In Morrow Sodali’s latest institutional investor survey, 85% of respondents said that climate change was their most important engagement topic (up 31% from last year) – although when it comes to disclosure, they’re more focused on getting human capital details. Maybe this result isn’t too surprising given that the 46 global survey participants are all signatories to the UN’s Principles for Responsible Investment – but their combined $33 trillion of assets under management is nothing to sneeze at (and yes, the “Big 4” US institutional investors – BlackRock, Vanguard, State Street & Fidelity – are all PRI signatories).
When it comes to voting, the survey says that governance policies & practices are by far the most important factor. Also, some investors are more willing these days to nuance their voting decisions based on information gained in engagements, but some continue to rigidly adhere to stated policies. So you just have to know who you’re dealing with. And be aware that the cost to nuanced decision-making is a greater demand for transparency and director involvement in engagements (87% said that director involvement helps their evaluation of a company’s culture, purpose & reputational risks). Here’s a few other hot topics that will continue to impact board meetings, engagements and disclosure (also see this “Harvard Law” blog):
– Board composition & competence – skills & qualifications are the most important factor in evaluating directors, with diversity lagging behind
– Executive pay – pay-for-performance, rigor of performance targets and the inclusion of long-term performance targets are all important, and investors are beginning to engage collectively on this topic
– Human capital management and corporate culture – including succession planning to prepare for the risk of abrupt executive departures that could result from a scandal
Audit Committees: Tech’s Impact on Financial Reporting
Tech disruption is coming to an audit near you. Whether it’s turning to tech firms for the “data gathering” phase of the audit, or ensuring that automated financial record-keeping and reporting is accurate – which are both increasingly common according to this WSJ article – audit committees need to oversee the related financial reporting risks. Fortunately, the “Center for Audit Quality” has released a tool for audit committees that explains the impact of emerging technologies on the oversight framework. In addition to identifying other helpful resources, the CAQ’s tool contains suggested questions for a number of key tasks.
Large-Cap Directors: Bad News for Small-Caps?
If the director recruitment industry is any indication, experienced large-cap directors are in high demand. And for good reason – they’ve likely had first-hand involvement with a variety of board, management & shareholder situations. But since small-caps tend to have more retail shareholders, fewer resources and different types of business issues, that large company experience could be a double-edged sword.
In this blog, Adam Epstein covers six potential “negatives” – and makes it clear that impressive credentials don’t negate the need to find the right fit and remain attuned to director & board performance. Here’s an excerpt:
– Form over substance: If a large-cap company is akin to an aircraft carrier, many small-caps are more like speedboats. The former takes dozens of people and extended periods of time to change speed or course, while the latter can take one or two people and happen in a matter of seconds. When you try and operate a speedboat the same way as an aircraft carrier, it’s pretty easy to hit other stuff… or sink. Every small-cap investor has a story about a portfolio company that sunk – or came needlessly close to it – because a newly-appointed board member from the large-cap world unconsciously redirected the board’s attention away from key existential threats to never-ending boardroom box-checking.
– Misplaced emphasis on proxy advisors: Large-cap companies are typically more than 80 percent owned by large institutional investors. Those investors, in turn, can place a high degree of emphasis upon third-party advisors that educate institutional investors how they should consider voting on various annual proxy proposals. These so-called proxy advisors (e.g., ISS, Glass Lewis, etc.), can be highly impactful on board appointments and director compensation, among other things, and large-cap board members can get transfixed upon remaining within the good graces of ISS, et al. Regrettably, many large-cap emigres assume that their small-cap colleagues should be equally concerned about proxy advisors, despite the fact that many small-caps are majority owned and traded by retail (i.e., nonprofessional) investors who don’t care one iota about what any proxy advisor says… about anything. The result isn’t pretty, because when small-cap boards lose primary focus on strategy, innovation, culture, and capital formation, and instead become enamored with proxy advisors, bad things tend to happen.
– Corporate finance disasters: Large-cap companies rarely need to access the equity capital markets, and when they do it’s almost always from a position of strength and leverage – strong balance sheets and extremely liquid stocks. On the other hand, many small-caps are serial capital raisers, and often transact financings from positions of weakness and vulnerability – everyone knows they are running out of money and their stock is illiquid. Here’s the rub: when I was an institutional investor, many of our portfolio companies either waited too long to raise “must have” capital, or they turned down “market terms” all because a large-cap board member noisily applied big company corporate finance sensibilities to a marketplace they didn’t understand – at all. This problem is exacerbated by the fact that “other” board members are often overly deferential to the new board member who operated, governed or advised famous companies. Just because someone works on an Indy 500 pit crew, doesn’t mean they are the best person to change the brakes on your Lexus.
Here are results from our recent survey on board fees for CEO searches (the sample size was small, FYI):
1. During our most recent CEO search, we paid a search-related fee to the directors who led the search:
– Yes – 7%
– No – 57%
– We haven’t conducted a CEO search – 36%
2. For those paid the search-related fee, the total amount paid to each director was:
– $25,000 or more – 0%
– $15,000-$25,000 – 50%
– $5,000-$15,000 – 0%
– Less than $5,000 – 50%
3. For those paid the search-related fee, the fee was structured as:
– Per-meeting & per-interview fee – 0%
– Periodic additional retainer – 0%
– Additional “committee” fee – 100%
4. For those paid the search-related fee, the fee was based on:
– Compensation consultant survey & recommendation – 50%
– Informal estimate of extra time commitment – 50%
Please take a moment to participate anonymously in these surveys:
This 28-page survey from Allen & Overy and Willis Towers Watson summarizes the most common D&O concerns – not too surprising that cyber threats now top the list, but less expected is the fact that health & safety is now in the top five – as well as the coverage issues that are most important to directors and officers. These are their top policy priorities:
1. D&O policy and/or company indemnification is able to respond to claims in all jurisdictions
2. How claims against D&Os will be controlled and settled
3. Broad definition of who is insured
4. Clear and easy-to-follow policy terms
5. Whether there is cover for the cost of advice at the early stages of an investigation
Cyber Insurance: Standalone Policies Gain Steam
This PartnerRe/Advisen survey of cyber insurance trends reports that for the last couple years, companies have been shifting from endorsements to standalone policies – in order to get higher dedicated limits and expanded business interruption coverage. In fact, as also noted in this Allianz survey, “BI” coverage was the most sought-after type of protection – displacing data breach from its long-standing spot at the top of cyber-protection priority lists. It’s also helpful to know that many more small- and mid-sized companies are hopping on the cyber insurance bandwagon.
Here we go again. Elon Musk can’t quit Twitter – which means the SEC can’t quit Elon. It was only last October that the Tesla CEO settled with the SEC on allegations of securities fraud, after a series of surprising “going private” tweets. Part of the settlement required Musk to get internal pre-approval of tweets that could contain material info about the company. But, as Broc and others predicted, it was a pretty tall order to think a mere mortal could stand between Elon and his social media.
Last week, Elon tweeted some production stats without getting that internal pre-approval. The SEC responded yesterday with this motion – asking the federal district court in Manhattan to hold Musk in contempt for violating the court-approved settlement. The motion is worth reading – it includes Tesla’s “Senior Executives Communications Policy” as well as a look into how the policy was being applied, and an excerpt from Musk’s December interview with “60 Minutes” Lesley Stahl in which Musk essentially thumbed his nose at the SEC.
It is not surprising that the SEC felt compelled to ask for Musk to be found in contempt, said Charles Elson of the University of Delaware. “They have to react. From an agency standpoint, if you show outright contempt towards the agency and they do nothing, how are they ever going to enforce the law?,” he said.
The SEC could ask the judge to increase the $20 million fine Musk has already paid or move to punish the company’s board if they don’t rein him in, said Adam Epstein, a corporate-governance advisor. But SEC is not likely to ask that Musk be removed from the company altogether, as it initially did last year, he said. “He has a pattern and practice of tweeting in an inflammatory fashion for years,” Epstein said. “He probably knows that the government is not going from Defcon 5 to Defcon 1 to remove him from the company, because that would be the worst possible outcome for investors. He’s clearly created more value than he’s hurt shareholders by his tweeting.”
As this ‘Journal of Accountancy’ article explains, Corp Fin clarified in 2016 that non-GAAP measures that substitute individually-tailored recognition & measurement methods for those of GAAP could violate Rule 100(b) of Regulation G (see CDI 100.04). Head scratching ensued – even at the Big 4 – because nobody knew the meaning of “individually tailored.” But the article reports that at the most recent AICPA conference, Patrick Gilmore (a Corp Fin Deputy Chief Accountant) provided these questions to guide the assessment:
– Does the adjustment shift GAAP from an accrual basis of accounting to a cash or modified basis of accounting? For example, Gilmore said using cash receipts or billings as a proxy for revenue for a subscription-based business that recognizes revenue over time would provide a profitability measure that would be determined on a mixed basis of accounting and would be an individually tailored accounting principle.
– Does the adjustment add in transactions that are also reportable in the company’s financial statements? As an example, Gilmore said adjusting from the guidance for determining whether a company is a principal or an agent could result in presenting transactions that don’t qualify as your own under GAAP and may be an individually tailored accounting principle.
– Does the adjustment reflect parts, but not all, of an accounting concept? For example, Gilmore said adjusting income tax effects for cash taxes but not for temporary or permanent differences may be an individually tailored accounting principle.
– Does the adjustment render the measure inconsistent with the economics of a transaction or an agreement? As an example, Gilmore cited some companies that earn revenue from operating leases, but also from sales-type leases or financing leases. “They will adjust revenue for the sales-type or financing leases as if they were operating leases, thus ignoring some of the economics of the lease agreements that they have,” he said.
Would Your Investors Support An Activist?
This recent “Trust Barometer” from the Edelman communications firm has lots of intel about what’s driving investment decisions – based on responses from 500 chief investment officers, PMs and buy-side analysts. This CFO.com article recaps the declining level of trust in business and suggests that companies with higher trust levels, gained via accurate & transparent reporting, experience steadier (and better) share prices.
But what most caught my eye were the investors’ views on activism – especially since this WSJ article reports that there were a record number of activist campaigns last year, and Broc recently blogged that mutual funds are increasingly willing to employ activist tactics:
– 87% of investors are more open to taking an activists approach to investing
– 92% will support a “reputable” activist if they believe change is necessary at the company
– 87% think companies are unprepared for activist campaigns
This “Tech IPO Pipeline” from CB Insights shows that the SEC still has some work to do if it wants to make public offerings as attractive as private funding or an M&A deal. Maybe the SEC’s recent “testing the waters” proposal will help…but this article says it may be more of a market issue, with money migrating to private markets at an unusual rate. Here’s a summary of the pipeline report from Mayer Brown’s blog:
In 2013, the median time between first funding and IPO for U.S. VC-backed tech companies was 6.9 years compared to 10.1 years for tech companies that went public in 2018. In 2018, tech companies raised, on average, $239 million before undertaking their IPOs, which is almost 1.4x the amount raised in 2017, and over 3.7x as much as 2012 figures.
The mega-round financing trend, wherein companies raise over $100 million per round, was also prevalent in the tech-sector, with almost 120 mega-round financings completed in 2018. Tech-focused private equity firms continue to acquire majority stakes in tech companies that are nearing liquidity opportunities, whether IPOs or M&A exits. However, M&A exits continue to replace IPOs.
Pre-IPO Governance: Institutional Investor View
In this interview, Bob McCormick of PJT Camberview points out that it’s not just private equity and VC investors who are funding large pre-IPO companies – institutional investors are also involved. He asked Donna Anderson of T. Rowe Price how much they care about pre-IPO governance, and here’s what she said:
Our approach is to be consistent: we have principles we believe in, whether companies are public or private. For example, our public voting policy is to oppose certain key board members for any company that is controlled by means of dual class stock with differentiated voting rights. We accompany these votes with an explanation to the company as to why we have concerns with that structure for the long-term. Any features we oppose on the public side, we would not tend to consent to them on the private side either.
But it’s really not about applying a rules-based framework. These private companies are looking to their early investors to be their partners, and that’s the attitude we take. It’s about helping them along the journey, helping them find a governance structure that might be appropriate for them today vs. five or ten years from now. Our role in this is not to be the cops on the beat – it’s a consultative relationship. We’re helping to prepare them, if going public is in their plans, for what that will look like in the world of public shareholders, proxy advisors, votes and shareholder rights.
Pre-IPO Governance: When Do Changes Happen?
When it comes to the pre-IPO governance journey, this survey from Stanford’s Rock Center for Corporate Governance says that most companies start transitioning to public company “best practices” about 2-3 years before they go public. Here’s seven examples of how corporate governance practices evolve from startup through IPO:
1. Companies typically add their first independent director to the board 3 years prior to IPO. This occurs around the same time the company first becomes serious about developing a corporate governance system.
2. On average, companies add 3 independent directors prior to IPO. This number varies widely across companies.
3. 53% of companies go public with founder-CEOs. Companies who bring in a non-founder CEO do so 5 years before the IPO, on average. But most companies say that those leaders were hired to scale the company, not necessarily take it public.
4. CFOs are more likely than CEOs to be brought on as part of the IPO process – typically 3 years before going public. Many companies also transition from a regional auditor to a Big Four accounting firm.
5. An internal GC is the “least necessary” governance feature – many companies rely on external counsel.
6. Executive compensation doesn’t change as companies approach the IPO – and KPIs are common – but it becomes more formalized with financial targets afterwards.
7. Only 12% of founders & CEOs believe the quality of governance impacts IPO pricing – but most agree that having a high-quality governance system is required by institutional investors and the SEC.
Over the years, Broc has blogged about periodic attempts by shareholder proponents of going to court to compel the inclusion of a proposal and/or seek declaratory relief to enjoin an annual meeting due to shareholder proposal issues. These types of lawsuits typically challenged a company’s decision to exclude a proposal after Corp Fin granted no-action relief. But recently, the NYC Comptroller went one step further – by filing this complaint against TransDigm shortly after it sought no-action relief – and before Corp Fin weighed in.
The lawsuit sought to enjoin TransDigm – which manufactures aerospace components – from soliciting proxies for its meeting without including a climate change proposal submitted by a group of NYC pension funds. TransDigm had argued to Corp Fin that it could exclude the proposal under Rule 14a-8(i)(7) because it related to “ordinary business.” But the funds – which announced a couple of years ago that they might pursue climate change proposals as an initiative and more recently said they’d pursue a “clean energy” investment & divestment strategy – insisted that this was an urgent matter. Cydney Posner’s blog explains what happened next:
Instead of conforming to the usual practice of submitting its own response to the SEC, the NYC Comptroller’s office wrote to the SEC on December 7th that it would not respond to the company’s November request for no-action because the pension funds had separately commenced a lawsuit against the company seeking declaratory and injunctive relief “that would ensure the… shareholder proposal is included in the proxy solicitation materials.” As a result, in light of the pending litigation, the Comptroller requested that the SEC leave the matter to the courts, requesting that, the “staff follow its prior practice and decline to issue any response to TransDigm’s no-action request.”
The company apparently decided that this was not a battle worth fighting. By letter dated December 28, 2018, in the midst of the government shutdown, the company advised Corp Fin that it was withdrawing its request for no-action relief and would be including the proposal in its 2019 proxy materials. The parties filed a stipulation of settlement on January 18 concluding the action.
In its press release announcing the settlement, the Comptroller said that the “need for climate leadership is more urgent than ever. Yet, just when we need to speed up the pace, federal roll-backs are making polluting easier and could cause generations of damage. That’s why as investors, we’re using our voice to pressure companies to step up and address their role in climate change….Reducing greenhouse gas emissions is a moral imperative—and it’s better for business. We’ll continue to fight for shareholders rights and to hold companies like TransDigm to the highest standards for business and our planet.”
We don’t know yet if the NYC funds will adopt – or inspire other proponents to adopt – a litigation strategy against other companies for climate change proposals and/or other topics. Although the complaint was filed before the government shutdown began, the company might’ve felt additional pressure to settle due to Corp Fin’s inability to respond to no-action requests.
SEC Chair Talks About “Human Capital” Disclosure
In remarks a few days ago to the SEC Investor Advisory Committee, SEC Chair Jay Clayton provided some of his views on human capital disclosure. He first noted that since the time the current disclosure requirements in Items 101 & 102 of Regulation S-K were adopted, human capital has evolved into a resource – rather than a cost – for businesses. And, he acknowledged, disclosure requirements should also evolve over time to reflect market changes…but should remain flexible, enforceable, efficient and grounded in materiality.
So the basic idea stands that companies should focus on providing material information that a reasonable investor needs to make informed investment & voting decisions, and he’s wary of mandating rigid disclosure standards or metrics. But it doesn’t sound like he’s closed the door on nudging companies to provide more info. He continued:
Instead, I think investors would be better served by understanding the lens through which each company looks at their human capital. Does management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors? I have heard this and similar questions on earnings conference calls and in other investor settings. I am interested in hearing from those on the Committee who manage investment capital – what is it that you are looking for as an investor and what questions do you ask the issuers when it comes to human capital?
Here, a note on comparability. In some cases it is possible to identify metrics that provide for reasonable market-wide comparability (for example, U.S. GAAP). In other cases, this is not possible at a market-wide level, and comparability is reasonably possible at an industry level or only at a company level (this is demonstrated by the development of non-GAAP financial measures). For example, for human capital, I believe it is important that the metrics allow for period to period comparability for the company.
This Cooley blog reports that Jay also touched on proxy plumbing in his remarks – and said that new Commissioner Elad Roisman will be taking the lead on efforts to improve the proxy process, including proxy plumbing, for both the short- and long-term.
SEC Lifts Stay on Administrative Proceedings
Last week, the SEC announced that it was lifting the stay on pending administrative proceedings that it had ordered as a result of the lengthy government shutdown. Parties that had filings due last month should either submit the filings or request an extension – either way, by February 13th.
Yesterday, Corp Fin issued two identical “Regulation S-K” CDIs – 116.11 and 133.13 – to clarify what disclosure of self-identified director diversity characteristics is required under Item 401 and, with respect to director nominees, under Item 407. Broc’s blogged about whether – and how – to address diversity in D&O questionnaires – and we’ll post memos in our “Board Diversity” Practice Area about how this new guidance impacts that analysis.
In the meantime, here’s the new CDI (also see this Cooley blog):
Question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company’s disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407?
Answer: Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees.
To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company’s disclosure of those characteristics, we would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered. Similarly, in these circumstances, we would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics. [February 6, 2019]
“Shutdown Threat” Risk Factors & MACs
In light of the possibility that “government-by-shutdown” is our new normal, Intelligize has gathered a handful of risk factors that identify specific business threats caused by a non-functioning government – e.g. delayed FDA & CFIUS reviews. And Intelligize also reports that several companies are adding shutdown references to forward-looking statement disclaimers and MAC clauses. Here’s an excerpt:
For example, pest control provider Rollins Inc. noted in its 2018 earnings statement filed on Jan. 23 that “the impact of the U.S. government shutdown” was among the “various risks and uncertainties” that could cause the company’s actual results to diverge from its forward-looking statements. Other companies that have added similar language to their filings this year include Teledyne Technologies and financial services giant Bank of America Corp.
And back in September, the contract language in Fortive Corp’s acquisition of Johnson & Johnson subsidiary Ethicon nixed “any actual or potential sequester, stoppage, shutdown, default or similar event or occurrence by or involving any governmental entity affecting a national or federal government as a whole” as material adverse effects.
Securities Class Actions: Highest Levels Ever?
A pair of recent reports on securities class actions – from Cornerstone Research and NERA Economic Consulting – both say that a greater percentage of listed companies were hit with lawsuits last year (about 4.5% of all exchange-listed companies, and 9.4% of the S&P 500…even higher if you include merger-related litigation). This is due to the declining number of public companies as well as a higher number of class actions.
The Cornerstone report also highlights that state court filings – which have become more likely since the Supreme Court’s 2018 Cyan decision – are driving litigation to potentially record levels. Here’s an excerpt from Cornerstone’s press release:
Plaintiffs filed a total of 403 securities class actions in 2018 compared to 412 in 2017. The number of core filings increased from 214 to 221—the highest level since 2008, when securities class actions surged due to volatility in U.S. and global financial markets. Federal M&A filing volume was the second-highest on record, despite declining from 198 to 182.
Securities class action filings related to stock price drops reached levels not seen since the peak of the financial crisis, with the annual likelihood of such filings against exchange-listed companies at an all-time high.
In a Sunday NYT op-ed, Senators Chuck Schumer (D-NY) and Bernie Sanders (D-VT) said they’re going to introduce a bill that would allow companies to buy back shares only if they pay their workers well. Here’s a few articles about their proposal:
As you focus on this year’s risk management priorities and refine your “Risk Factor” disclosure, consider that this “WSJ Pro” article reports that over 50 companies (mostly in the tech, entertainment, media & financial services sectors) mentioned AI in their risk factors last year – more than double than in 2017. That number will likely go up again this year, considering that this recent Protiviti survey of 825 directors & executives identifies disruptive innovations – e.g. AI – and competition from “born digital” companies as a top risk.
Meanwhile, on the geopolitical front, the Eurasia Group’s forecast predicts that our current cycle of destruction will cause a global “innovation winter” – and lots of other mayhem that will impact businesses. When it comes to Brexit’s impact on business, this memo from The Conference Board identifies six potential risks and what industries they apply to.
Here’s something I blogged yesterday on CompensationStandards.com: After market close on Friday, Goldman Sachs announced via an Item 8.01 8-K that in light of the ongoing 1MDB investigation, its compensation committee might reduce bonuses to current – and former – senior executives. The board is wise to leave themselves some room, since they’ll likely face shareholder scrutiny for the alleged fraud and all of its fallout. For last year’s annual equity awards, the board added a new forfeiture provision. The 8-K doesn’t go into detail about what types of harm – e.g. strictly financial v. reputational – would result in forfeiture, but simply says:
This provision will provide the Committee with the flexibility to reduce the size of the award prior to payment and/or forfeit the underlying transfer-restricted shares (which transfer restrictions release approximately five years after the grant date) if it is later determined that the results of the 1MDB proceedings would have impacted the Committee’s 2018 year-end compensation decisions for any of these individuals.
For former executives, Goldman’s comp committee decided to defer determinations about LTIP awards that otherwise would’ve paid out in January, since the 1MDB investigation relates to events that occurred during the performance period. This WSJ article reports that the forfeiture wouldn’t apply to former exec Gary Cohn, who was paid out in lump sum when he joined the Trump Administration.
So these aren’t true “clawbacks” – they’re potential forfeitures of unpaid amounts, which are much easier for a company to administer. Remember that a few years ago in a different kind of scandal, Wells Fargo started off with forfeitures – and eventually also clawed back pay.
More on “First IPO Without Delaying Amendment?”
During the final stretch of last month’s government shutdown, I blogged that Gossamer Bio was prepared to go public without final sign-off from the SEC. Now, that company has announced that it’s reverting to a traditional IPO. The company has restored the delaying amendment language on an amended Form S-1 and will ask the SEC to accelerate effectiveness. Since it’s already set the offering price, there’s not much upside to waiting to sell the shares.
Audit Fees: New Standards Cause Modest Increase
This “Audit Fee Survey” from ferf & Workiva reports that audit fees rose by about 2.5% last year – mostly due to implementing the new revenue recognition and lease standards, but also because of M&A activity and more stringent PCAOB inspections. However, auditors remained open to negotiation due to the competitive marketplace and automation. The median fee for accelerated filers was $415k – compared to nearly $7 million for large accelerated filers…and this Fenwick & West study notes that average fees were $22.2 million for S&P 100 companies.
Meanwhile, Audit Analytics reported that non-audit fees represented about 10% of total fees paid by accelerated filers to their external auditors in 2017 – way down from 38% of the pie in 2002, which caused concern that these services were impacting auditor independence.
Here’s something I wrote last week on CompensationStandards.com: I recently blogged about the pros & cons of disclosing your “equal pay audit.” There aren’t many US companies doing this…yet. But Citigroup is one of the trailblazers. Last year, similar to the stats in Intuit’s proxy (hat tip Lois Yurow), Citi announced on its website the results of a “pay inequality” analysis – the difference in pay of women & men and US minorities & non-minorities, as adjusted for job function, level and geography. And it’s made some pay adjustments based on the findings.
More recently, Citi announced on its website its unadjusted “pay gap” for women and US minorities – i.e. the difference in median total compensation. Citi agreed to publish the stats in response to a “gender pay equity” proposal from Arjuna Capital – who then withdrew the proposal. Here’s an excerpt from Arjuna’s announcement about what comes next:
Citi’s analysis shows that the median pay for women globally at Citibank is 71 percent of the median for men, and the median pay for US minorities is 93 percent of the median for non-minorities. Citi’s goal is to increase representation at the Assistant Vice President through Managing Director levels to at least 40 percent for women globally and 8 percent for black employees in the US by the end of 2021.
Alongside the median pay disclosure, Citi updated last year’s “equal pay for equal work” analysis to extend across its global operations, reporting that when adusting for job function, level, and geography women globally are paid on average 99% of what men are paid, and no statistically significant difference between what US minorities and non-minorities are paid at Citi. Citi also made pay adjustments following this year’s compensation review.
Borrowing for Buybacks: Is the Heyday Over?
This Bloomberg article reports that, after peaking in 2017, debt-financed buybacks are now at the lowest level since 2009. And although that’s partly because cash is abundant, this ‘Think Advisor’ article says that bondholders and ratings agencies are also starting to take issue with using debt proceeds for that purpose. Here’s an excerpt:
Already, U.S. companies are curtailing the amount of bonds sold to buy back their own stock by a third in 2018, based on a Bloomberg data search of transactions detailing use of proceeds. In Europe, where it’s more unusual for companies to borrow to redeem stock and profitability has recovered more slowly, issuance is running at an eight-year low.
It all points to a reversal of the type of shareholder-friendly activity that propelled the S&P 500 to dizzying peaks this year. Companies need to shore up their leverage before an economic downturn hits, as well as court lenders they may need down the road. And as interest rates grind even higher, treasurers are likely to think even harder about borrowing to enrich shareholders.
…[T] the drop in borrowing volumes is illustrative of a growing trend: Corporate America is facing a wake-up call as once-acquiescent bondholders balk at funding rewards to equity owners. After CVS Health Corp. closed a $70 billion deal to buy health insurer Aetna Inc. on Nov. 28, Moody’s Investors Service downgraded its credit rating and laid out its prescriptions for balance-sheet repair: “We expect the company to cut all share repurchases and use free cash flow to reduce debt.”
Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”
Tune in tomorrow for the webcast — “Conflict Minerals: Tackling Your Next Form SD” — to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2018.
Speculation’s been mounting about whether Nasdaq will approve listing applications from companies that want to raise capital during the shutdown – I blogged yesterday that they might be warming up to IPOs under limited circumstances. In response, the exchange has now issued five FAQs to explain how they’ll handle new listings – as well as the shutdown’s impact on currently-listed companies.
For IPOs and OTC-traded ’33 Act registrations, Nasdaq is more open to listing companies that substantially completed the comment process before the shutdown began – and suggests that companies in that position call the Listing Qualifications Staff to discuss the situation. At this time, Nasdaq remains reluctant to list companies that are just starting the IPO process…but they don’t entirely close the door on that possibility.
Here’s a video from Dave & Marty about the shutdown…
Delaware’s Sustainability Certification: First Filer
Last summer, John blogged about Delaware’s new “Transparency and Sustainability Standards Act” – a voluntary certification program (or as John calls it, “the corporate equivalent of buying a Subaru”). Now, the first company is trying it out – a Euronext-traded company called “DSM” (also known as “Royal DSM”). Here’s the integrated annual report that’s posted to the state’s certification page.
The NYSE’s Annual Compliance Letter
The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. There aren’t any new rules this year – but the letter highlights that the NYSE’s “Timely Alert/Material News Policy” now requires companies to provide notice to the Exchange at least 10 minutes before making any public announcement about a dividend or stock distribution, even outside of trading hours.
Transcript: “How Boards Should Handle Politics as a Governance Risk”
We have posted the transcript for our recent webcast: “How Boards Should Handle Politics as a Governance Risk.”
