Over the past month or so, I have done a lot of speaking about the SEC’s new pay versus performance rules (including our excellent program on CompensationStandards.com last week), and one consistent practice pointer has been to line up your outside valuation service providers now.
Just as everyone seems to be doing their holiday shopping early this year, folks dealing with the pay versus performance rules have been rushing out to engage with outside valuation firms for the purpose of valuing equity awards to compute “compensation actually paid.” Outside valuation firms may be necessary for this purpose because your equity awards may require complex valuation approaches that require significant computer firepower and particular expertise, so it may not be possible for your in-house financial reporting and accounting groups to do the work on their own.
But we have a scarcity problem here, because there are only so many firms that do this sort of valuation work, and there are only so many hours in the day in which they can run their models, so it is important to claim your spot in the queue now before all of the spots are claimed. Reach out today to the firm that you regularly work with, or establish a relationship with a firm if you have not worked with one before, so that you will be ready to compute “compensation actually paid” when the time comes.
Thank you to all of the members of our military – and their family members – for your service & sacrifice for our country. While we are mindful of your contributions every day, they are particularly front-of-mind each year on Veterans Day.
More & more companies are also recognizing veteran status as an element of diversity. In its recently published 2022 Board Index, Spencer Stuart found that 72% of new directors who joined S&P 500 boards in 2022 were from historically underrepresented groups and that 18% of the incoming class was below age 50. Spencer Stuart also observed that disclosure of more expansive “diversity” dimensions are becoming more common for S&P 500 boards. Here’s an excerpt with more detail:
– Seventy-four boards (15%) included LGBTQ+ disclosure in their proxy statement, more than twice as many as in 2021 (32 boards, 6%). This year, 29 boards (6%) identified the LGBTQ+ status of individual directors. On these boards, a total of 45 LGBTQ+ directors were disclosed: 27 unnamed and 18 named, more than three times the number who were named in 2021 (5).
– Twenty-two boards disclosed having a military veteran on their board, up from three in 2021.
– One board disclosed having a director with disabilities.
A search of Form 10-Ks on Edgar also shows that companies are incorporating veteran recruitment as part of DEI programs, and reflecting that in human capital management disclosure. Here’s an example from page 13 of C3.ai’s latest Form 10-K:
Our talent acquisition team engages various constituency groups to recruit qualified under-represented minorities, women, and military veterans to job opportunities. We host tech talks and workshops at top universities across the nation with the Women in Computer Science Associations, the Society of Women in Engineering, the Society of Latinx Engineers, and the Society of Black Engineers. We joined with BreakLine to help support hiring military veterans. Our goal is to find and recruit the best talent in the world.
Whether the service members in your life are continuing a military career or have gone on to join the corporate workforce, please take time today to honor & celebrate them.
As recently as 5 years ago, the director onboarding process at many companies was pretty basic: orientation, review of corporate governance documents & business info, and some management meetings. But with a growing number of first-time directors – and expectations that boards will oversee amorphous E&S issues, corporate culture, cybersecurity, macro-economic & political events – director onboarding has become more important and has expanded in scope.
A WSJ article from earlier this week outlines “new” strategies that can make director onboarding more effective. I was very happy to see Primerica’s Stacy Geer as a source on how she’s used virtual meetings to update their onboarding program. Here’s an excerpt:
She says that the flexibility of online meetings meant the company no longer needs to line up all meetings with management over one or two days. Its new program lasts around a month and includes 15 to 20 meetings with executives, covering topics including strategy, enterprise risk, the role of a director and director liability, she says. It also includes an overview of the board portal and a greater focus on ESG matters, the role of a corporation, and diversity, equity and inclusion.
Other recommendations from the article include providing more opportunities for directors to interact with employees and get a feel for company culture, and education on current macro-factors that are affecting the company’s business and are of interest to shareholders.
Corporate governance is a journey. Some companies are further down the path on this particular aspect, and have been employing a lot of the practices mentioned in this article for years – e.g., setting up a months-long program that arranges for a board mentor, site visits, etc. In fact, our “Director Onboarding” checklist reflects most of the recommendations from the article. So, if you’re not already incorporating some or all of these elements in your program, you wouldn’t be going too far out on a limb to suggest a change, if you think it would help your board.
If you’re already a leader, please drop me a note with things that have worked particularly well for you, and we’ll add them to our checklist to help the community! Email me at liz@thecorporatecounsel.net.
It’s no secret that certain folks at the SEC have been particularly focused on auditor independence as of late. Acting Chief Accountant Paul Munter has issued a couple of statements on the topic, and the Division of Enforcement is casting a net for gatekeeper wrongdoing. One thing that would seem to pretty obviously undercut auditor independence would be to have your independent auditor participate in the CFO interview process, but the SEC brought an enforcement action just a few weeks ago that alleges that an audit partner did this…which would be problematic, if true.
Meanwhile, the Center for Audit Quality has been sharing a series of videos & analyses on the value of auditor independence – including this post in support of the current model of auditor independence, which stems from the Sarbanes-Oxley Act and related reforms.
The CAQ says that criticisms of the current model fail to consider vital regulatory & voluntary components that safeguard auditor independence. One of these factors is the role of the audit committee. Here’s an excerpt:
In addition to the many safeguards that auditors must follow, the Sarbanes-Oxley Act had the wisdom to reinforce the role of public company boards of directors and their audit committee. SOX requires that the audit committee, not the CEO or CFO, maintain sole responsibility for the hiring, firing, compensation of, and oversight of the external auditor. Audit committee oversight is an important ingredient of auditor independence; external auditors are not reporting to the employees whose work they are reviewing but instead to a committee with fiduciary responsibilities to the company and its investors.
With 20 years of SOX under our belts, it is sometimes easy to be lulled into complacency and forget how critical it is to closely monitor the independence of the audit committee. This CAQ post is a reminder of why it matters – and the SEC’s current enforcement focus shows that now is not the time to let down your guard on this topic.
In a new 15-minute episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Sara Jensen, who is Assistant Corporate Secretary for Co-Op Solutions, which is the largest credit union-owned interbank network in the US. I very much enjoyed hearing Sara’s unique perspectives on supporting the board of a cooperative, and how she has made a career in corporate governance coming from a non-lawyer background.
In response to the SEC’s newly effective “universal proxy card” rules, some companies have been tightening up their bylaws (as explained in this 12-minute podcast that John taped with Hunton Andrews Kurth’s Steve Haas). We also discussed the need for bylaw amendments at our recent “Proxy Disclosure Conference” with Davis Polk’s Ning Chiu, Okapi Partners’ Bruce Goldfarb, SGP’s Rob Main and Wachtell’s Sabastian Niles – the consensus there was that bylaw amendments aren’t necessary for every company at this time, but many companies are using this as an opportunity to conduct a review.
A new case shows the risk in being too aggressive. In late October, an activist hedge fund sued a company in the Delaware Court of Chancery over a series of allegedly “draconian” advance bylaw amendments – which require an activist to provide extra disclosures about the hedge fund’s holdings as well as the fund’s limited partners’ holdings. The activist is asking the court to invalidate those provisions, which would reveal the identity of investors that are supporting activists. We don’t know the outcome yet of this case, and it will be worth watching.
Michael Levin at The Activist Investor shared this analysis of the provisions from an activist’s perspective – along with other examples that may go too far, such as requiring activist-appointed directors to resign from the board if they violate a company policy. He lays out activist-perspective concerns with how these provisions could be applied:
Also, we’re talking about duly-elected directors here. We can accept (but don’t like) that a director agrees to these terms as part of a settlement of a proxy contest, or otherwise accepts an invitation to join a BoD. These terms become part of the negotiation between the company and an activist.
Consider a director that wins an election, though. A company with these bylaw terms can pretty much remove directors at its will. It would approve a new policy that the director would violate, then accept the resignation that it required as a condition to even stand for election.
Sure, unnecessary and intrusive disclosure is an expensive hassle. We find limits on what a duly-elected director can do to represent shareholder interests, including automatic enforcement at the discretion of company leadership, much worse.
Lawrence has been blogging on PracticalESG.com about “greenwashing” investigations and consumer lawsuits. This “D&O Diary” blog from RT ProExec’s Kevin LaCroix highlights another flavor of litigation that (not surprisingly) is becoming more common: securities class action lawsuits that allege that company’s have misrepresented their ESG progress.
Kevin describes a recent case that came about after a short report targeted a company that positioned itself as an ESG leader. Here are thoughts from Kevin:
All of these examples (and many others I have previously documented on this site) underscore a point I have made many times, which is that it is not the ESG laggards that are attracting D&O claims. The companies getting hit with ESG-related claims are in fact companies that have taken the ESG initiative. All of this is inconsistent with the D&O insurance industry’s current operating premise about ESG, which is that companies that are supposedly “good” on ESG are better D&O risks and therefore entitled to some (usually unspecified) underwriting advantage or break. All of the available data suggests that this premise is at a minimum incomplete and arguably misguided. The fact is that ESG as a D&O risk is a much more nuanced and multilayered issue than the D&O marketplace have been assuming.
I find this lawsuit interesting to contemplate in the context of a financial marketplace environment where companies are under pressure to demonstrate their ESG credentials. Activist investors, institutional investors, and, yes, D&O insurance underwriters, are creating an environment where companies are motivated to wrap themselves in the ESG flag. The danger is that companies eager to demonstrate their ESG virtues may be vulnerable to allegations of exaggeration, or execution error, or failure to follow through. All of these concerns may, as this case show, translate into D&O claims risk. For that reason, as I have said, even if the ESG laggards may be vulnerable to D&O claims, the companies taking the ESG initiative also may face D&O claims risk, perhaps even more so than the ESG laggards.
The uptick in greenwashing allegations shows that ESG disclosure controls are not a “nice to have” – they are necessary from a risk perspective. We discussed ESG litigation & investigation risks at our 1st Annual Practical ESG Conference a couple of weeks ago, with guidance delivered by Morrison Foerster’s Jina Choi, Beveridge & Diamond’s John Cruden, Ecolumix’s Doug Parker and Baker Mckenzie’s Peter Tomczak. The on-demand video archive & transcript of that conference is still available for purchase by emailing sales@ccrcorp.com. Members of PracticalESG.com can also take advantage of the practical checklists and other resources on that site, which walk through how to verify data, as well as give tips for how to deliver on your claims.
As you face down the new Item 402(v) disclosure requirements for your 2023 proxy statement, join us tomorrow on CompensationStandards.com for a 3-hour special session, “Tackling Your Pay Vs. Performance Disclosures.” This is a 3-part, 3-hour special session that will cover:
1. Navigating Interpretive Issues – we are already getting lots of questions in our Q&A forum about how to apply the new rules, and we know that new issues are arising daily. Hear practitioner guidance and any SEC updates that you need to know – from Sidley’s Sonia Barros, Compensia’s Mark Borges, WilmerHale’s Meredith Cross, EY’s Mark Kronforst, and Morrison Foerster’s Dave Lynn – including what you’ll need to tell your board and executives.
2. Big Picture Impact – how will the disclosure mandate affect say-on-pay models and shareholder engagements? This session will provide context and pointers for bolstering executive compensation & compensation committee support during proxy season – featuring ISS Corporate Solutions’ Jun Frank, Morrison Foerster’s Dave Lynn, and SGP’s Rob Main.
3. Key Learnings From Our Sample – attendees of this event will get first access to our sample disclosures, prepared by Mark Borges and Dave Lynn. Hear “lessons learned” from their drafting effort that will guide you through your own process and jump start your disclosures. Mark & Dave will be joined by Gibson Dunn’s Ron Mueller and Fenwick’s Liz Gartland for this discussion.
If you’ve signed up to access this event, you’ll access the video stream tomorrow by clicking through where indicated on the event page and entering the email address that you used to register. If you have any questions, please email our Event Manager, Victoria Newton, at vnewton@ccrcorp.com.
This event is available at a reduced rate of only $295 for anyone who is already a CompensationStandards.com member or who registered for the live or on-demand version of our “Proxy Disclosure & 19th Annual Executive Compensation Conferences.” You can still register online today for the “special session” and get the CompensationStandards.com member rate. Beginning tonight, you can register by emailing sales@ccrcorp.com, up until 12:30 pm Eastern tomorrow.
For non-members, the cost to attend is $595. You can register online if you sign up before 4pm Eastern today (after that, email sales@ccrcorp.com… you can sign up as late as 12:30 pm Eastern tomorrow).
If you’re not yet a member, try a no-risk trial now. We’ll be continuing to add practical guidance on this topic to CompensationStandards.com as disclosure hurdles & consequences come to light – such as this great podcast that Dave already taped with Gibson Dunn’s Ron Mueller about “first impressions” of the rule, emerging interpretive issues, possible pitfalls, and more.
All that to say, a CompensationStandards.com membership be an essential ongoing resource if you are involved with pay vs. performance. Plus, our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. Register for the “special session” here if you are a non-member and didn’t attend our Conference.
As a bonus, you also can still get the discounted special session rate if you sign up for on-demand access to the Conference archives, which you can do by emailing sales@ccrcorp.com. The practical guidance that was provided at these events will help you navigate shareholder activism, executive compensation, ESG disclosures, compensation committee responsibilities, and more in 2023.
Snow is in the forecast here this week, which is a reminder that annual report season will soon be upon us – and it’s time to start assessing whether you need to update your risk factors. This 14-page memo from White & Case gives color on 10 macro developments that may affect your risk factors this year:
1. Market Conditions
2. Inflation & Interest Rates
3. Covid-19 Impact
4. ESG Issues
5. Ukraine Conflict
6. Cybersecurity
7. Supply Chain Disruptions
8. Human Capital & Labor Issues
9. Regulatory Developments (e.g., the Inflation Reduction Act)
10. Trade Sanctions
The memo goes on to give 4 important drafting reminders – e.g., avoiding hypotheticals. For additional practical tips on that front, see our article from the January-February 2018 issue of The Corporate Counsel newsletter on “Best Practices for Drafting Your Risk Factors” – and our “Risk Factors Disclosure” Handbook. Also see the memos we’ve posted on “Risk Trends” in our “Risk Management” Practice Area. If you don’t already have access to these resources, email sales@ccrcorp.com.
Korn Ferry & Gibson Dunn recently published this survey of board evaluation practices in the S&P 500, based on public disclosures. Anthony Goodman, who leads Korn Ferry’s Board Effectiveness Practice, shared these highlights from the 440 companies that provided details in their proxy statements:
– 60% are evaluating individual directors, not just the board or its committees
– 53% are using interviews as part of the process, rather than relying purely on surveys
– 32% use a third party evaluator either annually or periodically
While individual director evaluations appear to be getting more common, Anthony notes that it’s rare for them to yield constructive feedback for directors. Using independent evaluators to conduct interviews can help overcome that challenge – and make it more likely that the board & individuals receive candid, nuanced & actionable feedback.
Right now, the survey concludes that the lack of feedback could be hampering the usefulness of board evaluations: only 23% of companies disclosed that they made changes as a result of the evaluation.
That seems low, but it’s important to keep in mind that there are a variety of reasons why companies might not spell out changes that resulted from the evaluation process – so a lack of disclosure doesn’t necessarily prove that changes aren’t happening. Yet, there are ways to make the board’s efforts at “continuous improvement” more transparent. Anthony suggests describing:
– An overview of the process
– Key takeaways
– Updates on the key takeaways from prior year evaluations