Monthly Archives: September 2019

September 30, 2019

Wow! Corp Fin “Realigns” (But It’s More Than That)!

Wow! All that is new is “old” again! When I first joined Corp Fin in 1988, there were a half dozen or so “pods” – each with two branches – that were devoted to specific industries. Each pod was headed by an Assistant Director, which was a difficult job to obtain because a slot only opened when someone retired (back then, it was quite rare for an AD to leave the SEC before retirement). Over time, the Division’s “groups” (as they were eventually renamed from “pods”) grew and the number of them nearly doubled. Now, with this Corp Fin announcement on Friday, we’re going back to the way we were.

Here’s some things to note:

1. Cutting the Number of Groups Nearly in Half – Corp Fin is realigning some of industry groups and reducing them in number from 11 to 7. The groups are now called “Offices” – led by a “Chief” and a “Senior Advisor.”

2. Improving (& Streamlining) the Review Process – Led by an “Office of Assessment & Continuous Improvement,” the teams within Corp Fin that will review filings look to be leaner under this new realigned group structure. There have been fewer comments issued in recent years by the Staff as companies have gotten better observing comment trends and adjusting their disclosures according (not to mention the sheer number of public companies has shrunk a whole lot). Corp Fin will continue to focus on improving the comment process in an effort to be more relevant, timely & consistent.

3. Focus on “Hot” Comment Areas – Led by an “Office of Risk & Strategy,” Corp Fin will focus on emerging issues in their comments – think Libor, cybersecurity and Brexit as recent examples. This Office will review filings for good (or bad) examples of disclosure and then share those internally. It’s something the Staff has already been doing – but it’s now formalizing that function.

4. What Group Is Your Company In? – These seven new groups took effect yesterday – so you can find your new industry group by looking on Edgar for your filing history and noting what “Office” is listed. For example, you’ll see in the 4th line down that Microsoft belongs in the “Office of Technology” group. In many cases, your company’s group will be the same. And if you have a filing that is being actively reviewed right now, the Staffers reviewing your filing aren’t going to change – even if the Office that your company belongs in has changed.

Corp Fin has pulled down its org chart – at least for now. We just deleted our own more comprehensive Corp Fin org chart. I’ve maintained it for 17 years but it’s become too hard to keep up. That was a harder task than you would think – very few people even within Corp Fin know the identities of all the middle managers, etc. A constant game of “Where’s Waldo”…

SEC Proposes to Modernize the OTC Market

Last Thursday, the SEC proposed to modernize the over-the-counter market (OTC) by proposing changes to Rule 15c2-11, which sets out certain requirements with which a broker-dealer must comply before it can publish quotations for securities in the OTC market. Here’s the 228-page proposing release.

Moody’s “Governance” Framework for Credit Ratings

Recently, I blogged how Moody’s was getting into the governance ratings business – but as I noted in that blog, Moody’s has scored governance for quite some time for their credit ratings business. Recently, Moody’s issued a framework to help understand key aspects of governance that are incorporated into all Moody’s credit ratings and analysis, including two taxonomies: a private taxonomy, which applies to non-financial corporates, financial institutions, infrastructure, structured finance and certain competitive government-owned enterprises; and a public taxonomy, which applies to sovereign, sub-sovereign and municipal issuers…

Broc Romanek

September 27, 2019

Everybody Into the Pool! SEC Adopts “Test the Waters” for All

Yesterday, the SEC announced that it had adopted final rules permitting all companies to gauge market interest in a possible initial public offering or other registered securities offering to “test the waters” by reaching out to certain institutional investors before filing a registration statement. Previously, only EGCs had been able to engage in this activity under applicable provisions of the JOBS Act. Here’s an excerpt from the fact sheet included in the press release summarizing the rule:

Securities Act Rule 163B will permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The rule is non-exclusive and an issuer may rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate about a contemplated securities offering.

Under the rule:

– there are no filing or legending requirements;
– the communications are deemed “offers”; and
– issuers subject to Regulation FD will need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

In a public statement accompanying the announcement of the new rule, SEC Chair Jay Clayton said that it will allow issuers to “better identify information that is important to investors and enhance the ability to conduct a successful registered offering, ultimately providing both Main Street and institutional investors with more opportunities to invest in public companies that, in turn, provide ongoing disclosures to their investors.” The new rule will become effective 60 days after publication in the federal register.

Auditor Independence: Flurry of SEC & PCAOB Enforcement

Earlier this week, the Division of Enforcement announced a settled enforcement proceeding with PwC arising out of alleged violations of the SEC’s independence rules. PwC’s Mexican affiliate was also sanctioned for independence violations by the PCAOB in August. The SEC’s action against PwC comes on the heels of another settled proceeding late last month involving RSM US LLP. Earlier this month, the PCAOB sanctioned another two accounting firms for independence violations.

So, what’s with this recent spate of enforcement proceedings? It’s hard to say for sure, but this may have been coming for quite some time. Broc blogged last year that Lynn Turner reported that there was “trouble brewing” at the PCAOB & SEC over independence issues. The PCAOB apparently discovered a number of independence issues in its 2016 inspection reports, and noted that many of these were not reported to the audit committee as required under PCAOB rules.

Earlier this year, the PCAOB came out with additional guidance on what the rules require auditors to communicate to audit committees when they identify independence issues, and the failure to comply with independence disclosure requirements is at the heart of both the PCAOB & SEC enforcement proceedings involving PwC.

PCAOB: Board Laying Low in Wake of KPMG Scandal?

Speaking of the PCAOB, according to this article by’s Francine McKenna, the PCAOB continues to be in transition in the wake of the KPMG scandal – and its board has apparently decided to keep a very low profile, even if that appears to violate the PCAOB’s bylaws:

The PCAOB board is staying out of the public eye in 2019, in violation of bylaws established by the law that created the PCAOB, the Sarbanes-Oxley Act of 2002. The law requires the PCAOB to hold at least one public meeting of its governing board each calendar quarter. However, the PCAOB board has held no public meetings of its governing board since December 20, 2018.

MarketWatch asked the PCAOB to comment on its apparent lack of compliance with its bylaws regarding open board meetings. A PCAOB spokeswoman told MarketWatch, “Consistent with long-standing practice, the Board holds open meetings to take action on business such as standard-setting or voting on its budget and strategic plan. We expect to hold two open meetings in the coming months to address our 2020 budget and a proposed concept release related to our quality control standards.”

Even by current D.C. standards, the PCAOB’s response leaves much to be desired. It’s not a denial, and it isn’t even a “non-denial denial.”  By the way, it isn’t just the board – the article says that the PCAOB’s two outside advisory groups haven’t met in 2019 either.

John Jenkins

September 26, 2019

Being Litigated! Tesla’s Colossal CEO Comp In The Crosshairs

I have a friend who keeps trying to persuade me to buy a Tesla.  He owns one, and I guess there’s some kind of bounty the company pays to Tesla owners who convince other people to pony up for their own E-Z-Go on steroids. I’ve told him he’s barking up the wrong tree. I’ve always driven a beater. My current ride is a 2012 Chevy Equinox with 140,000 miles on it. It goes through 2 quarts of oil a month and I’m still determined to keep it for at least another couple of years.

But I also confess that even if I was in the market for a new car, I just can’t see buying one from Elon Musk. The guy’s antics really rub me the wrong way.  So it pains me to have to blog about him again – but I do.  This time, Elon and his board have gotten themselves sideways with Tesla shareholders in the Delaware Chancery Court, and the issue isn’t his tweets, it’s his comp.

Last year, the Tesla board – and shareholders – signed-off on a pay deal that would provide Musk with a potentially gargantuan payout if its stock hit some very aggressive market cap & operational goals.  How gargantuan? Try more than $50 billion.  A shareholder subsequently filed a lawsuit against Musk and the Tesla board alleging that the comp award was a breach of fiduciary duty.

By way of background, the Chancery Court decided last year that Musk was a “controlling shareholder” of Tesla in an unrelated case, despite the fact that he owned only around 20% of the stock.  So, for purposes of the motion to dismiss filed in this case, the parties treated him as if he was a controller.  That complicates things considerably, because the default standard for reviewing for transactions between a company and its controlling shareholder – even comp decisions – is the demanding “entire fairness” standard and not the deferential business judgment rule.

Delaware has laid out a path to the business judgment rule for these transactions, but in his 40-page opinion denying the defendants’ motion to dismiss, Vice Chancellor Slights found that despite the approval of the comp award by Tesla’s shareholders, the process wasn’t good enough to allow this award to make the cut:

Had the Board ensured from the outset of “substantive economic negotiations” that both of Tesla’s qualified decision makers—an independent, fully functioning Compensation Committee and the minority stockholders—were able to engage in an informed review of the Award, followed by meaningful (i.e., otherwise uncoerced) approval, the Court’s reflexive suspicion of Musk’s coercive influence over the outcome would be abated. Business judgment deference at the pleadings stage would then be justified. Plaintiff has well pled, however, that the Board level review was not divorced from Musk’s influence. Entire fairness, therefore, must abide.

The Vice Chancellor held that the defendants were unable to establish that the award was entirely fair at the pleading stage, so he declined to dismiss the plaintiff’s breach of fiduciary duty & unjust enrichment claims. That probably means I’ll have to blog about Musk again at some point in the not-too-distant future. Lucky me.

SEC Settles Nissan Fraud Charges: Don’t Have the CEO Set Their Own Pay!

It’s been a big week for CEO compensation stories. Here’s something Liz blogged earlier this week on Wow. Broc & I have blogged a couple of times over the past year about the SEC’s Nissan investigation, which (among other reasons) is of interest because Nissan is a Japanese company, and also because of the bold efforts people took to conceal former CEO Carlos Ghosn’s pay.

Yesterday, the SEC announced that it settled Section 10(b)/Rule 10b-5 fraud charges with Nissan, Ghosn, and a former director/HR exec for omitting $140 worth of Ghosn’s compensation from Japanese securities filings – which were published in the US because the company’s securities trade as ADRs on the OTC – and which required information about executive pay. Allegedly, Ghosn went to all this effort to restructure & hide his pay because he was worried that people would criticize the amounts (pro tip: at least in the US, that’s a hint that you’re probably required to disclose the info).

Nissan is ponying up $15 million – while the individuals are getting off with civil fines of $1 million and $100k. Seems like a pretty good deal for those two, based on the allegations in the SEC’s complaint against them – e.g., Ghosn first brainstormed ways to conceal part of his pay by paying it through Nissan-related entities…when that didn’t work, he started entering into secret contracts with employees and executing backdated letters for LTIP awards, and decided that “postponing” pay (along with creative accounting) would get him around the disclosure obligations.

Initially, one problem here for the company might have been faulty internal controls. But according to the SEC’s complaint against the company, the fatal blow was that because Nissan had specifically delegated to Ghosn the authority to set individual pay arrangements – including his own! – he was acting within the scope of his employment when he intentionally misled investors, and the company was liable under the principles of respondeat superior. We can complain all we want about the burdensome listing rules here, but maybe they’re saving some companies from themselves…

Audit Reports: What Does Auditor Tenure Disclosure Look Like?

This Audit Analytics blog discusses the disclosures that accounting firms are including in their audit reports in response to the relatively new requirement to disclosure their tenure with a particular company. The blog says that although the PCAOB has provided guidance on determining & reporting tenure, “auditors have discretion regarding exactly what and how the information is disclosed, resulting in substantial variation in disclosures.”

Having reviewed the blog, I can assure you that auditors have used their discretion to ensure that all versions of tenure disclosure are extremely boring.

John Jenkins

September 25, 2019

D&O Questionnaires: Few Changes for 2020 Proxy Season

This Stinson blog highlights rule changes that could prompt a few tweaks to D&O questionnaires. Specifically, the blog notes that:

– Companies can now rely on Section 16 filings & written representations to determine whether an insider has delinquencies. As a result, companies may ask whether all required Section 16 reports have been filed on EDGAR instead of asking whether all of those reports have been provided to it.

– If Nasdaq’s proposed changes to the definition of the term “family member” are approved, Nasdaq-listed companies may want tweak the definition contained in their D&O questionnaires to reflect the changes.

The blog also urges companies to be cautious about eliminating references to Section 162(m) in D&O questionnaires for compensation committee members unless it’s clear that the committee isn’t required to administer any compensation arrangements under the transition rule.

Stinson’s blog is a reminder that although it may seem like proxy season just ended, it’s actually right around the corner. And to help you get ready, we’ve already scheduled our “Pat McGurn’s Forecast for 2020 Proxy Season” webcast for January 16th.

Today’s Open Commission Meeting: Cancelled

The SEC has cancelled the open meeting that it had previously scheduled for today to consider, among other things, adopting its “test the waters” for all proposal. No word on rescheduling yet.

I don’t know if this had anything to do with the decision to cancel the meeting, but all 5 Commissioners were grilled for several hours yesterday by the House Financial Services Committee.  Committee Chair Maxine Waters (D – Cal.) opened the hearing with a statement that accused the SEC of “not fulfilling its mission as Wall Street’s cop.” No doubt a good time was had by all.

ESG: Investors Want Companies to Align with Paris Climate Goals

According to this Ceres press release, a group of 200 socially conscious institutional investors with more than $6.5 trillion in AUM sent a letter to 47 large public companies asking them to align their climate change lobbying activities with the Paris Agreement’s goal of limiting global temperature increase to less than 2° C and pursue efforts to hold it at 1.5° C.

The group’s letter doesn’t just address the lobbying activities of the individual companies – it also calls upon them to review those of any trade associations to which they belong and engage with the organization if its activities are inconsistent with the Paris Agreement’s goals. If companies are unable to persuade the association to modify its position, then the signatories ask that they “consider taking the steps necessary to disassociate your company from these policies.”

John Jenkins

September 24, 2019

Quarterly Reporting & ESG: The CFA Institute Weighs In

This SEC Institute blog flags a recent CFA Institute member survey addressing quarterly reporting & ESG disclosure. This excerpt says that quarterly reports are more important to investors than earnings releases, and that those reports & releases should be provided simultaneously:

The majority of survey respondents state that investors heavily rely on earnings releases because they are generally issued before quarterly financial reports. Respondents, however, indicate that quarterly reports remain more important to investors than earnings releases.

These quarterly reports provide a structured information set that follows accounting standards and regulatory guidelines and include incremental financial statement disclosures and management discussion and analysis. In addition, quarterly reports offer greater investor protections as they are certified by the officers of the company, subject companies to greater legal liability, and are reviewed by company auditors.

As for timing, the majority of respondents believe quarterly reports and earnings releases should be provided simultaneously because this would reduce the significant amount of time spent reconciling the contents of earnings releases with those of quarterly reports as well as ensure that investors can ask better questions during earnings calls by having access to the more detailed information contained in the quarterly report. Roundtable participants agree with these positions.

I understand why investors might like earnings releases & SEC reports to hit simultaneously, but I think many lawyers would say that idea is a non-starter. The problem is that earnings calls can go in all sorts of directions, and a lot of companies want to have the opportunity to take a last look at their draft filings make sure that all topics addressed in the call are appropriately addressed in what gets filed with the SEC. If they’re not, companies risk hearing about it in a Staff comment.

By the way, the survey also says that investors have no taste whatsoever for alternatives to 10-Q reporting or less frequent reports, and want companies to continue to provide quarterly earnings guidance.

When it comes to ESG reporting, the survey says that investors are for it, but because ESG means different things to different people, securities regulators need to provide uniform standards in order for that disclosure to be meaningful.

SEC Enforcement: Who Needs a CFO When You Have a POA?

Every now and again you stumble across an SEC enforcement proceeding that can only be described as “goofy.” I think the recently announced action against former Viking Energy CEO Tom Simeo easily qualifies for that description. According to the SEC’s press release announcing the litigation, the CEO “created the false impression to the public that Viking had an experienced financial professional involved in its operations and financial reporting as its CFO, when in reality, the Company had no CFO.”

At one point, the company apparently did appoint Guangfang “Cecile” Yang as its CFO, but the SEC alleges that there’s no evidence that she actually functioned as CFO “from at least November 2014 through Yang’s purported resignation in July 2016.” While the company didn’t actually have a CFO, according to the SEC’s complaint, the CEO did have something else:

One day after her appointment as Viking’s CFO, Yang also executed a power of attorney in favor of Simeo, authorizing Simeo to affix Yang’s signature to any and all documents – including filings with the SEC – that Yang was required to review and sign as Viking’s CFO and board member. The Company never disclosed in its filings that Yang had executed a power of attorney in favor of Simeo.

Simeo allegedly put that POA to good use, liberally affixing the purported CFO’s signature to various SEC filings & certifications. For some reason, the SEC appears to have found that troubling. . . .

Transcript: “Secrets of the Corporate Secretary Department”

We’ve posted the transcript for our recent webcast: “Secrets of the Corporate Secretary Department.”

John Jenkins

September 23, 2019

SEC Oversight Hearing: “Come One, Come All!”

Tomorrow morning, the House Financial Services Committee will hold an oversight hearing on the SEC in which all 5 SEC Commissioners will participate. If nothing else, the logistics of that hearing should be interesting. According to this  Committee memorandum, here’s some of what’s on the agenda:

– The growth in private markets v. public markets
– Public company ESG disclosures
– The impact of the Supreme Court’s Kokesh decision on enforcement actions
– Application of the securities laws to cryptocurrencies

Although not of professional interest to most of our members, the SEC’s fiduciary rule is also on the agenda, & that may set off some fireworks.

About Those Private Markets. . .

It isn’t just Congress that’s interested in the growth of private v. public securities markets.  According to this Reuters article, the continuing growth of private securities markets is something that’s concerning SEC Chair Jay Clayton as well:

“Why are people waiting so long to access capital from our public markets?” Clayton said. “Is it because there’s so much capital in the private markets or are we too short-term oriented, (is there) too much cost associated with going public?”  Companies traditionally went public roughly six years after founding. Now, they often are not coming to market until 10 to 12 years after they were created, analysts said.

The NYT’s recent article on the impact of Airbnb’s delay in going public on its employee option-holders illustrates some of the real world consequences of companies deciding to postpone IPOs.

IPOs: VCs Eyeing “Direct Listing” Alternative

We’ve blogged about the potential of “direct listings” as an alternative to IPOs – and a couple of high-profile unicorns have already opted to take this path in lieu of an IPO.  Now this “Axios Pro Rata” article says that another important constituency is taking a hard look at direct listings:

Venture capital’s call for more direct listings is growing louder, with a group of big-name investors and tech company executives expected to attend a private, invite-only “symposium” on the matter next month at a hotel in San Francisco. Among those expected to speak are Benchmark’s Bill Gurley, who’s been banging this drum for a while, Sequoia Capital’s Mike Moritz, who just write about direct listings in the FT, and Spotify CFO Barry McCarthy, whose company went public via a direct listing last year.

Why it matters is that there’s a growing investor consensus that the traditional VC-backed IPO process is antiquated and broken — too often benefiting a high-net-worth bank clients and a small pool of mutual and hedge funds, at the expense of issuers.

Big-time investment banks haven’t exactly covered themselves in glory with some recent traditional IPO filings, so if the VCs calling the shots on many deals revolt, the IPO process could be in for a big shake-up.

John Jenkins

September 20, 2019

“Greenwishing”: Sustainability’s Greatest Threat?

Recently, Lawrence Heim – himself the author of the book “Killing Sustainability” – sent me this 17-page essay on “greenwishing.” It’s written by Duncan Austin – a former investment manager at a large sustainable investment firm – and traces the rise in investor & consumer interest in sustainability. While it seems like that might be a good thing, Duncan opines that pushing sustainability as a cost-free endeavor – or a half-baked profit-driver – is hurting the cause. Of course, here’s the current problem with trying to do it any other way:

Today, companies can only pursue sustainable behaviors that are profitable. This rules out many sustainability actions that corporations are uniquely positioned to offer–and used to provide–though certain initiatives can make the grade as long-term investments, with characteristic extended payback periods. Yet, corporate pronouncements of such long-term investment plans are precisely the klaxon calls that bring activist investors running to restore short-term profit-maximizing order.

So here we have some evidence that deep down, even the most ardent proponents of sustainability reporting know that those metrics are always going to be “second class” compared to financial figures (even though financials don’t reflect external costs). In other words, reporting on sustainability metrics isn’t the answer. Duncan calls on people in the sustainable business community to take a more collaborative approach – e.g. by prodding their companies to disclose political contributions, not lobbying against environmental protection policies and adding disclosure – but not the type we’ve been focused on:

The disclosure now required is not more detail about a company’s own greenhouse gas emissions or water use, but rather what companies publicly stand for regarding the changes in rules and prices needed for a more sustainable world–and what, exactly, they are doing about it. This is the critical question we must now ask our portfolio managers and corporations.

It’s an interesting idea and aligns with the BRT’s recent statements. A few companies are even forming “public policy” board committees (see this Diligent video). Investors & lawmakers will probably have to take up the mantle on this before directors would do anything drastic…but some companies might actually benefit from supporting legislation that “levels the playing field.”

Better The Devil You Know? ISS ESG Business Keeps Growing

Most of us primarily think of ISS as a proxy advisor, but it’s also been not-so-quietly building its ESG business since acquiring oekom research last year. According to this announcement, ISS ESG (the “responsible investment arm of ISS”) now employs nearly 400 people and offers a slew of new products:

– Climate research & impact services – to help investors “reflect & vote their views on a company’s climate-change risks, disclosure & performance”
– Indexing services – for investors who want to build turnkey or custom indexes
– Publication of a broad range of data about 7800 companies on the “FactSet” marketplace – which aggregates data & analysis from many vendors for investors to access
– Absolute & relative ESG rankings of companies – see our “ESG” Practice Area for more info on the types of ratings & methodologies

I’ve blogged that State Street already uses ISS data in its “R-Factor” scoring. And to further appeal to investors, the press release says that ISS is showing how its ratings align with the SASB reporting framework:

ISS ESG has mapped its ESG Corporate Rating against the Sustainability Accounting Standards Board’s (SASB) industry standards to identify the degree of alignment and completion of accounting standards and performance ratings. The mapping shows meaningful alignment with the SASB view on the relevance of ESG performance information for investors and the status of ESG materiality within the rating.

Furthermore, a mapping of the ESG Corporate Rating methodology against the recent EU taxonomy proposal also showed great alignment, enabling investors to prepare and align their investments towards the EU taxonomy objectives.

ISS: “Climate Change” Voting & Research

Of course, ISS is also capitalizing on E&S interest through its proxy advisory services. The “climate research & impact services” offered by ISS ESG include a “climate change” voting service that scores disclosure, climate performance & sector-specific materiality. It’s marketed as a service that helps investors create & act on their own customized voting policies – in other words, it’s not a set of ISS-dictated voting recommendations. But it’s probably worth noting that ISS’s annual policy survey included questions about director accountability for climate change risk, so maybe that will be coming in some form.

This ISS blog says that select research reports will now also include the “ISS Climate Awareness Scorecard.” The blog gives some info on how the research report & voting service scoring will work – e.g. here are some of the TCFD-based disclosure topics that will win brownie points:

– Climate change strategy
– Climate change risk management – and how the processes are integrated into the overall risk management program
– Climate change targets & metrics

Liz Dunshee

September 19, 2019

Executive Pay: CII Policy Overhaul Says to “Get Back to Basics”

I’ve blogged from time to time on that people are starting to question whether “pay-for-performance” is all it’s cracked up to be – and now you can add CII to its list of skeptics. Yesterday, the Council of Institutional Investors announced that it had overhauled its “Executive Compensation Policy” to urge companies to dial back the complexity of their plans and – when it comes to long-term incentives – to use at least a five-year period to measure performance.

While the old policy called for executive pay to be driven predominately by performance and said that salary should be no more than $1 million, the new policy suggests that some companies may be able to do without annual metric-based incentives – and says this about fixed pay:

Fixed pay is a legitimate element of senior executive compensation. Compensation committees should carefully consider and determine the right risk balance for the particular company and executive. It can be appropriate to emphasize fixed pay (which essentially has no risk for the employee) as a significant pay element, particularly where it makes sense to disincentivize “bet the company” risk taking and promote stability. Fixed pay also has the advantage of being easy to understand and value, for the company, the executive and shareholders. That said, compensation committees should set pay considering risk-adjusted value, and so, to the extent that fixed pay is a relatively large element, compensation committees need to moderate pay levels in comparison with what would be awarded with contingent, variable pay.

The new policy also broadens its approach to clawbacks – adding to the list of appropriate recovery events “personal misconduct or ethical issues that cause, or could cause, material reputational harm to the company and its shareholders.”

While some of these changes may be driven by the repeal of 162(m) (there’s no longer a tax advantage to keeping salaries low), CII hasn’t been shy about its concerns on murky pay-for-performance disclosure. And based on its reaction to the BRT’s recent emphasis on “stakeholders,” there may be some heartburn about ESG metrics that are starting to pop up in incentive plans…

Amy Borrus to Succeed Ken Bertsch as CII Leader Next Year

CII also recently announced that Amy Borrus, the organization’s current Deputy Director, will succeed Ken Bertsch as Executive Director when he retires in August 2020. Amy has served as CII’s Deputy Director since 2006 and was Interim Executive Director from June 2015 to March 2016.

Glass Lewis CEO KT Rabin to Depart

In other transition news, Glass Lewis announced that KT Rabin is stepping down after 12 years as CEO (she’ll continue as a member of the company’s Research Advisory Council).

The proxy advisor has appointed its co-founder, former President and Research Advisory Council member Kevin Cameron to the role of Executive Chair and has appointed Carrie Busch as President. Carrie ran Glass Lewis’s research department years ago and is now returning to the company.

Liz Dunshee

September 18, 2019

Governance Might Affect IPO Pricing After All

We’ve questioned whether institutional investors would ever be so concerned about a unicorn’s governance structure that they would pass on an IPO investment. Amid the plummeting expectations for the “We Company’s” valuation, this NYT article suggests investors may have found their limit. The company has made a few change in response – and this WSJ article says that all the fuss has even led to postponing the roadshow that was expected to occur this week.

Of course, another headline could be, “Investors Finding Their Limit With Unprofitable Companies,” but in this case, an overly optimistic valuation combined with things like trying to give founder & CEO Adam Nuemann extra voting rights into the afterlife just went too far. Here’s an excerpt from the NYT article describing the amended Form S-1 that the company filed last Friday:

The business would appoint a lead independent director and bar any member of Mr. Neumann’s family from the board. The special class of stock that Mr. Neumann owns will now have 10 votes per share, down from 20. Should he die or become permanently disabled, those shares will have only one vote apiece. Even so, Mr. Neumann will control a majority of shareholder votes after the change.

The board will also have the ability to choose Mr. Neumann’s successor; previously, succession was left to a three-person committee that included his wife, Rebekah.

And remember the concerns about the company’s related party transactions? There were a few changes there too:

And Mr. Neumann has pledged to give back any profits he makes from leasing properties to the We Company, transactions that prospective investors had highlighted as potential conflicts of interest.

Board Gender Diversity: Giving Credit Ratings a Lift?

A recent Moody’s study of over 1100 companies found a positive relationship between board gender diversity and credit ratings – but since the analysis didn’t examine other factors that might be affecting credit quality, it doesn’t prove causation. Here’s an excerpt:

The variance in board gender diversity is particularly evident at both ends of the rating spectrum. For instance, the five Aaa-rated companies in our cohort have the highest level of gender diversity on their boards, with women accounting for an average of 28% of their corporate directors. Women generally make up about a quarter of the boards of companies rated Baa1 or higher, with gender diversity largely declining by rating category to less than 5% for our two Ca-rated companies.

The study also points out that diversity mandates – while not common – might cause short-term business risks through board turnover, which could potentially create short-term credit risk:

For North American companies almost 75% would have to add at least one woman by the end of 2021. High levels of board turnover could signal a material change in corporate strategy or financial policies.While these changes could be both credit positive or credit negative, we tend to view the uncertainty as credit negative.

Board Gender Diversity: Russell 3000 Passes the 20% Milestone

For the first time ever, more than 20% of Russell 3000 board seats are occupied by women. That’s according to this Equilar announcement, which highlights the momentum in this area since Equilar first began publishing its quarterly “Gender Diversity Index” in 2017.

Liz Dunshee

September 17, 2019

Today: “16th Annual Executive Compensation Conference”

Today is the “16th Annual Executive Compensation Conference”; yesterday was the “Proxy Disclosure Conference” (for which the video archive is already posted). Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of or to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player). Here are the “Course Materials.”

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for or If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s conference agenda; times are Central.

How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your Bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see this “List: CLE Credit By State.”

Streamlined MD&As: How to Handle Retrospective Accounting Changes

Under the Fast Act, Item 303(a) now allows companies that provide three years’ worth of financials in their 10-K to omit from their MD&A a discussion of the earliest year. We’ve heard some companies ask how they should handle disclosure if they’ve retrospectively adopted a new accounting principle for that earliest year. These notes from a recent meeting between the CAQ & Corp Fin Staff shed some light on the SEC’s expectations (see pg. 3):

The Committee asked the staff how registrants should consider the effect of retrospective changes in omitting the earliest year discussion, given that registrants must disclose the location in the prior filing where the disclosure can be found. The staff noted that this amendment does not change the standard that applies to all of MD&A – a registrant shall provide such other information that it believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations.

Accordingly, where there has been a retrospective change, a registrant should assess whether the previously filed disclosure that it is considering omitting and making reference to continues to provide the information necessary to understand the registrant’s financial condition, changes in financial condition and results of operations.

XBRL: What’s It Good For?

XBRL has been around 10 years! A lot of people would say it’s still good for absolutely nothing – among other reasons, because it requires extra software to consume, doesn’t cover non-GAAP disclosures and can be error-prone. But there are a few cheerleaders. This FEI interview gives some insight into how Famous Dave’s CFO Paul Malazita is using data tags to evaluate acquisition targets and the company’s competitive position:

We’re working with a third-party company right now to use their software to build out a peer set of companies with certain metrics that we look at in the restaurant industry for the purposes of setting up templates and data for when we perform our annual Goodwill impairment analysis. It also helps us to understand certain transaction multiples. We pay close attention to what’s going on in our industry. Why certain brands traded at different multiples is not necessarily apparent at the outset.

Being able to use XBRL data to normalize the company, looking at the strength of their balance sheet, the strength of their revenues, their profitability metrics, things like that, really starts to get a sense of what our company is truly worth. We’re a public company. But, oftentimes, there is intrinsic value that might not be captured by the market. As we look either into acquiring other companies or what we look like in the market, using XBRL data is extremely helpful in being able to do those analyses.

Also, our note disclosures and financial statements are compared across our industry using software that provides search function on XBRL filings. So, for example, when I have something come up in a certain quarter and we’ve never had to disclose it before, I go out and search through XBRL filings to find similar companies within our industry that have had to present certain similar things in the past. And that really helps me in crafting our disclosures to make sure that we’re complying with the spirit of GAAP and providing the information that we’re supposed to be providing.

Here’s another tip from Paul: moving away from narrative disclosure in 10-Qs and 10-Ks and more toward a tabular format doesn’t just make the report easier to read for normal humans – it also makes it easier (and presumably less expensive) to add the XBRL tags.

Liz Dunshee