September 6, 2019

Governance: Closing the Board Information Gap

With everybody debating big picture issues like corporate purpose & stakeholder v. shareholder interests, this “Ethical Boardroom” article by Harvard’s Stephen Davis is a reminder that when it comes to good governance, there are more fundamental issues that need to be addressed – like making sure directors have the information they need to do their jobs.

The article points out that directors are “on the short end of a massive information imbalance.” They’re entirely dependent on management for their information flow, and even when they retain outside advisors, those advisors may be primarily loyal to management.  This disparity gives management a routine advantage in influencing what gets on the board’s agenda and how matters are addressed.  This excerpt says that the solution to this information imbalance may be an independent staff serving only the board:

Cementing the information imbalance is the fact that the typical company board has no everyday dedicated staff. Instead, directors rely on an executive – usually a company secretary or general counsel – who is accountable to and works for management. These officers are often the silent heroes of corporate life, as they attend to multiple, sometimes conflicting, constituencies and do so with high ethics and professionalism.

But make no mistake: they are not employed by and for the board. Indeed, outside observers would find it hard to fathom how companies go to such lengths to recruit great independent directors – only to make them largely dependent for help on the team they are supposed to oversee.

One of the interesting things that the article points out is that some companies have taken steps in this direction – although most of them appear to have done so in response to massive scandals.  In that regard, in the wake of the Carlos Ghosn scandal, Nissan announced that it would establish an “office of the board” to improve the board’s ability to access information independently.

LIBOR Transition: FASB Exposure Draft Would Ease Accounting Burden

This recent blog from Stinson’s Steve Quinlivan flags a new FASB exposure draft that would make life a little easier when it comes to accounting for the impact of the upcoming elimination of LIBOR.  Why should you care? Well, here’s an excerpt about the accounting hurdles companies could face absent the proposed relief:

Without any relief by FASB any contract modifications resulting from contract modification to implement a new reference rate would be required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The application of existing accounting standards on modifications could be costly and burdensome due to the significant volume of affected contracts and the compressed time frame for making contract modifications.

In addition, changes in a reference rate could disallow the application of certain hedge accounting guidance, and certain hedge relationships may not qualify as highly effective during the period of the market-wide transition to a replacement rate. The inability to apply hedge accounting because of reference rate reform would result in financial reporting outcomes that would not reflect entities’ intended hedging strategies when those strategies continue to operate as effective hedges.

The proposed ASU would simplify accounting analyses under current GAAP for contract modifications if qualifying criteria are met & would allow hedging relationships to continue without de-designation as a result of certain LIBOR reform-related changes in their critical terms.

The Martin Act Gets Its Claws Sharpened

I’ve previously blogged about New York’s formidable Martin Act, which the NY AG uses as the basis to investigate and prosecute . . . well . . . just about anything. Last year, the statute had its claws trimmed when the NY Court of Appeals pared back its limitations period for non-scienter based fraud claims from 6 years to 3 years. But this New York Law Journal article reports that last month, NY Governor Andrew Cuomo signed legislation that essentially undid the Court’s decision & restored the 6 year statute of limitations.

John Jenkins