Exec Stock Options: Put ‘Em to a Vote

SEC requires companies to get shareholder approval for stock-option grants. Elsewhere: Auditors checking up on auditors, FASB wants quarterly DB reports, and 300 companies settle IPO suit.


The Securities and Exchange Commission has approved a requirement ordering public companies to get shareholder approval before doling out stock-option packages to executives, directors, or employees.

The commission today approved listing standards recommended by the New York Stock Exchange and NASD requiring that shareholders okay many lucrative stock-based pay plans, according to Reuters.

Under the rule, brokers holding shares for their clients would also be barred from voting on equity compensation unless the owner of the shares has given voting instructions, it was reported earlier.

The new listing standards will also require that shareholders approve changes in the exercise price option grants that have lost value because of falling stock prices, Bloomberg News reported Friday. One likely exception to the requirement for shareholder approval: option packages aimed at executive recruitment.

Until now, corporations have not been required to seek shareholder approval for broad-based stock-compensation plans. Although shareholder advocates welcomed reports of the new rule late last week, some lamented that it wasn’t approved in time for this year’s proxy season, according to a story in the Wall Street Journal.

Divulged: Petty Auditor Crimes

PricewaterhouseCoopers and KPMG are asking their auditors to fess up about any misdemeanor convictions they might have had in the past five years, according to Bloomberg News. Shoplifting, trespassing, and drunk driving are among the misdeeds that would need mentioning.

The firms are reportedly inquiring about the misdemeanors because it’s part of the information they’re being asked submit as part of their registration with the Public Company Accounting Oversight Board (PCAOB). Firms that audit public companies must register by October, and some of the largest firms have begun assembling the required background information.

Executives at some of the firms have reportedly complained that such criminal information has nothing to do with the quality of audits. The executives also worry that the inquiries violate employee privacy—especially if the PCAOB lists names and details on its Website.

The SEC, which must give final approval to PCAOB rules, is accepting public comments on the registration requirements until July 2. The PCAOB OK’d the disclosure rule in April and hasn’t decided whether auditors’ criminal records will be released to the public, Bloomberg reported, citing board members.

Under the board’s registration rules, the accounting firms can ask that the information they hand over to the PCAOB be handled confidentially. Board members can choose on a case-by-case basis whether to grant such a request.

The Sarbanes-Oxley Act of 2002, which created the PCAOB, called for disclosure of criminal, civil, and administrative proceedings “pending” against an audit firm or its accountants “in connection with any audit report.”

A number of audit firms and the American Institute of Certified Public Accountants reportedly intend to ask the SEC to change the PCAOB requirement to make it align more closely with Sarbanes-Oxley.

No More Waiting on Those Creditors’ Lines

Corporations looking to get paid by bankrupt insurers can bring their claims straight to the carriers’ reinsurers, a Pennsylvania judge has ruled. The decision has added significance in light of growing concerns about the solvency of property-casualty insurers.

Under reinsurance contracts that cover specific insurance programs, policyholders that can show they have third-party rights can tap directly into the reinsurance proceeds that crop up in an insurer insolvency, according to a decision handed down by the Pennsylvania Commonwealth Court in Harrisburg.

In her opinion, Judge Mary Hannah Leavitt placed Legion Insurance Co. and Villanova Insurance Co. into liquidation, allowing certain policyholders to recover directly from reinsurance companies.

That’s good news for the policyholders. Unlike Legion and Villanova, the reinsurers on most of the insurers’ programs are solvent and can pay claims. In the case, American Airlines and three of the insurers’ other corporate policyholders sought direct access to reinsurance.

The bankruptcy rehabilitator had argued “that ‘sophisticated’ [corporate] policyholders are less deserving than others and, thus, prime candidates for having their contractual expectations compromised.” The judge reportedly rejected that notion.

One of the insurers, Legion, had sold many “fronted” insurance policies, in which the policyholder’s risk was passed through to reinsurance companies. Policyholders had often bought reinsurance directly from solvent reinsurance companies, paying Legion a fee for issuing an insurance policy just to meet regulatory requirements. In fronting arrangements, the policyholder commonly insures itself via a captive insurance subsidiary, which buys the reinsurance.

When Legion became insolvent, it claimed that all reinsurance proceeds should go into the estate, instead of to policyholders.

Pensions and the Bottom Line

The Financial Accounting Standards Board will reportedly require companies sponsoring defined-benefit pension plans to make quarterly disclosures detailing the plans’ effect on earnings.

That’s quite a boost in the frequency of disclosures: currently an annual report on the pension impact is all that’s required to be included in financial statements.

Under last week’s FASB decision—which is subject to change—companies would have to disclose the dollar impact on quarterly earnings that the various parts of their pension plans had, according to the Wall Street Journal. Corporate pension plan sponsors would also reportedly have to show how much certain line items on their income statements were affected by pension moves.

The rule could take effect as soon as December, FASB staff told the Journal. A formal draft of the rule and other pension-accounting changes could be issued by August.

GM Funds the Underfunding

In other pension news: the $17 billion bond sale dished up by General Motors last week—the biggest debt offering in the history of the U.S. corporate bond market—was apparently put together to help the automaker deal a $19.3 billion pension shortfall. This according to Reuters.

Citing analysts, the news service reported that the debt issuance will mean the company will rely less on cash from operations or asset sales to meet its minimum pension payments.

The automaker’s pension problem is said to be the worst of any U.S. company. That follows, since GM reportedly has the most retirees of any U.S. company—about two and a half retirees per employee, in fact.

Still, investors are ravenous for corporate bonds in the face of a succession of cuts in interest rates. Demand for the GM’s paper was so intense that the automaker boosted its bond offer by about $4 billion just days after issuing $13.55 billion in debt instruments. The offering will also include about $3.5 billion of securities convertible into GM shares.

The borrowing will reportedly top a $16.4 billion bond issue by France Telecom in 2001, the previous record holder for a corporate fund-raising.

IPO Share Prices: Shaken, Stirred

According to press reports, more than 300 companies that launched initial public offerings during the late 1990s agreed to pay $1 billion to settle a class-action lawsuit by shareholders. Those shareholders contend that the IPO stock prices were jiggered with.

The companies, most from the tech sector, include such household names as Ask Jeeves, Global Crossing, and, yes, Martha Stewart Living Omnimedia.

The companies won’t have to pay anything, however, if the litigants win a settlement of at least $1 billion in a current suit against the 55 investment banks and brokerages that underwrote the stock offerings, according to theNew York Times.

The shareholders allege that the brokerage firms—reportedly including Goldman Sachs, Morgan Stanley, and Credit Suisse First Boston—had secret deals that required clients to keep buying as prices rose. That, in turn, allegedly created artificial demand, Bloomberg News reported. Recipients of IPO shares had to kick back some profits to brokers, and the banks failed to reveal those secret payments, the plaintiffs claim.

The issuers took part in and profited from the arrangement, the shareholders contend.

The settlement is separate from the $1.4 billion agreement reached in April by the New York Attorney General’s office and 10 large Wall Street firms. That suit concerned allegedly biased stock research.

While 42 insurers would be obliged to pay the companies’ settlement, they aren’t required to hand over any money until the claims against the brokerage firms are resolved, Bloomberg reported, citing one of the plaintiffs’ lawyers.

Short Take

  • Hollywood Entertainment Corp., which owns a chain of video stores, has named Tim Price CFO. Price had been the company’s senior vice president of financial planning and reporting. Jim Marcum, the incumbent finance chief and an executive vice president, has been given operating responsibilities for information systems, loss prevention, distribution, and logistics. Before joining Hollywood Entertainment in January, Price had been with The May Co. for four years.

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