Red state or blue state, Fox News or MSNBC, everybody can agree that when it comes to public companies, we’re all for good governance. But what exactly do we mean by that term? According to this recent Stanford article, nobody has the foggiest idea of what “good governance” really entails. Here’s the intro:
A reliable corporate governance system is considered to be an important requirement for the long-term success of a company. Unfortunately, after decades of research, we still do not have a clear understanding of the factors that make a governance system effective. Our understanding of governance suffers from two problems.
The first problem is the tendency to overgeneralize across companies—to advocate common solutions without regard to size, industry, or geography, and without understanding how situational differences influence correct choices. The second problem is the tendency to refer to central concepts or terminology without first defining them. That is, concepts are loosely referred to without a clear understanding of the premises, evidence, or implications of what is being discussed. We call this “loosey-goosey governance.”
The article identifies several governance practices that have become talismans of good governance – including independent chairs, elimination of staggered boards and the absence of dual class capital structures – and concludes that empirical support for their impact on the quality of governance is inconclusive at best. Other common good governance principles, like pay for performance and board oversight, are poorly understood and difficult to evaluate.
This article really resonated with me. I’m very dubious about a lot of corporate governance “best practices,” because I think many of them simply reflect the ideological position that shareholders and not directors should have control over the destiny of public companies. If after decades of research, we still can’t answer the question “what makes good governance?” then maybe cynics like me are onto something here.
Board Agendas: What’s On the List for 2020?
Deloitte recently published its list of topics that are likely to feature prominently on the agenda of many corporate boards during the upcoming year. These include the usual suspects – oversight of risk, strategy, executive compensation, board composition & shareholder engagement – as well as some more cutting edge topics. This latter group includes the role and responsibilities of the company in society. Here’s an excerpt on corporate social purpose:
Perhaps the most dramatic development―or, rather, series of developments―that boards may need to consider in 2020 is the intense focus on the role of the corporation in society. Starting in late 2017, companies have been urged to focus on and disclose more about their “social purpose” and their place in society.
Several theories have been advanced as to the origins of and continuing pressure for corporate social purpose, including concerns about persistent economic inequality, climate change, and the availability and cost of healthcare, as well as concerns about the ability of governments to address these and other issues. However, regardless of the reasons, investors, media, and other constituencies are asking companies to look beyond their bottom lines.
ESG Activism: YourStake’s Portfolio Analyzer
It isn’t news that ESG issues are a high-priority item for many investors. Last year, I blogged about a new organization called “Stake” that was intended to help amplify the voice of retail investors on these issues. It looks like that platform – now rebranded as “YourStake.org” – is expanding its capabilities.
Jim McRitchie recently blogged that YourStake’s booth was getting a lot of traffic at the SR130 investor conference due to a new tool targeted at financial advisors. The tool is designed to allow retail investors to evaluate the environmental & social impact of their investment portfolios. While there’s still a lot of “noise” around ESG-focused investing, it’s interesting to see the development of tools like this one – particularly when it’s targeted to retail investors & paired with a platform that’s intended to increase their ability to influence the companies in which they invest.
In response to uncertainties surrounding insider trading law under Section 10(b) of the Exchange Act, in recent years federal prosecutors have increasingly opted to rely on another federal statute – 18 U.S.C. §1348 – in bringing criminal insider trading cases. On its face, that statute, which was enacted as part of Sarbanes-Oxley, requires only the existence of fraudulent intent and a scheme or artifice to defraud in connection with the sale or purchase of a security. That allows prosecutors to avoid dealing with Section 10(b)’s more thorny requirements, such as the need to establish the existence of a relationship of trust or confidence and the receipt of a personal benefit.
The ability of federal prosecutors to rely on this statute was recently given a boost by the 2nd Circuit’s decision in U.S. v. Blaszczak, (2d. Cir.; 12/19), which affirmed that 18 U.S.C. §1348 doesn’t require the government to establish a personal benefit. This excerpt from Proskauer’s memo on the case explains the Court’s reasoning:
The court explained that “the personal-benefit test is a judge-made doctrine premised on the Exchange Act’s statutory purpose,” which is “to protect the free flow of information into the securities markets” while “eliminat[ing] [the] use of inside information for personal advantage.”
Securities fraud under Title 18, in contrast is “derived from the law of theft or embezzlement,” where a breach of duty (including receipt of a personal benefit) is not an additional prerequisite. “In the context of embezzlement, there is no additional requirement that an insider breach a duty to the owner of the property, since it is impossible for a person to embezzle the money of another without committing a fraud upon him.
Because a breach of duty is thus inherent in . . . embezzlement, there is likewise no additional requirement that the government prove a breach of duty in a specific manner, let alone through evidence that an insider tipped confidential information in exchange for a personal benefit.”
The defendant complained that this interpretation of the statute would broaden the government’s enforcement power with respect to insider trading cases – but the Court concluded that this was a feature of the law, not a bug.
Insider Trading: What Does Blaszczak Mean for SEC Enforcement?
Because 18 U.S.C. §1348 is a criminal statute, the Blaszczak decision isn’t going to be much use to the SEC in its civil insider trading enforcement proceedings. In those cases, the SEC is going to have to continue to satisfy the somewhat murky requirements imposed by Section 10(b). As this WilmerHale memo notes, that seems a little goofy:
The decision also raises the prospect that a person could be criminally prosecuted for securities fraud for tipping schemes that could not be reached in a civil securities fraud action brought by the Securities and Exchange Commission—a seemingly illogical result.
The memo goes on to suggest that this disconnect “is likely to strengthen calls for insider trading legislation that would create a consistent standard.”
Last year, we blogged about the SASB’s publication of the first-ever the first-ever industry-specific sustainability accounting standards. The standards covered 77 different industries, and were designed to enable businesses to identify, manage & communicate financially-material sustainability information to investors. According to this recent IR Magazine article, the SASB standards appear to be gaining traction with both companies & investors:
It’s been one year since the Sustainability Accounting Standards Board (SASB) launched its 77 industry-specific reporting standards, and the non-profit says 120 companies are now using the standards in their ESG reporting.
SASB launched its standards in November 2018, having worked with a large investor advisory group since 2011 to determine the material ESG factors issuers should be updating investors on. The investor advisory group continues to expand, and SASB announced last week that six new investors had signed up to participate – bringing the count to 49 firms, representing more than $34 trillion in assets under management.
The SASB’s sustainability accounting standards are available on its website. Early adopters of the standards include GM, Nike, Merck & JetBlue.
I’ll admit to a certain bias here, but to me 2019’s two greatest fiascos were the performance of my Cleveland Browns & the aborted WeWork IPO. While early returns suggest that nobody affiliated with the Pumpkin Helmets has learned anything from their disastrous 2019 campaign, this recent PitchBook article says that VCs actually may have learned a thing or two from WeWork. The article suggests that their hard earned wisdom may be a game changer for the IPO class of 2020:
The collapse of WeWork shook up Silicon Valley, and it will likely mean elevated levels of scrutiny for any unicorn that’s planning to go public in 2020, a list that could include names like Airbnb, DoorDash and GitLab.
Taken as a whole, the debacle was the single biggest cause of a reckoning among VCs and startups that occurred in the final months of the year. It brought a renewed focus on profitability (or at least the potential thereof), as well as questions about whether VCs have become too founder-friendly and pushback against SoftBank-style excess used to finance explosive growth at all costs.
Silicon Valley seems to be embracing a newfound austerity, and WeWork deserves much of the credit—or much of the blame.
With its hockey-stick growth, heavy losses and extremely founder-friendly share structure, WeWork was a lot like some of the other unicorns that went public earlier in the year (including names like Lyft and CrowdStrike), only more so. In recent years, VCs had accepted that red ink and bowing at the feet of founders were the prices they had to pay to get in on rounds being raised by the hottest startups. But WeWork showed what can happen when those trends reached their logical endpoint.
The article says that Wall Street’s new-found unwillingness to buy into the fever-dream valuations of these companies appears to have woken VCs up to the risks associated with dumping piles of cash into money-losing ventures with governance provisions designed to cater to the whims of diva founder CEOs. If so, good for them.
On the other hand, I guess we’ll just have to see whether the Browns have learned anything about catering to the whims of their own underachieving divas. We fans have two decades of reasons to be skeptical about that.
SOX 404: Point & Counterpoint on Auditor Attestations
Over on Radical Compliance, Matt Kelly recently blogged about the status of the SEC’s proposed changes to the accelerated filer definition – which would have the effect of increasing the number of companies that would not have to comply with SOX 404(b)’s auditor attestation requirement for their reports on ICFR.
The blog notes that Corp Fin Director Bill Hinman’s recent comments at the AICPA suggest that a final rule should reach the SEC soon, and also acknowledges that proponents of the rule change have a point when they talk about the disparate impact of compliance costs on smaller companies:
Smaller companies devote much more of their revenue to audit fees. For example, if you’re a firm with $10 million in annual revenue, for every $1,000 that comes in the door, $29.70 goes back out to your audit firm. For a company with $50 billion in revenue, that amount is just 57 cents.
What’s more, the burden on smaller companies has increased substantially over the past decade. The blog says that in 2007, a hypothetical $10 million firm devoted only $17.73 to audit fees for every $1,000 in revenue. But it goes on to say that the increase isn’t necessarily just attributable to SOX 404 compliance – there have been substantial changes to financial reporting over that same time period.
While acknowledging the cost disparity, the blog also says that smaller companies are more likely to have weaker internal controls than larger firms, and that’s what Section 404(b) audits are meant to address. So, while changes may decrease some companies’ audit costs, they’re also likely to lead to more restatements – the cost of which will be borne by investors.
Materiality: Executive Health Disclosures
Over on “The Mentor Blog,” I recently blogged about a WSJ opinion piece by 2 Stanford profs addressing disclosures about executive health. Now Fenwick & West has prepared this 12-page memo diving into the details of the various issues surrounding whether disclosure about executive health is appropriate & suggesting some best practices for dealing with these issues. It’s definitely worth reading.
Tomorrow’s Webcast: “The Latest – Your Upcoming Proxy Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance – including the latest SEC positions – about how to use your executive & director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult ongoing issues that many of us face.
With all the emphasis on increased candor in disclosures about cybersecurity in recent years, it’s a little surprising that, according to this recent ProPublica report, there’s one type of cyber breach that companies are unwilling to call by its name – specifically, a ransomware attack. Here’s an excerpt:
Each year, millions of ransomware attacks paralyze computer systems of businesses, medical offices, government agencies and individuals. But they pose a particular dilemma for publicly traded companies, which are regulated by the SEC. Because attacks cost money, affect operations and expose cybersecurity vulnerabilities, they sometimes meet the definition used by the SEC of a “material” event — one that a “reasonable person” would consider important to an investment decision. Material events must be reported in public filings, and failure to do so could spur SEC action or a shareholder lawsuit.
Yet some companies worry that acknowledging a ransomware attack could land them on the front page, alarm investors and drive down their share price. As a result, although many companies cite ransomware in filings as a risk, they often don’t report attacks or describe them in vague terms, according to experts in securities law and cybersecurity.
The report points out that ransomware attacks are often featured in risk factor disclosure, but many companies victimized by these attacks seem to take the position that they aren’t material because customer data hasn’t been compromised.
There may be an argument for that position, but companies that consider adopting it should take a hard look at the language of their risk factor disclosure about ransomware. As Facebook found out last year, while it’s prudent to warn about risks that haven’t happened, disclosure that suggests an event is merely a risk when it has actually occurred may well be misleading.
Oscar Wilde once said (well, sort of) that the U.S. and the U.K. are two peoples separated by a common language. Now, it looks like their regulators’ approach to auditor independence may be another area in which they differ. While the SEC recently proposed to loosen the reins on auditor independence, this FT article says that the U.K.’s Financial Reporting Council is taking the opposite approach. Here’s an excerpt:
UK regulators have banned audit firms from providing a number of advisory services to listed companies and financial institutions in an effort to strengthen auditor independence after a series of scandals. The Financial Reporting Council on Tuesday issued a “radical” update to its ethical standards for audit firms, which have been scrutinised over poor audits and possible conflicts of interest in the wake of corporate collapses such as at Carillion, BHS and Thomas Cook.
The regulator banned accounting firms from providing all recruitment and remuneration services and due diligence from the public interest entities they audit — mostly listed companies, banks and insurers. It also prohibited them from giving tax advice, advocacy and acting in any management role.
In fairness, some of these services are already prohibited under U.S. independence rules, but it certainly suggests a more skeptical regulatory climate when it comes to independence issues than the one that’s currently prevailing here.
CEO Leadership: Don’t Hate Me Because I’m Beautiful
A recent study says that I’m putting a real crimp in my wife’s chances to succeed as a CEO. How come? Not to brag, but it’s my smokin’ hotness that counts against her. If that’s not bad enough, it turns out that – here’s a shock – it works the other way for men. Here’s an excerpt from the study’s abstract:
Study 1 found that while partner’s attractiveness enhanced the perceived leadership of male CEOs, female CEOs’ leadership was downgraded in the presence of an attractive partner. Study 2 validated that the leadership penalty for female CEOs increased when they were seen with more attractive males than with less attractive males.
I suppose that some of you may take issue with my view of myself as a “trophy husband.” Well, I can assure you that despite my strong resemblance to The Addams Family’s Uncle Fester, I radiate an inner beauty – or at least that’s what my mother says.
Happy Thanksgiving! I hope everybody gets a break from work, avoids travel nightmares & gets a chance to spend some time with family and friends over the holiday. Now, I’m going to speak bluntly – when it comes to cooking your turkey, I think most of you are doing it wrong. See that Norman Rockwell bird to the left? Chances are, you’re preparing yours the same way Mr. & Mrs. “Freedom from Want” did in 1942, and like theirs, I’d wager yours looks great, but tastes pretty mediocre.
I do most of the cooking in our house, which my wife thinks is only fair considering that I do most of the eating. I’ve been cooking Thanksgiving dinners for decades, and for most of that time, my turkey was a crapshoot. Usually, it turned out okay, but sometimes, it ended up so dry that you needed to drown it in about half a gallon of gravy in order to choke it down.
I read all sorts of tips about how to cook the turkey, and finally got so befuddled that I ended up with a bird in the oven that looked like it was wearing a tin foil hat to protect against gubmint mind control rays and that had so many meat thermometers sticking out of various parts that it looked like it was on life support in a poultry ICU. Meanwhile, I was spending Thanksgiving Day hanging around the kitchen adjusting the oven temp & basting the thing every 15 minutes for 3+ hours, while everybody else was drinking Christmas Ale & watching football.
This was sub-optimal & I kept thinking that there had to be a better way. A few years ago, I finally stumbled upon it. No, it’s not the deep fried thing. I’ve had deep fried turkey, and it tastes like chicken wings. I like chicken wings, but not for Thanksgiving. Also, I’m not comfortable with what seems to be about a 1-in-4 chance of having flames engulf everything I own that goes along with deep frying a turkey.
Anyway, here’s the big reveal – if you spatchcock your turkey, you will achieve true Thanksgiving bliss. What’s “spatchcocking” a turkey all about? It’s simple really, you butterfly the bird by cutting out the backbone with poultry shears, and then flip it over and press down on it until the wishbone breaks. Then season it & toss it breast side up into a preheated oven – or do as I do, and throw it onto your grill – and prepare to be amazed.
The first thing you’re going to notice about this method is how fast it is. I cooked an 18 lb. turkey on my “Big Green Egg” grill last year & it took just about 80 minutes at 400 degrees. For those of you for whom my description of spending an afternoon with a baster in hand struck a cord, that may sound absurd – but no kidding, it really is that fast.
The other thing is that the bird turns out really juicy with nice, crispy skin. Because it’s flattened out, it cooks more evenly and you don’t end up drying out the white meat in order to avoid poisoning the folks who like dark meat. The backbone also will help you make a richer stock for your gravy, if you’re so inclined.
So, if you want to simplify cooking Thanksgiving dinner & end up with a much better result, give this method a try. Here’s the recipe from the “Serious Eats” website that I use (although I find a 400 degree temperature works better on my grill). Finally, regardless of how you how you cook your bird (or your Tofurky), have a great holiday!
Anybody interested in a little C-suite soap opera today? I’ve recently stumbled across a number of studies addressing various aspects of the CEO-CFO relationship, and since it’s a slow news day, I thought it might be kind of fun to blog about a couple of them. The first item is a recent study that found that younger CFOs may deter earnings management activities by older CEOs, which in turn results in lower audit fees. Here’s an excerpt:
CEO-CFO career heterogeneity suggests that younger non-CEO executives have different career concerns and career goals with the pre-retirement CEOs. Therefore, younger non-CEO executives are less likely to be cooperative with pre-retirement CEOs on earnings management behavior. We find a negative and significant association between audit fees and CEO-CFO career heterogeneity.
The results suggest that auditors perceive CEO-CFO career heterogeneity as a favorable factor of firms’ internal governance and therefore may decrease audit risks. Further, we find that firm’s financial performance, as well as the corporate governance, moderates the relationship between audit fees and CEO-CFO career heterogeneity.
So, if you want to lower the risk of your audit & the size of your fees, hire a millennial CFO to keep a lid on your boomer CEO’s desire to live a little dangerously.
Audit Fees: The Cost of Conflict Between CEOs & CFOs
On the other hand, you also need to make sure your CEO & CFO get along, because if they don’t, another study says you’re likely to pay higher audit fees. Here’s an excerpt from that one:
We investigate the relation between audit fees and differences in CEO and CFO personality traits. Audit fees should reflect engagement risk associated with a client. This risk is likely influenced by the client’s top management team’s personalities and how they differ. For example, top management teams that experience more disagreement about key strategic decisions may pose higher risks to auditors. We proxy for CEO-CFO conflict by using differences in CEO and CFO “Big Five” personality traits. We examine whether these personality differences help explain audit fees after controlling for other determinants of audit fees in the literature.
We find that CEO-CFO personality differences are positively associated with audit fees, consistent with auditors assessing risk from conflicting personalities in the C-suite.
The study does say that the effect of a personality clash between the CEO & the CFO on audit fees can be mitigated by the number of years they’ve worked together, the company’s corporate governance practices & the tenure of its auditor.
But before you decide to send your CEO & CFO to couples therapy, it turns out that a little personality conflict isn’t always a bad thing. As I blogged over on DealLawyers.com, another recent study says that the winning combination for M&A appears to be a visionary, upbeat CEO paired with a CFO who’s always reading to pour cold water on the CEO’s fever dreams.
November – December Issue: Deal Lawyers Print Newsletter
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– How the Type of Buyer May Affect the Target’s Remedies in a Public M&A Deal
– The Risks of Not Strictly Complying with a “No Shop” Clause
– When Passive Investors Drift into Activist Status
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. 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.
Rick Fleming, the SEC’s Investor Advocate, recently lambasted companies with dual-class capital structures, referring them to as a “festering wound” that, if left unchecked, could “metastasize” and threaten the “entire system of our public markets.” C’mon Rick, we won’t get anywhere if you keep pulling your punches – let people know how you really feel. . .
Notwithstanding his rhetorical flourishes, Mr. Fleming deserves credit for being willing to acknowledge that investors are a big part of the problem:
We need to acknowledge that investors themselves have engaged in their own race to the bottom when it comes to corporate accountability to shareholders. Investors, and particularly late-stage venture capital investors with deep pockets, have been willing to pay astronomical sums while ceding astonishing amounts of control to founders. This means that other investors, in order to deploy their own capital, must agree to terms that were once unthinkable, including low-vote or no-vote shares. The end result is a wave of companies with weak corporate governance.
But after making this acknowledgment, he immediately retreated to the customary fallback position – we need government intervention on dual-class stock because there’s an insurmountable collective action problem here: “Investors, acting in their own self-interest (or according to their investment mandates), may be inclined to invest in companies with weak corporate governance even though they know that these companies will ultimately harm the broader capital formation ecosystem.”
Are late round & IPO investors just too greedy & short-sighted to be trusted to get this right? Could be. I mean, they’re sure greedy. But on the other hand, it’s possible that their indifference reflects the fact that many institutional investors don’t think dual-class structures pose the kind of existential threat to the market that people like Mr. Fleming do. Who knows? Some may even believe that the jury’s still out on whether dual-class structures are a problem at all.
Oddly enough, the WeWork fiasco may undermine the argument for outside intervention in IPO capital structures. WeWork indicates that there is a point when governance problems are egregious enough to provoke IPO investors to collectively say “no thanks” – no matter how much sizzle the deal supposedly has. The fallout from the busted deal also suggests that even VC enablers are capable of learning their lesson when it comes to ceding so much control to founders.
I don’t want to push this too far – WeWork turned out to be such a mess that nobody really deserves to be patted on the back for having the sense to walk away. But if the argument for intervention on dual class structures is based on the premise that investors won’t act collectively to draw the line on governance problems, WeWork suggests that isn’t the case, and that the reasons why they don’t normally take collective action on this issue may have to do with things other than greed & short-sightedness.
Testing the Waters: Managing & Disclosing Indications of Interest
The post-JOBS Act ability to “test the waters” prior to filing a registration statement has made soliciting non-binding indications of interest from institutional investors a fairly common practice for IPO issuers. But while companies may obtain those indications of interest, this Olshan blog points out that there are still many issues that companies need to consider when it comes to planning the solicitation process & disclosing indications of interest.
In particular, this excerpt points out that offering participants still need to navigate the statutory restrictions on “offers” & “sales” under the Securities Act:
In view of these restrictions on premature “offers” and “sales,” the SEC has periodically requested issuers, through staff comment letters, to explain how and when they received the indications of interest, especially from new unaffiliated investors, and disclose any written communications or agreements that accept the investments or indications of interest. The SEC has also asked issuers to disclose the number of potential indicated investors the issuer communicated with on the topic.
As a result, issuers should note that any pre-IPO meetings or oral communications with potential new investors—where an investor indicates an interest in purchasing shares—must be conducted in the context of “testing-the-waters” activities pursuant to Section 5(d) of the Securities Act. An underwriter should generally be able to seek non-binding indications of interest from prospective investors (including the number of shares they may seek to purchase at various price ranges) as long as the underwriters do not solicit actual orders and an investor is not otherwise asked to commit to purchase any particular securities.
Similarly, when the issuer or underwriter engages a potential investor in any written communications (as defined in Rule 405 under the Securities Act), they may also need to provide them to SEC staff, who will verify whether the issuer violated Section 5.
Oops! Canadian Fund Overlooks $2.5 Billion in Securities in 13F Filing
I’ve always thought that 13F filings were far and away the most useless documents required to be filed with the SEC. But they’re even more useless if the filer neglects to include 20% of its reportable holdings. This is from The Financial Post:
One of Canada’s largest pension funds “inadvertently omitted” all of its Canadian holdings from a recent disclosure it made to the U.S. Securities and Exchange Commission, failing to include about US$2.46 billion in investments.
British Columbia Investment Management Corporation made the omission in February, when it submitted its disclosures for the three months ending on Dec. 31, 2018. The pension fund, which has $145.6 billion in assets under management, failed to disclose holdings in 98 companies, primarily across Canada’s energy, banking and mining sectors. The Canadian holdings accounted for more than 20 per cent of its total disclosed investments.
Apparently, this isn’t the first time that BCI has messed up its 13F filings. The Post article says that in October 2015, it filed 16 amendments to 13F filings dating back to 2010.
The comment period on the SEC’s proposal to amend Items 101, 103 & 105 of Regulation S-K recently expired. In the proposing release, the SEC laid out some controversial changes to current rules, including a “principles based” approach to Item 101 & a “human capital resources” disclosure requirement. In light of the contentious nature of these proposals, I thought a stroll through the comment letters might be interesting – and I was right.
But so was a new entrant into the governance debate – I guess I’ll call this one “Big Yoga“. “Yoga Burn Challenge” CEO Zoe Bray-Cotton submitted a comment letter focusing on human capital issues. Her comments are thoughtful & serve as a reminder that these issues matter to a broader segment of society than just those of us who earn a living dealing with securities regulation. But what really made her letter stand out from the crowd was the fact that she cited us – well, actually, ME! – in it:
I also refer to the following articles published by TheCorporateCounsel.net website:
1. Board Gender Diversity: Good for Business
2. Gender Quotas on Boards?
3. “Just Vote No”: State Street’s Alternative to Quotas
Those were all in this blog that I wrote a couple of years ago. Anyway, she plugged me, so I will plug her. Go check out the Yoga Burn Challenge – and tell Ms. Bray-Cotton that I sent you.
Data Security: CalPERS Directors Keep Losing Their Devices
Here’s a goofy one for you – it seems that some members of the CalPERS board have a real problem hanging on to their devices. Here’s an excerpt from a recent Sacramento Bee article:
CalPERS board member Margaret Brown has reported losing two state-issued iPhones and an iPad since she was elected to her seat overseeing the $380 billion pension fund two years ago, according to device records. Brown’s losses of the devices, while representing relatively minor security risks for the California Public Employees’ Retirement System, stand out compared to other board members’ handling of their devices, according to records CalPERS provided under the Public Records Act.
In the last five years, three other board members among the 20 officials listed in the records reported losing one iPad each. Former Board President Priya Mathur reported losing an iPad Air 2 in 2018, and the device wasn’t found, according to the records. Board members Theresa Taylor and Ramón Rubalcava each lost one iPad, neither of which appear to have been returned, according to the records.
But there’s no need for CalPERS participants to worry about their personal data being compromised. That’s because experts quoted in the article said that “only an extremely sophisticated hacker could access information on the iPads with the protections CalPERS has in place.” Whew! Good thing there are so few extremely sophisticated hackers out there.
I guess I shouldn’t be too hard on these folks. After all, my youngest son lost 2 smart phones on consecutive college spring breaks (we were not amused). On the other hand, it’s probably fair to expect directors of a public institution to be a little more responsible than a frat boy. I don’t know if there will ever be a Hall of Fame for institutional investors, but if there is, the slogan “for thee but not for me” should be carved in stone over the entrance to it.
EDGAR: Why Are iXBRL Filings Sometimes So Clunky to Download?
Several members have pointed out – in emails & in our ”Q&A Forum” (eg #10032) – that some iXBRL filings take forever to load. According to the SEC Office of Structured Disclosure’s Inline XBRL page, that shouldn’t be the case if you’ve got an up-to-date browser:
Viewing Inline XBRL filings is simple and does not require any specialized software because the Commission has incorporated an Inline XBRL Viewer into the Commission’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
Anyone using a recent standard internet browser can view an Inline XBRL filing on EDGAR. (Recent standard internet browsers are ones that fully support HTML 5 and JavaScript, such as Chrome 68 and later, Firefox 60 and later, Safari IOS 11 and later, Microsoft Edge Windows 10, and Internet Explorer 11.)
Personally, I found that when I used the old computer that I was issued when I first joined TheCorporateCounsel.net team, iXBRL filings took forever to load. However, they uploaded fairly quickly on the new computer that my law firm issued to me, so I chalked it up to outdated hardware/software. However, others seem to have had problems on new computers/browsers as well. Does anybody know if there’s a fix that people may be overlooking?
Yesterday, the SEC issued two controversial rule proposals that, if adopted, would significantly modify the proxy disclosure & solicitation process. There’s a lot to cover, so I’m going to do these one at a time. First, the SEC announced a rule proposal that would impose disclosure & other obligations on proxy advisors. The proposed rules would:
– Amend Exchange Act Rule 14a-1(l), which defines the terms “solicit” and “solicitation,” to specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules.
– Revise Rule 14a-2(b) to condition certain exemptions relied upon by proxy advisors on their compliance with three new requirements. In order to avoid complying with the full range of rules applicable to proxy solicitations, proxy advisors would have to disclose material conflicts of interest in their proxy voting advice, provide the company with an opportunity to review and comment on their advice before it is issued; and, if requested by the company, include in their voting advice a hyperlink directing the recipient of the advice to a written statement that sets forth the company’s position on the advice.
– Modify Rule 14a-9 to include examples of when failing to disclose certain information in the proxy voting advice could be considered misleading within the meaning of the rule.
The SEC was sharply divided on this proposal & its companion – both of which were approved by a 3-2 vote. Commissioner Jackson issued a statement on his decision to dissent from the proposal, which he characterized as limiting the ability of investors to “hold corporate insiders accountable.” Fellow Democratic Commissioner Allison Herren Lee issued a statement in which she said that both proposals would “suppress the exercise of shareholder rights.”
In contrast, Republican Commissioner Eliad Roisman issued his own statement in support of the proposal, which he said would help fiduciaries “receive more accurate, transparent, and complete information when they make their voting decisions.”
When Caesar crossed the Rubicon with his legions in 49 BC, he knew that he was taking a fateful step and reportedly exclaimed “Alea iacta est!” – “The die is cast!” Maybe I’m being a little dramatic, but it sure feels like there’s an element of that sentiment in the SEC’s action. While Commissioner Clayton issued a statement in which he stressed that the proposal is just that – a proposal – it seems inevitable that the regulatory ground is about to shift in a significant way.
But Wait! There’s More! SEC Proposes to Tighten Shareholder Proposal Thresholds
Because one highly controversial proposal wasn’t enough, the SEC also announced a rule proposal yesterday that would make it more difficult for shareholders to submit & resubmit proposals for inclusion in a company’s proxy statement. The rule proposal would, among other things:
– Amend Rule 14a-8(b) to replace the current $2,000/1% ownership for at least 1 year threshold with 3 alternative thresholds for submission: continuous ownership of at least $2,000 of the company’s securities for at least 3 years; at least $15,000 of the company’s securities for at least 2 years; or at least $25,000 of the company’s securities for at least 1 year.
– Amend Rule 14a-8(c) to apply the one-proposal rule to “each person” rather than “each shareholder,” which would effectively prohibit a shareholder-proponent from submitting one proposal in their own name and simultaneously submit another proposal in a representative capacity. Representatives would also be prohibited from submitting multiple proposals, even if the representative were to submit each proposal on behalf of different shareholders.
– Amend Rule 14a-8(i) to increase the current thresholds of 3%, 6% and 10% for resubmission of matters voted on once, twice or three or more times in the last five years to 5%, 15% and 25%, respectively. A new provision would also be added permitting exclusion of a proposal that’s received 25% approval on its most recent submission if it has been voted on 3 times in the last 5 years and both received less than 50% of the votes cast and experienced at least a 10% decline in support.
Other proposed changes to Rule 14a-8(b) would subject shareholders using representatives to enhanced documentation requirements with respect to the authority of those agents, and require shareholder-proponents to express a willingness to meet with the company and provide contact & availability information.
I’ve already noted the reaction of individual SEC commissioners to these two proposals, but outside commenters had plenty to say as well. For instance, the CII decried the proposals as apparently “intended to limit shareholders’ voice at public companies in which they invest,” while the U.S. Chamber of Commerce hailed them for ensuring that “investors will have access to transparent and unconflicted proxy advice as well as improv[ing] the proxy submission process.”
Audit Reports: New CAM Disclosure Req’t Shines Light on Material Weakness
Check out this recent “FEI Daily” commentary on the impact of the new CAM disclosure requirement on one company:
In a stark example of how the new “critical audit matters” (CAM) rule is training a spotlight on companies’ internal controls, Stitch Fix Inc. is expanding its internal information-technology controls after identifying weaknesses in how the online service reported financial performance. The issue, related to outsourced information-technology service providers, was flagged by the San Francisco company’s independent auditor in October. The Public Company Accounting Oversight Board began requiring independent auditors to disclose significant challenges in reviewing public companies’ financial statements under the CAM rule this year.
– Excluded Shareholder Proposals. Some of the most notable policy changes respond to the SEC’s recent guidance on the shareholder proposal no-action process. Glass Lewis now says that if the SEC declines to state a view on whether a shareholder proposal should be excluded, then it will likely recommend that shareholders vote against the members of the governance committee unless that proposal appears in the proxy statement.
If the SEC verbally permits a company to exclude a proposal and doesn’t provide a written record, Glass Lewis says that the company will have to provide some disclosure about the no-action position. Companies that don’t provide this disclosure will also face a negative recommendation on the members of their governance committee.
– Committee Performance & Disclosure. Several revisions relate to the codification of circumstances under which Glass Lewis will recommend against chairs of the audit, governance, and comp committees. Audit committee chairs will earn a thumbs down if fees paid to the company’s external auditor aren’t disclosed.
Governance committee chairs will get dinged when either director attendance information isn’t disclosed or when a director attended less than 75% of board and committee meetings and the proxy doesn’t provide enough details as to why. Comp committee chairs will earn Glass Lewis’s wrath if they adopt a time period for holding a “say-on-pay” vote that differs from the one approved by shareholders.
– Exclusive Forum Bylaws & Supermajority Provisions. Glass Lewis has tweaked its guidelines to clarify that it may not recommend against the governance committee chair in situations where it determines that an exclusive forum bylaw has been “narrowly crafted to suit the unique circumstances facing the company.” Glass Lewis has also codified its position that it will recommend voting against proposals to eliminate supermajority provisions at controlled companies, because these protect minority shareholders.
– Gender Pay Equity. Glass Lewis clarified that it will review on a case-by-case basis proposals that request that companies disclose their median gender pay ratios. It will generally vote against those proposals if the company has provided sufficient information concerning its diversity initiatives & concerning how it is ensuring that women and men are paid equally for equal work.
Other changes include defining situations where Glass Lewis reports on post-fiscal year end compensation decisions & setting expectations for disclosure of mid-year adjustments to short-term incentive plans. Glass Lewis also says that it has “enhanced” its discussion of excessively broad “change in control” provisions in employment agreements.
Whistleblowers: SEC Enforcement Says Protections Aren’t Just for Employees
Typically, when we think about whistleblowers, most of us probably picture disgruntled current or former company employees. Yesterday, the SEC’s Division of Enforcement provided a reminder that while that’s often the case, others can qualify as whistleblowers too. As this excerpt from the SEC’s press release announcing enforcement proceedings against Collector’s Café & its CEO demonstrates, investors are also eligible for protection as whistleblowers:
The Securities and Exchange Commission today filed an amended complaint against online auction portal Collectors Café and its CEO Mykalai Kontilai to add allegations that they unlawfully sought to prohibit their investors from reporting misconduct to the SEC and other governmental agencies. The SEC previously charged Collectors Café and Kontilai with a fraudulent $23 million securities offering based on false statements to investors, and alleged that Kontilai misappropriated over $6 million of investor proceeds.
The SEC had previously brought securities fraud charges against the defendants, and its amended complaint alleges that the defendants tried to resolve investor allegations of wrongdoing by conditioning the return of their money on agreements barring investors from dropping a dime on them to law enforcement, including the SEC.
The SEC’s complaint alleges that this conduct violated the SEC’s whistleblower protection rules – and just to make absolutely certain that they waived a red flag in front of the SEC bull, the complaint alleges that these defendants sued two investors that it believed breached one of these agreements.
Non-GAAP: Is It a Non-GAAP Number or Something Else?
Here’s a really helpful SEC Institute blog that reviews the sometimes murky distinction between non-GAAP financial measures subject to Reg G’s requirements & operating measures that are outside the scope of the rule. It also provides some guidance as to how to go about determining what category a particular metric falls into.
