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Next week, you will receive additional attendee communications with your unique direct link to access the Conferences for which you have registered. We will be sending the direct access link the day before the applicable event. So, for the “2nd Annual Practical ESG Conference,” attendees will receive their direct access link on Monday, September 18th, and attendees will receive the direct access link for the “Proxy Disclosure & 20th Annual Executive Compensation Conferences” on Tuesday, September 19th.
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Since they’re right around the corner, keep in mind that you can use this promotional discount on our “Proxy Disclosure & 20th Annual Executive Compensation Conferences” and “2nd Annual Practical ESG Conference.” With potential implications of the SEC’s ambitious regulatory agenda continuing to loom large in the minds of public companies & their advisors, you can’t afford to miss them this year! Do yourself (and your friends) a favor and take advantage of this offer! Email sales@ccrcorp.com today – or call 1-800-737-1271.
We got word last week that NYSE sent an email blast to listed issuers regarding the new clawbacks listing rules. After reminding companies that issuers must adopt a Dodd-Frank clawback policy no later than December 1st, NYSE noted that it is also requiring each listed issuer to confirm via Listing Manager either that it adopted a policy by that date or that it is relying on an applicable exemption. NYSE plans to require such confirmation for initial listing applications as well for companies applying to list their securities on or after October 2nd. The email noted a subsequent communication with more details would be sent in the fourth quarter.
On a related note, at the “Dialogue with the Director” session on Friday at the ABA’s Business Law Section Fall Meeting, Corp Fin Director Erik Gerding was asked who should field interpretive questions regarding Dodd-Frank clawback requirements — the SEC or the stock exchanges. While “both” may not be the answer we wanted to hear, Erik’s suggestion — that interpretive questions first be directed to the relevant stock exchange and then its response be conveyed to the Commission — makes a lot of sense.
Also during the “Dialogue with the Director” session on Friday at the ABA’s Business Law Section Fall Meeting, Jay Knight, Chair of the Federal Regulation of Securities Committee, asked Corp Fin Director Erik Gerding about the SEC’s current areas of focus. While Erik noted that his discussion was not exhaustive, one of the topics he highlighted was disclosures by bank issuers, stating that the SEC was looking at the following areas in particular:
– Liquidity disclosures under Item 303 of Regulation S-K, including liquidity risks, available sources, key provisions or parameters of those sources and actions taken to ensure liquidity
– Interest rate risk, including whether interest rate sensitivity disclosures under Item 305 of Regulation S-K would benefit from additional explanation of the key assumptions underlying that disclosure
The WSJ previewed these topics in June, noting that this was an area of focus for SEC comments on registration statements filed by regional banks after the bank failures we saw this spring.
This summer, I blogged about FASB’s Exposure Draft to solicit public comment on proposed changes to ASU Topic 740: Income Taxes, which was FASB’s third attempt at tackling this topic. As reported in the WSJ, in late August, FASB unanimously approved the update to require “public and private companies to break out the income taxes paid to authorities at the federal, state and foreign levels for the full year in their annual financial reports.” Here’s more from the article giving a high-level summary of the new requirements:
If a particular jurisdiction represented more than 5% of these taxes for the year, businesses will have to identify that jurisdiction and specify the amount in their annual reports.
Public companies will need to share more detail on how they reconcile their domestic statutory rate with the rate they actually paid. The actual rate is usually lower because it includes the effects of tax credits and other breaks.
These companies will also have to present a standardized table showing how categories such as state and local income taxes, foreign taxes, tax credits and the enactment of new tax laws contribute to the difference between the two rates, the statutory rate and the actual one, by providing the percentages and dollar amounts.
This article from CFO Dive details the compliance dates as follows:
The new rules will be effective for public companies for fiscal years beginning after Dec. 15, 2024, and for private companies and other companies beginning after Dec. 15, 2025.
I confess that my eyes glaze over when I see anything relating to XBRL, and I suspect I’m not the only one who suffers from this weakness. Apparently, the Corp Fin Staff has noticed that “structured data” is getting short shrift, because they posted a wake-up call yesterday in the form of a sample comment letter.
Corp Fin has been providing guidance in the format of “Dear Issuer” letters on a somewhat regular basis since at least 2021. The letters tend to be issued when the Staff notices an emerging disclosure or market-related issue that is affecting a lot of companies. Topics have included market volatility, China-based disclosure requirements, and crypto fallout. But for this instance of sample comments, with XBRL being required since 2009 and Inline XBRL since 2018, you might wonder, “Why now?” The Staff gives a couple of reasons:
1. Comments on the pay versus performance rule provided increased evidence that this data format is useful to investors.
2. The Financial Data Transparency Act (FDTA) became law at the end of last year and requires the SEC to establish a program to improve the quality of the corporate financial data filed or furnished by companies under the ’33 and ’34 Acts.
In addition, new XBRL requirements have accompanied several recent SEC rulemakings (clawbacks, pay vs. performance, repurchases, insider trading), so there actually are new practices to watch out for right now. The sample comment letter flags these issues:
1. Item 405 of Regulation S-T: Your filing does not include the required Inline XBRL presentation in accordance with Item 405 of Regulation S-T. Please file an amendment to the filing to include the required Inline XBRL presentation.
2. Cover Page: The common shares outstanding reported on the cover page and on your balance sheet are tagged with materially different values. It appears that you present the same data using different scales (presenting the whole amount in one instance and the same amount in thousands in the second). Please confirm that you will present the information consistently in future filings.
3. Pay versus Performance: Disclosure under Regulation S-K Item 402(v) must be in Inline XBRL, in accordance with Item 405 of Regulation S-T and the EDGAR Filer Manual. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
4. Pay versus Performance: Refer to the [relationship disclosures] graph. Although it is permissible to combine one or more sets of relationship disclosures under Regulation S-K Item 402(v)(5) into one graph, table, or other format, note that you must still provide separate XBRL tags for each required item. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
5. Financial Statements and Supplementary Data: You have used different XBRL elements to tag the same reported line item on the income statement from period to period. Please provide us your analysis as to how you concluded that the results reported necessitated the change in the element. Alternatively, if you conclude that the change from period to period was not necessary to communicate a change in the nature of the line item, confirm that you will ensure that your choice remains consistent for line items from period to period.
6. Financial Statements and Supplementary Data: We note that instead of using an XBRL element consistent with current U.S. GAAP in your income statement, you instead used a custom tag. Custom tags are to be used by filers when an appropriate tag does not exist in the standard taxonomy. See Item 405(c)(1)(iii)(B) of Regulation S-T. Please tell us why the current U.S. GAAP tag is not applicable, or alternatively revise your disclosure, beginning with your next filing, to correctly tag this disclosure.
Yesterday’s sample comment letter says that more investors are using XBRL data, but they aren’t the only ones: Corp Fin is also putting this info to work. In the SEC’s most recent “Semi-Annual Report to Congress on Machine Readable Data for Corporate Disclosures” – which John flagged in July – the Staff gave a heads up that they had been issuing comment letters about tagging requirements. In addition, the report says that Corp Fin is using the data in these ways:
– To help identify issuers that are subject to the disclosure and submission requirements of, and potentially subject to a trading prohibition under, the Holding Foreign Companies Accountable Act (Commission-Identified Issuers). Specifically, the staff uses data in Forms 10-K, 20-F and 40-F identifying the auditor (or auditors) who provided opinions related to the financial statements presented in the registrant’s annual report, the location where the auditor’s report has been issued, and the Public Company Accounting Oversight Board (PCAOB) ID Number(s) of the audit firm(s) or branch(es) providing the opinion(s).
– To identify, count, sort, compare, and analyze registrants and their disclosures (e.g., to identify more readily and accurately issuers that are listed on a specific exchange or that have identified themselves as well-known seasoned issuers), based on several items of machine-readable data that appear on the cover pages of registrants’ annual reports (Forms 10-K, 20-F, and 40-F).
– To make preliminary assessments of compliance with the Commission’s recently adopted pay-versus performance disclosure requirements.
With XBRL creeping in to proxy statements, will it also come for ESG? Only time will tell.
I have to say that I never thought I would write three blogs in one day on the topic of XBRL, but if the Staff thinks it is important, I will do my part to get on board. And here is something that truly caught my eye from the SEC’s 2023 Semi-Annual Report to Congress on structured data disclosures:
Enforcement utilized risk-based data analytics to uncover potential accounting and disclosure irregularities caused by, among other things, earnings management practices. Machine-readable data enabled Enforcement staff to review the financial data of thousands of public issuers in order to detect indicia of earnings management or other types of financial misconduct. The initiative resulted in charges against six public companies and several related individuals for violations of the federal securities laws for engaging in certain practices that gave the appearance of meeting or exceeding consensus earnings-per-share (EPS) estimates.
I blogged about the latest of those cases back in February – and I pointed out that the SEC’s data analytics tools are now sensitive enough to flag potential “earnings management” situations even when the adjusted dollar amounts are small. That’s because of XBRL! Now that the SEC has a solid dataset in its toolbox, it is becoming easier for the Enforcement Division to detect and pursue accounting issues.
Board composition is always a hot topic. During the past several years, investors have pushed for skills matrices & diverse backgrounds – in order to provide some comfort that the board is well-positioned to address dynamic business risks & opportunities. But, board quality is difficult to measure. This 47-page report from JamesDruryPartners’ takes a stab at it.
The report offers a number of public company board stats that could be useful for benchmarking, and even ranks companies based on their “average director weight” (fortunately, this is referring to business acumen, not body mass). The report also offers commentary and recommendations. Here are a few points that jumped out:
1. The the number of board seats filled by active & retired CEOs has been declining:
The percentage of CEOs serving on external boards ticked lower, continuing a prolonged decline that began decades ago. Examining the 582 boards common to both this report and our last report, the number of board seats filled by CEOs (active and retired) decreased by 4.9% (from 2,079 to 1,978). Board seats filled by active CEOs decreased by 11.8% (from 536 to 473); those filled by retired CEOs decreased by 2.5% (from 1,543 to 1,505).
2. Only 52% of “financial experts” have CFO or public accounting expertise. The report urges boards to consider CFOs for board seats:
We remain concerned that boards undervalue the disciplined financial perspective that CFOs and Public Accountants can bring to boardroom deliberations. When we ask boards about the underrepresentation of CFOs, the most common reply is, “If we were to consider a CFO for our board, they would have to have a broad-gauged, strategic business mindset, not a corporate controller’s perspective – perhaps a CFO who is now, or might become, a CEO.” We certainly agree with the strategic mindset requirement; however, in our experience, other than the CEO, CFOs are very often the second ranking corporate executive most engaged in the company’s total business operations. Therefore, we strongly encourage boards to challenge this outdated thinking.
Directors designated as Financial Experts should truly be independent financial experts, not professionals who qualify simply because they work in the finance industry or are P&L executives who have a finance department reporting to them. One board in our study even designated a director as a Financial Expert based solely upon their service on another board’s Audit Committee.
3. Based on the number of mentions in a survey of experienced directors, page 14 of the report identifies the “Top 10 Most Essential Attributes of Effective Board Directors.” Here are the top 3:
– Communication Skills (73%): Thoughtful, logical, and articulate. Doesn’t dominate boardroom conversation. Knows when to speak. Understands the impact of words and tone. Not compelled to contribute to every topic discussed. Does not comment just to get credit. Listens more than speaks. Speaks only when has something valuable to contribute. Able to build on the commentary of others and take it to the next level. Focuses discussion on the right strategic level. Does not rush to conclusions. Objective in their commentary.
– Professional Collegiality (67%): Good social and people skills. Likeable. Proactive in developing relationships. Collaborative. A team player. Contributes to the success of others. Not a “gotcha” type. Discreet, diplomatic, and tactful. Respectful of tradition. Sensitive to the views of others.
– Relevant Experience and Knowledge (63%): Track record of high accomplishment and success, ideally in business. Leads from competency. CEO experience is considered most valuable, ideally in a large, complex organization. Business intelligence is most relevant, compared to intelligence in non-business fields. Best directors tend to be all-around athletes with significant breadth. Can grasp a broad range of business issues. Seasoned, mature, and resilient. Understands risk. Able to deal with the good and the bad. Capable of boardroom leadership impact when necessary and appropriate.
4. Governance capacity & “average director weight” aren’t necessarily correlated to company size.
Some large companies score poorly and some small companies score very well. Page 24 offers a “governance capacity worksheet” to use when filling a board vacancy.
5. Expanding your board size and replacing retiring directors with individuals who have more substantive experience are two steps that can help improve your board’s governance capacity & board weight.
We cover a lot of “shareholder activism” developments over on DealLawyers.com,* and last week, Meredith blogged about a recent Delaware case that came down in favor of a company that relied on an advance notice bylaw to reject a dissident nominee. This MoFo memo says that case is part of a broader trend of companies being sticklers for compliance with “advance notice” provisions. In the past 18 months, 17 companies rejected dissident director nominations for failure to comply with advance notice bylaws – and Delaware courts are tending to uphold those decisions.
The memo urges companies to make sure that their advance notice bylaws incorporate the latest protective features, without going so far that the bylaw will be struck down when it’s enforced. This excerpt outlines what to consider when you’re dealing with these provisions:
– Review the company’s bylaws and, in particular, advance notice provisions regularly. The recent introduction of the “universal proxy card” provides a good point of departure for a bylaw review, if one has not been undertaken already.
– Adopt any changes to the advance notice bylaws on a “clear day,” if possible, i.e., before any dissident stockholder surfaces.
– Advance notice bylaws should be clear and unambiguous, as any ambiguity or lack of clarity may be resolved in favor of the dissident.
– The board must act reasonably when it considers whether a stockholder nomination complied with the advance notice bylaws. “Inequitable acts towards stockholders do not become permissible because they are legally possible.”
– Advance notice bylaws should be in line with market standards. Courts see standard advance notice bylaws as commonplace and as serving a legitimate purpose. However, if they are overly aggressive or burdensome compared to market standards, they may be subject to challenge.
*ICYMI, our daily DealLawyers.com blog is free and you should subscribe to get the headlines in your inbox. And if you regularly handle hostile – or friendly – M&A, the site is full of very useful & practical info that will come in handy when you’re on a tight time frame. It’s also a great training resource for new associates!