February 20, 2015

ISS Issues FAQs on Proxy Access Proposals

Here’s news from Davis Polk’s Ning Chiu’s blog :

In its long-awaited FAQs, ISS indicates that it will generally recommend in favor of management and shareholder proposals for proxy access which allow for nominations to be made by shareholders owning not more than 3% of the voting power for 3 years, with “minimal” or no limits on the number of shareholders permitted to form a nominating group, and allowing nominations for up to 25% of the board. ISS will also review the reasonableness of any other restrictions and may recommend against proposals that are more restrictive than these guidelines.

ISS is tracking 96 shareholder proposals on proxy access. For companies that present both a board and a shareholder proxy access proposal in their proxy statement, ISS will review each proposal separately. Yesterday, we issued a memo on a decision framework for evaluating proxy access, including for those companies that do not have the proposal this season but are watching these governance developments, which is available here.

In addition, ISS will recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances), if a company excludes a shareholder proposal, unless it has obtained (a) voluntary withdrawal by the proponent; (b) no-action relief from the SEC or (c) a U.S. district court ruling. ISS may issue negative recommendations in these situations regardless of whether there is also a management proposal on the same topic. This is under ISS’ governance failures policy and expand beyond proxy access, to other situations where companies had also attempted to exclude conflicting shareholder proposals through the SEC no-action letter process, such as proposals requesting the right to call a special meeting. If a company has taken unilateral steps to implement the proposal, the degree to which the proposal is implemented, including any material restrictions, will also factor into the assessment.

Striking a Balanced View of Non-GAAP Disclosures

Non-GAAP measures have received some bad press recently – and in some cases, deservedly so. The WSJ reported that some companies are excluding costs that would seem to belong in earnings calculations such as “regulatory fines, ‘rebranding’ expenses, pension expenses, costs for establishing new manufacturing sources, fees paid to the board of directors, severance costs, executive bonuses and management-recruitment costs.”

Yet another WSJ article cites questions about exclusions of executive bonueses, fees for stock offerings and acquisition expenses, and notes that the SEC has sent comment letters to more than 30 companies in the past two years for giving their non-GAAP measures “undue prominence” in their filings. And this CFO article notes comments made by a PCAOB representative at an accounting conference about companies’ “increasing abuse” of non-GAAP measures, and an example he cited of a company’s exclusion of director fees because they allegedly related to governance – purportedly unrelated to company operations.

However, non-GAAP measures aren’t inherently bad. Used appropriately – in conformance with the letter and the spirit of SEC rules – they can significantly enhance comparability and provide tremendous insights into the business, ongoing operations and future prospects that aren’t otherwise discernable based on the use of GAAP alone. Rather than be deterred by – or ignoring – the bad press, companies should revisit the non-GAAP measure basics, and continue to use them effectively to enhance the utility of their disclosures.

PwC’s recent IPO study, although IPO-focused, provides a nice overview of the objectives, uses and SEC requirements pertaining to non-GAAP measures – as well as SEC comment letter examples that, for the most part, apply equally to mature companies. In addition, this Deloitte report (pgs. 72 – 74) includes a helpful discussion of recent SEC comment letter trends pertaining to non-GAAP measures that is instructive for future disclosures.

See also my previous blog addressing tips to enhance non-GAAP disclosures, and additional resources in our “Non-GAAP Measures” Practice Area.

Non-GAAP Measures Inspire FASB’s Financial Reporting Project

In this post, FASB Member Marc Siegel addresses some of the murmurings and studies on the use non-GAAP measures – and shares his view that the combination of GAAP and non-GAAP information is “more impactful” for purposes of understanding a company’s business than either dataset on its own.

Observations that non-GAAP measures may indicate how similar information might be better organized or presented in the income statement appears to be the genesis for FASB’s Financial Performance Project:

If this project is officially added to our agenda, we would look to find ways to improve the relevance of information presented in the performance (income) statement for public and private companies. Our goal would be to increase the understandability of the performance statement by presenting certain items that may affect the amount, timing, and uncertainty of an organization’s cash flows. Specifically, the research is developing a framework for defining operating activities and distinguishing between recurring and infrequent items.

The project is currently in the research phase.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for 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:

– Study: 10-K Tax Disclosure as a IRS “Roadmap”
– Revealing Whistleblower’s Identity is Retaliation
– Darden Announces Governance Reforms
– Basics of Board Delegations
– Comment Letter Summary: Advertised Private Placements Under Rule 506(c)
– Giving Good Guidance
– Study: Director Appointment Trends
– CPA: More Companies Pull Back Veil on Political Spending
– IPOs: Use of Non-GAAP Measures
– Revenue Recognition Changes & SEC’s Five-Year Summary
– Free Database of Fortune 500 Codes & Policies: Useful?
– Whistleblower Hotline Checklist


– by Randi Val Morrison