Monthly Archives: August 2018

August 31, 2018

California Mandates Board Gender Diversity! (Almost)

Here’s the news from Annalisa Barrett: On Wednesday, the California Assembly passed Senate Bill 826, which requires that companies headquartered in the state which are traded on a major stock exchange have women on their boards.

If the bill is signed by Governor Brown, companies with their principal executive offices located in California will face monetary penalties if they do not have at least one female director serving on their board as of December 31, 2019. As of June 30th, among Russell 3000 companies that are headquartered in California:

– 20% of boards (85 companies) had no women
– 38% of boards had one woman
– 29% of boards had two women
– 14% of boards had three women

California’s New Gender Diversity Law: The Details

Annalisa Barrett also sends us these details: The Russell 3000 Index does not include many of the microcap companies headquartered in the California. A recent study of microcap boards nationwide found that most do not have female directors; therefore, it stands to reason that the number of companies affected immediately by the bill is much higher than 85. In fact, Board Governance Research has identified more than 120 California-headquartered companies which have all-male boards.

The bill further requires that nearly all companies headquartered in California have more than one female director by December 31, 2021. The number of female directors required by that date varies by board size, as follows:

– 4 or fewer directors: 1 female director required
– 5-member board: 2 female directors required
– 6 or more directors: 3 female directors required

Based on board size and composition as of June 30, 2018, 377 of the Russell 3000 companies headquartered in California will need to add a total of 684 female directors by December 31, 2021.

Boards which do not add the requisite number of women to their boards by the 2019 and 2021 deadlines will have to pay fines to the Secretary of State. The first time a company is not in compliance, the fine will be $100,000. In the event of subsequent years of noncompliance, the fine increases to $300,000. However, while the monetary impact of non-compliance is important, the reputational damage may be even more impactful. Since the bill requires that the California Secretary of State publish an annual update of compliance, the scrutiny from the press and public will likely lead to negative publicity for any company with an all-male board.

However, one could argue that this negative publicity will occur even if the Governor does not sign the bill. Therefore, companies headquartered in California would be well served to begin the process of identifying female director candidates if they have not already done so. And, given the nationwide attention that the bill is receiving (e.g., this WSJ article), companies across the US with all male boards should expect intensified scrutiny as well.

This WSJ article notes that opponents of the mandate believe it will result in unfair discrimination against men – so they intend to challenge the law in court. It also points out that the legislation provides for creating an extra board seat to accommodate a new female member, rather than removing a man already on the board.

Board Gender Diversity: Russell 3000 Adds Women

Earlier this week, Equilar reported that the percentage of women on Russell 3000 boards has increased for the third consecutive quarter – to almost 18%. And from April to June of this year, 35% of new board seats went to women. However, 485 companies – about 17% of the Russell 3000 – continue to have all-male boards.

Liz Dunshee

August 30, 2018

The “Karla Bos” Files: A List of Lists – Part II

Here’s the second “list-of-lists” installment from Karla Bos of Aon (here’s the first one):

1. Things I’ve Moved To My JOMO List – To Practice The “Joy Of Missing Out”

2. Reasons Everyone Should Move Across Country At Least Once

3. The Name Of Every Plant In My Yard, Where I Bought It, What I Paid For It & When I Planted It

4. Barriers I Have Implemented/Need to Implement So Rattlesnakes Can’t Get Into My Yard

5. Home Improvement Projects My Husband & I Want To Do Ourselves

6. Home Improvement Projects My Husband Wants To Do (But I Think We Should Hire Someone)

7. Ways That “Urgent” Work That Gets In The Way Of “Important” Work & How I Try To Balance That

8. My MinimaLIST – Items I Never Use & Should Donate, Items I’ve Donated This Year, Things I Need To Let Go Of

9. Verbal Commands For Our Home Automation System That I Can Never Remember

10. Things I Need To Research & Source Before Buying (AKA What Not To Buy If Enough Time Passes & Apparently I Didn’t Need It After All)

11. Foods My Niece & Nephew Will – And Won’t – Eat These Days

12. Rattlesnake Emergency & Removal Contacts – And What To Do If Bitten

Sustainability Disclosure: “Give The People What They Want”

This recent 31-page report from Ceres – “Disclose What Matters” – benchmarks sustainability disclosure from almost 500 companies worldwide to see whether they’re providing the information that investors actually need.

The report acknowledges that sustainability disclosure has grown by leaps & bounds during a short time period. But some of it’s akin to throwing everything at the wall to see what sticks. According to Ceres, here’s what investors want:

1. Comparability: There’s been a lot of progress here – 70% of companies now use the Global Reporting Initiative Standards, often in conjunction with other overlapping reporting standards. As painful as it might be, it’s time to familiarize yourself with the available standards and help select one or more for your company.

2. Integration: Only about 20% of companies connect the dots to describe how their systems integrate sustainability values & assessments into business processes. Reiterating its spring 2018 report on “systemic” sustainability, Ceres suggests describing the board’s oversight role, materiality assessment processes, how assessment results are used in the business, financial relevance, and stakeholder engagement.

3. Reliability: Only 42% of companies give any indication that there’s been formal assurance for sustainability disclosures, and fewer than 10% provide the “holy grail” of third-party verified disclosures and recommendations for improvement.

The report also includes sector & regional findings – 80% of American companies are classified as “median” or “poor” performers – and provides “best practice” examples.

Transcript: “Retaining Key Employees in a Deal”

We have posted the transcript for our recent webcast: “Retaining Key Employees in a Deal.”

Liz Dunshee

August 29, 2018

CEOs on Soapboxes: A Necessary Evil?

According to two recent studies, the days of CEOs staying out of politics are pretty much over. The jury’s out on whether that’s good for business. This Weber Shandwick study says that 46% of people are more likely to buy from a company whose CEO speaks out on an issue (that they agree with), but 35% of people have boycotted a company because of CEO activism. And 7% of people say it’s led them to buy a company’s stock – while 5% say it’s led them to sell. This Morning Consult study reflects similar findings.

With stats like that, you might think CEOs should just avoid risk by keeping a low profile. That might’ve worked 5 years ago – but now a big chunk of people view silence as activism too. This WSJ op-ed suggests that it’s as likely to alienate customers & business partners as public declarations. It contends that the way to simultaneously please the “stick to business” crowd & the “social justice” crowd is to make statements that link the issue to the company’s bottom line – not personal moral views.

Board Oversight of CEO Political Activism

If CEO social & political activism is the “new normal,” the next question is whether – and how – boards can manage the related risks & opportunities. This “Corporate Board Member” article and this NACD article give some recommendations on how to proactively establish CEO communication guidelines that address:

1. The company’s mission, audiences, and relevant social & political issues

2. How to handle specific topics (Practice in advance. Get diverse views to recognize “blind spots.”)

3. Whether & how to use social media

4. Using a “personal opinion” disclaimer for comments related to the CEO’s personal convictions

5. Ways to monitor sentiments of employees, shareholders & other stakeholders – and make timely updates to company policies on evolving issues

6. How the CEO’s internal & external communications will be evaluated as part of the performance review

Meanwhile, if your CEO has somehow stuck their foot in their mouth, this WSJ article offers some tips for damage control. For more on this topic, tune in on November 28th for our webcast: “How Boards Should Handle Politics as a Governance Risk.”

More on “Impact Investing: Continued Growth”

Earlier this month, I blogged about a heightened focus on “impact investing” among funds, foundations, banks, family offices and pension funds. This study (from an asset manager that specializes in impact investing) suggests that’s probably a result of client demand. About half of the 1000 survey participants were interested in using their investment dollars to make a positive impact on society, in addition to their obvious desire to garner a financial return. Here are the finer points:

– 49% of people found impact investing “appealing” – compared to 38% in 2016
– 56% of Millennials are interested in impact investing – compared to 52% of Gen Xers and 44% of Boomers
– 45% of people say they intentionally choose to do business with companies whose “values align” with their own
– Popular causes for impact investing ranked as healthcare/disease prevention, environment/sustainability, education, mitigating poverty, and alignment with religious principles

Liz Dunshee

August 28, 2018

SEC’s Filing Fees: Going Down 3% for Fiscal Year 2019!

Last week, the SEC issued this fee advisory that sets the filing fee rates for registration statements for 2019. Right now, the filing fee rate for Securities Act registration statements is $124.50 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, this rate will decrease to $121.20 per million, a 2.6% decrease. This reduction modestly offsets the price hikes from the past couple of years.

As noted in the SEC’s order, the new fees will go into effect on October 1st like the last six years (as mandated by Dodd-Frank) – which is a departure from years before that when the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.

Board Matrices: NYC Comptroller’s “Best Practices”

Recently, the NYC Comptroller & NYC Pension funds compiled 18 “best practice” board matrices from companies that were targeted by the “Boardroom Accountability Project 2.0” – which we’ve blogged about on our “Proxy Season Blog.”

Each of the “best practice” companies discloses director skills on an individual basis. When it comes to gender and race & ethnic diversity, the companies are grouped into two categories: (1) voluntary self-identification of individual directors and (2) aggregate board self-identification.

EYCBM’s “Proxy Season Review” (pg. 2) says that 29% of companies in the S&P 500 are now disclosing director-specific skills – and 17% of companies are disclosing skills on an aggregate basis. Those stats are up from 10% and 1% just three years ago.

SEC’s ALJs Get a “Do-Over”

Remember earlier this summer, when SCOTUS held that the SEC’s ALJ appointment process was unconstitutional? At that time, all pending administrative proceedings were stayed – and there was even some question of whether prior ALJ decisions were valid.

Well, it looks like the SEC is now doubling down on its ALJs. Last week, it issued an order to ratify the appointment of previously-approved ALJs and lift the stay on administrative proceedings, effective immediately. But, there will be completely new hearings in front of a different ALJ for all of those stayed proceedings – almost 200 cases! This Ropes & Gray memo analyzes the order. Here’s an excerpt:

First, the Order attempts to confirm that the SEC has appointed those ALJs as per the Appointments Clause of the Constitution, and that the ALJs may adjudicate cases.

Second, the Order addresses the Lucia majority’s only definitive command regarding a remedial scheme – that Lucia be afforded the opportunity for a new hearing in front of a different ALJ than the one who had previously decided his case. In fact, the Order grants all respondents in the newly un-stayed proceedings the “opportunity for a new hearing before an ALJ who did not previously participate in the matter,” and remands all cases pending before the Commission to the Office of the ALJs “for this purpose.”

Moreover, the Order vacates “any prior opinion” the Commission has issued in nearly 130 matters pending before the Commission. Chief ALJ Brenda P. Murray confirmed via notice on August 23, 2018 (the “Notice”) that another nearly 70 cases pending before ALJs prior to the Order would be reheard pursuant to the Order. As a result of this Order, respondents (and possibly the SEC) who received a negative initial decision from an ALJ prior to the SEC’s Ratification Order but have not yet exhausted their appeal, will now get a fresh “bite at the apple” and a completely new hearing before a different ALJ.

Liz Dunshee

August 27, 2018

The IRS’ New 162(m) Guidance: How to “Grandfather” Awards

Recently, the IRS issued long-awaited initial guidance – via Notice 2018-68 – on how awards made on or prior to November 2, 2017 can continue to qualify for the “performance-based” exception of Internal Revenue Code Section 162(m) – notwithstanding its elimination by the Tax Cuts & Jobs Act last December. Recall that the result of the tax reform amendments is that companies can’t deduct any “covered employee” pay above $1 million (the definition of “covered employee” was also expanded).

Over on, Mike Melbinger is analyzing all of the “ins & outs” of the new guidance on his blog. Here’s his overview of the framework that will apply:

The guidance answers nearly all of our questions, but it’s not nearly as favorable as we hoped – and not even as favorable as we expected. It contains more than 14 detailed examples, which are more helpful than the text itself. However, the guidance (and the examples) are full of twists and turns and exceptions to the exceptions.

One thing the guidance does make absolutely clear is that the first step in determining whether any payment to any person in any year after 2017 is subject to the draconian limits of Section 162(m) is to determine whether there was a written binding contract in effect on November 2, 2017, which created a legal obligation on the company under any applicable law (e.g., state contract law) to pay the compensation under such contract if the employee performs services or satisfies the applicable vesting conditions. Every one of the many examples provided in the guidance begins with a determination of whether the plan or agreement created a legal obligation on the company. In the examples, some do and some don’t.

The existence of discretion to reduce any promised payment does not always make the full payment subject to the deduction limit of 162(m), but it usually reduces the amount of the payment that is grandfathered. However, the failure, in whole or in part, to exercise negative discretion under a contract does not result in the material modification of that contract.

As we predicted in a few blogs from earlier in the year, the accrued benefits and accounts under non-qualified deferred compensation plans are most likely to qualify for grandfathering protection. In many cases, future payments to the company’s CFO will be grandfathered and remain deductible. However, as we feared, benefits and accounts under plans that reserve to the company the right to amend or terminate the plan prospectively (which includes all well-drafted plans) will only be grandfathered to the extent they are legal obligations as of November 2, 2017.

Art Meyers, Takis Makridis and I will be drilling deeply into this topic (among others) at the upcoming NASPP Conference in our session titled: “Hot Topics in Equity Compensation.” The topic heading is deliberately vague to allow us to cover exclusively issues like this, which have developed or evolved since the deadline for submitting topics and materials for the Conference.

We’re posting memos over on – in our “Section 162(m) Compliance” Practice Area. And stay tuned for more analysis in future issues of our print newsletter: “The Corporate Executive.”

Audit Reports: PCAOB Staff Updates Guidance

Last week, the PCAOB Staff posted this updated “Audit Report Guidance”– updating original guidance that came out in late 2017. The updated guidance doesn’t say anything new about “critical audit matters” – but it gives more instruction for these areas:

– Voluntarily disclosure about audit participants (including sample language)
– Calculating & describing auditor tenure
– Reporting when other regulators require internal control audits
– Explanatory & emphasis paragraphs
– Supplemental & interim financial information
– Special reports

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:

– A Hostile “Token-Over?”
– Activism: Want a Settlement? It’ll Cost a Comp Committee Seat
– ICOs: A Dip in the Action?
– Cybersecurity: Will the SEC’s New Guidance Spur New Disclosures?
– Sustainability: Differentiator for Sell-Side Analysts’ Survival?

Liz Dunshee

August 24, 2018

Wu-Tang Clan: Killah’s C.R.E.A.M. Crypto Craters!

Time for an update on the Wu-Tang Clan’s crypto activities – and I’m afraid the news is bad. Very bad. Remember when I blogged about Ghostface Killah’s planned ICO for his C.R.E.A.M. (Cash Rules Everything Around Me) token? Sadly, this “Digital Music News” story reports that it has, shall we say, “underperformed”:

Back in January, a cryptocurrency company called Cream Capital hoped to raise $30 million through an initial coin offering (ICO). The company was named after the Wu-Tang Clan’s 1993 song, ‘C.R.E.A.M.’, which stands for ‘Cash Rules Everything Around Me’. Wu-Tang’s Ghostface Killah was a founding member of the company, and hoped his involvement with the cryptocurrency would help raise funds during its initial coin offering.

However, it appears as though the ICO hasn’t gone well, as the coin’s value has plunged more than 96% since it launched back in January. The Cream Dividend token initially went on sale back in November of 2017, when coins were sold for as little as $0.02 per coin. The price for the cryptocurrency subsequently spiked in January to a high of $0.12, before riding a downward trending wave. The current value of the coin at the time of writing is just $0.0045, making it a crypto-flop.

So, Ghostface Killah’s C.R.E.A.M. coin has lost 96% of its value. That’s not good – but if it’s any consolation, he’s got a lot of company among much higher-profile cryptocurrencies.

Sarbanes-Oxley Compliance: You Know It Don’t Come Easy. . .

Protiviti recently released its annual “Sarbanes-Oxley Compliance Survey”, which reviews companies’ compliance efforts & the costs associated with them. This year’s survey says even after 16 years, this stuff’s still not easy – costs for many companies continue to rise, & the hours commitment continues to grow. Here’s an excerpt with some of the key takeaways:

– Compliance costs continue to rise for many organizations but remain dependent on size, SOX year, filer status and more – Many organizations experienced increases in their SOX compliance costs during their last fiscal year, and those spending $2 million or more grew as well. However, annual compliance costs did decrease from the prior year for certain groups of companies.

– SOX compliance hours have increased significantly – There are likely many factors at play here, including changing organizational structures resulting from ongoing digital transformation efforts, as well as continuing PCAOB inspections of external auditors that are placing increased demands on their clients to perform more rigorous SOX compliance testing and reporting.

Perhaps surprisingly, the survey also says that the use of automated controls testing & process automation remains low – and that implementing these technologies represents a significant opportunity to improve the efficiency of the compliance process.

Sustainability: More On “Will Delaware’s Statute Move the Needle?”

I’ve previously blogged about Delaware’s new sustainability certification statute. This recent blog from Lois Yurow reviews the statute & considers the “why bother?” question. Here’s an excerpt:

So why would a company bother getting a certificate (and paying fees, and assuming a disclosure obligation)?

Every company is at liberty now, certificate or no certificate, to voluntarily issue a sustainability report. Indeed, 85% of the Fortune 500 published a sustainability report in 2017. No doubt those reports represent a genuine commitment on the part of the issuing companies. Still, it pays to consider who chooses what a given company reports on: what goals it adopts, what metrics it uses to gauge progress, who measures that progress, and what specific information will be shared. With voluntary reporting, companies have almost infinite flexibility.

Under the Certification Act, reporting entities will need to disclose “objective and factual” performance results, and each entity’s governing body will be required to specifically address those results, offering its view of whether they represent success. By imposing these rules, the statute responds to the ever lingering concern that at least some sustainability reports are as much about marketing as they are about real change. The public in general, and investors in particular, may find the Certification Act’s data-heavy reports more valuable.

We’ll see how this plays out – I guess I’m still in the “corporate equivalent of buying a Subaru” camp when it comes to this statute, but this is the first piece I’ve seen that articulates what might be in it for companies that are looking to do more than just signal their virtue.

John Jenkins

August 23, 2018

Climate Change: SEC Not Cracking the Disclosure Whip?

Earlier this year, we blogged about the GAO’s assessment of the SEC’s efforts to promote better climate change disclosure. According to the GAO, the biggest constraint that the SEC faced in its efforts was its need to rely on self-reporting. But this Bloomberg article says that the SEC isn’t pushing companies to improve disclosure in this area:

The SEC last issued a climate change-related public comment letter in September 2016, when it asked Chevron to expand its risk factor disclosure related to California’s greenhouse gas emission regulations. Typically, the SEC issues such letters to companies with suggestions on how they can fill in gaps. But the agency has been silent during this administration.

The article says that during the Obama administration, the SEC issued 44 climate change-related comment letters, while the SEC under Chairman Jay Clayton hasn’t issued any.

Climate Change: SEC Drops ExxonMobil Investigation

In another climate change disclosure-related development, the WSJ recently reported that SEC has dropped its investigation of ExxonMobil’s disclosures about how it accounted for oil and gas assets. As the WSJ reported in 2016, the investigation centered on the impact of climate change on the company:

The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects.

The SEC’s investigation followed on a similar one initiated by the NY & Massachusetts AGs. That investigation continues, as does private class action litigation surrounding the company’s climate disclosure.

#Crypto Utopia: A Very Deep Dive on the Crypto Economy

Want to get up to speed fast on all things crypto? Check out #Crypto Utopia, a 124-page presentation on the current state of the cryptoeconomy – including an analysis of the market environment and regulatory & legal issues – from and Latham & Watkins.

John Jenkins

August 22, 2018

Tesla Tweets: “Class Action Lawsuits Secured”

This recent “D&O Diary” blog says that the securities class action bar has latched on to Elon Musk’s ill-considered tweetstorm.  Here’s an excerpt on the winners of the race to the courthouse:

On Friday, two Tesla shareholders filed separate securities class action lawsuits in the Northern District of California against Tesla and Musk. The first of the lawsuits, filed by Tesla shareholder William Chamberlain, purports to be filed on behalf of a class of shareholders who purchased or sold Tesla shares between August 7, 2018 and August 10, 2018, inclusive.

The second of the two lawsuits, filed by Tesla investor Kalman Isaacs, purports to be filed on behalf of a class of shareholders who purchased Tesla securities after 12:48 pm EST on August 7, 2018 (the time of Musk’s first take-private tweets) and including August 8, 2018. According to news reports, Issacs is a short seller who sustained significant losses purchasing shares at the inflated price to cover his short position. Both complaints allege that Musk’s tweets contained material misrepresentations in violation of the federal securities laws and seek to recover damages on behalf of the plaintiff class.

Subsequently, the class action lawsuits have continued to roll-in – and the alleged class period for the more recent complaints extends from August 7th through August 14th.  That time frame includes the dates when media reports began to surface about the SEC’s decision to subpoena Tesla for information surrounding the tweets, when Elon penned a blog purporting to explain what he meant by “funding secured” (we’ll get to that in a minute), and when he apparently had a bizarre house guest.

Since 75% of those of you who took our recent poll are of the view that either Musk’s tweets violated the securities laws or that he is a supervillain, I don’t expect that you’re shedding a lot of crocodile tears over these developments.

Tesla Tweets: “Why, Elon, Why?”

Even if you’re enjoying his predicament (shame on you), you’ve got to be wondering – why on earth did Elon Musk end his tweet with the phrase “funding secured?”  Lots of other people had the same question – and so he posted this blog explaining his comment:

Why did I say “funding secured”?

Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction. . .

Yada, yada, yada . . . Anyway, this goes on for another 424 words, making a total of 518 carefully chosen and undoubtedly heavily-lawyered words to explain 2 very ill-considered ones. Still, the manure content in this statement seems pretty high. This “MarketWatch” article says that the SEC still has lots of questions for Elon, so my guess is that his word count will go much higher before this is over (and Broc is quoted in that article).

Crypto Exchanges: FinCEN Says Compliance Efforts Stink

I recently blogged about how CoinBase is laying the groundwork to possibly become the first “token securities exchange.” If so, it may want to take the recent comments from FinCEN’s Director Ken Blanco in this “ABA Journal” article to heart. He says that financial crimes enforcers are watching the crypto space—and they don’t like what they see.

The Treasury’s Financial Crimes Enforcement Network and the Internal Revenue Service “have examined over 30 percent of all registered virtual currency exchangers and administrators since 2014,” said Kenneth Blanco, FinCEN’s director, in an Aug. 9 speech to the Block (Legal) Tech conference at Chicago-Kent College of Law. “And there is no question we have noticed some compliance shortcomings.” Specifically, Blanco maintains that adequate money laundering controls are not put in place until a trading platform or peer-to-peer exchanger gets an investigation notice.

“Let this message go out clearly today: This does not constitute compliance,” he said. “Compliance does not begin because you may get caught, or because you are about to be discovered. That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate.”

Blanco’s comments were echoed by Amy Hartman, Assistant Director of the SEC’s Enforcement Cyber Unit, who expressed concerns about the potential for fraud associated with stateless virtual currencies & advised any company thinking about a coin offering to “engage competent securities counsel.”

John Jenkins

August 21, 2018

Disclosure Simplification: The SEC Cleans Out the Garage

My wife recently announced that we’re having a garage sale – which bums me out because now I have to help her clean the garage so the strangers who stop by to peruse our junk won’t think less of us. Anyway, last Friday, the SEC announced some garage cleaning of its own – in the form of this 314-page release adopting amendments to certain “redundant, duplicative, overlapping, outdated, or superseded” disclosure requirements.

There’s a lot to digest in the release, but this Steve Quinlivan blog provides a helpful guide to the changes. Here’s an excerpt summarizing the revisions to Item 101 of S-K:

The amendments revise Item 101 of Regulation S-K to eliminate required disclosures in the business description regarding:

– Financial information about segments
– Research and development spending
– Financial information about geographic areas, such as revenues from external customers in the issuers country of domicile and foreign countries, but where material must be covered in the MD&A
– Risks attendant to the foreign operations and any dependence on one or more of the registrant’s segments upon such foreign operations, but where material should be covered in risk factors

The SEC’s press release notes that the rule changes are part of Corp Fin’s initiative to review & improve disclosure requirements for the benefit of investors and issuers. We’re posting memos about this in our “Fast Act” Practice Area.

Beyond “Bedbugs”: More Corp Fin Actions to be Posted on Edgar

While this doesn’t appeal to the prurient interest nearly as much as the recent decision to post “bedbug” letters on Edgar, Corp Fin announced yesterday that it has decided to post more Staff actions on Edgar.  Here’s an excerpt from the announcement:

Starting October 1, 2018, the Division will begin to release through EDGAR orders we issue granting or denying regulatory relief on behalf of the Commission, as identified below. We intend to continue our efforts to enhance transparency in subsequent phases by releasing additional types of documents, including those memorializing actions or positions taken by the Division staff, such as interpretive guidance and no-action relief.

Orders that will soon become available include Reg A & 1934 Act orders of effectiveness, orders declaring 1933 Act registration statements abandoned, and orders granting exemptions under the tender offer rules. This is pretty prosaic stuff, but stay tuned – availability of interpretive guidance & no-action relief on Edgar could be more interesting.

PCAOB Seeks Comment on Draft Strategic Plan For 1st Time

The PCAOB recently issued a draft of its 5-year Strategic Plan – and the accompanying press release notes that for the first time, it’s soliciting comments from the public. Here’s an excerpt from the press release with an overview of the key goals of the plan:

After its own careful study and a survey of PCAOB staff and the public, the new Board intends to:

– Broaden its approach to driving improvement in the quality of audit services and more clearly communicate how it is driving that improvement.

– Ensure that its inspections and standard-setting activities are responsive to and do not impede technological innovations.

– Engage proactively more often and directly with investors, audit committees, and other stakeholders to encourage relevant and timely conversations about the quality of audit services.

– Optimize PCAOB operations to more efficiently and effectively use resources.

– Reinforce the PCAOB’s culture of integrity, excellence, effectiveness, collaboration, and accountability.

So what’s behind the PCAOB’s decision to seek public input on its strategic plan? Here’s some insight from a recent Gibson Dunn blog:

Coming on the heels of a complete turnover of the Board and the subsequent departure of numerous senior personnel, the process by which the Board is crafting its strategic plan provides further evidence—if any were necessary—that this Board intends to seek out new ways to operate and to fulfill the PCAOB’s mission.

John Jenkins

August 20, 2018

Trump Asks SEC to Study Semi-Annual Reporting (Big Deal or Big “So What?”)

On Friday, President Trump announced via Twitter (naturally) that he had asked the SEC to study the possibility of moving from quarterly to semi-annual reporting for public companies.  As we’ve previously blogged, this isn’t a new idea. Less frequent reporting also dovetails with recent calls from a “Who’s Who” of business groups & CEOs to eliminate the practice of providing quarterly earnings forecasts – but even many of these business leaders continue to endorse quarterly SEC reporting.

But if the SEC did move to a semi-annual reporting system, would that really help promote a longer-term focus?  Would it even change the practice of releasing quarterly results?  This MarketWatch editorial from last year by a group of B-school profs who studied the issue suggests that the answer to both questions may be “no.” Here’s an excerpt:

In 2014, the U.K. followed the E.U.’s directive and eliminated the requirement for quarterly reporting. Yet, less than 10% of all U.K. public companies have so far moved to semi-annual reporting. These were mainly companies involved in the energy and utility sectors, where investments of 20-30 years are typical. However, the investment level of companies moving back to semiannual reporting did not increase more than those companies continuing to report quarterly.

Accordingly, our research strongly suggests that moving from quarterly to semi-annual reporting is not an effective response to concerns about the undue corporate emphasis on short-termism. If quarterly reporting focuses company executives on profit maximization in the upcoming three months, then semi-annual reporting might logically focus these executives on attractive investments in the upcoming six months — not over the next three to five years.

In contrast, another recent study suggests that less frequent reporting may help reduce short-termism – but that study was based on a review of the effect of changes in reporting mandates that occurred long before the advent of the 24-hour news cycle, the Internet & social media.

In our current information-saturated environment, it might be a stretch to conclude that the behavior of public companies & investors would change much based solely on the SEC’s decision to reduce the frequency of mandatory reporting. I doubt companies would alter their internal accounting cycle or stop generating quarterly financials for internal use (and many probably would also voluntarily file 10-Qs).  My guess is that our experience would mimic the UK’s – although you never know…

Investor groups are likely to strenuously oppose any effort to move to semi-annual reporting – this press release from the CII in response to the President’s announcement is a case in point. Also see this Vox article – and Cooley blog.

”The Accountable Capitalism Act”: Attacking Short-Termism From the Left

Meanwhile, in a parallel universe, Sen. Elizabeth Warren introduced her own prescription for short-termism – ”The Accountable Capitalism Act”.  Under her proposal, all companies with $1 billion in annual revenues would be required to be chartered by the federal government.  As this New Republic article explains, those federally-charted companies would also have some pretty unusual governance provisions:

Under the federal charter, companies would be required to consider the interests of workers, customers, communities, and society before making major decisions. Employees would elect at least 40% of all company directors, giving them representation on corporate boards.

That would involve worker representatives in decisions like whether to engage in political spending, which would require sign-off from 75% of all directors and shareholders. Finally, executives who receive shares of stock as compensation would have to hold them for at least five years.

Sen. Warren explained the rationale for her legislation in this WSJ editorial. Here’s an excerpt:

As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” This approach worked. American companies and workers thrived.

Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”

That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer.

I’m no pundit, but I’ll still go out on a limb and say that in the current political climate, my beloved Cleveland Browns have a better chance of winning the Super Bowl than this legislation does of getting enacted.

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John Jenkins