Sleep-Blogging Mary Schapiro's Confirmation Hearing

Having survived my live-blogging of the TARP Congressional Oversight Panel hearing yesterday, I thought I'd head over (virtually) to today's Senate Banking Committee confirmation hearing for Mary Schapiro. I will skip the Senators' opening statements and drop in when it's Ms. Schapiro's turn to talk. If she's still conscious at that point, she'll have passed her first test.

While we're waiting for the committee members to complete their oratory, let me say that I hate to be mean, but I'm not a big fan of this nomination. Since 1996, Ms Schapiro has spent most of her time running Wall Street's main "self-regulatory" organization, which in its latest permutation is called FINRA. Year after year, folks from this organization have swarmed through Wall Street firms, performing examinations, making rules and writing reports. Dunno why, but I just have a feeling they may have missed something here and there. If I were writing Ms. Schapiro's performance reviews, I don't think I'd recommend her for a big promotion.

10:38: OK, she's making her opening statement. She has a nice feminine voice, verging on breathy. I imagine this comes in handy when speaking to male Senators. Her statement, to me, is bland and boring.

Ah, Chris Dodd is asking why FINRA examiners didn't catch Madoff.

Schapiro responds: There's currently a "stovepipe" approach to regulation. Her excuse, in other words, is that FINRA had jurisdiction over Madoff's broker-dealer activities, but not his dealings as an investment adviser. (Stovepipe? A new one on me; the usual buzzword for this concept is "silo.")

Responding to a question about how everything got so screwed up, she says she warned Chairman Cox last August about an increasing "migration" of activities out of regulated entities. (Wait, is she saying it took her till August of 2008 to figure this out? Or did she mean 2007? Rather late, either way.)

10:48 am: Schapiro says credit rating agencies shouldn't be compensated by the firms whose products they rate. Not much of a shocker there.

10:51: Richard Shelby: Thinks the federal government may have to take over insurance regulation. In passing, he disses the NY State insurance department, which regulated AIG. He asks her how she'd restructure the regulatory system, saying he's not sure the Fed should be given a bigger role than it has now.

Schapiro's response: She seems to like the Fed as a systemic risk watchdog. She says it's the SEC's job to protect investors. (She's not taking the bait to bash the Fed and reach for more SEC authority. In fact, she mentions the possibility of the SEC being merged with other regulators.) On insurance, she thinks federal regulators should be involved if an institution poses systemic risk.

I don't hear any vision or novelty in her answer.

10:58: Credit rating agencies again. She suggests there should be some kind of oversight board for these guys. Or at least that's what I think she's suggesting, as she's making an analogy to FASB and PCAOB.

11:02: She wants to "take the handcuffs" off the SEC's enforcement division. She also wants to build a stronger Office of Risk Assessment. But we'll never be able to catch everything, she says.

11:07: Question about proxy access.

Schapiro responds: It's time for the U.S. to join the 40 foreign jurisdictions that already have proxy access. The devil is in the details, she says, but she's clearly signaling a change from the Cox approach. I believe the folks at union pension funds just ran out to get doughnuts. Time to celebrate!

Sorry, forgot to "time stamp" from here on in. I can't imagine you really care.

Another question (not sure which Senator is talking) about regulatory reform. Schapiro seems to say the federal government should have authority over anything that poses systemic risk. No one asks her who is going to figure out which products, activities and firms are creating systemic risk, or how we're going to get it right next time. (Judging from her earlier answer, it looks like she'd be willing to rely on the Fed for that.)

She's asked about the uptick rule and short selling. Says she'll look at all that and see if the rule should be re-instituted.

Question about "revolving door" at the SEC. Schapiro responds that she worries about people leaving the SEC to work in the industry, but she also worries about restricting this so much that no one will want to work for the agency in the first place. An eternal dilemma for federal agencies, and she doesn't suggest any specific solutions. The panel seems satisfied, though.

Ah, finally someone (Menendez?) asks her to respond to criticisms of her past performance and the idea that she is a "predictable and safe" choice but not a "robust" one. (Sorry, can't see the members' nametags, and I'm not enough of a Senate geek to recognize all the faces.)

Schapiro responds: She started her career as an enforcement attorney, and she intends to "ignite passion" in the Commission's enforcement lawyers. She calls today's WSJ's article unfair. She has been and will be aggressive, there'll be no sacred cows, etc.

Very nice, but this all misses the point. It's not just about her commitment to enforcement after the fact, but her ability to catch potential disasters before the fact. And her track record isn't so good on the latter.

Question about investor education/literacy: She wants the SEC to develop plain English explanations of stuff for investors and distribute them all over the place. (Yes! Plain English rocks.)

Dodd asks her to comment on the lawsuits over the FINRA merger. They're frivolous, she says.

OK, Mary's done. Dodd is acting charming to her kids. A lovefest.

In fact, the whole hearing has been a perfunctory lovefest. Eric Holder, eat your heart out.

Live-Blogging the Congressional Oversight Panel Hearing

I'm just sitting down to live-blog, intermittently, the hearing of the TARP Congressional Oversight Panel, or COP. This hearing is about regulatory reform, BTW, not the panel's ongoing inquiry into what on earth Hank Paulson has been up to.

This isn't my first try at live-blogging a hearing, but the soporific effect of droning Congressmen has foiled my past attempts. However, this isn't a Congressional hearing, so perhaps I can stay awake.

Chair Elizabeth Warren gave her introduction, and now the panel members are each giving statements.

9:08 am - Damn, I forgot there's a Congressman on the COP - Republican Jeb Hensarling; he's speaking now. Must try not to fall asleep. I think he's warning against an overreaction that might lead to overregulation. Thanks, Jeb, but I'm going to worry about that one later.

Damon Silvers of AFL-CIO followed, but my toast was popping up so I missed him.

9:19 am - Former Senator John Sununu just made a good point - that it's not just what regulations you have, but how those regulations operate in practice. I feel like people don't say this often enough.

9:24 am - Richard Neiman, NY State Banking Supervisor: Not much of interest. Sorry, Mr. Neiman.

Now cometh the witnesses: (here's the witness list).

9:29 am - Gene Dodaro, acting head of the GAO: Regulatory system is outdated, has gaps, etc. New products, like credit default swaps, aren't sufficiently regulated. But we must avoid "unanticipated consequences" of any changes we make. (Well, Gene, how does one take steps ahead of time to avoid unanticipated consequences? Do you see any flaw in that concept?) He notes that no one regulator is charged with looking at risks across the whole system. Yes indeedy, that's been a problem.

9:46 am - Hensarling says prosecutors are focused on terrorism and don't investigate and prosecute fraud these days unless it's earth-shaking. An interesting point - is he right, and is this an underestimated factor in the meltdown?

9:48 am - Dodaro has what I'd swear is a classic New York accent - and a face to match it - even though Wikipedia says he grew up in Pennsylvania. He really ought to be starring on Law and Order. Oops, my attention is wandering. Detailed Q&As going on about pros and cons of different federal regulatory structures, involvement of states, etc. State regulators, says Dodaro, give you "eyes and ears on the ground" so we should keep them in place.

10:05 - Second panel is seated. Warren just made a comment about having trouble with people's names and this being like a "confusing dinner party." No wonder I'm so hungry.

10:07 - Sarah Bloom, Commissioner of the Maryland Office of Financial Regulation. Her not-so-thinly-veiled message seems to be that the state regulators have been doing their jobs, but the feds have not. From her state "foxhole," she says, she's watched "classic regulatory capture" take over in Washington. Go, Sarah. Oooh, she even managed to mention Katrina and FEMA. She claims the states were on top of subprime lending and saw the flaws of the Basel capital accord (you know, that brilliant decision to let the banks calculate their own risk and decide how much capital they needed).

10:13 - Joel Seligman, President of the University of Rochester and serious securities law guru in his past life: Lays out his broad principles for a new system, including: (1) let's make a clear distinction between emergency moves and long-term restructuring, and (2) financial regulation should be comprehensive, including all products, folding in insurance companies (AIG, anyone?), credit rating firms, investment advisers. We have a "partial" regulatory system at the moment. In his new dream system, the Fed would be at the top. He also mentions "private rights of action" as being part of the regulatory structure. This means lawsuits, by those dreaded trial lawyers. Wow, I didn't expect that one, but I kind of like it.

10:19 - Robert Schiller, Yale economist: Brags that he's written 2 books about this subject, and seems to be implying "why haven't you guys read these already?" He wants to "democratize finance." Government should subsidize personal financial advice and financial education. He agrees with Elizabeth Warren's idea of a "Financial Products Safety Commission." We need to improve risk management. He wants to create "continuous workout mortgages;" i.e., in recessions the mortgage payment and principal would automatically adjust down. Good luck with that one, Bob. Have a nice drive on Utopia Parkway.

10:22 - Joseph Stiglitz, Columbia economics professor and Nobel laureate: This bailout, and past bailouts, reflect the failure of our system to meet basic requirements, like evaluating creditworthiness. In fact, America's financial system is pretty much a failure overall -- lack of transparency, flawed incentive structures that foster risky, short-term behavior. Good regulation can attract capital and encourage creativity. Derivatives should be approved by that wonderful Financial Products Safety Commission that could exist in the future. TARP has failed because there's been no regulatory reform accompanying it. We could have used $700 billion to create a new institution - huh? sounds intriguing but he's not explaining it. I kind of expected more from Nobel Prize Guy.

10:30 - Marc Summerlin, Managing Director at the Lindsey Group (who is this person? I must look him up): Fed should take a more active role in preventing bubbles and mitigating boom/bust cycles, and in fact the Federal Reserve Act says so. (I'd like to hear more about that part.) Fed has created "a bias toward overvalued assets." Buying a house with no down payment "is not home ownership; it is renting with risk." Nice point. Also, binding leverage ratios work and we should have more of them, he says.

10:37 - Peter Wallison from the American Enterprise Institute: Regulation itself introduces moral hazard, because people think the government is on top of things. There is no policy reason why the government should take responsibility for preventing business failures - let 'em fail. Regulation hasn't been working, so why have more of it? (Gee, you'd think this guy was from the American Enterprise Institute or something.) It is "a very bad idea" to empower an agency to identify "too big to fail" institutions because you end up with numerous Fannies and Freddies that have a competitive advantage over purely private firms. So what does he want to do? Require more transparency about the risks that firms are taking, and pay more attention to short selling and hedge funds.

Question period starts: Elizabeth Warren goes directly to Wallison's argument that regulation hasn't worked. She refers to the "regulatory capture" that state regulator Sarah Raskin described and asks him: isn't it really "non-regulation regulation" that has failed here?

Wallison (who still believes in oxymornons like market discipline) answers that creditors, not regulators, are the ones that can effectively "regulate," as long as there's transparency. Warren invites Raskin to respond. She says she believes regulation has worked, again praising state regulators. I hope she's right, though I'd feel better if she weren't a state regulator who fears being legislated out of existence.

Seligman comments that "effective regulation can increase confidence." But "non-regulation regulation" can undermine that confidence. (Will the oxymoron "non-regulation regulation" spread and become the new catch phrase for policy geeks?)

Hensarling, being a good Republican, apparently woke up when Wallison mentioned Fannie and Freddie; he asks for comments on the role of the GSEs. Summerlin says Fannie/Freddie had an incentive problem - they could "privatize profits and socialize losses." So the government backing made things worse, right? asks Hensarling. Yeah, I guess, says Summerlin.

Silvers from the AFL-CIO, who's been strangely quiet, asks Seligman about regulatory consolidation. Seligman talks about balancing the useful expertise of separate regulators (e.g., for securities and commodities) against the danger of regulatory arbitrage.

Silvers asks Raskin how Fannie/Freddie mortgages have performed versus purely private sector mortgages. She doesn't really answer the question.

Silvers asks Stiglitz what he thinks of the Fed as a regulator. Stiglitz says the Fed was " too easily captured in the spirit of the bubble." It must become more explicit about its mandate, and that must be to create financial stability, not just to monitor inflation. And it should be more "representative." In Sweden, he notes, labor has representation at the central bank. I'm proud of the American Enterprise guy for not immediately jumping up and calling Stiglitz a socialist just for mentioning Sweden.

Gotta go now - you're on your own.

Big Bedfellows

Last week found me lurking in the carpeted hallways of D.C.’s Capitol Hilton, press pass hanging from my neck. The occasion was the Council of Institutional Investors (CII) spring meeting, entitled “Thinking Globally.” I assume CII printed its glossy brochures before subprime hell broke loose, and it was too late to re-name the event "Grimacing and Clutching a Bottle of Maalox.”

This seemed like your typical corporate conference: the suits gray, the ballroom chandeliers glitzy, half the audience checking Blackberries as the speakers droned on. So I was startled when a CII board member from a union pension fund mounted the dais, along with a half-dozen hotel workers, to praise the Hilton’s unionized status and remind the crowd to tip generously. People applauded politely, but it was clear not every institutional investor in the room was pleased with the guy's "rah-rah unions" message.

The incident reminded me that people - and yes, bloggers are people too - like to talk about "shareholders” as if they were a homogeneous group when, really, we all know that's silly.

Big shareholders, for one thing, command more respect than little ones. At the conference, SEC Commissioner Kathleen Casey encouraged institutional investors to huddle with corporate managers. (I note that Kathy, in person, is a striking blond who clearly knows her way around a makeup counter, and also that her speech, oddly, isn't yet posted on the SEC website.) And former Pan Am CEO Thomas Plaskett—a guy who’s sampled the doughnuts served in the boardrooms of 12 different companies—had a similar message; disdaining formal “say on pay” resolutions, he suggested those in the room simply “pick up the phone" and call directors to chat about executive compensation.

Some worry that companies, as they make nice to big shareholders in ex parte encounters, foster what SEC Commissioner Atkins called “tyranny of the minority.” Institutional investors, after all, don't have an obligation to represent the concerns of retail shareholders, who are probably more likely to get an audience with the Pope than to get one with a comp committee chair at a Fortune 500 company.

Anyway, I sure hope no CII members directed their anti-union sentiments at the Hilton's unionized chambermaids by leaving soggy towels on the bed.

You Rock, IRS

Thanks to Hillary Clinton, we all know who gave Barack Obama sound bites for his speeches. But what genius has been feeding lines to folks at the SEC? Last week an SEC official devoted an entire speech – in Australia*, no less – to a strained analogy between the 1962 western, The Man Who Shot Liberty Valance, and...I don’t know, something or other.

SEC Commissioner Kathleen Casey also waxed clumsily metaphorical recently. Speaking at a conference, she commented that when Congress has tried to use tax laws to tamp down executive compensation, compensation has simply “shifted” elsewhere “like a rock on jello.” (I keep wondering if she meant to say "jello on a rock." Would a rock on jello really shift? Wouldn't you need a whole lot of jello and a really small rock? Anyone out there looking for science project ideas?)

Commissioner Casey may soon be eating her words. The very day she delivered that speech, the IRS threw Proxyland (the place, not the blog) into a tizzy by deciding to re-interpret a section of the Internal Revenue Code that’s been sitting around, not doing terribly much, since Bill Clinton signed it into law in 1993. I’m talking, of course, about the famous Section 162(m), which says you can only deduct a paltry $1M per year for a top executive’s compensation, unless (nice big exception here) it's completely "performance-based.”

Last week, backing up a less formal ruling it issued in late January, the IRS officially confirmed its new tough guy position, which basically says: If an executive's contract calls for bonuses tied to performance, but also guarantees him freebie bonuses to be paid out as severance if things don't work out - no matter how he's performed - then the bonus program isn't entirely performance-based. So, sorry, no tax deductions. Did that make any sense? The tax code is no fun to blog about.

Even though the IRS was nice enough to grandfather all existing contracts, the immediate result of this ruling will be that law firms will reap their own "performance-based compensation" for re-writing massive numbers of bigshot employment agreements. One firm even suggests that “most companies will want to eliminate these termination and retirement accelerations from their plans and agreements.” If that’s right, there's a chance that Commissioner Casey, and others who don’t believe in the power of legislation to affect executive compensation in a meaningful way, could be wrong.

If this tax ruling inspires companies to hand out severance payments in a less carefree manner, I'll have one less thing to complain about here. In which case I'll have to find my lab partner, get out my rock and my jello, and figure out how to shift my cranky attention to something else.
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*Coincidentally, this very blog just made news in the Land Down Under.

It's The Thought That Counts

If someone else wrote your Christmas wish list, it probably wouldn't include the thing you want most. When it comes to the content of CD&As, only one list matters - the one written by the SEC last year - and the rest of us are stuck with what we get, no returns or exchanges allowed. (I swore off insipid holiday metaphors a year ago, but I also swore off salt and vinegar potato chips and that’s not going so well either.)

In its October report card on CD&A disclosures, the SEC told companies to stop rambling on about general compensation philosophies without explaining how they'd gotten to the actual numbers in the compensation table. But the report barely mentioned the #1 item on the Proxyland wish list for CD&As: analysis of how an executive’s overall “wealth accumulation” affects the level and structure of his compensation. For example, if someone has gotten rich through mega stock option grants, might that lessen his need for a huge retirement payout, or dilute the "incentivizing" effect of piling on more options? As noted here a while back, the answer to this question seems obvious, which may explain why companies prefer not to ask it.

Since it’s too damn cold to go out and shop, I decided to see how many of the 343 proxy statements filed since November 1 include the phrases “wealth accumulation” or "accumulated wealth" in the CD&A. The answer seems to be 7, and I've summarized the analyses for your convenience:

Tyco International Ltd. (TYC) and Robbins & Myers, Inc. (RBN): WE'VE USED THE WORDS "WEALTH ACCUMULATION" IN PASSING, BUT THAT'S ABOUT IT.

Revlon, Inc. (REV): WE'VE THOUGHT ABOUT THE CONCEPT, BUT IT TURNS OUT NO ONE HERE IS THAT WEALTHY.

From Revlon's CD&A: “As a general matter, since the Named Executive Officers have not realized any meaningful wealth accumulation from equity Awards or other incentive compensation, as described above, the absence of wealth accumulated from prior compensation, such as equity Awards, has influenced setting base salaries."

Acxiom Corp (AXCM): WE LOOK AT ACCUMULATED WEALTH WHEN DECIDING ON LONG-TERM EQUITY AWARDS, BUT THAT'S ALL WE'RE GOING TO TELL YOU.

From Acxiom's CD&A: "The amount of RSUs and stock options were based on the Committee’s evaluation of a number of factors which included each recipient’s responsibilities and demonstrated performance, internal pay equity, accumulated wealth analysis, analysis of the benchmarking data discussed above, and retention considerations."

Monsanto Company (MON): WELL, WE DID A WEALTH ACCUMULATION ANALYSIS WITH RESPECT TO OUR CEO (WHO HAPPENS TO HAVE THE SAME NAME AS ACTOR HUGH GRANT), BUT WE DECIDED IT SHOULDN'T AFFECT HIS COMPENSATION EVEN THOUGH HIS TOTAL COMP FOR 2007 WAS NEARLY $11 MILLION, FORBES LISTED HIM AS THE HIGHEST-PAID EXECUTIVE IN THE CHEMICAL INDUSTRY FOR 2006, AND SOME MIGHT SAY HE HAS A LOT OF EQUITY. OH, AND WE'RE NOT GOING TO EXPLAIN OUR REASONING EXCEPT IN A VAGUE WAY.

From Monsanto's CD&A: "The Committee made no adjustment to Mr. Grant’s compensation or to the program design as a result of the analysis, based on its assessment that the existing program provides strong alignment with the creation of shareowner value, as well as retention value.”

Batesville Holdings, Inc.: WE PLAN TO FACTOR WEALTH ACCUMULATION INTO OUR COMPENSATION DECISIONS IN THE FUTURE. (AFTER ALL, WE'RE IN THE "DEATH CARE" BUSINESS SO WE KNOW YOU CAN'T TAKE IT WITH YOU.)

From Batesville's CD&A: “We expect that wealth accumulation data will be used in setting compensation for our Named Executive Officers going forward.” (Legalistic note: This was not technically a proxy statement, but a 10-12B filing related to the upcoming spinoff by Hillenbrand Industries (HB) of its subsidiary, Batesville Casket.)

Financial Federal Corporation (FIF): WE DON'T REALLY CARE HOW RICH OUR EXECUTIVES GET.

From Financial Federal's CD&A: "The Committee does not believe accumulated wealth from prior compensation or significant compensation from one component of compensation should necessarily negate or reduce compensation from other components. For example, if an officer's equity awards are providing significant compensatory value because the Company's stock price has been appreciating, that would not cause the size of future equity awards or other compensation to be reduced."


All 7 companies deserve credit for at least mentioning wealth accumulation. even if most don't intend to change their ways. As for the 336 firms who failed to use the magic phrase, I will forgive you provided you each ship me one of those gynormous popcorn tins.

p.s. This post was changed to correct an error in a number. The mistake was only up for about an hour before I caught it, but you never know when some unfortunate soul might be reading this thing.

Chucking It

At today’s SEC open meeting on proxy access, Chairman Cox was definitely protesting too much, and as you know Shakespeare was all over that one.

The Chairman listed many reasons why the Commission absolutely positively had to clarify its position on proxy access right now this second before the 2008 proxy season got underway. Uncertainty was very dangerous, he said. So the Commission adopted today what Annette Nazareth (its sole Democratic member) has been snarkily calling the “non-access” proposal, over her dissent.

Many knowledgeable types who’ve been following this issue didn't share the Chairman's sense of urgency. This includes Ms. Nazareth, who not long ago noted that the proxy access question had been left hanging for the entire 2007 proxy season and “not surprisingly, the sky did not fall.”

Much as we admire certain aspects of Chairman Cox’s personality (namely, his fondness for Plain English and his boyish delight in technology), his handling of this issue has been overly cute, as in his parlor trick last summer of voting for both sides. If he had more spine, he would simply have grabbed a machine gun many months ago and blasted the whole proxy access concept to bits, Chuck Norris-style. Instead, he made nice to it for over a year, then quietly knifed it in the back at the last minute.

On November 14, Cox told the Senate Banking Committee he couldn’t predict how his agency would rule, saying all the Commissioners “take this issue very seriously and with an open mind.” He explained that the issue had generated 34,000 comments – the most for any SEC proposal in history - so there was still a lot of reading to do. But the idea that a mere two weeks ago the Commisssion was still debating this issue like the British Parliament strikes us as (duck, here comes more Shakespeare) “an improbable fiction.”

At least we didn’t waste our time writing a comment letter, like those 34,000 poor suckers.

Feeling a Draft

The concept of proxy access, as we (and some wiser souls) have noted, is BIG. It fosters levels of hysteria usually reserved for things like doping on the Tour de France, or, in this country, Barry Bonds moving his lips.

In a brilliant move, the SEC is publishing two proposals – one for and one against proxy access. Chairman Cox, a former Congressman, has voted for both. (How foolish we have been, agonizing over life’s wrenching decisions when all this time we could have taken both The Road and The Road Not Taken. Take that, Robert Frost.)

Here’s the SEC’s official summary of its non-decision. As of this posting, the full proposals still aren’t released. Drafts are circulating among the in-crowd, but it’s summer, Harry Potter is 700-plus pages, and Barry Bonds just called that adorable Bob Costas a “little midget man,” so we are way too busy to read any draft documents.

Defining Moments

Harry Potter can speak Parseltongue, the language of snakes. SEC Chairman Cox prefers Plain English, and has declared it the official language of executive compensation disclosure. But most CD&As this year remained in Proxytongue, making the Chairman hopping mad. “The SEC is dead serious about shedding 70 years of accumulated bad habits in writing,” he said not long ago.

Still, Proxytongue is far from a dead language. In a 10-K, for example, only certain parts must be in Plain English. For some reason, those parts do not include the “Business” section, where a company tells us what the heck it does all day.

Explaining your business is easy if you’re, say, Wendy’s International, Inc. (WEN), which according to its 10-K is “primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food.” A simple (if optimistic) description.

But what if you’re a company doing pharmaceutical research? Here's one that filed its 10-K yesterday, Peregrine Pharmaceuticals, Inc. (PPHM). Peregrine’s business involves “two platform technologies: Anti-PhosphatidylSerine (“Anti-PS”) Immunotherapeutics and Tumor Necrosis Therapy (“TNT”), and they're testing a potential cancer fighter called bavituximab, which sounds like something Harry, Ron and Hermione stirred up in a cauldron.

Peregrine's year-over-year numbers ain't great, but it has a way with words, managing to explain the science behind its business in something approaching Plain English. The 10-K even includes a glossary, from which we learned that a "chimeric" is "a type of antibody that is mostly human and partially mouse." Cool.

Inspired, we looked at other recent 10-Ks (anecdotal research, not the best but the only kind we can afford) and while we didn't find another pharmaceutical outfit that was nice enough to throw in a glossary, slews of companies in the lingo-ridden oil, gas and mining industries do use them. The handy upfront glossary in the 10-K for gold and silver mining company Commerce Group Corp. (CGCO), sends us back to eighth grade earth science: (An "Outcrop" is "that part of a geologic formation or structure that appears at the surface of the earth.")

But it will take more than a few definitions for us to get what some companies do, whether described in 10-Ks or press releases. ("Integra LifeSciences Holdings Corporation (IART) announced today that it released the Uni-CP(TM) Compression Plating system, the latest addition to its extremity fixation product line." No, that will require a magic Plain English wand.

Mad Man

A year ago this month Thomas Perkins, Hewlett Packard (HPQ) director and fifth ex-husband of pulp novelist Danielle Steel, got mad and resigned because he didn’t like how HP was handling an investigation into press leaks. The leak scandal ended up keeping everyone at HP quite busy for a while, as you may recall.

If a director resigns because of a spat with his company about "operations, policies or practices,” the firm is supposed to disclose the “circumstances,” as the SEC rules politely put it. Yep, within 4 business days; it says so right there in Form 8-K. HP, however, announced that Mr. Perkins had left but didn’t explain why until months later.

On Wednesday the SEC settled charges it had brought against HP for this lapse. HP promised, without admitting or denying having broken the rule, to cease and desist from breaking the rule any more. (Thank goodness we read Through the Looking Glass as a child.) No fines were paid, no knuckles broken.

If we ran the joint we wouldn't have been so nice to HP, which clearly should have disclosed the incident. While this kind of violation isn’t as much fun as when people steal money, it's a serious matter. Disclosure is supposed to be the key to the securities laws. If we have to hear one more SEC staffer remark that “sunlight is the best disinfectant,” we will lose our lunch and have to reach for the disinfectant. Even the most avid regulation-haters grudgingly admit that if there’s anything the agency is allowed to do, it’s to ensure that information is revealed so the market, in all its glory, can function.

If a director feels strongly enough about something to resign, shareholders should indeed be told. More and more, modern corporate governance hinges on the hope that directors will think for themselves and know what they’re doing. So we need to know what they’re doing too. And not just because a pissed-off director storming out of a boardroom is to this blog what steamy sex is to Danielle's novels.

Arms and the Man

We wonder if SEC Commissioner Paul Atkins hates himself. He purports to love free markets and be wary of regulation, yet he is a regulator. Of course he’s not alone; with so many anti-regulators running federal agencies, therapists all over Washington must be lending an ear to the inner conflicts such outer conflicts may produce.

Last week the SEC held the first in a series of “Roundtable Discussions Regarding the Proxy Process,” with Atkins among those attending. On one panel, a couple of institutional investors noted that before annoying CEOs with proxy proposals, they try to meet with companies in private and air their grievances about governance and whatever else. Apparently this often results in quiet changes to company practice or policy, and the best part is that Gretchen Morgenson never has to know.

We would have expected Commissioner Atkins, a Bush appointee, to like this concept. True, one of the institutions represented on the panel was Knight Vinke Asset Management, a self-described “activist fund,” and Atkins doesn't like troublemakers. But the other was TIAA-CREF, whose shareholder activism is known to be gentlemanly. And shouldn't a free marketeer be pleased when "the market," represented here by self-interested, sophisticated shareholders, pressures entrenched or clueless management so regulators don't have to?

Yet Commissioner Atkins seemed perturbed that big institutions - having no fiduciary responsibility to other investors - engage in what he called “behind-the-scenes maneuvering.” He even accused nice TIAA-CREF of “arm-twisting” companies into adopting measures that, if put to a shareholder vote, might go down in flames. “Tyranny of the minority,” he called it.

The odd thing is, we must grudgingly admit Mr. Atkins has a point. As more big shareholders explore the activist lifestyle, it's becoming apparent that no one has answers to all the questions this raises about inter-shareholder relationships. Enter the law professors: We predict that the topic of rights and duties among shareholders will soon be to scholarly corporate law journals what starlet anorexia is to Us Weekly.

Maybe Commissioner Atkins is just worried that all those twisted arms will keep CEOs off the golf course, leaving him no one to play with. Tell it to your therapist, Paul.

Unwanted Gifts

Last Christmas, when the SEC got the notion to fiddle with the rules for disclosing stock options, rumor had it they were working for the Forces of Corporate Evil (whose official spokesman is, of course, Mr. Burns of The Simpsons). If so, they may have bungled the assignment.

Instead of the number that was originally supposed to go into the Summary Compensation Table - the value of all options granted to an exec – the SEC went for the value of the options that vested. This victory made the Forces of you-know-what rub their manicured hands together and cackle because if a CEO was given, say, 50,000 options with 5-year vesting, only 10,000 would need to be reported at a time. Shareholder activists had a major hissy fit.

But it’s unclear who really won here. Take the proxy filed yesterday by Laboratory Corp. of America Holdings (LH). Thanks to the vesting of grants from prior years, the SEC's new approach tagged former President/CEO Thomas Mac Mahon with stock awards valued at over $18 million rather than the mere $4.5 million granted in 2006. So activist organizations like the AFL-CIO, which like to recalculate total comp based on grants rather than vesting, will wind up with a much smaller take for Mr. Mac Mahon ($7.6 million) than the SEC's method produces ($21.5 million).

Speaking of big numbers, we're loving the “Potential Payments Upon Termination or Change of Control” chart in the company's proxy. Apparently Mr. Mac Mahon was eligible for a stash ranging from $53 million in a termination for Cause (!) to nearly $83 million in a change of control. Just plain old retirement, which befell the man at the end of last year, is supposed to yield him $76 million under the company’s handy “Transition Plan.”

If Mr. Burns weren't yellow, he'd be green with envy.

Ripped (Off) From the Headlines

With Anna Nicole’s burial behind us, we can all get back to whatever we were supposed to be doing this week. Oh, is today Friday? Sorry, guess it's too late for that.

I cannot fill the void left by our tragic loss of the most engrossing tabloid story since bald Britney, but here are some headlines worth noting:

SEC Takes Action On Proxy Access

Having sheepishly shuffled its feet since last September, the SEC has finally taken a firm stance on the politically loaded question of whether to let certain shareholders stick certain proposals into certain companies’ proxy statements in certain circumstances, a concept known as "proxy access." (As previously noted here, many denizens of Proxyland find this idea severely disturbing, probably because if you think of shareholder activist strategies as high school seniors, proxy access would be pictured in the yearbook as Most Likely To Succeed.)

Pressured from all sides, Chairman Cox came out decisively in favor of procrastinating for another year. He has – you guessed it - commissioned a study. And John White, head of the Division of Corporate Finance, made it official with this rousing statement on the topic:

"I don't have much more to say at this point, but understand that our goal… remains to act in time for the 2008 proxy season. "

Aliens Invade 10-K Filing

It has fallen to ace blogger Michelle Leder at Footnoted.org to prove once and for all that aliens exist and periodically take over the minds of earthlings. No other explanation can be found for the Compensation Discussion & Analysis inserted in Kinder Morgan Management, LLC’s 10-K, which Michelle quoted today:

Unlike many companies, we have no executive perquisites and, with respect to our United States-based executives, we have no supplemental executive retirement, non-qualified supplemental defined benefit/contribution, deferred compensation or split dollar life insurance programs. We have no executive company cars or executive car allowances nor do we offer or pay for financial planning services. Additionally, we do not own any corporate aircraft and we do not pay for executives to fly first class. We are currently below competitive levels for comparable companies in this area of our compensation package, however, we have no current plans to change our policy of not offering such executive benefits or perquisite programs.

I hope someone has alerted NORAD.

(p.s.: There is a remote chance aliens were not involved here. As one law professor has argued, businesses organized as publicly traded partnerships, as is Kinder Morgan, tend to be more accountable to their owners than traditional corporations.)

Lenovo Recalls Laptop Batteries, Citing Fire Risk

This has nothing whatsoever to do with corporate governance, but it has to do with me, which is more important. Upon learning that aliens really walked the earth, I dropped my ThinkPad laptop, an event that vastly increases the risk my Sony lithium-ion battery will soon explode. So if you don’t hear from me next week, you’ll know why.

Not a Hoax

My last post dealt with the White House's "little-noticed" tinkering with an executive order affecting federal regulation, part of its ongoing campaign to make real regulators quit their jobs so they can be replaced with rejected first-round American Idol contestants.

Though the order was amended a while ago - January 18 - the scheme was indeed "little-noticed" when I blogged about it yesterday. Today, however, it is on the front page of the New York Times. One small step for the Times, one giant leap for Proxyland. Or maybe it's the other way around.

Working for the Clampdown

Happy Milton Friedman Day! It feels a bit early for this kind of tribute, the man having left us only two months ago. Life is so unfair: Nine years gone since the death of a different Republican hero, yet not one Sonny Bono Day have we celebrated.

Still, we must honor this occasion. So let’s mull over a little-noticed recent milestone in the annals of deregulation, a cause close to Mr. Friedman’s heart.

While drafting his State of the Union address, the President took his pencil and made some changes to an executive order entitled "Regulatory Planning and Review" (Executive Order number 12866, for you lottery buffs). First adopted in 1993 as part of the Clinton-Gore “Reinventing Government” bash, this order is believed to be the sole extant document from the Clinton era that Dick Cheney has not made into a spitball.

Even before Mr. Bush got hold of it, 12866 was a nice exercise in bureaucratic poetic justice, requiring agency officials to follow a bunch of vaguely worded and irritating procedures before making new regulations. For example, they’re supposed to prepare annual “regulatory plans” and submit lots of paperwork to the White House Office of Information and Regulatory Affairs (an arm of the not-very-nice-these-days OMB), explaining how each regulation they propose is, like, totally awesome, absolutely necessary, and brimming with exciting benefits that way exceed any costs.

Under the original order, each agency also had to appoint an internal Regulatory Policy Officer (RPO). Here's where Mr. Bush just got creative: Agency heads used to be able to pick anyone they wanted for this thankless-sounding job, but under the revised order all RPOs must now be presidential appointees. Oh, and get this: from now on an agency can’t "commence rulemaking" - or even add to its regulatory plan - unless the RPO says it’s OK. Agency heads can overrule the RPO, but having to do so over and over could dampen a bureaucrat's yen for new rules, which is probably the general idea.

While so-called independent agencies like the SEC are exempt from parts of the executive order, the stuff about regulatory plans and RPO approval does apply to them. I meandered around on the SEC website but ran out of patience before I could find the name of the agency's current RPO. (A free Sonny and Cher CD awaits anyone who can tell me.) Of course, the SEC Chairman is a presidential appointee and no political novice, so maybe he can just do the job himself.

To borrow Sonny Bono’s epitaph, when it comes to the Bush administration and de facto deregulation, the beat goes on.

Think Different

The stock options backdating scandal is getting monotonous, with 200 companies under some sort of option-y cloud. And now Steve Jobs is back, looking earnest in his long-sleeved black T-shirt as he tries to iExplain some other iProblems with Apple option grants. (We wondered back in October if there was more to the Apple story, so we’re feeling smug.)

After all this backdating, we all deserve a fresh and different scandal for the New Year. So I was overjoyed when I put my thumb into last Friday’s pre-Christmas pudding of SEC filings and pulled out a plum. (I hate these tired seasonal references as much as you do, but like bourbon balls on Christmas Eve, they’re irresistible. See, there I go again.)

Hawk Corporation (HWK) announced in an 8-K/press release that the SEC is raising questions about its "preparations for compliance" with Section 404 of SOX. (That’s the big nasty SOX section that says management has to make sure its internal controls over financial reporting are up to snuff.) The Commission is, it seems, curious about "transactions in Hawk’s common stock on June 30, 2006 by a stockholder that is not affiliated with the Company and the impact of those transactions as to when Hawk would be required to comply with Section 404." The Justice Department is sniffing around too.

This all sounds cryptic at first, but it’s not too hard to figure out what they’re talking about. If a company's "public float" – the market value of its common stock held by outsiders – is below $75 million, it gets to put off compliance with Section 404 for another year. The way the rules work, Hawk's public float got measured at the end of its second fiscal quarter – June 30, 2006, the date of those mysterious stock transactions. Voila. Apparently the SEC suspects Hawk of playing games to make sure its float stayed below the magic number on the magic measurement date.

Everyone's so afraid of Section 404 I don't doubt they’d go to great lengths to stave it off. If Hawk had the clever idea to monkey around with its public float number, I’ll bet you half a dozen fruitcakes some others did too.

Half-Baked

Recently I lamented the passing of the old staid and reliable SEC. Once the rosy-cheeked avuncular Kris Kringle of federal agencies, it’s morphing into just another regulatory Bad Santa. Take the agency's announcement last Friday of last-minute “interim final rules” changing how stock options get reported under the new compensation disclosure regime.

The Commission now wants companies to put an executive’s options in the proxy compensation table as they vest rather than showing the whole slew in the year of grant. I guess you can argue for doing it either way. Me, I like the report-it-now approach better, and not just because the Chamber of Commerce really hates it. The SEC says it prefers the report-as-they-vest method because it conforms to financial reporting, but I kinda think that if you’re awarded something now you should report it now, and also that just because your accountant is doing something doesn’t mean you should too.

Asked to explain the agency’s late-day, pre-holiday change to rules everyone thought were finalized last summer, SEC Chairman Cox declared that really he’d always wanted the rules to work this way, but “it came out differently from that when we adopted it.”

As a less than skillful cook, I have a soft spot for the “it came out differently than it was supposed to” excuse, especially when applied to pecan pie. So I regret having to point out that when the SEC adopted the rules earlier this year, it rejected lots of requests to treat options exactly as it’s now treating them, and specifically pooh-poohed the notion of kowtowing to the financial reporting rules. It was “more consistent with the purpose of executive compensation disclosure,” said the agency then, to disclose the options to investors all at once than to dribble the news out like molasses.

We'll have to see how the molasses approach pans out in next year's proxy statements. The only thing I know is that adding that stuff to pecan pie can make it very gooey.

Socks and SOX

Procrastination is underrated as a life skill. Sure, it makes your boss see you as an underperforming loser and maybe you are. And if you put off doing the wash you may have to go out in your Last Resort Laundry Day Outfit, which in my case consists of a pair of high-waisted "mom" jeans two sizes too big and that flowered shirt my mother bought me that I’m saving to wear on my first day at the nursing home years hence.

But sometimes the procrastination gods smile on us. Last week I kept intending to write one more post on the Interim Report of the Committee on Capital Markets Regulation. I meant to quote an article that quoted a bunch of experts who, not being procrastinators, declared the report "dead on arrival" the very day it was released. I never got to it, and that saved me embarrassment, because the experts were wrong.

In fact, shortly after the report came out a bunch of its recommendations were adopted, one by one, as if Angelina Jolie had suddenly taken pity on them. First there was the SEC’s proposal to let foreign companies bid their SEC registrations good-bye even if a lot of Americans still hold their securities. Then the Justice Department decided it would no longer take it personally if a company it wants to prosecute turns down its polite invitations to waive attorney-client privilege or suspend payment to employees’ lawyers. (I favored this move, along with the ACLU and Ed Meese, making this one a real crowd-pleaser.) And the PCAOB announced it was tired of listening to everyone whine about its post-SOX auditing standard on internal control over financial reporting, and would finally change it. Plus it promised to conduct a cost-benefit analysis, fulfilling another of the report’s wishes.

Of course much of this was in the works well before the report came out. And many of the Committee's suggestions are still being ignored. Nevertheless, I’m going to celebrate by not washing my socks today.

Two Tomes

Funny how the Interim Report of the Committee on Capital Markets Regulation came out just a few days before that Iraq Study Group Report. Apparently the SEC didn't enjoy being criticized any more than Mr. Bush did; it didn't even post on its website the normal polite/insincere press release thanking the critics for their efforts. I hadn’t realized it was National Downplay-A-Critical-Report Week, though my kids, handing over their first-quarter report cards, seemed well aware.

If you'd like to know how some bigshots feel about the report (not the Iraq one, the other one), check out Broc Romanek’s summary today on TheCorporateCounsel.net Blog. But if you're interested in the views of a complete nobody, keep reading this post.

I don’t feel qualified to comment on every recommendation, and some I’m saving for later, but here are a few reactions:

Paraphrased Committee Recommendation #1: "SEC, cut out all this nasty rule-mongering and adopt ‘principles-based’ regulation."

What I think: To try to make the SEC feel bad, the Committee speaks lovingly of banking regulators, who use a touchy-feely "safety and soundness" approach and rely less on enforcement. But as a lawyer I found the bank regulators even more annoying than the securities folks, and often scarier. With principles-based regulation, the guys being regulated get to interpret the principles, but so do the regulators, and arguing gets expensive. Subjecting yourself to this type of regulatory scheme is like putting on leggings to go out- it sounds cool, but after you do it you realize it was a mistake.

Paraphrased Committee Recommendation #2: "SEC, do a real cost-benefit analysis before you adopt more of your stupid rules."

What I think: I don’t have a clue whether regulatory cost-benefit analysis is a real science. If it is, I’m all for it. Whatever. What interests me more is one amazing sentence I found buried in this section. Discussing how the SEC might get these analyses done, the Committee helpfully suggests that “the use of seconded personnel with experience from securities firms could speed the development of an in-house analytic capability and make it more effective.” I believe this roughly translates to "hey, let’s get Goldman Sachs in here to second-guess the SEC." Thank you, Mr. Paulson, for your generous offer.

Paraphrased Recommendation #3: "SEC, stop forcing companies to treat institutions as if they were normal clueless investors."

What I think: I mostly agree. In my past life I was involved in several futile efforts to convince the SEC to do just that, and never understood why they hated the idea so much. The concept makes sense, so go for it.

Paraphrased Recommendation #4: “Someone please fix this wacky system with all these different regulators overseeing the same companies. The Europeans are making fun of us.”

What I think: Same as #3.

Paraphrased Recommendation #5: "Maybe if we strengthen shareholders’ rights for real, say with majority voting, we won't need to rely as much on regulation."

What I think: Duh.

Paraphrased Recommendation #6: “Hey, Justice Department, did you ever think maybe it’s not such a good idea to prosecute corporations under criminal statutes and force them to waive attorney-client privilege?”

What I think: Good point. I said so before, here and here.

Paraphrased Recommendation #7: "SEC, don’t be so hard on those nice outside directors. You’re scaring them."

What I think: This one is so yummy it deserves its own post, to be drafted in the near future.

If nothing else, the report succeeded in acquiring a nickname - the "Scott Report" - after Harvard professor Hal Scott, the Committee’s director. Mr. Bush, known for creative nicknames, no doubt has a much better one for his awful Iraq report card.

Chipping Away

In a foolish moment I promised to post something substantive this week on the Interim Report of the Committee on Capital Markets Regulation. So here’s Part I of the assignment - my general reaction.

While some suspect the Committee of being a regulation-bashing, reactionary front for Treasury Secretary Henry Paulson and his former employer, I found the report fairly measured and some of its recommendations - though not all - quite sensible. It also makes a compelling case, backed with scary statistics, that in the last five years the U.S. has lost its mojo in world capital markets. Five percent of IPO dollars were raised here in 2005 versus fifty percent in 2000. If there were a show called Global IPO Idol, the U.S. would get voted out before the finals and sit home on the couch eating Pringles whilst the U.K. sang its way to stardom. (I used to work for the Brits and they really do say "whilst," which makes their ascension that much more surprising.)

Some have unkindly pointed out that the document is brimming with ideas that have been reincarnated more times than Shirley MacLaine. True, but who cares? If you complain year after year that "the U.S. regulatory system is complex and highly fragmented,” it will become more and more annoying but no less correct.

Tomorrow’s assignment to myself: Stop screwing around and post about what the damn report actually says, whilst the U.S. is still a sovereign nation and my can of Pringles remains colorful and not colourful.

Smashed Idols

I miss the old boring SEC. I feel like the kid in the Cheap Trick song "Surrender," who observes his parents suddenly behaving strangely:

When I woke up, Mom and Dad are rolling on the couch,
Rolling numbers, rock and rolling, got my Kiss records out
Mommy's all right, Daddy's all right, they just seem a little weird
Surrender, surrender, but don't give yourself away.

At a hearing yesterday, the Senate Judiciary Committee grilled SEC staffers involved in the botched investigation of Pequot Capital Management. This was jarring for those of us who'd always experienced the agency as soothingly, parentally dull. I dealt with these guys quite a bit and occasionally attended their annual conference, "The SEC Speaks," otherwise known as "The SEC Speaks, You Snore." Those of us in the ranks of the regulated sometimes found the staffers overzealous or misguided, but we never doubted they took their jobs seriously.

The agency has gotten much more exciting. Bush’s first two Chairmen each resigned for generating too much heat, albeit in quite different ways. In recent years, spats between Republican and Democratic commissioners have produced such sharp dissenting opinions that I have to wonder if Antonin Scalia is ghostwriting on the side. In 2004 Broc Romanek noted what he believed to be the first-ever dissent to an enforcement matter. And now we have the Pequot mess.

If you haven’t followed this one, a former SEC lawyer named Gary Aguirre says his supervisors fired him to kill his investigation of suspicious trading by the Pequot hedge fund, and in particular to keep his grubby little hands off the powerful John Mack, head of Morgan Stanley. A connection between Aguirre’s removal and Mack’s Bush-friendly political philanthropy remains to be proven. But there’s no conceivable excuse for the conduct of the agency’s Inspector General, Walter Stachnik, who closed his investigation of the whistle-blowing incident without ever talking to the guy holding the whistle.

Mom and Dad, please get your act together. We don’t need SEC employees sweating before Congressional committees over sordid greased-palm deals. We already have a wild, pot-smoking, Kiss-listening federal agency for that stuff. It’s called FEMA.