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Monthly Archives: August 2018

August 3, 2018

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

We’re feeling pretty lucky around here. Karla Bos reached out to us after reading “The ‘Nina Flax’ Files” – to let us know that she too is a list-maker. Here’s Part I of Karla’s “list of lists” (let Karla know what you think – my personal favorite is #2):

I’ve always been a list-maker, thanks to my parents – family to-do lists for the weekend (equal parts work & play, as I recall, something I’m striving to return to) and lists of summer chores by the day (including the much-despised yardwork, yet ironically I now enjoy it, go figure). But I didn’t fully appreciate until I read Nina’s lists how much I enjoy and rely on lists myself and what they must reveal about me. So I was inspired to make my own “list of lists” – sans my multiple shopping lists – and to make my own versions of many of Nina’s excellent lists:

1. Why Making Lists Keeps Me Sane

2. Why I Look Forward To The Women’s 100 Every Year

3. Multiple To-Do Lists (each with a strategic physical location in addition to electronic reminders): Multi-Week Personal To Do List, Today’s Personal To-Do List, Today’s Business Success (Aka Must-Do) List, Upcoming Personal/Family Appointments

4. Things I Didn’t Realize Were So Hard for Companies When I Was on the Investor Side

5. Things Companies Don’t Understand About the Investors That Vote Their Proxies

6. Ways My Acting School Training Helps Me In Business Every Day

7. What I Learned From Living In a Small Town, a Big City, the Woods & the Desert

8. Things I Do For My Job That Add Value (But Aren’t Billable)

9. What Working From Home Has Taught Me

10. Ways That Companies Inadvertently Offend Their Investors

11. 10 Things (Or More) I Accomplish Before 8:30 am Every Workday

12. Activities I Do/Should Be Doing Every Day To Counteract Too Much Sitting At a Desk

NASAA Proposes “Blue Sky” Updates

NASAA has proposed two rules that would make overdue updates to the ancient “manual exemption” – which is available for secondary resales when companies make certain information publicly available. The proposed rules would encourage states to:

1. Replace “S&P’s Corporation Records” with the OTC website as an information source for the manual exemption and

2. Provide an exemption for companies that have conducted a “Tier 2” Regulation A offering and are current in their ongoing reporting requirements

Is it just me, or do these changes seem overdue? The SEC adopted the Reg A+ changes over 3 years ago – and S&P discontinued their records service in 2016. You’d have thought something would have come along sooner. Comments are due by August 20th. Hat-tip to Latham’s Paul Dudek for bringing this to our attention.

Reduced Rates End Next Week: Our “Pay Ratio & Proxy Disclosure Conference”

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

August 2, 2018

Where Do Investors Get ESG Info?

This blog from “The Conference Board” discusses “reporting fatigue” on ESG matters. In the growing universe of ratings, rankings and initiatives, it’s hard to know where to focus your limited bandwidth. This Clermont Partners survey of 189 active investors – and related interview – say that annual reports are the #1 source of ESG info for investors, followed by direct questions to the company.

What about sustainability reports? For those of you working on them, I’m sorry to say there might be some leeriness there:

– While 28% of investors said that the reports were helpful, they also said they didn’t answer all of their questions; and

– 63% of the investors said they “don’t spend much time” with them.

But your work is not for nothing. According to this survey, almost everyone turns around and uses some combination of annual, integrated & sustainability reports to answer those direct questions from investors. And when investors look to third-party ratings agencies to fill information gaps, some of that information also comes from sustainability report.

Although depending on the ratings agency, that percentage might not be as high as you think: Broc has blogged on our “Proxy Season Blog” about how company disclosures contribute only about 35% of the data underlying MSCI ratings. Also see these MSCI resources in our “ESG” Practice Area.

This blog from Globoforce’s Derek Irvine discusses why it makes sense for employee engagement surveys to be one component of ratings – organizations that score in the top 25% on employee experience report nearly 3x the return on assets and more than 2x the return on sales as compared to organizations in the bottom quartile.

Human Capital: Investor Coalition Sends 45-Page Survey

The “ShareAction Workforce Disclosure Initiative” – a 100-member investor coalition – recently sent this 45-page survey to 500 companies. The coalition says the survey is a “streamlined solution” that helps companies avoid responding to multiple surveys & data requests. They’re also encouraging companies to make their responsive information public. Here’s a summary of results from their pilot project last year.

ESG Ratings: “Wildly Divergent”?

The American Council for Capital Formation is following up on its hard look at proxy advisors – which Broc blogged about on our “Proxy Season” Blog last month – with a new 17-page assessment of four major ESG ratings agencies. It concludes that output from MSCI, Sustainalytics, RepRisk and ISS Environmental & Social QualityScore is…less than ideal. Here’s an excerpt from the press release (also see this Financial Times article):

The major rating agencies have significant disparities in the accuracy, value, and importance of their individual ratings to investors,and arguably undermine the validity of ESG investment strategies. Findings reveal significant disparities in ratings due to a lack of standardization, inconsistencies, and subjective interpretation influenced by a number of biases – including company size, geography, and industry-specific criteria.

Though modern ESG investing has been practiced for over a decade now, there is still a lack of accurate data to support the evaluation process. To meet growing customer demand and attract ESG-orientated capital, companies have begun making selective and unaudited disclosures in regard to their performance. These disclosures are then utilized by ESG rating agencies, despite the fact that there are neither standardized rules, nor an auditing process to verify company data.

The report is careful to note that it’s not saying one particular method of ESG investment is right or wrong – only that the application of ESG-related metrics & ratings into complex investment decisions remains much more an art than a science. Among other recommendations, the ACCF advocates for standardized ESG disclosures in regulatory filings, in order to help ratings agencies make more consistent judgments. It also says that the agencies should be more transparent in their process – and better adjust for size, industry & jurisdiction.

Liz Dunshee

August 1, 2018

Exempt Solicitations: 2 New CDIs

There’s been a lot of buzz this year about voluntary exempt solicitations – increasingly, these notices are being used to publicize shareholder views on proposals and other topics. Broc blogged about John Chevedden’s first “Notice of Exempt Solicitation” in March – and earlier this week I noted on our “Proxy Season Blog” that it may become a year-round practice. Yesterday, Corp Fin issued two new Proxy Rules CDIs that confirm that voluntary exempt solicitations are okay – if it’s clear who is making the filing.

Question 126.06 says that the Staff will not object to a voluntary submission of such a notice, provided that the written soliciting material is submitted under the cover of Notice of Exempt Solicitation as described in CDI 126.07 and such cover notice clearly states that the notice is being provided on a voluntary basis. Doing so will make it clear to investors the nature of the submission and that it is being made on behalf of a soliciting party who does not beneficially own more than $5 million of the class of subject securities.

Question 126.07 says that the Rule 14a-103 information required by Rule 14a-6(g)(1) – e.g. the filer’s name & address – must be presented in an Edgar submission before the written soliciting materials, including any logo or other graphics used by the soliciting party. To the extent that the notice itself is being used as a means of solicitation, the failure to present the Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9. This requirement applies regardless of whether the filing is voluntary or to satisfy the requirements of Rule 14a-6(g)(1).

For more background & commentary, visit this Gibson Dunn blog. Here’s an excerpt:

While these new CDIs provide helpful guidance on the use of voluntary Notices of Exempt Solicitations, the CDIs may not go far enough to address potential abuses that increasingly are arising when the EDGAR system is used as a platform for disseminating a filer’s views. For example, C&DI Question 126.06 does not expressly require that the filer represent that it is in fact a shareholder.

Absent further guidance from or review and comment on such filings by the Staff, the process allows anyone with EDGAR codes to submit filings unrelated (or only tangentially related) to a proposal, or to set forth disparaging or inflammatory views, subject only to the Rule 14a-9 standard governing false and misleading statements. For example, John Chevedden, who as of July 31 has filed 21 of these filings in 2018, filed a Notice of Exempt Solicitation at Netflix a week after the company’s annual meeting, which contained only a vague and confusing voting recommendation at the very end, and instead was devoted largely to criticizing the company’s decision to hold a virtual annual meeting. However, the Staff has informally indicated that companies should contact them if they believe the PX14A6G process is being abused, and the new interpretations hopefully indicate that the Staff will be more proactive in reviewing and possibly commenting on such filings.

“Passive” Investors: Causing a Rise in Activism?

We’ve blogged a few times about the misnomer of “passive” investors. But whatever we call them, the capital flow to these firms continues to increase. And this “Rivel Research” study indicates that these firms are exercising more & more influence – particularly when it comes to engagement on corporate governance & executive pay. Some active managers aren’t happy about that, because they think their passive counterparts make uninformed decisions that adversely impact stocks that the active funds are mandated to hold.

So what’s an active manager to do? Maybe they write a 17-page client letter to say they’re still better at picking stocks, as described in this WSJ article. Maybe they call them communists. Or maybe, they move away from simply picking stocks and into the potentially more lucrative field of campaigning for stock-enhancing changes – which could also minimize the impact of the passive engagement that they find problematic. This WSJ article credits passive investing with the hot activist environment and increasing involvement of first-time activists.

For tips on communicating with “passive” investors (and active investors that bifurcate the engagement & voting teams), check out this article from Ron Schneider of Donnelley Financial Solutions. He points out that they’re more likely to rely on the proxy statement than IR blasts – so there’s an increasing benefit in providing voluntary proxy disclosure on things like strategy & ESG issues. And as Broc has blogged – it’s best to do this in a thoroughly-bookmarked online document.

Our August Eminders is Posted!

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

Liz Dunshee