October 14, 2020

D&O Questionnaires: Few Changes for 2021 Proxy Season

This Stinson blog highlights things to think about for the upcoming proxy season – meeting format, issuer status, recent SEC guidance, and other developments. Here’s an excerpt explaining that very few changes will be needed to D&O questionnaires:

As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition rule. We continue to urge caution in eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members unless it is clear the compensation committee is not required to administer any compensation arrangements under the transition rule. The same can be said for eliminating references to §162(m) in compensation committee charters.

In February 2020, the SEC approved a Nasdaq proposal to amend the definition of “Family Member” used in its corporate governance rules, which is incorporated into the definition of “Independent Director.” The definition will no longer include step-children and will include a carve out for domestic employees who share a director’s home. The issuer’s board must still affirmatively determine that no relationship exists that would interfere with a director’s ability to exercise independent judgment.

As Lynn recently blogged, companies may want to consider adding a “demographics” question in order to gather diversity info – but undertaking that kind of addition is less straightforward than it might seem at first blush. This Dorsey blog offers a sample question.

Misleading Disclosures: SEC Enforcement is Watching…Everything

Enforcement Division Director Stephanie Avakian recently gave this speech to recap actions over the past 3 years (also see the speech from SEC Chair Jay Clayton) – the walk down memory lane touched on these headline-grabbing allegations:

– Fraudulent accounting practices intended to misrepresent a company’s underlying financial condition, as in the Commission’s actions against Theranos, Hertz, and Penn West and their former executives

– Intentionally distorted non-GAAP metrics and key performance indicators, as in the Commission’s actions against Wells Fargo, Fiat Chrysler, Valeant, and Walgreens

– Misrepresentations or omissions in connection with risk factors, as in the Commission’s actions against Facebook and Mylan

– Materially misleading and incomplete disclosures, as in the Commission’s actions against Nissan and Volkswagen and their former executives

Stephanie acknowledged that the Division’s focus on financial fraud isn’t new – but she emphasized the expansion of the types of info that Enforcement is tracking. If her remarks had a theme song, it would be Rockwell’s “Somebody’s Watching Me” – and it’s a reminder to companies to watch all forms of disclosure. Here’s an excerpt:

Our focus on financial fraud and issuer disclosure cases resulted in some significant changes in how we approach identifying and investigating potential misconduct. Our proactive efforts to identify cases has employed a variety of research, approaches, internal and external tools, and other information sets. We routinely look at all public information about an issuer – statements made by a company or its officers, in filings, during investor presentations, in tweets or blog posts; related commentary by others including analysts, shorts, competitors, shareholders – to develop a deep understanding of the company’s reporting environment and industry. This is not a low cost investment, but it has provided substantial value in identifying potential financial fraud.

Further, in appropriate cases, we are employing strategies to streamline these investigations in an effort to substantially accelerate the pace of our investigations. This has come through a purposeful effort by our investigative teams to efficiently triage issues, increase staffing, make more targeted requests at the outset, substantively engage early with relevant parties, and leverage cooperation. We have already seen some success in our acceleration efforts and expect to see those successes continue in the near and long term.

This recap actually occurred before the flurry of enforcement activity that we saw a couple of weeks ago – so you can add those settlements to the tally. Also see this Davis Polk memo – noting that the speech signaled that the SEC may seek increased penalties in future insider trading cases, rather than disgorgement.

Corporate Governance: The “Acronym” Challenge

I love a good quiz – and this acronym challenge from Soundboard Governance is a fun one. Can you decipher the 40 selections from the corporate governance field’s “alphabet soup”? I got over 30 and called it a win.

Liz Dunshee