February 10, 2016

SEC Chair White on Activism & Board Diversity

This Q&A interview with SEC Chair White conducted by Wilson Sonsini’s Steve Bochner is more useful than the typical speech (here’s a summary from Ning Chiu). Here’s an excerpt from near the end:

STEVEN BOCHNER: We have a few more minutes. Maybe talk a little bit about something that the next panel’s going to touch on as people get their lunch in a few minutes here, which is kind of balancing shareholder rights with the domain of the board. I mean, that seems to be one of the topics of our time here and there’s just been — since Sarbanes-Oxley dramatic change in shareholder rights, which has caused shareholder activism and a lot of is it a good thing/bad thing? The answer is probably somewhere in the middle, but proxy access, I think people know that history here.

What’s your view of how to strike that balance, the Commission’s role in it? How do you see that particular debate playing out?

CHAIR WHITE: Yes. I think at its core it’s not for the Commission to take sides in the debate. I can sort of explain what I mean about that a little bit. I mean, we obviously have rules that govern various acts of activism if we want to phrase it that way. We have rules that require disclosure. We’re focused on everybody, obeying/adhering to those rules, so investors get the information, shareholders get the information that they need to have. And so, I think that’s, one kind of important bedrock principle in that to the extent that I’ve said this before, I don’t think activists are a seamless piece. I think they can fall into different categories and they can be seeking different things and they can use different methods, which presumably means issuers may want to be responding differently depending on exactly what’s in front of them.

One of my favorite anecdotes is, I gave a speech on a lot of this at Tulane, at their corporate governance [conference], and the two immediate press readouts from what I said, one said, “White supports activists.” The other one side, “White trashes activists.” So I think I struck the balance right that day. [Later, they wrote about differences] between me and your opening speaker yesterday. On shareholder proposals, obviously our rules, since 2011 have provided for qualifying shareholders to make proposals.

Proxy access, clearly 2015 was a pivotal year. I think there were a lot — I think ISS has said over 120 shareholder proposals. I think 90 plus of them made it to a ballot. Sixty percent of them if I’m right, I think got majority support, and then I think there were 118 companies who actually in 2015 adopted some form of proxy access, names everyone knows –GE, Microsoft, Goldman Sachs, Morgan Stanley, Bank of America, and many other companies. And I saw one figure recently where I think there are 20 percent of the S&P — I think it’s 100, not 500 now have some form of proxy access. If you look back in 2013, it was 1/2 of 1 percent.

So, obviously there’s been a lot of activity in that space. I expect, by the way, there’ll be more activity this season in that space too.

The other piece of this — free associating a little bit — is, the uptick in what I call direct shareholder engagement that boards and companies are doing and shareholder proposals aren’t in that category. I’m really thinking of the outreach that’s being done. I think that’s all to the good. I mean, that’s something I really think is quite constructive.

STEVEN BOCHNER: Yeah. Well, why don’t we end on a topic that I know is important to you, which is diversity and you’ve been a director of a public company. You’ve been a federal prosecutor, Chair of the SEC. You’ve worked in a law firm, so you’ve seen it from about every side and I know it’s something you care deeply about.

CHAIR WHITE: Diversity on boards I think is enormously important — diversity everywhere I think is an enormously important topic. I think it adds value. I think you’ve seen in terms of the board context really study after study showing that greater diversity on boards adds value. I mean, it makes your board function better and adding value to your company obviously correlations — but start with that, and yet the numbers [on boards] really are not bearing that out in most companies.

I think on the gender side, it’s 16 percent women [on public boards] and I think GAO just put out a study in December saying that it’d take about four decades to get parity if you had an equal number of men and women, for example appointed to boards.

I don’t think it’s a want of supply either. I think there are plenty of highly qualified diverse candidates. There are resources to find them if your nominating committee needs resources to find them. I think I would urge boards to kind of start there. Where are you looking for your board candidates? If it’s that old traditional network where everybody’s come from for the last 50 years, you may have more trouble getting to highly qualified, diverse members of your board.

Obviously [I am] speaking [personally] from my various perspectives. When it comes to the SEC’s regulatory space, we don’t tell you who should be on your board and we don’t generally talk about even board qualifications. You know, a couple of exceptions to that, we do have disclosure rules on directors and their experiences and backgrounds and diversity. Those rules have been the subject of some conversation as to whether they are strong enough, whether they really are giving [enough useful information to] investors who are interested, and many are, in the racial, ethnic, and gender diversity of boards. They don’t require that disclosure. What they require is if a board considers diversity, say so and how, if it does. If you have a policy on a diversity as you’re locating and nominating directors how is that implemented and how do you judge its effectiveness?

In that rule we don’t have a definition of diversity because obviously diversity can mean a lot of things. In addition to gender, race, ethnicity, all kinds of qualifications, rightly so, fit into that concept.

We have a number of petitions pending that raise the issue of — wouldn’t this be more meaningful if you actually defined diversity in your rule, SEC, to at least include ethnicity, race, and gender, in addition to whatever other qualities, fall under that category and require disclosure of those facts And I think those concerns, from my point of view, are well-founded and I’ve asked the staff to study basically what the disclosures are currently under our existing rule, what they’ve been over time with an eye towards — with these concerns that I share, whether we need additional guidance or rulemaking.

Going Concerns: Slightly Down

Here’s the highlights of this Audit Analytics study on going concerns, for which an initial review seems to provide positive news, but a deeper analysis reveals a mixed bag of indicators:

– Fiscal year end 2014 is estimated to receive 2,233 going concerns, a decrease of 170 from the year prior, but this decrease is only 10 companies more than the 160 companies that ended up filing terminations with the SEC after disclosing a going concern in 2013. Therefore, almost all the drop was due to company attrition from the prior year’s going concern population.

– It is estimated that 15.8% of auditor opinions filed for fiscal year end 2014 will contain a qualification regarding the company’s ability to continue as a going concern. In 2008, the figure was 21.1% and the percentage decreased for 6 consecutive years thereafter to drop to the value of 15.8%.

– For fiscal year 2014, the number of new going concerns (going concerns filed for a particular fiscal year, but not the year prior) is estimated to be 530, which is the 4th year in a row with an amount under 600. This streak is notable because the 10 years prior to 2011 all had numbers above 600. Moreover, it should be noted that 48% of the new going concerns as of July 14th were disclosed in S-1s or F-1s and thus linked to recent IPOs, not established companies. A new going concern linked to a recent IPO should not necessarily be viewed as a negative economic event.

– Fiscal year 2014 saw the third (tied) lowest number of companies that improved well enough to shed its going concern status. A multi-year analysis of the going concerns allows for an identification of companies that filed a going concern one year but not the following year. This cessation can occur for one of two reasons: (1) the company files a subsequent clean audit opinion (subsequent improvement) or (2) the companies stopped filing audit opinions altogether (subsequent disappearance). A review of companies that experienced a subsequent improvement reveals that only 200 companies that filed a going concern in 2013 were able to file a clean audit opinion in 2014. This figure represents the third lowest (tied) for any year analyzed, since 2000.

Corp Fin Issues EDGAR Guidance for Asset-Backed Issuers

Yesterday, Corp Fin issued 21-pages of EDGAR guidance – in the form of 12 Q&As – for ABS issuers…

Broc Romanek