Yesterday, the PCAOB Staff issued implementation guidance addressing the changes in audit reports that are mandated under its new standard – AS 3101. As Liz blogged at the time of the standard’s adoption, AS 3101 requires a major revision in how auditors think about what – and how – they communicate to boards & investors.
The PCAOB Staff’s new guidance addresses both format & content and includes an annotated version of the new auditor’s report. Here’s an excerpt addressing the most controversial aspect of the new standard – the requirement that the report include a discussion of “Critical Audit Matters” (known as “CAMs”):
When the relevant requirements take effect, auditors of certain issuers will be required to include in the auditor’s report a communication regarding CAMs. CAMs are defined under AS 3101 as matters arising from the audit of the financial statements that have been communicated or were required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging subjective, or complex auditor judgment.
The communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans.
CAMs may be included voluntarily before the effective date or for entities for which the requirements do not apply. In advance of implementation, auditors may want to discuss the new CAM requirements with management and audit committees.
With the exception of the provisions relating to CAMs, the new standard goes into effect for audits of fiscal years ending on or after December 15, 2017. For large accelerated filers, the provisions relating to CAMs go into effect for audits of fiscal years ending on or after June 30, 2019. They go into effect for all other filers for audits of fiscal years ending on or after December 15, 2020.
Yesterday, PCAOB Chair Jim Doty delivered this speech entitled “The PCAOB’s Initiatives to Bolster Investor Trust in the Audit”…
Still More on “GAAP Means Nothing to Me”. . .
As another follow-up to my recent blog about institutional investors’ increasing disdain for GAAP, Broc pointed me in the direction of a series of articles in “Accounting Today” that say that it’s time for a paradigm shift in the way the accountants & standard setters approach GAAP. Why? According to the authors – two accounting profs – it’s because GAAP simply isn’t very useful:
We’re convinced that the consequence of practitioners’ inability to change is a status quo that is an unserviceable hodge-podge remnant of out-of-date practices. Specifically, we find today’s GAAP financial statements are as far removed from reports that meet the capital markets’ needs as hand-cranked telephones differ from smartphones. It follows, then, that financial accounting is stunningly ready for disruption.
Toward that end, we’re offering up paradigm-challenging truths to suggest that today’s financial accounting is bound to collapse. So, why would it?
It’s because the inability of practitioners to question their paradigm also keeps them from actually serving accounting’s ostensible information-providing purpose. Although they say they aim to present useful information, many inconsistencies between those words and their actions prove otherwise. Ultimately, their choices always favor what’s useful to themselves, not users.
Subsequent articles in the series drill down into some of the specific problems they have with the current financial reporting paradigm.
Corp Fin Updates “Financial Reporting Manual” for New Accounting Standards
On Friday, as noted in this Cooley blog, Corp Fin updated its “Financial Reporting Manual” to revise guidance on the pro forma impact of new accounting standards, address adoption of new accounting standards upon termination of EGC status, and clarify the effective date of the new revenue recognition & lease accounting standards for certain entities.
‘Tis the season for the “Big 4” accounting firms to weigh-in on Corp Fin comment priorities. Earlier this month, we blogged about EY’s take on the topic – and now Deloitte’s weighed in with its own study on Corp Fin comments for the 2016-2017 review period. The study found that the top 10 areas for comments were:
– Non-GAAP measures
– MD&A
– Fair value
– Segment reporting
– Revenue recognition
– Intangible assets & goodwill
– Income taxes
– State sponsors of terrorism
– Signatures, exhibits & agreements
– Acquisitions, mergers & business combinations
The list includes plenty of the usual suspects, but one of these things is clearly not like the others – here’s what the study says about comments addressing state sponsors of terrorism:
This category is new to the top 10 this year. The SEC staff has increased its focus on registrants that do business with countries designated by the U.S. State Department as state sponsors of terrorism, including Iran, Sudan, and Syria. SEC staff comments focus on disclosure about (1) the nature and extent of these contacts and (2) quantitative and qualitative factors about such activities.
The study includes examples of comments that the Staff has issued to companies disclosing business in these countries.
More on “Farewell to Corp Fin Giant, Bill Morley”
Recently, I blogged that Bill Morley passed away. We now have information about his memorial: “Glory Days Restaurant” in Edgewater, Maryland – this Friday, December 1st from 6-10 pm. It’s informal in a private room. Please RSVP to Marty Dunn if you (& others you know) plan on going as they need a head count.
Here are a few more remembrances:
– Marty Dunn, who worked with Bill for several decades, notes: “From the day I arrived at the SEC in 1988, I knew what the goal was. It was to be Bill. He had the ’33 and ’34 (and ’39) Act in his being. He understood them all. Their purpose was in his soul. He taught us all so much while being so humble. He said to me ‘our job is important, we’re not.’ That always stuck with me. Mr. Carter and Mr. Morley were incredible mentors & teachers. There is an entire generation of Corp Fin lawyers who appreciate their contribution to our careers. Bless you, Bill.”
– Paul Dudek, who left Corp Fin after 22 years last year, notes: “Thanks for sharing the sad news about Bill, and the stories and the picture. He was outstanding in so many ways, as a person, as a securities lawyer, as a manager, and much more. I think at some level he was a model for me staying in Corp Fin for so long, a shining example of how to carry out the mission of investor protection through full and fair disclosure, and all the corollaries to that simple statement, through thick and thin.”
– Stan Keller notes: “Here’s one outside perspective on Bill. For so many of us practicing on the outside, Bill was for so long the face of the SEC and a good one at that. Bill treated you as a professional with respect and was always willing to listen to your position and share his vast knowledge of the law and the lore with you. You knew that you would get a fair hearing and a thoughtful, considered response. We learned a lot about securities law from Bill in this way and we learned about the agency. Bill helped instill the Corp Fin Staff ethic of the SEC as being a service agency, which continues to this day. We remember him with fondness, respect and appreciation.”
Farewell to Mort Koeppel
I’m also sad to report that Mort Koeppel also passed away recently. Mort retired in the early ’80s as an Associate Director in Corp Fin after 40 years at the SEC. He lived nearly another 40 years, passing away at 98. His son – Jeff Koeppel – who also served in Corp Fin a while back. Here’s a picture of Mort’s branch back in the day: (seated) Mort Koeppel; (standing, left to right) Bill Carter, Joe Hock, Becky Fleck, Alan Cohen, Jim McCabe, Paul Belvin, Letty Lynn, Mark Warner, Tom Klee & Laurence Lese:
We’ve previously blogged about FASB’s controversial proposal to conform its approach to financial statement materiality to the judicial definition of “materiality” that applies in other contexts. While that proposal is supported by business groups, most investor advocates have panned it.
After two years of back & forth, FASB has decided to throw in the towel on the new proposal – but instead of leaving things stand, it opted to return to an earlier materiality standard. This Thomson Reuters article explains what FASB has done:
A unanimous FASB agreed to return to the definition of materiality from Concepts Statement (CON) No. 2, Qualitative Characteristics of Accounting Information, which defines materiality in the context of “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.” The FASB said the CON No. 2 definition is consistent with the definition used by the SEC, the PCAOB, and the AICPA.
The FASB’s new approach tracks a recommendation that it received this summer from the SEC’s Office of Investor Advocate – and also reflects an apparent consensus reached among participants at a roundtable meeting held by FASB last March.
More on “GAAP Means Nothing to Me”
Last month, I blogged about an investor survey that suggested that many institutional investors didn’t have a lot of use for GAAP. Here are some insightful comments on the results of that survey from Maynard Cooper’s Bob Dow:
It was suggested that GAAP is not useful because cash flow is more important. But of course there are GAAP measures for cash flow on the cash flow statement. I have always found the cash flow from operations to be an important measure. If a mature company consistently has a negative cash flow from operations, that almost always spells big trouble.
We do expect start-ups to have a negative number until they become cash flow positive, but the measure can help to indicate how far we are from that milestone. The cash flow from operations is harder to manipulate than some other measures, except maybe straight EBITDA (unadjusted). But EBITDA is a less reliable measure of cash flow because it doesn’t take into account changes in working capital. You can go all the way to bankruptcy court with a positive EBITDA.
That’s a major problem with non-GAAP measures, they are susceptible to manipulation. As a Corp Fin Staffer once said, the most prominent non-GAAP measure is EBBS – everything but the bad stuff.
Of course most non-GAAP measures themselves are built on GAAP. To have a consistent and comparable measure for EBITDA, you have to have an agreed-upon set of ground rules for, e.g., revenue recognition. GAAP provides that set of rules. If everyone starts making up their own rules for revenue recognition, how could any of the measures be comparable?
My own experience suggests that Bob’s comments about EBITDA are right on the money – forgetting that the accounting concepts of depreciation & amortization represent the reality that assets wear out is a great way to end up in over your head.
Non-Voting Common Stock: Delaware Law Overview
As I recently blogged, multi-class capital structures continue to hang around – despite the opposition of many institutional investors. This Hunton & Williams memo provides an overview of Delaware corporate law issues associated with non-voting common stock, and is a handy reference tool for companies considering such a capital structure.
1. Shareholder Rights Plans. In order to “simplify” ISS’s approach to rights plans and “to strengthen the [ISS] principle that poison pills should be approved by shareholders in a timely fashion,” ISS will now recommend voting against all directors of companies with “long-term” (greater than one year) unilaterally adopted shareholder rights plans at every annual meeting, regardless of whether the board is annually elected. Short-term rights plans will continue to be assessed on a case-by-case basis, but ISS’s analysis will focus primarily on the company’s rationale for the unilateral adoption.
2. “Excessive” Non-Employee Director Compensation. ISS will recommend voting against or withholding votes from members of board committees responsible for setting non-employee director compensation when there is a “pattern” (over two or more consecutive years) of “excessive” non-employee director pay without a compelling rationale or other mitigating factors. Because “excessive” pay would need to be flagged for at least two years under the new policy, ISS will not make negative vote recommendations on this basis until 2019.
3. Disclosure of Shareholder Engagement. In considering whether to recommend against compensation committee members of companies whose Say-on-Pay proposals received less than 70% of votes cast, ISS considers the company’s disclosure regarding shareholder engagement efforts. ISS provided guidance regarding the level of detail included in such disclosures, including whether the company disclosed the timing and frequency of engagements with major institutional investors and whether independent directors participated; disclosure of the specific concerns voiced by dissenting shareholders that led to the Say-on-Pay opposition; and disclosure of specific and meaningful actions taken to address the shareholders’ concerns.
4. Gender Pay Gap Proposals & Board Diversity. ISS will vote case-by-case on requests for reports on a company’s pay data by gender, or a report on a company’s policies and goals to reduce any gender pay gap, taking into account the company’s current policies and disclosure related to its diversity and inclusion policies and practices, its compensation philosophy and its fair and equitable compensation practices. ISS will also take into account whether the company has been the subject of recent controversy or litigation related to gender pay gap issues and whether the company’s reporting regarding gender pay gap policies or initiatives is lagging its peers. ISS also noted that it would highlight boards with no gender diversity, but would not make adverse vote recommendations due to a lack of gender diversity. In addition, ISS revised its “Fundamental Principles” to state that boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
In Canada where there are new disclosure requirements on companies’ gender diversity policies, ISS is introducing a new policy on board gender diversity that will generally recommend withhold votes for the chair of the nominating committee if a company has not adopted a formal written gender diversity policy and no female directors serve on its board.
5. Pledging of Company Stock. ISS has codified its existing practice to recommend withhold votes against the members of the relevant board committee or the entire board where a significant level of pledged company stock by executives or directors raises concerns absent mitigating factors.
6. Pay-for-Performance Analysis. In connection with its pay-for-performance analysis, ISS will consider, in addition to other alignment tests, the rankings of CEO total pay and company financial performance within a peer group measured over a three-year period.
7. Other Changes. ISS has further revised its voting recommendations on climate change shareholder proposals in order to promote greater transparency on these matters.
FCPA Disgorgement: Kokesh Decision Underlines “Need for Speed”
In a recent speech, SEC Enforcement Co-Director Steve Peikin reviewed the agency’s FCPA enforcement priorities. One of the more interesting parts of Steve’s remarks addressed the impact of the Supreme Court’s Kokesh decision on FCPA enforcement. Here’s an excerpt:
In many instances, by the time a foreign corruption matter hits our radar, the relevant conduct may already be aged. And because of their complexity and the need to collect evidence from abroad, FCPA investigations are often the cases that take the longest to develop. In contrast to the Department of Justice, the statute of limitations is not tolled for us while our foreign evidence requests are outstanding.
These limitations issues have only grown in the wake of the U.S. Supreme Court’s recent decision in Kokesh v. SEC, in which the Court held that Commission claims for disgorgement are subject to the general five-year statute of limitations. Kokesh is a very significant decision that has already had an impact across many parts of our enforcement program. I expect it will have particular significance for our FCPA matters, where disgorgement is among the remedies typically sought.
While the ultimate impact of Kokesh on SEC enforcement as a whole – and FCPA enforcement specifically – remains to be seen, we have no choice but to respond by redoubling our efforts to bring cases as quickly as possible.
Kokesh: The Bad Guys Want Their Money Back
It turns out that the need to bring FCPA cases on a more timely basis isn’t the only potential fallout from the Kokesh decision. In addition to barring claims for disgorgement beyond the limitations period, this King & Spalding memo points out that Kokesh raises the broader issue of whether the SEC has authority to seek disgorgement at all:
As it considers the impact of Kokesh, we expect that the SEC staff will be less aggressive in its disgorgement demands and more open to arguments limiting how disgorgement is calculated. At the same time, defendants and respondents who litigate will undoubtedly follow up on the Supreme Court’s apparent invitation, in a footnote, to challenge whether disgorgement is available at all as an SEC remedy in enforcement actions.
Now, this Bloomberg article says that the Supreme Court’s invitation to litigate that issue has been accepted. You know all of those guys that the SEC sought disgorgement from? Well, they want a refund:
Anyway some lawyers read the Kokesh opinion in that particular way and brought this class-action lawsuit against the SEC a couple of weeks ago. Delightfully the class of victims/plaintiffs in the lawsuit is securities fraudsters: Specifically, it’s “all persons or entities from whom the SEC has collected, during the period from October 26, 2011 to the present, purported ‘disgorgement,'” with some fairly minor-seeming exceptions. The alleged damages are “approximately but not less than $14.9 billion over the last six years.”
According to the most recent edition of the “Spencer Stuart” board survey, the CEO was the only insider serving as a director on approximately 60% of S&P 500 boards. This Sidley memo says that a recent study indicates that may not be such a good thing:
Based on S&P 1500 company data from 2003 to 2014, the study concluded that companies with lone-insider boards (i.e., boards with no inside directors other than the CEO) awarded their CEOs “excess pay” (i.e., pay above what factors such as firm size, CEO age, CEO tenure, CEO equity ownership, industry, stock returns and performance would predict), with such CEOs receiving approximately 82% more pay than CEOs at peers with more than one insider on the board.
The study found that, as compared to their non-lone-insider peers, companies with lone-insider boards (1) have a $2.99 million larger pay gap between the CEO and other top management team (TMT) members, (2) are 1.27 times more likely to experience financial misconduct (defined as instances of financial restatements that are not due to clerical errors or minor accounting issues) and (3) experience poorer performance (e.g., a 10% lower return on assets).
The study says that analyst coverage and a high percentage of institutional share ownership mitigated the negative effects of a sole insider board on CEO pay vs. company performance – but not for pay gaps between the CEO & other executives or financial misconduct.
While We’re on the Topic of Inside Directors…
This “Columbia Blue Sky” blog discusses a new study by Virginia Tech’s Prof. Donald Bowen that says maybe those pre-SOX insider dominated boards weren’t so terrible after all. This excerpt summarizes the study’s results;
In a new working paper, I examine these questions by taking a new approach that exploits the implementation of the law. In short, the independent board mandates defined independence such that some directors could reclassify from non-independent to independent.
The effect of this definition is that while some firms—“treatment” firms—were required to change the membership of the board to meet the requirement, other firms—“placebo” firms—complied not because their directors changed, but because the classification of their directors changed. Importantly, the social and economic relationship between the CEO and director are largely unchanged for reclassified directors. As such, the reclassifications made boards at placebo firms more independent legally, but not economically.
My main tests show that placebo firms significantly outperformed treatment firms following the introduction of the independent board rules. I also show that the specific conditions that determine whether a firm is defined as a treatment firm or placebo firm are effectively random. This gives the estimated performance advantage of placebo firms a causal interpretation and implies that treatment firms performed worse because their boards were changed. In other words, the mandated governance policies impeded the conduct of firms targeted by the regulations.
Overboarding: What’s Good for the Goose. . .
This WSJ article points out that overboarding is a big issue for institutional investors – and this excerpt says that some big players are using their voting clout to curb the practice:
BlackRock, the world’s largest asset manager, cast 168 votes against directors this year due to overboarding concerns. It fought the reelection of directors at companies such as Charter Communications Inc., Pfizer Inc. and PayPal Holdings, Inc., according to filings and a spokesman for the money manager.
BlackRock wasn’t alone – the article says that last year, State Street cast votes against 69 CEOs who served on more than 3 boards & against 22 non-CEO directors who each sat on more than 6 public boards.
But this blog from Professor Ann Lipton suggests that these institutions may not be the right folks to lead the charge on this issue:
Most mutual fund companies employ a single board – or a few clusters of boards – to oversee all of the funds in the complex. This can result in directors serving on over 100 boards in extreme cases. State Street’s Equity 500 Index Fund, for example, reports trustees who serve on 72 or 78 boards within the complex. BlackRock’s Target Allocation Funds have trustees who serve on either 28 and 98 different boards (depending on how you count).
I’ll admit this is something of a cheap shot: presumably each fund is much more similar to the other funds than are the various companies at which overboarding concerns are raised. Still, when you get to over 20 funds per director, that’s a lot, no? Or 50 funds? Especially since the funds have varying interests – they might stand on opposite sides of a merger, or invest at different levels within a single firm’s capital structure, or compete for limited opportunities like IPO allocations and pre-IPO shares.
Yesterday, the House Financial Services Committee approved 23 bills – including two pieces of legislation that would repeal Dodd-Frank’s conflict minerals & mine safety and health disclosure requirements.
– H.R. 4248 would amend the Securities Exchange Act to repeal Section 13(p) – which directed the SEC to adopt its conflict minerals disclosure rules and related certification and audit requirements. The bill would also make conforming changes to the text of Dodd-Frank.
– H.R. 4289 would amend the Securities Exchange Act to repeal Section 1503 of the Dodd-Frank Act, which requires detailed disclosures about mine safety and health in the quarterly and annual reports they file with the SEC.
So, should everybody put their pens down? This recent blog from Steve Quinlivan says that’s not necessarily a good idea:
I recommend that anyone working on conflicts minerals to continue to work. Bills passed by the Financial Services Committee have a relatively poor track record of being enacted into law, at least over the short term. Similar provisions were included in the Financial Choice Act 2.0 which has not been enacted.
Tax Reform & CEO Pay: Adding to the “Museum of Unintended Consequences?”
The GOP’s ever-evolving tax reform proposal has produced a torrent of memos from law firms, accounting firms, & other advisors (we’re posting them on CompensationStandards.com). Not surprisingly, many of the memos focus on the impact of proposed changes in the treatment of executive comp. Among other things, the current version of the proposal would repeal the provisions of Section 162(m) that allow companies to deduct performance-based pay in excess of $1 million.
Congress’ willingness to tinker with executive comp reminds me of the old adage that those who don’t learn from the past are condemned to repeat it. Remember, the much reviled Section 162(m) itself was enacted in 1993 in an effort to align executives’ interests with those of stockholders.
Instead, as former SEC Chair Chris Cox put it, Section 162(m) “deserves a place in the museum of unintended consequences.” That’s because, instead of aligning management & shareholder interests, the emphasis on performance-based pay led to something else entirely, as Prof. Steve Bainbridge explains in this blog:
Although CEO pay had been growing fast relative to other metrics during the 1980s, it was in the 1990s that CEO pay really started to explode as a percentage of corporate profits and total wages. In large measure, this occurred because of a huge shift towards options and other forms of incentive pay that were tax favored under the 1993 amendments.
How big is huge? According to this study, in 1992, the S&P 500 granted options worth a total of $11 billion – a figure that rose to $119 billion by 2000. Boards & comp committees undervalued equity awards. In fact, as one director quoted in this 2016 NPR podcast put it, “we thought they were free.”
Changes in accounting rules subsequently made it clear that equity awards aren’t free – but big equity awards have become part of the executive comp landscape, and this recent Stanford study says that they continue to play an outsized role in executive pay, and an even more outsized role in its explosive growth.
Now, Congress is considering eliminating the “performance-based” pay loophole. What’s going to happen to equity awards & executive comp if this becomes law? You’ve got me – but history says that the consequences are unlikely to be what’s intended.
Activism: CEOs In the Crosshairs
This “Forbes” interview with Skadden’s Rich Grossman discusses the implications of an increasingly popular activist tactic – targeting CEOs for removal from the board through proxy contests. Here’s an excerpt from Rich’s comments:
I think most practitioners and governance experts would agree that one of the most important responsibilities of a board is the selection of the CEO, and the removal of the CEO from the board sends a very strong message, especially a board made up of a majority of independent directors.
While shareholders do not have the right to directly remove board-selected officers, if a CEO gets removed from the board in a contest, it’s a vote of no confidence. In those circumstances, I can’t imagine a board not looking at the situation and saying, “should we rethink our decision regarding the CEO?” It certainly makes for an awkward situation.
Why are CEOs being targeted? The approach ISS takes toward proxy contests seeking minority board representation is a big part of the reason:
Under the current ISS analytical framework, recommendations are made depending on whether the dissident is seeking a minority or a majority position on the board, with the standard for a dissident seeking minority representation being significantly easier to meet than if control is sought. The ISS minority contest standard — what I’ll call the “what’s the harm” standard — for replacing directors seems to apply regardless of whether the CEO is targeted.
In July, the SEC issued a highly-publicized Section 21(a) Report detailing the circumstances under which digital assets – such as “tokens” or “coins” – may be regarded as securities. In a recent speech, SEC Chair Jay Clayton touched on securities law issues surrounding ICOs – but as this blog from Duane Morris’ David Feldman notes, it was his off-script remarks that were the most interesting:
Chairman Clayton went a bit further today, going off his script to say that he has yet to see an ICO that doesn’t have “sufficient indicia” of being a securities offering. He also mentioned that the trading platforms could face SEC scrutiny and might have to either register as national securities exchanges or make clear they have an exemption from doing so.
Pro tip – If Jay Clayton hasn’t seen a ICO that didn’t involve a securities offering, you should expect the SEC to be skeptical of arguments that “this one’s different.”
ICOs: Disclose That I’m Getting Paid? But I’m a Celebrity!
I’ve reached the conclusion that the SEC is totally out of touch (said with “tongue in cheek”). If the folks who worked there watched TMZ like the rest of us, they’d know better than to suggest that our nation’s celebrities should have to comply with the law like ordinary people.
Unfortunately, based on this recent statement addressing unlawful celebrity promotional activities for ICOs, everybody at the SEC must be watching C-SPAN. Here’s an excerpt:
Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion. A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws. Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.
The reference to touting in the statement’s “parade of horribles” is interesting. Touting is prohibited by Section 17(b) of the Securities Act, but in recent years, it hasn’t featured prominently in the SEC’s enforcement efforts – that is, until last spring, when the Division of Enforcement conducted an anti-touting “sweep” targeting 27 firms and individuals. Of course, none of the defendants in those cases had their own television show, much less their own line of non-stick cookware. We’re posting memos about SEC enforcement actions in this area in our “ICOs” Practice Area.
ICOs: Most People Who’ve Heard of Coin Offerings Think They’re Illegal – and Plan to Invest
According to this LendEDU survey addressing public awareness of cryptocurrencies & initial coin offerings:
– 25% of Americans have heard of ICOs
– 21% of Americans believe that ICOs are illegal
– 15% of Americans intend to invest in ICOs
So, while roughly 85% of Americans who’ve heard of ICOs think they’re illegal, 60% of the members of that same group intend to invest in them. Now, I suppose some or all of that 15% could have come from the 75% of Americans whom the survey says have never heard of an ICO – but I’m not sure whether that’s better or worse…
Anyway, to me, this says 3 things:
– First, the SEC is going to have a heck of a time policing this stuff
– Second, the 60% deserve what they get
– Third, resistance is futile
Welcome to “DotCom II: The Tokening,” everybody! It’s a long way off, but we have just posted the flyer for this webcast: “The Latest on ICOs/Token Deals.”
This survey from communications firm Edelman says that companies have to do a lot to earn the trust of institutional investors – but that it’s worth their effort.
The report says that institutions are a pretty jaded bunch. They have a negative outlook about the political & investment environment, think companies are unprepared for the business risks created by the political climate, and don’t trust government or the media. Institutions also are prepared to act as change agents – 87% say they’d support an activist if they think change is necessary, & nearly the same percentage think that the companies they invest in aren’t prepared for an activist campaign.
In short, institutional investors don’t have a lot of trust in key watchdogs of corporate conduct or in the companies in which they invest – and they’re prepared to take things into their own hands. All-in-all, this doesn’t sound like the recipe for a very pleasant “Investor Day” – but the report provides some insight into key areas that help build investor trust. According to the report:
– 69% of investors believe that the way a company treats its employees impacts their trust in the company
– 87% say the customer satisfaction plays a big role in their level of trust
– 86% say that a reputation for innovation builds trust
– 77% say that equal voting rights are an important measure of trust
– 99% trust a company with a clear strategy more than those without one
Other factors cited as helping to build trust include speaking out on social issues that impact business, providing guidance on future results, an active and engaged board, & efforts to keep shareholders informed.
So what’s the payoff? According to the report, trust drives valuation and investment decisions among institutions – 77% say they bought or increased their investment positions in companies that they trusted, while more than 70% did not invest or underweighted stocks of companies that they did not trust.
Proxy Advisors: Input Sought on “Best Practice Principles”
As Broc blogged back in 2014, a group of European proxy advisors put forward a set of “Best Practice Principles for Shareholder Voting Research.” That group – known as the “Best Practice Principles Group” – now includes ISS & Glass Lewis as signatories, & is soliciting input from companies & investors about on whether those principles need to be revised in light of market experience & regulatory changes.
Tune in tomorrow for the DealLawyers.com webcast – “M&A Stories: Practical Guidance (Enjoyably Digested)” – to hear Withersworldwide’s Ridge Barker, Ropes & Gray’s Jane Goldstein, Morgan Lewis’ Keith Gottfried and our own John Jenkins share M&A “war stories” designed to both educate and entertain.
Here are the 15 stories that will be told during this program:
1. Dig Your Well Before You Are Thirsty
2. Diligence Isn’t Just About Looking for Problems, But for Opportunities Too
3. Expect the Unexpected
4. Keep Your Eye on the Ball
5. Keep Your Friends Close (And Your Enemies Closer)
6. Strategic Deals Require Creativity & Patience
7. The Speech the Director Never Delivered
8. Another Rat’s Nest
9. Don’t Attempt to Win the Championship Football Game With an All-Star Basketball Team
10. What Does Collegiality Really Mean?
11. The Board Book’s Tale: Bankers, Stick to the Numbers!
12. Preparing for Battle
13. Driving a Deal Is Not Unlike Filming a Movie
14. Assumptions Make an *%$ Out of You & Me
15. A Deal So Nice, We Did it Twice
In the wake of Corp Fin’s new Staff Legal Bulletin No. 14I, we have scheduled a webcast for tomorrow, Tuesday, November 14th – “Shareholder Proposals: Corp Fin Speaks” – during which Davis Polk’s Ning Chiu will ask Corp Fin’s Matt McNair about how the new SLB should be applied in practice. This webcast is freely available – even to nonmembers.
As reflected in the memos posted in our “Shareholder Proposals” Practice Area, there are a number of open issues to consider after the SLB – particularly logistical issues about how boards can timely act to qualify for the Staff’s new “ordinary business” position…
Governance: Do Companies Really Need an LTSE to Think Long-Term?
Over on “The Mentor Blog,” Broc recently blogged about the Long-Term Stock Exchange – a proposed new stock exchange designed to promote a long-term approach to governance. Among other innovations, the LTSE would impose a moratorium on guidance and embrace tenure voting.
This recent blog from Andrew Abramowitz asks whether we really need a new exchange to accomplish a more long-term approach by companies:
What is less clear to me is why it has to be a new stock exchange that is the mechanism for implementing these changes. There is no reason why any company listed on the NYSE or Nasdaq cannot (with appropriate internal board and stockholder approval) voluntarily comply with all the requirements that LTSE imposes.
Assuming there could be broad agreement on a set of standards for long-term orientation – perhaps a group of law and business professors can create and update something like that – then any public company can voluntarily decide to adhere to those standards and publicize that fact.
This November-December issue of the Deal Lawyers print newsletter was just posted – & also sent to the printers – and includes articles on:
– Setting the Record Straight: Regulation G Doesn’t Apply to M&A Forecasts
– Structuring Asset Deals: “Traditional” vs. “Our Watch, Your Watch” Constructs
– Controlling Stockholders: Forging Ahead With “Entire Fairness”
(Or Playing It Safer)
– PRC Acquirors: How M&A Agreements Handle Risks & Challenges
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.
If you weren’t paid to read a proxy statement, would you ever think about looking at anything other than the summary comp table? I know I wouldn’t – it’s just human nature to have a prurient interest in this kind of stuff. Maybe the Wu-Tang Clan put it best:
Cash Rules Everything Around Me
C.R.E.A.M. get the money
dolla dolla bill y’all. . .
Anyway, because they know that we’re dying to know, Equilar just issued a new study on General Counsel pay at 1,100 public companies. As with previous Equilar GC pay studies, this one isn’t publicly available, but here’s Equilar’s press release summarizing it. Here are the key findings:
– How Much – The median total compensation for General Counsels, broken out by revenue range was:
o Under $1 Billion: $918k
o $1 Billion to $5 Billion: $1.5 million
o $5 Billion to $15 Billion: $2.4 million
o Over $15 Billion: $3.8 million
– Equity Awards are a Big Part of Comp – Equity awards represented about 1/2 of total compensation at the smallest companies in the study, and nearly 2/3rds at the largest. However, it’s good to be at the top of the pyramid – GCs at the largest companies were awarded more than 7x the amount in stock value as those who worked for companies with less than $1 billion in revenue.
– Pay Increases – Overall, GC pay rose 4% last year. The big winners were GCs of companies in the $1-5 billion range – they saw their comp increase by an average of 8.1%. Their counterparts at companies in the $5-15 billion range saw pay climb 3.3%, while those at the smallest companies surveyed received a 6.6% bump. GCs at the largest companies fared the worst – experiencing a decrease of 0.6% in compensation.
For data on broader in-house comp trends, check out this BarkerGilmore study. It covers both private & public companies and addresses comp trends for the GC, managing counsel and senior counsel.
Securities Fraud: Do Not Disrespect the Wu-Tang Clan
So, “Harper’s” magazine published the transcripts of the jury selection in Martin Shkreli’s securities fraud case. Among his other antics, Shkreli purchased the only copy of Wu-Tang Clan’s “Once Upon a Time in Shaolin” album for $2 million – and then contrived to manufacture a bizarre & convoluted beef with the Clan.
The transcripts reveal that these shenanigans didn’t sit too well with Juror #59:
Juror #59: Your Honor, totally he is guilty and in no way can I let him slide out of anything because…
The Court: Okay. Is that your attitude toward anyone charged with a crime who has not been proven guilty?
Juror #59: It’s my attitude toward his entire demeanor, what he has done to people.
The Court: All right. We are going to excuse you, sir.
Juror #59: And he disrespected the Wu-Tang Clan.
Future defendants are on notice – do not disrespect the Wu-Tang Clan.
Our New Practice Area: “Wu-Tang Clan”
As we’ve shown with our recent blogs on ICOs, blockchain & cryptocurrencies, we strive to keep up with the latest developments on the securities law and capital markets front. Along those lines, there’s an emerging player on the scene that we think merits its own practice area.
If you’ve been playing along with the home version of our game today, then by now you know that I’m talking about the Wu-Tang Clan.
Scoff if you want, but shortly after the Clan’s pivotal role in Martin Shkreli’s fraud trial, a “Wu-Tang Coin” ICO was launched with the stated purpose of purchasing the band’s “Once Upon a Time in Shaolin” album from Shkreli & releasing it to the public.
As if that weren’t enough, now “Rolling Stone” reports that band member Ghostface Killah has himself jumped in to the world of crypto-finance:
Ghostface Killah has cofounded a cryptocurrency company called Cream Capital, CNBC reports. The company is looking to raise $30 million during its initial coin offering (ICO).
Cream Capital takes its name from Wu-Tang Clan’s 1993 classic song “C.R.E.A.M.,” which stands for “Cash rules everything around me.” In the case of the company, Cream Capital Chief Executive Brett Westbrook told CNBC it has been granted the trademark for Crypto Rules Everything Around Me.
The ICO “Cream Dividend” tokens will be sold in November, which can then be exchanged for Ether. Ether is the value token of the Ethereum blockchain.
When it comes to acknowledging the Wu-Tang Clan’s prominence in finance & the capital markets, we concede that we’re a distant second to Dave Chappelle, whose classic “Wu-Tang Financial” sketch saw it all coming several years ago. No, I’m not going to link to it – the language is NSFW – but do yourself a favor and check it out on your own time.
