One of the topics that we will discuss later today on our very timely CompensationStandards.com webcast is all of the many considerations that go into adopting or amending your clawback policy to be compliant with the requirements of the NYSE and Nasdaq that will be effective on October 2, 2023. Companies will have until December 1, 2023 to adopt compliant clawback policies. While the requirements for the policy that are dictated by SEC Rule 10D-1 are very specific (and restrictive), the actual implementation of clawback provisions in response to those requirements is proving to be somewhat complex for listed companies.
This new alert from Gunster highlights the many decisions that companies will have to make as they seek to adopt or update clawback policies in light of the new listing requirements. The alert notes the following regarding updates to existing policies:
The new rules are complex and require a listed company to take a number of steps in order to amend existing clawback policies or provisions (contained in compensation plans or otherwise) or, if none, to adopt and implement one or more compliant policies in a timely manner. The following is a summary of the key steps to be taken and decisions to be made.
If your company has an existing clawback policy, you will need to compare the existing policy to the requirements of the new rules, including any additional requirements in the applicable listing standards. For example:
Existing policies may apply to a narrower or broader employee population than is required under the new rules, which applies to current and former Section 16 officers.
Existing policies may be tied to a specific type of restatement or may apply only in cases of misconduct. The new rules require recoupment for two types of restatements and apply whether or not the restatements are the result of misconduct.
Existing policies may apply to different forms of compensation. The new rules apply to all “incentive-based compensation,” which is broadly defined as any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any “financial reporting measure.”
Existing policies may be discretionary, whereas under the new rules clawbacks are mandatory except in three limited circumstances.
The alert goes on to highlight considerations with respect to: maintaining multiple clawback policies; the treatment of existing clawback provisions (including provisions in plans, specific grants under plans, employment agreements, or otherwise); the incorporation of the clawback policy in awards going forward; the approach to enforcing the clawback policy; the determination of executive officer status; and ongoing disclosure obligations. Needless to say, there is a lot of work required to finalize a compliant clawback policy that works within a company’s existing plans and programs.
They are here! Yesterday, the International Sustainability Standards Board (ISSB) rolled out its inaugural standards—IFRS S1 and IFRS S2. As you may recall, the ISSB was established in November 2021 at COP26 to develop a comprehensive global baseline of sustainability disclosures. ISSB consolidated the CDSB and the Value Reporting Foundation (the combination of SASB and IIRC) under the auspices of the IFRS Foundation.
IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. The ISSB notes in its announcement that both IFRS S1 and IFRS S2 fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The ISSB’s announcement notes:
The ISSB Standards are designed to ensure that companies provide sustainability-related information alongside financial statements—in the same reporting package. The Standards have been developed to be used in conjunction with any accounting requirements. They are also built on the concepts that underpin the IFRS Accounting Standards, which are required by more than 140 jurisdictions. The ISSB Standards are suitable for application around the world, creating a truly global baseline.
For more coverage of these new ISSB standards, sign up today for PractialESG.com. You can begin your membership today online, or you can contact a Specialist at Sales@CCRcorp.com or at 1-800-737-1271 for assistance.
At last week’s meeting of the SEC’s Investor Advisory Committee, the role of the audit committee was explored in a panel discussion focused on audit committee workload and transparency. The Committee’s consideration of audit committees begins at around the 1 hour and 39 minute mark of the replay of the afternoon webcast. The agenda described the topic as follows:
This panel will focus on the role of the audit committee, which is rapidly changing, where many audit committees now oversee a variety of emerging risks while balancing an ever-increasing workload. Simultaneously, there is a larger focus on the audit itself with the PCAOB taking a fresh look at auditing standards. Risks continue to emerge and evolve. The presenters and the panel will explore how audit committees are keeping pace with shifting responsibilities and priorities, and whether existing audit committee disclosures adequately benefit investor needs.
Two presentations were made available to the Investor Advisory Committee: one presentation titled “Audit Committee: The Kitchen Sink of the Board,” was presented by Lauren Cunningham, Keith Stanga Professor of Accounting, University of Tennessee, while the other presentation was titled “Audit Committee Transparency Barometer,” which was presented by Vanessa Teitelbaum, Senior Director, Professional Practice, The Center for Audit Quality. A panel discussion followed which included four audit committee chairs, including Robert Herz, chair of the Morgan Stanley Audit Committee and formerly chair of the FASB and a member of the IASB and the Value Reporting Foundation.
The topic of audit committee disclosure has been something that the SEC Staff has been discussing on and off for over the past decade or so. This discussion of the Investor Advisory Committee may ultimately evolve into some further recommendations on expanding audit committee disclosures.
While much of the focus over the years has been on the robustness of audit committee disclosures in SEC filings, the topic of direct engagement between investors and audit committees has not been discussed as often. Investors have sought out engagement on compensation issues with compensation committee chairs for many years now after the advent of say-on-pay, but investor engagement with audit committee chairs seems to be less common.
Earlier this year, the UK’s Financial Reporting Council (FRC) announced the launch of a new web page that provides a series of conversation starters for engagement between investors and audit committees. The FRC indicates in the announcement that direct engagement with investors can provide insight into “the company’s approach to regulatory focus and areas of interest to market participants.”
While these conversation starters are UK-oriented, they are still useful for audit committees of US companies as a way of understanding the particular areas that investors may be focused on, which could aid in expanding disclosures or direct engagement efforts.
I have been on the road again after the long pandemic hiatus from business travel and it hit me that these trips are much less enjoyable without my friend and collaborator Marty Dunn. Marty passed away three years ago this month and his absence is strongly felt at the events that I have recently attended. To sum it up, during his life Marty had found a way to make what we do and what we talk about every day somehow fun and interesting, and that was indeed a special gift. What we do on a day-to-day basis can seem like drudgery at times, so finding that spark which makes the job fun and interesting is perhaps the most important part of having a long and successful career. Marty’s inspiration to find that spark is one of the many gifts from my friend that I am grateful for, and I hope you feel the same way.
If you are looking for a refresher on Marty’s many gifts, you can read my tribute to Marty in this blog, as well as The Fond Farewell episodes of The Dave and Marty Radio Show in 2020 section of our podcasts archive. You can also check out my tribute to Marty in this Deep Dive with Dave podcast.
Earlier this week, Vanguard published a statement on its approach to board responsiveness to shareholders & other stakeholders. After a couple of pages devoted to the usual platitudes about the importance of engagement and the general need for directors to be responsive to shareholder input, Vanguard lowered the boom by laying out its policy on board responses to majority supported shareholder proposals:
When a board fails to respond to a proposal supported by a majority of its voting shareholders and the Vanguard-advised funds supported the proposal, the funds will generally vote against relevant members of the board. For example, concerns with compensation matters would likely impact votes on members of the compensation committee, while governance concerns would generally impact votes on members of the nominating/governance committee. A pattern of unresponsiveness to shareholder feedback (e.g., a failure to act, or slow action, on shareholder votes) may be an indicator of poor governance practices and may result in increasing levels of opposition to board members’ election.
Not surprisingly, Vanguard doesn’t specify what an appropriate “response” would be to a majority-supported shareholder proposal, which is probably impossible to do in the abstract. Nevertheless, companies need to know that their responsiveness to these proposals will be graded at the ballot box by one of their largest shareholders.
Vanguard’s policy may not have a significant impact on most companies, at least for now. That’s because, as SEC Commissioner Mark Uyeda pointed out in his speech at the Society for Corporate Governance’s conference earlier this week, the percentage of shareholder proposals receiving majority support has fallen precipitously in recent years. Only 5% of proposals received majority support this proxy season, compared to 19% just two years ago.
The May-June issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Anatomy of a CVR: A Primer on the Key Components and Trends of CVRs in Life Sciences Public M&A Deals
– Chancery Ruling Highlights Important Role of Special Litigation Committees in Maintaining Board Control Over Derivative Litigation
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
Liz and Broc met up at the Society Conference in Salt Lake City this week and I just couldn’t resist sharing this picture of two of TheCorporateCounsel.net’s all-time greats with our readers. It feels like a Beatles reunion – minus Ringo, of course, but nobody misses him anyway!
Yesterday, the SEC announced settled enforcement proceedings against Marcum LLP, for what it contends were systemic quality control failures & audit standards violations in connection with audit work for hundreds SPAC clients. This excerpt from the SEC’s press release provides additional details on the proceeding:
Over a three-year period, Marcum more than tripled its number of public company clients, the majority of which were SPACs, including auditing more than 400 SPAC initial public offerings in 2020 and 2021. The strain of this growth, however, exposed substantial, widespread, and pre-existing deficiencies in the firm’s underlying quality control policies, procedures, and monitoring. These deficiencies permeated nearly all stages of the audit process and were exacerbated as Marcum took on more SPAC clients.
Moreover, in hundreds of SPAC audits, Marcum failed to comply with audit standards related to audit documentation, engagement quality reviews, risk assessments, audit committee communications, engagement partner supervision and review, and due professional care. Depending on the audit standard at issue, violations were found in 25-50 percent of audits reviewed, with even more frequent, nearly wholesale violations found as to certain audit standards across Marcum’s SPAC practice.
The SEC’s order alleges that “Marcum’s quality control and audit standard failures permeated most stages of engagement work—from client acceptance to risk assessments, audit committee communications, audit documentation, assembly and retention of audit documentation, engagement quality reviews, technical consultations, due professional care, and engagement partner supervision and review. At nearly every stage, Marcum lacked sufficient policies and procedures to provide reasonable assurance that engagements were conducted in accordance with professional standards.”
Without admitting or denying the SEC’s allegations, Marcum agreed to an order finding that the firm engaged in improper professional conduct within the meaning of Rule 102(e), violated multiple audit standards across numerous engagements, and violated Rule 2-02(b)(1) of Regulation S-X. Marcum also agreed to pay a $10 million penalty & to undertake remedial actions, including retaining an independent consultant and abiding by certain restrictions on accepting new audit clients.
The Association of Corporate Counsel recently released the results of its 2023 Law Department Benchmarking Survey, which covered 449 legal departments in companies of all sizes across 24 industries and 20 countries. Here are some of the key takeaways:
– Privacy is now the most common business function directly overseen by Legal (57% and six points more than reported in 2022) overtaking compliance, which traditionally tops the list (56%). An additional 19% of departments, however, indicated that compliance is a separate department that reports to legal. Therefore, in total, 77% of legal departments reported that the CLO ultimately oversees compliance compared to 70% that have oversight over privacy.
– The median total legal spend for all participating companies increased from $2.4 million last year to $3.1 million this year and although this increase occurred across companies of all sizes, the largest increases were driven by companies with greater than $20 billion in revenue, with a median total legal spend of $80 million this year compared to $50 million last year.
– The median total legal spend as a percentage company revenue (a key measure of Legal’s overall cost to the business) also increased to 0.63% compared to 0.56% last year. However, the total inside/outside spend distribution has remained roughly the same with 53% of total spend going to internal costs and 47% of total spend going to outside costs.
– About three in ten departments track internal diversity metrics related to the legal department’s composition, and 21% report tracking diversity metrics with respect to their outside counsel. There has been little movement in these numbers over the past three years despite the increased attention and desire to establish a more inclusive and equitable environment within the legal profession.
The increases in total legal spend are pretty eye-popping, particularly for large companies. A recent LegalDive.com article on the survey notes that although law firms increased their rates by an average of 5.5% in the first quarter of 2023, other factors, such as increased litigation and regulation, are more significant contributors to the jump in overall spending.
