Yesterday, Glass Lewis announced the publication of its 2024 Voting Guidelines. We’ll be posting memos in our “Proxy Advisors” Practice Area. Here are excerpts from the intro highlighting some of the key changes:
Material Weaknesses – When a material weakness is reported and the company has not disclosed a remediation plan, or when a material weakness has been ongoing for more than one year and the company has not disclosed an updated remediation plan that clearly outlines the company’s progress toward remediating the material weakness, we will consider recommending that shareholders vote against all members of a company’s audit committee who served on the committee during the time when the material weakness was identified.
Cyber Risk Oversight – In instances where cyber-attacks have caused significant harm to shareholders, we will closely evaluate the board’s oversight of cybersecurity as well as the company’s response and disclosures. Moreover, in instances where a company has been materially impacted by a cyber-attack, we believe shareholders can reasonably expect periodic updates from the company communicating its ongoing progress towards resolving and remediating the impact of the cyber-attack. These disclosures should focus on the company’s response to address the impacts to affected stakeholders and should not reveal specific and/or technical details that could impede the company’s response or remediation of the incident or that could assist threat actors.
In instances where a company has been materially impacted by a cyber-attack, we may recommend against appropriate directors should we find the board’s oversight, response or disclosures concerning cybersecurity-related issues to be insufficient or are not provided to shareholders.
Board Oversight of Environmental and Social Issues – Given the importance of the board’s role in overseeing environmental and social risks, we believe that this responsibility should be formally designated and codified in the appropriate committee charters or other governing documents. When evaluating the board’s role in overseeing environmental and/or social issues, we will examine a company’s committee charters and governing documents to determine if the company has codified a meaningful level of oversight of and accountability for a company’s material environmental and social impacts.
Board Accountability for Climate-Related Issues – Beginning in 2024, Glass Lewis will apply this policy to companies in the S&P 500 index operating in industries where the Sustainability Accounting Standards Board (SASB) has determined that the companies’ GHG emissions represent a financially material risk, as well as companies where we believe emissions or climate impacts, or stakeholder scrutiny thereof, represent an outsized, financially material risk.
We will assess whether such companies have produced disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). We have further clarified that we will also assess whether these companies have disclosed explicit and clearly defined board-level oversight responsibilities for climate-related issues. In instances where we find either of these disclosures to be absent of significantly lacking, we may recommend voting against responsible directors.
Clawback Provisions – In addition to meeting listing requirements, effective clawback policies should provide companies with the power to recoup incentive compensation from an executive when there is evidence of problematic decisions or actions, such as material misconduct, a material reputational failure, material risk management failure, or a material operational failure, the consequences of which have not already been reflected in incentive payments and where recovery is warranted. Such power to recoup should be provided regardless of whether the employment of the executive officer was terminated with or without cause. In these circumstances, rationale should be provided if the company determines ultimately to refrain from recouping compensation as well as disclosure of alternative measures that are instead pursued, such as the exercise of negative discretion on future payments.
Other policy changes address executive stock ownership guidelines, proposals concerning equity awards to shareholders, NOL pills and control share acquisition statutes. Glass Lewis also adopted clarifying amendments to its policies on board responsiveness and interlocking directorates.
By the way, don’t forget that ISS’s peer group review & submission window for most companies opens on Monday, November 20th. Check out Liz’s blog on CompensationStandards.com for more details.
I think it’s fairly common for people involved in internal investigations to feel uncertainty about the investigatory process and to have concerns about whether that process conforms to best practices. If you find yourself worrying about these issues, this recent blog from “Compliance & Ethics: Ideas and Answers” may be helpful. It identifies areas of inquiry that should be considered in evaluating investigation processes. This excerpt provides some examples:
– Are there written guidelines governing how investigations will be assigned? Are they logical and appropriate? Are they followed in practice?
– Is there a written investigations protocol, and does it include those elements that are necessary to facilitate robust investigations? Some of the elements that are typically included in investigations manuals include:
– Professionalism standards that govern the investigations process, such as a discussion of the importance of impartiality, competency, confidentiality, and non-retaliation.
– Step-by-step guides for each aspect of investigations, including intake procedures, preliminary analysis of the allegation, assigning investigations, opening a case file, creating an investigative plan, reviewing documents, whom to interview and how to do so, preparing interview notes, assessing and determining findings, preparing a final report, responding to the complainant and subject, and closing out the case.
– Samples and outlines of investigation documents, such as reports of interviews, reports of investigation, and sample communications with interviewees, complainants, supervisors, and subjects of investigations.
– Are there protocols that govern how evidence can be collected (e.g., required approvals before electronic data is accessed) and when and how litigation or investigation holds will be issued?
– Are there clear guidelines governing when to get the Legal Department involved and the steps to be taken when conducting an inquiry under the attorney-client privilege?
The blog says that, ultimately, an effective assessment of an investigation’s process seeks to determine whether it is being conducted independently, objectively and impartially, whether the investigators have the access to the people and documents they need, and whether the investigator is qualified to conduct the investigation.
The PCAOB recently proposed amendments to its rules governing when an individual accountant will be deemed to have contributed to a firm’s primary violations of professional standards. This excerpt from Dan Goelzer’s blog on the proposal summarizes its implications:
The Public Company Accounting Oversight Board has proposed to amend its rule governing the liability of a person associated with an accounting firm whose conduct causes the firm to violate a professional standard. The Board’s proposal would lower the level of conduct that can result in an individual’s “contributory liability” for a firm’s violation from recklessness to negligence.
If the change is adopted, the PCAOB would be able to bring disciplinary proceedings against an individual auditor (and potentially bar him or her from public company auditing) for failing to exercise reasonable or ordinary care. Under its current rules, the Board would have to show that the individual’s conduct was intentional or reckless, not merely negligent.
The proposal is unlikely to be welcomed by your friendly neighborhood auditor. Most audit firms have a black belt in “CYA” and already go to extraordinary lengths to protect themselves during the course of an audit engagement. Lowering the bar for enforcement actions against individual accountants will undoubtedly spur increased efforts on their behalf to protect their firms & themselves.
When you consider the possibility that a change like this could come on the heels of the adoption of the PCAOB’s demanding NOCLAR proposal, it sure looks like dealing with your outside auditors could become an even more difficult, painstaking, and expensive process in the near future.
As Liz blogged earlier this month, the 5th Cir. recently sent the SEC back to the drawing board on its buyback disclosure rules, and it now looks like something similar could happen to the SEC’s Staff Accounting Bulletin 121, which addresses accounting for safeguarded digital assets. That’s because, according to the GAO, the SEC failed to comply with procedures mandated by the Congressional Review Act (CRA) when its accounting staff issued the SAB. This excerpt from a recent Fenwick memo explains:
The CRA requires that, before an agency rule can take effect, the agency must submit a report on the rule to both the House of Representatives and the Senate as well as to the Comptroller General. The law allows Congress to review and disapprove any rule newly issued by federal agencies for a period of 60 days using special procedures. If a resolution of disapproval is enacted, then the new rule has no force or effect.
On August 2, 2022, Senator Cynthia M. Lummis requested the GAO—which is an independent, non-partisan agency within the legislative branch of the federal government—to determine whether SAB 121 was a “rule” subject to the CRA. The SEC maintained that the bulletin was not subject to the CRA because it was published by the SEC’s staff, rather than through the SEC. The GAO disagreed, however, finding that the statement was an “agency statement” within the applicable definition of a “rule” under the Administrative Procedures Act, and thus, was subject to the CRA’s requirements.
The GAO reasoned that, since the role of the SEC’s Division of Corporation Finance (Division) is to monitor companies’ compliance with accounting and disclosure requirements, and since the Division’s practice is to refer noncompliant companies to the SEC’s Division of Enforcement, it was “reasonable to believe that companies may change their behavior to comply with the staff interpretations found in [SAB 121].”
So what happens now? That’s a bit unclear. The memo says that there’s a window of time during which Congress can pass a joint resolution disapproving the issuance of SAB 121. It seems unlikely that the Congressional clown show could get its act together to do something like that, but even in the absence of such action, the memo says that the GAO’s decision strengthens the hand of any litigant seeking judicial review of SAB 121.
In a recent speech, SEC Commissioner Mark Uyeda criticized the process by which the SEC adopted its pay versus performance disclosure rule, and in particular called out some of the goofy proxy disclosure resulting from the SEC’s decision to change the definition of “compensation actually paid” and the treatment of equity awards in the final rule without seeking additional public comment. He says there’s a lesson there for the SEC that it should take into account before moving forward with a final climate change disclosure rule:
Hopefully, the Commission will consider learning from the lesson of the pay versus performance rulemaking as it moves forward with other rulemakings, including climate-related disclosure. This proposal has received over 16,000 comments. The volume of comments is not surprising given the proposal’s expansive nature and the hundreds of requests for feedback contained in it. Most commenters did not focus on, or address, every single issue or alternative raised in the proposal.
Before the Commission adopts any final rule that significantly deviates from the proposal, it should seriously consider re-proposing the rule with revised rule text and an updated economic analysis. Doing so would provide the public with an opportunity to focus on aspects of the proposal that they did not initially consider, and perhaps more importantly, submit feedback on any revised requirements.
Commissioner Uyeda argues that a re-proposal “may ultimately help the Commission craft a better rule for all market participants” and says that the SEC should do everything possible to avoid promulgating a “costly and ineffective” rule. Okay, but what if the SEC just moves forward with a final rule? Well, that’s where Commissioner Uyeda drops his mic – he says that adopting a rule without reproposing it “might be indicative of a flawed process that raises the question of whether the rule is arbitrary and capricious under the Administrative Procedure Act.”
Earlier this year, Meredith blogged about the Pegasystems case, which highlighted the potential perils of reflexively characterizing claims made by the plaintiff in a lawsuit as being “without merit.” This Goodwin blog highlights some things that companies should consider as they draft litigation disclosure post-Pegasystems, and this excerpt offers up some specific examples of alternative disclosure that might be appropriate:
In reviewing litigation disclosures in filings with the SEC, close attention needs to be paid to the language asserting that a litigation against the company is “without merit.” To mitigate risk, and after consultation with the company’s auditors, it may be best to avoid such language and rely on statements such as the following:
– We intend to vigorously pursue our claims against [defendant] in this matter.
– We intend to vigorously defend against the claims brought by [plaintiff] in this matter.
– We are unable to reasonably estimate possible damages or a range of possible damages in this matter given the uncertainty as to how a jury may rule if this ultimately proceeds to trial.
– We dispute these allegations and plan to vigorously defend ourselves.
– We have defenses to the claims raised in this lawsuit.
The blog points out the need to consult with auditors concerning this disclosure, because it may well have an impact on whether they believe that a reserve for the litigation should be established.
Yesterday, the SEC announced a settled enforcement action against Charter Communications arising out of what the agency alleges was an “unauthorized” stock buyback program. This excerpt from the SEC’s press release summarizes its allegations:
According to the SEC’s order, Charter’s board authorized company personnel to conduct certain buybacks using trading plans that conform to SEC Rule 10b5-1. Rule 10b5-1 offers protection to companies and individuals from insider trading liability as long as they meet the conditions of the rule, including a requirement that they not retain the ability to change the planned purchases or sales after they adopt the trading plan.
However, the SEC’s order finds that, from 2017 to 2021, Charter used plans that included “accordion” provisions, which company personnel described as giving Charter flexibility, that allowed Charter to change the total dollar amounts available to buy back stock and to change the timing of buybacks after the plans took effect. According to the SEC’s order, because Charter’s trading plans did not meet the conditions of Rule 10b5-1, the company’s buybacks did not comport with the board’s authorizations. The SEC’s order finds that Charter included accordion provisions in nine separate trading plans over the four-year period.
The SEC’s order found that the company’s violated the internal controls requirements of Section 13(b)(2)(B) of the Exchange Act. Without admitting or denying those findings, Charter agreed to cease-and-desist from further violations of Section 13(b)(2)(B) and pay a civil penalty of $25 million.
The SEC’s Charter Communications order prompted a dissenting statement from commissioners Peirce and Uyeda, which focused on what they contend is the SEC’s application of Section 13(b)(2)(B) to internal controls that aren’t covered by the statute:
The fundamental flaw in the Order is its failure to distinguish between internal accounting controls and other types of internal controls. Section 13(b)(2)(B)(i) requires Charter to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization.” (emphasis added).
The Order recites no facts suggesting that Charter’s management used more funds than the board authorized for share buybacks, that management purchased shares at a quantity or time inconsistent with the board’s authorization, or that management failed to properly record the expenditure of corporate funds and consequent purchase of shares on Charter’s books. Instead, the Order faults Charter because it lacked “reasonably designed controls to analyze” its trading plans for compliance with Rule 10b5-1. Controls designed to answer a legal question—compliance with the regulatory conditions necessary to qualify for an affirmative defense—are simply not internal accounting controls within Section 13(b)(2)(B)’s scope.
This isn’t the first time the SEC has interpreted this statutory provision to cover non-accounting related controls, and it isn’t the first time that commissioners Peirce & Uyeda issued a dissenting statement on the SEC’s use of the statute in this manner. Remember the Andeavor enforcement action in 2020? That also involved a buyback program, and the controls failure identified by the SEC in that proceeding related to compliance with the company’s insider trading program.
Commenters also flagged the Andeavor case as an unprecedented use of Section 13(b)(2)(B), and also highlighted its potential implications. As one commenter noted at the time, “if this precedent were followed, any deficiency or breach of internal corporate compliance policy could constitute a violation of internal accounting controls under [Section 13(b)(2)(B)].” It appears that this is exactly the message that the SEC wants to send with this latest enforcement action.
As if this wasn’t enough enforcement-related news for a single day, yesterday the SEC also announced its enforcement results for fiscal 2023. I don’t think we could’ve timed today’s “SEC Enforcement: Priorities and Trends” webcast better if we tried.
Join us tomorrow at 2 pm Eastern for our CompensationStandards.com webcast, “More on Clawbacks: Action Items and Implementation Considerations” – to hear Compensia’s Mark Borges, Ropes & Gray’s Renata Ferrari, Gibson Dunn’s Ron Mueller and Davis Polk’s Kyoko Takahashi Lin continue their excellent discussion from our 20th Annual Executive Compensation Conference on complex decisions and open interpretive issues that unlucky companies faced with a restatement will need to tackle.
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We’re making this webcast available to members of TheCorporateCounsel.net as a bonus, but if you want to stay up to date on the latest developments on clawbacks, you need to become a CompensationStandards.com member if you aren’t already. We offer a no-risk trial for that site as well on the same terms that we provide for TheCorporateCounsel.net – and you can take advantage of that offer in exactly the same way!
Last week, Glass Lewis released the results of its inaugural Client Policy Survey, which reflects input on corporate governance, ESG and stewardship matters from more than 500 institutional investors, corporate issuers, corporate advisors, shareholder advocates and other stakeholders. This excerpt from the accompanying press release highlights some of the survey’s findings:
– Investors view financial results, excluding total shareholder return (TSR), and incentive payouts relative to TSR as the most important factors when reviewing executive pay-for-performance alignment.
– Overwhelmingly, respondents indicated that companies should set greenhouse gas (GHG) emissions targets. However, there was a split on exactly which companies should set targets — and exactly which types of targets they should set.
– More than 40% of investors would vote against boards that use plurality voting for uncontested director elections, and over two-thirds view the practice as problematic.
– Most investors believe all board-level roles should be considered when assessing whether directors’ commitments are overstretched.
The survey covers a lot of ground and includes responses addressing a variety of issues relating to board governance, director commitments, capital structure & voting rights, ESG & shareholder proposals, and executive compensation.