Here’s something I blogged yesterday on CompensationStandards.com: When the SEC adopted the pay ratio rule four years ago, it repeatedly stressed that company-to-company comparisons would be meaningless. The adopting release said:
As we noted in the Proposing Release, we do not believe that precise conformity or comparability of the pay ratio across companies is necessarily achievable given the variety of factors that could cause the ratio to differ. Factors that could cause pay ratio to differ from one company to the next include differences in business type, variations in the way the workforces are organized to accomplish similar tasks, differences in the geographical distribution of employees, reliance on outsourced workers, and the variations in methodology for calculating the median worker. Consequently, we believe the primary benefit of the pay ratio disclosure is to provide shareholders with a company-specific metric that they can use to evaluate the PEO’s compensation within the context of their company.
That message stuck: most people seemed to understand that the ratio would be company-specific, and there was a pretty “ho-hum” reaction to the first year of pay ratio disclosure. But, you might say, “What about tracking changes to a particular company’s ratio over time, to monitor how CEO pay increases compare to everyone else’s? Won’t that be useful?” More than a few people predict that pay ratio will garner more attention going forward, because shareholders & others will compare a company’s current year number to prior years.
The problem with that, as this WSJ article points out, is that the same factors that make comparisons among different companies meaningless are also things that can change from one year to the next at a single company. And as I’m sure you can guess, those changes cause big swings in the ratio. So for many companies, pay ratio doesn’t even provide meaningful year-over-year info (at least, about the relationship between CEO & employee pay). Here’s a couple of examples from the article:
Median pay at Jefferies Financial jumped to $150,000 last year from $44,584 in 2017 after the holding company sold most of its stake in its National Beef meat-processing unit in June 2018, cutting its workforce to about 4,600 from 12,600. The 2017 median employee at the company, formerly called Leucadia National, was an hourly line worker at National Beef, while last year’s was a senior research associate in the company’s Jefferies LLC financial-services operation.
Coca-Cola slashed its median pay figure by two-thirds after it finished shifting North American bottling operations to franchisees and acquired a controlling interest in African operations. The 2017 median worker was an hourly full-timer in the U.S. making $47,312, while last year’s made $16,440 as an hourly full-timer in South Africa. In its proxy statement, Coca-Cola said it intends to shed the African operation again after making improvements and offered an alternative median employee excluding that unit: an hourly full-timer in the U.S. making $35,878, about 25% less than his or her 2017 counterpart.
I will say, companies are making the most of what they have to work with (thanks in large part to the flexibility the SEC incorporated into the rule). And for better or worse, the “median employee” data point might illustrate to people how company policies & strategies play out in the workforce. But a single data point can’t tell the whole story – and the pay ratio itself remains pretty useless.
Internal Auditors Worry Boards Aren’t Using Them Enough
This survey of chief audit executives & directors, compiled by the Institute of Internal Auditors, suggests that enhancing internal audit’s role could help directors identify & mitigate emerging risks. Here’s a few of their recommendations (also see this and this CFO.com article and this Cooley blog):
– While cyber and IT issues have grown to represent nearly 20% of the average audit plan, CAOs still think there’s a shortage in the resources and skills that would allow them to protect the company from significant cyber incidents. Audit committees should ask about obstacles to internal audit’s performance in this area.
– At about 60% of companies, internal audit either never reviews board materials, or does so only for unusual situations. Copying the CAO on board materials would allow them to provide negative assurance on its accuracy, completeness, timeliness, transparency, and reliability. According to this WSJ article, the lack of corroboration worries auditors, who feel that audit committees aren’t exercising “professional skepticism,” and aren’t ensuring that necessary controls are in place.
– Organizational monitoring of third-party relationships is viewed by nearly half of CAOs as ad hoc or weak. CAOs must elevate concerns about weak controls on third-party risks to the audit committee. These relationships require the same level of risk management as any that affect the organization directly.
– 75% of CAOs report to the CFO – which is concerning because they may focus disproportionately on financial risks and overlook areas such as reputational & cyber risk. Internal audit can take on a greater role in oversight of emerging risks by monitoring “key risk indicators” for the company.
– Variances in audit committee structure and responsibility create the real possibility that in some organizations internal audit is not involved with committees that handle critical issues, such as cybersecurity and overall risk governance. For example, in many organizations, risk and IT committees, not audit committees, are tasked with overseeing cybersecurity and cyber preparedness. Such conditions could handicap internal audit’s ability to deliver perspectives about those vital risk domains. CAOs should be present and able to share information at these committee meetings.
“Changes in Accounting Estimates” Linked to Low-Quality Financial Reporting
Accounting isn’t as “black & white” as people sometimes think. This Audit Analytics blog highlights the tendency for people to overlook the significant judgment calls that are involved in financial reporting – and it takes a look at what it can mean when those judgments change. Here’s an excerpt:
Changes in Accounting Estimates (CAEs) are a normal part of periodic reviews of both current and future benefits and obligations. These estimates are recorded as new information appears. From an accounting perspective, the disclosure is governed by ASC 250, which requires all material changes in estimates to be disclosed.
The PCAOB proposed amendments to ASC 250 a couple of years ago, because it views this area as one of the riskiest parts of an audit. The blog walks through three studies that lend support to the PCAOB’s belief – and encourages auditors to be very skeptical of CAEs. Here’s the conclusion:
All three working papers found evidence that CAEs can lead to lower quality of financial reporting. Whether it may be from opinion shopping, managerial opportunism or an unintentional misstatement, these CAEs have been positively associated to subsequent restatements. This can lead to poorer financial quality which, in turn, can impede the assessment of earnings quality making it harder to accurately assess a company’s performance.
We’ve blogged about how some companies have adopted a “Rooney Rule” in an effort to improve board diversity. Now, it might be easier to include diverse candidates for vacancies – because Heidrick & Struggles has announced that each year, half of their cumulative slate of board candidates presented to clients will be diverse.
Heidrick has reason to be confident they’ll meet that goal. In 2018, 52% of their North American board placements were diverse candidates. Hopefully, starting with change at the beginning of the recruitment process will result in real change – but the proof is in the pudding…
This WaPo article reports on Goldman Sachs’ efforts to improve gender diversity for both entry level & senior employee positions, which came about because the bank wants to improve its gender pay ratio (which is required to be reported in Britain).
Board Diversity: Illinois Considering Quotas
Recently, the Illinois House of Representatives passed “House Bill 3394” – which would amend the state’s Business Corporation Act to require public companies headquartered in the “Land of Lincoln” to have at least one female director and one African-American director on their boards by the end of next year. Companies that don’t comply would face fines of $100,000 (first-time offenders) or $300,000 (repeat offenders).
After a heated debate, the bill advanced to the Illinois Senate by a vote of 61-27. If it becomes law, companies can increase the size of their boards to comply. Illinois is home to some pretty well-known companies – e.g. Walgreens, Boeing, McDonald’s, Archer Daniels Midland – but I’m guessing that smaller companies will be more affected. UCLA’s Stephen Bainbridge is among those criticizing the bill. But there’s a reputational risk for companies that challenge the low bar that the legislation would establish.
Board Diversity Mandates: What’s the Impact?
It was pretty big news when California passed its board gender diversity law last year. And Illinois isn’t the only state that’s considering similar legislation. Earlier this year, Broc blogged about a bill in New Jersey, and this Bloomberg article reports on proposed legislation in Massachusetts and non-binding guidelines in other states. But if these types of statutes catch on in the US, how much will they move the needle? This Cooley blog analyzes Bloomberg’s findings – here’s an excerpt:
The Bloomberg analysis showed that the new law could mean that 692 more board seats open up for women. In addition, reports Bloomberg, if every state were to adopt a comparable law, “U.S. companies in the Russell 3000 would need to open up 3,732 board seats for women within a few years.” Meaning the number of women on boards nationwide would rise by almost 75 percent.
Currently, among the Russell 3000, men hold 21,424 board seats, while women hold 5,088 seats. And 99 percent of boards are majority male. Board seats are often filled by current or retired executives, who are most often men. In addition, when director slots open, they are often filled through personal connections, likewise most often male. Those are just two of the reasons why women make up only one-fifth of U.S. board directors.
As Bloomberg reports, without some kind of change, “it could take another two generations before the boardroom matches the workforce, which is about half female. The glacial rate of progress inspired the California law, which had wide support in the state legislature.” And, as discussed in this article in the WSJ, companies will need to “revamp the way they recruit female directors.” According to the chair of the NACD, the “‘system produces white male candidates unless board leaders deliberately do something different.’”
Beginning next year, CalPERS will likely vote “against” compensation committee members in the same year that the compensation plan fails its pay-for-performance quantitative model. That’s according to recommendations in a recent staff report to the pension fund’s Investment Committee. Here’s more detail on the executive compensation initiative that’s underway:
– Move from a 3-year to a 5-year quantitative model (developed in collaboration with Equilar) to assess pay-for-performance, and vote “against” bottom quartile of universe
– Vote “against” Compensation Committee members in the same year the compensation plan fails the pay-for-performance quantitative model (effective 2020 proxy season)
– Additional qualitative components will continue to be used to assess compensation plans – e.g. insufficient disclosure of goals, lack of clawback policy
– For this year, CalPERS expects its say-on-pay voting outcomes to be similar to 2018, where CalPERS voted against 43% of pay programs
The report also summarizes the status of CalPERS’ voting & engagement efforts with Climate Action 100+, and its push for board quality, board diversity and majority voting in director elections. Here’s the staff’s recommended enhancements for overboarding and refreshment:
– Vote “against” non-executive directors who sit on more than 4 boards. The current practice is to vote “against” non-executive directors who sit on more than 5 boards
– Vote “against” Nominating/Governance Committee members if the Board has more than 1/3 of directors with greater than 12-year tenure AND less than 1/3 of directors were appointed in the last 6 years
More on “SEC Chair Talks About ‘Human Capital’ Disclosure”
In February, I summed up then-recent remarks from SEC Chair Jay Clayton on the topic of human capital disclosure by saying:
Companies should focus on providing material information that a reasonable investor needs to make informed investment & voting decisions – Jay is wary of mandating rigid disclosure standards or metrics.
In remarks a couple of weeks ago to the SEC Investor Advisory Committee, it was pretty clear that Chair Clayton’s views still stand. Here’s an excerpt:
Disclosure should focus on the material information that a reasonable investor needs to make informed investment and voting decisions; yet, applying this and the other principles I mentioned to human capital in the way businesses assess and disclose, and investors evaluate, for example, revenue or costs of goods sold, is not a simple task. That said, the historical approach of disclosing only the costs of compensation and benefits often is not enough to fully understand the value and impact of human capital on the performance and future prospects of an organization.
With that as context, my view is that to move our framework forward we should not attempt to impose rigid standards or metrics for human capital on all public companies. Rather, I think investors would be better served by understanding the lens through which each company looks at its human capital. In this regard, I ask: what questions do boards ask their management teams about human capital and what questions do investors—those who are making investment decisions—ask about human capital?
These remarks came in response to an IAC subcommittee recommending that the SEC adopt additional disclosure requirements on the topic of human capital management. Here’s an excerpt (also see this Cooley blog, which summarizes several HCM rulemaking petitions & initiatives, and this Willis Towers Watson memo about the IAC recommendations):
There are a wide range of potentially material HCM disclosures and ways to integrate that information into current reporting. At the most basic, issuers could be required to comply with a principles-based disclosure requirement asking them to detail their HCM policies and strategies for competitive advantage and comment on their progress in meeting their corporate objectives. This would essentially augment existing principles-based requirements with explicit discussions of HCM.
The fact that board and managers routinely rely on a number of similar metrics suggests that they can add value for investors, at least within a given sector, similar to the “view from management” approach to MD&A disclosure. We offer a few examples here of disclosure that – based on research findings in the studies cited above — could be considered. They could be considered in rule-making or as part of routine disclosure reviews by Commission staff. At a minimum, application of existing SEC guidance on non-GAAP accounting, including efforts to prevent issuers from providing inconsistent or otherwise misleading HCM disclosures over time, could be specifically applied to HCM metrics.
In the category of “leading by example,” SEC Chair Jay Clayton structured his remarks at yesterday’s “SEC Speaks” Conference in the form of an MD&A. Here’s an excerpt that shows the importance of “human capital” at the SEC:
Employee pay and benefits was our largest expenditure in fiscal years 2018 and 2013. This is not surprising given that our human capital is by far our most important asset. Technology expenditures have increased in total dollars and as a percentage of the total budget over the last five years. This is a direct result of our commitment to maintaining and upgrading our information technology systems and enhancing the agency’s cybersecurity and risk management.
For fiscal year 2019, our current fiscal year, employee pay and benefits is expected to continue to account for a significant portion of our appropriation. As a result of a hiring freeze, Commission staffing is down more than 400 authorized positions compared to fiscal year 2016. To ensure we can continue to meet our mission objectives, the resources Congress provided the agency for fiscal year 2019 will allow us to lift the hiring freeze and add 100 much-needed positions. This would put our staffing level on par with where we were five years ago.
A few weeks ago, the SEC adopted rules to implement the “Fast Act” – and when the rules go effective next month, they’ll make the following changes to the cover pages for Form 10-K, Form 10-Q and Form 8-K:
– Forms 8-K and 10-Q will require disclosure of the national exchange or principal US market for their securities, the trading symbol, and the title of each class of securities
– Form 10-K will have a new field for disclosure of the trading symbol for any securities listed on an exchange
– Form 10-K will no longer have a checkbox to show delinquent Section 16 filers
To reflect these changes, we’ve updated the Word version of the Form 10-K cover page in our “Form 10-K” Practice Area, as well as the Word version of the Form 10-Q cover page in our “Form 10-Q Practice” Area, and the Word version of the Form 8-K cover page in our “Form 8-K” Practice Area. Note that the adopting release contains the new cover page captions starting on page 216 – but doesn’t indicate exactly where the new text will be added to Form 8-K and Form 10-Q. So we’ve made an educated guess of where this new language will appear. The rules are effective May 2nd – but it typically takes the Staff a few weeks or months to incorporate these types of updates to the PDF cover pages published on the SEC’s website.
For companies that are required to submit Interactive Data Files in Inline XBRL format under Reg S-T, the Fast Act rules also require every data point on the cover pages to be presented with Inline XBRL tags. Some of the “Cover Page Interactive Data File” can be embedded – and the remainder should be attached as an exhibit under Reg S-K’s new Item 601(b)(104). The phase-in for this requirement matches the phase-in for mandatory Inline XBRL compliance. So for large accelerated filers, that means this will first be required in reports for periods ending on or after June 15th. Accelerated filers have until next year – and everyone else has until 2021. We’ve updated our “Form 10-K Cover Page Requirements Checklist” for all of the Fast Act rules – and will be updating all of our Handbooks as well.
Unsurprisingly, BlackRock is now using a technology solution, provided by CorpAxe, to coordinate governance engagement requests. There was an announcement last year that BlackRock had selected CorpAxe as their “corporate access and research management solution,” but since it didn’t mention governance activities per se, it didn’t move onto my radar until BlackRock started redirecting companies that had reached out via email to request engagement. There is also a notice on their stewardship website that you should submit engagement requests through CorpAxe.
Podcast: “Legislation to Study Rule 10b5-1 Plans”
We blogged a few months ago about proposed legislation that flew through the House and would require the SEC to study – and potentially restrict – Rule 10b5-1 trading plans. In this 19-minute podcast, Scott McKinney of Hunton Andrews Kurth discusses the bill in more detail, as it awaits consideration by the Senate. Topics include:
– What is the status of the legislation?
– What are the concerns about Rule 10b5-1 plans the legislation is intended to address?
– What specific issues would the legislation require the SEC to consider?
– What should companies do now?
On Wednesday, the SEC approved changes to the price requirements that companies must meet to qualify for exceptions under the NYSE’s shareholder approval rules. Broc blogged about the proposal last fall – noting that it would make NYSE rules more similar to previously-approved Nasdaq updates. Maybe that’s why the SEC received zero comments in five months. Among other things, the amendments:
– Change the definition of “market value,” for purposes of determining whether exceptions to the shareholder approval requirements under NYSE Sections 312.03(b) and (c) are met, by proposing to use the lower of the official closing price or five-day average closing price and, as a result, also remove the prohibition on an average price over a period of time being used as a measure of market value for purposes of Section 312.03
– Eliminate the requirement for shareholder approval under Sections 312.03(b) and (c) at a price that is less than book value but at least as great as market value
Shareholder Engagement: Tips for Director Involvement
In this 10-page memo, DLA Piper suggests ways to use your proxy statement as a shareholder engagement tool – as well as best practices for disclosing your shareholder engagement efforts. It notes that this type of disclosure is becoming a lot more common. That’s not too surprising since according to this “Director-Shareholder Engagement Guidebook” from Kingsdale Advisors, the vast majority of large companies are now involving directors in regular shareholder engagement – and of course they want to get credit for that.
The Guidebook highlights the benefits of involving directors in engagement efforts and responds to some common objections. And whether your directors already have relationships with shareholders or you’re still evaluating the pros & cons of a direct dialogue, it provides some tips to get the most “bang for your buck.” Here’s an excerpt:
Director-level engagement has to be convenient, otherwise boards and shareholders aren’t going to keep up with the expectations that have been set. Engaging shareholders does not necessarily mean traveling and sitting down for an hour or two. Ideally boards engage face-to-face annually, perhaps on the back of board meetings or institutional investor days, but follow-up may occur over the phone or in video-conferencing.
One of the most convenient set ups we have seen (for directors) is to invite shareholders in the day after a board meeting, when the directors are already prepared and gathered for a series of back-to-back meetings. We recommend invitations to shareholders for director-level meetings come from the corporate secretary, not the IRO. This will signal shareholder engagement is a board-level priority and the meeting will not cover the same topics that may have been previously covered with management.
Engagement should take place well before proxy season, not simply because there is time, but because you will have plenty of runway to address any governance issues that come up.
Transcript: “Earnouts – Nuts & Bolts”
We have posted the transcript for the recent DealLawyers.com webcast: “Earnouts – Nuts & Bolts.”
It’s finally happened. Yesterday, the SEC announced that it’s adopted final rules to implement the “Fast Act” disclosure simplifications – which were proposed about a year & a half ago. We’ll be posting memos in our “Fast Act” Practice Area. Here are some highlights from the 251-page adopting release – and except as noted below, the rules become effective 30 days after their publication in the Federal Register:
– Item 303 and Form 20-F will allow companies to exclude discussion of the earliest of three years in the MD&A if they’ve already included the discussion in a prior filing
– Item 601(b)(2) and (10) will allow companies to omit confidential information in exhibits without submitting a CTR, so long as the information is (i) not material and (ii) would likely cause competitive harm to the company if publicly disclosed (this part of the rule is a change in procedure only, and is effective upon the rule’s publication in the Federal Register)
– Item 601(b)(10) will require only newly-reporting companies to file material contracts that were entered into within two years of the registration statement or report
– Item 601(a)(5) will no longer require companies to file attachments to material agreements, if the attachments don’t contain material information and aren’t otherwise disclosed
– Item 102 will require disclosure about physical properties only to the extent they’re material to the company
– Forms 8-K, 10-Q, 10-K, 20-F & 40-F will require companies to disclose on the cover page the national exchange or principal US market for their securities, the trading symbol, and the title of each class of securities
– “Incorporation by Reference” rules will no longer require companies to file as an exhibit any document or part thereof that’s incorporated by reference in a filing – but instead will require them to provide links to documents incorporated by reference
– Forms 10-K, 10-Q, 8-K, 20-F & 40-F will require Inline XBRL tags on the cover page (this part of the rule has a three-year phase-in)
– Form 10-K will no longer have a checkbox to show delinquent Section 16 filers, the Item 405 heading to be used within the proxy is now “Delinquent Section 16(a) Reports,” and the heading should be excluded altogether when there are no delinquencies to report
– Item 503 (risk factors) will become new Item 105 – and the list of example risk factors is being eliminated from the rule in order to emphasize that it’s principles-based
Business Development Companies: SEC Proposes Offering Reforms
Yesterday, the SEC proposed Securities Act amendments to streamline the offering process for business development companies and registered closed-end funds – by expanding the “WKSI” definition, among other things. Here’s the 361-page proposing release – we’ll be posting memos in our “Business Development Companies” Practice Area.
NYSE’s “eGovDirect” Decommissioned
According to a notice sent to listed companies, the NYSE is planning to decommission “eGovDirect” at the end of next week. Everything will be migrated to the exchange’s “Listing Manager” system. The “Listing Manager” will also be enhanced to allow submission of press releases and supplemental listing applications. Here’s more detail:
Current users of eGov, who do not have accounts on Listing Manager, will need to work with their Listing Manager administrator to obtain access to the new reporting platform. Alternatively, users can contact the NYSE at ListingManager@nyse.com or 212-656-4651 to request access – or to discuss any questions or concerns. Please note that eGov login credentials will not work on the new Listing Manager website.
HOW WILL THIS IMPACT ME?
– If you have an interim written affirmation record in progress, you will have to complete the submission in eGov no later than a) the affirmation’s due date or b) by 5:00PM EST on March 29th (whichever is earlier)
– If you have an annual written affirmation record in progress, this will be migrated to Listing Manager as an open record. You will have the chance to complete your submission online once you obtain access to the website
– If you recently submitted your shareholder meeting dates in eGov, you do not have to re-enter the information in Listing Manager
– Previously completed written affirmations in eGov will not be available in Listing Manager, but a copy can be provided by an NYSE representative
– CAM Basics – a high-level overview of the required “CAM language” that will be added to auditors’ reports, and the quality review & documentation requirements for CAMs
– Determination of CAMs – FAQs on how to identify CAMs, e.g. how they differ from the company’s critical accounting estimates
– Review of Audit Methodologies – observations based on a review of audit firms’ “dry run” CAM methodologies, training materials & practice aids
The guidance is based on the PCAOB’s discussions with audit firms that collectively audit 85% of large accelerated filers, as well as other outreach efforts. All three documents emphasize the company-specific nature of CAMs and related reporting, the broad scope of information that auditors will look at to identify and address CAMs, and the role of the auditor versus the audit committee & management. Here’s a few nuggets:
– CAMs are drawn from matters required to be communicated to the audit committee — even if not actually communicated — and matters actually communicated — even if not required. The standard does not exclude any required audit committee communications from the source of CAMs.
– When identifying CAMs, AS 3101 requires auditors to consider the six factors in the standard as well as other factors specific to the audit
– Descriptions of CAMs – and how they were addressed – are required to be specific to the circumstances – i.e. auditors can’t just restate that they identified “a matter involving especially challenging, subjective or complex auditor judgment,” or generically say they tested internal controls to address the CAM
– Auditors aren’t expected to provide non-public information in their report unless it’s “necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM or how the matter was addressed in the audit” – and “public information” includes press releases, etc. – not just financials
– Although audit committees are entitled to a draft of the auditor’s report and a dialogue about CAMs (and any sensitive information) is expected, CAMs are the responsibility of the auditor, not the audit committee
Auditor Ratification: Tenure Not a Factor for ISS?
This memo from EY/Tapestry Networks summarizes a meeting among audit committee chairs & ISS to discuss potential changes to the factors considered by the proxy advisor for its voting recommendations on auditor committee matters, including auditor ratification. While ISS isn’t making immediate policy changes, it’s trying to understand whether financial reporting shortcomings share red flags that signal a relationship should be reconsidered. Audit chairs cautioned against a more formulaic approach. On the topic of tenure, this dialogue occurred:
While audit firm tenure is one possible factor in evaluating auditor independence, members were cautious about proxy advisory firms using this metric as well. Several members noted that auditor tenure is an ineffective data point that further limits competition and a company’s ability to select the best firm. Others emphasized the difficulty of changing audit firms: “There’s turmoil when you change auditors; these are massive projects.” On the issue of partner tenure, members generally agreed that the current five-year rotation requirement in the United States should make this a non-issue.
Mr. Goldstein agreed on both auditor and partner tenure: “We don’t expect to use tenure in our guidelines. Partner rotation already exists.” Mr. Goldstein sought to reassure the audit chairs by describing the factors ISS considered in making a recommendation against the ratification of KPMG as GE’s external auditor. “Long tenure as GE’s auditor was not a reason for our recommendation,” said Mr. Goldstein. “KPMG had given GE a clean bill of health for many years, and then there was a surprising large write-off related to their legacy long-term care insurance business, followed by an SEC investigation. There were other concerns and enough questions for us to take what, for us, was a radical position.” Mr. Goldstein elaborated that part of ISS’s concerns in the GE case stemmed from the criticism of KPMG’s work as the auditor of Carillion. Members again cautioned that ISS be careful before connecting a firm’s performance on one audit in a particular country with its work on another audit in another country.
Transcript: “How to Use Cryptocurrency as Compensation”
We’ve posted the transcript for the recent CompensationStandards.com webcast: “How to Use Cryptocurrency as Compensation.” The agenda included:
1. Defining “Cryptocurrency”
2. Securities Implications
3. Tax Implications
4. Accounting Implications
5. Other Applicable Regulations
6. Why Digital Assets Are Attractive To Entrepreneurs
7. Types of Crypto Compensation Structures
8. Drafting Issues For Plans & Awards
9. Token Plan Administration
10. When Using Crypto Doesn’t Make Sense
It’s no surprise that the uncertainty surrounding Brexit continues to impact business – I blogged last month that it might be one of this year’s “top risks.” And in December, I wrote that the SEC is monitoring disclosure.
In remarks late last week, Corp Fin Director Bill Hinman reiterated that the UK’s withdrawal from the European Union may be material not just to UK- and EU-headquartered companies – but to any company with extensive international operations – and explained how companies should be applying the SEC’s “principles-based” disclosure rules to Brexit’s evolving business risks (he also touched on sustainability disclosure, as noted in this blog from Stinson Leonard Street).
Bill shared six topics for companies to consider as a starting point when assessing & drafting tailored Brexit disclosures. This Cooley blog highlights that these are the types of questions Corp Fin will be asking during their disclosure reviews. And this “D&O Diary” blog provides further analysis, along with an abbreviated “cheat sheet”:
1. Is the business exposed to new regulatory risk given the uncertainty of which set of laws and regulations will apply and whether transition agreements will be in place?
2. Are there significant supply chain risks due to the potential disruption to the U.K.’s access to free trade agreements with other nations and any resulting changes in tariffs to exports or imports?
3. Does the company face a material risk of losing customers, a decrease in sales or revenues or an increase in costs due to tariffs or other factors? Is the demand for the company’s product especially sensitive to exchange rates or changes in tariffs?
4. Does the company have exposure to currency devaluation, foreign currency exchange rate risk or other market risk?
5. What is the company’s exposure to contractual risk in the face of Brexit? Has the company undertaken a review of its existing contracts with counterparties in the U.K. or the EU to determine whether renegotiation or termination is necessary in light of contractual obligations?
6. Do Brexit-related issues affect financial statement recognition, measurement or disclosure items, such as inventory write-downs, impairments, collectability of receivables, assumptions underlying valuations, foreign currency matters, hedge accounting, or income taxes?
Glass Lewis announced that it will pilot a new Report Feedback Statement (RFS) service to a limited number of U.S. public companies and shareholder proponents during the 2019 proxy season. According to Glass Lewis, the purpose of the RFS service is to allow companies and shareholder proponents to “more fully and directly express their views on any differences of opinion they may have with Glass Lewis’ research.”
The RFS service is to be used to report on differences of opinion — not factual errors, which companies should continue to communicate to Glass Lewis. Companies and shareholder proponents may submit statements noting their differences of opinion with Glass Lewis’ analysis of their proposals to Glass Lewis’ research and engagement team. That team will then distribute the statements, without editing or modifying the content, directly to Glass Lewis’ 3,000+ investor clients along with Glass Lewis’ response to the RFS.
Participants may submit a request to subscribe to the RFS service; Glass Lewis will accept requests on a first-come-first-served basis. The maximum number of pilot participants will be 12 companies and/or shareholder proponents per week between March and May 2019 (subject to decrease if the statements received in any week are particularly long or complex).
Free CLE for In-House Lawyers
I recently noticed on LinkedIn that some of my in-house connections have been panelists for a new CLE provider -“In-House Focus.” IHF is focusing on including case studies from current in-house lawyers, and has committed to using diverse faculty. And according to this announcement, they’re offering nine free video programs as part of their launch. Topics include legal operations, privacy, IPOs and government investigations.
After Broc blogged last week about GE’s “Letter to Shareholders,” a few loyal readers reached out to gush about the proxy statement that was recently filed by Regions Financial. One person said it was “unreal – totally changes expectations around proxy disclosures.” And this comment explains why:
It’s like a proxy statement, proxy advisory data report on governance practices, consolidated sustainability report and review of every shareholder hot topic rolled into one. It’s worth checking out if you’re looking for sample proxy disclosure on virtually any topic – it was even cited by CII in its recent report on best practices for board evaluation disclosure.
This is not to comment on the merits of any of their programs or practices, which I haven’t reviewed, just the scope of disclosure. I do note they have enjoyed strong voting support, but clearly they aren’t resting on their laurels in that respect. And that’s a good lesson for every company, even if you don’t have the resources to prepare a proxy like Regions’.
Sustainability: How to Talk So Investors Will Listen
This PwC memo says the “safe zone” of ESG reports & communications is quickly disappearing as investors get more aligned in the type of info they’re looking for – and continue to integrate ESG criteria into decision-making by investment officers & PMs, rather than just the stewardship team.
You’re likely familiar with the “safe zone” – it’s sustainability reporting that calls out a ton of company accomplishments…but it doesn’t quantify their impact on the bottom line, and there’s no convincing link to business strategy. From an investor’s view, it’s a start – but it’s not going to ensure the company avoids the biggest global risks that are coming down the pike, or that it’s positioned to capture a competitive advantage. A recent 40-page report from Ceres offers some strategies to improve your positioning – and engagement – on this topic. Here’s one takeaway, as summarized in this Cooley blog:
Use language that investors understand and value. One goal of the IR team should be to “communicate the company’s values and strategies using language that investors understand” — including, where appropriate, financial terms such as margin and EPS, as well as business concepts such as risk mitigation, cost avoidance, revenue growth and competitive differentiation — thus positioning sustainability in the context of business performance.
To permit investors to incorporate sustainability into their valuations, companies should discuss sustainability investments, risks and benefits “through the prism of [practical business concerns such as] supply chain resilience, stranded asset avoidance, cost savings and efficiency, improved product performance, consumer acquisition and increased employee retention.” Notably, some asset managers do not position their questions as “sustainability” questions per se, but may instead frame them strictly as financial issues, such as supply chain stability.
According to Ceres, one “constant refrain” heard from investors is that “if a company is not talking about its sustainability strategy and performance, they may conclude the company does not have a story to tell or, even worse, it’s hiding something.”
Preparing for “CEO Activism”
There’s a perception that CEOs have become more willing in recent years to speak out on controversial social & political issues. It’s still pretty rare, but that doesn’t mean you shouldn’t prepare for the day when your company’s leader wants to take a stand. We’ve blogged about the public and investor reactions to this double-edged sword – and we’ve been posting even more resources in our “Crisis Management” Practice Area. In this WSJ article, two B-School profs offer tips on when CEOs should take a stand – and how to speak out effectively. Here’s the takeaways:
CEOs should take a stand when:
1. The nudge comes from their employees
2. Their corporate or personal values – and corporate practices – align with the issue at hand
3. The issue is “live”
CEOs who speak out should:
1. Set up a rapid response team
2. Anticipate backlash
3. Work with the communications team
I love that we have a lot of avid readers in our community. Here’s a “Best Books of 2018″ list from Bob Lamm. And when it comes to reading goals, Nina Flax of Mayer Brown has it covered with her latest “list” installment (here’s the last one):
Now that we’re well into the new year, I’m sure we are all making progress on our resolutions. Some of my lofty ideas include watching less mind-numbing TV, increasing my practice of “single-tasking”, actually exercising ever, eating more healthy food, etc. One also includes reading more books for pleasure.
This is actually a hard one for me, because it seems so accomplishable and yet… On the one hand, I love to read books. On the other hand, I read so much for work my eyes are tired. In between the two ends of my reading spectrum thoughts, if I find a book I like, I read and read and read – and will stay awake sometimes all night (literally), which leads to more tired eyes, not wanting to read… I completely appreciate this is a silly problem. And so, I am trying to break through the cycle and focus on reading in a more mindful way, by both picking up AND putting down a book more often. Plus, if I accomplish this goal, by sheer lack of time I will also likely accomplish my watching less mind-numbing TV goal. Yay for my one stone!
So, for my first list of the year, I have created simply a list of non-work books I would like to read in 2019.
Bad Blood
The Girl Who Smiled Beads: A Story of War and What Comes After
Here’s Looking at Euclid: From Counting Ants to Games of Chance – An Awe-Inspiring Journey Through the World of Numbers
Tubes: A Journey to the Center of the Internet
Ghost Fleet: A Novel of the Next World War
On Being Blue: A Philosophical Inquiry
What a Fish Knows: The Inner Lives of Our Underwater Cousins
Mapping the Heavens: The Radical Scientific Ideas That Reveal the Cosmos
The Path Between the Seas: The Creation of the Panama Canal, 1870-1914
Tigana
The Sword of Shannara (which will inevitably lead to the other two)
The Queen’s Poisoner (which will inevitably lead to the other five, but not the prequels)
I also have on my list re-reading a few books – Siddhartha, Peony and Animal Farm. I must admit that I purposely wrote this so that I will feel like you all are holding me accountable and I may actually accomplish this goal! To leave you all with a quote from someone I knew as a child, “Each year you should take a long walk, make a new friend and read a good book.” Here’s to 2019 being great.
Audits: Radical Change on the Horizon?
This article from a Harvard Law School Fellow analogizes problems with the “independent auditor” framework to climate change – there are issues that may well bring down the entire system, but we’re lacking a short-term incentive to fix them. Here’s what he identifies as destabilizing trends that audit committees need to watch:
1. Big 4 Breakup – The UK is continuing to discuss a breakup in light of the Enron-like failure of Carillion – and audit chairs may want to watch these developments carefully when they consider whether to retain or replace current auditors. Not surprisingly, auditors are opposed to spinning off non-audit services – but say they’re open to a market share cap. This blog argues that the break-up proposals are impractical.
2. Obsolete Measures – More stakeholders are asking whether boards in general, and audit committees in particular, are accessories to a process that is growing obsolete by looking at wrong or incomplete indicators – e.g. ignoring the value of intangible assets and metrics that measure long-term performance
3. Changes to Reporting – As enhanced audit reports (CAMs) and integrated reporting spread, board audit committees may find value in monitoring how pace-setting companies handle the new disclosure techniques. They may even urge their companies and auditors to run tests to see how they might be adapted. Advantages could come in the form of higher confidence among investors, with the prospect of a lower cost of capital, and better internal management of multiplying risks that fall outside the bounds of conventional accounting standards. See this 5-minute CAQ video on how audit chairs are approaching CAM disclosures…
Our March Eminders is Posted!
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Note from Broc: One last casualty of the shutdown: PLI’s “SEC Spleaks” got moved to April from its traditional February date because they were afraid of a possible second shutdown and they would have no speakers. The ASECA dinner was moved too.
