September 19, 2019

Executive Pay: CII Policy Overhaul Says to “Get Back to Basics”

I’ve blogged from time to time on that people are starting to question whether “pay-for-performance” is all it’s cracked up to be – and now you can add CII to its list of skeptics. Yesterday, the Council of Institutional Investors announced that it had overhauled its “Executive Compensation Policy” to urge companies to dial back the complexity of their plans and – when it comes to long-term incentives – to use at least a five-year period to measure performance.

While the old policy called for executive pay to be driven predominately by performance and said that salary should be no more than $1 million, the new policy suggests that some companies may be able to do without annual metric-based incentives – and says this about fixed pay:

Fixed pay is a legitimate element of senior executive compensation. Compensation committees should carefully consider and determine the right risk balance for the particular company and executive. It can be appropriate to emphasize fixed pay (which essentially has no risk for the employee) as a significant pay element, particularly where it makes sense to disincentivize “bet the company” risk taking and promote stability. Fixed pay also has the advantage of being easy to understand and value, for the company, the executive and shareholders. That said, compensation committees should set pay considering risk-adjusted value, and so, to the extent that fixed pay is a relatively large element, compensation committees need to moderate pay levels in comparison with what would be awarded with contingent, variable pay.

The new policy also broadens its approach to clawbacks – adding to the list of appropriate recovery events “personal misconduct or ethical issues that cause, or could cause, material reputational harm to the company and its shareholders.”

While some of these changes may be driven by the repeal of 162(m) (there’s no longer a tax advantage to keeping salaries low), CII hasn’t been shy about its concerns on murky pay-for-performance disclosure. And based on its reaction to the BRT’s recent emphasis on “stakeholders,” there may be some heartburn about ESG metrics that are starting to pop up in incentive plans…

Amy Borrus to Succeed Ken Bertsch as CII Leader Next Year

CII also recently announced that Amy Borrus, the organization’s current Deputy Director, will succeed Ken Bertsch as Executive Director when he retires in August 2020. Amy has served as CII’s Deputy Director since 2006 and was Interim Executive Director from June 2015 to March 2016.

Glass Lewis CEO KT Rabin to Depart

In other transition news, Glass Lewis announced that KT Rabin is stepping down after 12 years as CEO (she’ll continue as a member of the company’s Research Advisory Council).

The proxy advisor has appointed its co-founder, former President and Research Advisory Council member Kevin Cameron to the role of Executive Chair and has appointed Carrie Busch as President. Carrie ran Glass Lewis’s research department years ago and is now returning to the company.

Liz Dunshee

September 18, 2019

Governance Might Affect IPO Pricing After All

We’ve questioned whether institutional investors would ever be so concerned about a unicorn’s governance structure that they would pass on an IPO investment. Amid the plummeting expectations for the “We Company’s” valuation, this NYT article suggests investors may have found their limit. The company has made a few change in response – and this WSJ article says that all the fuss has even led to postponing the roadshow that was expected to occur this week.

Of course, another headline could be, “Investors Finding Their Limit With Unprofitable Companies,” but in this case, an overly optimistic valuation combined with things like trying to give founder & CEO Adam Nuemann extra voting rights into the afterlife just went too far. Here’s an excerpt from the NYT article describing the amended Form S-1 that the company filed last Friday:

The business would appoint a lead independent director and bar any member of Mr. Neumann’s family from the board. The special class of stock that Mr. Neumann owns will now have 10 votes per share, down from 20. Should he die or become permanently disabled, those shares will have only one vote apiece. Even so, Mr. Neumann will control a majority of shareholder votes after the change.

The board will also have the ability to choose Mr. Neumann’s successor; previously, succession was left to a three-person committee that included his wife, Rebekah.

And remember the concerns about the company’s related party transactions? There were a few changes there too:

And Mr. Neumann has pledged to give back any profits he makes from leasing properties to the We Company, transactions that prospective investors had highlighted as potential conflicts of interest.

Board Gender Diversity: Giving Credit Ratings a Lift?

A recent Moody’s study of over 1100 companies found a positive relationship between board gender diversity and credit ratings – but since the analysis didn’t examine other factors that might be affecting credit quality, it doesn’t prove causation. Here’s an excerpt:

The variance in board gender diversity is particularly evident at both ends of the rating spectrum. For instance, the five Aaa-rated companies in our cohort have the highest level of gender diversity on their boards, with women accounting for an average of 28% of their corporate directors. Women generally make up about a quarter of the boards of companies rated Baa1 or higher, with gender diversity largely declining by rating category to less than 5% for our two Ca-rated companies.

The study also points out that diversity mandates – while not common – might cause short-term business risks through board turnover, which could potentially create short-term credit risk:

For North American companies almost 75% would have to add at least one woman by the end of 2021. High levels of board turnover could signal a material change in corporate strategy or financial policies.While these changes could be both credit positive or credit negative, we tend to view the uncertainty as credit negative.

Board Gender Diversity: Russell 3000 Passes the 20% Milestone

For the first time ever, more than 20% of Russell 3000 board seats are occupied by women. That’s according to this Equilar announcement, which highlights the momentum in this area since Equilar first began publishing its quarterly “Gender Diversity Index” in 2017.

Liz Dunshee

September 17, 2019

Today: “16th Annual Executive Compensation Conference”

Today is the “16th Annual Executive Compensation Conference”; yesterday was the “Proxy Disclosure Conference” (for which the video archive is already posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of or to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for or If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.

How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your Bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”

Streamlined MD&As: How to Handle Retrospective Accounting Changes

Under the Fast Act, Item 303(a) now allows companies that provide three years’ worth of financials in their 10-K to omit from their MD&A a discussion of the earliest year. We’ve heard some companies ask how they should handle disclosure if they’ve retrospectively adopted a new accounting principle for that earliest year. These notes from a recent meeting between the CAQ & Corp Fin Staff shed some light on the SEC’s expectations (see pg. 3):

The Committee asked the staff how registrants should consider the effect of retrospective changes in omitting the earliest year discussion, given that registrants must disclose the location in the prior filing where the disclosure can be found. The staff noted that this amendment does not change the standard that applies to all of MD&A – a registrant shall provide such other information that it believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations.

Accordingly, where there has been a retrospective change, a registrant should assess whether the previously filed disclosure that it is considering omitting and making reference to continues to provide the information necessary to understand the registrant’s financial condition, changes in financial condition and results of operations.

XBRL: What’s It Good For?

XBRL has been around 10 years! A lot of people would say it’s still good for absolutely nothing – among other reasons, because it requires extra software to consume, doesn’t cover non-GAAP disclosures and can be error-prone. But there are a few cheerleaders. This FEI interview gives some insight into how Famous Dave’s CFO Paul Malazita is using data tags to evaluate acquisition targets and the company’s competitive position:

We’re working with a third-party company right now to use their software to build out a peer set of companies with certain metrics that we look at in the restaurant industry for the purposes of setting up templates and data for when we perform our annual Goodwill impairment analysis. It also helps us to understand certain transaction multiples. We pay close attention to what’s going on in our industry. Why certain brands traded at different multiples is not necessarily apparent at the outset.

Being able to use XBRL data to normalize the company, looking at the strength of their balance sheet, the strength of their revenues, their profitability metrics, things like that, really starts to get a sense of what our company is truly worth. We’re a public company. But, oftentimes, there is intrinsic value that might not be captured by the market. As we look either into acquiring other companies or what we look like in the market, using XBRL data is extremely helpful in being able to do those analyses.

Also, our note disclosures and financial statements are compared across our industry using software that provides search function on XBRL filings. So, for example, when I have something come up in a certain quarter and we’ve never had to disclose it before, I go out and search through XBRL filings to find similar companies within our industry that have had to present certain similar things in the past. And that really helps me in crafting our disclosures to make sure that we’re complying with the spirit of GAAP and providing the information that we’re supposed to be providing.

Here’s another tip from Paul: moving away from narrative disclosure in 10-Qs and 10-Ks and more toward a tabular format doesn’t just make the report easier to read for normal humans – it also makes it easier (and presumably less expensive) to add the XBRL tags.

Liz Dunshee

September 16, 2019

Today: “Proxy Disclosure Conference”

Today is the “Proxy Disclosure Conference”; tomorrow is the “16th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of or to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5 or Flash Player). Here are the “Course Materials.”

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for or If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.

How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your Bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”

10b-5 Liability: Exec Gets Sanctioned for “Failure to Correct”

Earlier this year, John blogged that the US Supreme Court gave the SEC a big win when it held – in Lorenzo v. SEC – that individual anti-fraud liability can apply under Rules 10b-5(a) and (c) to someone who “disseminates” false or misleading statements, even if that person didn’t “make” the statement under Rule 10b-5(b). Now, the 10th Circuit has become the first circuit court to apply Lorenzo – and it couldn’t have gone much better for the SEC. This Arnold & Porter memo explains the facts of this case – Malouf v. SEC:

Dennis Malouf served as an executive at both a securities brokerage and an investment adviser. He subsequently sold his interest in the brokerage in a transaction in which he continued to receive installment payments based on the commissions the brokerage collected from securities sales. Malouf facilitated these installment payments by routing client trades through the brokerage without disclosing his financial interest to clients or to the investment adviser and despite knowing that the investment adviser represented that Malouf did not have any conflicts of interest.

The Securities and Exchange Commission (SEC) brought an enforcement action against Malouf, and the Tenth Circuit affirmed an administrative law judge’s finding that Malouf had violated Exchange Act Rules 10b-5(a) and (c) and Sections 17(a)(1) and (a)(3) of the Securities Act. The Tenth Circuit reasoned that Malouf had engaged in an unlawful fraudulent scheme because he knew that a conflict existed while the investment adviser was telling clients that he was independent and, despite this knowledge, failed to take steps to correct the misstatements or to disclose the conflict. The Tenth Circuit rejected Malouf’s argument that the SEC had “obliterated[d] the distinction” between Rule 10b-5 subsections (b) on one hand and (a) and (c) on the other because, as the Court in Lorenzo expressly held, defendants could be liable under sections of the Securities Act and Rule 10b-5 dealing with fraudulent schemes in connection with misstatements without having been the “maker” of misstatements.

Malouf was fined $75,000, had to disgorge $562,000 in profits, and is now barred for life from working in the securities industry. To me, it seems pretty clear that someone should correct known misstatements about their own conflicts – and if you dig into the facts of this case, you’ll see that the defendant was also involved with causing the misstatement in the first place. But, this wasn’t a slam dunk case for the SEC since there’s still some uncertainty around how Lorenzo will be applied. The memo notes that the holding gives the SEC even more encouragement to pursue anti-fraud charges against individuals who aren’t “makers” of statements. We don’t know yet whether plaintiffs will try to extend these theories to private class actions. . .

Delaware Company Adopts “Gender Quota” Bylaw

A Delaware-incorporated company that’s headquartered in California has filed a Form 8-K to report adoption of a “board diversity” bylaw. The 8-K says that the company took this step to implement the requirements of SB 826, the California law that requires female representation on boards. This blog from Allen Matkins’ Keith Bishop dives into the details:

The Bylaw operates by dividing NantKwest’s board into two classes. To be qualified for a “Class 2 Directorship”, the individual must self-identify her gender as a woman, without regard to her designated sex at birth. Consonant with SB 826, the number of Class 2 Directorships will eventually depend upon the “number of directors”. All directorships that are not Class 2 Directorships are Class 1 Directorships.

Keith highlights that nothing in SB 826 requires companies to amend their bylaws – and that doing so might cause issues under California’s Civil Rights Act. He also raises a few questions about how this particular bylaw will operate.

Liz Dunshee

September 13, 2019

Our “Q&A Forum”: The Big 10,000!

In our “Q&A Forum,” we have reached query #10,000 (although the “real” number is much higher since many queries have others piggy-backed upon them). So crazy. There was a time that I thought I should quit this gig when we hit 5000. For me, answering the questions is one of the hardest parts of this job. The first 14 years handling the queries was rough (even with help from many folks, including Alan & Dave) – but since John came on board three years ago, it’s been easy for me because he’s been the master handling that task.

Anyway, I know this is patting ourselves on the back – but it’s 17 years of sharing expert knowledge and it’s quite a resource. Combined with the “Q&A Forums” on our other sites, there have been well over 30,000 questions answered. We beat Alan Dye to the punch, as he has over 9600 questions answered over on He’ll get to 10,000 soon enough…

You are reminded that we welcome your own input into any query you see. And note there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.

Auditor Independence: SEC’s Chief Accountant Updates FAQs

The SEC’s Office of Chief Accountant has updated its “Auditor Independence FAQs.” See this Cooley blog

Corp Fin Is Hiring Lawyers!

It’s funny to me that this is even considered news. But it is rare these days. Corp Fin has posted a broad notice that it’s hiring lawyers with varying levels of experience. My 5-minute video about how to land a job at the SEC is exactly 10 years old. I looked a lot younger then…

Broc Romanek

September 12, 2019

ISS Releases Policy Benchmark Survey Results

Yesterday, ISS released the results of its benchmarking survey for the annual update of its voting policies. Here’s a summary:

1. Board Gender Diversity – Responses to ISS’ question about views on the importance of gender diversity on boards showed that majorities of both investors (61 percent) and non-investors (55 percent) agreed that board gender diversity is an essential attribute of effective board governance regardless of the company or its market. Among those who did not agree with that view, investors tended to favor a market-by-market approach and non-investors tended to favor an analysis conducted at the company level.

2. Director Overboarding – Investors and non-investors diverged on the question of measurement of how many boards is too many for an individual director. A plurality (42 percent) of investor respondents selected four public-company boards as the appropriate maximum limit for non-executive directors. A plurality of investor respondents (45 percent) also responded that two total board seats is an appropriate maximum limit for CEOs (i.e., the CEO’s “home” board plus one other). A plurality of non-investors responded that a general board seat limit should not be applied to either non-executives (39 percent) or CEOs (36 percent), and that each board should consider what is appropriate and act accordingly.

3. Climate Change Risk Oversight – A majority (60 percent) of investor respondents answered that all companies should be assessing and disclosing climate-related risks and taking actions to mitigate them where possible. 35 percent of investor respondents answered “Maybe” to the following statement about how companies should approach this issue: each company’s appropriate level of disclosure and action will depend on a variety of factors including its own business model, its industry sector, where and how it operates, and other company-specific factors and board members.

Only 5 percent of investors indicated that the possible risks related to climate change are often too uncertain to incorporate into a company-specific risk assessment model. Non-investor responses to those same three issues were 21 percent, 68 percent and 11 percent respectively. The actions that investors considered most appropriate for shareholders to take at companies assessed to not be effectively reporting on or addressing their climate-related risks were engagement with the company (96 responses), and considering supporting shareholder proposals on the topic (94 responses). Based on the number of non-investor responses, these two options were also ranked first and second in popularity by non-investors.

4. Mitigating Factors for Companies with Zero Women on Boards – ISS announced in 2018 that it is introducing a new U.S. Benchmark Voting Policy for 2020 to generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies when there are no women on the company’s board, but with some mitigating factors that may be taken into account.

Respondents this year were asked whether ISS should consider other mitigating factors, beyond a firm commitment to appoint a woman in the near-term and having recently had a woman director on the board, when assessing such companies. Investor respondents were less likely than non-investor respondents to say that other mitigating factors (such as adopting an inclusive Rooney Rule-style procedure for candidate searches or maintaining an active recruitment process despite the absence of a boardroom vacancy) should be considered and may be sufficient to avoid a negative recommendation on directors.

5. Combined CEO/Chair – Investor respondents cited poor company responsiveness to shareholder concerns as the most commonly chosen factor that strongly suggested the need for an independent board chair. This was followed by governance practices that weaken or reduce board accountability to shareholders (such as a classified board, plurality vote standard, lack of ability to call special meetings and lack of a proxy access right). For non-investors, the most commonly chosen factor was a poorly-defined lead director role, followed by poor company responsiveness to shareholder concerns.

Is the SEC Seeking to Replace PCAOB’s Kathleen Hamm?

As I’ve blogged about several times over the years, one of the oddest provisions of Sarbanes-Oxley was Congress creating the PCAOB with a dotted line to the SEC. That means the SEC decides who gets appointed to the Board of the PCAOB. That has resulted in a few battles over time. Here’s an excerpt from this MarketWatch article by Francine McKenna:

Kathleen Hamm says her work as a member of the Public Company Accounting Oversight Board, the audit-industry regulator, is not done. But the Securities and Exchange Commission apparently thinks otherwise, and posted for her job over the summer. Hamm stepped into a term in 2017 that had approximately two years remaining, expiring this October. She is eligible for reappointment to the second five-year term, through 2024, but now she’s had to reapply for her job and she’s not sure why.

“I am seeking reappointment to continue the important work I began 20 months ago,” Hamm said in a statement provided by the PCAOB spokeswoman to MarketWatch. “My efforts have centered on protecting investors by applying my expertise and experience in technology, risk management, and compliance to upgrading and modernizing the PCAOB’s approach to cybersecurity and emerging technologies, both at the board and among the audit firms we oversee.”

Hamm was appointed to the PCAOB board after the SEC announced in December 2017 that it would appoint a full slate of five new members to replace all incumbents. The SEC had never before declined to reappoint PCAOB members who were eligible to serve another term, and it was the first time in the PCAOB’s 15-year history that the entire board was replaced all at once.

The new board members came on with staggered terms to fill out. Hamm is the second board member to have her term come up; Duane DesParte was renewed without fanfare after his original term expired after six months. Hamm said she’s pushed for an increased focus on the control systems that auditors use to ensure that they consistently deliver high-quality audits for the benefit of the investing public. “I would like the opportunity to continue to drive this vital initiative as well,” she said in her statement.

Jim Daly Retires!

Happy retirement to long-time Staffer Jim Daly! As noted in this press release, Jim served in Corp Fin for 38 years in a variety of positions – the latest being Associate Director – and mentored hundreds of folks as they came up through the ranks. He surely will be missed!

Broc Romanek

September 11, 2019

Auditor Independence: What Your Independent Auditor Might Not Tell You

Here’s a note from Lynn Turner:

Recently, the PCAOB sanctioned PWC as a result of partners having a financial relationship with a bank the firm audited. Then the firm lied to the banks audit committee when it sent a letter to the committee saying there were no independence issues. The rules on this issue is not new. The SEC sanctioned another of the Big 4 firms – EY – as a result of similar problems some 30 years ago.

I too have served on an audit committee where a Big 4 firm sent us a letter saying there were no independence issues, only to find out the firm was aware of issues they withheld from the committee. This is a huge issue for audit committees and investors. The PCAOB’s sanction of $100k is a slap on the wrist in this instance. Which perhaps explains why we continue to see this type of behavior by the firm’s go unabated.

Does the PCAOB Undermine Auditor Professionalism?

Congrats to Dan Goelzer & Tom Riesenberg for launching their new blog – “The Audit Blog.” Here’s the intro from Dan’s blog about the PCAOB’s impact on auditor professionalism:

In 2002, the Sarbanes-Oxley Act created the Public Company Accounting Oversight Board and transformed public company auditing in the United States from a self-regulated, to a regulated, profession. The PCAOB’s statutory mission is to “further the public interest in the preparation of informative, accurate, and independent audit reports” — in other words, to improve audit quality. Based on objective measures, such as frequency of restatements and magnitude of financial reporting failure market losses, most observers would probably agree that the PCAOB has made considerable progress toward accomplishing that goal.

A separate issue is how PCAOB oversight has affected the experience of being a public company auditor and auditors’ perceptions of their professionalism. Three academic researchers, Kimberly D. Westermann, California Polytechnic State University, Jeffrey Cohen, Boston College, and Greg Trompeter, University of Central Florida, have undertaken to explore that topic. Their findings raise questions about the long-term impact of PCAOB oversight on the auditing profession.

CAMs: Snapshot of Filings By Types of Disclosures

Recently, Deloitte put together this nifty chart indicating what types of matters where deemed “CAMs” in recent filings by large accelerated filers. Check it out…

Broc Romanek

September 10, 2019

Course Materials Now Available: Many Sets of Talking Points!

For the many of you that have registered for our Conferences coming up next Monday, September 16th, we have posted the “Course Materials” (attendees received a special ID/PW last week via email that will enable access to them; note that copies will be available in New Orleans). The Course Materials are better than ever before – with numerous sets of talking points. We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers certainly have gone the extra mile this year!

Here’s some other info:

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of or to watch it live or by archive (note that it will take a few hours to post the video archives after the panels are shown live). A prominent link called “Enter the Conference Here” – which will be visible on the home pages of those sites – will take you directly to the Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player).

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for or If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Central.

How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if it’s possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see our “CLE Credit By State” list.

Register Now to Watch Online: There is still time to register for our upcoming pair of executive pay conferences – which starts on Monday, September 16th – to hear Keith Higgins, Meredith Cross, etc. If you can’t make it to New Orleans to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now to watch it online.

Register to Watch In-Person in New Orleans: Starting next Thursday, you will no longer be able to register online to attend in New Orleans – but you can still register to attend when you arrive in New Orleans! You just need to bring payment with you to the conference and register in-person. Through the end of next Thursday, you can still register online to attend in-person in New Orleans. And you can always register online to watch the conference online…

More on “Directors, How Well Do You Really Know the Shareholders You Represent?”

Recently, I blogged about a cute little cocktail party story where a director failed to follow-up with probing questions to a retail shareholder he met at a party. One of our members had this comment in reaction:

David Shaw’s story likely is the fault of lawyers. Indeed, many lawyers routinely tell directors they have no right to speak for the corporation and have no obligation to do so. These lawyers proceed, telling clients that a corporation must speak with one or two – perhaps three (for example, CEO, CFO and IR head) voices – and no more. Threat of liability is the clear concern, but perhaps overstated today relative to the need for companies – and their directors – to understand the perspectives of other stakeholders.

SEC Sanctions for 10-K Misrepresentation on Loan Covenant Compliance

In this blog, Stinson’s Steve Quinlivan describes the facts behind the SEC’s recent enforcement action against a company – Omega Protein – for its 10-K disclosure that it “was in compliance with all of the covenants contained” in its borrowings (repeated in three subsequent 10-Qs)…

Broc Romanek

September 9, 2019

Shareholder Proposals: Corp Fin’s Big Announcement – Oral Responses & Declining to Provide a View!

A few months ago, we blogged about how Corp Fin was considering changing how their “referee” role. Well, that change has happened. On Friday, Corp Fin announced that some of its no-action responses going forward may be in oral form rather than in writing. A written response can be expected if Corp Fin “believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.”

We’re posting memos in our “Shareholder Proposals” Practice Area – and our “SEC All-Stars” will be discussing this big development during our “Proxy Disclosure Conference” next week.

Here’s a few “food for thought” items to start with (thanks to Ron Mueller & Dave Lynn for their 10 cents on some of these):

1. Will There Really Be No Writings? – Good lawyers like to see things documented, particularly if they achieve a result they seek. So mere oral responses may feel like kissing your sister. Surely, Corp Fin will have some type of writing somewhere about their decision?

This announcement seems like the kind of approach that Corp Fin’s accounting staff has employed over the years for financial statement waivers – and that Chief Counsel’s office has used with S-3 eligibility waivers. In both situations, I believe the Staff still puts an internal (ie. nonpublic) note up on Edgar, so maybe they will do the same thing here. Of course, if this writing is nonpublic, that’s not doing you much good…

2. Can I Record My Conversation With Corp Fin? – If a Staffer leaves a voicemail as its oral response, you’ll at least have some sort of “writing” that you can archive and share with your working group. But what if you pick up the phone when they call? Can you tape it? Or should you just write a memo to the file memorializing the conversation?

I guess you’ll find out when you ask (I wouldn’t record the convo without the Staffer’s permission). But I threw this item in here so I can go back in the day to when I started in Corp Fin in the late ’80s. Back before computers. We wrote comment letters by hand – they would eventually get typed up by a secretary. But the Corp Fin “branches” had one secretary for about 10 lawyers. So comment letters didn’t get typed up until the deal went to market in most cases. Instead, Staffers would call and read off their comments over the phone – and the law firm on the other side would record the conversation and transcribe it. So there is some sort of precedent…

3. What Happens If Corp Fin Doesn’t Take Any Position? – Corp Fin’s announcement states that the Staff’s failure to take a position on a no-action request should not be construed as an indication that the company’s failure to include a shareholder proposal in its proxy materials is a violation of Rule 14a-8. As noted in this Gibson Dunn blog, the Staff may now more frequently decline to give a definitive response. That used to be rare – perhaps now it will be more common.

Gibson Dunn notes: “In considering whether to omit a proposal in such situation, a company will need to consider the potential reaction of its shareholders, the risk of adverse publicity, possible reactions from proxy advisory firms (discussed below), the risk of litigation, and the possibility that including the proposal in its proxy statement will attract more proposals in future years.”

4. Why Bother Seeking No-Action Relief At All? – Unfortunately, this Corp Fin position doesn’t change anything for companies in terms of spending resources to seek no-action relief. (Remember that a no-action response only means that Corp Fin won’t refer the matter to the SEC’s Enforcement Division if a company excludes a shareholder proposal from the proxy. It ain’t a “get out of jail free” card).

Companies still are required by Rule 14a-8 to notify Corp Fin that they intend to omit a proposal and the “reasons” for excluding it, and since (at this point at least) we don’t have a good sense of when Corp Fin will respond with a definitive position, companies still have to make as strong of a case as they can because you don’t want to be so unconvincing that Corp Fin says (whether orally or in writing) that they don’t concur.

5. Will Corp Fin’s Announcement Result in More Lawsuits? – Corp Fin’s announcement notes – as has always been the case – that proponents & companies are free to seek adjudication of the Staff’s positions in federal court. Personally, I don’t think we’ll see more lawsuits.

For the bigger investors that have submitted shareholder proposals in the past, they may gravitate to other methods to pressure companies in the wake of the Staff’s new position – for example, engage in more “just vote no” campaigns or more joint activities with other investors to apply pressure. Lawsuits take too long, cost too much and the judges involved typically don’t know the nuances of the securities laws. But you never know, maybe we’ll see more litigation after all…

6. Will Corp Fin Give Broader Guidance More Frequently? – As noted in this Gibson Dunn blog, “The Staff announcement indicates that one instance in which the Staff will issue response letters will be to provide “more broadly applicable guidance about complying with Rule 14a-8.”

Although the Staff has on occasion used a Rule 14a-8 no-action response to elaborate on its interpretation of the rule, historically the Staff has utilized Staff Legal Bulletins to provide “more broadly applicable guidance” regarding its interpretation of Rule 14a-8. The Staff’s announcement appears to suggest that it now will more commonly spring guidance on the shareholder proposal community in the middle of the season and in the context of specific factual situations, which may make such guidance harder to apply in other contexts than if the Staff addressed such issues more generally.”

Tomorrow’s Webcast: “Secrets of the Corporate Secretary Department”

Tune in tomorrow for the webcast – “Secrets of the Corporate Secretary Department” – to hear Norfolk Southern’s Ginny Fogg and Home Depot’s Stacy Ingram debunk myths on how to run the corporate secretary department, as well as provide oodles of practice pointers on how to leverage outside resources & technology; tips for caring of the board; managing a budget; streamlining the board materials process; optimizing director orientation & education; and much more.

Poll: Desirability of Receiving Oral Responses to No-Action Requests?

Please take a moment to participate in this anonymous poll:

survey services

Broc Romanek

September 6, 2019

Governance: Closing the Board Information Gap

With everybody debating big picture issues like corporate purpose & stakeholder v. shareholder interests, this “Ethical Boardroom” article by Harvard’s Stephen Davis is a reminder that when it comes to good governance, there are more fundamental issues that need to be addressed – like making sure directors have the information they need to do their jobs.

The article points out that directors are “on the short end of a massive information imbalance.” They’re entirely dependent on management for their information flow, and even when they retain outside advisors, those advisors may be primarily loyal to management.  This disparity gives management a routine advantage in influencing what gets on the board’s agenda and how matters are addressed.  This excerpt says that the solution to this information imbalance may be an independent staff serving only the board:

Cementing the information imbalance is the fact that the typical company board has no everyday dedicated staff. Instead, directors rely on an executive – usually a company secretary or general counsel – who is accountable to and works for management. These officers are often the silent heroes of corporate life, as they attend to multiple, sometimes conflicting, constituencies and do so with high ethics and professionalism.

But make no mistake: they are not employed by and for the board. Indeed, outside observers would find it hard to fathom how companies go to such lengths to recruit great independent directors – only to make them largely dependent for help on the team they are supposed to oversee.

One of the interesting things that the article points out is that some companies have taken steps in this direction – although most of them appear to have done so in response to massive scandals.  In that regard, in the wake of the Carlos Ghosn scandal, Nissan announced that it would establish an “office of the board” to improve the board’s ability to access information independently.

LIBOR Transition: FASB Exposure Draft Would Ease Accounting Burden

This recent blog from Stinson’s Steve Quinlivan flags a new FASB exposure draft that would make life a little easier when it comes to accounting for the impact of the upcoming elimination of LIBOR.  Why should you care? Well, here’s an excerpt about the accounting hurdles companies could face absent the proposed relief:

Without any relief by FASB any contract modifications resulting from contract modification to implement a new reference rate would be required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The application of existing accounting standards on modifications could be costly and burdensome due to the significant volume of affected contracts and the compressed time frame for making contract modifications.

In addition, changes in a reference rate could disallow the application of certain hedge accounting guidance, and certain hedge relationships may not qualify as highly effective during the period of the market-wide transition to a replacement rate. The inability to apply hedge accounting because of reference rate reform would result in financial reporting outcomes that would not reflect entities’ intended hedging strategies when those strategies continue to operate as effective hedges.

The proposed ASU would simplify accounting analyses under current GAAP for contract modifications if qualifying criteria are met & would allow hedging relationships to continue without de-designation as a result of certain LIBOR reform-related changes in their critical terms.

The Martin Act Gets Its Claws Sharpened

I’ve previously blogged about New York’s formidable Martin Act, which the NY AG uses as the basis to investigate and prosecute . . . well . . . just about anything. Last year, the statute had its claws trimmed when the NY Court of Appeals pared back its limitations period for non-scienter based fraud claims from 6 years to 3 years. But this New York Law Journal article reports that last month, NY Governor Andrew Cuomo signed legislation that essentially undid the Court’s decision & restored the 6 year statute of limitations.

John Jenkins