According to the latest Spencer Stuart Board Index, financial types & techies top the “Most Wanted List” when it comes to skills desired in new directors on S&P 500 boards. Here some of the highlights when it comes to new director demographics:
– Only 36% of the new S&P 500 directors are active or retired CEOs,board chairs or vice chairs, presidents or COOs. That’s down from 47% a decade ago.
– Board experience is also no longer a prerequisite. One-third of the incoming class are serving on their first public company board.
– Directors with financial backgrounds are a priority, representing 25.5% of the new S&P 500 directors in 2018, up from 18% in 2008.
– 40% of the members of the incoming director class are female, 10% are minority males, and 17% are under 50.
– Of the directors under 50, one-third have tech or telecommunications backgrounds.
The index covers a lot of ground, and includes information about board size ranges, director tenure, board governance practices, director compensation and 1, 5 & 10-year trends in board composition.
Spencer Stuart says that the S&P 500 appointed appointed 428 new independent directors in the 2018 proxy year. Although that’s up 8% over the prior year, overall turnover is low, with new directors representing just 8% of all board seats.
While 50% of those new seats went to women or minority men, this WSJ article notes that the low turnover rate slows efforts to promote diversity. It also provides some insight into one reason why turnover may be so low:
“Boards are a little more static than they should be in a world that’s so dynamic,” said Julie Daum, head of Spencer Stuart’s North American board practice. That means there are few opportunities for women and people of color to join boards.
One reason for the low turnover: Directors have been voting to raise their own mandatory retirement ages. Of the S&P 500 companies that have such policies, around 44% set the age at 75 or older, compared with 11% in 2008. Of all S&P 500 companies, 71% disclose a mandatory retirement age.
The article says that the shift to later retirement ages emerged during the financial crisis, when companies were seeking to maximize stability by retaining experienced directors.
Shareholder Engagement: “Top of Mind” Issues for Investors
Interest in off-season engagement with investors is reportedly very high this year. If your company is one of those preparing for a round of shareholder engagement, you should check out D.F. King’s 20-page “Fall Engagement Guide,” which provides a brief overview of the issues that are currently “top of mind” among institutional investors. It’s the perfect type of document to slide across the boardroom table to your CEO or CFO – and to share with your directors.
The U.S. Chamber of Commerce recently published this report warning that the US securities class action system is yet again in dire need of reform. The report notes that while M&A litigation has long been the domain of state courts, 87% of M&A lawsuits last year were federal securities class actions. It also highlights another burgeoning category of claims – the “everything is a securities claim” class action. Here’s an excerpt:
A second variety of securities class actions has also emerged that seeks to capitalize on adverse events in a company’s underlying business, such as a product liability lawsuit, data breach, or similar high-profile, unexpected negative occurrence. The securities class action lawsuit does not seek damages for harm from the underlying event, which is addressed through other lawsuits. Rather, the securities claim asserts that the company defrauded investors by intentionally or recklessly failing to warn that the adverse event might occur, even though these events are—by definition—unexpected.
There’s no doubt that a lot of these claims are meritless, and the Chamber wants Congress to enact legislation to deter them. But recent events suggest that potential defendants should be careful what they wish for, because reforms may be accompanied by unintended consequences. For instance, an emerging trend among major investors to “opt out” of securities class actions – a trend the Chamber’s advocacy inadvertently helped to create – may represent an even bigger problem for defendants.
Alison Frankel highlighted this emerging problem in a recent blog about a $217 million settlement that Verit reached with some heavy-hitter institutions that opted out of an ongoing class action lawsuit. She suggests this settlement may have some ominous implications for defendants in securities litigation going forward:
Is this the future for defendants accused of securities fraud: facing a multitude of far-flung suits by well-counseled, well-capitalized investment funds?
If so, the business lobby has only itself to blame. As you know, the U.S. Supreme Court put shareholders on notice in its 2017 ruling in CalPERS v. ANZ Securities that if they want to preserve their right to bring individual securities fraud claims, they have to file their own suits within the three-year statute of repose, even if there’s already a class action under way. The U.S. Chamber of Commerce, the Washington Legal Foundation, the Securities Industry and Financial Markets Association and the Clearing House Association all urged the justices to uphold the strict time limit for individual investor suits.
Alison says that the bottom line for institutions is that in light of ANZ Securities, if there are big bucks on the line, they’re likely to go their own way and opt out of class actions. And as this recent “D&O Diary” blog points out, that’s going to make everybody’s life more complicated.
Earlier this week, the Sustainability Accounting Standards Board published the first-ever industry-specific sustainability accounting standards. The standards are designed to enable businesses to identify, manage & communicate financially-material sustainability information to investors. Here’s an excerpt from the press release announcing the standards:
Covering 77 industries, the standards were approved on October 16, 2018, by a vote of the Standards Board after six years of research and extensive market consultation, including engagement with many of the world’s most prominent investors and businesses from all sectors. By addressing the subset of sustainability factors most likely to have financially material impacts on the typical company in an industry, SASB’s industry-specific standards help investors and companies make more informed decisions.
SEC Enforcement: Crypto & Cyber Remain High Priorities
Earlier this month, the SEC’s Division of Enforcement published its annual report. The report notes that the agency brought 821 actions and obtained more than $3.9 billion in disgorgement & penalties. It also returned $794 million to investors, suspended trading in the securities of 280 companies – and obtained nearly 550 bars and suspensions.
The annual report also says that Enforcement “remains focused” on ICOs & crypto scams – topics that this Fortune article notes didn’t even merit a mention two years ago. As this excerpt from the report highlights, cyber issues are also high on the priority list:
Since the formation of the Cyber Unit at the end of FY 2017, the Division’s focus on cyber related misconduct has steadily increased. In FY 2018, the Commission brought 20 stand alone cases, including those cases involving ICOs and digital assets. At the end of the fiscal year, the Division had more than 225 cyber-related investigations ongoing.
Meanwhile, this front-page Sunday NYT article compares enforcement actions filed during the last 20 months of the Obama administration and the first 20 months of the Trump administration and claims that enforcement activity has declined significantly. It contends that the numbers reveal a 62% drop in penalties imposed and illicit profits ordered returned by the SEC under the Trump administration in comparison to the Obama administration. The Times laid out its methodology – with which the SEC disagrees – in a companion piece.
Yesterday, Corp Fin updated 4 CDIs to address the implications of the SEC’s adoption of rule amendments increasing the number of “smaller reporting companies” (SRCs) eligible to provide scaled disclosure. The updated CDIs reflect the impact of changes in the size thresholds for SRC status on prior interpretive guidance.
Corp Fin also withdrew 4 CDIs addressing transition issues for SRCs, as well 2 obsolete CDIs relating to old Reg S-B and a misstatement in the original SRC adopting release concerning when SRCs would have to provide audit committee financial expert disclosure. Here’s the tally of CDIs that were updated or withdrawn:
3. Section 110. Item 303 — Management’s Discussion and Analysis of Financial Condition and Results of Operations:
– CDI 110.01 (withdrawn)(obsolete guidance relating to inapplicability of old Reg S-B provision)
4. Section 133. Item 407 — Corporate Governance:
– CDI 133.09 (withdrawn) (correction of misstatement on financial expert disclosure in original SRC adopting release)
5. Exchange Act Forms CDIs – Section 104. Form 10-K:
– CDI 104.13 (updated)
Check out this Cydney Posner blog for a more detailed analysis of the updated CDIs. And also see Cydney’s blog about how the NYSE has proposed changes to Section 303A.00 of the Listed Company Manual related to the exemption from the compensation committee requirements applicable to SRCs due to the SEC’s recent changes to the SRC definition.
ESG: Making Sense of the Current Landscape for Boards
This Skadden memo reviews the many facets of the environmental, social & governance (ESG) issues that boards are confronted with and offers insights into how boards can make sense of the current environment. ESG issues can manifest themselves in a variety of ways – including shareholder proposals, surveys from ESG rating services, investor proxy voting policies, ESG-based activism, and legislation. This excerpt provides some thoughts on how boards should approach those issues:
To borrow a phrase from then-Justice Andrew Moore of the Delaware Supreme Court, in his 1985 Revlon decision, directors would appear to have wide latitude — and responsibility — for dealing with ESG issues to the extent they represent matters “rationally related [to] benefits accruing to the stockholders.”
That said, it is incumbent on directors to do their homework and apply appropriate processes to establish informed decision-making regarding that key determination — which also will enable them to defend challenges to spending shareholder money on “causes” that not all shareholders may support and to demonstrate to the “new” shareholder constituency, ESG investors, the attention paid to the subject at the board level.
Beyond that, of course, are a myriad of other important and potentially difficult decisions that may be required. These may include: Whether, when, to whom and how to engage in outreach regarding ESG issues. Choosing among ESG matters. Deciding how, how much and when to spend company resources to support selected ESG matters. How and when to communicate choices made and actions taken.
While the stakes are higher than ever when it comes to decisions surrounding ESG issues, the memo notes that these ultimately are board decisions that – like any other – require the exercise of business judgment in the best interests of the company and its shareholders.
ESG: More Sustainability Disclosure Means Less Analyst Coverage?
I guess this falls under the heading of “no good deed ever goes unpunished” – but in any event, a new study from a group of B-School profs suggests that the price for providing additional sustainability disclosures may be a reduction in the number of analysts following your stock & lower quality coverage. This excerpt from a recent article on the study summarizes its findings:
As the number of environmental performance ratings for firms in their portfolio increases, analysts cover fewer firms and provide fewer and less timely revisions for earnings-per-share forecasts. The average number of firms in their portfolios dropped 14.2 percent or 1.1 firms. Revisions to earnings-per-share forecasts decreased 3.2 percent, and those issued within two days of quarterly earnings reports were down 1.4 percent.
The study concludes that the effects are greater for negative environmental concerns than for environmental strengths, and suggests that part of the problem may be in the lack of a standardized approach to this type of disclosure.
Speaking of standardization, this King & Spalding memo notes that a rulemaking petition has been filed on behalf of a group of institutional investors requesting the SEC to develop a “comprehensive framework for clearer, more consistent, more complete, and more easily comparable information relevant to companies’ long-term risks and frameworks” to provide clarity on ESG reporting for US companies.
Corp Fin has long permitted businesses acquired during the current fiscal year to be excluded from management’s report on internal control over financial reporting – but a recent study says that you may want to think twice before you opt to do that. This “Audit Analytics” blog discusses the study’s conclusions. Here’s an excerpt:
A recent academic paper provides some insight into acquisitions that may generate negative returns to investors. In the “Costs and benefits of internal control audits: Evidence from M&A transactions”, Kravet found evidence that acquisition targets that were excluded from the assessment of internal controls by the acquiring companies generated statistically significant negative stock returns of 0.8% at the time of the exemption announcement (typically, months after the acquisition news hits the market).
The authors identified statistically significant negative returns of 8.8% and 12% for the period of two and three years after the exemption announcement, indicating that negative outcomes are not fully priced at the announcement date. In addition to negative stock returns, Kravet associated acquiring companies that elect to exclude acquisition targets from control assessments with other negative outcomes, such as higher likelihood of goodwill impairments, lower return on investment, higher probability of a financial restatement and overall lower quality of financial reporting.
As a practical matter, the blog says that a company’s decision to take advantage of the SOX 404 exemption for a newly-acquired company provides an early warning that it may need more scrutiny on a going forward basis.
More SOX 404: Management-Only Reports & Auditor’s Attestations
Audit Analytics seems to be locked-in on Sarbanes-Oxley 404 reporting lately – in addition to its analysis of the potential “red flags” associated with excluding acquisitions from management’s report on ICFR, this recent blog discusses its report on 14 years of trends in auditor’s attestations & management-only SOX 404 assessments.
If you’ve ever read Audit Analytics’ stuff, you know that there’s great information there, but pulling it together sometimes takes a little effort. Fortunately for me, Cooley’s Cydney Posner’s done that work so I don’t have to. Check out this excerpt from her recent blog summarizing the report’s conclusions about trends in auditor attestations:
Starting in 2004, there were 454 adverse auditor attestations (or 15.9% of the total population of attestations). That number increased in 2005 to a high of 492 (although declining as a percentage to 12.6%), but then tiptoed down to a low of 141 (3.5%) in 2010.
Arguably, following SOX, the introduction of auditor attestations imposed some discipline on the process, which led initially to the identification of more ICFR issues, but declined thereafter as companies began to get a better handle on the process. After that, the number steadily rose again to hit 246 (6.7%) in 2016, which the analysis attributes to more aggressive oversight from the PCAOB. In 2017, the number of adverse attestations declined to 176 (4.9%), a 28% decrease and the first decline since 2010.
Cydney points out that trends in the management-only assessments that non-accelerated filers provide don’t exactly line-up with those for reports including auditors’ attestations:
The first year non-accelerated filers were required to make assessments was 2007. In that year, there were 1,089 adverse assessments, representing 30% of small companies. The number rose to a high of 1,727 (34.9%) in 2010—curiously, a year when adverse auditor attestations were at their low point. Unlike auditor attestations, the numbers were almost identical for the period from 2011 to 2013 at around 1,616; however, the percentages varied from 35.6% to 39.5%.
Although the number dipped in 2014 to 1,556, the percentage of smaller companies with management reports showing ineffective ICFR reached a high in that year of 40.8%, then dipped every year after. In 2017, the number fell to 1,191 (38.1%). The most startling aspect of the analysis here is that at least one-third of non-accelerated filers disclosed ineffective ICFR every year, reaching a high of almost 41% in 2014.
Transcript: “Blockchain in M&A”
We have posted the transcript for the recent DealLawyers.com webcast: “Blockchain in M&A.”
Last year’s SLB 14I addressed, among other things, the scope & application of Rule14a-8(i)(5) (the “economic relevance” exception) & Rule 14a-8(i)(7) (the “ordinary business” exception). That SLB also invited companies to include in their no-action requests a discussion of the board’s analysis of the policy issue raised by the shareholder proposal and its significance in relation to the company.
The new SLB 14J reviews the Staff’s experience with these no-action requests during this year’s proxy season and highlights the discussions of the board’s analysis that were most helpful. From Corp Fin’s perspective, the best of these submissions focused on the board’s consideration of specific substantive factors in reaching its conclusions. This new SLB specifies several of these substantive factors:
– The extent to which the proposal relates to the company’s core business activities.
– Quantitative data, including financial statement impact, related to the matter that illustrate whether or not a matter is significant to the company.
– Whether the company has already addressed the issue in some manner, including the differences – or the delta – between the proposal’s specific request and the actions the company has already taken, and an analysis of whether the delta presents a significant policy issue for the company.
– The extent of shareholder engagement on the issue and the level of shareholder interest expressed through that engagement.
– Whether anyone other than the proponent has requested the type of action or information sought by the proposal.
– Whether the company’s shareholders have previously voted on the matter and the board’s views as to the related voting results.
SLB 14J also addresses the application of the ordinary business exclusion to proposals relating to executive and director compensation. In particular, it provides further guidance on the circumstances under which proposals implicating the following issues may be excludable:
– Senior executive and/or director compensation and ordinary business matters.
– Aspects of senior executive and/or director compensation that are also available or applicable to the general workforce.
– Micromanagement of senior executive and/or director compensation practices
Sustainability: A Low Priority for Institutional Investors?
According to a recent survey, most institutional investors still don’t prioritize sustainability in making their investment decisions. This article summarizes the study:
Sustainable investing is a low priority issue for most institutional investors, according to a survey by Schroders. The UK-listed asset manager polled 650 investors around the world running $24trn (€20.6trn) and found that, although they expected sustainable investing to become a bigger issue in the next few years, it was not currently a high priority for most.
Almost a third (32%) of those questioned by Schroders said that how sustainable an investment was had “little to no influence” on the decision to buy. Factors such as a manager’s track record, expected return and risk tolerance were all more important factors, investors said.
There is a silver lining in the survey’s results for sustainability advocates – nearly 75% of respondents said sustainable investment would become more important over the next five years, and half have increased their allocations to sustainable investments during the past five years.
Activism: Dealing with Shareholder-Nominated Directors
With activists increasingly winning representation on public company boards, many GCs are seeking guidance on how to deal with these new directors. This Ropes & Gray article provides insight into how to address some of the more difficult issues that arise with the election of a shareholder’s representative to the board. This excerpt discusses how to approach the director’s sharing of information with the activist:
When a shareholder-nominated director is clearly the representative of the shareholder, the shareholder is generally entitled to receive the information that the director receives. Since the shareholder-nominated director generally has access to all company information, this effectively means that the shareholder likewise has access to all company information.
In light of the reality and general acceptability of the shareholder-nominated director’s sharing of confidential and/or privileged company information with the shareholder, company counsel should seek, before the shareholder-nominated director takes office, to have the shareholder sign an NDA restricting the shareholder’s disclosure and use of such information.
While the general rule is that information sharing is permissible, the article goes on to address situations in which it might be a breach of the director’s fiduciary duty to provide confidential information to the activist.
The SEC continues to ratchet up its scrutiny of cybersecurity issues. It issued disclosure guidance earlier this year & recently turned its attention to internal control implications of cybersecurity lapses. But are companies getting the message?
This recent EY report provides some clues on the disclosure front. It analyzes cybersecurity-related disclosures of Fortune 100 companies in proxy statements and Form 10-K filings. Not surprisingly, disclosure practices vary widely. Here are some some key findings:
– 84% of companies disclosed that at least one board-level committee was designated oversight of cybersecurity matters. At the same time, around 25% identified one or more “point persons” among the management team on cyber – e.g., the CISO or CIO.
– All companies included cybersecurity as a risk factor. In comparison, less than 15% voluntarily highlighted cybersecurity as a strategic focus in the proxy statement.
– 71% of companies described efforts to mitigate cybersecurity risk and 30% specifically referenced response planning, disaster recovery or business continuity considerations.
The report notes that cybersecurity risk management and incidents and related disclosures are a critical issue for investors & other key stakeholders. The SEC’s guidance & its high-profile enforcement proceeding involving Yahoo’s data breach indicate that this topic remains high on regulators’ list as well.
Cybersecurity: Board Oversight of a Dynamic Threat Environment
There’s also evidence to suggest that boards are taking cybersecurity threats – and the board’s oversight role in corporate efforts to prevent breaches – more seriously. For example, this recent EY memo reports on a recent cybersecurity board summit, in which 30 directors & other panelists participated. Here are some of the key takeaways:
– The board’s role is not cybersecurity risk management; it is cybersecurity risk oversight.
– Boards may need to restructure their committees and develop new charters to adequately oversee cybersecurity risk management.
– Directors want and need more education on cybersecurity risk.
– Boards need to engage a third party to independently and objectively assess whether the company’s cybersecurity risk management program and controls are meeting its objectives.
– These third parties should have direct dialogue with the board to report on the effectiveness of the company’s cybersecurity risk management program.
– Boards and companies need to adequately plan for a cybersecurity crisis, including having an arrangement with all their third-party specialists in place before a crisis hits.
– The board and management need to routinely practice the cybersecurity response plan.
– Management should consider providing the board regular updates with key metrics on critical cybersecurity controls communicated in plain English.
The memo notes that while improved detection efforts may increase the rate of cyber-related incidents, the rate of noteworthy incidents should decline as organizations improve how they manage and contain these incidents.
I’ve noticed that I blog a lot about cybersecurity. Maybe that’s because I’m a “Mr. Robot” fan – and I think anybody who’s watched that show probably has a bit of a knot in their stomach when they consider just how plausible the whole scenario of a truly devastating cyber-attack seems to be.
Theranos: “Things Fall Apart”
Despite my best efforts, I actually learned a few things in my college English classes. For example, I learned that everything Emily Dickinson wrote can be sung to the tune of “The Yellow Rose of Texas.” I also learned that John Keats’ last name is pronounced “Keets” & W.B. Yeats’ last name is pronounced “Yates.”
I also picked up a few lines from Yeats’ “The Second Coming”, one of which is “Things fall apart; the centre cannot hold.” That line came to mind when I read this article from MarketWatch’s Francine McKenna detailing the last days of Theranos. Check it out.
Like the prior version, the updated principles are intended to provide a basic framework for sound, long-term-oriented corporate governance for public companies, their boards & their institutional shareholders. According to this press release announcing the updated governance principles, changes from the prior version include:
– Board members should be prepared to serve for a minimum of three years.
– If board elections are not annual, companies should explain why.
– Companies and shareholders are encouraged to engage early on important proxy proposals.
– Companies should allow some form of proxy access.
– Poison pills and other anti-takeover defenses should be put to a shareholder vote and re-evaluated by the board on a periodic basis.
– Asset managers should disclose if they rely on proxy advisors to inform their decision making.
– Asset managers should disclose their conflict of interest policies in their proxy voting and shareholder engagement activities.
– Portfolio managers should be compensated based on performance over an appropriate term, given the strategy and investment time horizon for the portfolio.
– Asset owners should promote sound, long-term oriented governance in their direct interactions with both companies and asset managers.
– Asset owners should use benchmarks and performance reports consistent with their investment time horizon to affect governance outcomes with asset managers and evaluate the asset managers’ performance on both investment returns and governance.
Early returns indicate that the new principles are likely to be well-received by investor groups. For instance, the CII issued a press release “applauding” the updated version, which it says represents a “significant improvement” over the original. More information, including an “open letter” from the signatories, is available at the group’s website.
ISS Policy Survey: Pay-for-Performance & Board Gender Diversity
As always, this is the next step for ISS as it formulates its 2019 voting policies. Comments are due by November 1st. Final policy changes are expected in mid-November…
Blockchain & Beyond: SEC Introduces “FinHub” for FinTech
Yesterday, the SEC announced the launch of “FinHub” – its new “strategic hub for innovation and financial technology.” According to the press release, FinHub will serve as a resource for public engagement on blockchain & other FinTech-related issues and initiatives.
In addition to blockchain and digital assets, issues & initiatives encompassed by FinHub include automated investment advice, digital marketplace financing, and artificial intelligence/machine learning. It’s intended to replace several existing SEC working groups that have focused on similar issues. According to the release, FinHub will:
– Provide a portal for industry and the public to engage directly with SEC staff on innovative ideas and technological developments;
– Publicize information regarding the SEC’s activities and initiatives involving FinTech on the FinHub page;
– Engage with the public through publications and events, including a FinTech Forum focusing on distributed ledger technology and digital assets planned for 2019;
– Act as a platform and clearinghouse for SEC staff to acquire and disseminate information and FinTech-related knowledge within the agency; and
– Serve as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems.
FinHub also replaces the FinTech@secgov address established in connection with the SEC’s 21(a) Report on the status of digital assets under the Securities Act – and provides a form that may be used to contact the Staff to arrange a meeting or request assistance with FinTech issues.
Earlier this year, Broc blogged about the Staff’s efforts to complete its decade-long project of transitioning from its legacy “Telephone Interpretations” guidance to CDIs. Yesterday, Corp Fin reached another milestone when it issued 27 new CDIs to replace the interps contained in Section II of the July 2001 Supplement dealing with cross-border exemptions. Here’s the inventory:
– 5 CDIs (101.03, 103.01, 104.02, 104.03, & 104.05) reflect substantive changes to the Telephone Interps
– 2 CDIs (100.04 &101.01) reflect technical revisions to the Telephone Interps
– 4 CDIs (100.01, 101.09, 104.04, & 105.01) reflect only non-substantive changes to the Telephone Interps
– The remaining 16 CDIs are newly published interpretations
Tweet Fight! Nell Minow v. Main Street Investors Coalition
Governance guru Nell Minow is not shy about calling things as she sees them – and her cavalcade of Twitter blasts against the NAM-backed “Main Street Investors Coalition” is a good example of that.
Here’s how this has been playing out – every time @MainStInvestors tweets, @NMinow fires back a response. She usually starts by highlighting the organization’s ties to CEOs and raising questions about its funding sources – and sometimes goes on from there. Here’s a recent example. I called this a “tweet fight,” but it’s pretty one-sided at this point. Main Street appears to have decided not to engage with Nell.
Nell also has been using the term “corp-splaining.” One person defined the term as “companies trying to tell people outside of a corner office why they shouldn’t care.”
Tweet Tempest! “Say Shareholder Value Theory is Evil Again – I Dare Ya!”
I spend way too much time on Twitter – which FT Alphaville recently described as a “rage-as-a-service platform.” But since we’re there, this Business Law Prof blog recounts the tempest that pundit Matt Yglesias stirred up when he responded to reports about Google’s decision to build a censored search engine in China by tweeting that, “according to shareholder value theory, if being evil increases the discounted present value of future dividends then Google’s executives are required to be evil.”
The responses started with UCLA’s Stephen Bainbridge inquiring whether Matt was “really that stupid?” & didn’t get a whole lot warmer after that. Enjoy!
I previously blogged about how Hester Peirce’s dissent from the SEC’s refusal to permit the listing of a bitcoin ETF earned her the moniker “Crypto Mom” from crypto enthusiasts. Judging by a recent speech, Commissioner Peirce digs her new nickname – & wants to be regarded as a “free range” mom who “encourages her child to explore with limited supervision, which requires the acceptance of a certain level of risk.” This excerpt elaborates on what “free range parenting” means when it comes to the crypto:
Steering a speeding machine down the highway is an enormously complex and cognitively-challenging task, one that is dangerous for drivers, passengers, and innocent bystanders. Permitting people to drive means people will be injured and, in too many cases, die. Outlawing driving would save lives, but the costs in terms of lost quality of life of doing so would be enormous, albeit difficult to quantify.
Instead of banning it entirely, therefore, we place reasonable restrictions on driving. Some of us may decide to avoid risks the law allows us to take. A speed limit, after all, is not a mandate. Some of us may choose not to drive at night, in bad weather, or at all. But, barring bad behavior on our part, the choice is ours, not the government’s.
It puzzles me that it is so difficult for those of us who regulate the securities markets to understand this concept; after all, capital markets are all about taking risk, and queasiness around risk-taking is particularly inapt. A key purpose of financial markets is to permit investors to take risks, commensurate with their own risk appetites and circumstances, to earn returns on their investments. They commit their capital to projects with uncertain outcomes in the hope that there will be a return on their capital investment. The SEC, as regulator of the capital markets, therefore should appreciate the connection between risk and return and resist the urge to coddle the American investor.
I get the argument for a lighter regulatory touch, but the analogy between cars and crypto falls flat. I mean, even the most gruesome multi-car pileup never helped trigger a global depression – the same can’t be said for innovative financial instruments.
Ironically, Commissioner Peirce’s remarks came during the month marking the 10th anniversary of the financial crisis. Axios’ Felix Salmon commemorated that milestone by tweeting a copy of what may be the most chilling email ever sent – a message in which one NY Fed official told another that Morgan Stanley had informed Tim Geithner late on Friday, Sept. 20, 2008 that it would be unable to open on the following Monday, and indicating that if Morgan Stanley didn’t open, Goldman Sachs was “toast.”
“Crypto Mom” or “Stakeholder Slayer?”
Commissioner Peirce may like her “Crypto Mom” nickname, but I’d venture a guess she might actually prefer “Stakeholder Slayer.” That’s because in another recent speech, she made it clear that she’s not a fan of the idea of corporate “stakeholders.” Here’s an excerpt:
We have a deep and well-developed body of corporate law. It rests on the assumption that the board owes its principal duty to the shareholders collectively, not to an amorphous group of stakeholders. There is no compelling reason to overturn centuries of settled law, and there are many reasons not to.
Although she objects generally to efforts designed to compel directors to consider ESG issues as part of their fiduciary duties, Commissioner Peirce is particularly critical of California’s new law mandating inclusion of women directors on public company boards. She contends that California’s legislation “effectively forces corporations, including non-California corporations, to consider all women as stakeholders,” and argues that it opens a door to get other “favored groups” included in the stakeholder definition.
Cyber Insurance: GDPR Penalties? They May Not Cover It
One of the most intimidating aspects of the EU’s General Data Protection Regulation – GDPR – is the enormous potential penalties the companies can face for violating its provisions. Companies that run afoul of the GDPR could face fines of up to the greater of €20 million or 4% of their gross annual revenue.
For many companies, this regime means that the most significant potential cyber-related exposure they face is GDPR non-compliance. But this Womble Bond Dickinson memo says that if you expect your cyber insurance policy to protect you, you may be out of luck:
Companies with international exposure should check their cyber insurance policies to determine coverage of EU fines. According to an analysis conducted this summer by Aon, GDPR fines were found to be insurable in only two countries – Norway and Finland – out of the 30 European countries surveyed. In fact, in 20 of the 30 jurisdictions, including the UK, France, Spain and Italy, GDPR fines would specifically NOT be insurable. The other eight jurisdictions were less clear, and may depend on whether a GDPR fine is classified as civil or criminal.
The memo says the answer may be different for U.S. domiciled companies – but even here, the availability and scope of GDPR coverage varies from carrier to carrier.
Recently, Liz blogged about the California Assembly’s passage of Senate Bill 826, which requires exchange-listed companies headquartered in the Golden State to have women on their boards. On Sunday, California Gov. Jerry Brown signed that statute into law.
This excerpt from an article in Sunday’s LA Times summarizes the new law’s mandate:
The new law requires publicly traded corporations headquartered in California to include at least one woman on their boards of directors by the end of 2019 as part of an effort to close the gender gap in business. By the end of July 2021, a minimum of two women must sit on boards with five members, and there must be at least three women on boards with six or more members. Companies that fail to comply face fines of $100,000 for a first violation and $300,000 for a second or subsequent violation.
So how many companies are going to need to add women to their boards? Annalisa Barrett has crunched some of the numbers:
I examined Equilar data for the companies headquartered in California which were in the Russell 3000 Index as of June 2017 and found that, based on current board composition, 377 companies will have to add female director(s) their boards in order to be in compliance with SB 826 by December 31, 2021.
– 66 companies would have to add three women to their boards
– 175 companies would have to add two women to their boards
– 136 companies would have to add one woman to their boards
Annalisa notes that there are likely to be many more companies that will need to take action to comply the statute. Many public companies headquartered in California are too small to be in the Russell 3000 – and the majority of microcap companies (i.e., smaller than $300M in market capitalization) don’t have women on their boards. We’re posting memos in our “Board Diversity” Practice Area.
But Is It Legal? “California Über Alles”
In Gov. Brown’s signing statement, he acknowledged that “serious legal concerns” have been raised about the statute, and that its flaws “may prove fatal to its ultimate implementation.” This recent blog from Cooley’s Cydney Posner reviews some of the statute’s potential constitutional flaws. Here’s an excerpt addressing one of the most frequently cited concerns – the law’s “California Über Alles” provision, which purports to apply its mandate to companies that aren’t incorporated under California law:
You may recall that, generally, the “internal affairs doctrine” provides that the law of the state of incorporation governs those matters that pertain to the relationships among or between the corporation and its officers, directors and shareholders. In case you were wondering how California could profess to control the internal corporate affairs of a foreign corporation, you may not be familiar with the long arm of California’s Section 2115, which purports to apply to foreign corporations that satisfy certain tests related to presence in California (minimum contacts), referred to as “pseudo-foreign corporations.”
Cydney points out that the pseudo-foreign corporations statute used to cause severe problems for law firm opinion committees until the provision was amended to exclude from its application companies listed on the NYSE or Nasdaq. However, the new law expressly applies to these “pseudo-foreign” listed companies.
Cydney says that it is unclear whether courts will view the location of a company’s principal executive office as sufficient to overcome the internal affairs doctrine. Keith Bishop is skeptical that courts will sign-off on the statute – and this recent blog lays out his reasoning.
Transfer Agents: Market Share Leaders
This “Audit Analytics” blog discusses its annual review of 2018 market share leaders among transfer agents. Here’s an excerpt about the leaders for IPO market share:
AST has moved to the top transfer agent of IPO market share, putting Computershare/BNY Mellon into second. Two transfer agents that were in the top last year, Wells Fargo and Citibank, are not top competitors in the IPO market this year. Instead, Vstock Transfer, who was last in the top in 2016, has reappeared. Another notable change is from Deutsche Bank Trust Co Americas/TA, which has made an appearance in the top five for the very first time.
