Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Last week, as noted in this NY Times article, the DOJ issued six new guidelines – being called the “Yates memo” after Deputy Attorney General Sally Yates – aimed at prioritizing its focus on individual responsibility in both civil and criminal corporate wrongdoing cases. The Yates memo’s guidelines reflect a push by the DOJ to strengthen efforts at obtaining criminal penalties against responsible individuals in addition to the firms they work at. We’re posting oodles of memos about the Yates memo in our “White Collar Crime” Practice Area.
The SEC takes enforcement actions against individuals too. See this enforcement action against General Employment Enterprises and two of its former CEOs and its Chair (as well as its outside auditor) from last week…
Financial Services Ethics: How Much Has Changed?
One of the reasons why DOJ changed its “individuals” policy is the lack of accountability from the last financial crisis. How has behavior on Wall Street changed since ’07? Check out this study – which surveyed more than 1200 US & UK financial services professionals about industry-wide workplace ethics. The study found that many of the results are unchanged since a similar ’12 survey and some actually have changed for the worse. Of course, it’s important to note that this is just one study. Here’s an excerpt:
The answers are not pretty. Despite the headline-making consequences of corporate misconduct, our survey reveals that attitudes toward corruption within the industry have not changed for the better. To be sure, there are some encouraging statistics such as increased faith in law enforcement and in colleagues. Nevertheless, there is no way to overlook the marked decline in ethics and the enormous dangers we face as a result, especially when considering the views of the most junior professionals in the business. Most concerning, is the proliferation of secrecy policies and agreements that attempt to silence reports of wrongdoing and obstruct an individual’s fundamental right to freely engage with her government.
Coming Soon! 2016 Executive Compensation Disclosure Treatise – With a “Pay Ratio” Chapter!
We just wrapped up Lynn, Borges & Romanek’s “2016 Executive Compensation Disclosure Treatise & Reporting Guide” — and it’s headed to the printers! This edition has two new key chapters — one on the new SEC’s pay ratio rules, with over 60 pages of practical analysis & model disclosures — and one with over 120 pages of sample proxy disclosures and detailed analysis from the 2015 proxy season!
How to Order a Hard-Copy: Remember that a hard copy of the 2016 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1600-page comprehensive Treatise soon after it’s done being printed. Here’s the Detailed Table of Contents listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.
Steven Hall & Partners recently released its 2015 Director Compensation Study, which indicates that, among the top 200 companies studied, 2014 total compensation for the average director increased 3.1% as compared to 2013 compensation, and 19.2% over 2009 amounts. Over the last five years, the compensation committee chair position has had the largest increase in total compensation, up 19.6%. The study also indicates that while equity awards continue to increase as a percent of total compensation, stock options continue to decline in prevalence. Also noted in the study is the prevalence of share ownership guidelines, which are generally expressed as a multiple of the annual board cash retainer.
The Securities and Exchange Commission is looking at candidates to lead the government’s audit regulator other than current Chairman James Doty, even though Mr. Doty has indicated he wants to be reappointed to another term. The SEC is “identifying interested and qualified candidates” to chair the Public Company Accounting Oversight Board, SEC Chairman Mary Jo White told reporters Wednesday at a meeting of a PCAOB investor advisory group. That raises the possibility that the SEC, which oversees the auditing panel and appoints its members, could select someone other than Mr. Doty to serve as chairman after his current term expires in October.
A change at the top could signify a change in priorities for the PCAOB, the government watchdog responsible for making sure auditors conduct rigorous, impartial audits of publicly held companies. As chairman, Mr. Doty has emphasized efforts to require auditors to disclose more information to investors, but he has faced pushback from the accounting industry and, sometimes, questioning from SEC officials about the audit panel’s approach. Ms. White said the decision will be made by the five-member commission, but declined to discuss timing.
Mr. Doty, who has chaired the PCAOB since 2011, told reporters at the same meeting that he would like to remain as PCAOB chairman if the SEC wishes to keep him in the post. “I’ve made it clear that if the SEC thinks I should be there, I want to be there,” he said, adding there is ”more work we need to do.” A PCAOB spokeswoman declined further comment. During his tenure, Mr. Doty, 72 years old, has focused on initiatives such as requiring audit firms to name the partner in charge of each client’s audit and expanding the audit report to have auditors tell investors more about what they discover. He contends those disclosures will improve audit quality and make auditors more accountable.
But some of Mr. Doty’s disclosure efforts have been modified or significantly delayed. When Mr. Doty broached the idea of requiring audit firms to periodically change their auditors—a move that regulators in Europe have since enacted—pushback from the industry and Congress was fierce enough for the idea to be shelved.
Last December and again in February, SEC officials also criticized the PCAOB over the audit panel’s priorities, suggesting the PCAOB was too focused on its disclosure efforts and not enough on enacting rules to govern the nuts and bolts of conducting audits. Since then, however, the two regulators seem to have smoothed things over. Mr. Doty has said he is trying to make the PCAOB’s rule-making process more efficient, and SEC Chief Accountant James Schnurr said in a June speech he is “pleased” with the PCAOB’s response, though the board should “stay focused.”
Despite the fact that Mr. Doty may be replaced in coming months, Ms. White thanked Mr. Doty “for his leadership,” and Mr. Doty said it “has meant a great deal to me” to have known Ms. White and have her support. It is possible the SEC may allow Mr. Doty to stay on as PCAOB chairman beyond the end of his term until it decides whether to reappoint him or name a different chairman. There is precedent for such a move—before Mr. Doty became chairman, Daniel Goezler, the previous acting chairman, and Charles Niemeier, a PCAOB member, stayed in their posts long after their terms officially expired. The SEC is about to lose two of its five commissioners, but Ms. White said she doesn’t anticipate a “hiatus” in the SEC’s work as a result, including the consideration of Mr. Doty’s reappointment.
Last week, the North American Securities Administrators Association filed an amicus brief in the litigation initiated by Montana and Massachusetts seeking to invalidate the SEC’s Regulation A amendments. As Broc recently noted, Montana and Massachusetts have also filed their briefs in the case. Not surprisingly, NASAA supports the efforts of Montana and Massachusetts, arguing that the SEC went too far in preempting state regulation of Tier 2 Regulation A offerings.
Senate Democrats Turn Up the Heat on Political Spending Disclosure
It is that perennial disclosure topic for discussion, and the debate grows only louder every time an election approaches: political spending disclosure. For reasons that I have never been able to understand, for many years various interest groups have been seeking to hijack the public company disclosure system to mandate specific disclosure about the money that companies spend on political activities, even though the amounts involved are often miniscule and by no means material. The SEC, to its credit, has withstood the onslaught of calls for more disclosure for as long as I can remember. (If only the SEC was able to stand its ground as well on conflict minerals disclosure.)
The latest salvo in this war of words came last week, when forty-four Senate Democrats sent a letter to Chair White expressing support for the rulemaking petition that was submitted way back in 2011 and which called for disclosure of how public companies use company resources for political activities. The letter from the Senators cites the more than one million comments that have been submitted in support of the rulemaking petition, and asks that the Commission make this topic a top priority.
Just Printed: The 2015 Edition of “The Corporate Governance Treatise”
We are happy to say the 2015 Edition of Morrison & Romanek’s “The Corporate Governance Treatise” is done being printed. Here’s the “Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature.
You will want to order now so you can receive your copy as soon as it’s done being printed. With over 1000 pages — including 239 checklists — this tome is the definition of being practical. You can return it any time within the first year and get a full refund if you don’t find it of value.
Last week, Commissioner Gallagher announced that he will be leaving the Commission upon the earlier of the appointment of his successor or Friday, October 2, 2015. Gallagher had previously indicated in May that he would be leaving upon the appointment of his successor, but no appointment has yet come along. His statement indicates that he is setting a firm end date given that “the need to bring greater clarity to my tenure has steadily grown.”
Staff View on Conflicting Proposals – Where Do We Go From Here?
Now that summer is over, our thoughts inevitably turn to the upcoming proxy season (or at least mine do), and the clock is ticking on whether the Staff will provide some guidance about the availability of Rule 14a-8(i)(9) as a basis to exclude a shareholder proposal based on the argument that the shareholder proposal conflicts with a management proposal. The Staff of course abandoned its efforts to address Rule 14a-8(i)(9) no-action letters at the outset of the last proxy season, following the direction of Chair White, leaving a gaping hole in the body interpretative gloss for shareholder proposals. Chair White asked the Staff to study the issue and report back to the Commission.
In the meantime, the Staff has solicited comments regarding the scope and application of Rule 14a-8(i)(9). Given that the position attracted so much attention back in January, it is somewhat surprising that the only 19 comment letters have been submitted to date. The bulk of the letters submitted were from shareholders and shareholder groups, and unfortunately it doesn’t appear that any consensus has emerged for a clear path forward.
If the Staff were to revisit the interpretation in the form of a Staff Legal Bulletin (as has been done in the past with other Rule 14a-8 interpretive issues), we would expect to see that guidance issued in October or November, so that participants in the shareholder proposal process are on notice as to what will transpire for the upcoming season. If the Commission elects to take the rulemaking route that some commenters have suggested, we may not see any rule changes emerge for years, given how long it has taken the Commission to act on the rules that were mandated by Congress over the past five years, as well as the many other collateral issues that have been raised about Rule 14a-8(i)(9) and the shareholder proposal process. Let’s hope that we hear one way or the other soon.
Last week, Judge Denise Casper of the U.S. District Court for the District of Massachusetts ordered the SEC to file an expedited schedule for promulgating final rules regarding disclosure of payments by resource extraction issuers. The SEC has 30 days to file this expedited schedule. The order indicates that the court will retain jurisdiction to monitor the schedule and to ensure compliance.
As you may recall, the SEC’s original attempt at writing rules to comply with the Dodd-Frank Act’s resource extraction issuer disclosure directive was vacated in 2013 by the U.S. District Court for the District of Columbia Circuit. That court had remanded the matter to the SEC to fix the defective parts of the rules, but the SEC did not propose any revisions to the rules. In light of the delay, Oxfam America filed the present lawsuit in an effort to compel SEC action on the rulemaking. Now we have something new in the ongoing battle that is Dodd-Frank – real-time, court-monitored SEC rulemaking.
NYSE Amends Rule for Release of Material Information
Also last week, the NYSE filed a rule proposal to expand the pre-market hours during which listed companies must notify the NYSE prior to the dissemination of material news, and to provide the exchange with the authority to halt trading in pre-market hours under certain circumstances. The NYSE believes the rule changes are necessary to facilitate and orderly opening when a listed company is releasing news prior to NYSE’s scheduled market hours.
The amendments to the Listed Company Manual were effective upon filing with the SEC under a process for approving “non-controversial” rule changes set forth in the Securities Exchange Act of 1934 and will become operational on September 26, 2015 (unless the SEC designates an earlier date). As part of this process, the amendments are currently subject to a public comment period, and the SEC may temporarily suspend them within 60 days of the filing if it believes that doing so is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the statute. See more in this Gibson Dunn blog.
Given that I’m in the conference planning business, I’m a bit of a conference connoisseur – I love to innovate so that our attendees learn as much practical information as they can – but yet consume our conferences in a way that is not painful. And even fun!
For example, the “Proxy Disclosure Conference” day of our upcoming pair of conferences includes seven “PEP Talks” this year. These are 5-minute presentations on discrete narrow topics that are designed to break up a long day of learning. Note that no single panel is “long” – the longest panel is 45 minutes – as my design is 20 panel slots in a 8.5 hour programming day. That forces speakers to give you their best. No time to waste droning on.
Another way that I force our speakers to give you their best is by having each of them put together a set of bulleted “Talking Points.” That way, you can take notes directly on their written practical guidance. Our “Course Materials” simply can’t be beat!
Last year, I experimented with our keynote panel by organizing it so that it was like the “Survivor” TV show. To start, each panelist created their own superhero alter ego – complete with an origin story – and dressed the part. Then, the audience voted someone off after each panelist answered a substantive question – until we were down to two winners.
That was so much fun for everyone that we are keeping the “game” theme and I have designed this year’s keynote to be like the “Family Feud” TV show. We are now in the process of obtaining feedback from you – so that we have the data for the “survey says” part of the show. Please take a moment to fill out this survey. You can remain anonymous – or you can include your name to be entered in a raffle for a $100 Amazon gift certificate! And you don’t have to be registered for the conference to participate in this survey.
Go ahead & come out to San Diego on October 27-28th for our pair of conferences and have some fun! Register now.
Just love this dance scene from the 1964 French movie “Bande à part.” Finally heading out on my summer vaca tomorrow (to Prague, not France). Enjoy the holiday!
Proxy access is being debated in Canada ahead of a possible proposal (see this memo) – and this excerpt from this article gives a sense of the possible stakes:
Proponents of “proxy access” all agree to these conditions or some variant thereof; but in a policy paper from the Canadian Coalition for Good Governance (CCGG) stands apart and alone in the North American investment world on a most important condition of proxy access: The CCGG would place no holding time requirement whatsoever before shareholders acquire the right to nominate board members.
Meanwhile, Ning Chiu of Davis Polk delves into this working paper from the SEC’s DERA about the trade-offs between universal proxy access through federal regulation and the “private ordering” of proxy access through shareholder proposals…
In a swift reversal of its earlier determination to sue the New York State Department of Financial Services, the Promontory Financial Group, a leading consultant to the industry, took what some observers say is the kind of advice it typically offers clients when accused of wrongdoing: settle. Rather than risk even greater reputational damage during a lengthy court battle – and some speculate that negative fallout from the decision to fight the case could have been a driving force behind the strategy shift — the prominent Washington, D.C.-based firm climbed down from its confrontational strategy on Tuesday, admitting that its actions fell short of the New York regulator’s standards when it investigated possible sanctions violations by Standard Chartered bank.
In addition, Promontory agreed to pay a $15 million fine and accepted a six-month suspension from new consulting projects that require New York state authorization.
States File First Brief in Regulation A+ Challenge
In this blog, Stinson Leonard Street’s Steve Quinlivan note that Montana and Massachusetts have filed their first brief in their Regulation A+ challenge…
– Retention Payment Program: Decision Tree
– Earn-Out Covenants
– Spin-Offs & Executive Compensation: Keys to Success
– D&O Insurance: Maximizing Returns In the Face of M&A Lawsuits
– Providing Effective, Practical Counsel Regarding Acquisition Surprises
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Recently, someone posted a query in our “Q&A Forum” wondering if there were any updated states on Rule 506(c) placements (Corp Fin Director Keith Higgins had given some preliminary stats in this speech last year). Here are more recent stats:
Since the exemption became available in September 2013, Form D filing data indicates that as of June 30, 2015:
– Filers checked that they intended to rely on Rule 506(c) in almost 2,900 new offerings, and planned to raise more than $37 billion in new capital and
– Filers checked that they intended to rely on Rule 506(b) in approximately 34,800 new offerings, and planned to raise more than $1.15 trillion in new capital.
More on “SEC Busts Earnings Release Hackers! 150K Releases Stolen Over 5 Years”
My head is still spinning from the revelations noted in my blog last week about how hackers stole over 150,000 earnings releases from the newswires over a period of five years.
Based on activity in our “Q&A Forum” (#8516), it looks like some companies are rethinking their practice of giving their earnings releases to the newswires before they make them publicly available (given the unreliability of how secure the newswires apparently are). These companies would file their earnings releases on a Form 8-K before they hand them over to wires. Of course, these would mean that the wires wouldn’t be the first place to go for news – but they did that damage to themselves. Let me know what you think…
Check out this blog about “Do hiring practices lead to earnings management?”…
Shareholder Proposals: Trinity v. Wal-Mart’s Impact on the “Ordinary Business Exclusion”
In this podcast, Brian Breheny, Ted Yu & Hagen Ganem discuss the Third Circuit’s ruling in Trinity Wall Street v. Wal-Mart and its impact on the interpretation of the “ordinary business exclusion” to the shareholder proposal rule, including:
– What was this case all about?
– Can you give a bit more gloss on the “ordinary business exclusion” to Rule 14a-8?
– How did the Third Circuit’s opinion differ from the SEC’s view?
– What do you think the impact will be of this decision?
– Will Trinity appeal the decision – does it have a shot with the US Supreme Court?
Our September Eminders is Posted!
We have posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
I’m wrapping up a comprehensive “pay ratio” chapter for the 2016 edition of our “Executive Compensation Disclosure Treatise” (order your copy now – 1600 pages!) and came across this article by Quartz. Here’s an excerpt:
Starting in 2018 [Broc’s correction], US companies will have to report the ratio of their CEO’s pay to the average employee’s salary to the Securities and Exchange Commission. But why wait? Salary-data aggregator Glassdoor put together a ranking of pay ratios for companies in the S&P 500 based on the median employee pay data it has and CEO pay data from company filings. At the top: David Zaslav of Discovery Communications with an astounding ratio of 1,951-to-one, followed by the chiefs at Chipotle (1,522), CVS (1,192), and Walmart (1,133).
The biggest takeaway? We have no idea what these ratios really look like. Estimates are wildly inconsistent. And it’s unclear how much better things will be under the new rules since companies will get to choose how they calculate employee pay.
A recent analysis from Payscale, also an online salary aggregator, came out with an entirely different ranking and vastly lower ratios. Larry Merlo of CVS tops its list, but with a ratio of 422-to-one, compared to 1,192 from Glassdoor. Payscale’s highest estimated ratio would only make the 37th spot on Glassdoor’s ranking.
A separate Bloomberg analysis computed average worker pay in a different way, using publicly available data, and came up with a whole other set of estimates and rankings. Bloomberg puts the average salary at JP Morgan at $124,959, compared to $65,344 from Glassdoor. Consequently, Glassdoor’s estimate of the pay ratio is twice as high.
To make it more confusing, Glassdoor isn’t universally higher. Bloomberg has ex-McDonald’s CEO Don Thompson in first place with a pay gap ratio of 644 to one. Glassdoor puts the ratio at 422.
Some caveats are in order for data from sites like Payscale and Glassdoor. Their salary data is self-reported by employees, and not entirely reliable. And as Glassdoor notes, CEO pay varies highly from year to year, due to things like stock options and bonuses. Employees tend to underreport such earnings to Glassdoor, and the distribution of people who report on the site may be skewed in terms of pay or seniority. Some companies have already disputed the average salaries reported by Glassdoor.
Here’s a note that I received from a member in response:
According to this Reuters article, the Glassdoor study (which I couldn’t find anywhere on Glassdoor’s website) used “CEO compensation figures reported by 441 S&P 500 companies through Aug. 14 and Glassdoor.com user reports about salaries at those companies. Only companies for which Glassdoor had 30 or more worker salary reports were included. The data could be skewed if workers under-counted tips or bonuses, Glassdoor said.” Anyone using Glassdoor or Payscale stats as reliable is irresponsible – but some journalists obviously are (here’s a NY Times example and here’s a new one from TheStreet.com).
Pay Ratio: Investor & Proxy Advisor Views?
If you want a preview of how proxy advisors & institutional investors perceive the coming pay ratio disclosures, check out this Bloomberg article. Of course, we’ll have representatives from ISS, Glass Lewis, BlackRock, CalSTRS and Capital Research and Management at our upcoming “Proxy Disclosure Conference/Say-on-Pay Workshop” to discuss that and more…
Drafting Effective CD&As
In this CompensationStandards.com podcast, Sharon Podstupka of Pearl Meyer & Partners provides some insight into how to draft more effective CD&As (here’s the related report findings), including:
– What are the benefits of having a non-lawyer involved in drafting the CD&A?
– What are arguments that can “win the day” at companies who have senior management not interested in drafting user-friendly CD&As?
– How does creating more usable disclosure impact the timeframe for drafting proxy disclosure?
– Do you see companies planning in advance for the pay ratio rules? And if so, in what ways?
