A recent working paper, "Why Do Firms Convert to Cash Balance Pension Plans? An Empirical Investigation," written by Julie D'Souza of Cornell University, John Jacob of the University of Colorado, and Barbara Lougee of Morgan Stanley found the timing of "cash balance" conversions "appears to be linked to incentive compensation and profitability." Critics of these pension fund changes have suggested that companies may be motivated by the desire to inflate their book profits with surpluses in their pension trust funds, which are freed up by the conversion.

It's important to note defined benefit plans reward employees for long service while cash-balance plans tend to treat all workers equally. A typical traditional plan accrues benefits based on a percentage factor, multiplied by the number of years of service, multiplied by the participant's final five-year average base pay. Cash balance plans instead annually reserve a fixed percentage of base salary, plus interest, and are portable.

The study also found those who made the conversions do not have greater employee turnover than firms that retained their traditional defined benefit-plans, a fact that countered the argument the changes were made for the benefit of a more mobile work force. Additionally, the conversions were more common when incentive compensation was a larger proportion of total compensation.

An interesting piece by Caroline Humer ran on the Reuters wire a few days ago titled U.S. Management-Led Buyouts Soar. What's most astounding is her statistic on U.S. management buyouts.

"So far this year, $74.7 billion has been announced in U.S. management buyouts compared with $9.2 billion last year, accounting for more than 9 percent of U.S. merger and acquisition deals, up from 1.2 percent in the year earlier period. That growth also outpaces the growth in U.S. private equity and M&A overall, up151 percent and 25 percent respectively this year."

Leveraged buyouts account for a significant percentage of today's M&A activity. Some of the LBO bidding groups include current management or significant individual shareholders like company founders. For target shareholders, LBOs (and in particular MBOs), create unique factors to consider when weighing whether to vote for or against a proposed deal.

One issue that has been causing investor consternation is the shortened payout period between buyout and monetization event. Historically, private equity buyers put in three to five years of hard work before selling the company or taking it public again. Recently, however, financial sponsors have sometimes paid themselves special dividends within months that allow them to continue to own the portfolio company using "house money." In such cases, shareholders wonder why the company couldn't remain public and allow the value to flow to public shareholders.

MBOs add an additional concern: that insiders who know the company best are somehow taking advantage of that knowledge to buy the company on the cheap. Again, shareholders wonder why incumbent management cannot do for them what it plans to do for the financial sponsors.

What are your thoughts on management-led buyouts? We welcome your comments.

One year ago today, Hurricane Katrina formed in the Atlantic Ocean. Within a week, it became the nation's worst natural disaster, causing $45 billion in insured property losses. Since Katrina and the record number of hurricanes that followed, the insurance industry has raised rates and pulled back coverage along the East and Gulf Coasts. But is this a sustainable strategy? A new CERES Report released on Tuesday estimates that the insurance industry has turned down $3 billion in premium renewals rather than face the risk of added losses.

Making matters worse, global warming is implicated in spawning not only more intense hurricanes like Katrina, but also in exacerbating a range of other weather-related disasters, including drought, wildfire, floods and life-threatening heat waves -- all of which have hit portions of the country this summer. Instead of remaining passive in the face of rising damage claims, the insurance industry is becoming more proactive. The Ceres report highlights dozens of ways that the industry is starting to address global warming by encouraging actions that cut down on greenhouse gas emissions. These range from reducing insurance premiums for "green buildings" and people who drive their cars less to providing insurance for new alternative energy and energy-saving projects.

The takeaway point of the study -- and a Fortune article written yesterday by Mark Gunther -- is that addressing global warming can be smart and profitable for companies that are looking ahead, while those who ignore the problem are as vulnerable as those who think they can ride out a storm like Katrina.

Do you believe the insurance industry is doing an effective job managing climate change? We welcome your thoughts.

This article (subscription req'd) entitled "Head of the Class" in the August 18, 2006 issue of TheDeal.com suggests that the long-standing aversion to securities class actions in Europe may soon become a thing of the past. According to the article,

"Within the past year, several European Union countries have either enacted laws or considered legislation that would pave the way for class actions. Last summer, a new Dutch law authorized associations representing injured parties to collectively negotiate settlements; in July, a group of French investors followed up with a class action in a Dutch court. The target: Airbus parent European Aeronautic Defence and Space Co., or EADS, whose stock recently collapsed. In the past 12 months, Germany and Spain began to permit collective shareholder action under certain circumstances. In July, the center-left government of Italian Prime Minister Romano Prodi passed a decree explicitly authorizing class actions; if parliament does not approve the law by September, it will expire. France's center-right government is considering a similar statute."

The article states that this possible "change of heart" in Europe may be the product of a recent spate of scandals that have harmed European investors, including "the December 2003 insolvency of [Italian] dairy company Parmalat Finanziaria SpA, which collapsed with some 14 billion Euros ($18 billion) in debt, and the 2002 demise of canned food maker Cirio SpA, which defaulted with more than 1 billion Euros in outstanding obligations. More than 100,000 Italian investors held Cirio and Parmalat bonds."

These and many other international developments in securities class actions were the subject of a February 2006 ISS Corporate Governance Forum webcast entitled "Securities Class Action Litigation Moves Beyond US Borders," which featured attorneys representing eight countries. An archived version of that webcast is available here.

The AFL-CIO has asked UnitedHealth Group, Merrill Lynch, and four other companies to explain why their executives were granted stock options after the Sept. 11, 2001, terrorist attacks, when U.S. markets declined.

The labor federation said it wrote to the firms' compensation committee chairs seeking an explanation for the grants by the companies, which didn't normally grant options in September. The AFL-CIO also sent letters to: Sandisk, Stryker, Teradyne, and Apollo Group. The six issuers were mentioned in a July article in The Wall Street Journal about 91 companies that made unusual grants in the first two weeks of trading after the Sept. 11 attacks, the labor federation said.

The Securities and Exchange Commission last week released much-anticipated new rules governing the disclosure of boardroom pay. The rules, adopted late last month, mark the first time in 14 years that the commission has addressed executive and director pay disclosure.

While the 436-page set of final rules will take effect 60 days after its publication in the Federal Register, the commission opted to solicit further public comment on the so-called "Katie Couric" provision that calls on firms to disclose the pay of three of the highest-paid non-executive employees. (That moniker refers to Couric, a television newscaster who recently signed a multi-million dollar deal with CBS.)

The rule, proposed in January, was criticized by Wall Street firms and media companies, which voiced concerns over competitors' potential ability to poach talent, and the likelihood that internal rivalries would develop if employees were privy to their colleagues' pay. The SEC revised the rule last month carving out employees with no responsibility for significant policy decisions--such as star athletes and entertainers--while indicating the rule would only apply to large capital companies. Employees' names also would not be disclosed, the SEC said.

The SEC is seeking comment on whether the re-proposed rule balances investors' needs for compensation information with the privacy concerns of non-executives. The commission also is seeking input on whether it should require companies to describe the duties of the three top-paid non-executives and define the phrase "responsibility for significant policy decisions," according to Bloomberg News. Comments must be submitted within 45 days of publication of the proposed rule in the Federal Register.

For more on the pay rules, please visit the SEC's website.

Most of the 2006 proxy season vote results are in. Highlights from ISS' 2006 Proxy Season Scorecard to-date include:

--Majority vote to elect director proposals received an average level of support of 47.8 percent, up from 43.7 percent in 2005.
--Use performance-based vesting proposals received an average level of support of 41.5 percent, jumping more than nine percentage points from 2005.
--Disclose political contribution proposals received an average level of support of 20.7 percent, which is more than double last year's average.

Stay tuned for further updates.

Our options backdating securities class action list has been updated to add Witness Systems, Inc. The number of companies on the list now stands at 13.

Despite what readers might anticipate in light of the extensive media coverage of proxy fight votes, more contests settle than actually go to a vote. So far in 2006, 31 of 51 selected fights (61%) culminated in a settlement, thereby avoiding a harsh "winner vs. loser" epitaph.

Settlements between issuers and activist shareholders are typical of the (sometimes last minute) compromise a target company will "choose" when it becomes clear that it will lose a proxy fight. With a settlement, the issuer may be able to extract some concessions from the dissidents (usually a board seat or two) that it was unlikely to have obtained if the original slates had gone to a vote. Moreover, the company is able to save face by not officially "losing" the contest (at least for posterity). In contrast, the dissidents often are able to get everything they asked for and appear reasonable in the bargain, which can only enhance their options in future proxy fight negotiations.

The fact that some companies wait until the eleventh hour to settle indicates: (i) some proxy fights are difficult to handicap, and/or (ii) some companies have a misguided sense of the level of support they will receive from the shareholder base. In many cases, it may be a wiser course to settle with the dissidents at an earlier stage in order to avoid the costly distraction of a fight that is very much in the public eye. Many of the companies who have opted to settle this year have chosen such a course, thereby avoiding the embarrassment of a meeting day loss.

We welcome your thoughts on this year's settlement fever.

A controversial takeover battle between two of Japan's largest paper manufacturers may prompt a legal ruling on how and when Japanese companies can deploy poison pill defenses.

The use of pills has grown exponentially in Japan over the past 18 months, but the legality of their use in some circumstances remains questionable, leaving both issuers and shareholders searching for guidance from Japan's judiciary.

H.J. Heinz Co. management has won the endorsement of three labor investors and the California Public Employees' Retirement System in its high-profile proxy fight with billionaire investor Nelson Peltz. Most other institutional investors have not yet announced how they will vote, leaving it still unclear who will prevail.

Peltz and his Trian Group hedge fund, which have a 5.5 percent stake in the company, have put forth five nominees for Heinz's 12-member board. The company's annual meeting will be Aug. 16 in Pittsburgh.

The Criminal Complaint filed today by federal prosecutors against three former executives of Comverse Technology (the former CEO, CFO and General Counsel) for options backdating is available here, courtesy of the WSJ Law Blog.

Before your eyes glaze over and you hit the "Back" key to go read about something less arcane than strike dates, compensation accounting rules, etc., just know that the stuff in the Criminal Complaint is pretty fascinating. The FBI agent providing the statement in the Criminal Complaint gets deep into the details of the alleged scheme at Comverse, including the creation of a secret slush fund account called Phantom in which options to fictitious employees were stashed and later awarded to favored employees for recruitment and retention.

The Criminal Complaint also details the alleged cover-up of the scheme when the WSJ started asking questions about options grants in March 2006, which according to the complaint included evidence tampering and numerous misstatements and half-truths to company lawyers, the company's auditors, the WSJ, and the Special Committee hired to investigate the matter.

One of the more interesting statements in the Criminal Complaint is that according to the defendants, the backdating practice was shut down in April 2002 because of "the advent of Sarbanes-Oxley and a more stringent enforcement 'environment.'"

The boards of Australian banks have become smaller and more independent since the 1980s, while increases in executive pay have far outpaced the banks' performance, according to a recent ISS analysis.

This analysis of governance trends at banks listed on the Australian Stock Exchange (ASX) includes various indicators, such as: the number of directors; board composition and committees; and executive remuneration levels in the 1980s, 1995 and 2005.

Since the 1980s, bank boards on average have become smaller. In the 1980s, Westpac Banking and Australian and New Zealand Banking had the largest boards each with 15 directors.

This changed little in 1995, with the largest board having 14 directors.. However, between 1995 and 2005 there was a marked decrease in board size, with all but three banks in the sample decreasing their directors to below 10. Two banks, Commonwealth Bank of Australia and Suncorp-Metway had 10 directors and National Australia Bank had 14.

The Public Company Accounting Oversight Board (PCAOB), which oversees U.S. accounting firms, has called on auditors to pay closer attention to whether companies have properly accounted for the cost of stock options.

The PCAOB, in a July 28 alert, said accounting firms should ask companies that use options as a major component in executive pay or have high stock volatility to provide letters certifying that their stock options have been properly accounted for. The agency also urged auditors to review past financial statements if questions over past option grants arise, according to news reports.

There is an interesting article today on CFO.com titled "Paulson: Regs Went Too Far" by Stephen Taub. The piece reports that Hank Paulson, in his first speech as Treasury Secretary, hinted at trimming back SOX, suggesting that "often the pendulum swings too far and we need to go through a period of readjustment."

What are your thoughts on SOX reform? We welcome your comments.

Amid growing international concerns over stock option practices, a group of French lawmakers and politicians are backing legislation that would significantly limit the ability of company executives and directors to exercise their stock options.

The bill, introduced June 28 by former Prime Minister Edouard Balladur, would prevent board members and executives from exercising their stock options while in office. At least 138 of the National Assembly's 577 members have signed a request to put the legislation on the lower chamber's agenda, according to Challenges, the French electronic business journal.

In a July 14 interview, President Jacques Chirac said he favored the bill and asked his finance minister, Thierry Breton, to propose appropriate measures. While the bill has not been formally endorsed by the government, it likely will be, especially in light of presidential elections next year and the fact that Breton is the author of the 2005 law that requires greater transparency in executive pay, according to the daily Le Monde.

Medef, the union of French employers, has called Balladur's proposal to limit the exercise of stock options "absurd" and counter-productive because it would undermine executives' incentives to increase shareholder returns.

The legislation was proposed after news reports of stock options exercised by high-profile executives. Noel Forgeard, a former top executive at the EADS aerospace and defense company, earned 2.5 million Euros ($3.2 million) from exercising options weeks before a profit warning was issued. At the Vinci construction group, former Chairman Antoine Zacharias took home an estimated 250 million Euros ($320 million) after cashing in his stock options, in addition to a 13 million Euros ($16.4 million) severance package.

In a study published by L'Expansion, an online business journal, top executives at the CAC 40 companies hold stock options that are worth as much as 700 million Euros ($884 million).

The European Commission's report on corporate governance priorities found "split views on corporate governance," suggesting that support for new European-wide directives has diminished.

Internal Market Commissioner Charlie McCreevy attributed the results to "regulatory fatigue," but there was some consensus that the principle of "one share/one vote" needs to be addressed. The commission has ordered a fact-finding study on the proportionality between ownership and control in EU-listed companies, to be done by the European Corporate Governance Institute, the law firm of Shearman & Sterling, and ISS Europe.