In a post on the Advisor’s Blog on CompensationStandards.com, Liz highlights the early trends in pay versus performance disclosure courtesy of Compensation Advisory Partners. Their new memo summarizes early trends for S&P 500 disclosures. As we had expected based on our experience with preparing model disclosure, the pay versus performance disclosure is long, ranging from three to seven pages in the proxy statement, with an average of 4.3 pages. Most of the early filers included the disclosure near their CEO pay ratio disclosure, outside of the CD&A. Further, most of the companies used an industry index for their peer group TSR comparison, rather than a self-selected peer group.
Be sure to check out the webcast today at 2:00 pm Eastern tomorrow over on CompensationStandards.com – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest areas of focus for compensation committees, including early trends in pay versus performance disclosures and say-on-pay.
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Over the weekend, we marked three years since COVID-19 was officially declared a pandemic by the World Health Organization. Despite the passage of time, my memories of the weeks leading up to that announcement are very clear, as we all grappled with how best to protect ourselves and our families in the face of a distinct lack of information and what was then very little government support. What is perhaps most striking looking back now on those events three years ago is our complete lack of recognition at the time of how the pandemic would go on to change our lives forever. Most importantly, we should take this moment to grieve for the lives lost (and yet to be lost) because of COVID-19. Finally, we wonder when this pandemic will ever end.
As we navigate yet another period of market volatility that, at least in part, traces its roots to the wide-ranging impacts of the pandemic, the measures taken to prevent the spread of COVID-19 and the government’s efforts to avert economic calamity, there are some important lessons to consider for our daily practice:
1. Markets Worked. In the darkest days of 2020, when markets were swooning, companies were still able to raise capital and, in quite a few cases, set themselves up for extraordinary business success as the pandemic raged on. For some, that success proved to be short-lived as the pandemic conditions waned, but at least they got their day in the sun. In short, markets worked in the face of crisis, which is a comforting reminder as we face yet another financial crisis this morning.
2. Disclosure Worked. One of the highlights for me in the early days of the pandemic was how companies stepped up and sought to provide effective disclosure to investors, even in the face of extraordinary uncertainty. While it may not have been possible to provide guidance at a time when economic activity had ground to a halt, companies tried to provide whatever current and forward-looking information that they could to keep investors informed about developments, and the SEC and its staff did a good job of providing guidance on how that level of transparency could best be accomplished.
3. We Worked. While it is easy to characterize the last three years of the pandemic as a very fractured time in our government and society, there was a lot of collective effort that sustained us through those tough times. Teachers and students rapidly pivoted to a remote learning environment, officer workers shifted quickly to work from home mode and our frontline workers, first responders, soldiers and healthcare workers put their lives on the line everyday to not let the pandemic defeat us. Incredibly, a vaccine was developed and deployed very quickly to avert total calamity. While, for a variety of reasons, the country did not seem to come together in the same sort of patriotic unity that we saw during World War II or after 9/11, we still somehow managed to get it done. And for that, we should all be very grateful.
During the preparation and review of Form 10-K filings this annual reporting season, the question invariably arose as to what still needed to be said about the COVID-19 pandemic. The surprising answer was that, in many cases, the COVID-19 pandemic continues to impact the operations of public companies in a wide variety of ways and therefore disclosure about the pandemic, principally in MD&A and risk factors, continues to be necessary.
While I am certain that we will not be talking about the COVID-19 pandemic forever, it is important to keep providing the disclosure that addresses the trends, risks and uncertainties arising from the pandemic that continue to this day. One thing to keep in mind is that now that we have experienced the COVID-19 pandemic, we have a much greater appreciation for the risks associated with any global pandemic, and that recognition should be reflected in risk factor disclosure going forward, thereby avoiding the “hypothetical” risk factor situation in future filings.
As we strap in for what could be a wild ride in the markets this week, SEC Chair Gary Gensler released the following (somewhat cryptic) statement last night:
“In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly. Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.”
While this seems to be stating the obvious, we will take it as reassurance that the SEC is on the case and monitoring activities in the markets as they happen.
We received a bunch of memos over the weekend on the Silicon Valley Bank situation, and we are posting those memos and other materials relating to SVB’s closure in our “Financial Institutions Practice Area.” There’s also a brief post on The Mentor Blog this morning about some of the 8-K filings that companies made on Friday concerning the situation.
Hopefully, the joint statement issued by the Fed, FDIC & Treasury last night that depositors will be made whole and have access to their money today will take the edge off the crisis that erupted late last week, but we’ll stay tuned and post additional resources when we receive them.
Last month, Liz blogged about the SEC’s recent enforcement action against Activision-Blizzard, which is the latest action premised solely on an issuer’s alleged deficient disclosure controls unaccompanied by a related disclosure violation. This Shearman memo reviews that proceeding and another recent SEC action premised solely on deficient controls and offers up some lessons that public companies should draw from those enforcement actions. This excerpt says that companies should look at the relationship between disclosure controls and the disclosures contained in their SEC filings as a two-way street:
Treat the relationship between disclosure controls and disclosure content as an open feedback loop rather than as a one-way communication channel. Disclosure controls are often viewed as informing disclosure content, but not the other way around. Consider reviewing your existing disclosure content with an eye towards identifying key topics and risks and then compare those to your disclosure processes.
Is each of these topics and risks covered by a corresponding stakeholder on your disclosure committee? Are disclosure committee members collecting information relevant to assessment of these topics and risks? What information are you collecting from business unit leaders who are not directly represented on the disclosure committee, and what procedures do you have in place to ensure that relevant information is fed into the disclosure process? Allowing feedback from disclosure content to disclosure controls also means being mindful of the disclosure controls implications when adding new risk factors.
The memo disagrees with contentions that the Activision-Blizzard proceeding will require companies to collect all information that could potentially be relevant to disclosures about an operational risk once it decides that the risk merits a reference in the risk factors section of its filings. Instead, the authors expect that the SEC will pursue these purely disclosure controls related proceedings selectively, “in matters (1) of broader public interest, or (2) where the SEC sees a specific opportunity to highlight an example of information it believes is getting insufficient attention for disclosure purposes.”
Inflation, rising interest rates, recession concerns & market volatility have provided activists with a target-rich environment this year, and the implementation of universal proxy gives them a key tool to help capitalize on those opportunities. That raises the stakes when it comes to shareholder engagement, and this Wilson Sonsini memo has some thoughts about how boards and management teams can most effectively structure their engagement efforts. This excerpt addresses two of the key components for successful engagement in 2023:
– Proactively enhancing governance practices. Governance is almost never the central feature of an activism campaign, but it is frequently used as a wedge issue by activists to paint a board of directors as entrenched and out of touch. As such, companies should regularly evaluate their governance practices and look for proactive measures—such as the adoption of majority voting in director elections, the elimination of supermajority vote provisions, and even, in appropriate circumstances, voluntary declassification of the board—that can be taken to show the board’s deliberate approach to governance. Shareholder engagement is a long game, and years of thoughtful evolution can reassure shareholders that the board prioritizes good governance and has sufficient internal will to make changes when they are warranted.
– Focusing on board composition and refreshment. A robust approach to board refreshment has become table stakes for the most sophisticated companies when it comes to engagement. Institutional shareholders appreciate seeing changes in board composition and view a regular cadence of new directors joining a board as evidence of a healthy boardroom dynamic. As noted above, the universal proxy rules have cast a brighter light on the skills and qualifications of each director individually. As such, boards should be conscious of, and seek to proactively address, weaknesses that an activist might seek to exploit. This is particularly true at companies that have seen an erosion in investor support for directors and say-on-pay proposals.
Other areas of emphasis in shareholder engagements include clearly articulating the company’s strategy for value creation, considering efforts to boost shareholder value, and understanding the views of the company’s shareholder base. Perhaps most important of all, the memo says that companies need to listen actively and be open to change, because shareholders—especially activist shareholders—want to know that the board takes their views seriously and isn’t “willfully blind” to alternatives.
The latest issue of the Shareholder Service Optimizer has some timely tips for making your annual meeting run smoothly this year. Here are a couple of important ones:
– Make sure that no one on your Meeting Team agrees to accept “Floor Votes” as a way to head off a formal shareholder proposal: Please be sure to review our article on this crazy process, which a few naïve companies foolishly agree to every year – based on the often-mistaken notion that there will be too few voters to worry about. Brush up here: The Best, Worst and Weirdest Things We’ve Seen in the 2019 Meeting Season to Date
– Beware: Shareholder Proponents, and activists in general, will be monitoring VSMs and paying special attention to the Q&A period, and to whether shareholders are being given a fair chance to ask questions and suffcient time to cast or change their votes online. Here’s a sample ‘run of show’ and tips for the Q&A to avoid being publicly named and shamed: A Sample “Run-Of-Show” For A Satisfying And Successful VSM & The Virtual Shareholder Meeting Q&A – and How to Tackle It
The article also says that the vast majority of companies that went the virtual-only route last year are doing the same this year, and it also reminds companies to identify their shareholder proponents by name. This year, failing to identify the lead proponent could result in a negative recommendation from Glass-Lewis on the chair of the governance committee.
Speaking of annual meetings, don’t forget to attend our “Conduct of the Annual Meeting” webcast on March 30th for more timely tips to help you manage your annual meeting.
The Jim Hamilton Blog recently flagged the competing efforts of Democrats & Republicans on Capitol Hill to influence the substance of the SEC’s climate disclosure rules. Republicans continue to fixate on questioning the SEC’s authority to adopt these rules as proposed, while this excerpt indicates that some Democratic lawmakers continue to push hard for Scope 3 disclosures:
Democrat lawmakers’ recent letter to the SEC specifically addressed another topic the SEC may be mulling as it finalizes the climate risk disclosure regulation—Scope 3 emissions, or what might be considered the proverbial electrified third rail of climate disclosure. The Democrats’ letter said overall that they want the SEC to move forward with a “strong climate disclosure rule without delay.”
While the letter worried about the SEC potentially raising the threshold for disclosure (the proposal pegged the threshold at 1 percent of the specified line-item financial metric), the letter was even more concerned about the prospect that the SEC could weaken or even eliminate Scope 3 emissions disclosures from the final regulation.
The Democrats’ letter references recent Wall Street Journal and Politico reports that the SEC is considering easing the final version of its rules – including possibly eliminating the proposed Scope 3 disclosure requirement – and is clearly an attempt to keep the agency from going wobbly on the final version of its rules.
But with recent reports suggesting that political support for Scope 3 disclosures among Democrats may be on the wane, perhaps it’s worth noting that the letter was signed by only eight senators and 43 members of Congress. That’s a lot fewer than the 130+ Dems who signed an earlier letter supporting the SEC’s rulemaking last summer,