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Monthly Archives: June 2018

June 22, 2018

SCOTUS: SEC’s ALJ Appointment Process Unconstitutional

Yesterday, in Lucia v. SEC, the SCOTUS held that the SEC’s appointment process for its ALJs violated the Appointments Clause of the U.S. Constitution. As this excerpt from the opinion’s syllabus notes, the Court’s decision was based primarily on its earlier decision in Freytag v. Commissioner, 501 U. S. 868 (1991), which held that Tax Court “special trial judges” were “officers of the United States” for purposes of the Appointments Clause:

Freytag’s analysis decides this case. The Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law. SEC ALJs “receive[ ] a career appointment,” to a position created by statute. And they exercise the same “significant discretion” when carrying out the same “important functions” as STJs do. Both sets of officials have all the authority needed to ensure fair and orderly adversarial hearings – indeed, nearly all the tools of federal trial judges.

The Trump Administration’s decision to “switch sides” in this case & support the argument that the SEC’s ALJs were unconstitutionally appointed might suggest that the case was decided along partisan lines. But that’s not what happened.  Justice Kagan delivered the Court’s opinion, and the Chief Justice and Justices Thomas, Kennedy, Alito & Gorsuch joined in the opinion.  Justice Breyer also concurred – in part – in the Court’s decision. Justices Ginsburg, Sotomayor & Breyer (in part) dissented. We’re posting memos in our “SEC Enforcement” Practice Area.

What About Prior ALJ Decisions?

As we’ve previously blogged, some have suggested that the decision to invalidate the SEC’s appointment process for its ALJs might call into question the validity of prior decisions.  The Lucia Supreme Court didn’t speak to that issue directly, but if you’re interested in reading tea leaves, check out this excerpt from Justice Kagan’s opinion:

This Court has held that “one who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case” is entitled to relief. Ryder v. United States, 515 U. S. 177, 182–183 (1995). Lucia made just such a timely challenge: He contested the validity of Judge Elliot’s appointment before the Commission, and continued pressing that claim in the Court of Appeals and this Court.

That emphasis on a “timely challenge” suggests that parties who didn’t make a timely objection to the ALJ’s authority in their particular case may be out of luck if they try to challenge a decision now.  Or maybe not – look, I mostly played softball in law school, so don’t expect profound insights on SCOTUS opinions from me.

SEC to Consider Proposed Changes to “Smaller Reporting Company” Definition

According to this “Sunshine Act” notice, the SEC will consider adopting proposed amendments to the definition of the term “smaller reporting company” at an open meeting to be held next Thursday, June 28th. Other items of interest on the agenda include:

– Consideration of a proposed rule amendment that would mandate the use of “Inline XRBL” – which allows filers to embed XRBL data in filings – in operating company financial statement information and mutual fund risk/return summaries.

– Whether to propose amendments to the SEC’s whistleblower rules.

John Jenkins

June 21, 2018

The “Nina Flax” Files: The List of Lists

I’m pretty excited that Nina Flax of Mayer Brown is willing to share the following with us (let Nina know what you think of her list of lists!):

At the recent “Women’s 100” in Palo Alto, I decided to share two (overachiever, I know) interesting facts during the intros (where each attendee stands up & provides a “fun fact” about themselves). In addition to the fact that I’ve been to North Korea, I am a perpetual “list maker.” My second fun fact was: the night before the event, I couldn’t fall asleep (common problem for me), so I had been up until 2 am making an excel list of all of the words my son knows. Yes, I am crazy.

But I am also fortunate! Apparently, lists are cool. So Broc & Liz asked me to contribute some lists for this blog. Where to begin? A list of potential lists! So here it goes…

1. Things On My “To Do List” I Never Get To
2. Why I Love LinkedIn
3. Crazy Things I’ve Done For The Job Lately
4. How I Try to Balance Work & Life
5. Things I Miss From Pre-Law Days
6. Things I Still Do Infrequently
7. Some Truly Horrifying Quotes
8. The Hidden Gem Associates
9. Meaningful Law School Characters
10. Things I Feel When Reviewing Agreements
11. Things About My Job That Exhaust Me
12. Ways We Make Our Office Fun
13. My “Personal Grateful” List for Today
14. My “Work Grateful” List for Today
15. Things That Are Always On My Desk
16. How I’ve Mastered Work Travel
17. My Favorite Shows I’ve Binge Watched Lately
18. Questions I Have About The “Other Side”
19. Why I Always Question My Skills
20. Things I Constantly Scope on Amazon

I am sure I will come up with a bunch more – and I am not promising any of the above in any particular order! Stay tuned…

Auditors Being Tipped Off Before Inspections: Will Your Company’s Name Surface?

Yes, your company may be impacted by shenanigans committed by your independent auditor. The intro from this MarketWatch piece by Francine McKenna makes that clear:

Former KPMG executives are on trial for obtaining confidential information about audit inspections. The auditor of some of the world’s largest banks including Citigroup, Credit Suisse and Deutsche Bank was tipped off before a regulator inspected them.

It’s been previously reported that KPMG executives were able to extract from the regulator, the Public Company Accounting Oversight Board, confidential information ahead of inspections, and use that information to correct their work and at least in one instance, withdrawn an opinion. But MarketWatch now has court documents that, for the first time, names the audit clients caught up in the scandal.

The SEC’s Proposed Long-Term Strategic Plan

Every time that the SEC comes out with its strategic plan, I blog about how I dislike five-year horizons for any plan since unforeseen events often change priorities & needs (here’s an example of a past blog). As noted in this Cooley blog, the SEC has come out with a draft of its latest strategic plan. Nothing earth-shattering as it essentially recaps what Chair Clayton has been saying since he took office – here is Chair Clayton’s testimony about the plan…

Broc Romanek

June 20, 2018

How Investors Read Proxies (In the Real World)

Recently, I blogged about a study that tracks whether mutual funds & proxy advisors are reading your proxy online. I threw in an aside that “If I was an institutional investor, I would still be asking for paper as that seems like a far easier way to actually read a proxy.” It might be easier to read a proxy if you did a straight read – but the reality is that investors drill down into the areas that they are most interested in.

In other words, investors typically read proxies electronically. They like the ability to word search. They like the ability to quickly move around. In fact, they like it when you provide links in your “executive summary” of the proxy to more detailed discussions. Karla Bos of Aon provides even more wisdom:

1. Another big reason that investors use electronic proxies (aside from sheer volume) – governance teams often cut & paste sections of the proxy into emails or other materials for their portfolio managers & proxy committees

2. Investors want links from the table of contents (no links there often means the rest of the proxy and perhaps the company’s governance are “old school” — first impressions count)

3. When investors analyze your proposals, before going to your proxy, many rely on proxy advisor reports or data feeds (for the facts, not their recommendations), so remember that if investors can’t quickly find what they need, the proxy advisors may not either

4. On word searches – ensuring your investors can quickly find what they want means you have to know them and the terms & content they’re looking for

5. I like how GE uses internal links – and even includes an index of frequently requested information right up front. But proxies don’t have to have all the bells & whistles that GE’s does to make navigation more shareholder friendly.

So there you have it, several more “pro tips” to learn from this blog. And yes, I was wrong. And you were right…

Revenue Recognition: Corp Fin Comments Begin

Just yesterday, I blogged that Corp Fin planned a lighter touch when issuing comments on the new revenue recognition standard – and now Steve Quinlivan has blogged about how the comments have begun rolling in…

Big Four Audit Quality Review Results Decline

As the Big Four appear to continue to push back against the PCAOB regulating them here in the US (the PCAOB’s budget was cut in December & much of the senior staff has been let go since), here is sobering news from the UK’s Financial Reporting Council:

The Big Four audit practices must act swiftly to reverse the decline in this year’s audit inspection results if they are to achieve the targets for audit quality set by the Financial Reporting Council (FRC). Overall results from the most recent inspections of eight firms by the FRC show that in 2017/18 72% of audits required no more than limited improvements compared with 78% in 2016/17. Among FTSE 350 company audits, 73% required no more than limited improvements against 81% in the prior year.

Across the Big 4, the fall in quality is due to a number of factors, including a failure to challenge management and show appropriate scepticism across their audits, poorer results for audits of banks. There has been an unacceptable deterioration in quality at one firm, KPMG. 50% of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year. As a result, KPMG will be subject to increased scrutiny by the FRC.

Meanwhile, two editorial pieces – this one by the financial editor of the Times and this one by a senior editor at Bloomberg – has suggested that the Big 4 might need to be broken up…

Broc Romanek

June 19, 2018

Revenue Recognition: Corp Fin Plans Lighter Touch

This nice blog from Cooley’s Cydney Posner offers a bunch of interesting nuggets from an interview with SEC Chair Jay Clayton and Corp Fin Director Bill Hinman at a recent WSJ event. Here are the highlights:

1. Corp Fin’s Approach to Revenue Recognition Comments – Hinman reportedly said that the staff understands that the rule is complex to apply and is focused on helping issuers comply; the staff doesn’t “have a particular agenda or standard comments…We don’t expect to repeat the same comment for five different companies.” He contrasted the staff’s approach to revenue recognition with its approach to compliance with the SEC’s guidance on non-GAAP financial measures or compliance with GAAP, where the staff would often issue standard comment letters.

2. Talk to Staff for Reg S-X 3-13 Waivers – Hinman reportedly advised issuers to skip the 30-page treatises; first talk with the staff.

3. Mandatory Auditor Rotation Not Priority – Although some European regs require mandatory auditor rotation every 10 years, Clayton also noted that “mandatory rotation of company auditors ‘is not something that is front and center in my mind.’”

4. Fine-Tuning Dodd-Frank; Not Overhauling It – Clayton, speaking at the annual meeting of the WSJ’s CFO Network, said that “regulators are evaluating how postcrisis rules have performed in practice, and that he had concerns about some of the unintended side effects from some regulations. But any changes will be around the edges, keeping the core of postcrisis overhauls in place, he added. ‘I don’t think Dodd-Frank is changing a great deal, just to put a pin in it.’

Corp Fin Director Hinman Talks Cybersecurity Disclosures

Here’s the intro from this blog by John Atwood:

Bill Hinman, director of the SEC’s Division of Corporation Finance, said the staff is looking closely at companies’ risk disclosure surrounding cybersecurity in this year’s filings following the update to the SEC’s cyber guidance that was issued in February. At the PCAOB’s recent Standing Advisory Group meeting, he noted that some aspects of the guidance have been controversial, so he explained some of the Commission’s thinking behind the guidance.

Hinman said that the staff wanted to focus the guidance on a few areas to which it wanted to draw more attention. The first area was internal controls and how companies were designing internal controls so that when a cyber incident occurs, there were the right procedures in place to escalate the issue.

Companies should not just have IT personnel looking at cyber risks anymore, he said. The issues now should be brought to the attention of disclosure experts at the company, as well as the general counsel. Hinman said the staff wanted to remind companies that they should have procedures in place that would cause escalation to occur, so it was added to the guidance.

May-June Issue of “The Corporate Executive”

We recently mailed the May-June issue of “The Corporate Executive” – and it includes articles on:

– Court Decisions Breathe New Life into Lawsuits over Directors’ Compensation—And What You Need to Do about It
– Understanding the New Qualified Equity Grant Deferrals
– Elon Musk’s Mega Grant
– Rule 701 Disclosure Threshold Finally Increased

Broc Romanek

June 18, 2018

Corp Fin Director Weighs In Big-Time: Digital Assets as “Securities”

Last week, Corp Fin Director Bill Hinman delivered this speech on digital assets as “securities” – which caused a stir. Here’s an excerpt from this Debevoise & Plimpton memo about it (also see this WSJ article):

Certain digital assets are not, today, securities. Director Hinman expressly noted during the speech that the virtual currencies Bitcoin and Ether, as offered and sold today, are not securities. This is the first time that an SEC official has publicly indicated that a virtual currency, other than Bitcoin, does not constitute a security and, importantly with respect to Ether, notwithstanding a history of fundraising that accompanied its creation. Underlying his view is the fact that applying the disclosure regime of the U.S. federal securities laws to current transactions in these virtual currencies would add little value because the underlying software platforms are sufficiency decentralized and sufficiently functional. In other words, there is no informational asymmetry between founder/sponsor/promoter, on the one hand, and investors, on the other, that puts investors at risk.

Other digital assets may not, today, be securities. Director Hinman covered three additional points during the speech that may help to bring additional virtual currencies and other digital assets out of the regulatory “shadows.” First, he allowed that there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. Second, he made clear his view that “whether something is a security is not static and does not strictly inhere to the instrument.” Consistent with relevant case law and the SEC’s long-stated views, the economic substance of the transaction in question always determines the legal analysis, and this cuts both ways:

– A digital asset that was originally distributed in a securities offering may later be sold in a manner that does not constitute an offering of a security; and
– Digital assets with utility that function solely as a means of exchange over a decentralized network could be packaged and sold as an investment strategy that can be a security.

Finally, Director Hinman laid out a framework containing two sets of non-exclusive factors that the SEC considers in assessing whether a digital asset is offered as an investment contract and is thus a security. The critical underpinnings of the Hinman Factors are: (i) the role that a third party, whether a person, entity or coordinated group of actors, plays in driving an expectation of an investment return and (ii) whether the economic substance of the transaction indicates that the digital asset truly functions more like a consumer item and less like a security.

As an aside, here’s something wild: The best “wallets” for cryptocurrency are glorified USB drives. So since the exchanges aren’t secure, the traders download their “keys” to the drive every night and lock it in a safe. Blockchain! So easy! And then there’s this guy’s story – forgot his pin, tried a bunch of stuff to recall it (including hypnosis) and then paid someone almost $4k to hack the drive…

More on “First Universal Proxy Card!”

Last week, Liz blogged about the first US-incorporated company to use a universal proxy card – and as an aside, she mused about whether this was a strategy by Sandridge Energy. A member responded with these thoughts:

I suppose a key element of the strategy could involve the grant of discretionary authority to the proxies appointed on the universal card. Specifically, even shareholders wishing to support (partially or fully) the Icahn group will appoint management proxies to vote in their discretion on such other business as may properly come before the meeting or any adjournment or postponement thereof.

I am not certain, but suspect, that if a card were returned with fewer than seven “for” votes in the election of directors, the proxies also would be able to vote in accordance with the board’s recommendation. Thus, if the shareholder cast five votes in favor of Icahn nominees (and cast no votes for any of the Company nominees), the proxies likely can cast two votes in favor of two Company nominees. If correct, there could be controversy because the proxies might be able to distribute those votes in a way to knock out one or more Icahn nominees. Interesting stuff.

HBO’s “Succession”: Duty to Disclose CEO’s Illness

Spoiler alert! The title of this blog already gave away the end of the first episode of HBO’s new show – “Succession.” Sorry about that. Anyway, I thought I would turn off “Succession” about five minutes into the first episode given that we already hear too much about powerful, white, rich families. But I have found it interesting.

For starters, it’s close to home in that I work for a family-owned company that has successfully lived through a recent transition in senior management (Jesse Brill has turned over running the company to his son, Nathan). Then, I am in the midst of my own long-term succession planning as I train Liz about the facets of this job (John isn’t the heir apparent – he & I are the same age).

More importantly, the show grapples with issues that arise for many of you reading this blog. The show’s family-owned business is a publicly-held media empire (but supposedly not based on the Murdochs). As the title of the show suggests, the main premise of the show is about how to handle CEO succession planning. And Episode 2 mainly deals with the duty to disclose a CEO’s illness.

In Episode 2, several characters discuss the CEO’s illness & whether investors should be told. Some of the statements are inaccurate of course. It’s a tricky topic. The most inaccurate statement is that the SEC has a rule compelling disclosure of a CEO’s illness (ie. an affirmative duty to disclose). There is a more accurate statement about the NYSE having a standard that requires disclosure of the CEO’s illness (it’s clearly material in this case). And then there are multiple references to Steve Jobs – as Apple’s decision to be mum about Steve’s health is held up as precedent as part of the argument to do the same in the show.

Here are my three main blogs on the securities law aspects of this topic:

A Delicate Disclosure Issue: Steve Jobs’ Health

More on Steve Jobs & Disclosure of Health Issues

A Recap of Thoughts on Apple & Illness Disclosures

Broc Romanek

June 15, 2018

Generic Risk Factors: PSLRA & Comment Letter Benefits?

This research analyzes why companies continue to use long, generic risk factors despite negative capital market consequences, a decline in the ability of analysts to assess fundamental risks and Corp Fin’s criticism of boilerplate disclosure. Here’s an excerpt:

Our results suggest that longer and more boilerplate risk factor disclosures are less likely to be flagged as inadequate under judicial and regulatory review. Specifically, we find that longer and more generic risk factor language is positively associated with favorable assessments for purposes of the Private Securities Litigation Reform Act’s safe harbor, and that standardized risk factor language is less likely to be targeted by an SEC comment letter during the SEC’s filing review process.

This makes sense up to a point. Nobody wants to be an outlier when judges & regulators use precedent to determine whether disclosure is adequate – that’s why it’s important to benchmark against peers, especially for industry risks. But – as we saw with the recent $35 million cybersecurity enforcement action against Yahoo! – it doesn’t work to use generic hypotheticals to describe a specific thing that’s actually happened (or is likely to happen) to your company. Our “Risk Factors Handbook” is full of tips for striking this balance.

SEC Enforcement: 67% Decline in Actions Since Last Year

This report from Cornerstone/NYU highlights just how much the SEC has stepped back from enforcement actions against public companies in the first half of this year. It initiated only 15 new enforcement actions – compared to 45 in the first half of last year. This is the lowest semiannual total since 2013. Here are five other findings (also see this blog from Kevin LaCroix):

1. 87% of enforcement actions were resolved on the same day they were initiated

2. 67% of actions didn’t have an associated individual defendant

3. Of the 5 actions with individual defendants, 4 involved reporting & disclosure allegations

4. 67% of actions were against companies in the finance, insurance & real estate industry

5. Monetary settlements declined to $65 million – the lowest semiannual total since at least 2009

According to this Bloomberg article, SEC Commissioner Hester Peirce might be emerging as an opposition force to many proposed enforcement actions, settlements and penalties. She retorted by explaining that she wants to move away from the SEC’s “broken windows” approach to enforcement. Along those lines, this WSJ article notes that the Division of Enforcement also says it wants its activities to be measured not by penalty totals, but by its success in expelling bad actors from the financial industry.

More on “Enforcement: Assessing the Fallout from Kokesh”

It’s been about a year since the Supreme Court’s Kokesh decision – which said that SEC disgorgement claims were subject to a 5-year limitations period. Since our last blog on this, the Co-Directors of the SEC’s Enforcement Division testified before Congress that the SEC has likely missed out on over $800 million in disgorgement penalties since the ruling – and may be unable to compensate victims in the future due to the time it takes to discover and investigate fraud. Limits on the SEC’s ability to obtain disgorgement could also help explain the decline in the magnitude of its settlement penalties this year. It’s unclear at this point whether these consequences will lead to legislation…

Liz Dunshee

June 14, 2018

First Universal Proxy Card!

For years there’s been a debate over universal proxy cards. The SEC hasn’t acted on its 2016 proposal. But according to this press release, we now we have the first US-incorporated company using one – SandRidge Energy. The proxy card names all SandRidge nominees and all Icahn Capital nominees – but Carl Icahn still sent a separate card with only the dissidents listed.

In its latest communication to shareholders, the company stresses that shareholders should use its card to vote for all company nominees and two (of seven) independent Icahn Capital nominees.

Perhaps this shows the strategy & gamesmanship that can be played with universal proxies? Maybe Sandridge knew it wouldn’t win a clean sweep – and wanted to facilitate vote splitting.

Corp Fin “Bedbug Letters”: Now Promptly Available on Edgar

Corp Fin has a longstanding practice of refusing to process registration statements with “serious deficiencies.” In the past, the Staff would send a “bedbug letter” to the company telling them to try again – and these letters would show up on Edgar 20 business days after the Staff completed its filing review. But in an effort to enhance transparency, Corp Fin recently announced that it’ll now post these letters on the company’s Edgar page within 10 calendar days. And as noted in this Cooley blog, the letters won’t beat around the bush:

The public release of these letters “will make it clear that the Division believes the filing under consideration is not minimally compliant with statutory or regulatory requirements.” Just to ensure there’s no mistaking it—and, some might say, to raise the humiliation quotient—these letters “will appear in companies’ filing histories as SEC STAFF LETTER: SERIOUS DEFICIENCIES.”

SCOTUS: No Tolling for Successive Class Actions

On Monday, the US Supreme Court unanimously held that a pending class action tolls the statute of limitation only for individual claims – not for successive class actions. Justice Ginsburg’s opinion in China Agritech v. Resh benefits companies because it effectively caps the period for exposure to class action claims that are premised on the same allegations as an earlier claim.

This particular case involved alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 of the Securities Act – which are subject to a 2-year statute of limitations. We’re posting memos in our “Securities Litigation” Practice Area – here’s an excerpt from Arnold & Porter’s take:

Although the Court acknowledged that the decision could lead to the filing of multiple class-actions, it concluded that this could be beneficial as “efficiency favors early assertion of competing class representative claims” so that “the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel.” In making this observation, the Court noted that the China Agritech litigation was governed by the Private Securities Litigation Reform Act of 1995 (PSLRA), which requires parties filing putative class actions to provide notice to potential plaintiffs of the filing of a purported class action, and an opportunity to apply for status as a lead plaintiff. This reflects a congressional preference “for grouping class-representative filings at the outset of litigation.” In this action, shareholder Michael Resh had ignored such opportunities to join either of the prior class action complaints, and the Court saw no reason to allow such a plaintiff “to enter the fray several years after class proceedings first commenced.”

The Court held that the decision would apply to class actions generally. Although the Court’s judgment was unanimous, Justice Sotomayor issued an opinion concurring in the judgment in which she expressed her belief that the holding should be limited to securities class actions governed by the PSLRA. She explained that “instead of adopting a blanket no-tolling-of-class-claims-ever rule outside the PSLRA context, the Court could have held, more narrowly, “that tolling only becomes unavailable for future class claims where class certification is denied for a reason that bears on the suitability of the claims for class treatment.” But as the Court noted, “Endless tolling of a statutes of limitations is not a result envisioned by American Pipe.”

Liz Dunshee

June 13, 2018

Eliminating Quarterly Guidance: BRT, NACD & NIRI Join Bandwagon

For quite some time, there has been a movement away from quarterly earnings guidance – and maybe towards foregoing quarterly reporting altogether (for example, see this blog from a few years back) – and John recently ran a blog entitled “Should We Lose the 10-Qs?

Now, the Business Roundtable (BRT) (press release), the National Association of Corporate Directors (NACD) (press release) and the National Investor Relations Institute (NIRI) (press release) have joined the chorus – calling for an end to short-termism by eliminating quarterly earnings guidance. Also see this op-ed by Jamie Dimon and Warren Buffett supporting this view.

Insiders Selling More After Buyback Announcements?

In a recent speech, SEC Commissioner Robert Jackson called for rule changes to discourage insider sales during buybacks. Commissioner Jackson believes the Rule 10b-18 safe harbor – which protects companies from fraud liability if a share repurchase meets certain conditions – shouldn’t be available if the company allows executives to sell stock during a buyback. Here’s an excerpt from this WSJ article (also see this Cooley blog and Wachtell Lipton memo):

Insiders who sell stock into buyout bounces aren’t trading illegally, of course, and Mr. Jackson isn’t accusing them of that. And other investors also have the opportunity to take advantage of the bumps. But these price surges can be especially beneficial to corporate executives holding large chunks of corporate stock looking for an uptick to unload shares. “The SEC gives an exemption from market-manipulation rules to companies doing a buyback,” Mr. Jackson said in an interview. “The SEC shouldn’t be making it easier for executives to use them to cash out.”

Mr. Jackson, a former law professor, examined stock trades at 385 companies that announced buybacks in 2017 through this year’s first quarter. He found the percentage of insiders selling shares more than doubled immediately following their companies’ buyback announcements as many of the stocks popped. Daily stock sales by the insiders rose from an average of $100,000 before the buyback announcements to $500,000 after them. The sellers received proceeds totaling $75 million more than had they sold before the announcement, the study concluded. At 32% of the companies, at least one insider sold in the first 10 days after the buyback announcement.

And this blog from Steve Quinlivan notes that Commissioner Jackson is also attuned to the potential connection between buybacks & executive pay:

Commissioner Jackson also stated his view that corporate boards and their counsel should pay closer attention to the implications of a buyback for the link between pay and performance. In particular, the company’s compensation committee should be required to carefully review the degree to which the buyback will be used as a chance for executives to turn long-term performance incentives into cash. If executives will use the buyback to cash out, the committee should be required to approve that decision and disclose to investors the reasons why it is in the company’s long-term interests, according to Commissioner Jackson.

Sights & Sounds: “Women’s 100 Conference ’18”

This 45-second video captures the sights & sounds of the “Women’s 100” events that just wrapped up in Palo Alto & NYC (by the way, here’s what I learned last year at our events):

Liz Dunshee

June 12, 2018

Board Diversity: Amazon Adopts “Rooney Rule”

Amazon has amended its corporate governance guidelines to formalize a “Rooney Rule” for director nominees. The company – whose board consists of 7 white men & 3 white women – will now consider at least one woman or minority candidate whenever there’s a board vacancy. In April, Amazon had recommended “against” a shareholder proposal on this topic, but according to this Fortune article – and several notices of exempt solicitations – the company’s unwritten commitment to diversity wasn’t cutting it with employees, shareholders and some members of Congress.

The “Rooney Rule” – named after Dan Rooney, former owner of the Pittsburgh Steelers & former chair of the NFL’s diversity committee – started as an NFL policy that requires teams to interview minority candidates for head coaching and senior operation jobs. It doesn’t give preference to those candidates or impose a quota. This “Harvard Business Review” article discusses Amazon’s new policy – and how to avoid the risk of “tokenism” and resistance to change that can result when there’s a quota mentality. Here’s an excerpt:

Our research, which explored status quo bias, or the desire to preserve the current state of things, found that when there is only one woman or person of color in a finalist pool of job candidates, that candidate stands out so much that they have essentially no chance of being hired. But importantly, we also found that interviewing two women or minority candidates can make the difference and lead to their hiring. So the evidence suggests that mandating diverse candidate slates can improve diversity overall.

This Davis Polk blog notes there are six shareholder proposals on ballots this season that ask for increased board diversity or disclosure about board diversity. And Broc has previously blogged about sample language from other companies that have implemented a “Rooney Rule.”

What’s “Good” Board Diversity? Shareholders Weigh In

This “Rivel Research” survey finds that 67% of institutional investors think that “good” board diversity enhances stock price performance. But “good” diversity is hard to define. It comes down to having board composition that aligns with the company’s business & strategy and helps directors avoid “groupthink.”

About 90% of these shareholders view varied skills & experiences as a “very important” element of diversity – a much higher percentage than gender, geographic, ethnic and age diversity. But at the same time, they don’t think that boards are looking at a broad enough talent pool to find those skill sets: in one shareholder’s words, “the same people get recirculated.”

While most of the shareholders – particularly those in the US – don’t support demographic quotas, almost half of them will vote against boards that lack diversity. And that strategy might be yielding the type of independent thinking they’re looking for, according to this “Harvard Business Review” article:

It’s been found that CEOs who increased the demographic diversity of their boards elicited higher profit margins for the company, but it came at the expense of lower pay for themselves. And using 12 years of data on Fortune 500 companies, other researchers showed that demographically diverse boards are more likely to challenge the authority of the CEO and curtail CEO pay. A McKinsey study showed that only 14% of C-suite executives select board members on the basis of having a “reputation for independent thinking.”

Tomorrow’s Webcast: “D&O Insurance Today”

Tune in tomorrow for the webcast – “D&O Insurance Today” – to hear Holland & Knight’s Tom Bentz, D&O Diary’s Kevin LaCroix, Simpson Thacher’s Joe McLaughlin and Pat Villareal discuss all the latest in the D&O insurance area.

Liz Dunshee

June 11, 2018

Should Directors Attend Management Meetings?

Occasionally, there’s an debate about whether directors should attend senior management meetings. Some think it’s a bad idea because directors might cross the line into operations. This “Stanford Rock Center” article presents the counterargument – by using Netflix as a case-study. At Netflix, directors regularly observe senior management meetings to get an unfiltered understanding of issues & strategies.

Of course, another benefit is that it’s an opportunity for directors to build relationships outside of the C-suite – and it gives them the ability to evaluate senior managers, which can eventually help with CEO succession planning. For more, see our “Checklist: Board Access to Management” – and our “Board Access” Practice Area.

Poll: Should Directors Attend Management Meetings?

Please take our anonymous poll about director attendance at management meetings:

customer surveys

Director Viewpoints: Anxious About Technology

The main finding from the annual “What Directors Think” survey – by NYSE Governance/Spencer Stuart – is that many directors share an “overwhelming concern” of being ill-equipped to keep up with cyber threats & disruptive technology. Here are five other takeaways:

1. Boards’ main strengths continue to center around strategy & finance – only 12% of directors list IT as a skill

2. Cybersecurity, disruptive innovations & succession planning are the main issues for which directors would seek outside advice

3. Directors are changing their tune about cybersecurity regulations – 60% now think they’re a good idea (compared to 22% last year)

4. Nearly 75% support board diversity efforts

5. 57% of directors say an enhanced brand image and reputation – and a greater ability to attract & retain employees – are big benefits of corporate social responsibility programs…but ESG initiatives are at the bottom of their priorities

Liz Dunshee