,500

70,000

0

0

88,500

Phillip J. Quigley

188,000

140,025

18,117

0

346,142

Judith M. Runstad

143,000

140,025

18,303

0

301,328

Stephen W. Sanger

148,000

140,025

0

0

288,025

Susan G. Swenson

125,000

140,025

0

0

265,025

John G. Stumpf

0

0

0

0

0

*As an employee director, Mr. Stumpf does not receive additional compensation for his board service.

 Director Compensation.  During 2011, the board held thirteen meetings.  Director attendance averaged 98% for meetings of the board and its committees.  Each director attended at least 75% of the total number of meetings for the board and committees on which he or she served.  Effective on January 1, 2011, the company ceased granting stock options to non-employee directors.  Effective January 1, 2012, the value of the annual stock award for directors increased from $140,00 to $150,000.  Upon Ms. Chao’s election to the board, she received 4,071 shares of common stock.  Upon Mr. Peña’s election to the board, he received 2,826 shares of common stock.

Director Tenure.  Effective at the 2011 annual meeting of stockholders, Mr. McCormick retired as a director. Ms. Chao was elected to the board on July 1, 2011.  Mr. Peña was elected to the board on November 1, 2011.  Several directors also sit on other boards.  For instance, Mr. Baker is a director for Patriot Transportation Holding, Inc.; Progress Energy Inc.; and Texas Industries, Inc.  Mr. Hernandez serves on the board for Chevron Corporation; McDonald’s Corporation; and is Chairman of the Board for Nordstrom, Inc.  Ms. Milligan has been a director since 1992 and has the longest tenure on the board.

Executive Compensation. Mr. Stumpf, President and CEO, earned the highest compensation in 2011 of $19,843,021.  Mark C. Oman, former Senior Executive Vice President of Home and Consumer Finance, retired on December 1, 2011.  He received a total compensation of $16,427,890, $7,957,453 of which was categorized as a “Change in Pension Value and Nonqualified Deferred Compensation Earnings.”  Mr. Oman’s 2011 retirement benefits were calculated pursuant to Securities and Exchange Commission rules and were based on his thirty years of employment with Wells Fargo, his age at retirement of 56 years, and the immediate payment of his retirement benefit in 2012.  Overall, Mr. Oman received a supplemental retirement arrangement in a lump sum of $12,159,452.

Thursday
Jun212012

The Director Compensation Project: Cardinal Health, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 Cardinal Health, Inc. (NYSE: CAH) 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
($)

Colleen F. Arnold

75,000

120,015

0

0

195,015

Glenn A. Britt

88,837

120,105

0

4,330**

218,182

Carrie S. Cox

77,750

120,105

0

0

197,765

Calvin Darden

77,750

120,105

0

0

195,765

Bruce L. Downey

77,750

120,105

0

1,000

198,765

John F. Finn

106,163

140,017

0

0

246,180

Gregory B. Kenny

88,000

120,015

0

0

208,015

James J. Mongan*

61,558

183,720

0

0

245,278

Richard V. Notebaert

77,250

120,015

0

0

197,265

David w. Raisbeck

88,000

120,015

0

0

208,015

Jean G. Spaulding

75,000

120,015

0

0

195,015

*Dr. Mongan retired on April 18, 2011 due to health-related concerns.

** At the request of Mr. Britt’s employer, Time Warner Cable, Mr. Britt uses his employer’s corporate aircraft for travel.  This figure represents reimbursement for the use of that aircraft for travel to Cardinal board meetings. 

Director Compensation. Director compensation was comprised of an annual retainer recently increased from $75,000 to $90,000 on November 2, 2011, restricted stock units recently increased from $120,000 to $140,000, and varying amounts for chairing committees.  The chairs of the Audit Committee, Compensation Committee, and Nominating and Governance Committee received an additional $20,000, $15,000, and $10,000, respectively.  The board of directors held seven meetings during the 2011 fiscal year, which ended June 30, 2011. The directors attended 75% of the board of directors and committee meetings.  All of the directors but Dr. Mongan attended the annual shareholders’ meeting. 

Director Tenure.  Mr. Finn is the longest tenured director, having held his position since 1994.  Mr. King holds the shortest tenure after being elected in September of 2011.  All of the directors except Ms. Arnold and Ms. Spaulding are directors for at least one other company.  For instance, Mr. Britt also sits on the board and is the Chief Executive Officer of Time Warner Cable.  Although Ms. Arnold is an executive at IBM, she was still classified as independent by the Nominating and Governance Committee because payments from Cardinal represented less than 1% of IBM’s gross revenues over the past 3 years. 

Executive Compensation. George S. Barrett, Cardinal’s CEO and Chairman of the Board, received $10,214,206 in compensation last year.  Included in that figure was Mr. Barrett’s personal use of the company’s aircraft, relocation expenses, and monitoring expenses for a security system at his residence.  If Mr. Barrett is terminated before the earlier of December 31, 2012 or the June 30, 2012 annual shareholders’ meeting, he is entitled to $1,200,000 in salary, a bonus of at least 130% of his base salary, long-term incentive awards equal to at least 600% of his annual base salary, and personal use of the corporate aircraft not to exceed $100,000.  Jeffrey W. Henderson, Cardinal’s Chief Financial Officer, was compensated $3,777,410 for his services in 2011. 

Thursday
Jun212012

The Director Compensation Project: The Walt Disney Company

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 Walt Disney Company (NYSE: DIS) 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
($)

Susan E. Arnold

90,000

140,319

0

7,528

237,847

John E. Bryson

53,407

94,158

0

0

147,565

John S. Chen

90,000

140,319

0

4,044

234,363

Judith L Estrin

90,000

140,319

0

7,365

237,684

Steven P. Jobs*

0

0

0

0

0

Fred H. Langhammer

105,000

140,319

0

16,936

262,255

Aylwin B. Lewis

115,000

140,319

0

5,477

260,796

Monica C. Lozano

90,000

140,319

0

18,396

248,715

Robert W. Matschullat

100,000

140,319

0

20,535

260,854

John E. Pepper, Jr.

0

557,265

0

4,911

562,176

Sheryl K. Sandberg

90,000

140,319

0

13,544

243,863

Orin C. Smith

105,000

140,319

0

7,356

252,675

*At Mr. Jobs’s request, he received no compensation for his services as a director. Mr. Jobs passed away on October 5, 2011.

Director Compensation. Effective October 1, 2011, the board increased the annual board retainer from $80,000 to $100,000, increased the annual deferred stock unit grant from $140,000 to $150,000, and increased the annual committee retainer for the Audit Committee chair from $15,000 to $20,000. The annual retainer for committee membership remained at an additional $10,000 paid to each director. The retainer for committee chairs remained at an additional $15,000. The annual retainer for the Chairman of the Board, Mr. Pepper, was $500,000 for the 2011 fiscal year. The board met five times during the 2011 fiscal year. Every current director attended at least 75% of the board meetings, the committee meetings on which he or she served, and the company’s 2011 annual shareholders’ meeting. To encourage the directors to personally experience the company’s products, services, and entertainment, Walt Disney allowed each non-employee director up to $15,000 per year at the company’s resorts, cruises, and stores. The company also allowed family members, including spouses, children, and grandchildren, to participate and reimbursed their travel expenses.

Director Tenure.  On January 1, 2007, Mr. Pepper became the Non-Executive Chairman of the Board. Mr. Pepper has notified the board that he plans to retire at the 2012 annual shareholder meeting. The board concluded that it will extend Mr. Robert Iger’s CEO employment contract and name him Chairman of the Board upon Mr. Pepper’s retirement. Mr. Jobs passed away on October 5, 2011, and Mr. Bryson resigned from the board on October 21, 2011.

Executive Compensation.  In 2011, Mr. Iger, CEO, received fixed compensation of $2,962,932, a performance-based bonus of $15,500,000, and an annual equity award of $12,900,081. Mr. Iger’s total compensation was $31,363,013. Mr. Iger also received $371,439 in personal air travel and $561,303 for security. James A. Rasulo, CFO, received fixed compensation of $1,457,743, a performance-based bonus of $3,750,000, and an equity award of $4,676,340. Mr. Rasulo’s total compensation was $9,884,083. All executives were entitled to the option of a company-supplied automobile or a monthly payment; health club membership; free access to company theme parks, some resort facilities, and discounts on merchandise; and personal use of tickets that were acquired for business entertainment when no business use had been arranged.

Tuesday
Jun192012

The Director Compensation Project: Apple Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation.  We are for the most part including companies from 2011’s Fortune 500 and using information found in their 2011 proxy statements.

 Nasdaq and the NYSE have similar rules with respect to director independence.  NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors.  A director does not qualify as “independent” if he or she has a “material relationship with the company.”  NYSE Rule 303A.02(a).  In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years.  NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with 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 Apple Inc. (NYSE: AAPL) 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
($)

William V. Campbell

50,000

200,090

0

5,230

255,320

Millard S. Drexler

50,000

200,090

0

13,675

263,765

Al Gore

50,000

200,090

0

10,639

260,729

Robert A. Iger **

0

0

0

0

0

Andrea Jung

50,000

200,090

248,148

3,787

502,025

Arthur D. Levinson

50,000

200,090

0

6,706

256, 796

Ronald D. Sugar

75,000

255,884

0

2,615

333, 499

Steve Jobs***

-

-

-

-

-

Timothy D. Cook****

-

-

-

-

-

*These amounts include one or more products that are made available through the company’s board of directors equipment program. 

**Mr. Iger was appointed to the board on November 15, 2011 after the end of the fiscal year. As a result, Mr. Iger did not receive any compensation from the company in the 2011 fiscal year.  

***Mr. Jobs passed away on October 5, 2011 and, at his request, received no compensation for his services as a member of the board.  

****Mr. Cook received no compensation for his services as a member of the board.

 Director Compensation. During 2011, Apple Inc. held five board of directors meetings.  Each member of the board attended 75% or more of the total number of board meetings and the total number of meetings held by all committees of the board on which that person served.  The Director Plan, amended in 2009, provided for the non-employee directors to receive a one-time prorated stock option grant.  This was done in order to provide compensation for periods of service that would not otherwise be covered due to conflicting timing in the distribution of the annual grants with the director’s anniversary of joining the board and the date of the shareholders annual meeting. 

 Director Tenure and Leadership.  During 2011, there were many changes on the board.  After Mr. Jobs’s resignation as Chief Executive Officer on August 24, 2011, the board appointed him Chairman of the Board, a position he held until he passed away on October 5, 2011.  Mr. Cook was appointed to the board and to CEO on August 24, 2011.  Mr. Cook has been with the company since March 1998.  Dr. Levinson, who has served on the board since 2000, was appointed as Chairman of the Board on November 15, 2011.  Mr. Iger was appointed to the board on November 15, 2011.  Since October 2005, Mr. Iger has been the President and CEO of The Walt Disney Corporation.  Mr. Campbell, Chairman of Intuit Inc. since August 1998, had the longest tenure on Apple’s board, having served since 1997.

 Executive Compensation.  Apple believed that Mr. Jobs’s level of stock ownership, which totaled approximately 5.5 million shares at the end of 2011, significantly aligned his interest with that of the shareholders.  Therefore, his total compensation consisted of a salary of $1 per year.  Mr. Cook, the newly appointed CEO, earned a total of $377,996,537 during the 2011 fiscal year.  This included 1,000,000 restricted stock units (RSUs) at a current stock price of $376.18, totaling $376,180,000 in stock awards.  In determining Mr. Cook’s compensation, the board considered his promotion to CEO, the importance of retaining him, the ten-year vesting period of the RSUs, and the company’s belief that a CEO’s large equity investment aligns with shareholder interests.  In 2011, the board promoted Eduardo H. Cue to Senior Vice President of Internet Software and Services.  This promotion included a stock award of $51,852,000.  Mr. Cue’s total compensation for 2011 was $52,952,975, which included a $607,704 salary, $444,615 from Incentive Plan Compensation, and $48,656 of other compensation.  Mr. Cue’s other compensation consisted of 401(k) contributions of $12,798, life insurance premiums of $1,242, and a cash-out on accrued and unused vacations worth $34,616.

Saturday
Jun162012

Law and Society (Part 2): Teaching Happiness

On Wednesday, June 6, I attended a roundtable discussion entitled, “Engagement, Happiness, and Meaning in Legal Education and Practice.”  What I took away from the discussion was that there is significant evidence to suggest that law students are unnecessarily and excessively suffering from anxiety, depression, substance abuse, and other unhealthy responses to the stress of law school, and that law schools should do a better job of educating students about these risks and providing them with tools to help them better cope with stress.  What follows is a brief overview of the roundtable discussion, which I hope will provide some useful contacts for those wishing to learn more about what we can do as educators to help our students thrive.  I apologize in advance for the brief coverage (particularly of the last three speakers), which in no way does justice to the tremendous work each of these individuals is doing.  I hope you will take the time to follow-up on the links I provide.

The roundtable began with Rhonda Magee guiding us all through a mindfulness exercise.  I have some experience with mindfulness meditation (I’ve edited a book of dharma talks given by my sensei Ji Sui Craig Horton of the Cleveland Buddhist Temple during the year that I studied zazen with him, which is available at cost here--accompanying photobook available at cost here), and Prof. Magee struck me as someone who is highly skilled at conveying the essence of good practice in this area.  She is also President of the Board of Directors of the Center for Contemplative Mind in Society, which seeks to transform higher education "by supporting and encouraging the use of contemplative/introspective practices and perspectives to create active learning and research environments that look deeply into experience and meaning for all in service of a more just and compassionate society."

Peter Huang then spoke about his work with the Telos Project at the University of Colorado School of Law.  I pulled the following from a news story that you can find here:

In order to broaden student's perception of the legal profession, the university has implemented the Telos Project. The project organizes 25 students to reflect on their chosen path in a non-credit, reading intensive course. “The Telos Project is a small group seminar designed to engage law students in conversation about the behavioral and ethical dimensions of their legal training and prepare them for the legal profession,” University of Colorado Law School Vice Dean Dayna Matthew said.

Todd Peterson then discussed some of the empirical evidence that supports the conclusion that law schools have a problem in this area.  You can find his article, “Stemming the Tide of Law Student Depression: What Law Schools Need to Learn from the Science of Positive Psychology,” on SSRN here.

To round out the discussion, Marjorie Silver spoke about her work on therapeutic jurisprudence, Daniel Bowling noted that if you purposely wanted to design a course of study that would induce learned helplessness and depression you likely couldn’t come up with something better than the typical 1L experience (and he has designed a course to try and deal with this problem), and Lorenn Walker talked about her work with restorative justice for healing.

Finally, I couldn't help but think about the work my wife, Dr. Maria Pagano, has been doing in the area of substance abuse, where she has empirically validated the helper principle.  Certainly there is no shortage of techniques, from meditation to reflective writing to reframining to service work, that we can leverage to help our students avoid the pitfalls of excessive stress.

Sunday
Jun102012

Law and Society (Part I)

I just returned from the Law and Society Association's 2012 International Conference in Honolulu.  There were a number of excellent presentations, and I plan on blogging about a few of them over the course of my next few posts.  I want to start with a presentation by Lloyd Drury entitled "The New Governance Model of Publicly-Held Private Equity Firms," wherein Prof. Drury reviewed all the ways in which certain publicy-held private equity firms have effectively rejected traditional corporate governance tools like fiduciary duties and shareholder oversight without sending investors running for the hills.  Obviously, this may be primarily an issue of pricing, but the reason I find the project particularly interesting is because I think it can serve as a great introduction and/or closing to my Corporations class--encouraging my students to question everything corporate law suggests is necessary to facilitate capital formation.  Keep your eyes on Prof. Drury's SSRN page for a draft of the paper. 

Sunday
Jun032012

Director-Primacy and Team-Production as Real Entity Theories

I have previously debated the appropriateness of viewing director-primacy as a type of real entity theory of the corporation with director-primacy’s most renowned spokesperson, Stephen Bainbridge.  (You can find the last post in the series, with links to the preceding posts, here.) 

I now want to take that discussion a step further by suggesting that team-production theory may also be aligned with real entity theory.

For those of you not familiar with team production theory, you can go here to view the abstract for (and download the text of): Margaret Blair & Lynn Stout, “A Team Production Theory of Corporate Law.”  A relevant portion of the abstract provides that:

[W]e argue that the essential economic function of the public corporation is not to address principal-agent problems, but to provide a vehicle through which shareholders, creditors, executives, rank-and-file employees, and other potential corporate "stakeholders" who may invest firm-specific resources can, for their own benefit, jointly relinquish control over those resources to a board of directors…. The team production model … suggests that maximizing shareholder wealth should not be the principal goal of corporate law. Rather, directors of public corporations should seek to maximize the joint welfare of all the firm's stakeholders …

Thus, it appears clear that director primacy and team production theory differ in terms of what they view as the goal of corporate governance.  For director primacy, it is shareholder wealth maximization.  For team production theory, it is the maximization of “the joint welfare of all the firm's stakeholders.”  However, both theories locate the ultimate decision-making power in the board of directors, and I believe this fact makes them both candidates for alignment with real entity theory as follows.

To begin with, I believe it is important to understand that I come to this issue largely as a result of wanting to coordinate traditional corporate law theories of the corporation with traditional constitutional law theories of the corporation as part of my latest project, “The Silent Role of Corporate Theory in the Supreme Court’s Campaign Finance Cases” (forthcoming in the Penn. Journal of Const. Law—latest draft available for download here).  To that end, it seems relatively non-controversial to align artificial entity theory with concession theory, and nexus-of-contracts theory with the aggregate theory of the corporation.  However, deciding which traditional corporate law theory of the corporation (if any) to match up with real entity theory—the third traditional constitutional theory of the corporation—is a bit more complicated.

At the risk of over-simplification, I think one valid way of approaching the problem is as follows.  First, concession theory and artificial entity theory are aligned because both view the corporation as a creature of the state and tend to presume the state has great discretion in regulating its creation.  Aggregate theory and contractarianism, on the other hand, focus on the “association of citizens” that contract with one another for private gain via the corporate form, and view the state’s role as essentially limited to providing default rules to further private ordering.  While the typical economic analysis of contractarianism can be used to explain the corporate norm of director primacy as a function of efficient private ordering, one assumes it does not require power to be centralized in a board of directors as a normative matter.  The theories of director primacy and team production, however, go much further in establishing the board of directors as the “mediating hierarchy” of choice (though certainly not to the point of mandating such a structure), and therefore could be said to come closer to identifying a specific locus of corporate control that can be said to constitute the “real entity” that represents the corporation.  As Reuven Avi-Yonah has written (here): “The [emergence of the business judgment] rule reflected the real entity view, which equates the corporation with its management, and rejected the aggregate view of the corporation as an aggregate of its shareholders.”

Admittedly, there is some smashing of square pegs into round holes going on here.  Furthermore, given that my project ultimately seeks to distinguish theories of the corporation on the basis of how great a role they assign the state in terms of regulating corporations, distinctions between real entity theory and aggregate theory may be of limited relevance since both currently tend to justify limiting state regulation more than concession theory.  As Atiba Ellis has written (here): "The important implication of this real entity theory is that the corporation has a life completely separate and apart from the state; the state merely records the combination of the private parties and plays only observer of the corporation's formation."  However, I continue to believe there is value to be derived from trying to align the corporate and constitutional theories of the corporation, and to that end view director primacy and team production as good candidates for alignment with real entity theory due to their combination of situating the locus of the corporation in the board of directors and justifying this on the basis of contract rather than regulation.  As Lynn LoPucki has written (here):

The Team Production Theory has striking implications for bankruptcy theory. Applied to bankruptcy reorganization, the Team Production Theory turns existing contractarian bankruptcy theory virtually upside down. Bankruptcy reorganization ceases to be a regulation imposed by government and instead becomes a contract term by which creditors and shareholders agree to subordinate their legal rights to the preservation of the going concern.

Saturday
May262012

How JP Morgan’s $2 Billion Trading Loss May Impact Citizens United II

The United States Supreme Court is currently reviewing a petition for a writ of certiorari in the case of American Tradition Partnership, Inc. v. Attorney General of Montana.  The case has been dubbed “Citizens United II” by some because, as I blogged back in February (here), the “Montana Supreme Court ruling that upheld a state ban on corporate political independent expenditures…. appears to be in direct conflict with Citizens United.”  I was reminded of this case when I read the following in the Wall Street Journal (here) this past Tuesday:

 J.P. Morgan Chase & Co. is finding few friends on Capitol Hill…. Republicans haven't forgotten that J.P. Morgan gave a majority of its campaign donations to President Barack Obama and Democrats in the 2008 campaign. Even though the company has since reversed course and donated most of its political dollars to Republicans ... senior GOP officials say they still perceive the firm as cozy with the Democratic establishment…. And Republicans say their displeasure extends to contribution patterns by other banks including Goldman Sachs Group Inc., Bank of America Corp., and Citigroup Inc. …. But frustrations with J.P. Morgan are also a reason the GOP defense of the bank's misstep has been muted, according to senior Republican officials…. In January 2010, Mr. Boehner, now the House speaker, made a pitch to Mr. Dimon over drinks on Capitol Hill to make more donations to Republicans, who were opposing Mr. Obama's plans to impose tough new regulations on the industry. Since then, J.P. Morgan has worked hard to curry favor with important Republicans in Congress.

This strikes me as precisely the sort of thing that implicates both the anti-corruption and shareholder-protection rationales for regulating corporate political expenditures that a majority of the Supreme Court rejected in Citizens United.  In “A Contractarian Critique of Citizens United,” Joseph Morrissey recounts the following from Citizens United:

Justice Stevens cited to the district court opinion, written by Judge Kollar Kotelly.  That opinion discussed the subtleties of corruption and the evidence that electioneering involves indirect forms of influence peddling.   Judge Kollar Kotelly had found that politicians routinely request corporations to make electioneering communications so that the politicians themselves do not have to engage in disseminating certain messages.   She also discovered that politicians routinely communicate with corporations to thank them for distributing those messages.   In addition, she found that a vast portion of the American public – 80% -- believe that corporations get pay backs for engaging in political electioneering.   One lobbyist had even testified that indirect expenditures in fact generate more influence with politicians than direct contributions.   That testimony went uncontroverted.

Furthermore, in “Rational Coercion: Citizens United and a Modern Day Prisoner's Dilemma,” Anne Tucker argues that:

The prisoner's dilemma demonstrates the pressure on corporations to participate in politics via their checkbooks. That pressure existed before Citizens United (i.e., political action committees and affiliated non-profit foundations, and charitable contributions), but was exacerbated with the expansion of corporate political speech through independent expenditures. Increased corporate political spending impacts both the participatory rights and the economic interests of citizen shareholders. The individually rational choice of corporations to make political expenditures creates irrational results, which will impact the price and efficiency of political messages as well as promote the inefficient allocation of corporate resources.

It will be interesting to see whether the evolving JP Morgan story becomes a part of the Citizens United story.

Wednesday
May232012

The NYT, the SEC and Insider Trading (Part 3)

We are discussing the piece in the NYT about alleged "insider" trading at Lehman Brothers.   See Is Insider Trading Part of the Fabric?

The article contained allegations suggesting that pressure had been placed on analysts at Lehman to write more favorable opinions in order to garner additional investment banking business.  This raised possible concerns under NYSE Rule 472 and the global settlement with brokers designed to separate their investment banking and analyst functions.  Lehman was one of the firms subject to the global settlement.    

What ever concerns exist over the relationship between investment banking and analysts, the JOBS Act just put in place a provision designed to make the separation far more difficult to maintain.   According to Section 105 of the On Ramp provision, Section 2(a)(3) of the Securities Act was amended to provide that, in connection with a public offering for equity securities (and not just the IPO) for an "emerging growth company," the publication of an analyst report will: 

not to constitute an offer for sale or offer to sell a security, even if the broker or dealer is participating or will participate in the registered offering of the securities of the issuer.

This presumably means that the SEC cannot restrict the distribution of analyst reports (even those issued by the underwriter) during the offering process.  It probably sets aside the restriction in NYSE Rule 472 that prohibited analysts at firms involved in the underwriting from circulating reports until 40 days after the offering.  See Id.  ("A member organization may not publish or otherwise distribute research reports regarding an issuer and a research analyst may not recommend or offer an opinion on an issuer's securities in a public appearance, for which the member organization acted as manager or co-manager of an initial public offering within forty (40) calendar days following the offering date."). 

Moreover, Section 15D of the Exchange Act has been amended to provide that with respect to an emerging growth company engaging in an IPO, neither the SEC nor the exchanges can adopt rules that restrict: 

based on functional role, which associated persons of a broker, dealer, or member of a national securities association, may arrange for communications between a securities analyst and a potential investor;

The provision presumably overturns the prohibition in NYSE Rule 472 on analysts participating in road shows and may overturn the prohibition on communcations with prospective customers "in the presence of investment banking department personnel or company management about an investment banking services transaction." 

Likewise, the SEC and exchanges cannot adopt a rule that restricts:

a securities analyst from participating in any communications with the management of an emerging growth company that is also attended by any other associated person of a broker, dealer, or member of a national securities association whose functional role is other than as a securities analyst.

Analysts can, therefore, attend meetings in which management of an emerging growth company is "pitched" for investment banking business, overturning yet another requirement of NYSE Rule 472.  See NYSE Rule 472  ("A research analyst is prohibited from participating in efforts to solicit investment banking business. This prohibition includes, but is not limited to, participating in meetings to solicit investment banking business (e.g., "pitch" meetings) of prospective investment banking clients, or having other communications with companies for the purpose of soliciting investment banking business.").

All of this suggests that analysts can, with respect to emerging growth companies, have a much greater connection to the efforts to sell shares and to pitch management.  It will likely be difficult to ensure that this involvement is limited to emerging growth companies.  Moreover, it will likely be difficult to ensure, given this involvement, that analyst reports are uninfluenced by the needs of the investment banking arm of the firm. 

Thus, for example, it is hard to imagine an analyst for a managing underwriter issuing an unfavorable report during the offering.  This will be true even where the analyst is not subject to direct pressure from the investment banking side of the firm.  Investors, therefore, will always get a positive spin on the company, at least from the analysts connected to the underwriter. 

As the tumbling Facebook shares illustrate, investors benefit not from a rosy forecast but from the truth.  It is not at all clear that the provisions of the JOBS Act governing analyst reports have advanced that possibility. 

Tuesday
May222012

The Trial of Rajat Gupta (Opening Arguments)

There is some good coverage of the trial of Rajat Gupta who is accused of engaging in insider trading.  The Deal Book in particular looks like it will provide some detailed coverage.  An early example is here.   We will comment on the case from time to time from afar, relying on the strength of this commentary.  Had the case been in Denver, there is no doubt that the staff of the Race to the Bottom would have blogged the trial as we have for other important cases (the trial of Joe Nacchio and the trial of Ward Churchill). 

This is a case where the government wants it to be simple (and indeed, the prosecution described the matter as a "straightforward case of insider trading.").  Mr. Gupta gave information to others (out of friendship or in return for some benefit) and they traded on it.

Gupta's side will to some degree simply deny the charges.  Suggestive evidence (the taped phone calls that do not refer to Mr. Gupta by name) will be disputed.  But in addition, his side appears to be raising a more complicated defense:  As the Deal Book reported:

Mr. Naftalis also hinted at another defense strategy: portraying Goldman Sachs as a sieve of information. He noted that Galleon was a top customer of Goldman and hinted that Mr. Gupta was not the only Goldman insider with valuable information. Three executives from the company are under investigation by the federal authorities for possibly leaking illicit information.

This is a high risk defense.  A defense that others do it does not absolve Mr. Gupta.  To the extent the defense is that others provided the information, this is premised around the acknowledgment that, in fact, material inside information was conveyed but that someone other than Mr. Gupta conveyed it.  In other words, a crime was committed but not by Mr. Gupta.  Any hint that in fact the law was violated may make it easier for the jury to lean toward a conviction. 

Whatever happens with the defense, one thing seems clear.  Goldman will not come out of this looking particularly good.  The firm already appears to have a credibility problem with clients after some of the behavior, alleged by regulators, occurred during the financial crisis.  To the extent that the trial of Mr. Gupta suggests that there was widespread favoritism (including tips that provided trading advantages) to favored clients, this may not be well received by the less favored clients.