Here’s the survey results about drafting proxy statements, glossy annual reports & Form 10-Ks:
1. At our company, the lead for drafting our proxy statement is (ie. running the master):
– Corporate secretary’s department – 28%
– Legal department – 67%
– Accounting department – 0%
– IR department – 0%
– Outside counsel – 5%
– None of the above – 0%
2. At our company, the lead for drafting our glossy annual report is:
– Corporate secretary’s department – 8%
– Legal department – 5%
– Accounting department – 5%
– IR department – 33%
– Outside counsel – 0%
– None of the above – 49%
3. At our company, the lead for drafting our 10-K is:
– Corporate secretary’s department – 10%
– Legal department – 10%
– Accounting department – 77%
– IR department – 0%
– Outside counsel – 3%
– None of the above – 0%
4. At our company, the lead group for conducting our disclosure committee meetings for our proxy statement is:
– Corporate secretary’s department – 24%
– Legal department – 53%
– Accounting department – 8%
– IR department – 0%
– Outside counsel – 3%
– None of the above – 13%
5. At our company, the lead group for conducting our disclosure committee meetings for our 10-K and 10-Q is:
– Corporate secretary’s department – 8%
– Legal department – 22%
– Accounting department – 65%
– IR department – 3%
– Outside counsel – 3%
– None of the above – 0%
When It Hits The Fan: Who Signs the CEO/CFO Certifications
The toughest questions arise in the CEO/CFO certification area when the company is in turmoil and the CEO and CFO are suddenly fired – without immediate replacements. This MarketWatch article by Francine McKenna tackles those issues – and cites our “CEO/CFO Certifications Handbook” in the process!
I’m very excited for the unveiling of Tesla’s Model 3 today!
Corp Fin Updates Financial Reporting Manual (For FAST Act, Etc.)
Recently, Corp Fin updated its Financial Reporting Manual to update guidance on significance testing for equity method investments, conform guidance for the FAST Act, and add guidance relating to the implementation of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (as amended by Accounting Standards Update No. 2015-14) and IFRS 15, Revenue from Contracts With Customers.
The soap opera continues. On Monday, the US Supreme Court denied certiorari to a constitutional challenge about how the SEC uses its administrative law judges for enforcement cases (the Bebo case involved Article II’s Appointment clause). Some lower courts had issued preliminary injunctions while SCOTUS was presented with the opportunity to rule on this case. I guess Mark Cuban’s amicus curiae brief wasn’t persuasive. The SEC still has outstanding proposed changes from last September about its ALJ framework – so I imagine those changes will now move forward.
One member wrote in: “This is a very good decision for investors and the SEC. This issue is simply one of venue chasing. Both the plaintiff & defense bar have chased around trying to find the most favorable venues in the past, without any regard for justice. Why would someone think the SEC should be precluded from doing the same?” What are your thoughts – weigh in via the poll below…
Particularly given regulators’ aversion to external auditor-provided tax services, this new study: “The Role of Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness” (full study available for purchase) is noteworthy. Among other things, the study found that companies preparing their own tax returns or having them prepared by a firm other than their auditor claim about 30% more aggressive tax positions than companies using their own auditor as the tax preparer, and Big 4 tax preparers in particular are linked to less tax aggressiveness when they are the auditor than when they are not the auditor.
As discussed further in this CFO.com article, the rationale is that the company’s external auditor has much more at risk (i.e. much more to lose) than either the company or another external preparer by taking an aggressive stance:
The study, based on data from S&P 1,500 companies, offers a rationale: “With the joint provision of audit and tax services, auditor preparers bear greater costs, relative to other preparer parties, if a position is overturned due to a tax audit and court action.” The study notes that auditors bear at least two types of risk that do not apply to other preparer types: (1) the risk of a financial reporting restatement due to an audit failure; and (2) reputation risk, in that an auditor’s work is more visible and sensitive to the firm’s leadership. In short, having more to lose than other preparers, auditors tend to be less aggressive in advancing tax-benefit claims.
The findings are worthy of consideration in the context of other concerns – primarily, auditor independence – that regulators have raised about the auditor’s provision of tax services.
Almost half of auditors’ 530 new going concern warnings for fiscal 2014 were issued relative to companies filing for an IPO rather than established companies, according to this recent MarketWatch post on 2015 filings. And the top two reasons auditors cite for giving such an opinion – “net losses since inception” or an “absence of significant revenues” – apply to pre-development stage companies. The post cites research that purportedly shows that over half of companies that filed for bankruptcy between 2000 and 2009 had received going concern warnings from their auditors the prior year.
We continue to post new items daily on our blog – “The Mentor 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:
– Exchanges Get Guidance on Sustainability Disclosure Standards
– Whistleblowers: Speak Now or Get a Smaller Piece
– Audit Committees: Comments to SEC Urge, At Most, Principles-Based Reporting
– Insider Trading: Holiday Card to Directors (With Compliance Reminder)
– Top 10 Mistakes in Selecting D&O Insurance
Not surprisingly (based on my own in-house experience), a positive corporate culture apparently boosts company performance (i.e., higher profits) over time, but company performance doesn’t translate to a positive corporate culture. That’s according to this WSJ article, reporting results from a recent study (abstract here) on the relationship between culture and sales at 95 auto dealerships over a period of six years. Companies that performed well financially reportedly scored low on employee surveys used to evaluate culture, and companies that showed no improvement in culture became less profitable over time.
CIOs/CISOs Pressured to Unleash IT Projects Prematurely
According to this recently published Trustwave Security Pressures Report, a concerning 77% of more than 1,400 IT security professionals worldwide (83% in the US) are pressured to unveil IT projects that aren’t security-ready.
Additional noteworthy key findings based on a late 2015 survey include:
Board Burden: 40% of respondents feel the most pressure in relation to their security program either directly before or after a board meeting – 1% higher than how they feel after a major data breach hits the headlines.
Skills Gap: Shortage of security expertise has climbed from the 8th biggest operational pressure facing security pros to the 3rd biggest – behind advanced security threats and adoption of emerging technologies.
Under Pressure: 63% of respondents felt more pressure to secure their organizations in 2015 compared to the prior 12 months, and 65% expect to feel additional pressure this year. Those numbers grew 9% and 8%, respectively, vs. last year’s report.
Moved to Managed: The number of respondents who either already partner or plan to partner with a managed security services provider rose from 78% in last year’s report to 86% this year.
See the report’s conclusions and recommendations aimed at tempering the pressures and enhancing security, and oodles of additional resources in our “Data Security” Practice Area.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Six Tips for Board Cybersecurity Oversight
– Small Business Administration Launches Cybersecurity Webpage
– Audit Committee Agenda: Non-GAAP Measures
– Factors That Characterize a World-Class Ethics & Compliance Program
– Top 10 Most Commonly Missed Proxy Statement Items
It is with sadness that I report that Randi Morrison will be leaving us in a few days. She’s been toiling for the Society of Corporate Secretaries most of the week for the past year – but now she will be their full-time staffer. Randi has been working with me for well over five years – first as a volunteer and then as my right-hand woman.
Randi is a unique individual in our field – her enthusiasm for all things governance, securities and compliance-related is absolutely unparalleled. When you see Randi at a conference, she is sitting up straight – soaking in every nuance for hours on end. Her spark inspired me at a time when this job was becoming “old hat.” Her fingerprints are all over some of the best content on this site – the hundreds of Handbooks & Checklists for starters. She won’t be far away – but I will miss her dearly all the same! Good luck Randi!
Proxy Access: Corp Fin Provides Further Clarity on “Substantially Implemented”
Here’s some of the work that Randi is doing for the Society – she’s the lead author for its weekly alert, which included this gem a few days ago: As discussed in this new Goodwin Procter memo, another series of no-action letters issued by the SEC’s Division of Corporation Finance since our last report appear to make clear that companies may use Rule 14a-8(i)(10) to exclude proxy access shareholder proposals on “substantially implemented” grounds provided that the ownership threshold and holding period sought by the proposal and already implemented by the company are the same, despite differences in other proxy access terms. Each of the 15 no-action letters that were granted from February 26th – March 17th based on Rule 14a-8(i)(10) included a 3% ownership threshold and 3-year holding period, but the company’s proxy access right and the shareholder proposal differed as to the shareholder director nominee cap and aggregation (for purposes of attaining the ownership threshold).
The memo includes a table summarizing the principal terms of the company provisions and shareholder proposals, as well as a detailed summary in the Appendix.
House Committee Passes 10 Capital Access Bills
This MoFo blog by Carlos Juarez notes that the House Financial Services Committee passed ten bills yesterday relating to facilitating access to capital and the reduction of regulatory burden on smaller reporting companies…
Disclosure Effectiveness Project: Concept Release Coming on Wednesday, April 13th!
Yesterday, the SEC announced that they will hold an open meeting on Wednesday, April 13th to decide “whether to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Regulation S-K.” This follows the “request for comment” that the SEC put out about Regulation S-X last September. This open meeting was originally scheduled for March 30th but then got pushed back two weeks…
Nearly half of 550 companies worldwide surveyed in 2015 saw their directors meeting with investors in the past year, but North American companies had by far the lowest rate of director/investor interaction (26%, compared to e.g., Developed Asia at 81% and most other regions within the 50% – 60% range), according to BNY Mellon’s 2015 Global Trends in Investor Relations Survey.
Engagement highlights include:
The director most likely to participate in investor meetings is the lead director or board chair, although a corporate “chaperone” is usually still present – with 61% of IROs and 55% of management also in attendance.
Of the companies whose directors participated in investor meetings, most said such participation is standard company practice (54%), and most were prompted by investor request.
24% of companies reported having a written policy regarding interaction between directors and investors.
The most common topics for investor meetings with participation of directors are company strategy (82%) and management performance (50%).
21% that said they do not believe directors should be in direct contact with investors.
The number of companies that have strategies in place to communicate with key investors on corporate governance issues on a regular basis increased from 37% in 2013 to 46% in 2015. Those companies reported that the top issues addressed with key investors were board composition (76%), transparency and disclosure (71%), and remuneration (60%).
More than half of companies still don’t see ESG outreach as part of their investor strategy.
See also MoFo’s blog, which highlights results across various survey topics.
Survey: Strategic Assumption Concerns are Concerning
KPMG’s recently issued report on the board’s role in strategy simply provides more evidence of a trend toward the board’s greater and ongoing engagement with management, scrutiny and healthy challenge of strategic plans and underlying assumptions, and active participation in shaping strategy – from what was historically quite often a once/year cursory review and approval of the management-only developed strategic plan. The report is based on late-2015 roundtable input from more than 1,200 directors and senior executives across the country who shared their views on the board’s role in strategy in the context of increasing global volatility and uncertainty.
Among the noteworthy roundtable survey (of approximately 200 directors & C-suite executives) findings:
95% are either very or somewhat concerned that the high degree of uncertainty and volatility poses a significant threat to their company’s strategy.
78% are either very or somewhat concerned that management tends to use “more of the same” assumptions re: key factors and uncertainties in the external environment in setting strategy.
49% are only “somewhat satisfied” and 14% are not satisfied that management has an effective process to scan and monitor changes in the external environment on a regular basis in order to test the continuing validity of the critical assumptions at the core of the company’s strategy.
See the report’s Ten Recommendations for Strategy Engagement, this Accounting Today article, and my prior blogs on the board’s role in strategy:
We continue to post new items daily on our blog – “The Mentor 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:
– Revenue Recognition Standard: Implementation Benchmarking & Guidance
– SEC Enforcement Action Database Launched
– Cybersecurity: The Board’s Role
– Survey: It’s Time to Brief Directors on Related Party Transactions Standard
– Survey: Corporate Governance & Exec Comp Practices of Top 100 Companies
Back in October, Corp Fin issued Staff Legal Bulletin No. 14H, which set forth a new “direct conflicts” standard for counterproposals. As noted in this blog, Corp Fin will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict.”
On Monday, Corp Fin posted the first no-action letter issued under this new standard – this response to Illumina that allows the company to exclude a Jim McRitchie proposal that had requested that the board take the steps necessary so that each voting requirement in the company’s charter and bylaws that calls for a greater than simple majority vote be eliminated and replaced by a requirement for a majority of the votes cast for and against applicable proposals, or a simple majority in compliance with applicable laws. The Staff’s response allowed exclusion under Rule 14a-8(i)(9) because it “directly conflicts with management’s proposal because a reasonable shareholder could not logically vote in favor of both proposals.”
Does this letter foretell a new strategy by companies to bar shareholder proposals? Here’s an excerpt from this Cooley blog on that topic:
Does this letter outline an approach that may appeal to other companies seeking to exclude a shareholder proposal? Of course, in some – or perhaps many – cases, companies may be reluctant to submit to their shareholders management proposals to ratify a position that is the opposite of one that governance activists and institutional holders are ardently promoting as de rigueur. Nevertheless, this approach is apparently just what Mr. Chevedden fears. In one of his many letters to the staff regarding this no-action request, Mr. Chevedden recognized what may well represent a strategy for the future: “Implicit in the company argument is the concept that henceforth any rule 14a-8 governance proposal topic, that often obtains a majority vote, might be kept off the ballot by simply asking shareholders to ratify the opposite of the rule 14a-8 proposal.”
Ironically – from the perspective of proponents of shareholder proposals (some of whom prompted the staff’s reexamination of the conflicting proposals exclusion) – under the staff’s prior approach, companies seeking to exclude a shareholder proposal would have submitted as a management proposal a moderated version of the shareholder proposal that at least took some steps in the proponent’s direction but, under the new approach, companies seeking exclusion will now need to submit management proposals that completely reject the proponent’s position.
Proxy Cards: Corp Fin’s New CDI on “Clear & Impartial” Proposal Descriptions
Yesterday, Corp Fin issued this CDI 301.01 about how a proxy card should “clearly identify and describe the specific action on which shareholders will be asked to vote” for both management & shareholder proposals. The CDI provides six examples of what not to do. This is one of those examples that doesn’t satisfy Rule 14a-4(a)(3): “A shareholder proposal on executive compensation.” The CDI doesn’t clarify whether it applies to VIFs – but it likely does. Here’s an excerpt from this Gibson Dunn blog:
The CD&I does not indicate that a shareholder proponent’s title or description of its own proposal is necessarily determinative of how that proposal should be identified on the company’s proxy card. For example, if a shareholder captions her proposal as “Proposal on Special Meetings,” that description presumably still may not satisfy Rule 14a-4(a)(3). Thus, a company remains ultimately responsible for determining how a shareholder proposal is described on the company’s proxy card.
Because the Staff’s interpretation was based on Rule 14a-4, it applies only to how proposals are addressed on a company’s proxy card. Nevertheless, we would expect the Staff to hold similar views in interpreting the requirement under Rule 14a-16(d)(6) that a company’s Notice of Internet Availability contain a “clear and impartial identification of each separate matter intended to be acted on.” Similarly, to the extent that companies are involved in reviewing and commenting on the form of voting instruction card that is distributed to street name shareholders, best practice is to conform the descriptions of proposals on the voting instruction card to the descriptions on the company’s proxy card. Companies also are subject to the general standard of avoiding misleading statements when identifying or describing proposals within the body of the proxy statement.
Notably, the SEC does not have a rule on the form and content of the state law notice that appears at the front of companies’ proxy statements. Thus, if a company has determined that a generic description of shareholder proposals is sufficient for the notice page of the proxy statement under state law, such as stating that the shareholder meeting agenda includes a “shareholder proposal, if properly presented,” the C&DI does not prevent that practice. As a result, the description (if any) of those proposals on the notice page may differ from how each proposal is identified on the proxy card.
Corp Fin’s New Enforcement Liaison Chief: Tim Henseler
It’s been five months since Mary Kosterlitz retired as the long-time Chief of the Corp Fin’s Office of Enforcement Liaison – and now Corp Fin has a new Chief for that Office: Tim Henseler. Tim moved over from serving as the SEC’s Director of the Office of Legislative and Intergovernmental Affairs.
According to this Bloomberg article, SEC Chief Accountant Jim Schnurr told attendees at the recent “SEC Speaks” conference that the SEC will deem the views of the “FASB/IASB Joint Transition Resource Group for Revenue Recognition” (TRG) to be practical guidance for purposes of implementing the new standard – and will expect companies to adhere to those views despite the fact that the TRG’s views are not FASB or IASB authoritative pronouncements or standards.
Notwithstanding the fact that the release announcing the formation of the TRG – and other information on FASB’s website about the group – specifically disclaim the TRG’s issuance of any guidance, Schnurr reportedly stated: “From a practice point from my office, we would expect a registrant to follow the guidance that comes out of those deliberations’ of the TRG… ‘If a company chose to take a different approach’ from what the TRG concluded, ‘we would expect them to come in and talk to us about why they were not following’ what the TRG had found.'”
Among the noteworthy trends identified in this recent report – SEC Enforcement Activity Against Public Company Defendants: Fiscal Years 2010 – 2015 – from Cornerstone Research and NYU: In the context of increasing scrutiny and challenge of the constitutionality and overall fairness of its administrative proceedings, the proportion of actions the SEC brought as administrative proceedings more than tripled from 21% in fiscal 2010 to 76% in fiscal 2015.
Additional key findings and trends include:
The total number of SEC enforcement actions in fiscal 2015 represented a 7% increase compared to record-breaking fiscal 2014, and was 10% above the median for fiscal years 2010 through 2015. The increase was fueled by a record level of independent actions.
From fiscal 2010 to fiscal 2015, the majority of actions against public company defendants involved either Issuer Reporting and Disclosure or FCPA violations.
The total number of enforcement actions initiated by the SEC generally increased over the past six fiscal years; however, the number of actions against public company defendants remained relatively stable. During this period, the SEC initiated a median of 735 actions per year with the total number of enforcement actions trending upward beginning in fiscal 2014 to a record 807 actions in fiscal 2015.
In fiscal 2015, more than 80% of public company defendants settled concurrently with the filing of the action. Concurrent settlements in civil actions dropped substantially, while concurrent settlements in administrative proceedings increased.
Following the passage of Dodd-Frank in 2010, which enabled the SEC to seek monetary penalties against an array of defendants in administrative proceedings, the majority of large penalties and disgorgements imposed on public company defendants have occurred in administrative proceeding cases.
We continue to post new items daily on our blog – “The Mentor 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:
– CEOs Claimed Almost Half of New Board Seats in 2014
– Board Approach to Strategy & Risk
– DOJ Compliance Counsel Controversy
– Board Risk Committee Considerations
– Audit Fee Disclosures
According to this recent WSJ article, 2015 reported earnings were 25% lower than pro forma results – the widest gap since 2008, when companies took a record amount of charges. S&P 500 EPS reportedly declined by 12.7% on a GAAP basis, compared to an increase of 0.4% on a pro forma basis.
Although the use of non-GAPP measures is not inherently wrong or bad (and in fact, used properly, can be integral to understanding a company’s period-over-period performance and future prospects), SEC Chair White and other regulators have recently communicated concerns about its misuse or potential to mislead notwithstanding compliance with the letter of the law. Just last week, Chair White reportedly reiterated the SEC’s scrutiny of this area – portending regulation that presumably would aim to curb perceived abuses or the potential to mislead without hampering the clarity that the use of non-GAAP measures can provide.
In December, Chair White cautioned corporate finance and Legal staff and audit committees to be more vigilant and thoughtful about the use non-GAAP measures in her keynote address at the 2015 AICPA conference:
Another financial reporting topic of shared interest and current conversation is the use of non-GAAP measures. This area deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices. Non-GAAP measures are allowed in order to convey information to investors that the issuer believes is relevant and useful in understanding its performance. By some indications, such as analyst coverage and press commentary, non-GAAP measures are used extensively and, in some instances, may be a source of confusion.
Like every other issue of financial reporting, good practices in the use of non-GAAP measures begin with preparers. While your chief financial officer and investor relations team may be quite enamored of non-GAAP measures as useful market communication devices, your finance and legal teams, along with your audit committees, should carefully attend to the use of these measures and consider questions such as: Why are you using the non-GAAP measure, and how does it provide investors with useful information? Are you giving non-GAAP measures no greater prominence than the GAAP measures, as required under the rules? Are your explanations of how you are using the non-GAAP measures – and why they are useful for your investors – accurate and complete, drafted without boilerplate? Are there appropriate controls over the calculation of non-GAAP measures?
And both SEC Commissioner Kara Stein and PCAOB Chair James Doty signaled their concerns about the use by companies and investors of non-GAAP performance-related information in last week’s open meeting to consider the PCAOB’s proposed 2016 budget.
4% of exchange listed companies were named in federal securities class action suits in 2015 – up from 3.6% in 2014 and 3.1% in 2013, and 11% more securities class action suits were filed in 2015 compared to the prior year. These are among the findings and trends identified in the most recent report – Securities Class Action Filings: 2015 Year in Review – from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.
Additional noteworthy findings include:
The Consumer Non-Cyclical sector again had the most filings in 2015. This sector is predominantly composed of Biotechnology, Healthcare, and Pharmaceutical firms, which collectively totaled 43 filings.
Approximately 84% of the 2015 suits were largely based on Exchange Act Section 10(b) and Rule 10b-5. That percentage has been relatively consistent over the last three years. About 15% of the suits filed were based on Securities Act Section 11 – compared to 14% in 2014 and 9% in 2013.
Virtually all of the complaints filed in 2015 alleged misrepresentations in financial documents, which is largely consistent with prior years. About half of the complaints filed in 2015 alleged false forward-looking statements. Only about 11% of those actions were based on a restatement of the financial statements, while 35% alleged violations of GAAP.
Filings against companies in the Financial sector were well below historical averages, declining from 26 in 2014 to 17 in 2015. For the first time since 2006, there were no filings against banks.
IPO activity fell from 207 in 2014 to 117 in 2015, but remained above post dot-com bubble levels.
We continue to post new items daily on our blog – “The Mentor 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:
– Computershare & AST Occupy 63% of Transfer Agent Market
– Survey: Financial Services Risk Management Practices
– Cybersecurity: Reporting to the Board
– Comprehensive Audit Committee Guide
– (Re)configuring Parent & Spin-Off Boards
Recently, I blogged about the process of companies selecting a SIC code when they file their IPO registration statement with the SEC, including how to change that code if the company’s business changes over time. One member asked me a follow-up question – Why does the SEC still use SIC Codes?
The member pointed out that the SIC code system is almost 80 years old and it supposedly was superseded by NAICS in 1997. “NAICS” stands for the North American Industry Classification System – and it’s the standard used by federal agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the US economy. The answer to the question is “I don’t know” – anyone know?
Insider Trading: Mark Cuban Keeps The Heat On
As noted in this Dallas Morning News article, Mark Cuban has filed amicus briefs in three federal cases – including one before the US Supreme Court – regarding the SEC’s use of administrative law judges. As noted in the article, Cuban describes himself as qualified to weigh in on the issue because he was a “victim” of SEC overreach (see this blog about Cuban’s own insider trading case that he won in court a few years back – and this blog about his appearance at a “SEC Speaks” conference).
Misleading Statements: Sanofi Interprets Omnicare
After SCOTUS handed down its Omnicare opinion last year, many wondered what its impact would be – and how the case would be applied in the lower courts. A few weeks ago, the Second Circuit issued Tongue v. Sanofi that applies Omnicare. I’ve been posting memos on Sanofi in our “Securities Litigation” Practice Area…