Monthly Archives: February 2018

February 14, 2018

Proxy Access: Game Over?

Wasn’t it was only yesterday that proxy access was one of the most hotly contested corporate governance issues? Now this Sidley memo says the game’s pretty much over – and proxy access has become mainstream:

As of the end of January 2018, 65% of S&P 500 companies have adopted proxy access. Through the collective efforts of large institutional investors, including public and private pension funds and other shareholders, shareholders are increasingly gaining the power to nominate a number of director candidates without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders have yet another tool to influence board decisions.

Some of the 2017 developments noted in the memo suggest that not only is the concept of shareholder proxy access well-established, but investors and management are generally in accord on what it should look like:

– The continuing pace of proxy access bylaw adoptions and ongoing convergence toward standard key parameters (83% of companies that adopted proxy access in 2017 did so on the following terms: 3% for 3 years for up to 20% of the board (at least 2 directors) with a nominating group size limit of 20);

– Slightly increased average support (54% versus 51%) for shareholder proposals to adopt proxy access in 2017, but fewer proposals being voted on as more companies adopted proxy access in exchange for withdrawal of the proposals;

– The failure to pass of all shareholder proposals seeking specified revisions to existing proxy access provisions (so-called “fix-it” proposals) in 2017, despite favorable recommendations from ISS, which voting results suggest that many shareholders are satisfied with proxy access on market standard terms.

The memo also points out that Fidelity’s shift from opposing to supporting proxy access shareholder proposals may seal the fate of many companies that receive such a proposal in the future.

It seems fair to say that given current trends, proxy access may soon become ubiquitous. Of course, one big question remains – is anybody ever going to actually use it?

Cybersecurity: “I, For One, Welcome Our New Cyber Insurance Overlords”

This Cleary blog says that a group of corporate titans are joining forces to roll out an innovative new cyber insurance product that’s designed to reward good cybersecurity practices:

In response to the growing threat of malware and ransomware attacks and other cybersecurity threats facing businesses today, Apple, Cisco, Allianz and Aon announced a new holistic cyber risk management solution on February 5, 2018. The new product is designed to provide a comprehensive framework for companies to reduce cyber risk by leveraging the expertise of each of the partners. As cyber incidents often impose significant costs on companies that can be difficult to bear directly, cyber insurance can help provide some protection.

Companies interested in purchasing the new insurance product must first undergo a cyber resilience evaluation from Aon to determine their “cybersecurity posture.” Aon will also recommend ways for the company to improve their cybersecurity defenses. Companies that employ Cisco’s Ransomware Defense product and/or Apple devices such as iPhones, iPads and Mac computers, may then be eligible for an “enhanced cyber insurance offering” underwritten by Allianz Global Corporate & Specialty that provides what Apple describes as “market-leading policy coverage terms and conditions,” including lower deductibles, or in certain cases, no deductibles. Companies that purchase this insurance package will also have access to Cisco’s and Aon’s incident response teams in the event that they do suffer a cybersecurity incident.

The blog notes that providing incentives for good cybersecurity practices benefits both insurer and insured – and it won’t hurt Apple & Cisco’s bottom lines either.

There’s one other thing that caught my eye in the blog – the rather alarming statistic that 68% of U.S. businesses haven’t purchased any cyber insurance. Really? Hey, you guys – doesn’t anybody watch “Mr. Robot?”

Cybersecurity: The Board’s Role

While we’re on the subject of cybersecurity, this recent Deloitte memo addresses the board’s role in overseeing the company’s cyber risk management efforts. The memo lays out a model for how boards can develop strong oversight of cyber risks, and notes that this oversight function involves the many of the same risk management skills that directors apply to other areas of the company’s business. Here’s an excerpt:

Board members needn’t become cyber security specialists. But by bringing to bear their deep experience in risk management, they can push management to answer tough questions and identify potential weaknesses in an organization’s cybersecurity strategy and capabilities.

Knowing that every company will have to accept some risk, the board can help management focus its efforts on the highest risk areas, while preserving the company’s ability to innovate. Again, the question returns to the organization’s risk appetite, and the board’s ability to make sure the organization’s cyber security efforts align with agreed upon risk parameters.

John Jenkins

February 13, 2018

SEC’s Budget Seeks Cybersecurity Boost

Yesterday, the SEC issued a press release announcing its proposed budget for fiscal 2019.  Last fall, SEC Chair Jay Clayton told Congress that he’d seek more funding to boost cybersecurity and IT in the wake of disclosure that the Edgar system had been hacked – and he’s a man of his word.

The proposed budget represents a 3.5% increase over the agency’s 2018 request, and the bulk of the request for increased funding is directed at those areas. Here’s an excerpt:

In furtherance of the objectives of the SEC’s 2018–2020 Technology Strategic Plan, this request seeks an additional $45 million to restore funding for technology development, modernization, and enhancement projects. Together with the support of the SEC Reserve Fund, the FY 2019 request would allow the agency to continue implementing a number of multi-year technology initiatives.

Uplifting the agency’s cybersecurity program is a top priority. The FY 2019 request would support increased investment in tools, technologies, and services to protect the security of the agency’s network, systems, and sensitive data. Priorities for FY 2019 include maturation of controls through continuous diagnostics and monitoring, and further enhancements to firewall technologies. Another way the FY 2019 request helps reduce the agency’s cybersecurity risk profile is by enabling the funding of multi-year investments to transition legacy IT systems to modern platforms with improved embedded security features.

Additional funding is also being sought for the restoration of 100 positions (50 FTEs) across various SEC divisions. The SEC’s budget request assumes that it will continue to have access to its reserve fund – something that many Republican legislators & the Trump Administration have targeted for elimination.

Tax Reform: What’s It Mean for Loan Markets?

This Milbank memo takes a look at what tax reform might mean to the loan markets.  Here’s an excerpt of some of the memo’s preliminary conclusions:

The combination of a much lower corporate tax rate and the new limitations on the deductibility of interest may make debt financing a less tax advantageous form of financing for some U.S. taxpayers, although debt financing still has certain tax advantages over equity financing. Multi-national groups may rethink their financing structures now that the incentive to borrow in the United States rather than abroad due to much higher U.S. corporate rates has been reduced or eliminated.

As has been reported in the press, the change to corporate rates, the taxable deemed repatriation of deferred offshore earnings, the limitations on post-2017 NOLs and other provisions may result in significant financial accounting charges that will be reflected on financial balance sheets and earnings statements.

The memo also points out a variety of other potential issues. These include increased complexity in negotiating tax distribution provisions in loan documents due to the disparity between corporate and individual rates, and the potential need for multinational entities to reorganize their corporate structures in ways that may require them to renegotiate existing loan covenants.

Tomorrow’s Webcast: “The Top Compensation Consultants Speak”

Tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be.” The jam-packed agenda includes:

1. Pay ratio – last minute items
2. The tax reform bill eliminates the 162(m) exemption – what impact will that have on executive pay design, structure and governance (e.g., salaries and positive discretion on incentive payouts)?
3. Calculation of existing performance awards under tax reform
4. Director pay is continuing to get additional attention from the proxy advisors and the plaintiff’s bar. What will this attention mean for how director pay is structured & administered?
5. Clawbacks aren’t just for restatements anymore. What is the latest thinking on applying clawbacks to a broader range of activities and a broader population?
6. Goal-setting and performance adjustments remain major discussion points at the C-suite level: what are some best practices that can be helpful in this regard?
7. Investors, the SEC and proxy advisors are all still looking for the best way to assess pay & performance? What is the best thinking about how companies can kick the tires around their own pay & performance?

John Jenkins

February 12, 2018

Mandatory Arbitration: Clayton’s “Not Anxious” to Give ‘Thumbs Up’

This article quotes SEC Chair Jay Clayton as saying that he’s “not anxious” to pursue a rule that would allow companies to adopt bylaws compelling their shareholders to arbitrate securities claims. As we’ve previously blogged, it’s been suggested that such a move is under consideration by the SEC – but as we’ve also blogged, the idea has attracted heat from investor groups.

So, these comments suggest that this idea is likely dead, right? Not so fast. With a hot potato issue like this, we all probably read too much into prior reports suggesting that the SEC was ready to act, and we’re probably reading too much into his remarks now.

After all, those comments were in response to the customary “beating about the head and shoulders” that Senator Elizabeth Warren administers to every financial regulator who testifies in front of the Senate banking committee. Sen. Warren demanded a “yes or no” answer on whether the Chair would support “eliminating class actions” – and his response beyond the “not anxious to see a change” sound-bite fell far short of that. Here’s an excerpt:

“”If this issue were to come up before the agency, it would take a long time for it to be decided, because it would be the subject of a great deal of debate. In terms of where we can do better, this is not an area that is on my list of where we could do better.”

This FedNet video captures Jay Clayton’s full testimony before the committee. The exchange with Sen. Warren begins at the 55:25 mark. The Senator didn’t get the yes or no answer she was looking for – instead, she got one that seemed to say “I’m not prepared to die on this hill, but I’m not going to let myself be pinned down either.”

Insider Trading: It’s Worse Than You Think?

Here’s a cheery item from “The Economist” – according to three recent studies, insider trading is running rampant on Wall Street. Here’s the intro:

Insider-trading prosecutions have netted plenty of small fry. But many grumble that the big fish swim off unharmed. That nagging fear has some new academic backing, from three studies. One argues that well-connected insiders profited even from the financial crisis. The others go further still, suggesting the entire share-trading system is rigged.

Nice. I sometimes think that John Calvin may have been on to something with that “total depravity” stuff.

Tax Reform: An Accounting Disclosure Primer

As Broc blogged last week, some investors are finding company disclosures about the effects of tax reform to be a jumbled mess.  While the complaints so far have surrounded disclosure in earnings releases, it’s not likely to get any easier for companies or investors when it comes time to spell things out in SEC filings.  That’s why this BDO memo detailing the accounting & financial statement disclosures associated with the new tax law is a handy resource.

John Jenkins

February 9, 2018

More on “’Black Monday’: 30 Years Ago Today!”

Recently, in this blog, John did a great job bringing back memories of the 1987 stock market crash – the largest single day drop in Wall Street’s history. Here’s my own personal story about it:

I was in law school on a field trip to the Philadelphia Stock Exchange that day. The head of the Exchange spoke to us and started crying. He said that everyone in the building had lost millions. Being a pauper myself – and having had a few drinks with my law school buddies on the train up there – I couldn’t relate.

A year later, I was working at the SEC – and the agency sponsored a HUGE keg party for the “Market Break” anniversary at a local bar. I thought the SEC would be routinely sponsoring keg parties at bars. That was the last of them…

Here’s other stories of the ’87 crash from some old-timers:

– I was just an associate and, fortunately, did not have much money in the market. However, when I was leaving for the day, a senior corporate partner advised me, “Don’t walk too close to the buildings. There may be people jumping.” I believe he was serious.

– I had taken the day off to take my daughter (who was about 20 months old) to the Bronx zoo. Didn’t see a TV or a radio until I got home. My doorman said he was ruined and could never retire!

– I was in a drafting session for an IPO that was being led by Smith Barney and Needham & Co. Because this was before the days of mobile phones and other handheld devices – and before 24-hour cable financial news shows – the bankers would periodically walk out of the room to call back to their offices and find out how bad it was. Their faces grew longer as the day wore on. The company went public two years later.

– I was working on a leveraged ESOP deal as an ERISA lawyer in Charlotte. I had just signed the preceding Friday a contract for a house in the Hamptons. When I got back to NYC I rushed off the plane (with everyone else) to see if the world as we knew it had ended. The next day we backed out of the Hamptons contract, without taking any loss. And the next week, my wife and I decided that New York was going to get ugly, which it did. That was the start of our 3-month decision making process to change my specialty – and to move to Palo Alto. Funny how bad can turn into all things good.

– I had just entered private practice and was new to both doing deals and buying stocks in my meagerly funded retirement account. All day long frantic co-workers were announcing the next new market low, and as the public offering I was working on fell apart, I wondered who in the world was on the buy side of all those trades. When I got home that night, I collapsed onto my apartment sofa to watch the market news on TV and noticed that the light was blinking on my answering machine (one of those clunky tape recorders everyone connected to their telephones at the time). My sole message was from the broker handling my IRA, informing me that a limit order to buy a particular stock that I had placed nearly two months earlier and had since forgotten about had been executed that morning at $19 a share. The stock closed that day at just over $12. The whole experience was sobering.

– I had left the night before on a flight to Europe to close a stock-for-stock acquisition of a privately-held business for a public client. As the stock plummeted during the day, the seller refused to close. The client and I hung around for another day to see if it would recover, but ended up heading home when it did not. A few weeks later it had recovered enough to close.

Broc Romanek

February 8, 2018

Former Congressman Scott Garrett to Join SEC Chair’s Office

Here’s the intro from this WSJ article by Dave Michaels and Andrew Ackerman:

Scott Garrett, a former Republican lawmaker known for criticizing what he considered government overreach by Wall Street regulators, has landed a senior role at the Securities and Exchange Commission. Mr. Garrett, 58 years old, plans to take a position advising SEC Chairman Jay Clayton, according to people familiar with the matter. The job would represent a second act for Mr. Garrett, whom U.S. senators rejected last year as a pick to lead the U.S. Export-Import Bank under the Trump administration.

The hiring is a rare instance of a former lawmaker joining a federal agency in a staff role. Mr. Garrett, first elected to Congress in 2002, lost a re-election campaign for his northern New Jersey House seat in 2016. As a lawmaker, he routinely questioned the SEC’s regulations and priorities during the Obama administration.

Poll Results: Do You Care If the SEC Shuts Down?

A few weeks ago, the government shut down – but the SEC stayed open. Back then, I conducted a poll about whether folks cared if the SEC was closed.

Here’s the results:

– 47% said they wouldn’t notice
– 32% said they would take an early nap
– 8% said they’d call a lawyer
– 7% said they wouldn’t be able to sleep
– 6% said they’d drink themselves into a stew

Although a deal in Congress is brewing to avoid another shutdown at midnight tonight, it’s still possible that a deal won’t happen. There isn’t a note on the SEC’s home page yet about what would happen then – but I imagine the situation is like a few weeks ago. That the SEC has enough funds to keep the lights on for a “limited” amount of time…

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:

– SEC Continues to File Amicus Briefs in Support of Its “Whistleblower” Definition
– Halliburton: Eighth Circuit Upholds “Price Impact” Rebuttal of Rule 10b–5 Reliance Presumption
– Board Seats: “Reverse” Board Searches
– Why I’m So Passionate About Omnicare
– Must Directors Follow Company Policy on Shareholder Communications?

Broc Romanek

February 7, 2018

Shareholder Proposals: Investor Angst Over Corp Fin’s (i)(9) Position

As noted in this Reuters article, the Council of Institutional Investors has sent this letter to Corp Fin objecting to its recent no-action decision allowing AES Corp to exclude a shareholder proposal on the threshold required for investors to call a special meeting.

CII claims that AES is gaming the no-action process to exclude a shareholder proposal that typically receives substantial investor support — and urges the SEC to revisit its approach to Rule 14a-8(i)(9)(the “directly conflicts” exclusion basis) – so that it is more consistent with the language & intent of the underlying rule. CII says that AES’s reasoning is reminiscent of the argument that Whole Foods used in ’15 to exclude a shareholder proposal about proxy access. That ultimately prompted a Corp Fin review that led to Staff Legal Bulletin No. 14H as the appropriate guidance for determining the scope of Rule 14a-8(i)(9). Also see this Cooley blog

More on “Mandatory Arbitration: Will the SEC Give Corporate America a Gift?”

Last week, John blogged about that the SEC may be open to revisiting the permissibility of bylaws requiring investors to arbitrate their claims against public companies. As noted in this article, investors are expressing angst about this possibility. CII sent a letter to the SEC about this topic too…

Tomorrow’s Webcast: “Auctions – The Art of the Non-Price Bid Sweetener”

Tune in tomorrow for the webcast – “Auctions: The Art of the Non-Price Bid Sweetener” – to hear McDermott Will’s Diego Gómez-Cornejo, Alston & Bird’s Soren Lindstrom and Western Reserve Partners’ Chuck Aquino discuss how non-price bid sweeteners move the needle with private sellers in competitively bid deals.

Broc Romanek

February 6, 2018

Pay Ratio: Equilar’s Survey Predicts Average of “140-1”

It will be interesting to see if Equilar’s new ‘pay ratio’ survey proves accurate after the proxy season – the survey predicts that companies will disclose a ratio of 140:1 on average. Here’s the intro from the blog by Cooley’s Cydney Posner about the survey results (see this related WSJ article):

Equilar has just released the results of an anonymous survey of public companies, with 356 respondents, which asked these companies to indicate the CEO-employee pay ratios they anticipated reporting in their 2018 proxy statements. As you would expect, there was a lot of variation among companies based on industry, market cap, revenue, workforce size and geography. In addition, because the rule provided significant flexibility in how companies could identify the median employee and in how they calculate his or her total annual compensation, variations in company methodology likely had a significant impact on the results.

These variations in the data underscore the soundness of the SEC’s view, expressed at the time it adopted the pay-ratio rule, that the rule was “designed to allow shareholders to better understand and assess a particular [company’s] compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one [company] to another”; “the primary benefit” of the pay-ratio disclosure, according to the SEC, was to provide shareholders with a “company-specific metric” that can be used to evaluate CEO compensation within the context of that company.

Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”

Tune in tomorrow for the webcast – “Conflict Minerals: Tackling Your Next Form SD” – to hear our own Dave Lynn of Jenner & Block, Ropes & Gray’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2018.

By the way, check out Lawrence’s new book – “Killing Sustainability” – which attacks old myths, unrealistic expectations and flawed valuation methodologies related to corporate sustainability/CSR. The book lays out a pragmatic foundation from which readers can develop a credible approach to demonstrating financial contributions of CSR programs…

SEC Approves NYSE Change: Facilitate Listing Without an IPO

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

The SEC has approved a rule change to the NYSE listing standards to facilitate the listing of an issuer without conduction an IPO. According to the NYSE, the rule change is necessary to compete for listings that might otherwise by listed on NASDAQ.

As revised, the NYSE will, on a case by case basis, exercise discretion to list companies whose stock is not previously registered under the Exchange Act, when the company is listed upon effectiveness of a registration statement registering only the resale of shares sold by the company in earlier private placements.

Broc Romanek

February 5, 2018

Auditor Independence: Trouble Brewing?

Here’s commentary from Lynn Turner:

There’s a serious issue brewing at the PCAOB – and SEC – regarding auditor independence. This summary report issued by the PCAOB a few months ago about inspections conducted over 2016 year-end audits states on pages 14-15 that independence issues were found. That apparently caused the PCAOB to delay issuing inspection reports. Inspection reports for the Big 4 were issued in the August-November time-frame during the prior year. For 2017, only one report – about Deloitte – has been issued so far. This also highlights the periodic lack of transparency & timeliness of the PCAOB inspection process.

Fight Over Independence Disclosures

It’s my understanding that PCAOB inspectors found independence violations by the audit firms that were not reported to either investors or audit committees. This would mean these violations were not reported in writing as required by PCAOB Rule 3526, as noted in the PCAOB’s summary report. As an investor & audit committee member, I find this misleading disclosure to be troubling. Footnote 30 of the report (pg. 14) states: “PCAOB Rule 3520, Auditor Independence, requires auditors to satisfy all independence criteria applicable to an engagement, including the criteria in PCAOB rules and the criteria in the rules and regulations of the SEC.”

The Big 4 firms have prepared a white paper – collectively – that they submitted as a group to the PCAOB and its inspection group. The firms are apparently arguing they should not have to make the necessary disclosures – and despite the violations, can still publicly tell investors they are independent. I understand that white paper hasn’t been made public.

The firms argue that if they engage in a violation, they should be able to somehow “fix” the problem. But that is clearly not how the auditor independence rules work. The SEC has stated that the independence rules are prophylactic – so as to ensure investors can have trust & confidence in the audit. Yet, apparently in the instances found by inspectors, the auditors failed to notify the proper people (audit committee, PCAOB, SEC, investors) about the problems. Similar issues were found by regulators in the Netherlands a number of years ago, who found that one could not rely on the auditors to put in place “safeguards” for their independence, as the auditors put in place self-serving “remedies” in some cases.

The Use of Indemnification Clauses

The PCAOB’s summary report also notes that auditors continue to put indemnification clauses in their audit engagement contracts – despite the fact the AICPA has a clearly stated rule, as does the SEC, that indemnification clauses are not permitted for public company audits. In the recent Colonial Bank case, the judge ruled that PWC had improperly included an indemnification clause in one of its engagement letters and was therefore not independent.

The SEC also brought an enforcement case against an auditor in Florida for including an indemnification clause in the audit engagement letter (the auditor’s second enforcement action within a few years). It appears some auditors believe they can “slip one by” if no one notices these. In fact, to the PCAOB’s credit, they have been citing auditors for violations of the professional standards and GAAS for indemnification clauses for a number of years. This raises the question of why doesn’t the PCAOB take enforcement actions instead of just writing up the deficiencies in inspection reports. Clearly, the latter action is not having the necessary impact.

The SEC’s independence rules (Regulation 210.2-03) have a provision to exempt an audit firm if an inadvertent violation occurs, The exemption applies provided the person or persons on the audit: (1) were not aware of the circumstances giving rise to the violation, (2) the firm had adequate internal controls for independence in place, (3) violation was promptly corrected, (4) the firm had a training program in place, and (5) had an enforcement mechanism in place. But the SEC’s rules don’t permit an exemption if at the time of the violation, the auditor knew – or should have known – they were violating the rules. Here’s a lawsuit involving such an example.

The SEC & PCAOB rules are very clear. The auditor must follow the independence rules throughout the audit year. The firms are required to have training programs in place to require this. These rules are not new to anyone – and any professional knows they are serious and to be followed. In fact, GAAS states that a violation of independence is a violation of one of the ten primary “Generally Accepted Auditing Standards” – and that such a violation cannot be corrected through other auditing procedures.

Will the States Be Brought In?

It will interesting to learn if the PCAOB has involved the “National Association of State Boards of Accountancy” in these discussions as the State Boards each have independence rules which are built around compliance with the rules of the SEC, PCAOB and AICPA. If you can’t trust an auditor to follow the laws & regulations, what can you trust them for? Particularly if they engage in covering up their violations.

Transcript: “Handling the Proxy Season – The In-House Perspective”

We have posted the transcript for our recent popular webcast: “Handling the Proxy Season – The In-House Perspective.”

Broc Romanek

February 2, 2018

Mandatory Arbitration: Will the SEC Give Corporate America a Gift?

This Bloomberg article says that the SEC may be open to revisiting the permissibility of bylaws requiring investors to arbitrate their claims against public companies. Here’s an excerpt:

The SEC in its long history has never allowed companies to sell shares in initial public offerings while also letting them ban investors from seeking big financial damages through class-action lawsuits. That’s because the agency has considered the right to sue a crucial shareholder protection against fraud and other securities violations.

But as President Donald Trump’s pro-business agenda sweeps through Washington, the SEC is laying the groundwork for a possible policy shift, said three people familiar with the matter. The agency, according to two of the people, has privately signaled that it’s open to at least considering whether companies should be able to force investors to settle disputes through arbitration, an often closed-door process that can limit the bad publicity and high legal costs triggered by litigation.

The SEC’s willingness to take up the issue is apparently based on its desire to encourage more companies to take the IPO plunge. As I blogged last year, at least one Commissioner is on record as being open to permitting mandatory arbitration bylaws.

The article suggests that any action by the SEC to allow mandatory arbitration would be a “big gift” to companies – but as Broc pointed out in this blog, others say that companies should be careful what they wish for…

Activism: Glass Lewis Says “Hey, Don’t Blame Us!”

Some companies have grumbled that proxy advisors – like ISS and Glass Lewis – are fueling activism by generally supporting insurgent nominees in activist campaigns. This Glass Lewis blog pleads “not guilty”:

This perception isn’t borne out by the overall numbers. We’d caution against reading too much into the data, since the yearly sample of contested meetings is both too small to be free of significant variance, and too big to reflect the particular combination of parties and moving parts that makes each contest unique. That said, Glass Lewis’ support for contests dropped from 40% in 2016 to 32% in 2017, and has historically stayed within that range. Nor has Glass Lewis’ approach to contested meetings changed in a way that would result in increased activist support; our methodologies, our case-by-case approach and our team have remained consistent.

Glass Lewis suggests that the perception that proxy advisors are all-in for activists is fueled by the changing nature of the activism. Larger activists have a lot of capital, sophisticated strategies & a long-term approach, and that’s allowed them to hunt larger game & win proxy advisor support in some cases:

This combination of long-term goals, sophisticated tactics and significant investment has allowed activists to pursue larger, more established companies that perhaps were not previously at risk of a shareholder campaign. As well known companies are targeted, the contests themselves are generating more headlines; and with campaign strategies getting more and more refined, Glass Lewis supported some, but not all, of the highest profile dissidents in 2017 — for example, at Arconic, Cypress Semiconductor and P&G.

There were also a number of large contests where we supported management (General Motors, Buffalo Wild Wings and Ardent Leisure), and as noted above Glass Lewis’ overall support for 2017 contests was at the lower end of the historical range; nonetheless, the combination of high profile contests, and sophisticated campaigns, may explain a perception of increased overall dissident support.

Securities Litigation: You Can Get Into Trouble Without Saying a Word…

Did you know that most securities litigation involves alleged material omissions, not misstatements?  Me either. This recent Katten Muchin article reviews the legal landscape for omissions claims and offers tips to directors on how to reduce their company’s risk of being on the receiving end of such a claim.

John Jenkins

February 1, 2018

Early Bird Registration! Our “Pay Ratio & Proxy Disclosure Conference”

We’re excited to announce that we have just posted the registration information for our popular conferences – “Pay Ratio & Proxy Disclosure Conference” & “Say-on-Pay Workshop: 15th Annual Executive Compensation Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days.

Early Bird Rates – Act by April 13th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 13th to take advantage of the 20% discount.

More on Voting: When Is An Investor “Passive”?

A while back, Liz blogged about investors who break from their normal approach of voting with ISS to support management. Does voting with management make those investors more “passive”? Not necessarily. Here’s an excerpt from “Proxy Insight’s” follow-up article (pg. 7) by Aon Governance’s Karla Bos:

Certainly, at the investment firms I worked for, overriding our voting policy was anything but a passive act. With the value placed on thoughtful and thorough decision-making and the constant spotlight on our voting decisions, the override process was intentionally designed to take some measure of time and effort. It took an active voting process to engage with issuers, hold internal discussions and debates, ensure no conflicts were present, and document our rationale for voting differently than we typically might have.

Furthermore, like the ISS auto-voters, many of our overrides resulted in decisions to vote with management. Similar to the ISS voting policy, many of our stated voting policies addressed potential governance concerns, so they were written to lay out the voting action we would take in those cases. Therefore it is not surprising that our overrides often occurred where we ultimately deemed the company’s practice acceptable and appropriate based on the particular facts and circumstances.

This is a good reminder that even some so-called “passive” investors are actively engaged…

Our February Eminders is Posted!

We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

Broc Romanek