Some of you might know that we’re soon moving to “zone defense” in my house – my husband & I are expecting our third child any day now. We also took on parenthood later in life, and we love a challenge, so they’re all under age 5.
At about this point with our second, I went way out of my comfort zone and blogged about some of the issues I was facing. I loved that many of you responded with your own anecdotes, words of encouragement and advice. Even more gratifying was that a few people confided that they were facing similar issues and felt less alone after reading that post. I’ll say that most of the things in that list still apply the third time around, but I have a few more to add:
1. Living the Cliche: The biggest difference this time around is my “time flies” mindset. With our oldest starting kindergarten next year and our “baby” (soon-to-be middle child) well into the toddler phase, I’m really starting to grasp how quickly this all goes. I’ve barely accepted the fact that I’m pregnant and it’s already over!
2. ESG Is Everywhere: People are mad at Fisher Price/Mattel and the Consumer Product Safety Commission for failing to share stats about infant deaths caused by the Rock ‘n Play, a super popular product that we used for both of our kids. The info came to light, and the product was recalled, only because the CPSC accidentally shared product-specific info with Consumer Reports. So that’s not too reassuring. Only read the report if you can stomach the tragic human element of the story. This truly is a “buyer beware” world – which is scary when you’re desperate, sleep-deprived, faced with loads of conflicting info and in charge of keeping a defenseless human alive.
Will there be long-term legal or reputational fallout for the company or the agency? At least one well-known “baby sleep” author (yes, that’s a thing – she also runs a 45,000-member Facebook group) has renounced her trust of any products and is rewriting her book. I’m left wondering what kind of info the company’s board was getting and whether there’s an advisory board that will get more attention in future disclosures, since there don’t appear to be any pediatricians or child safety experts on the board itself. This WaPo article about “voluntary safety standards” set by companies is also…interesting. I guess that’s good for shareholders, at least in the short-term?
3. My Kids Make Me Better: I suspect that many in our community – myself included – can identify with this HBR article about overworking. Sometimes I try to do some “light work” around the family on nights & weekends. But lately, my 2-year-old walks up, shuts my laptop and carries it away – then he grabs my phone too, saying, “No more, mommy!!” Unfortunately, that’s the kind of “tough love” that I need right now to be able to live in the moment. Among other things, our kids are also constantly teaching me patience, new perspectives, organization, appreciation for beauty in small things and a nuanced understanding of bathroom humor. After seeing the two of them interact over the last couple years, I’m even more excited to see how the new baby’s personality will fit into the mix.
4. Transitions Aren’t Easy: I blogged last time about “transition mechanics,” which are very important. This is more about the “transition mindset.” I’m lucky in being afforded an opportunity to take leave – not everyone has that. However, I feel I’m not “optimizing” that benefit because – rather than gradually ramping down – I tend to work excessively until the moment it’s physically impossible. I know from personal experience that this makes the birth and recovery much more difficult and I’ll spend a few weeks or months afterwards regaining the ability to function and beating myself up for not taking better care of myself and the baby during pregnancy. I also have to set really firm boundaries for myself during leave, because I know I’ll struggle with not feeling “productive” (despite producing a brand new person and having the primary responsibility to feed and keep that new, helpless person alive).
I recall that returning from leave can be pretty rough too, though I’m not in that moment yet. Whether you’re “leaning in” or “leaning out,” it takes a while to find a rhythm – and this NYT piece points out that for many, the “push-pull” doesn’t ever fully disappear. I try to remind myself that – while parenting continues forever – leave itself is such a short time period in the big picture and it’s best to stay healthy and present. Parenthood is also just one example of a big transition – everyone has “life” stuff going on throughout their career, and we’re doing ourselves a disservice if we glorify robotic compartmentalization.
5. Cultural Shift: Last time around, I blogged that professional networking while pregnant is particularly awkward. I do enjoy bonding over the shared parenting journey, but I know there are other things that we can also talk about, and regularly fielding “body” comments can make even the most confident person self-conscious. I’ve experienced much less of that this time, which I love. One person was surprised when I mentioned I was expecting and said they now look at people only from the neck up – bravo!
Another positive change I’ve noticed in the last few years is that many more men are unapologetically – even proudly – taking parental leave. One fellow lawyer has been posting daily updates about the time away from his “easier” job and told me that the expectation at the firm these days is that everyone (birthing & non-birthing parents) will take their full leave – it’s frowned upon to do otherwise. Shortly after that, I received a to-the-point auto reply from another male contact – “I’m out on parental leave and will not be responding to messages” – with contact info for colleagues. Two thumbs up to that team approach.
I (still) know I’m not alone on this journey of balancing pregnancy, parenthood & lawyering. I’d welcome more emails with any experiences & “lessons learned” that you want to share – just don’t be surprised if you get an auto reply! I’m extremely grateful to John, Lynn, Dave, Alan, Mike, Mark and the folks in our HQ for being so on top of their game and willing to handle some “extras” these next few months.
California’s “Board Gender Diversity” Law: FAQs
It’s official – California-headquartered companies are now required to have at least one female director. This WSJ article says that 244 California-based companies have added a woman to their board since the law went into effect, and 41 companies added two. For companies with five or more directors, the law requires having 2-3 female directors by the end of next year. This Wilson Sonsini memo provides some up-to-date info on how reporting and enforcement will work in the days ahead. Here’s an excerpt:
Are there any reporting obligations for companies under SB 826? Yes and no. Because the California secretary of state has not yet adopted implementing regulations under SB 826, there is currently no official regulatory mechanism for reporting that would result in a fine (see list in next section). However, the secretary of state has modified the current annual Corporate Disclosure Statement for publicly traded companies to include questions regarding the number of female directors currently serving on a company’s board (see question 5 in the statement).
Based on our conversations with an individual handling SB 826 matters at the secretary of state’s office, during calendar 2019 and as of the date of this Alert, responding to those questions on the Corporate Disclosure Statement is the only current way a company can inform the secretary of state’s office regarding compliance with SB 826. We do not expect the secretary of state’s office to review a company’s annual report on Form 10-K, proxy statement, website, or any other documentation to determine whether a company had a female director serving during a portion of calendar 2019.
The memo goes on to say that it’d be unlikely at this point for a company to be fined for being out of compliance based on 2019 board composition. However, there’s a “public shaming” factor that could motivate companies to comply:
If there are currently no official reporting obligations, why should my company report on the Corporate Disclosure Statement? SB 826 requires the California secretary of state to publish on its website a report documenting the number of companies whose principal executive offices are located in California and who have at least one female director. An initial report was published in July 2019, and with no official reporting mechanism there were a number of anomalies reported.
No later than March 1, 2020, and then on an annual basis, the secretary of state must publish a more detailed report on its website regarding the number of:
• companies subject to SB 826 that were in compliance with the law during at least one point during the preceding calendar year;
• publicly held corporations that moved their U.S. headquarters to California from another state or out of California into another state during the preceding calendar year; and
• publicly held corporations that were subject to SB 826 during the preceding year, but are no longer publicly traded.
Based on our conversations with an individual handling SB 826 matters at the California secretary of state’s office, the March 2020 report is currently being prepared based on responses received during 2019 from the Corporate Disclosure Statement. If companies want to be named on the secretary of state’s annual report as being compliant because a female director has served on their board for at least a portion of the calendar year, they will need to inform the secretary of state’s office through the Corporate Disclosure Statement.
California isn’t the only state to be taking a closer look at board diversity – New York is the latest jurisdiction to adopt a law on the topic. Starting in June of this year, companies will be required to report the number of directors on their boards and how many of those people are women. See this Ogletree Deakins memo for more info…
Auditor Independence: Proposed Rule Changes are Good News for Dealmakers
Here’s something John recently blogged on DealLawyers.com (and also see this four-part piece in Francine McKenna’s newsletter about the SEC’s auditor independence proposal): This recent blog from Weil’s Howard Dicker & Lyuba Goltser reviews the potential benefits to PE funds, IPOs & participants in M&A transactions associated with proposed changes to the SEC’s auditor independence rules. This excerpt discusses how the rule changes would address inadvertent independence violations that can arise in M&A transactions when the buyer’s auditor has also performed impermissible non-audit services for the target:
The SEC proposes a transition framework to address these types of inadvertent independence violations. An accounting firm’s independence will not be impaired because an audit client engages in a merger or acquisition that gives rise to a relationship or service that is inconsistent with the independence rules, provided that the accounting firm:
– is in compliance with applicable independence standards from inception of the relationship or service;
– corrects the independence violations arising from the merger or acquisition as promptly as possible (and in no event later than six months post-closing); and
– has in place a quality control system to monitor the audit client’s M&A activity and to allow for prompt identification of potential independence violations before closing.
The blog also points out that for PE funds, rule changes would codify Staff practice concerning independence issues that arise when sister companies with a common PE fund owner have engaged an audit firm to provide non-audit services that could impair the independence of the audit firm with respect to another sibling company. The rule changes would also shorten the look-back period for auditor independence from three years to one year, which would provide increased flexibility for IPO companies to address potential disqualifying relationships with their audit firms.
A public company currently has up to four business days after the occurrence of a material corporate event before it must file or furnish a Form 8-K (the 8-K Gap Period). Current law does not prohibit insider trading per se during the 8-K Gap Period, absent a showing that the insiders have traded on material nonpublic information in their possession or violated the prohibition against “short swing” trading under Section 16(b) of the Exchange Act.
The purpose of the Act is to address this perceived loophole by directing the SEC to issue rules, no later than one year after its enactment, to require a reporting company under the Exchange Act to “establish and maintain policies, controls, and procedures that are reasonably designed to prohibit executive officers and directors of the issuer from purchasing, selling, or otherwise transferring any equity security of the issuer, directly or indirectly” during the 8-K Gap Period.
Under the current version of the bill, the SEC would be permitted to exempt transactions under Rule 10b5-1 plans that were adopted outside of the gap period – and the prohibition wouldn’t be triggered when an event is announced in a press release or publicly disseminated in a Reg FD-compliant way. A similar bill has been introduced in the Senate.
This follows another insider trading bill that the House passed last month. Meanwhile, a former Congressman was just sentenced to 26 months in prison for insider trading (a case that Broc and John blogged about when it broke).
XBRL: Check Your Public Float!
Time to double check your XBRL data. Here’s a recent announcement about XBRL “scaling errors” from the SEC’s Division of Economic Risk & Analysis:
DERA staff has observed that some filers are inconsistently reporting public float values. For example, one filer reported a public float of $800 million in its HTML filing, but reported a public float of $8 billion in its XBRL data. Filers should carefully review their XBRL data to ensure scaling accuracy. Furthermore, filers should verify that information in their HTML filing is consistent with their XBRL data.
Non-Financial Disclosure: What “Audit Assurance” Looks Like
One of the suggestions that keeps turning up for ESG disclosures is that companies should explain how they verify the accuracy of the info or provide some external assurance – for example, see the Chamber’s recent “best practices.” This 16-page memo from the Center for Audit Quality discusses shareholders’ increasing interest in non-financial info and notes some industry guidance for auditors on how to review it.
From the company perspective, this 52-page guide – from the World Business Council for Sustainable Development and the Institute of Chartered Accountants in England & Wales – is even more helpful because it explains what the assurance process would look like, how to decide whether it’s right for your company, and how to enter into an assurance engagement. The report shows that this endeavor doesn’t have to be “all-or-nothing” – e.g. a project’s scope could range from:
– Site visits to head office only, no detailed tests, only reviews
– Site visits to 5 of 10 locations, detailed tests at 2 sites and a review of information at other locations
– Site visits to 7 of 10 locations, detailed tests at all 4 major sites and a review of information at other locations
At one point or another, most of us have clients who want to avoid scrutiny of sub-par results and consider the “Friday earnings release” approach. Legend has it that everyone will be too busy with their weekend to pay any attention to Friday news.
Sadly, this WSJ article confirms that the opposite is true: because fewer companies release earnings on Fridays, there tends to be more attention – and market volatility – for those who do. The most popular days for earnings are Tuesdays, Wednesdays & Thursdays – typically three or four weeks into earnings season. And here’s what the article says happens on those days:
Attention paid to companies’ earnings—measured by metrics such as downloads of regulatory filings, Google searches and news articles—drops on popular reporting days, said Ed deHaan, an associate professor of accounting at the University of Washington’s Foster School of Business. Mr. deHaan and his colleagues analyzed the timing and impact of 120,000 results announcements in 2015 and found that trading volumes of individual stocks also went down on busy earnings days. Their findings were published in the Journal of Accounting and Economics.
The article also points out that companies may miss out on attention if they hold their earnings call at the same time as industry competitors. It spotlights Citrix, whose earnings date typically conflicts with Microsoft’s – Citrix is now considering moving its earnings date based on unsolicited feedback from analysts & investors. A move might be worth some thought if you’re not getting the attendance you want…
Using Tax Shelters? It May Affect Your ESG Reporting
Recently, the Global Reporting Initiative – one of the longer-standing and more widely-adopted frameworks for sustainability reporting – published a new tax disclosure standard that’s intended to discourage “tax avoidance.” See pages 5-13 for the recommended disclosures – the “effective date” is next January, but early adoption is encouraged. Here’s an excerpt from GRI’s announcement:
The GRI Tax Standard is the first global standard for comprehensive tax disclosure at the country-by-country level. It supports public reporting of a company’s business activities and payments within tax jurisdictions, as well as their approach to tax strategy and governance. Global investors, civil society groups, labor organizations and other stakeholders have all signaled their backing for the Tax Standard, as it will help address their growing demands for tax transparency.
The Tax Standard has been developed in response to concerns over the impact tax avoidance has on the ability of governments to fund services and support sustainable development – and to give clarity on how much companies contribute to the tax income of the countries where they operate.
Tomorrow’s Webcast: “Cybersecurity Due Diligence in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “Cybersecurity Due Diligence in M&A” – to hear Jeff Dodd of Hunter Andrews, Sten-Erik Hoidal of Fredrikson & Byron and Jamie Ramsey of Calfee Halter discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.
After a 7-year hiatus, I’m thrilled to announce that Dave Lynn & Marty Dunn have resurrected their “Dave & Marty Radio Show.” Topics covered in this 21-minute episode include:
– “Top 10” expectations for this shareholder proposal season
– The latest issues with non-GAAP financial measures and key performance indicators
Airbnb Establishes “Stakeholder” Board Committee
On Friday, Airbnb announced a detailed “stakeholder” approach to governance and company-wide compensation. It identifies five key groups of stakeholders (including shareholders) – as well as principles for serving each group and detailed metrics to track progress against those principles. Here’s what it’s doing at the board level:
First, we will be establishing an official Stakeholder Committee on Airbnb’s Board of Directors. The Committee will be chaired by Belinda Johnson after she transitions from her current role as Chief Operating Officer to become a member of the Airbnb Board. This Committee will be responsible for advising our Board regarding our multi-stakeholder approach and the impact of our company on our stakeholders, the steps to institutionalize this approach into our company’s governance, and the application of our corporate governance principles to shape the future of our company.
Airbnb will report on its progress at a new “Stakeholder Day” – according to this NYT interview with the company’s CEO, that day will be similar to a traditional annual meeting but with a broader invite list that includes customers, hosts and employees. This WSJ piece ponders how the company’s approach will work out when it launches its expected IPO later this year.
Airbnb’s move arises out of last year’s statement on “corporate purpose” by the Business Roundtable. Don’t miss our webcast at 2pm ET today – “Deciphering ‘Corporate Purpose’” – to hear Morrow’s John Wilcox, Freshfields Bruckhaus’ Pam Marcogliese and Morris Nichols’ Tricia Vella discuss the debate over “shareholder primacy” – including what it means for directors’ fiduciary duties and disclosure.
Tomorrow’s Webcast: “2020 Section 16 Changes with Alan Dye”
Tune in tomorrow for the Section16.net webcast – “2020 Section 16 Changes with Alan Dye” – to hear Alan Dye of Section16.net and Hogan Lovells the latest developments and compliance requirements for Section 16, including the Section 16(b) plaintiff’s bar. Get answers to:
– What recent rule changes mean for your compliance program
– The status of cases challenging the Rule 16b-3 exemption for tax withholding
– What the latest issues are—and what you can do to resolve them
– Considerations to keep in mind for Form 5 reporting and Item 405 disclosures
– How to keep your compliance program up-to-date
Last year, John blogged about a shareholder proposal submitted to Johnson & Johnson dealing with a mandatory arbitration bylaw. The SEC granted no-action relief to J&J but since then, the proponent filed a dispute and it’s pending. Now, the same shareholder proponent has submitted a similar proposal to Intuit and it’s up for a vote at the company’s annual shareholders’ meeting later this month.
Based on this “thank-you” letter that CII sent to Intuit’s board, it appears that CII and management have found a shareholder proposal they both agree should be rejected. CII’s letter thanks Intuit’s board for opposing the shareholder proposal. In the letter, CII says that it opposes attempts to keep shareholders from courts through introduction of forced arbitration clauses. Here’s an excerpt:
Mandatory shareowner arbitration clauses in public company governing documents represent a potential threat to principles of sound corporate governance that balance the rights of shareowners against the responsibility of corporate managers to run the business. More specifically, among the many problems that our members have identified with shareowner arbitration clauses is the fact that disputes that go to arbitration rather than the court system generally do not become part of the public record and, thereby, may lose their deterrent effect.
Intuit’s statement of opposition points out that no other shareholders have identified a mandatory arbitration bylaw as a significant concern. In reference to the J&J situation, it also notes that another similar proposal is subject to litigation and says that adoption of such a bylaw would likely expose the company to unnecessary litigation.
Presuming the proposal at Intuit is soundly rejected by shareholders and how the proponent fares in the J&J dispute, it will be interesting to see whether these mandatory arbitration bylaw proposals continue to crop up going forward.
Heads up: 2020 Peak Edgar Filing Dates
Now that 2020 is here, plan ahead – the SEC published the list of peak filing days for 2020. If submitting test filings, the SEC says those should be submitted as early as possible prior to the filing due date – as processing times will take longer during these high-volume filing periods.
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2020 Proxy Season”
Tune in tomorrow for the webcast – “Pat McGurn’s Forecast for 2020 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS to recap what transpired during the 2019 proxy season – and predict what to expect for 2020. Please print these webcast materials in advance – it’s Pat’s deck that he will be working with.
Spanking brand new. By popular demand, this comprehensive “Secondary Offerings Handbook” covers the entire terrain, from the basics to how to deal with selling shareholders. This one is a real gem – 23 pages of practical guidance – and its posted in our “Secondary Offerings” Practice Area.
Smaller Reporting Companies: Some Stats
Recently, the SEC’s “Office of the Small Business Advocate” – which covers emerging, privately-held companies up to small public companies – released its inaugural Annual Report. Stats for smaller reporting companies begin on page 24 – here’s the main takeaways:
– The pre-exit holding period for a company in a PE or VC portfolio is now 6-7 years – so companies are choosing to enter the public markets after maturing beyond the smaller reporting company thresholds
– Average proceeds for small company IPOs & other registered offerings were $47 million last year
– 61% of small exchange-traded companies have no research coverage
The SEC also recently announced that it had published the report of findings from its Annual Small Business Forum. See this blog for a summary of the recommendations & SEC responses.
Cybersecurity: COSO’s New Guidance
Here’s 32 pages of new guidance from COSO – in partnership with Deloitte – that’s intended to help boards, audit committees and executives comply with COSO’s ERM Framework to protect companies against cyber attacks. This “Accounting Today” article gives an overview of how these resources work together:
COSO’s ERM Framework was updated in 2017 to spotlight the importance of applying ERM throughout an organization, particularly in strategic planning. One of the main drivers behind the 2017 update was to address the need for organizations to improve their approach in managing cyber risks. The new guidance aims to provide context on the fundamental concepts of cyber risk management to help organizations leverage their existing technical cybersecurity frameworks.
What will 2020 hold for BlackRock? Last year at this time, environmental activists were pegged as the pranksters behind a phony annual letter from BlackRock’s Larry Fink. Maybe we’ll see more of that “creativity” again this year (in the last few months, the asset manager has also faced protests as well as scrutiny from Al Gore). But for now – despite some reports that BlackRock’s shareholders have been appeased by its increased disclosure about engagements – a couple of proponents are revisiting the more traditional type of pressure for “walking the talk” on E&S issues. This Reuters article suggests that BlackRock may press companies harder this year as a result.
First, Mercy Investment Services (the asset management arm for the 9000 nuns of “Sisters of Mercy of the Americas”) filed this resolution:
Proposal requesting that the Board of Directors initiate a review assessing BlackRock’s 2019 proxy voting record and evaluate the company’s proxy voting policies and guiding criteria related to climate change, including any recommended future changes. A summary report on this review and its findings shall be made available to shareholders and be prepared at reasonable cost, omitting proprietary information.
This Guardian article provides some details on the supporting statement – e.g. BlackRock supported only 6 of 52 climate-related resolutions last year, according to the nuns. Meanwhile, As You Sow is questioning BlackRock’s commitment to “stakeholders” – with this resolution:
BE IT RESOLVED: Shareholders request our Board prepare a report based on a review of the BRT Statement of the Purpose of a Corporation signed by our Chairman and Chief Executive Officer and provide the boards perspective regarding how our Companys governance and management systems should be altered to fully implement the Statement of Purpose.
According to this Cooley blog, the proponent takes issue with BlackRock’s tendency to support management and vote against E&S shareholder proposals. The blog summarizes the “stakeholder” pressures that other companies are also facing – including calls for a reduced gap between CEO and worker pay.
Critical Audit Matters: What’s Your Auditor’s Average?
If you’re looking for “CAM” stats to share with your audit committee, check out the “CAM Counts by Auditor” available in this Audit Analytics blog (as well as the data from this earlier blog).
Right now, KPMG leads the way in terms of count – with 52 CAMs disclosed within the audit reports of 22 companies – averaging 2.4 CAMs per opinion. This is one area where being “below average” could provide some reassurance to directors.
A Fond Farewell To Broc
Many of us are still coming to terms with the fact that Tuesday was Broc’s last day as an Editor here at TheCorporateCounsel.net. Words aren’t adequate to express how much I’ve learned from him and how grateful I am for his mentorship. Here’s what I posted on LinkedIn last month (and also check out this well-stated DealLawyers.com blog from John):
Over the last 17 years, Broc has worked around the clock to make securities law & corporate governance accessible – and even entertaining! – to *everyone* in our community. Truth be told, I was star struck when I first met the human behind the guidance that I relied on every day, and was thrilled to be invited to the first “Women’s 100” Conference seven years ago. And although I loved private practice, when Broc suggested that I join him, John and the rest of the team here – and train to be his eventual successor – I couldn’t believe my luck.
Thank you, Broc, for giving me the opportunity and for teaching me so much over my career – especially during these last few years. Not just about the law, but about valuing people, embracing creativity and being unafraid to jump into new adventures. I’ll miss your daily presence but look forward to carrying on what you’ve been building.
For more details about what things will look like around here in the coming months and years, see our press release. Like Broc, I’m always open to suggestions, so feel free to email me any time at liz@thecorporatecounsel.net. I appreciate everyone who’s reached out so far!
John blogged a few months ago that 70% of restatements are now “Little r” revisions, according to data from Audit Analytics. This WSJ article reports on a couple of studies that analyze the potential connection between the presence of clawback provisions & performance awards, on the one hand, and management’s discretion to “restate” versus “revise” financials, on the other. Here’s an excerpt (also see earlier work from Francine McKenna, which the study cites, and CLS “Blue Sky” blog):
A study by Ms. Thompson found that almost half—45%—of Little r revisions from August 2004 through 2015 that she analyzed met at least one of the guidelines for them to be considered Big R restatements.
Her research points to one potential motivation: “clawbacks” that allow companies to recoup compensation from executives in the event of a Big R restatement. Companies with such clawbacks were more than twice as likely as others to use revisions for potentially material errors, her analysis found.
Although the article tries to also draw a link between “Little r” revisions and performance awards, the data doesn’t directly connect declines in performance award metrics like EPS to a company’s decision to carry out a “Big R” restatement versus a “Little r” revision. The article points out that in at least one situation, Corp Fin was deferential to a company’s decision to correct an accounting error via a revision even though the error had flipped one quarter’s earnings per share from negative to positive and the company used an annual EPS metric in its long-term incentive plan.
Also see this article suggesting that executives who are subject to clawback policies are more likely to push for tax savings – e.g. through use of tax havens. It wouldn’t seem there’s much downside to that for shareholders, but for companies that follow GRI Sustainability Reporting Standards, it’s relevant to know that GRI is recently announced a new “tax disclosure standard” to promote transparency of tax practices that could impact funding of government services & sustainability initiatives.
Corporate Governance Ratings: Internal Audit Enters The Game
Recently, the Institute of Internal Auditors announced a new “corporate governance index” that annually rates listed companies – based on surveys of Chief Audit Execs. Here are the results of the inaugural review.
While I’m not sure I can get behind the claim that this is “the first to truly probe – and grade – core actions and responsibilities that are crucial to successful, ethical, and sustainable organizational practices among American businesses,” it’s somewhat unique in highlighting auditors’ views (see page 7 for a take on that group’s role in corporate governance). Since my mom spent most of her career as an internal auditor, I can attest that these folks often have different perspectives & opinions than those of us on the legal side.
But don’t take my word for it! This note accompanies the finding that companies are vulnerable to corporate governance weaknesses because they have no formal monitoring or evaluation mechanism (which incidentally is the category of “worst performance”):
CAEs also reported that, if the evaluation is not conducted by internal audit, it is most often done by the general counsel’s office or under the direction of the nominating/governance committee, at which point it is more likely to be a compliance “check-the-box” exercise relative to listing exchange requirements and other laws and regulations.
Anyway, the surveyed companies averaged a “C+” grade and the report is pretty emphatic that there’s room for improvement (with all due respect to my auditor friends, if there’s anyone more “glass half empty” than us lawyers, my money is on CAEs). The grading is based on eight “Guiding Principles of Corporate Governance” – and helpfully, you can see the actual survey questions and the overall grade that each question generated. Here’s a finding that we can probably all agree is troubling:
When presented with specific scenarios in which the CEO wants to delay reporting negative news, respondents believed that only 64% of board members at their company would push back on the CEO, meaning more than one-third (36%) of board members would not. Similarly, CAEs gave a D (67) to the issue that board members should be asking whether information presented to them is accurate and complete.
Our January Eminders is Posted!
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the SEC announced this New Year’s gift: proposed amendments to Rule 2-01 of Reg S-X that would “modernize” the auditor independence rules and codify Staff consultations – which have been influencing how the rules are interpreted since they were adopted in 2000 and last amended in 2003. If adopted, the proposed amendments would:
– Amend the definitions of affiliate of the audit client, in Rule 2-01(f)(4), and Investment Company Complex, in Rule 2-01(f)(14), to address certain affiliate relationships, including entities under common control
– Amend the definition of the audit and professional engagement period, specifically Rule 2-01(f)(5)(iii), to shorten the look-back period, for domestic first time filers in assessing compliance with the independence requirements
– Amend Rule 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships
– Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationship rule with the concept of beneficial owners with significant influence
– Replace the outdated transition and grandfathering provision in Rule 2-01(e) with a new Rule 2-01(e) to introduce a transition framework to address inadvertent independence violations that only arise as a result of merger and acquisition transactions
– Make certain miscellaneous updates
The announcement runs through a couple of hypos that show how the proposal would address interpretive issues that have been popping up. As always, there’ll be a 60-day comment period that runs from when the proposing release is published in the Federal Register. Also see the summary in this Cooley blog…
Audit Committee Role & Reminders: Statement from SEC & Corp Fin
Also yesterday, this statement from SEC Chair Jay Clayton, Chief Accountant Sagar Teotia and Corp Fin Director Bill Hinman was issued to remind audit committees of their oversight responsibilities in financial reporting – and to remind companies that audit committees need adequate resources & support to fulfill their obligations. Here’s an excerpt:
– Non-GAAP Measures – Non-GAAP measures and other metrics used to gauge company performance, when used appropriately in combination with GAAP measures, can provide decision-useful information to investors on the company’s performance from management’s perspective. It is important that audit committees understand whether—and how and why—management uses non-GAAP measures and performance metrics, and how those measures are used in addition to GAAP financial statements in the company’s financial reporting and in connection with internal decision making. We encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.
– Reference Rate Reform (LIBOR) – The expected discontinuation of LIBOR could have a significant impact on financial markets and may present a material risk for many companies. The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate, a process often referred to as reference rate reform, is not completed in a timely manner. We encourage audit committees to understand management’s plan to identify and address the risks associated with reference rate reform, and specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR.
– Critical Audit Matters – Beginning in 2019, certain public companies’ auditors are required to communicate critical audit matters (CAMs) in the auditor’s report. While the independent auditor is solely responsible for writing and communicating CAMs, we encourage audit committees to engage in a substantive dialogue with the auditor regarding the audit and expected CAMs to understand the nature of each CAM, the auditor’s basis for the determination of each CAM and how each CAM is expected to be described in the auditor’s report. In short, we would expect that the discussion of the CAM in the auditor’s report will capture and be consistent with the auditor-audit committee dialogue regarding the relevant matter. We encourage audit committees to continue their efforts to understand the new standard and remain engaged with auditors in the implementation process.
We’re Gonna Party Like It’s…
Who else is in shock that we’re 20 years into this century?! Our flip from 2019 to 2020 feels momentous in its own right – but we’re lacking in catchy tunes to celebrate. When in doubt, tune to Prince:
My resolution this year is to finally visit Paisley Park…I live just down the road and I’m still kicking myself for never making it to one of “The Artist’s” impromptu parties. I did, however, join thousands of my closest friends outside First Ave the night he died, where he was honored by lots of local talent, including Lizzo before many people knew who Lizzo was – quite the scene with everyone singing along to “Purple Rain.”
Last week, the SEC issued this notice to approve changes to FINRA Rule 5110. This Mayer Brown blog gives a high-level overview of topics covered by the amendments – which are intended to reduce compliance costs:
(1) filing requirements; (2) filing requirements for shelf offerings; (3) exemptions from filing and substantive requirements; (4) underwriting compensation; (5) venture capital exceptions; (6) treatment of non-convertible or non-exchangeable debt securities and derivatives; (7) lock-up restrictions; (8) prohibited terms and arrangements; and (9) defined terms
Corporate Musicals: Ready for a Revival?
If you haven’t watched “Bathtubs Over Broadway” on Netflix, make it your New Year’s resolution. In this review for The New Yorker, Richard Brody concludes that high-budget corporate musicals like J&J’s “sunscreen disco” inspired countless “mid-level business people” to be heroes in their profession.
Is a revival of this genre the key to positive corporate culture that so many companies & shareholders say they want? For enough money, I’m pretty sure Kristin Chenoweth would sing about insurance policies, medical devices or self-driving vehicles. For some “short form” entertainment, check out Blackstone’s holiday video – 6 minutes and in the style of “The Office,” with a joke for us SEC geeks around the 4:30 mark.
Songs For Our Time
On second thought, maybe over-the-top, optimistic musicals aren’t a good fit for this day & age. What today’s workers would identify with is an album with songs like “The Perils of Mobile Connectivity” – from a derivatives trader who’s spent the best years of his life in an office tower. I’m here to report that Jason Pilling’s “White Collar Melodies” has all that & more…
