(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
In my previous post, “Whistle While You Work! SEC Proposes Whistleblower Rules under Dodd-Frank,” I reported on SEC’s proposed rules (PDF) under Section 922 of the Dodd-Frank Act, which provides a “bounty” to whistleblowers who disclose securities law violations leading to large monetary sanctions. The availability of the bounty could encourage potential whistleblowers to bypass reporting mechanisms within the company and report suspected violations directly to the SEC.
In a very interesting New York Post article last week, “SEC whistleblower call draws few tipsters”, Kaja Whitehouse reports that the expected flood of whistleblower tips to the SEC has not yet occurred:
The [SEC] has received just 168 complaints alleging corporate fraud in the first 6½ months of the program's existence, according to data the SEC provided to The Post through a Freedom of Information Act request. . . . At that rate, the SEC is receiving less than one tip a day -- hardly the flood that led the agency to delay staffing the program while it pleaded with lawmakers for more funding.
‘That's a lot less than I would have expected,’ said Steven Kohn, executive director of the National Whistleblowers Center in Washington, DC, which advocates for whistleblowers and pairs them up with lawyers. Kohn said . . . he expected the SEC . . . would receive closer to 3,000 whistleblower tips a year. . . . While the disappointing number might simply be the result of a slow start, whistleblower advocates say it may reflect the battle being fought over the SEC's final rules for governing the program, which are to be released in April. Among other concerns, the SEC has been asked to force employees to go through companies' internal whistleblower programs as a prerequisite to filing an official complaint.
Does that mean public companies should relax and stop worrying about their whistleblower procedures? Absolutely not. The complaints may come faster once the final rules are issued. And it only takes one complaint to tie up a lot of resources at a particular company.
Here is another interesting recent report on whistleblower claims by Compliance Week editor Matt Kelly, “Latest on Whistleblower Rules: Nothing Good.” Kelly reports that budget cuts at the SEC will leave the agency unable to investigate a large number of whistleblower complaints. This will increase the burden on public companies’ internal compliance programs, especially if a flood of whistleblower complaints does come.
Boards’ Recommendations on the “Say When on Pay” Vote: The Debate Continues
I got a lot of comments on my post last week about boards’ recommendations on the frequency vote required under the Dodd-Frank Act. In his subsequent post “The Debate Over Whether to Ignore Say-When-on-Pay Results So Far” on TheCorporateCounsel.net Blog, Broc Romanek said,
. . . I was a little surprised at the reactions that Mark Borges and I have received to our advice that - given the voting results so far - companies may reconsider recommending a triennial vote for say-when-on-pay (egs. Marty Rosenbaum and Amy Muecke). . . . With a statistically relevant number of results in, it's becoming pretty clear that shareholders want an annual SOP even if the company has stable management and sound pay practices. . . . [T]he fact that so many companies are ignoring the clear will of shareholders over this minor topic ("minor" in comparison to SOP itself) will likely further galvanize shareholders to more closely scrutinize pay practices. As I hear from shareholders, they feel like companies are deciding what is in the "best interests of shareholders" without taking into account what shareholders have clearly said is in their best interests. Looking at this situation from their perspective, I can see why they might get upset.
And the debate continues. Amy Muecke, in “Frequency of Say on Pay: The Statistics & Beyond,” responded that the results are still coming in, and there is evidence that some companies are successfully convincing shareholders to support triennial votes even in cases of companies with broad institutional holdings – citing Sanderson Farms as an example. And here is a commentary (PDF) released today in which Georgeson strongly supports the position that boards should make their own determination. I continue to believe that this is the correct approach, assuming as I do that most boards will take a very thoughtful approach – the board certainly should not take lightly the decision to support a triennial or biennial vote. Consider the following points, in addition to the ones I addressed in my previous post:
- Although ISS will always support an annual vote, another proxy advisory firm, Glass Lewis, has announced that it may support a “well-crafted” argument by the board in favor of a triennial or biennial vote.
- I recently heard the comments of a representative of a company that has already been conducting biennial say-on-pay votes after previous negotiations with shareholders. That is one example of a situation in which management cannot just assume that the shareholders will vote in favor of an annual vote, although that is a possible outcome.
- Hopefully, shareholders will not take a triennial or biennial recommendation, in the first year of the frequency vote, as an indication that the board or management is "ignoring" the voice of shareholders. Given that companies are spending more time engaging with shareholders on compensation issues, hopefully the seriousness of these discussions will convince large shareholders that management is serious about listening. I hope the shareholders will focus more on the board’s subsequent reaction to a vote favoring annual say-on-pay than on an initial triennial recommendation, as long as it is thoughtful and explained carefully.
- As Broc says, it is conceivable that shareholders will take the wrong message from a triennial recommendation and will be galvanized to take action in other areas. Therefore, the board should be cognizant of that risk. Again, good communications will be important in mitigating that risk, but will not eliminate it.