Temple Professor Tom Lin recently published an article examining executive power and “corporate democracy,” which is a loaded term for some in our profession. Below is the abstract:
This Article deciphers a long-standing paradigm of power — the President as CEO — and offers an original and better legal understanding of executive governance. This Article presents the first sustained, comparative study of CEOs and presidents, the theoretical ties that bind them in the popular imagination of law and society, and the practical truths that sever their bonds in the real world of politics and business. It argues that this overused but understudied construct of law and society illuminates these two chief executives, but also obscures and distorts them with dangerous consequences. This Article suggests that in better understanding the laws and powers of those who lead and govern, we can learn better ways to be led and governed, as shareholders and citizens alike.
This Article begins with a normative and historical analysis that challenges conventional comprehensions of the President as CEO paradigm. It then charts the parallel promises and perils of power shared by CEOs and presidents. Drawing from constitutional law, corporate law, and organizational theory, it explains how promises of unity, accountability, and effectiveness converge with perils of capture, deference, overconfidence, and aggrandizement. Next, this Article highlights critical divergences between CEOs and presidents in connection with their elections, objectives, and constituents. Because of these divergences, it argues that popular movements to conflate presidents and democracy with CEOs and corporations can undermine American democracy and American corporations. Instead of quixotic conflations, this Article calls for deeper comparative examinations of these chief executives as a way to unlock new insights into corporate democracy, corporate purpose, government privatization, and executive power.
Thanks for the Gumball Mickey: Gibson Dunn, Washington DC
Excited to get the good people at Gibson Dunn in DC involved in the “Gumball Madness” in this 20-second video:
Printed: Popular “Romeo & Dye Forms & Filings Handbook”
Good news. Alan Dye has completed the 2014 edition of the popular “Section 16 Forms & Filings Handbook,” with numerous new – and critical – samples included among the thousands of pages of samples. Remember that a new version of the Handbook comes along every 4 years or so – so those with the last edition have one that is dated. The last edition came out in 2009.
Act Now: If you don’t try a ’14 no-risk trial to the “Romeo & Dye Section 16 Annual Service,” we will not be able to mail this invaluable resource to you now that it’s done being printed. The Annual Service includes a copy of this new Handbook, as well as the annual Deskbook and Quarterly Updates.
In this 2-minute video, there are 19 great ways that Freeport-McMoRan enhances the usability of its 2014 proxy statement:
The Battle Over Delaware’s Fee Shifting Legislation
Initially, it looked like the Delaware legislature was moving fast to adopt legislation that would essentially overturn the recent Delaware Supreme Court decision in ATP Tour v. Deutscher Tennis Bund (which held that fee-shifting bylaws were permissible). It still is likely to get passed soon enough – but the Chamber of Commerce has written letters to state legislators that has delayed the debate on the bill for the time being…
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Shareholder Proposals: Proponent Loses Lawsuit to Compel Inclusion
– Determining Materiality in the Context of MD&A Disclosure
– Governance By Gunpoint: Aaron’s
– A Closer Look at Shareholder Proposals This Season
– More on the “Activist-Investor” Debate
There is nothing more stressful – with perhaps the exception of a major disruption – at an annual shareholder meeting than having to postpone and adjourn the meeting. As reported in Mike Melbinger’s blog, last week, Cheniere Energy filed these supplemental proxy materials to postpone a special shareholder’s meeting as a result of a lawsuit alleging improper compensation disclosures and some fishy counting of votes (see also Jill Radloff’s blog and this WSJ article).
Back to the fishy counting of votes, for those that have watched my videos about “usable” proxies, you will see that I have highlighted companies that used a chart to clearly describe how abstentions and broker non-votes are counted for each agenda item. The Cheniere Energy lawsuit highlights the need to have good disclosure in this area – and it will be interesting to see if the plaintiffs firms will be scouring 8-Ks for proposals that reportedly passed, but should not have passed had abstentions and broker non-votes been counted properly (and vice versa), as well as Section 14(a) claims for incorrect descriptions of the vote required…
PCAOB Adopts “Related Parties & Unusual Transactions” Auditing Standard
As noted in this blog by Gibson Dunn’s Michael Scanlon, the PCAOB recently adopted Auditing Standard #18 that expand audit procedures required to be performed with respect to three important areas: (1) related party transactions; (2) significant unusual transactions; and (3) a company’s financial relationships and transactions with its executive officers. The standards also expand the required communications that an auditor must make to the audit committee related to these three areas. They also amend the standard governing representations that the auditor is required to periodically obtain from management.
Surprise! It’s Randi blogging for the first time on this blog…Ever since the recent, highly publicized cyber breach incidents – whether warranted or not (see Broc’s recent blog) – it seems like hardly a day goes by without media coverage & third-party commentary about the board’s risk oversight role. This new Deloitte report– which addresses Deloitte’s findings of a global study addressing the prevalence and drivers of board-level risk committees – is very timely.
A primary theme is that board risk committees are just one tool that boards should at least consider to help effect their risk oversight responsibilities. That said, as the study shows, board risk committees (stand-alone or hybrid) for large companies outside the highly regulated financial services industry (FSI) are still relatively uncommon globally – and virtually non-existent in the US. This is the kind of benchmarking information most boards like to be aware of.
Most commonly, US boards effect their risk oversight by allocating responsibilities among multiple board committees; the balance typically retain responsibility at the full-board level. However, like all other governance practices, re-evaluating the approach to risk oversight periodically in the context of evolving macro & company-specific circumstances is important – even if it appears that the status quo is working. Sometimes this means reviewing particular governance practices outside of the board’s slated review time frame (e.g., proxy season). This report assists that review process by teeing up for the board’s consideration these potential benefits of a risk committee:
Depending on the organization and its industry, risks, and regulatory and risk governance needs, a board-level risk committee can enable the board to:
Assert and articulate its risk-related roles and responsibilities more clearly and forcefully.
Establish its oversight of strategic risks, as well as the scope of its oversight of operational, financial, compliance, and other risks.
Task specific board members, external directors, and other individuals with overseeing risk and interacting with management and the chief risk officer.
Recruit board members with greater risk governance and risk management experience and expertise.
Keep the board more fully informed regarding risks, risk exposures, and the risk management infrastructure.
Importantly, the report emphasizes that – outside of the FSI – risk committees aren’t normally required, and may not be desirable for every company. Each board needs to determine for itself how best to effect its risk oversight responsibilities; a dedicated risk committee is just one of several potential approaches. As noted in my previous blog about board technology committees, some boards function most effectively at the full board level with minimal work conducted in standing committees – whereas others function primarily through their standing committees. Both approaches can be equally effective. Along those lines, the board can certainly achieve the risk oversight benefits identified in the report without establishing a dedicated risk committee.
Should Directors Be Allowed to Attend All Committee Meetings?
Speaking of board committees, I couldn’t help but to add my 2 cents to a current spirited debate on LinkedIn about whether it’s appropriate for all board members to attend all committee meetings. It quickly became clear in my following of this group discussion that not only are the views about this topic widely divergent, but that my views appear to be in the minority on this issue.
So far, opinions weigh in favor of excluding all non-committee member directors from all standing committee meetings, whereas I and a few others believe that – generally (subject to independence & other relevant considerations) – allowing all directors to attend all committee meetings as observers/listeners is a net positive. What I am observing by following this discussion is that the views of those opposed to this “open invitation” approach are based on philosophical beliefs about “right and proper” governance and assumptions about director personality & behavior – rather than their personal experience. On the other hand, those of us in favor of this “open invitation” approach are basing our views on our positive first-hand experiences with this practice.
The “opposition camp” is largely attributing negative characteristics to directors who express a desire to attend committee meetings other than their own – including micromanagement, lack of trust of the competence of committee members, out-of-control egos, inexperience, etc. – that simply bear no resemblance to my (and a few others’) personal experience. There also appear to be concerns about potential inefficiencies, inadequate leadership skills of board chairs who would allow such a practice, the director’s desire to attend committee meetings possibly revealing tendencies to overstep into management territory, etc.
As I noted in the group discussion, while I was a corporate GC & secretary, two of my very seasoned and reputable directors who have served for many years as directors of other public companies suggested this practice of inviting (but not mandating) all directors to attend all committee meetings based on their positive experiences at one of the Fortune 500 company boards on which they (still) serve. Triggered by their recommendation, we adopted the practice at my company and it unquestionably resulted in a more aware and engaged board overall – as well as other upsides. These upsides (and others) are shared by the few other LinkedIn group members who expressed favorable views about this approach based on their personal experiences.
This is not to say that allowing all directors to attend committee meetings as a listener/observer is the right approach for every company; rather, each board should consider this based on its own facts and circumstances. However, those who have not experienced it should not automatically assume that a director’s request to attend committee meetings evidences personality (or other) flaws – or that adopting this approach would result in inefficiencies or other adverse implications.
Finally, I have to say that it seems counter-intuitive to me that – with all of the media and investor criticism lately about directors’ lack of sufficient awareness & engagement, people are so vehemently opposed conceptually to directors attending their own board’s key committee meetings.
Webcast: “Proxy Season Post-Mortem: The Latest Compensation Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
Perhaps not as good a battle as “What If Conan Met Thor?” – but it has to be up there. Recently, two different articles brought two extremes to my attention. First, this blog by the “Activist Investor” stated a belief that CEOs shouldn’t serve on the board at all, much less serve as the board chair. Then, this Laurel Hill article analyzed a WSJ article entitled “The Hottest Corporate Fad: Pay CEOs to Find Successors.” In essence, the boards in these cases arguably are paying the CEO to do its job. Shoot me an email with your opinion on either (or both) of these topics. I will keep them to myself – but I’m curious what others think…
Study: A 13-Year Comparison of Restatements
In a recent study, Audit Analytics looked back over 13 years of restatements and, among other things, found:
– In the last four years, the quantity of restatements has leveled off and severity has remained low, but restatements have increased from accelerated filers for the third straight year.
– During 2010, 157 accelerated filers disclosed restatements, followed by 210 in 2011; 282 in 2012 and 290 in 2013.
– During 2013, Revision Restatements (restatements revealed in a periodic report without a prior 8-K, Item 4.02 disclosure that past financials can no longer be relied upon) represented about 68.8% of the restatements disclosed by 10-K filers. This percentage represents the highest percentage calculated since the disclosure requirement came into effect August 2004.
– During 2013, the average income adjustment per restatement by publicly traded companies (on Amex, NASDAQ, or NYSE) was about 3.2 million dollars, the lowest during the last seven years reviewed.
– During 2013, about 52.8% (235 out of 445) of the restatements disclosed by publicly traded companies (on Amex, NASDAQ, or NYSE) had no impact on earnings, the highest during the last seven years reviewed.
– The average number of days restated (the restatement period) was 548 days during 2013, the sixth year in a row with a period above but near 500 days.
Tune in tomorrow for the webcast – “Underwriter’s Counsel: Latest Developments” – during which White & Case’s Colin Diamond, Cravath’s LizAnn Eisen and Davis Polk’s Joe Hall will explore the latest developments that impact underwriter’s counsel, including negotiating the underwriting agreement, obtaining a comfort letter and making filings with FINRA.
As reported in this WSJ article, nearly 1,300 companies filed Forms SD to report on conflict minerals by the June 2 deadline. The result? Inconclusive. While a number of companies acknowledged their suppliers may have sourced minerals from the DRC or adjoining countries, a “majority of companies whose filings were reviewed by The Wall Street Journal… said they haven’t figured out if their products, ranging from electronics to jewelry, are in the clear. Only a handful were confident their supplies were free of conflict metals….” Companies contended that the sources were difficult to trace, that they did not receive questionnaires from suppliers or received incomplete, inaccurate or unreliable responses or that “the complexity of their manufacturing processes made it impossible to give a definitive answer.”
A conflict minerals consultant observed that the “‘credibility and the certainty of the data, through the supply chain, doesn’t really exist completely. Because it is the first time anybody has ever done this, there is a question about the quality of the data.'” The article notes that the “SEC estimated conflict-mineral reports would cost companies up to $4 billion in the first year, and drop to between $200 million and $600 million in later years. Companies were projected to take about 480 hours, on average, to complete a report, compared with about 2,000 hours for a corporate annual report.” It will be interesting to see what the real numbers were.
Proposed Regulation A+: Comment Letter from 20 Members of Congress Opposing Pre-Emption
A few days ago, 20 members of Congress submitted this comment letter opposing pre-emption in the context of proposed Regulation A+. For some time, NASAA has been making the argument that the pre-emption aspects of proposed Regulation A+ are inconsistent with legislative intent. In addition, SEC Commissioner Stein is opposed to pre-emption – and Commissioner Aguilar has said that he has asked the SEC’s General Counsel to provide guidance on whether pre-emption was permitted. Here are all the comments so far on this proposal. Thanks to David Pankey of McGuireWoods for the heads up!
Meanwhile, here are the comments on the SEC’s crowdfunding proposal – including this one recently filed by the ABA’s Business Law Section…
Opposing Climate Change: Environmental Groups Warn Directors and Executives of Possible Personal Liability
Greenpeace International, WWF International and the Center for International Environmental Law sent letters to executives and directors of 32 major oil, gas and energy companies, warning them that they may ultimately face personal liability related to climate change issues.
According to the NGOs, the targeted companies are “working to defeat action on climate change and clean energy by funding climate denial and disseminating false or misleading information on climate risks.” Beyond this general yet inflammatory allegation, there are no specific examples or references cited other than a list of news stories and other publications about corporate influence and “lobbying” activities. The group claims that these companies face increasing risks of climate-related litigation arising from insufficient disclosures or as a result of major corporate losses, expenses or penalties. Derivative suits may follow with allegations of officers and directors’ mismanagement and ultimately create an evolving standard of fiduciary duty in the context of climate change. As a result, they warn that D&O insurers may not provide coverage for these kinds of lawsuits. The letter was also sent to 45 D&O insurers.
Responses to a list of questions, which will be made publicly available, are requested in four weeks. The questions include whether officers and directors believe that they would be indemnified under the company’s D&O policy if accused of having “misled” consumers and investors or engaged in “disinformation” or campaigns to “obstruct, suppress or discredit” scientific information.
We have posted the survey results regarding how companies are preparing now for the SEC’s upcoming pay disparity rulemaking (compare to the same poll from two years ago), repeated below:
1. At our company, the board:
– Does not consider internal pay equity when setting the CEO’s compensation – 64%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to all employees – 8%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to other senior executives – 36%
– Does consider internal pay equity as a factor by comparing the CEO’s pay to a formula different than the two noted above – 3%
2. Ahead of the SEC’s mandated pay disparity disclosure rulemaking under Dodd-Frank, our company:
– Has not yet considered how we would comply with the rules – 74%
– Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank but we have not yet tested statistical sampling – 29%
– Has begun considering the impact by assessing whether we could comply with the precise prescriptions in Dodd-Frank including assessing whether we could use statistical sampling – 12%
3. As one of the companies that have assessed the impact of the SEC’s mandated pay disparity disclosure rulemaking, our company:
– Believes we could comply with the precise prescriptions in Dodd-Frank without too great a burden – 78%
– Believes we could comply with the precise prescriptions in Dodd-Frank but it would be too burdensome unless statistical sampling is allowed – 3%
– Believes we could comply with the precise prescriptions in Dodd-Frank but it would be burdensome even if statistical sampling is allowed – 25%
– Believes we wouldn’t be able to ever comply with the precise prescriptions in Dodd-Frank – 0%
4. In your own opinion, do you think that statistical sampling would have too high a potential for manipulation or material error:
– Yes – 84%
– No – 5%
– I don’t have an opinion – 19%
Over on CompensationStandards.com, I have blogged about a California bill – California Senate Bill 1372 – that would tie the state’s tax code to a pay ratio formula as a way to tackle income inequality. Last week, the bill was narrowly voted down in the California Senate, 19-17. See this LA times article; AP article – and Towers Watson note.
SEC’s Reg Flex Agenda: Four Horsemen Rulemakings Comings & Goings
A few months ago, I blogged about some remarks from Corp Fin Director Keith Higgins that included a status update on the Four Horsemen rulemakings from Dodd-Frank. Last Friday, the SEC issued its semi-annual Reg Flex Agenda indicating that the pay ratio rules would be adopted by October – and that the three other rulemakings would be proposed by that same month. Does this really mean anything? No, not really – as Reg Flex Agendas tend to be “aspirational” as I’ve blogged about a few times recently.
That doesn’t mean that I don’t believe those actions will be accomplished by that date. In fact, SEC Chair White has continued to express a desire to get all the Dodd-Frank rulemakings behind her – so I would be surprised if we didn’t see final pay ratio rules sooner, as well as proposals on at least some of the other three before then too. But you never know, particularly as the five Commissioners seem to be more polarized than ever…
A potential wild card here is that the House Financial Services Committee recently passed 9 capital formation bills – some with strong bipartisan support and some that would require the SEC to adopt new rules within a short timeframe (eg. 180 days). A new spate of required rulemakings could hinder any plans to act on some or all of the Four Horsemen…
Just in time for the SEC’s 80th birthday (tomorrow is 80 years since the ’34 Act was signed into law), comes this news from Paul Weiss (we will be posting memos in our “SEC Enforcement” Practice Area):
Yesterday, the United States Court of Appeals for the Second Circuit issued a significant decision in SEC v. Citigroup Global Markets Inc., in which it concluded that the district court’s refusal to approve a consent judgment between the SEC and Citigroup was an abuse of discretion. On November 28, 2011, the district court rejected this consent judgment, in which Citigroup neither admitted nor denied the allegations, because of a lack of “cold, hard, solid facts, established by admissions or by trials.” The Second Circuit’s decision effectively rejects the proposition that district courts may substantively review regulatory consent judgments, and consequently endorses the ability of the SEC and other regulatory agencies to enter into “no admit, no deny” settlements.
This decision should undermine the increasing trend in the district courts to second-guess the remedies agreed to by regulators and defendants, and the concomitant media and political pressure to do so. The Second Circuit’s decision sharply delineates the respective roles of regulatory agencies and the courts, emphasizing that the SEC is charged with exercising discretionary judgment as to whether a settlement is in the public interest, and that courts are to defer to that assessment.
Also see this blog by David Smyth entitled “Judge Rakoff Reversed by Second Circuit on SEC-Citi case, Still Sort of Wins”…
SEC Enforcement: A Focus on Lawyers?
A recent speech by SEC Chair White – and one by Commissioner Kara Stein – has lawyers listening. That’s because they discussed the role of individuals in matters that lead to enforcement actions, including the novel idea of using Section 20(b) of the Exchange Act – with Commissioner Stein particularly focusing on lawyers. Here are a few articles on this:
Also see this Morgan Lewis blog about “Enforcement Case Shows SEC’s Increased Focus on Internal Controls”…
Another Rule 506 Bad Actor Waiver for Credit Suisse
As a follow-up to my blog noting a number of bad actor waivers, Corp Fin granted a second bad actor waiver to Credit Suisse a few weeks ago. This latest one is a bit different from the others since it is an “Order of the Commission” and it is specifically designed to give relief to certain current funds, third party issuers and portfolio companies affiliated with Credit Suisse (here’s the request). Rule 506(d)(2) provides that the disqualification “shall not apply . . . upon a showing of good cause and without prejudice to any other action by the Commission, if the Commission determines that it is not necessary under the circumstances that an exemption be denied.”
Admittedly I’m biased because I produced the conference – but trust me, “The Women’s 100 Conference” that took place on Monday was different than any other conference I have attended. There was a buzz before the first panel even started as many showed up early and immediately started networking. The panels were more interactive with the audience than you typically see. People were not afraid to speak up – and they were encouraged to do so. And the proof in the pudding is that it was hard to find anyone in the audience checking their phones. Wow!
So I pat myself on the back for one of my goals: reform the way that conferences are held. I can’t tell you how many panels I have sat through and didn’t take a single note. And I like to take copious notes. Here’s my “Do’s & Don’ts of Public Speaking.”
Note the purpose of this blog isn’t to market the “2nd Annual” for next year. My biggest problem is that I believe most of the 100 want to come back and I already have a waiting list – and this type of event works best with a limited number of participants…
Meredith Cross: Winner of the Linda Quinn Lifetime Achievement Award!
A different format – heavy on networking – was one reason for the event’s success. But the biggest reason was the speakers. Terrific women. I could listen to them all day.
And one of the key speakers was the winner of the Linda Quinn Lifetime Achievement Award: Meredith Cross. After former SEC Chair Elisse Walter gave a heartwarming introduction to Meredith, with a heavy dose about who Linda was – Meredith proceeded to bring us to tears with stories drawn from her career including her own fond memories about Linda. Meredith has been kind enough to share her remarks.
I’m particularly grateful for the kind words that Meredith shared about me. Certainly unexpected. And I also appreciate the many private notes I received from attendees afterwards. But I was most honored to receive this note from my wife who attended and is not in our field: “It was fantastic to witness the very women in a position to make an impact in your field do so utilizing creative strategies, brilliant analysis, unique insight and decades of experience. Not only that, they do it thoughtfully with kindness and humor. I moved quickly past intimidated to impressed and inspired. I was absolutely proud of you, but also vicariously proud of them. #genderpride.”
Sights & Sounds: “The Women’s 100 Conference ’14″
Here’s a 1-minute video that gives a little bit of the event’s flavor:
In the context of ESG shareholder proposals, this article notes that companies are becoming more sensitive to sustainable investment concerns. And Kevin LaCroix recently blogged about how environmental problems can lead to directors being named in lawsuits (and the D&O insurance implications).
Last month, the United Nations Global Compact opened a comment period for the 1000 publicly traded companies that have signed the “Global Compact” to comment upon this “Investor Listing Standards Proposal” (overall, there are 7k signatories to the Compact – but many are jurisdictions, schools, etc. and not public companies). Numerous investors from all around the world spent last year submitting their sustainability desires to the World Federation of Exchanges during a consultation period – and that feedback from investors is in this proposal (in other words, the areas where investors agreed upon the most made it into the proposal now being considered). That was a big challenge.
So now is the time for the corporate world to weigh in on what they’d like the stock exchanges to require when it comes to ESG reporting. The UNGC is going to compile company responses into one master document – and then submit a proposal to the 62 stock exchanges – through the WFE (there is now a sustainability working group of 17 exchanges – a sign of the sincerity that they intend to do something soon). This is expected to come out in the fall. Company feedback during this process is important (and a company doesn’t have to be a signatory to weigh in) – so act by the comment deadline of June 27th (learn more about how to do that in this feedback form).
California’s DOCQNET: A New Filing Framework
In an era when the SEC has EDGAR as a possible item for change (as part of the disclosure reform project), it is fitting that California has actually done that. As noted in Keith Bishop’s blog, California’s Department of Business Oversight is rolling out a new online system called “DOCQNET” (Document Quality Network) effective June 18th…
Transcript: “Appraisal Rights: A Changing World”
We have posted the transcript for the recent DealLawyers.com webcast: “Appraisal Rights: A Changing World.”