A recent Russell Reynolds report on GC hiring trends among Fortune 500 companies includes a number of interesting conclusions about the increasingly diverse makeup of CGs and how their roles are evolving. Here are some of the highlights:
– More women than men were appointed to the Fortune 500 general counsel role for the first time in history. 38% of appointed GCs were ethnically diverse for the first time in history. This was an increase of 12% over 2021, which was already a high water mark at 34% of appointments.
– Despite the impressive diversity headline, female legal executives below the GC level are less likely to get the opportunity to step into the top legal job compared to their male counterparts. 67% of male GCs are first timers in the role, vs. only 60% of female GCs and only 51% of ethnically diverse GCs. The report also suggests that female and ethnically diverse GCs need stronger educational credentials than their male counterparts in order to achieve their positions.
– The crisis environment under which many companies have operated in recent years has put a premium on experience. Only 56% of GCs appointed after the start of the pandemic (March 2020) are first-timers in the job, compared to 67% of those appointed pre-pandemic. Industry experience is also highly valued, although that preference varies among industries.
The report also notes that the percentage of newly hired Fortune 500 GCs responsible for their company’s compliance program declined from 37% in 2021 to 22% in 2022, while the percentage of those who served as corporate secretary remained relatively constant (62% in 2021 v. 60% in 2022).
A recent Stanford report on shareholder activism highlights some of the ways in shareholder activism and companies’ responses to it continue to evolve. In recent years, companies have frequently been admonished to “think like an activist” and identify & address potential weaknesses before activists leverage them into a successful campaign. This excerpt from the report says that’s proven to have been good advice:
As a result, more companies are looking at themselves through the lens of an activist and proactively taking actions that an activist would advocate (thereby weakening the argument for an activism campaign). Given that activists derive their power from gaining shareholder support, this means companies too are more likely to think in terms of maintaining shareholder support. Companies conduct preparedness exercises and advanced planning to discuss how they would respond, even before an activist engagement takes place. Preparedness also means that boards are much more conversant and comfortable with activism.
These practices took a dramatic step forward following the high-profile campaign between Nelson Peltz and Dupont, in which mega-cap companies realized they are not too big to become a target. Preparedness exercises have since proliferated to many large, medium and, in some cases, small-sized firms.
One result of this preparation is that companies have increased their success when campaigns come to a vote. According to statistics from FTI Consulting, whereas the activism slate historically has prevailed 50 percent of the time in a proxy contest, in recent years that success rate declined below 30 percent. Only around 30 directors are replaced each year in contested elections in the United States.
The report notes that how the universal proxy rules will affect these statistics remains to be seen, but says that boards will study early campaigns in order to learn how to improve their responses to activists in the new environment.
Well, you can’t say we haven’t warned you about a couple of looming compliance deadlines for recent rule changes – but we’ll do it again anyway with the help of this White & Case memo. The memo reminds readers that the new 10b5-1 checkboxes for Form 4s & 5s will be required beginning April 3rd and that electronic Form 144s will be required beginning on April 13th. This excerpt highlights the actions that affiliates who trade in reliance on Rule 144 may need to take prior to the deadline:
Importantly, affiliates required to file Forms 144 should obtain and/or confirm their EDGAR codes needed to make the required electronic filings well ahead of a planned sale. For directors and executive officers selling issuer equity securities, issuers should be prepared to obtain and/or confirm those codes on their behalf, and should also check with brokers used by the company and insiders to confirm that the necessary steps are being taken to make the electronic Form 144 filings on a timely basis.
Directors and executive officers of foreign private issuers (“FPIs”) do not typically have EDGAR codes; therefore, before Form 144 electronic filings become mandatory, FPIs will need to apply for and receive EDGAR codes for all of their directors and executive officers who may rely on Rule 144 for sales of issuer equity securities.
If you have questions on Rule 144, don’t forget our Rule 144 Forum, where Robert Barron has been responding to our members’ questions for more than 20 years. If you have questions on the new checkbox requirement, the recent changes in gift reporting, or any other Section 16 issues, you can use the Q&A Forum on Section16.net to direct them to Alan Dye – and that alone is reason enough to subscribe if you don’t already! Please email sales@ccrcorp.com or visit our membership center to subscribe to this invaluable resource online.
We’re continuing to post resources on the fallout from the collapse of SVB in our “Financial Institutions” Practice Area. Unfortunately, it still looks like there’s a chance that we could end up with a broader banking crisis on our hands – but even if we all dodge the bullet on this one, companies would be wise to consider how to mitigate the risks of a future crisis on their own businesses. This Freshfields memo recommends that companies implement an investment policy to actively manage those risks:
Every company should adopt an investment policy and actively manage investment risk. An investment policy prescribes how management should invest the company’s cash balances. For operating companies, investment policies accomplish at least two goals. First, the policies set forth the types of securities in which the company can invest and requires management to monitor the maturity profiles of such securities, any liquidity concerns and the performance of the investment portfolio.
Second, for operating companies, investment policies are designed to ensure that a company’s cash resources are not deployed in a manner that would inadvertently cause the company to become an investment company under the Investment Company Act of 1940, as amended. This is important because a failure to register as an operating company, even if inadvertent, can have significant negative direct and indirect consequences, including the potential unenforceability of all of the company’s contracts, SEC enforcement action and litigation.
The memo says that the policy should address, among other things, the company’s liquidity needs, cash flows, cash balances and portfolio performance, risk & concentration limits, and alternative capital sources. It also addresses the oversight responsibilities of management and the board, and the role that legal can play in helping to develop the policy and ensure that it works as intended.
This Wachtell memo says that the SEC’s recent settled enforcement action against Blackbaud provides a reminder to companies that when they communicate about a corporate crisis, their disclosure controls and procedures need to be sufficient to ensure that those communications are accurate. As this excerpt indicates, among other things, this requires companies to make sure that appropriate information about the facts on the ground is communicated to those making decisions about disclosure:
On July 16, 2020, Blackbaud disclosed that it had discovered a ransomware attack, but also stated that the attacker did not access any donor bank account information or Social Security numbers. According to the SEC’s order, within a matter of days, Blackbaud’s technology and customer service personnel learned that the statement about access to sensitive information was erroneous.
Nonetheless, those personnel failed to communicate that knowledge to senior management. As a result, not only did Blackbaud fail to correct the erroneous disclosure, but it also subsequently filed a Form 10-Q that failed to disclose that the attacker removed sensitive customer data. The SEC charged Blackbaud with negligence-based misrepresentations, as well as reporting violations and failure to maintain adequate disclosure controls.
The memo notes that the SEC imposed a $3 million civil penalty in this proceeding, and contrasts that with the $1 million penalty it imposed in a very similar 2021 proceeding involving Pearson. It suggests that it’s reasonable to assume that the SEC is acting on its well-publicized warnings that the penalties are going up.
The crypto bros have been having a bit of a moment in recent weeks, as bitcoin rallied while bank stocks burned. Some crypto-evangelists have contended that recent events have “exposed the fractional reserve banking system’s core limitations and strengthened the case for investing in bitcoin”. You folks do what you want, but I think it’s worth comparing the relative outcomes for SVB & FTX depositors before pulling your life’s savings out of the federally insured banking system and making a bet that Charlie Munger isn’t right about everyone’s favorite digital tulip.
Anyway, the SEC made it pretty clear last week that the crypto bros aren’t making much headway with it. In addition to Coinbase’s disclosure that it had received a Wells notice from the agency, the SEC’s Office of Investor Education & Advocacy issued an investor bulletin on Thursday warning about the risks of crypto investments. The bulletin was lengthy, but the SEC started it off with this “TLDR” summary:
TLDR: The SEC’s Office of Investor Education and Advocacy continues to urge investors to be cautious if considering an investment involving crypto asset securities. Investments in crypto asset securities can be exceptionally volatile and speculative, and the platforms where investors buy, sell, borrow, or lend these securities may lack important protections for investors. The risk of loss for individual investors who participate in transactions involving crypto assets, including crypto asset securities, remains significant. The only money you should put at risk with any speculative investment is money you can afford to lose entirely.
Among other things, the bulletin points out that those offering crypto asset investments or services may not be complying with applicable law, including federal securities laws, and that the marketplace is full of fraudsters peddling scams to retail investors.
It’s been a couple years since we’ve had a non-GAAP enforcement action. Last week, the SEC reminded us that they’re still watching for problems. The Commission announced charges against a company for allegedly misleading disclosures about its non-GAAP financial performance in multiple reporting periods from 2018 until early 2020.
One of the things that got the company in trouble was allegedly failing to adopt disclosure controls & procedures specific to non-GAAP measures. The SEC says that led to misclassifications of excluded expenses and misleading disclosures of what exactly had been excluded. Here’s more detail from the 11-page order (also see this Cooley blog):
The company also had insufficient processes to ensure that its business practices for classifying costs as TSI were consistent with the plain meaning of the company’s own description of those costs in its periodic reports filed with the Commission and in its earnings releases. The absence of a non-GAAP policy and specific disclosure controls and procedures caused employees within the business units and in the Financial Planning & Analysis area (“FP&A”) to make subjective determinations about whether expenses were related to an actual or contemplated transaction, regardless of whether the costs were actually consistent with the description of the adjustment included in the company’s public disclosures. As a result, the company negligently misclassified certain internal labor costs, data center relocation costs that were unrelated to the merger, and other expenses as TSI costs.
Without admitting or denying the findings in the order, the company consented to a cease-and-desist order, to pay an $8 million penalty, and to undertake to develop and implement appropriate non-GAAP policies and disclosure controls and procedures. The SEC considered the company’s cooperation and remedial actions in accepting the settlement offer.
I blogged a few weeks ago that “disclosure controls” enforcement actions are trending. We all need to pay attention to the link between disclosure controls & disclosure content – including for voluntary disclosures – because the SEC certainly is doing that. As Lawrence noted last week on PracticalESG.com, the SEC’s interest in whether companies are accurately explaining what makes up the information they’re providing could also translate to scrutiny of ESG disclosure controls in the future.
We received a bunch of memos over the weekend on the Silicon Valley Bank situation, and we are posting those memos and other materials relating to SVB’s closure in our “Financial Institutions Practice Area.” There’s also a brief post on The Mentor Blog this morning about some of the 8-K filings that companies made on Friday concerning the situation.
Hopefully, the joint statement issued by the Fed, FDIC & Treasury last night that depositors will be made whole and have access to their money today will take the edge off the crisis that erupted late last week, but we’ll stay tuned and post additional resources when we receive them.
Last month, Liz blogged about the SEC’s recent enforcement action against Activision-Blizzard, which is the latest action premised solely on an issuer’s alleged deficient disclosure controls unaccompanied by a related disclosure violation. This Shearman memo reviews that proceeding and another recent SEC action premised solely on deficient controls and offers up some lessons that public companies should draw from those enforcement actions. This excerpt says that companies should look at the relationship between disclosure controls and the disclosures contained in their SEC filings as a two-way street:
Treat the relationship between disclosure controls and disclosure content as an open feedback loop rather than as a one-way communication channel. Disclosure controls are often viewed as informing disclosure content, but not the other way around. Consider reviewing your existing disclosure content with an eye towards identifying key topics and risks and then compare those to your disclosure processes.
Is each of these topics and risks covered by a corresponding stakeholder on your disclosure committee? Are disclosure committee members collecting information relevant to assessment of these topics and risks? What information are you collecting from business unit leaders who are not directly represented on the disclosure committee, and what procedures do you have in place to ensure that relevant information is fed into the disclosure process? Allowing feedback from disclosure content to disclosure controls also means being mindful of the disclosure controls implications when adding new risk factors.
The memo disagrees with contentions that the Activision-Blizzard proceeding will require companies to collect all information that could potentially be relevant to disclosures about an operational risk once it decides that the risk merits a reference in the risk factors section of its filings. Instead, the authors expect that the SEC will pursue these purely disclosure controls related proceedings selectively, “in matters (1) of broader public interest, or (2) where the SEC sees a specific opportunity to highlight an example of information it believes is getting insufficient attention for disclosure purposes.”
Inflation, rising interest rates, recession concerns & market volatility have provided activists with a target-rich environment this year, and the implementation of universal proxy gives them a key tool to help capitalize on those opportunities. That raises the stakes when it comes to shareholder engagement, and this Wilson Sonsini memo has some thoughts about how boards and management teams can most effectively structure their engagement efforts. This excerpt addresses two of the key components for successful engagement in 2023:
– Proactively enhancing governance practices. Governance is almost never the central feature of an activism campaign, but it is frequently used as a wedge issue by activists to paint a board of directors as entrenched and out of touch. As such, companies should regularly evaluate their governance practices and look for proactive measures—such as the adoption of majority voting in director elections, the elimination of supermajority vote provisions, and even, in appropriate circumstances, voluntary declassification of the board—that can be taken to show the board’s deliberate approach to governance. Shareholder engagement is a long game, and years of thoughtful evolution can reassure shareholders that the board prioritizes good governance and has sufficient internal will to make changes when they are warranted.
– Focusing on board composition and refreshment. A robust approach to board refreshment has become table stakes for the most sophisticated companies when it comes to engagement. Institutional shareholders appreciate seeing changes in board composition and view a regular cadence of new directors joining a board as evidence of a healthy boardroom dynamic. As noted above, the universal proxy rules have cast a brighter light on the skills and qualifications of each director individually. As such, boards should be conscious of, and seek to proactively address, weaknesses that an activist might seek to exploit. This is particularly true at companies that have seen an erosion in investor support for directors and say-on-pay proposals.
Other areas of emphasis in shareholder engagements include clearly articulating the company’s strategy for value creation, considering efforts to boost shareholder value, and understanding the views of the company’s shareholder base. Perhaps most important of all, the memo says that companies need to listen actively and be open to change, because shareholders—especially activist shareholders—want to know that the board takes their views seriously and isn’t “willfully blind” to alternatives.
