July 17, 2019

Overboarding: New Investor Policies Causing Huge Drops in Director Support

This isn’t news to those of you who experienced it – and unfortunately, plenty of people I’ve talked to have. But this PJT Camberview memo highlights the unusually low votes that some directors are getting this year (in the 70th percentile range) – as a result of new overboarding policies at some institutional investors (especially those that were announced once proxy season was already underway, since at that point it was really too late to do anything about it). Here’s an excerpt:

In a sign of growing investor assertiveness, significant opposition to directors of Russell 3000 companies this year increased to its highest level since 2011 despite a year-over-year decrease in negative proxy advisor recommendations, according to a June ISS Analytics report. A contributor to this decline was new or stricter overboarding policies put in place by leading institutional investors such as Vanguard, BlackRock and Boston Partners. Active public company executives sitting on more than two boards were particularly hard hit, and a number of directors saw their support drop 25 or more percentage points on a year-over-year basis.

Investors’ stated concern with ‘overboarded’ directors is that they may not have sufficient time to dedicate to their roles, particularly when an activism, M&A or crisis event hits one or more of the companies on which they serve. Tighter overboarding policies may become more prevalent in the coming years, with direct implications for board diversity, succession planning and the way that directors and companies manage and track their board commitments.

Auditor Ratification: This Year’s Biggest (Almost) Losers

Each year, auditors at a handful of companies manage to irritate shareholders enough to motivate a notable “against” vote on the auditor ratification proposal. This “Audit Analytics” blog says that last year, there were 21 companies with more than 20% of votes “against” ratification. And according to the blog, 2018’s biggest (almost) losers were:

– Dynasil – 44% against
– Amber Road – 40% against
– MusclePharm – 37% against

If you think today’s headline is catchy, that’s because I stole it from John’s blog last year. He observed that most companies go on to reappoint their auditor despite shareholder objections – and that remains true…

EGC Transitions: Interplay With Revenue Recognition

Earlier this year, the Center for Audit Quality published notes from a spring meeting between its “SEC Regulations Committee” and the Corp Fin Staff. The Staff is considering the impact of the new leasing standard on the contractual obligations table – and has “pointed views” about the leasing standard’s impact on EBITDA disclosures (see this “Compliance Week” article). It also clarifies that an Item 2.01 Form 8-K is required to report an acquisition, even if the Staff grants a Rule 3-13 waiver that allows a company not to file acquired entity financials. The Staff also covered EGC transition issues, including:

Question: If an EGC loses status after it submits a draft registration statement or publicly files a registration statement, then it will continue to be treated as an EGC until the earlier of the date on which the issuer consummates its initial public offering (IPO) or the end of the one-year period beginning on the date the company ceased to be an EGC. If the EGC had elected private company transition for new accounting standards in the IPO, how and when is it required to transition to the new accounting standards for filings subsequent to its consummation of the IPO assuming that was the earliest date?

Answer: FRM 10230.1 states if an EGC loses its status after it would have had to adopt a standard absent the extended transition; generally,the issuer should adopt the standard in its next filing after losing status. EGCs that take advantage of an extended transition period provision are encouraged to review their plans to adopt accounting standards upon losing EGC status and to discuss with the staff any issues they foresee in being able to timely comply with new accounting standards already effective for public business entities in the next filing.

Question: When is quarterly information under Item 302 of Regulation S-K required to be revised under ASC 606 for a registrant that loses its EGC status?

Answer: FRM 10230.1 states if an EGC loses its status after it would have had to adopt a standard absent the extended transition; generally, the issuer should adopt the standard in its next filing after losing status. For example, a registrant that has elected the private company transition and loses its EGC status on December 31, 2019 would be required to reflect the adoption of ASC 606 in its December 31, 2019 annual report on Form 10-K. Since the issuer is not an EGC as of December 31, 2019 it is not provided the accommodation for Item 302 quarterly information, in FRM 11110.2, in that Form 10-K. That is, for the example provided, the issuer would reflect the adoption of ASC 606 in its 2019 quarterly financial information in its December 31, 2019 annual report on Form 10-K.

Liz Dunshee