February 18, 2015

Hedging & Pledging Policies: Possible Approaches & Survey

An analysis of ISS Governance QuickScore data finds: 54.3% of Russell 3000 companies have a policy prohibiting hedging of company shares by employees, while 84% of large capital S&P500 companies have such a policy. Executive or director pledging of company shares was prevalent at just 14.2% of Russell 3000 companies, and, notably, 15.8% of S&P500 companies.

In reaction to the SEC’s hedging & pledging policy disclosure proposal last week, I received this nifty chart on possible approaches from one in-house member – as well as this note below:

From where I sit, companies would do a disservice to themselves – and their stockholders – by adopting a blanket “one-size-fits-all” rule with regard to hedging of company securities. Instead, I believe we should consider different policy decisions on how we view hedging with regard to (i) outstanding equity awards v. shares owned outright and (ii) rank-and-file employees v. directors and officers. Also, even though the proposed rules are focused on hedging activity, I believe that companies should re-visit their pledging policies because they raise similar issues. See my attached snapshot summary.

We have numerous memos in our “Hedging” Practice Area – and I just posted this “Quick Survey on Hedging Policies.”

The SEC has announced the agenda & panelists for its proxy voting roundtable taking place tomorrow…

ISS Publishes TSR Medians By Industry Group

As noted in this blog, ISS has published “Industry Group US TSR Medians for Performance-Related Policies.” The publication was solely for informational purposes.

Company performance relative to industry medians is incorporated into ISS’ evaluation of shareholder proposals seeking an independent chair and for ISS’ evaluation of director performance. However, the TSR sector medians in ISS’ reports are updated monthly and align with the subject company’s fiscal year end.

Clawbacks: SEC Gets $500k from Pair of Ex-CFOs

Here’s news from this blog by Steve Quinlivan:

Two former CFOs have agreed to return nearly a half-million dollars in bonuses and stock sale profits they received while their Silicon Valley software company, Saba Software, was committing accounting fraud. While not personally charged with the company’s misconduct, the SEC’s position is the two CFOs are still required under Section 304 of the Sarbanes-Oxley Act to reimburse the company for bonuses and stock sale profits received while the fraud occurred.

Senior employees responsible for the fraud were told on multiple occasions by the finance department that the company’s accountants and auditors needed to understand exactly how many hours were being worked and when (regardless of whether or not they were billed to the customer) in order to ensure that revenue was recognized accurately, and they understood that inaccurate time-keeping would lead to misstatements in Saba’s reported professional services revenue and violate the Company’s policies regarding financial reporting. The two CFOs each consented to the entry of the SEC’s order without admitting or denying the finding that they violated Section 304 of the Sarbanes-Oxley Act.

Last year, the SEC charged Saba Software and two former executives responsible for the accounting fraud in which timesheets were falsified to hit quarterly financial targets. As part of that settlement, the SEC similarly reached an agreement with the former CEO to reimburse the company $2.5 million in bonuses and stock profits that he received while the accounting fraud was occurring, even though he was not charged with misconduct.

– Broc Romanek