Monthly Archives: November 2017

November 30, 2017

“Screw You for Reading This”

Sorry. I couldn’t help myself. The title of this blog was the title of a fictional play mentioned in last night’s episode of “Modern Family.” Not related at all to the title of this blog comes this news about a possible new PCAOB Chair, Bill Duhnke – who’s a veteran Staffer for Senator Richard Shelby (who used to be the Senate Banking Committee Chair). Here’s the intro from this Bloomberg article:

A little-known Republican Senate aide is in line to lead the accounting industry’s watchdog, setting up an official who lacks experience in the auditing profession for one of the highest-paying jobs in financial regulation. William Duhnke, a veteran staff member for former Senate Banking Committee Chairman Richard Shelby, is on track to be selected to become chairman of the Public Company Accounting Oversight Board, according to four people familiar with the matter. An announcement by Securities and Exchange Commission Chairman Jay Clayton could be made in the coming weeks, said one of the people, who like the others asked that they not be named discussing the plan.

The job is seen as one of the most attractive regulatory roles in Washington because it pays more than $670,000 per year — well above the president’s $400,000 salary. The selection of Duhnke, whose name has been circulating as a possible pick for more than a year, would likely be controversial among investor advocates concerned that he would promote a pro-business agenda.

Do You Need a Risk Factor for the Proposed Tax Reform?

We love blogging about risk factors – they can be tough judgment calls. And we are constantly updating our “Risk Factors Handbook” as a result. Anyway, this Dorsey blog by Kimberley Anderson gives us some nice “food for thought” (don’t forget to tailor your risk factors to your own company’s circumstances):

Tax reform efforts by Congress are ongoing, and the substance of the tax bills remains fluid. However, for foreign corporations with U.S. operations, there are some specific potential risks to consider, such as additional limitations on the deductibility of interest, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments.

Foreign corporations with U.S. operations may want to consider including a risk factor in their periodic reports or offering documents regarding the potential impact of U.S. tax reform. A sample risk factor (based on the current iteration of the tax bills) is below. As the tax bills are amended during the legislative process, the language of the risk factor may need to be edited prior to use.

Possible U.S. federal income tax reform could adversely affect us.

The new U.S. administration and certain members of the U.S. House of Representatives have stated that one of their top legislative priorities is significant reform of the Internal Revenue Code. Proposals by members of Congress have included, among other things, changes to U.S. federal tax rates, imposing significant additional limitations on the deductibility of interest, allowing for the expensing of capital expenditures, the migration from a “worldwide” system of taxation to a territorial system, and the use of certain border adjustments. There is substantial uncertainty regarding both the timing and the details of any such tax reform. The impact of any potential tax reform on our business and on holders of our common shares is uncertain and could be adverse. [Prospective investors should consult their own tax advisors regarding potential changes in U.S. tax laws.]

Poll: Does the PCAOB Chair Need Deep Auditing Experience?

Please take a moment to anonymously indicate whether you think the PCAOB Chair should have extensive auditing experience:

bike tracks

Broc Romanek

November 29, 2017

Corp Fin Comments: One of These Things is Not Like the Others. . .

‘Tis the season for the “Big 4” accounting firms to weigh-in on Corp Fin comment priorities. Earlier this month, we blogged about EY’s take on the topic – and now Deloitte’s weighed in with its own study on Corp Fin comments for the 2016-2017 review period.  The study found that the top 10 areas for comments were:

– Non-GAAP measures
– MD&A
– Fair value
– Segment reporting
– Revenue recognition
– Intangible assets & goodwill
– Income taxes
– State sponsors of terrorism
– Signatures, exhibits & agreements
– Acquisitions, mergers & business combinations

The list includes plenty of the usual suspects, but one of these things is clearly not like the others – here’s what the study says about comments addressing state sponsors of terrorism:

This category is new to the top 10 this year. The SEC staff has increased its focus on registrants that do business with countries designated by the U.S. State Department as state sponsors of terrorism, including Iran, Sudan, and Syria. SEC staff comments focus on disclosure about (1) the nature and extent of these contacts and (2) quantitative and  qualitative factors about such activities.

The study includes examples of comments that the Staff has issued to companies disclosing business in these countries.

More on “Farewell to Corp Fin Giant, Bill Morley”

Recently, I blogged that Bill Morley passed away. We now have information about his memorial: “Glory Days Restaurant” in Edgewater, Maryland – this Friday, December 1st from 6-10 pm. It’s informal in a private room. Please RSVP to Marty Dunn if you (& others you know) plan on going as they need a head count.

Here are a few more remembrances:

Marty Dunn, who worked with Bill for several decades, notes: “From the day I arrived at the SEC in 1988, I knew what the goal was. It was to be Bill. He had the ’33 and ’34 (and ’39) Act in his being. He understood them all. Their purpose was in his soul. He taught us all so much while being so humble. He said to me ‘our job is important, we’re not.’ That always stuck with me. Mr. Carter and Mr. Morley were incredible mentors & teachers. There is an entire generation of Corp Fin lawyers who appreciate their contribution to our careers. Bless you, Bill.”

Paul Dudek, who left Corp Fin after 22 years last year, notes: “Thanks for sharing the sad news about Bill, and the stories and the picture. He was outstanding in so many ways, as a person, as a securities lawyer, as a manager, and much more. I think at some level he was a model for me staying in Corp Fin for so long, a shining example of how to carry out the mission of investor protection through full and fair disclosure, and all the corollaries ‎to that simple statement, through thick and thin.”

Stan Keller notes: “Here’s one outside perspective on Bill. For so many of us practicing on the outside, Bill was for so long the face of the SEC and a good one at that. Bill treated you as a professional with respect and was always willing to listen to your position and share his vast knowledge of the law and the lore with you. You knew that you would get a fair hearing and a thoughtful, considered response. We learned a lot about securities law from Bill in this way and we learned about the agency. Bill helped instill the Corp Fin Staff ethic of the SEC as being a service agency, which continues to this day. We remember him with fondness, respect and appreciation.”

Farewell to Mort Koeppel

I’m also sad to report that Mort Koeppel also passed away recently. Mort retired in the early ’80s as an Associate Director in Corp Fin after 40 years at the SEC. He lived nearly another 40 years, passing away at 98. His son – Jeff Koeppel – who also served in Corp Fin a while back. Here’s a picture of Mort’s branch back in the day: (seated) Mort Koeppel; (standing, left to right) Bill Carter, Joe Hock, Becky Fleck, Alan Cohen, Jim McCabe, Paul Belvin, Letty Lynn, Mark Warner, Tom Klee & Laurence Lese:

Broc Romanek

November 28, 2017

Glass Lewis Issues ’18 Voting Guidelines

As noted on their blog, Glass Lewis posted 54 pages of ’18 policy updates last week, which includes a summary of the policy changes on the first page (we’re posting memos in our “Proxy Advisors” Practice Area). As the blog notes, the updates include:

– Feature increased discussion of board gender diversity in our reports, including a phased policy that will see nomination committee chairs targeted with against/withhold recommendations if boards do not include a female director, or provide a cogent explanation for their absence, by 2019;
– Set out our phased policy on virtual-only meetings, which from 2019 will hold governance committees accountable if shareholders are not offered the same rights and opportunities to participate as at a physical meeting;
– Address the emergence of proxy access in international markets, including Canada, and explain our rationale for approaching such proposals in the context of the regulatory landscape;
– Harmonize our approach in areas such as board responsiveness and dual-class share structures, including within the context of recent IPOs and spin-offs; and
– Clarify our methodologies, including for our pay-for-performance (P4P) grades and treatment of outside commitments for NEOs, and on shareholder proposals relating to climate change and proxy access.

Whistleblowers: SEC Paid $50 Million in ’17

Recently, as noted in this memo, the SEC published its “Annual Whistleblower Report,” as fiscal ’17 saw over 4,480 tips, $50 million in payments and 700 matters under review or investigation. Which was growth by most metrics…

Cap’n Cashbags Loves Vea World Recipes Crackers!

I love the new “Vea World Recipes” crackers – particularly the flavor of “Andean Quinoa & Spices.” In this 20-second video, Cap’n Cashbags foregoes holiday bonuses for employees so he can buy Vea World Receipes for himself!

Broc Romanek

November 27, 2017

Transcript: “Shareholder Proposals – Corp Fin Speaks”

We have posted the transcript for the popular webcast – “Shareholder Proposals: Corp Fin Speaks” – during which Corp Fin Staffer Matt McNair was interviewed by Ning Chiu about Staff Legal Bulletin 14I…

Shareholder Proposals: Apple First to Seek New SLB Exclusion

Here’s the intro from this blog by Steve Quinlivan:

In the closely watch area of shareholder proposals, Apple is seeking to exclude a shareholder proposal regarding the establishment of a Human Rights Committee because it involves the company’s ordinary business operations under Rule 14a-8(i)(7). Apple is relying on newly issued Staff Legal Bulleting 14I.

Apple states SLB 14I provides that whether a policy issue is of sufficient significance to a particular company to warrant exclusion of a proposal that touches upon that issue may involve a “difficult judgment call” which the company’s board of directors “is generally in a better position to determine,” at least in the first instance. A well-informed board, according to Apple analyzing the SEC’s views, exercising its fiduciary duty to oversee management and the strategic direction of the company, “is well situated to analyze, determine and explain whether a particular issue is sufficiently significant because the matter transcends ordinary business and would be appropriate for a shareholder vote.”

ISS Releases “Preliminary” Compensation FAQs

Last week, as noted in this FW Cook blog, ISS released these “Preliminary” Compensation FAQs, which provide insight into ISS’ updated quantitative pay-for-performance screening methodology and its Equity Plan Scorecard (EPSC) evaluation for stock plan proposals. “Final” FAQs are expected in a few weeks…see this note from Ed Hauder for more…

Broc Romanek

November 22, 2017

You’re So Cherry, You Don’t Even Know You’re Cherry…

Broc Romanek

November 21, 2017

Materiality Definition: FASB Presses “Rewind”

We’ve previously blogged about FASB’s controversial proposal to conform its approach to financial statement materiality to the judicial definition of “materiality” that applies in other contexts. While that proposal is supported by business groups, most investor advocates have panned it.

After two years of back & forth, FASB has decided to throw in the towel on the new proposal – but instead of leaving things stand, it opted to return to an earlier materiality standard. This Thomson Reuters article explains what FASB has done:

A unanimous FASB agreed to return to the definition of materiality from Concepts Statement (CON) No. 2, Qualitative Characteristics of Accounting Information, which defines materiality in the context of “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.” The FASB said the CON No. 2 definition is consistent with the definition used by the SEC, the PCAOB, and the AICPA.

The FASB’s new approach tracks a recommendation that it received this summer from the SEC’s Office of Investor Advocate – and also reflects an apparent consensus reached among participants at a roundtable meeting held by FASB last March.

More on “GAAP Means Nothing to Me”

Last month, I blogged about an investor survey that suggested that many institutional investors didn’t have a lot of use for GAAP.  Here are some insightful comments on the results of that survey from Maynard Cooper’s Bob Dow:

It was suggested that GAAP is not useful because cash flow is more important. But of course there are GAAP measures for cash flow on the cash flow statement. I have always found the cash flow from operations to be an important measure. If a mature company consistently has a negative cash flow from operations, that almost always spells big trouble.

We do expect start-ups to have a negative number until they become cash flow positive, but the measure can help to indicate how far we are from that milestone. The cash flow from operations is harder to manipulate than some other measures, except maybe straight EBITDA (unadjusted). But EBITDA is a less reliable measure of cash flow because it doesn’t take into account changes in working capital. You can go all the way to bankruptcy court with a positive EBITDA.

That’s a major problem with non-GAAP measures, they are susceptible to manipulation. As a Corp Fin Staffer once said, the most prominent non-GAAP measure is EBBS – everything but the bad stuff.

Of course most non-GAAP measures themselves are built on GAAP. To have a consistent and comparable measure for EBITDA, you have to have an agreed-upon set of ground rules for, e.g., revenue recognition. GAAP provides that set of rules. If everyone starts making up their own rules for revenue recognition, how could any of the measures be comparable?

My own experience suggests that Bob’s comments about EBITDA are right on the money – forgetting that the accounting concepts of depreciation & amortization represent the reality that assets wear out is a great way to end up in over your head.

Non-Voting Common Stock: Delaware Law Overview

As I recently blogged, multi-class capital structures continue to hang around – despite the opposition of many institutional investors.  This Hunton & Williams memo provides an overview of Delaware corporate law issues associated with non-voting common stock, and is a handy reference tool for companies considering such a capital structure.

John Jenkins

November 20, 2017

ISS Releases ’18 Policy Voting Updates

Last week, ISS released its revised policy voting guidelines for 2018. We’re posting memos in our “ISS Policies & Ratings” Practice Area. Here’s an excerpt from this Wachtell Lipton memo (also see this Davis Polk blog):

1. Shareholder Rights Plans. In order to “simplify” ISS’s approach to rights plans and “to strengthen the [ISS] principle that poison pills should be approved by shareholders in a timely fashion,” ISS will now recommend voting against all directors of companies with “long-term” (greater than one year) unilaterally adopted shareholder rights plans at every annual meeting, regardless of whether the board is annually elected. Short-term rights plans will continue to be assessed on a case-by-case basis, but ISS’s analysis will focus primarily on the company’s rationale for the unilateral adoption.

2. “Excessive” Non-Employee Director Compensation. ISS will recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Because “excessive” pay would need to be flagged for at least two years under the new policy, ISS will not make negative vote recommendations on this basis until 2019.

3. Disclosure of Shareholder Engagement. In considering whether to recommend against compensation committee members of companies whose Say-on-Pay proposals received less than 70% of votes cast, ISS considers the company’s disclosure regarding shareholder engagement efforts. ISS provided guidance regarding the level of detail included in such disclosures, including whether the company disclosed the timing and frequency of engagements with major institutional investors and whether independent directors participated; disclosure of the specific concerns voiced by dissenting shareholders that led to the Say-on-Pay opposition; and disclosure of specific and meaningful actions taken to address the shareholders’ concerns.

4. Gender Pay Gap Proposals & Board Diversity. ISS will vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers. ISS also noted that it would highlight boards with no gender diversity, but would not make adverse vote recommendations due to a lack of gender diversity. In addition, ISS revised its “Fundamental Principles” to state that boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.

In Canada where there are new disclosure requirements on companies’ gender diversity policies, ISS is introducing a new policy on board gender diversity that will generally recommend withhold votes for the chair of the nominating committee if a company has not adopted a formal written gender diversity policy and no female directors serve on its board.

5. Pledging of Company Stock. ISS has codified its existing practice to recommend withhold votes against the members of the relevant board committee or the entire board where a significant level of pledged company stock by executives or directors raises concerns absent mitigating factors.

6. Pay-for-Performance Analysis. In connection with its pay-for-performance analysis, ISS will consider, in addition to other alignment tests, the rankings of CEO total pay and company financial performance within a peer group measured over a three-year period.

7. Other Changes. ISS has further revised its voting recommendations on climate change shareholder proposals in order to promote greater transparency on these matters.

FCPA Disgorgement: Kokesh Decision Underlines “Need for Speed”

In a recent speech, SEC Enforcement Co-Director Steve Peikin reviewed the agency’s FCPA enforcement priorities. One of the more interesting parts of Steve’s remarks addressed the impact of the Supreme Court’s Kokesh decision on FCPA enforcement. Here’s an excerpt:

In many instances, by the time a foreign corruption matter hits our radar, the relevant conduct may already be aged. And because of their complexity and the need to collect evidence from abroad, FCPA investigations are often the cases that take the longest to develop. In contrast to the Department of Justice, the statute of limitations is not tolled for us while our foreign evidence requests are outstanding.

These limitations issues have only grown in the wake of the U.S. Supreme Court’s recent decision in Kokesh v. SEC, in which the Court held that Commission claims for disgorgement are subject to the general five-year statute of limitations. Kokesh is a very significant decision that has already had an impact across many parts of our enforcement program. I expect it will have particular significance for our FCPA matters, where disgorgement is among the remedies typically sought.

While the ultimate impact of Kokesh on SEC enforcement as a whole – and FCPA enforcement specifically – remains to be seen, we have no choice but to respond by redoubling our efforts to bring cases as quickly as possible.

Kokesh: The Bad Guys Want Their Money Back

It turns out that the need to bring FCPA cases on a more timely basis isn’t the only potential fallout from the Kokesh decision. In addition to barring claims for disgorgement beyond the limitations period, this King & Spalding memo points out that Kokesh raises the broader issue of whether the SEC has authority to seek disgorgement at all:

As it considers the impact of Kokesh, we expect that the SEC staff will be less aggressive in its disgorgement demands and more open to arguments limiting how disgorgement is calculated. At the same time, defendants and respondents who litigate will undoubtedly follow up on the Supreme Court’s apparent invitation, in a footnote, to challenge whether disgorgement is available at all as an SEC remedy in enforcement actions.

Now, this Bloomberg article says that the Supreme Court’s invitation to litigate that issue has been accepted. You know all of those guys that the SEC sought disgorgement from? Well, they want a refund:

Anyway some lawyers read the Kokesh opinion in that particular way and brought this class-action lawsuit against the SEC a couple of weeks ago. Delightfully the class of victims/plaintiffs in the lawsuit is securities fraudsters: Specifically, it’s “all persons or entities from whom the SEC has collected, during the period from October 26, 2011 to the present, purported ‘disgorgement,'” with some fairly minor-seeming exceptions. The alleged damages are “approximately but not less than $14.9 billion over the last six years.”

John Jenkins

November 17, 2017

Board Composition: More Insiders Needed?

According to the most recent edition of the “Spencer Stuart” board survey, the CEO was the only insider serving as a director on approximately 60% of S&P 500 boards.  This Sidley memo says that a recent study indicates that may not be such a good thing:

Based on S&P 1500 company data from 2003 to 2014, the study concluded that companies with lone-insider boards (i.e., boards with no inside directors other than the CEO) awarded their CEOs “excess pay” (i.e., pay above what factors such as firm size, CEO age, CEO tenure, CEO equity ownership, industry, stock returns and performance would predict), with such CEOs receiving approximately 82% more pay than CEOs at peers with more than one insider on the board.

The study found that, as compared to their non-lone-insider peers, companies with lone-insider boards (1) have a $2.99 million larger pay gap between the CEO and other top management team (TMT) members, (2) are 1.27 times more likely to experience financial misconduct (defined as instances of financial restatements that are not due to clerical errors or minor accounting issues) and (3) experience poorer performance (e.g., a 10% lower return on assets).

The study says that analyst coverage and a high percentage of institutional share ownership mitigated the negative effects of a sole insider board on CEO pay vs. company  performance – but not for pay gaps between the CEO & other executives or financial misconduct.

While We’re on the Topic of Inside Directors…

This “Columbia Blue Sky” blog discusses a new study by Virginia Tech’s Prof. Donald Bowen that says maybe those pre-SOX insider dominated boards weren’t so terrible after all.  This excerpt summarizes the study’s results;

In a new working paper, I examine these questions by taking a new approach that exploits the implementation of the law. In short, the independent board mandates defined independence such that some directors could reclassify from non-independent to independent.

The effect of this definition is that while some firms—“treatment” firms—were required to change the membership of the board to meet the requirement, other firms—“placebo” firms—complied not because their directors changed, but because the classification of their directors changed. Importantly, the social and economic relationship between the CEO and director are largely unchanged for reclassified directors. As such, the reclassifications made boards at placebo firms more independent legally, but not economically.

My main tests show that placebo firms significantly outperformed treatment firms following the introduction of the independent board rules. I also show that the specific conditions that determine whether a firm is defined as a treatment firm or placebo firm are effectively random. This gives the estimated performance advantage of placebo firms a causal interpretation and implies that treatment firms performed worse because their boards were changed. In other words, the mandated governance policies impeded the conduct of firms targeted by the regulations.

Overboarding: What’s Good for the Goose. . .

This  WSJ article points out that overboarding is a big issue for institutional investors – and this excerpt says that some big players are using their voting clout to curb the practice:

BlackRock, the world’s largest asset manager, cast 168 votes against directors this year due to overboarding concerns. It fought the reelection of directors at companies such as Charter Communications Inc., Pfizer Inc. and PayPal Holdings, Inc., according to filings and a spokesman for the money manager.

BlackRock wasn’t alone – the article says that last year, State Street cast votes against 69 CEOs who served on more than 3 boards & against 22 non-CEO directors who each sat on more than 6 public boards.

But this blog from Professor Ann Lipton suggests that these institutions may not be the right folks to lead the charge on this issue:

Most mutual fund companies employ a single board – or a few clusters of boards – to oversee all of the funds in the complex. This can result in directors serving on over 100 boards in extreme cases. State Street’s Equity 500 Index Fund, for example, reports trustees who serve on 72 or 78 boards within the complex. BlackRock’s Target Allocation Funds have trustees who serve on either 28 and 98 different boards (depending on how you count).

I’ll admit this is something of a cheap shot: presumably each fund is much more similar to the other funds than are the various companies at which overboarding concerns are raised. Still, when you get to over 20 funds per director, that’s a lot, no? Or 50 funds? Especially since the funds have varying interests – they might stand on opposite sides of a merger, or invest at different levels within a single firm’s capital structure, or compete for limited opportunities like IPO allocations and pre-IPO shares.

John Jenkins

November 16, 2017

Conflict Minerals/Mine Safety Disclosure: House Committee Okays Repeal

Yesterday, the House Financial Services Committee approved 23 bills – including two pieces of legislation that would repeal Dodd-Frank’s conflict minerals & mine safety and health disclosure requirements.

H.R. 4248 would amend the Securities Exchange Act to repeal Section 13(p) – which directed the SEC to adopt its conflict minerals disclosure rules and related certification and audit requirements.  The bill would also make conforming changes to the text of Dodd-Frank.

H.R. 4289 would amend the Securities Exchange Act to repeal Section 1503 of the Dodd-Frank Act, which requires detailed disclosures about mine safety and health in the quarterly and annual reports they file with the SEC.

So, should everybody put their pens down?  This recent blog from Steve Quinlivan says that’s not necessarily a good idea:

I recommend that anyone working on conflicts minerals to continue to work. Bills passed by the Financial Services Committee have a relatively poor track record of being enacted into law, at least over the short term. Similar provisions were included in the Financial Choice Act 2.0 which has not been enacted.

Tax Reform & CEO Pay: Adding to the “Museum of Unintended Consequences?”

The GOP’s ever-evolving tax reform proposal has produced a torrent of memos from law firms, accounting firms, & other advisors (we’re posting them on  Not surprisingly, many of the memos focus on the impact of proposed changes in the treatment of executive comp. Among other things, the current version of the proposal would repeal the provisions of Section 162(m) that allow companies to deduct performance-based pay in excess of $1 million.

Congress’ willingness to tinker with executive comp reminds me of the old adage that those who don’t learn from the past are condemned to repeat it.  Remember, the much reviled Section 162(m) itself was enacted in 1993 in an effort to align executives’ interests with those of stockholders.

Instead, as former SEC Chair Chris Cox put it, Section 162(m) “deserves a place in the museum of unintended consequences.” That’s because, instead of aligning management & shareholder interests, the emphasis on performance-based pay led to something else entirely, as Prof. Steve Bainbridge explains in this blog:

Although CEO pay had been growing fast relative to other metrics during the 1980s, it was in the 1990s that CEO pay really started to explode as a percentage of corporate profits and total wages. In large measure, this occurred because of a huge shift towards options and other forms of incentive pay that were tax favored under the 1993 amendments.

How big is huge?  According to this study, in 1992, the S&P 500 granted options worth a total of $11 billion – a figure that rose to $119 billion by 2000.  Boards & comp committees undervalued equity awards. In fact, as one director quoted in this 2016 NPR podcast put it, “we thought they were free.”

Changes in accounting rules subsequently made it clear that equity awards aren’t free – but big equity awards have become part of the executive comp landscape, and this recent Stanford study says that they continue to play an outsized role in executive pay, and an even more outsized role in its explosive growth.

Now, Congress is considering eliminating the “performance-based” pay loophole.  What’s going to happen to equity awards & executive comp if this becomes law?  You’ve got me – but history says that the consequences are unlikely to be what’s intended.

Activism: CEOs In the Crosshairs

This “Forbes” interview with Skadden’s Rich Grossman discusses the implications of an increasingly popular activist tactic – targeting CEOs for removal from the board through proxy contests. Here’s an excerpt from Rich’s comments:

I think most practitioners and governance experts would agree that one of the most important responsibilities of a board is the selection of the CEO, and the removal of the CEO from the board sends a very strong message, especially a board made up of a majority of independent directors.

While shareholders do not have the right to directly remove board-selected officers, if a CEO gets removed from the board in a contest, it’s a vote of no confidence. In those circumstances, I can’t imagine a board not looking at the situation and saying, “should we rethink our decision regarding the CEO?” It certainly makes for an awkward situation.

Why are CEOs being targeted? The approach ISS takes toward proxy contests seeking minority board representation is a big part of the reason:

Under the current ISS analytical framework, recommendations are made depending on whether the dissident is seeking a minority or a majority position on the board, with the standard for a dissident seeking minority representation being significantly easier to meet than if control is sought. The ISS minority contest standard — what I’ll call the “what’s the harm” standard — for replacing directors seems to apply regardless of whether the CEO is targeted.

John Jenkins

November 15, 2017

Senate Tax Bill Amended! 409B Eliminated Like House Bill

As reflected in this Senate tax bill markup, the Senate bill has been amended to reflect how the House bill was amended late last week to preserve Section 409A. I haven’t done a complete analysis of where the executive pay provisions stand in the Senate bill (I’ll blog that tomorrow on our “Advisors Blog” on – or you can read the markup now) – but I can report that Section 409B has been killed thankfully…

Broc Romanek