Monthly Archives: July 2018

July 31, 2018

SEC Announces Proxy Roundtable (Here We Go Again)

Yesterday, the SEC announced that it will hold a “proxy process” roundtable this fall. The date & agenda are TBD – but Chair Clayton is asking Corp Fin to reconsider the voting process, retail shareholder participation, shareholder proposals, proxy advisors, technology & universal proxy cards.

This isn’t the first time the SEC has tackled “proxy plumbing.” It issued its first concept release on this topic back in 2010 (see our “Proxy Plumbing” Practice Area). That effort didn’t result in much rule-making – maybe the SEC’s initiatives will be less controversial this time.

ISS Policy Survey: Auditor & Director Track Records, Gender Diversity & More

Yesterday, ISS opened its “Annual Policy Survey” – like last year, it consists of two parts:

1. Governance Principles Survey – 10 questions on high-profile topics. This year’s questions relate to auditor independence & quality, audit committee evaluations, impact of past & present director track records at other companies, board gender diversity and the “one-share, one-vote” principle. This part of the survey will close on August 24th.

2. Policy Application Survey – More expansive portion that can be accessed at the end of the initial survey, allowing respondents to drill down on key issues by region. This part of the survey closes September 21st. According to this Weil blog, the key issues for the Americas region include excessive non-executive director compensation, independent chair proposals, share ownership requirements for binding bylaw amendments and pay-for-performance metrics.

As always, this is the first step for ISS as it formulates its 2019 voting policies. In addition to the two-part survey, ISS will gather input via regionally-based, topic-specific roundtables & calls and a comment period on the final proposed changes to the policies.

Company Prevails Over Disputed Advance Notice Bylaw

A recent advance notice bylaw dispute is a reminder that there’s usually room for interpretation. Check out the intro from Ning Chiu’s blog:

HomeStreet received a 133-page notice the day before the advance notice deadline in its bylaws, alerting the company that Blue Lion intended to nominate two directors and submit two proposals – seeking annual elections and a binding resolution for an independent chairman.

Less than a week later, the company announced that the notice was deficient – attaching a five-page letter to a Form 8-K that it sent to the shareholder. The letter stated that the notice provided by the shareholder failed to meet several of the bylaw’s disclosure requirements, including providing information related to the holder of shares that would be disclosed in a proxy statement governing a solicitation as well as deficiencies in the D&O questionnaires returned by the shareholders’ nominees. Since the deadline had passed, declared the company, the company intended to disregard the nominations and the proposals for the meeting.

As you might guess – Blue Lion didn’t just accept this and walk away. In their view, the notice materially complied with the bylaw. They responded in a 34-page letter – and they took it to court. In this instance, the company prevailed.

According to this Sidley blog, since HomeStreet’s bylaw had been in place since the company’s IPO & was previously-disclosed, the court found that the company hadn’t taken any defensive measures. So, it rejected the argument that Delaware’s “enhanced scrutiny” test should apply. Broc recently blogged about a New York case with a different outcome…

Liz Dunshee

July 30, 2018

Eight Revenue Recognition Disclosure Trends

This Deloitte memo looks at disclosure trends under the new revenue recognition standard. Here’s eight key takeaways:

1. Many revenue disclosures were at least three times as long as the prior-year disclosures.

2. Over 85% of surveyed companies elected to adopt the new revenue standard by using the modified retrospective approach.

3. The new requirement to provide more comprehensive disclosures significantly affects financial statements regardless of the standard’s effect on recognition patterns.

4. Not everybody is adding a lot of disclosure. While some companies provided robust and thorough explanations, particularly on the nature of performance obligations and on the significant judgments and estimates involved, others didn’t.

5. Many companies chose to add a separate and specific revenue footnote that contains the required disclosures.

6. When providing disaggregated revenue disclosures, a majority of surveyed companies used two or fewer categories. The most commonly selected categories presented in tabular disclosure were (1) product lines and (2) geographical regions.

7. Most surveyed companies elected multiple “practical expedients” related to their ASC 606 disclosures, most commonly those related to remaining performance obligations.

8. We expect companies to continue to refine the information they disclose as (1) they review peer companies’ disclosures, (2) accounting standard setters clarify guidance, and (3) regulators continue to issue comments (see this recent blog from John about comment letter trends – also see this blog from Steve Quinlivan).

Elad Roisman Tapped as Next SEC Commissioner

This one slipped by us. Elad Roisman has been nominated as the person to replace Mike Piwowar as SEC Commissioner. And last week, the Senate Banking Committee held a confirmation hearing. Elad would be yet another former Senate Banking Committee Staffer to serve as a Commissioner (as John blogged recently, the confirmation process tends to go smoothly for these staffers before their colleagues).

This article notes that much of the hearing focused on enforcement priorities, given the huge year-over-year decline in actions & penalties.

More on “An Anti-ESG Campaign Begins”

A few months ago, I blogged about the “Main Street Investors Coalition” & its initiative to limit the ESG influence of large asset managers. This tone seems to play to Chair Clayton’s focus on retail investors. In recent testimony, he noted: “One area in particular I believe we should analyze is whether the voices of long-term retail investors are being underrepresented, misrepresented or selectively represented in corporate governance.”

But for a rebuttal to this Coalition, see this NYT DealBook article – and this blog from Nell Minow of ValueEdge Advisors. Here’s an excerpt:

The “Main Street Investors Coalition” completely overlooks the fact that institutional investors are fiduciaries representing everyday working people like teachers, firefighters, and employees of publicly traded companies. What the folksy-sounding, corporate-front Main Street Investors want to do is divide and conquer. They know they can no longer rely on the support of investors smart and focused enough to tell when corporate management has gone off the track and big enough to make their views meaningful.

So, they pretend to be concerned about some mythic, stock-picking investors who will read through the proxy statements and decide to vote for management’s recommendation. If MSIC really cared about the power of individual shareholders, and if in fact they controlled the single largest pool of equity capital in the world, it would help them to vote their proxies more effectively. It would help them provide oversight to the institutions who manage their money, perhaps circulating reports on the annual disclosures of how the funds vote. After all, index funds have the same fees and returns, but there are differences in how they vote their proxies. Then the investors could decide whether, for example, Vanguard’s votes on CEO pay were more appealing than Fidelity’s.

MSIC’s faux populism about the “real” investor being mom and pop and their little basket of stocks ignores the reality that most working people invest through intermediaries like mutual funds because they perform better. The whole idea of institutional investors is based on the reality that they do better than individuals who do not have the time, resources, or expertise. And it makes sense that the same people who make the buy, hold, and sell decisions should make the decisions about how to vote on proxies as well.

MSIC is not a membership organization. Its board does not include representatives of the groups that actually do work with small investors, like, for example, the American Association of Individual Investors, which has excellent educational materials for its members, or Motley Fool and FolioInvesting, which provide services for individual investors. Instead, MSIC has “partners” like the powerful corporate lobbying group the National Association of Manufacturers and the anti-public pension fund American Council for Capital Formation, which says on its website that its purpose is “exposing the politicization of corporate governance.”

Liz Dunshee

July 27, 2018

Sustainability: Will Delaware’s Certification Statute Move the Needle?

Last month, Delaware enacted legislation permitting businesses to signal their commitment to global sustainability by signing on to a voluntary certification regime. Here’s an excerpt from this Richards Layton memo summarizing the statute’s operation:

For an entity to seek certification as a “reporting entity” subject to the terms of the Act, the “governing body,” which is defined generally to mean the board of directors or equivalent governing body, must adopt resolutions creating “standards” (i.e., the principles, guidelines or standards adopted by the entity to assess and report the impact of its activities on society and the environment) and “assessment measures” (i.e., the means by which the entity measures its performance in meeting its standards).

The Act enables an entity to select its own standards, tailoring them to the specific needs of its industry or business. In designing its standards, the governing body may rely upon various sources, including third-party experts and advisors as well as input from investors, clients and customers. The Delaware Secretary of State does not evaluate or pass judgment on the substantive nature of an entity’s standards or assessment measures.

Entities that participate in the regime contemplated by the Act can obtain a certification of adoption of transparency and sustainability standards from the Delaware Secretary of State. Obtaining the certificate involves the creation of a standards statement (which includes the standards and assessment measures), the payment of relatively nominal fees to the Delaware Secretary of State, and the entity’s becoming and remaining a reporting entity. That an entity is a reporting entity allows it to disclose its participation in Delaware’s sustainability reporting regime.

Any entity that wishes to continue as a reporting entity must annually file a renewal statement. The renewal statement requires disclosure with respect to changes to the entity’s standards and assessment measures. The entity must also include in its renewal statement an acknowledgement that its most recent sustainability reports are publicly available on its website, and must provide a link to that site. If the entity fails to file a renewal statement (and thus becomes a non-reporting entity), it may have its status as a reporting entity restored through the filing of a restoration statement, which requires disclosure and acknowledgments similar to those in the renewal statement.

The statute does not give anyone a right to bring claims for an entity’s decision regarding whether or not to become a reporting entity – and there’s no penalty for a reporting entity’s failure to comply with its own standards.

Some people seem pretty excited about this new statute’s potential, but I’m skeptical. Maybe I’m too cynical, but since everything is voluntary & “do-it-yourself” and there’s no real liability exposure, the statute appears to be little more than a mechanism for virtue-signaling. You know what I mean – it’s sort of the corporate equivalent of buying a Subaru.

Universal Proxy: Rumors Say It’s “Face Down & Floating”

Earlier this month, Reuters reported that the SEC has shelved its proposal to implement a “universal proxy”. Despite Reuters’ report, there’s been no official word from the SEC indicating that the proposal has assumed room temperature. If it is gone, we’re kind of sad to see it go. It’s not that we’re pro or con – it’s just that universal proxy’s been such fertile “blog-fodder” for us here & on!

We’ve previously blogged about the potential impact on activism of an SEC decision to adopt – or not adopt – the proposal. We’ve also discussed Pershing Square’s unsuccessful efforts to persuade ADP to use a universal proxy card – and, more recently, SandRidge Energy’s decision to become the first company to use a universal proxy card in a proxy contest.

This recent blog from Cooley’s Cydney Posner provides some history on the universal proxy proposal. If the SEC’s proposal truly is on the shelf, it will be interesting to see if there’s a move toward more aggressive private ordering when it comes to the use of a universal ballot.

Cybersecurity: More Scrutiny from Boards than Regulators?

This Deloitte survey says that C-suite execs expect more scrutiny from their boards on cybersecurity programs this year than from regulators. Here’s an excerpt from a press release announcing the results:

As pressure to develop more effective corporate cybersecurity programs continues to mount, 63% of C-suite and other executives in a recent Deloitte poll expect board of director requests for reporting on cybersecurity program effectiveness to increase in the next 12 months. A slightly lower 57% percent of executives expect increased cybersecurity regulatory scrutiny during the same period.

One possible reason for executives’ expectations for increased board attention – the survey says that less than 17% of executives say they are highly confident in the effectiveness of their organization’s current cybersecurity program.

John Jenkins

July 26, 2018

Bad Actors: Boards Show Misbehaving CEOs the “Red Card”

This recent “exechange” report notes that roughly 10% of CEO departures during 2018 at the 1000 largest companies were related to conduct issues – and says that corporate boards are increasingly unwilling to tolerate bad behavior from CEOs.

The report reviews a number of recent high profile departures.  It points out that some departures were handled very differently than others – and suggests some reasons why.  Here’s an excerpt:

The fact that companies deal in various ways with their fallen CEOs may be related to the specific characteristics of their alleged misconduct. However, it may also highlight differences in corporate governance and raise questions about the independence of the board.

After allegedly or actually violating codes of conduct, CEOs were terminated or resigned “voluntarily.” In some cases, they left with a golden parachute, in others not. In a spectacular case, the board “reluctantly announced” that it had “accepted” the resignation of the CEO, chairman and main shareholder.

On the other hand, boards often take advantage of the opportunity to take the incident as a cautionary tale.

The report notes that in the past, if misbehaving CEOs were ousted, they were “rarely publicly shown the red card.”  Instead, those departures were typically characterized in a more neutral fashion. In contrast, one of the striking things about many of the disclosures described in the report is the degree of candor displayed concerning the executive’s alleged misconduct. The times, they are a changin’. . .

CEO Transitions: What Should You Say After You Say “You’re Fired”?

So when you kick your bad actor to the curb, what should you disclose? As this Washington Post article points out, the SEC leaves a lot of that up to you.  Here’s an excerpt:

How much detail must companies share when a CEO is asked to leave?

The answer: Not as much as you might think. Within four business days of making the decision, companies must issue a securities filing called an 8-K if a material corporate event occurs, and the departure of a chief executive certainly qualifies. It must include that the fact that the CEO is leaving, what kind of related agreements result from that departure (such as severance pay) and if the CEO is also a director — which a CEO almost always is — whether the departure is the result of a disagreement on “operations, policies or procedures.”

So that’s it, huh?  Not exactly – check out our “Checklist: Officer Departures- Procedures” for a more comprehensive breakdown of things you need to think about when you’re transitioning a senior exec.

Activism: When “Santa Claus” Attacks

Here’s something I recently blogged on If shareholder activism ever had an “everybody into the pool” moment, it probably came last month when Berkshire-Hathaway announced that it would withhold support from USG’s slate of directors at its upcoming annual meeting. Berkshire wasn’t happy about the USG board’s decision to stiff-arm a potential bid from Germany’s Knauf. Last week, USG’s board apparently got the message, and agreed to talks with Knauf.

Many have expressed surprise about Warren Buffett’s willingness to openly oppose the board of a company in which he’s invested. But despite his carefully cultivated public image as the genial “Sage of Omaha,” nobody becomes a billionaire without an iron fist somewhere inside that velvet glove. These 2010 comments from Buffett’s biographer, Alice Schroeder, probably ring true with USG’s board right about now:

“When he sees something he doesn’t like in a company whose shares he owns, the famously passive investor can swing into action to protect his investment—jawboning behind the scenes, scolding, cutting opportunistic deals, even hiring and firing CEOs. For some of those on the receiving end of his activism, it can feel a bit like being attacked by Santa Claus.”

Buffett’s actions are a reminder that at a time when longstanding passive investors are more frequently collaborating with activists to “shake things up” at the companies in which they invest, boards & management can take nothing for granted when it comes to investor support. As USG found out, even Santa Claus sometimes puts coal in your stocking.

John Jenkins

July 25, 2018

Debt Offerings: SEC Proposes to Simplify Guarantor & Pledgor Disclosures

Yesterday, the SEC proposed amendments to Rule 3-10 & Rule 3-16 of Regulation S-X, which address the financial information about subsidiary issuers, guarantors & affiliate pledgors required in registered debt offerings. Here’s the 213-page proposing release.

According to the SEC’s press release, the proposed changes are intended to “simplify and streamline the financial disclosure requirements” applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant’s securities. Highlights of the proposed amendments to Rule 3-10 include:

– replacing the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements;

– replacing the requirement to provide condensed consolidating financial information, as specified in existing Rule 3-10, with certain financial and non-financial disclosures;

– permitting the proposed disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in the registration statement prior to the first sale of securities;

– requiring the proposed disclosures to be included in the footnotes to the parent’s financial statements beginning with the annual report for the first fiscal year during which sales of the debt securities were made.

In addition, the obligation to provide the required disclosures would terminate when the issuers and guarantors no longer had an Exchange Act reporting obligation with respect to the securities – instead of terminating only when the securities were no longer outstanding, as provided under current rules.

Proposed changes to Rule 3-16 include:

– replacing the requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliates & the collateral arrangement as a supplement to the consolidated financials for the entity issuing the collateralized security;

– permitting the proposed disclosures to be located in filings in the same manner as the proposed guarantor disclosures under Rule 3-10; and

– replacing the existing requirement to provide disclosure only when pledged securities meet a numerical threshold relative to the securities registered with a requirement to provide the proposed disclosures in all cases, unless they are immaterial to holders of the collateralized security.

By reducing the compliance burdens associated with existing financial statement requirements for these entities, the SEC hopes to encourage issuers to register debt offerings, & thus provide investors with greater protections than they receive in unregistered offerings.

The Weed Beat: Doing Business with Cannabis Companies

With the DOJ’s reversal of the Obama Administration’s policy that provided federal tolerance of any cannabis business conducted in compliance with state law, the risks of doing business with these companies have become a greater concern. This Perkins Coie memo provides an overview of those risks & some tips on how companies can protect themselves. Here’s an excerpt with some questions companies considering such a business relationship should ask themselves:

– To what extent will the cannabis-related activities occur in a jurisdiction where cannabis is legal? So long as key federal concerns, such as violent crime, are not in question, federal prosecutors are unlikely to seek charges against companies that are only indirectly involved in the cannabis industry in states that have legalized the substance.

Indeed, cannabis-related activities that are otherwise legal in such jurisdictions do not involve “victims,” and are unlikely to be viewed as “serious” by USDOJ. An important corollary to this consideration is that the company directly involved in the cannabis industry should fully comply with the drug laws of the states in which it operates. The due diligence factors listed below become even more significant if the cannabis-related activities will occur outside of a jurisdiction where cannabis is legal.

– What is the level of support and involvement that your company is contemplating with the company undertaking cannabis-related activities? Will your company merely invest in or provide passive support to the company that is directly involved in the cannabis industry, or will your company take a predominant role in managing the other company (e.g., through seats on the corporate board)? The more significant your company’s role will be in managing the cannabis-related activities, the greater the perceived culpability of your company for those activities in the eyes of a federal prosecutor.

The memo also points out that companies should be particularly wary of involvement in the financial aspects of the company involved in the cannabis business – there’s a risk that the feds might characterize that activity as money laundering.

July-August Issue: Deal Lawyers Print Newsletter

This July-August issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a “Half-Price for Rest of ‘18” no-risk trial):

– Finders & Unregistered Broker-Dealers
– Governance Perils Involved in Financing Transactions by Emerging Companies
– Impact of the European GDPR on M&A

Remember that – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

John Jenkins

July 24, 2018

Audit Reports: Tenure Disclosure to Heighten AC Scrutiny of Auditors?

According to this “Compliance Week” article, the new audit report standard’s requirement to disclose auditor tenure in audit reports may result in audit committees devoting more attention to tenure-related issues. This excerpt explains why:

There are plenty of public companies that have engaged the same audit firm for decades, according to the latest study. The average tenure for the first 21 companies listed in the Dow 30 is 66 years, the study says. Analysis from Audit Analytics shows nearly 20 companies have had the same audit firm for 100 years or longer – and nearly 200 have had the same firm performing the audit for 50 years or longer. More than 850 companies have engaged the same firm for at least 20 years or longer.

That puts the onus on audit committees to determine whether the company is benefiting or not from a longstanding relationship with the firm. And the new disclosure puts it front and center before investors, which may serve to heighten pressure on audit committees, says Kevin Caulfield, managing director at Navigant Consulting. “Because it’s disclosed now, it’s a chance for audit committees to take that second look to think about are we still getting quality audits from this auditor,” he says.

The article goes on to note that while audit committees must be sensitive to the potential risks associated with long-tenured auditors, they should also consider the benefits associated with having an auditor that is well-acquainted with the company & its operations, systems & processes.

Risk Management: “It’s a Mad, Mad, Mad, Mad World”

Did you know there’s a theory that we’re all just living in a computer simulation – a video game – being played by some super-advanced alien intelligence? If so, then I think that some alien teenager grabbed the controller in 2016 & has been messing with us ever since.

I believe that I can even pinpoint the date that the kid grabbed the joystick: Sunday, June 19, 2016. That’s when Cleveland overcame a 3-1 Golden State lead to win the NBA Championship. That was followed by the Chicago Cubs winning the World Series (against the Indians, no less), and then the 2016 election. . .

It’s been a little more than 2 years, and it looks like the alien kid is still calling the shots (Nick Foles? The Washington Capitals?). Since that’s the case, corporate boards would be smart to take the advice in this EY memo and factor today’s volatile geopolitical environment into their risk management oversight efforts. Here’s an excerpt:

Rising geopolitical tensions and increasing electoral share for populist parties are a concern for businesses. With policy becoming harder to predict, many executives see policy uncertainty, geopolitical tensions, and changes in trade policy and protectionism as key risks to their business.

At the same time, business leaders are optimistic about the near-term US outlook – in part because of deregulation and the passage of US tax reform. In fact, the recent Borders vs. Barriers report from EY, Zurich Insurance and the Atlantic Council indicates that despite concerns about policies restricting their ability to transport goods and raise capital, global CFOs are overwhelmingly bullish on investing in the US – and 71% expect continued improvement in the US business environment in the next one to three years.

These dynamics underscore the need for companies to proactively address strategic opportunities and risks stemming from geopolitical and regulatory changes. For the board to provide effective oversight in this area, it is imperative that directors understand the geopolitical and regulatory landscape and how relevant developments are identified and evaluated within their strategy-setting process and Enterprise Risk Management (ERM) framework. Boards should also consider whether they have access to the right information and expertise to effectively oversee this space.

How to Deal With Leaks

This recent “Corporate Secretary” article by Iridium Partners’ CEO Oliver Schutzman reviews the leak of Saudi Aramco’s financial information to Bloomberg, and uses that as jumping off point for a general discussion on dealing with leaks. Here are some of the article’s “golden rules” for responding to a leak:

– Have a leak strategy in place. Regularly reviewed and updated, the strategy should sit alongside procedures for handling a crisis or operational disaster and should receive the same senior-level investment and attention.

– When a leak occurs, do not embark on a witch hunt to find the leaker. Instead, put all energy and efforts into executing the leak strategy.

– Don’t hide behind ‘no comment’ if there is truth to the leak. Acknowledge it and state the facts. This may be unpalatable and painful. It may involve criminality or unsavory behavior. If this is the case, confess errors and present the measures and consequences taken to ensure prevention going forward. Only by dealing with the substance of a leak can a company regain the initiative

Companies should act to address any shortcomings exposed, & then take back control of the narrative. All actions should be taken with complete transparency.

John Jenkins

July 23, 2018

Tax Reform: Sooner or Later, SAB 118’s “Holiday Gift” Will Stop Giving

In a recent speech, the SEC’s Deputy Chief Accountant – Sagar Teotia – reminded companies that the clock is ticking on finalizing disclosures relating to the impact of tax reform.  As you’ll recall, the OCA gave everyone a holiday gift last December by issuing Staff Accounting Bulletin No. 118.

At the risk of oversimplifying, SAB 118 permits companies to assess, record provisional amounts & ultimately finalize disclosure of the financial impact of tax reform over a “measurement period” of up to one year from the date of the legislation’s enactment.  However, this excerpt from the Deputy Chief Accountant’s speech clarifies that SAB 118 does not allow companies to defer reporting of tax reform’s impact:

Let me clarify a point about the measurement period and the expectation to be acting in good faith. SAB 118 states that the measurement period ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting required under ASC 740 and in no cases should the measurement period extend beyond one year from the enactment date. This should not be interpreted as a window to put pencils down until we are close to one year from the enactment date to get started on the accounting. Instead, entities should continue to keep moving in good faith to complete the accounting.

The measurement period ends when an entity has completed the process necessary to finalize its assessment of tax reform’s impact – and for certain income tax effects, that could be well before the one year mark.

Diversity: CalPERS Board Diversity Update

CalPERS recently provided this update on its efforts to improve board diversity among its portfolio companies. Among its other actions, CalPERS:

– Engaged more than 500 U.S. companies in the Russell 3000 Index regarding the lack of diversity on their boards;
– Adopted a “Board Diversity & Inclusion” voting enhancement to hold directors accountable at engaged companies that fail to improve diversity on their boards or diversity & inclusion disclosures;
– Withheld votes against 271 directors at 85 companies & ran proxy solicitations at two targeted companies where diversity proposals were filed by other investors.

Future actions under consideration include development of enhanced key performance indicators (KPIs) for diversity & inclusion. The KPIs will enable CalPERS to move beyond assessing whether a company has a dimension of board diversity to a more granular assessment of whether it has a level of board diversity that reflects each company’s business, workforce, customer base, and society in general.

CalPERS also intends to use the data provided by these enhanced key performance indicators to identify US companies lacking in diversity and file majority vote proposals & vote against board chairs, Nominating & Governance Committee members, and long-tenured directors at those companies.

Our “Q&A Forum”: The Big 9500!

In our “Q&A Forum,” we have blown by query #9500 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back – but it’s over 15 years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been well over 30,000 questions answered.

You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis & that any answers don’t contain legal advice.

John Jenkins

July 20, 2018

Perks: Another SEC Enforcement Case!

As you can see from our list of SEC perks cases (posted in our “Perks” Practice Area on, the SEC has averaged one perks enforcement case per year for the past dozen years. That’s why it’s so surprising that the SEC has now brought two perks cases in one week. Coincidence or a theme?

In this new case against Energy XXI, the CEO & board were charged with hiding more than $10 million in personal loans that the CEO obtained from company vendors and a candidate for the company’s board. The company wasn’t charged, interestingly. Here’s a blog about last week’s case.

The list of perks in para 56 of this complaint raises a couple of interesting issues. Is a bar stocked with cigars and liquor – on company premises for use in entertaining customers – necessarily a perk? You might ask what is a “Denny Crane” room? (Hint: TV show “Boston Legal” – that’s the character played by William Shatner). Come learn what you need to know as Mark Borges & Alan Dye lead a panel devoted just to perks at our upcoming “Proxy Disclosure Conference” – to be held September 25-26 in San Diego and via Live Nationwide Video Webcast.

Reduced Rates – Act by August 10th: Time to act on 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 – nearly 20 panels over two days. So register by August 10th to take advantage of the discount.

Revenue Recognition: Private Company Struggles

We’ve blogged about how difficult it’s been for public companies to implement FASB’s new(ish) revenue recognition standard. According to this Deloitte survey, private companies aren’t faring much better. They have to implement the new standard this January – and 47% are either in the early stages of implementation or haven’t started at all. Only 25% are on pace to actually hit the compliance deadline. And just because these companies are privately-held, doesn’t mean they won’t have to explain the impact of the new standard to their boards, audit committees, banks and investors.

Transcript: “D&O Insurance Today”

We have posted the transcript for our recent webcast: “D&O Insurance Today.”

Liz Dunshee

July 19, 2018

SEC Concept Release: Expanding Form S-8 & Rule 701

At its open meeting yesterday, the SEC voted to issue a 36-page concept release that seeks input on expanding and simplifying Form S-8 & Rule 701. Among other points, the release asks whether:

– Rule 701 & Form S-8 accommodations should extend to “gig economy” relationships – and what parameters should apply

– Form S-8 requirements should be revised to ease compliance issues that arise when plan sales exceed the number of shares registered

– The SEC should permit all of a company’s plans to be registered on a single registration statement

– Companies would benefit from a “pay-as-you-go” or periodic fee structure for Form S-8

– Rule 701 should be extended to reporting companies – eliminating the need for Form S-8

– The SEC should amend the disclosure content & timing requirements of Rule 701(e)

This blog from Cooley’s Cydney Posner notes that much of the discussion at the open meeting and in the concept release relates to whether or not liberalizing the equity compensation rules would create incentives for companies to “go public and stay public” (here’s Commissioner Stein’s statement and here’s Commissioner Peirce’s statement).

SEC Raises Rule 701 Disclosure Threshold

Yesterday, the SEC announced that it had unanimously approved an amendment to Rule 701(e). Non-reporting companies that issue equity compensation won’t have to provide financial statements, risk factors and other disclosures to participants until they’ve sold an aggregate of $10 million in securities during a 12-month period. Previously, that threshold was $5 million.

As John blogged a couple months ago, this amendment was a result of the “Economic Growth, Regulatory Relief & Consumer Protection Act.” The amendment will become effective immediately upon publication in the Federal Register – and companies that have already started an offering in the current 12-month period will be able to apply the new threshold.

House Passes “Jobs Act 3.0”

The “Jobs & Investor Confidence Act of 2018” has now passed the House – by a vote of 406-4 – according to this announcement from the House Financial Services Committee. Among other things, the 32 pieces of legislation that comprise the bill would:

– Require the SEC to analyze the costs & benefits of the use of Form 10-Q by emerging growth companies and consider the use of alternative formats for quarterly reporting for EGCs.

– Direct the SEC to consider amendments to Rule 10b5-1 that would, among other things: limit insiders’ ability to use overlapping plans, establish a mandatory delay between the adoption of the plan and execution of the first trade, limit the frequency of plan amendments, require companies and insiders to file plans and amendments with the SEC, and impose board oversight requirements.

– Require companies with multi-class share structures to make certain proxy statement disclosures about shareholders’ voting power.

– Allow emerging growth companies with less than $50 million average annual gross revenue to opt out of auditor attestation requirements beyond the typical 5-year period.

– Amend the definition of “accredited investor” to include people with education or job experience that would allow them to evaluate investments.

– Expand to all public companies the “testing the waters” and confidential submission process for registration statements in an IPO or a follow-on offering within one year of an IPO.

– Allow venture exchanges to register with the SEC, as a trading venue for small & emerging companies.

– Direct the SEC & FINRA to study the direct and indirect costs for small & medium-sized companies to undertake public offerings.

Liz Dunshee

July 18, 2018

Tying Executive Pay to Diversity

Here’s something I blogged yesterday on This Forbes op-ed notes that a few “pace-setting companies” now link executive bonuses to diversity objectives – and makes the case for more companies to follow suit. Here’s an excerpt:

If an objective is important, then the company should ensure (1) its employees know about it and (2) that their performance in meeting this goal will be measured along with the company’s other core values and targets. Fostering greater diversity and preventing harassment and discrimination is more than simply the right thing to do on a broader societal level. Indeed, a business case exists for these initiatives. According to research by McKinsey & Company, achieving these goals correlates with concrete financial improvement.

At Intel & Microsoft, diversity is one of the strategic performance goals that determine 50% of executives’ annual cash incentives. This is described on pg. 66 of Intel’s proxy statement – and on pg. 39 of Microsoft’s proxy statement.

At Alphabet, a recent shareholder proposal to link executive pay to diversity received about 9% of the vote. The company’s statement in opposition (pg. 66) noted that the CEO receives a base salary of only $1 per year and isn’t paid based on performance – so it argued that a rule like this would have little impact. And at Nike, a similar proposal was withdrawn after the company agreed to meet quarterly to discuss diversity.

Restatements: 17-Year Low

Recently, Audit Analytics released its annual report on restatement trends: “2017 Financial Restatements: A Seventeen Year Comparison.” The aggregate number of restatements fell to 553 last year – the lowest in 17 years. The number of restatements was about 18% lower than in 2016 – and as we blogged at the time on “The Mentor Blog” – that was a previous low. Here’s an interesting detail from Cydney Posner’s blog (also see this Compliance Week article):

The review distinguishes between “reissuance restatements” (meaning that, as the title suggests, the financials are withdrawn and cannot be relied on—necessitating the filing of an 8-K — and new financials are issued) and “revision restatements” (where the errors are just corrected and explanatory notes included). It’s not hard to guess which type of restatement is preferred by most companies; not surprisingly, the report indicates that around 77% of restatements were of the “revision” persuasion. Reissuance restatements have declined each year for the past 10 years. The number of revision restatements has also declined. And 168 restatements had no impact on earnings.

FYI: Conference Hotel Nearly Sold Out

As always happens this time of year, our Conference Hotel – the San Diego Marriott Marquis – is nearly sold out. Reserve your room online or by calling 877.622.3056. Be sure to mention the NASPP conference or Executive Compensation Conference or Proxy Disclosure Conference. If you have any difficulty securing a room, please contact us at 925.685.9271.

Reduced Rates – Act by August 10th: Time to act on 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 – nearly 20 panels over two days. So register by August 10th to take advantage of the discount.

Liz Dunshee