Audit Analytics recently took a look at the audit fees paid by S&P 500 companies – and to say that they vary widely is a huge understatement. The average audit fees paid by S&P 500 companies were $13.0 million in 2018. Median fees were $8.3 million, with the lower quartile cut-off at $4.6 million & the upper quartile cut-off at $14.7 million. But what’s really eye-popping is the fee range – audit fees paid by the S&P 500 ranged from $800,000 to $133.3 million.
That degree of variation in audit fees is interesting, but so is this nugget about non-audit fees:
Roughly 9.5% of S&P 500 companies had non-audit fees greater than 25% of total fees in 2018. While high non-audit fees exclusively are not a red flag, they can serve as an indicator for investors and other users of financial statements to review what factors are contributing to the fees in each disclosed fee category and potentially look closer at services that have been characterized as non-audit work.
As Audit Analytics notes, the size of non-audit fees that auditors receive may raise concerns. Here’s an excerpt from this NYT article on the topic:
Most recently, the Securities and Exchange Commission issued a statement cautioning accounting firms on the provision of consulting services to their auditing clients. The commission, which did not challenge any specific services in its June 15 “interpretive release,” said its purpose was “to reinforce the sensitivity of corporate‐audit committees and corporate managers as well as accounting firms to the need for preserving independent audits.” Apparently, the commission is concerned because it fears that an accounting firm’s interest in keeping — or obtaining — a company as a consulting client may erode the auditor’s independence.
I guess I probably should have mentioned that this NYT article was published in 1979. The rules are tighter now – but after more than 40 years, it seems like the music may have changed but the song remains the same.
Proxy Access: Adopted Widely, Used Only Once
Sidley recently issued a 5-year review of proxy access developments. In addition to tracking the adoption of proxy access bylaws, the review also addresses a variety of other topics, including management & shareholder proxy access proposals, typical proxy access provisions, and proxy advisor policies on proxy access.
While noting that proxy access bylaws have been adopted by 76% of the S&P 500 and a majority of the Russell 1000, the memo also notes that such bylaws have actually been used only once. Here’s an excerpt with the details:
In 2019, for the first and only time, a shareholder included a director nominee in the proxy materials of a U.S. company pursuant to a proxy access right. In December 2018, The Austin Trust dated January 1, 2006 (with Steven Colmar as trustee) with ownership of approximately 3.8% of the common stock of The Joint Corp. filed a Schedule 14N seeking to use proxy access to nominate a director at the company’s 2019 annual meeting.
The Joint Corp. had adopted proxy access in August 2018 on standard terms after a shareholder proposal to adopt proxy access submitted by Colmar was approved (with 96% support) at the company’s annual meeting in June 2018. (The board of directors had not made a recommendation for or against the proposal.)
Both the board of directors and ISS ultimately recommended that stockholders vote for the proxy access nominee, and he was elected at the company’s May 2019 annual meeting with more than 99% support.
Tomorrow’s Webcast: Tying ‘ESG’ to Executive Pay”
Join us tomorrow for the CompensationStandards.com webcast – “Tying ‘ESG’ to Executive Pay” – to hear Aon’s Dave Eaton, Mercer’s Peter Schloth, Southern’s James Garvie, and Willis Towers Watson’s Steve Seelig discuss how to handle the growing demands – and challenges – to including ESG metrics in executive compensation plans.
With D&O insurance premiums on the rise & more Section 11 suits being filed in plaintiff-friendly state courts, IPO companies and their directors & officers face an increasingly hostile environment. This Wilson Sonsini memo points out that for some companies, a direct listing may provide a practical solution for avoiding Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. This excerpt explains why:
In a direct listing, no shares are sold by the company and therefore no capital is raised. Rather, a company files a registration statement solely to provide certain of its existing shareholders, such as early stage investors and employees, the ability to resell their shares directly to the public.
The existing shareholders include both those whose shares are registered pursuant to the company’s registration statement and those whose shares are exempt from the registration requirements of the securities laws. The shareholders have complete discretion about whether to sell their shares and all are equally able to sell shares upon the company’s direct listing – i.e., starting from the moment of the opening bell.
There are no initial allocations: any prospective purchaser can place orders with their broker of choice. Because both registered and unregistered shares are available for sale upon the company’s direct listing and the sales are conducted through anonymizing brokerage transactions, it is not possible for any purchaser to trace the particular shares she bought back to the registration statement covering the direct listing. Accordingly, no purchasers have standing to assert an offering claim under the ’33 Act.
Before we all get too carried away, the memo also points out that this is a fix that only works for those few cash-rich unicorns that don’t need to raise capital in an IPO. But the memo says there’s another potential fix that could work for the rest of the pack – with a little cooperation from their underwriters. How? Just tweak the shareholder lockups to allow some shares to be sold into the market in exempt transactions simultaneously with the IPO. That would also make tracing of shares to the IPO impossible. Well, at least until Blockchain ruins things for everybody. . .
Compliance Officers: NYC Bar Says It’s Time to Turn Down the Heat
As a former junior high school football coaching super-genius, I know I would’ve done things differently in the 4th quarter of the Super Bowl if I were coaching the 49ers instead of Kyle Shanahan. While “Monday Morning QBs” like me are merely obnoxious bores, Matt Kelly recently blogged about an NYC Bar Association report that says our regulatory counterparts cause big problems for corporate compliance officers:
The New York City Bar Association released a report on Tuesday warning that compliance officer liability continues to be a worrisome part of regulatory enforcement, and called for more guidance about when a compliance officer’s conduct can leave him or her in regulators’ crosshairs.
The report focused on compliance officers working in financial services firms, although compliance officers from any industry will appreciate the points raised. Its chief complaint is that compliance officers fear growing personal liability for failures of their firm’s compliance program, when those failures might be more due to insufficient budgets, weakly structured compliance roles, or management that just doesn’t care much about the importance of a strong compliance function.
The report also complained that enforcement actions against compliance officers suffer from hindsight bias. That is, compliance officers are supposed to implement programs “reasonably designed” to prevent violations, but you can’t really assess the quality of that effort until a violation has actually happened — which creates the risk that what seemed reasonable at the time will look unreasonable after something has gone wrong.
The report recommends that regulators take a number of actions designed to provide greater clarity to compliance officers concerning what’s expected of them, and Matt’s blog also notes that some heavy hitters in the financial services industry have endorsed the report’s recommendations.
ESG Investing: It’s a Woman’s World – And It May Stay That Way
This Fortune article says that while men dominate most areas of finance & investing, socially responsible investing is a field where women are clearly in command:
It was the usual setup for panelists at a finance conference talking about making smart investments. They were all the same gender. In this case, all women. That probably wasn’t surprising, considering the event was hosted by the United Nations-backed Principles for Responsible Investment. Still, Karine Hirn, founding partner at East Capital in Hong Kong, watched in admiration. She celebrated on Twitter: “Climate finance is at last opening up perspectives for great talent within the otherwise very unbalanced world of finance.”
Men rule that world, except for one key field: the fast-growing arena of what’s known by the shorthand ESG. There’s big money pouring in, and there are big names promoting the idea of applying environmental, social and governance standards to the business of making money.
As more money has been poured in to ESG investments, the field has attracted more men – but women may have a key advantage here: a substantial installed base of talent. Companies are fighting for ESG investing talent, and that battle favors those who’ve been involved for years – many of whom are women.
Yesterday, the SEC voted to propose significant changes to the financial disclosure provisions of Regulation S-K. The changes are intended to eliminate duplicative disclosures & modernize and enhance MD&A disclosures while simplifying compliance efforts. Here’s the 196-page proposing release. This excerpt from the SEC’s press release summarizes the proposed rule changes:
The proposed amendments would eliminate Item 301 (selected financial data) and Item 302 (supplementary financial data), and amend Item 303 (management’s discussion and analysis). The proposed amendments are intended to modernize, simplify, and enhance the financial disclosure requirements by reducing duplicative disclosure and focusing on material information in order to improve these disclosures for investors and simplify compliance efforts for registrants.
Among other things, the proposed amendments to Item 303 would:
– Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
– Replace Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A;
– Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A;
– Add a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing Commission guidance in this area; and
– Revise the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.
Yesterday’s vote was another divisive one. Commissioner Allison Herren Lee issued a dissenting statement criticizing the proposal for ignoring “the elephant in the room” – climate change disclosure. She observed that in all of the SEC’s efforts to modernize Reg S-K in recent years, it has not once mentioned climate change or its relevance to these disclosures.
SEC Chair Jay Clayton issued his own lengthy statement in which he addressed, among other things, the SEC’s ongoing efforts to get its arms around climate change & environmental disclosure issues. Meanwhile, the ever-quotable Commissioner Hester Peirce weighed-in with a statement in support of the proposal, in which she warned that due in part to the efforts of “an elite crowd pledging loudly to spend virtuously other people’s money, the concept of materiality is at risk of degradation” through its expansion to ESG & sustainability disclosures.
But Wait! There’s More! SEC Issues Guidance on MD&A Metrics
As if a revamp of S-K’s financial disclosures wasn’t enough, the SEC also issued this 7-page interpretive release providing guidance on disclosure of key performance metrics in MD&A. The guidance says that when companies disclose such metrics, they should also consider whether additional disclosures are necessary and gives examples of such disclosures. The guidance also cites the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and advises companies to consider these requirements when disclosing metrics.
Risk Factors: Wuhan Coronavirus Outbreak
Jay Clayton also addressed the disclosure implications of the coronavirus outbreak in his statement on the S-K financial disclosure rule proposals. He noted the significant uncertainty surrounding the outbreak’s implications for businesses, but also observed that “how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.”
Speaking of that, Levi-Strauss filed its Form 10-K yesterday and it includes the first 10-K risk factor disclosure addressing the outbreak (see p. 19). Here’s an excerpt:
Disasters occurring at our or our vendors’ facilities also could impact our reputation and our consumers’ perception of our brands. Moreover, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally, which could adversely impact our operating results. For example, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, resulting in store closures and a decrease in consumer traffic in China. At this point, the extent to which the coronavirus may impact our results is uncertain.
If there’s one thing we know about cryptocurrencies, it’s that celebs love them. We’ve blogged about rapper Ghostface Killah’s unsuccessful efforts to launch his own cryptocurrency, and we also mentioned how boxer Floyd Mayweather & music impresario DJ Khaleed managed to get themselves sideways with the SEC due to their involvement in touting some ICOs on social media.
Now Spencer Dinwiddie of the Brooklyn Nets has entered into the crypto game with his SD8 coin offering. This excerpt from a recent Forbes article explains what he’s up to:
After nearly three months of delays, including a threat from the NBA to ban him from the league during negotiations, Brooklyn Nets point guard Spencer Dinwiddie plans to launch his token-based investment vehicle on Monday in conjunction with a bid to get selected to his first career All-Star Game.
I reported in October that the 26-year-old planned to launch DREAM Fan Shares, a blockchain-based investment platform, where he’ll sell 90 SD8 coins that will enable Dinwiddie to collect up to $13.5 million of his guaranteed three-year, $34 million contract upfront, as a business loan. But Dinwiddie ran into some disagreements with the NBA about this first-of-its-kind initiative, which he outlined over the phone on Sunday as Brooklyn arrived in Orlando for a game the next night against the Magic.
The third year of Dinwiddie’s Nets contract is a player option for just over $12.3 million. And his original tokenization plan called for the possibility of significant dividends for investors if he elected to opt out of the final year of his deal in 2021 and come to terms on a more lucrative contract with Brooklyn or another team. And that is where the NBA had some real issues, according to Dinwiddie.
“Pretty much what they said was that the player option was gambling,” he said, “and that would’ve been cause for termination.”
Dinwiddie ultimately agreed to tweak his coin to eliminate the portion of it that related to his 3rd year player option, and the NBA backed down. While the NBA may not have liked his deal, it appears that Dinwiddie’s trying to stay on-side with the SEC. He’s doing his offering in reliance on Reg D, and will sell the coins to accredited investors only.
Venture Capital: Marky Mark Backed Co. to Toe the IPO Mark
You know what celebs love even more than the crypto? That’s right – cocaine! venture capital! We’ve blogged about Snoop Dogg’s venture investments, but there are lots of other celebrities in the venture capital game. This recent Coinspeaker article says that Mark “Marky Mark” Wahlberg’s investment in F45 Training Fitness may be ready for an IPO as soon as the first half of this year. And the article says that his investment has already paid off big-time:
The franchise has quickly gained traction. In March 2019, it attracted an American actor, producer, businessman, model, rapper, singer and songwriter Mark Wahlberg. Hollywood celebrity once tried the F45 Training program. After that, his Investment Group and FOD Capital bought a minority stake in F45 Training. The investment made as much as $450 million.
Wow – talk about Good Vibrations! Makes me want to buy a pair of parachute pants. Wahlberg appears to have really hit the jackpot here, and it looks like that in addition to his achievements in show biz, when it comes to venture investing, he can now echo the words of one of his most famous characters: “I’m a star. I’m a star, I’m a star, I’m a star. I’m a big, bright shining star.”
Blue Sky Cops & Robbers: “The Story You are About to Hear is True. . .”
I’ve been a huge fan of “Dragnet” since I was a little kid. I still can’t get enough of Joe Friday and his partners & their true crime tales from the files of the LAPD. Maybe that’s why I was excited to read Keith Bishop’s recent blog discussing a new series of podcasts from the North American Securities Administrators Association.
The series is called “Real Life Regulators”, which NASAA’s press release says recounts “true crime stories straight from the investigative files of the securities regulators closest to investors.” That sounds awesome. Here’s a link to the first episode.
You may have noticed that I referred to Joe Friday’s “partners” in the first sentence. That’s not a typo. Sgt. Friday actually had 4 partners on TV & radio before Officer Bill Gannon: Ben Romero, Ed Jacobs, Bill Lockwood and Frank Smith.
Last fall, Liz blogged that ISS was suing the SEC to overturn the Commission’s August 2019 interpretations saying that proxy voting advice is “proxy solicitation” under SEC rules. As reported in Bloomberg Law, that lawsuit is now on hold.
As part of the stay, the SEC has indicated that its guidance issued last August doesn’t have the effect of law and it won’t be invoked while the stay is in place. All of the underlying court filings are available on Pacer.
Insider Trading: Bharara Task Force Weighs In
A few years ago, I blogged over on The Mentor Blog about the establishment of a task force led by former SDNY chief Preet Bharara to make recommendations about reforming insider trading law. The task force recently issued its report, which recommends enactment of a new statute setting forth the elements of insider trading. Here’s an excerpt from the executive summary summarizing what the task force thinks that statute should include:
The language and structure of any statute should aim for clarity and simplicity.
– The law should focus on material nonpublic information that is “wrongfully” obtained or communicated, as opposed to focusing exclusively on concepts of “deception” or “fraud,” as the current case law does.
– The “personal benefit” requirement should be eliminated.
– The law should clearly and explicitly define the knowledge requirement for criminal and civil insider trading enforcement, as well as the knowledge requirement for downstream tippees who receive material nonpublic information and trade on it.
The task force’s report includes specific language that it would like to see included in any statute, including this definition of what it means to “wrongfully” obtain MNPI:
“Wrongfully shall mean obtained or communicated in a manner that involves (a) deception, fraud, or misrepresentation, (b) breaches of duties of trust or confidence or breach of an agreement to keep information confidential, express or implied, (c) theft, misappropriation, or embezzlement, or (d) unauthorized access to electronic devices, documents, or information.”
There’s a lot to unpack in this definition, but among other things, the inclusion of language covering the breach of an NDA would address one of the key weaknesses in the SEC’s failed enforcement action against Mark Cuban, while the language in clause (d) would shore up insider trading cases against data hackers, which also face some impediments under existing law.
Building Better Board Evaluations
Over the years, some boards have become pretty good at implementing effective & insightful self-evaluation schemes. But others struggle with a formulaic, “fill-in-the-blanks” process that leaves many directors wondering just exactly what this all was supposed to accomplish. If you advise any boards that fall into this latter category, this Weil memo laying out a framework for more effective board evaluations may be a helpful resource. Check it out!
Goldman Sachs’ CEO David Solomon made news at Davos last week by announcing that his firm would no longer help companies go public unless they had “at least one diverse board candidate, with a focus on women.” I knew women were underrepresented on IPO boards, but Solomon’s statement made me wonder exactly what the gender composition of IPO boards was like. So, I did a little digging, and now I’m kind of sorry that I asked.
Last May, this Quartz article looked at the gender diversity of the 10 biggest IPO filings of 2019. While it was early in the year, the list included Uber, Lyft, Pinterest, Slack, Chewy, WeWork & CrowdStrike – so the kind of unicorns that banks like Goldman court were all in the mix. The results were pretty dismal:
Of the 10 biggest companies that have gone public or filed to go public this year, none is led by a woman, and the average number of women on their boards is less than two. Excluding WeWork, which filed its registration confidentially, the average number of women on the list of the highest paid executives, disclosed in each company’s S-1 filing, is 0.56.
WeWork’s public filing disclosed one woman on the list of its highest paid executives, but it also didn’t have a single woman serving on its board. Uber and Lyft were the medalists in the group, with both companies having 3 women on their board. In terms of overall percentage of women board members, Pinterest topped the list with 2 women serving on its 6 member board.
This isn’t just a problem among tech unicorns. According to this Equilar report, in 2018, the 4 most popular IPO industry sectors all averaged fewer than 2 female board members. Tech & Consumer companies led the way with an average of approximately 1.3 women on their boards, while Financial companies averaged 1.0 women and Healthcare companies brought up the rear with an average of less than one woman per board. Healthcare’s not necessarily an outlier. A 2018 Equilar report said that only about 60% of recent IPOs had a woman on their boards.
It remains to be seen how scrupulously Goldman Sachs will stick to its pledge and whether any of its cohorts in the “bulge bracket” will follow its lead, but the numbers indicate that there’s a lot of work to be done. Check out this Cydney Posner blog for more on Goldman’s decision.
This Bloomberg Law analysis says that Goldman’s decision has the potential to cost it more than $100 million in underwriting fees – and that’s nearly 1/3rd of the fees that it earned from underwriting U.S. IPOs last year.
Brexit: FAQs
I guess I’ve been paying a lot more attention to Megxit than to Brexit lately. But while Harry & Meghan sip on free Tim Horton’s coffee & plot to seize the Canadian throne, Britain’s withdrawal from the EU becomes effective on Friday – and that means after the end of an 11 month transition period, the Continent will be cut off!
In case you haven’t been paying as much attention to Brexit as you should, then you’ll find this Hogan Lovells memo helpful. It’s a series of FAQs designed to help businesses sort out the legal consequences of the UK’s departure from the EU. Topics include the provisions of EU law that will continue to apply during the transition period, the consequences of a failure of the UK & EU to reach a trade agreement before the end of the transition period, and the impact of Brexit on the enforceability of UK judgments in EU states.
The NYSE’s Annual Compliance Letter
The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. There aren’t any new rules this year – but the letter highlights the enhanced functionality of the NYSE’s “listing manager” app, which replaced the egovdirect.com website last spring & is now the way that companies submit materials to the Exchange.
On Friday, Corp Fin issued three new Regulation S-K CDIs addressing interpretive issues arising out of last year’s Fast Act rule changes that, under some circumstances, permit companies to exclude the discussion of the earliest of the 3 years covered by the financial statements from their MD&A. Here they are:
Question 110.02
Question: A registrant providing financial statements covering three years in a filing relies on Instruction 1 to Item 303(a) to omit a discussion of the earliest of three years and includes the required statement that identifies the location of such discussion in a prior filing. Does the statement identifying the disclosure in a prior filing incorporate such disclosure by reference into the current filing?
Answer: No. A statement merely identifying the location in a prior filing where the omitted discussion can be found does not incorporate such disclosure into the filing unless the registrant expressly states that the information is incorporated by reference. See Securities Act Rule 411(e) and Exchange Act Rule 12b-23(e). [Jan. 24, 2020]
Question 110.03
Question: May a registrant rely on Instruction 1 to Item 303(a) to omit a discussion of the earliest of three years from its current MD&A if it believes a discussion of that year is necessary?
Answer: No. Item 303(a) requires that the registrant provide such information that it believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. A registrant must assess its information about the earliest of three years and, if it is required by Item 303(a), include it in the current disclosure or expressly incorporate by reference its discussion from a previous filing. [Jan. 24, 2020]
Question 110.04
Question: A registrant has an effective registration statement that incorporates by reference its Form 10-K for the fiscal year ended December 31, 2018. In its Form 10-K for the fiscal year ended December 31, 2019, the registrant will omit the discussion of its results for the fiscal year ended December 31, 2017 pursuant to Instruction 1 to Item 303(a) and include a statement identifying the location of the discussion presented in its Form 10-K for the fiscal year ended December 31, 2018. The filing of the Form 10-K for the fiscal year ended December 31, 2019 will operate as the Section 10(a)(3) update to the registration statement. After the company files the Form 10-K for the fiscal year ended December 31, 2019, will the company’s discussion of its results for the fiscal year ended December 31, 2017 be incorporated by reference in the registration statement?
Answer: No. The filing of the Form 10-K for the fiscal year ended December 31, 2019 establishes a new effective date for the registration statement. As of the new effective date, the registration statement incorporates by reference only the Form 10-K for the fiscal year ended December 31, 2019, which does not contain the company’s discussion of results for the fiscal year ended December 31, 2017 unless, as indicated in Question 110.02, the information is expressly incorporated by reference. [Jan. 24, 2020]
We’ve gotten a few questions on our “Q&A Forum” about the mechanics of omitting the discussion of the earliest year from a company’s MD&A, and one of the things I’ve learned from them is that I’m not the only one who finds that process a little disorienting. Fortunately, this recent SEC Institute blog includes a bunch of MD&A examples from companies that opted to take advantage of the new rule, so now we all have plenty of precedent to look at.
Farewell to Bob Bostrom
All of us here at TheCorporateCounsel.net were saddened to learn of the passing of Bob Bostrom, and extend our sincere condolences to his family. Bob enjoyed a distinguished & award-winning legal career and generously shared his expertise with other practitioners. Here’s a remembrance from ACC President Veta Richardson.
Transcript: “Pat McGurn’s Forecast for 2020 Proxy Season”
We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for 2020 Proxy Season.”
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.
