I confess that my eyes glaze over when I see anything relating to XBRL, and I suspect I’m not the only one who suffers from this weakness. Apparently, the Corp Fin Staff has noticed that “structured data” is getting short shrift, because they posted a wake-up call yesterday in the form of a sample comment letter.
Corp Fin has been providing guidance in the format of “Dear Issuer” letters on a somewhat regular basis since at least 2021. The letters tend to be issued when the Staff notices an emerging disclosure or market-related issue that is affecting a lot of companies. Topics have included market volatility, China-based disclosure requirements, and crypto fallout. But for this instance of sample comments, with XBRL being required since 2009 and Inline XBRL since 2018, you might wonder, “Why now?” The Staff gives a couple of reasons:
1. Comments on the pay versus performance rule provided increased evidence that this data format is useful to investors.
2. The Financial Data Transparency Act (FDTA) became law at the end of last year and requires the SEC to establish a program to improve the quality of the corporate financial data filed or furnished by companies under the ’33 and ’34 Acts.
In addition, new XBRL requirements have accompanied several recent SEC rulemakings (clawbacks, pay vs. performance, repurchases, insider trading), so there actually are new practices to watch out for right now. The sample comment letter flags these issues:
1. Item 405 of Regulation S-T: Your filing does not include the required Inline XBRL presentation in accordance with Item 405 of Regulation S-T. Please file an amendment to the filing to include the required Inline XBRL presentation.
2. Cover Page: The common shares outstanding reported on the cover page and on your balance sheet are tagged with materially different values. It appears that you present the same data using different scales (presenting the whole amount in one instance and the same amount in thousands in the second). Please confirm that you will present the information consistently in future filings.
3. Pay versus Performance: Disclosure under Regulation S-K Item 402(v) must be in Inline XBRL, in accordance with Item 405 of Regulation S-T and the EDGAR Filer Manual. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
4. Pay versus Performance: Refer to the [relationship disclosures] graph. Although it is permissible to combine one or more sets of relationship disclosures under Regulation S-K Item 402(v)(5) into one graph, table, or other format, note that you must still provide separate XBRL tags for each required item. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
5. Financial Statements and Supplementary Data: You have used different XBRL elements to tag the same reported line item on the income statement from period to period. Please provide us your analysis as to how you concluded that the results reported necessitated the change in the element. Alternatively, if you conclude that the change from period to period was not necessary to communicate a change in the nature of the line item, confirm that you will ensure that your choice remains consistent for line items from period to period.
6. Financial Statements and Supplementary Data: We note that instead of using an XBRL element consistent with current U.S. GAAP in your income statement, you instead used a custom tag. Custom tags are to be used by filers when an appropriate tag does not exist in the standard taxonomy. See Item 405(c)(1)(iii)(B) of Regulation S-T. Please tell us why the current U.S. GAAP tag is not applicable, or alternatively revise your disclosure, beginning with your next filing, to correctly tag this disclosure.
Yesterday’s sample comment letter says that more investors are using XBRL data, but they aren’t the only ones: Corp Fin is also putting this info to work. In the SEC’s most recent “Semi-Annual Report to Congress on Machine Readable Data for Corporate Disclosures” – which John flagged in July – the Staff gave a heads up that they had been issuing comment letters about tagging requirements. In addition, the report says that Corp Fin is using the data in these ways:
– To help identify issuers that are subject to the disclosure and submission requirements of, and potentially subject to a trading prohibition under, the Holding Foreign Companies Accountable Act (Commission-Identified Issuers). Specifically, the staff uses data in Forms 10-K, 20-F and 40-F identifying the auditor (or auditors) who provided opinions related to the financial statements presented in the registrant’s annual report, the location where the auditor’s report has been issued, and the Public Company Accounting Oversight Board (PCAOB) ID Number(s) of the audit firm(s) or branch(es) providing the opinion(s).
– To identify, count, sort, compare, and analyze registrants and their disclosures (e.g., to identify more readily and accurately issuers that are listed on a specific exchange or that have identified themselves as well-known seasoned issuers), based on several items of machine-readable data that appear on the cover pages of registrants’ annual reports (Forms 10-K, 20-F, and 40-F).
– To make preliminary assessments of compliance with the Commission’s recently adopted pay-versus performance disclosure requirements.
With XBRL creeping in to proxy statements, will it also come for ESG? Only time will tell.
I have to say that I never thought I would write three blogs in one day on the topic of XBRL, but if the Staff thinks it is important, I will do my part to get on board. And here is something that truly caught my eye from the SEC’s 2023 Semi-Annual Report to Congress on structured data disclosures:
Enforcement utilized risk-based data analytics to uncover potential accounting and disclosure irregularities caused by, among other things, earnings management practices. Machine-readable data enabled Enforcement staff to review the financial data of thousands of public issuers in order to detect indicia of earnings management or other types of financial misconduct. The initiative resulted in charges against six public companies and several related individuals for violations of the federal securities laws for engaging in certain practices that gave the appearance of meeting or exceeding consensus earnings-per-share (EPS) estimates.
I blogged about the latest of those cases back in February – and I pointed out that the SEC’s data analytics tools are now sensitive enough to flag potential “earnings management” situations even when the adjusted dollar amounts are small. That’s because of XBRL! Now that the SEC has a solid dataset in its toolbox, it is becoming easier for the Enforcement Division to detect and pursue accounting issues.
Board composition is always a hot topic. During the past several years, investors have pushed for skills matrices & diverse backgrounds – in order to provide some comfort that the board is well-positioned to address dynamic business risks & opportunities. But, board quality is difficult to measure. This 47-page report from JamesDruryPartners’ takes a stab at it.
The report offers a number of public company board stats that could be useful for benchmarking, and even ranks companies based on their “average director weight” (fortunately, this is referring to business acumen, not body mass). The report also offers commentary and recommendations. Here are a few points that jumped out:
1. The the number of board seats filled by active & retired CEOs has been declining:
The percentage of CEOs serving on external boards ticked lower, continuing a prolonged decline that began decades ago. Examining the 582 boards common to both this report and our last report, the number of board seats filled by CEOs (active and retired) decreased by 4.9% (from 2,079 to 1,978). Board seats filled by active CEOs decreased by 11.8% (from 536 to 473); those filled by retired CEOs decreased by 2.5% (from 1,543 to 1,505).
2. Only 52% of “financial experts” have CFO or public accounting expertise. The report urges boards to consider CFOs for board seats:
We remain concerned that boards undervalue the disciplined financial perspective that CFOs and Public Accountants can bring to boardroom deliberations. When we ask boards about the underrepresentation of CFOs, the most common reply is, “If we were to consider a CFO for our board, they would have to have a broad-gauged, strategic business mindset, not a corporate controller’s perspective – perhaps a CFO who is now, or might become, a CEO.” We certainly agree with the strategic mindset requirement; however, in our experience, other than the CEO, CFOs are very often the second ranking corporate executive most engaged in the company’s total business operations. Therefore, we strongly encourage boards to challenge this outdated thinking.
Directors designated as Financial Experts should truly be independent financial experts, not professionals who qualify simply because they work in the finance industry or are P&L executives who have a finance department reporting to them. One board in our study even designated a director as a Financial Expert based solely upon their service on another board’s Audit Committee.
3. Based on the number of mentions in a survey of experienced directors, page 14 of the report identifies the “Top 10 Most Essential Attributes of Effective Board Directors.” Here are the top 3:
– Communication Skills (73%): Thoughtful, logical, and articulate. Doesn’t dominate boardroom conversation. Knows when to speak. Understands the impact of words and tone. Not compelled to contribute to every topic discussed. Does not comment just to get credit. Listens more than speaks. Speaks only when has something valuable to contribute. Able to build on the commentary of others and take it to the next level. Focuses discussion on the right strategic level. Does not rush to conclusions. Objective in their commentary.
– Professional Collegiality (67%): Good social and people skills. Likeable. Proactive in developing relationships. Collaborative. A team player. Contributes to the success of others. Not a “gotcha” type. Discreet, diplomatic, and tactful. Respectful of tradition. Sensitive to the views of others.
– Relevant Experience and Knowledge (63%): Track record of high accomplishment and success, ideally in business. Leads from competency. CEO experience is considered most valuable, ideally in a large, complex organization. Business intelligence is most relevant, compared to intelligence in non-business fields. Best directors tend to be all-around athletes with significant breadth. Can grasp a broad range of business issues. Seasoned, mature, and resilient. Understands risk. Able to deal with the good and the bad. Capable of boardroom leadership impact when necessary and appropriate.
4. Governance capacity & “average director weight” aren’t necessarily correlated to company size.
Some large companies score poorly and some small companies score very well. Page 24 offers a “governance capacity worksheet” to use when filling a board vacancy.
5. Expanding your board size and replacing retiring directors with individuals who have more substantive experience are two steps that can help improve your board’s governance capacity & board weight.
We cover a lot of “shareholder activism” developments over on DealLawyers.com,* and last week, Meredith blogged about a recent Delaware case that came down in favor of a company that relied on an advance notice bylaw to reject a dissident nominee. This MoFo memo says that case is part of a broader trend of companies being sticklers for compliance with “advance notice” provisions. In the past 18 months, 17 companies rejected dissident director nominations for failure to comply with advance notice bylaws – and Delaware courts are tending to uphold those decisions.
The memo urges companies to make sure that their advance notice bylaws incorporate the latest protective features, without going so far that the bylaw will be struck down when it’s enforced. This excerpt outlines what to consider when you’re dealing with these provisions:
– Review the company’s bylaws and, in particular, advance notice provisions regularly. The recent introduction of the “universal proxy card” provides a good point of departure for a bylaw review, if one has not been undertaken already.
– Adopt any changes to the advance notice bylaws on a “clear day,” if possible, i.e., before any dissident stockholder surfaces.
– Advance notice bylaws should be clear and unambiguous, as any ambiguity or lack of clarity may be resolved in favor of the dissident.
– The board must act reasonably when it considers whether a stockholder nomination complied with the advance notice bylaws. “Inequitable acts towards stockholders do not become permissible because they are legally possible.”
– Advance notice bylaws should be in line with market standards. Courts see standard advance notice bylaws as commonplace and as serving a legitimate purpose. However, if they are overly aggressive or burdensome compared to market standards, they may be subject to challenge.
*ICYMI, our daily DealLawyers.com blog is free and you should subscribe to get the headlines in your inbox. And if you regularly handle hostile – or friendly – M&A, the site is full of very useful & practical info that will come in handy when you’re on a tight time frame. It’s also a great training resource for new associates!
Executive compensation practices, disclosures, and the regulatory environment have evolved considerably since Dodd-Frank, and Say-on-Pay has become a key process for shareholder-board dialogue. With the new Pay-versus-Performance disclosure requirement and soon-to-be-effective listing standards on clawback policies, all the generally applicable executive compensation rules mandated by Dodd-Frank will be in place. We are entering a new era for Say-on-Pay!
Tune in today at 2 pm Eastern for the free webcast – “The Evolution of Say-on-Pay: Where We Started; Where We Are Now; What’s Next” – co-hosted by ISS Corporate Solutions and CCRcorp – to hear ISS Corporate Solutions’ Cameron Abrahams O’Neill & Valeriano Saucedo, and our very own Meredith Ervine and John Jenkins, as we examine the history of Say-on-Pay, current trending topics in executive compensation, a look back at the 2023 U.S. Proxy Season, and the future of pay-for-performance and pay practices.
Yesterday, the SEC posted a notice of filing – and immediate effectiveness – of a Nasdaq proposal to amend Listing Rules 5610 and IM-5610 – which is the rule and corresponding interpretation that requires listed companies to maintain a “code of conduct” and disclose certain waivers.
The amendment will permit board committees to approve waivers of the code of conduct for directors or executive officers, rather than requiring that approval to be granted exclusively by the board, which is what the rule currently requires. The updated rule also requires Foreign Private Issuers to disclose these types of waivers within 4 business days. Here’s more background:
Nasdaq is proposing to allow waivers of the code to be approved either by the board of directors or a committee of the board. This would give listed companies flexibility to place the oversight of a company’s code of conduct within the jurisdiction of a particular committee if that structure is more effective and appropriate, while following the obligations of ethical conduct required by Listing Rules 5610 and IM-5610.
The approach of delegating oversight authority to a board committee is also consistent with the provisions of Listing Rule 5630 that requires approval of related party transactions by the company’s audit committee or another independent body of the board of directors. In addition, Nasdaq believes that the proposed change would align the requirements of this rule with the requirements of Rule 303A.10 of the Listed Company Manual of the New York Stock Exchange (“NYSE”).
And here’s what the exchange says about FPIs:
Nasdaq is also proposing to clarify that Foreign Private Issuers are required to disclose any waivers of the code for directors or executive officers within four business days by providing website disclosure that satisfies the requirements of Item 5.05(c) of Form 8-K, by including disclosure in a Form 6-K or by distributing a press release. The disclosure of any code of conduct waivers provides investors the comfort that waivers are not granted except where they are truly necessary and warranted, and that they are limited and qualified so as to protect the company and its shareholders to the greatest extent possible.
Accordingly, Nasdaq believes that Foreign Private Issuers, like other Nasdaq listed companies, should be required to make such disclosure within four business days by providing website disclosure that satisfies the requirements of Item 5.05(c) of Form 8-K, by including disclosure in a Form 6-K or by distributing a press release rather than providing such disclosure in the next Form 20-F or 40-F.
If you’re a Nasdaq company, this amendment may be a point to consider when you next review your committee charters. The amendment is immediately effective, but there is still an opportunity for public comment, and the SEC may temporarily suspend the rule change if it determines within 60 days that a suspension is necessary or appropriate.
We’ve blogged a few times about the DOJ’s enforcement sweep for problematic director interlocks under the Clayton Act. In August, the agency announced that it had secured a couple of more director resignations pursuant to this initiative. Once again, the press release casts a wide net for tips, which makes it pretty clear that the DOJ is actively looking for more violations:
Anyone with information about potential interlocking directorates or any other potential violations of the antitrust laws is encouraged to contact the Antitrust Division’s Citizen Complaint Center at 1-888-647-3258 or antitrust.complaints@usdoj.gov.
As John noted in a recent DealLawyers.com blog, the DOJ’s interlocks initiative has now led to 15 interlocking director resignations from 11 boards. Moreover, a recent FTC settlement clarifies that non-corporate entities are also in the cross-hairs.
As we look ahead to proxy season, this is a reminder to revisit this topic in your annual D&O questionnaires (or any time a new director is joining the board). Our “D&O Questionnaire Handbook” has a couple of sample questions. And if you find yourself with a director who may be considered as also serving on the board of a competitor, this WilmerHale memo from last year gives a good primer on Clayton Act exceptions and consequences.
In this 23-minute episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet & I had the pleasure of speaking with Anat Alon-Beck. Anat (a.k.a. the “Unicorn Lady”) is an Associate Professor of Law at the Case Western Reserve University School of Law. Her extensive research on large privately held companies – and their impact on our market – has been cited to Congress, the SEC, and federal courts. Her findings have also influenced conversations & policy on a variety of high-profile corporate governance and securities law issues – including board diversity and human capital, corporate purpose, risk oversight, public benefit corporations, direct listings, and more. Listen to hear:
1. How Anat found her way into academia after practicing as a corporate & tech lawyer, and what led her to focus her research on corporate governance & securities issues.
2. The common thread that ties Anat’s published topics together – and a bit about her forthcoming research.
3. What the research shows about legal & regulatory reforms that could improve opportunities for corporate governance & securities practitioners and our markets overall – and what practitioners could do from a practical perspective to support reforms.
4. Thoughts on how boards & advisors can navigate the competing tensions and fraught political environment. Specifically, whether there are theories or data that could guide decision-making on sensitive topics without diverting too much time and money from the company’s core mission.
5. What Anat thinks women in the corporate governance field can add to the current conversation on the role of corporations in society.
To listen to any of our prior episodes, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Welcome back from the long weekend, everyone. In a treasured end-of-summer tradition, ISS recently announced that it has released its Annual Global Benchmark Policy Survey. There is nothing quite like this annual event to help us focus on what lies ahead in the upcoming proxy season. This year I’m particularly grateful for the opportunity to focus on the future, because my middle child is excitedly heading to his first day of kindergarten today, and there have been tears (from me, not him).
Anyway, in addition to executive compensation topics, this year’s survey includes questions on:
– Impact on director independence of being employed by a firm that provides professional services to the company
– Application of FPI vs. market-specific policy to companies that dual-list in the country of incorporation
– Whether the ISS policies should aim for global consistency on certain E&S issues vs. take a market-specific approach
– How investors and companies are considering single vs. double materiality
– What actions investors should expect companies to take to reduce an environmental or social risk that appears to be material to a company
– For high GHG emitters, whether risk should be assessed based on meeting standards under all of the governance, strategy, risk management, and metrics & targets pillars vs. each pillar individually
– Input on what guidelines, standards and frameworks are most relevant to companies and investors for drafting a climate transition strategy or plan
– How much tolerance investors will have for a reduction in transparency that results from risks from increased politicization of “ESG”
The survey is slated to close on September 21, 2023, at 5 p.m. ET.
In addition to feedback from the annual survey, as ISS develops its 2024 voting policies, it will also gather input from investors, company directors, and others by hosting various regionally-based, topic-specific roundtable discussions and other engagements. ISS will then publish for public comment the key proposed changes to its voting policies for next year, before adopting and publishing the final policies that will apply to 2024 meetings.
