As the 2022 edition of Deloitte’s “Audit Committee Guide” points out, NYSE and Nasdaq rules require that an independent board committee review & oversee related-party transactions – and that responsibility often falls to the audit committee. Deloitte notes:
While these types of transactions often occur in the normal course of business, transactions among related parties are sometimes associated with the risk of misstatement or omission in financial reporting, whether by error or fraud. Auditors are required to scrutinize related-party transactions that may pose an increased risk of fraud. These include transactions involving directors, executives, and their families; significant unusual transactions that are outside the normal course of business; and other financial relationships with the company’s executive officers and directors. Audit committees must be alert to these transactions as part of their oversight responsibilities.
The Guide suggests that audit committees consider asking these 6 questions:
1. What are the business reasons for the transaction? Are these reasons in line with the company’s overall strategy and objectives?
2. Are the terms of the transaction consistent with the market? In other words, would these terms apply to an unaffiliated party?
3. When and how will the transaction be disclosed? How will investors view the transaction when it is disclosed?
4. What impact will the transaction have on the financial statements?
5. Which insiders could benefit from the transaction, and in what way?
6. Are outside advisers needed to help understand the implications of the transaction?
The SEC’s newly adopted “pay vs. performance” disclosure rules are one of the most significant changes to executive compensation disclosure in the past decade. The new disclosures will require multiple years of information and new calculations for equity awards – and they’re required in 2023 proxy statements!
On Thursday, November 10th from 1-4pm ET, join us for a special session on “Tackling Your Pay Vs. Performance Disclosures” – featuring Compensia’s Mark Borges, Morrison Foerster’s Dave Lynn, WilmerHale’s Meredith Cross, Sidley’s Sonia Barros, SGP’s Rob Main, Fenwick’s Liz Gartland, Gibson Dunn’s Ron Mueller, and more.
This is a 3-part, 3-hour special session that will cover:
1. Navigating Interpretive Issues – we are already getting lots of questions in our Q&A forum about how to apply the new rules, and we know that new issues are arising daily. We’ll be sharing practical guidance and any SEC updates that you need to know – including what you’ll need to tell your board and executives.
2. Big Picture Impact – how will the disclosure mandate affect say-on-pay models and shareholder engagements? This session will provide context and pointers for bolstering executive compensation & compensation committee support during proxy season.
3. Key Learnings From Our Sample – attendees of this event will get first access to our sample disclosures, prepared by Mark Borges and Dave Lynn. Hear “lessons learned” from their drafting effort that will guide you through your own process and jumpstart your disclosures.
This event is available at a reduced rate of only $295 for anyone who is already a CompensationStandards.com member or who is signed up to attend our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” on October 12th – 14th – where we’ll be setting the stage with key takeaways from the pay vs. performance rule and the steps that you need to take now to be ready to comply. Register for the “special session” here for the CompensationStandards.com member rate (or, if you are not a CompensationStandards.com member but you are signed up for our “Proxy Disclosure & 19th Annual Executive Compensation Conferences,” contact sales@ccrcorp.com for the special rate).
For non-members, the cost to attend is $595. If you’re not yet a member of CompensationStandards.com, try a no-risk trial now. We’ll be continuing to add practical guidance on this topic to CompensationStandards.com as disclosure hurdles & consequences come to light – such as this great podcast that Dave already taped with Gibson Dunn’s Ron Mueller about “first impressions” of the rule, emerging interpretive issues, possible pitfalls, and more.
All that to say, a CompensationStandards.com membership be an essential ongoing resource if you are involved with pay vs. performance. Plus, our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. Register for the “special session” here if you are a non-member and are not attending our Conference.
The SEC announced on Friday that the EDGAR system is now ready to accept electronic Form 144 filings. Under rules that were adopted this past June, most Form 144 filings will be required to be made electronically beginning as early as March 2023 (the SEC will announce the exact compliance date when the final rule is published in the Federal Register, which is expected to happen within the next few weeks and will begin the 6-month countdown).
The SEC has launched a page with resources for filing Form 144 electronically. Here’s what you need to do now:
1. Make sure all of your company’s insiders have an EDGAR account and that their codes are up & running. The page explains how to search for lost codes.
2. If any reporting person doesn’t already have an EDGAR account, apply for one now. Applications require individual review by the Staff, and they expect a rush of submissions as the compliance date nears, so don’t be caught at the back of the line. The page explains the steps to apply.
3. Brush up on Form 144 CDIs for questions about when you need to file an amended Form, etc. Remember that we also have a “Rule 144 Q&A Forum” for questions about the Rule itself.
4. Check out the SEC’s page for step-by-step guidance for using the online fillable Form 144 and Frequently Asked Questions.
We’ll be discussing the implications of electronic Form 144 filings – along with many other practical topics – at our virtual “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – coming up in only two weeks, October 12th – 14th. There is still time to register! Here’s the agenda – 18 essential sessions over the course of three days. Sign up online (with the “Conference” drop-down, and the “PDEC” options), email sales@ccrcorp.com, or call 1-800-737-1271. Bundle your registration with our “1st Annual Practical ESG Conference” and get a discounted rate!
As John blogged in June, one of the questions surrounding the move to paperless Form 144 filings is whether brokers will continue to handle this step in the trading process – or if, because EDGAR codes are now involved and it can be a real mess if those get bungled, the Form 144 filings will now fall to company counsel.
In addition to discussing this with plan sponsors and other brokers, it’s helpful to get a sense of what other companies are planning to do. Please participate in this anonymous poll to share your thoughts:
Several hot topics and potential rulemaking items are getting air time with the SEC at an upcoming public meeting of the Investor Advisory Committee – scheduled for Wednesday, September 21st at 10am Eastern. The agenda includes:
1. Human Capital Management and Labor Valuation and Performance – This plenary session will consider the demand for labor-related performance data from the investor perspective, including investors’ views on the quality and decision-usefulness of currently-available data, and which information – if any – investors would use should it become available, and why.
2. Panel Discussion Regarding Schedules 13D and 13G Beneficial Ownership Reports – This panel will discuss the SEC’s proposals to shorten the reporting timeline around Schedule 13D and 13G and how that would affect shareholder activism. The panel will also discuss the current practices of certain shareholders disseminating not-yet-public large stakes with a select group of other shareholders, and how the SEC’s proposals around classifying them as a “group” would cut the existing information asymmetry between that group and other shareholders.
3. Panel Discussion Regarding ESG Fund Disclosure – This panel will focus on the importance of ESG and Greenwashing and the heightened role of ESG for investors seeking to understand their impact through investing. Our speakers will provide an overview of the definitions of ESG, sustainable investing, and greenwashing. Additionally, our speakers will discuss what investors should know about the proposed climate disclosure requirements and any observable effects of the proposal.
The agenda also includes time for discussing recommendations on cybersecurity disclosure, climate disclosure, and accounting modernization. That’s a lot of action.
Yesterday, EY announced that it is moving forward with partner votes to separate the firm into two distinct organizations, which it has been considering for several months and is aimed at helping avoid conflicts of interest between consulting and audit work. As I blogged in May, the breakup would be a big deal if it happens – but it is not completely novel. This NYT article explains how the split could be effected:
One way EY can achieve a split is by spinning off its consulting arm into a company that could file for an initial public offering. The auditing business would probably remain a private partnership.
One outcome of the split may be that, once separated from the accounting business, the advisory and consulting operations will be more profitable as they’re less constricted by conflict-of-interest rules that could limit the services they can provide to clients.
This WSJ article gives more detail on the dollars involved:
The firm’s 13,000 partners are expecting multimillion-dollar payouts from the split. To pay for that, EY is planning to raise about $11 billion in a public sale of a 15% stake in the consulting company, which will also borrow some $18 billion, according to Mr. Di Sibio. He said a large portion of this money would be used to pay partners, but declined to specify the amount.
It sounds straightforward, but this is going to be an exceedingly complex transaction due to auditor independence rules. Just last week, the SEC’s Acting Chief Accountant Paul Munter issued a statement about “critical points to consider when contemplating an audit firm restructuring” – so the SEC is watching. It’s not clear yet whether EY audit clients would have any reason to be skittish – there are probably decks already in the works to reassure everyone.
To move forward, in addition to regulatory approvals in some countries, EY’s 13,000 audit partners also need to approve the breakup. It will take some time to get the vote, but people are probably somewhat on board already since this has been socialized for several months. The WSJ reports that, at this time, the rest of the “Big 4” accounting firms are not planning to follow EY’s lead.
In remarks yesterday at SEC Speaks, Chair Gensler cut right to the chase about crypto tokens:
Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities. Offers and sales of these thousands of crypto security tokens are covered under the securities laws.
Some tokens may not meet the definition of a security — what I’ll call crypto non-security tokens. These likely represent only a small number of tokens, even though they may represent a significant portion of the crypto market’s aggregate value.
This isn’t too surprising given recent enforcement activity. In July, I blogged that Coinbase submitted a rulemaking petition that called on the SEC to adopt rules that provide more clarity on the framework for digital assets as securities.
The fact that Coinbase’s petition is 32 pages long gives you a sense for how complex regulating crypto as a security could be. In his Bloomberg column yesterday, Matt Levine pointed out how difficult it would be for the SEC to simply apply pre-existing disclosure requirements to tokens. Here’s an excerpt:
I do not think that that sort of adaptation is trivial. Think about what you would want to know about a crypto project before investing in it. Some of what you would want to know — things like the qualifications of the founding team, their financial incentives and conflicts of interest, where the money is going, how the project is capitalized, how they see the market, what their business plan is, etc. — is very similar to what you’d want to know before investing in the stock of a company. But a lot would be different. You might care a lot less about the funding and capital structure of the entity that employs the developers to build the project, and a lot more about the structure and tokenomics of the decentralized project itself. You might care a lot about the decentralized self-executing code of that project, since DeFi projects are constantly getting hacked, and you might want some sort of high-level summary of that code and its vulnerabilities rather than just a GitHub repository. In a truly decentralized project, the people issuing the tokens might just not have access to some of the things — biographies of key players, audited financials — that are required in normal stock offerings.
And it’s not like most tokens these days are just sold by project developers for cash to retail investors to raise money to build the projects. This used to be true, in the “initial coin offering” boom of 2017, but the SEC shut that down pretty hard. Now tokens are more likely to be earned (by mining, by staking, by running a hotspot) by ordinary participants, and if developers want to raise money they sell tokens to venture capital firms with long lock-ups. (You can sell securities to “accredited investors,” like VCs, without registering them with the SEC.) Adapting the securities-law framework to crypto would mean looking at how crypto tokens actually come into the hands of retail investors, and thinking about what sorts of protections they need in those transactions.
The SEC understandably believes that tokens should be regulated as securities, but coming up with workable rules is a big undertaking, and there are no signs that a tailored crypto framework is in process.
Now that the SEC’s universal proxy rules are effective, everyone is anxious to see what impact they’ll have – and what issues the new process will create for companies facing a proxy contest. John shared a roundup of recent commentary yesterday on DealLawyers.com. One thing that a number of experts are pointing out is that battles will get more personal now that all of the candidates are on one card. Here’s a prediction from Okapi Partners’ Bruce Goldfarb in a recent Forbes article:
It is a near-certainty that future proxy campaigns are going to focus more on the personal attributes of the individual candidates. Each side will need to make a strong case for the qualifications of each person nominated for a board seat. This process may lead to each side publicly “dissing” the capabilities, experience, and perhaps even the integrity of the other side’s nominees.
This means you’ll want to carefully consider your director bios, skills, and all of the surrounding disclosures going in to 2023 – presenting your directors as personable & savvy candidates who bring important benefits to the company. What’s also important to remember is that this change isn’t happening in a vacuum – it is coming at a time when director skill-sets and oversight structures are already under the microscope. Aon’s Karla Bos sent me this pondering based on a post from Michael Levin at The Activist Investor:
Obviously just getting a director onto the ballot doesn’t mean it’s easy to get them elected, but it certainly could garner additional attention. I wonder if, as navigating the UPC process becomes clearer, there might be an increase in nominations of qualified “ESG directors” in lieu of submitting ESG shareholder proposals? Or will that possibility simply accelerate the trend of companies pursuing constructive shareholder engagement with “little-a” activists?
This may not be something we see right out of the gate, but it’s not outside of the realm of possibility. It was only a year ago that ExxonMobil lost board seats in a campaign that put “ESG” concerns in the spotlight. CalSTRS warned at the time that it was just the beginning of an “activist stewardship” trend – where “universal owners” will be prepared to replace directors if they feel that engagements are ineffective. I also blogged at that time about a playbook for responding to (or heading off) ESG-themed activist inquiries. More recently, Emily noted on our “Proxy Season Blog” that when looking at responsiveness to ESG proposals, large asset managers are also developing escalation pathways for director votes.
For practical insights on how to work with your shareholders and protect your board from activists, join us in October for “Next-Gen Activism: Are You Prepared?” – with Davis Polk’s Ning Chiu, Okapi Partners’ Bruce Goldfarb, SGP’s Rob Main, and Wachtell Lipton’s Sabastian Niles. This critical session is part of our “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – happening virtually October 12th – 14th. Here’s the full agenda – 18 sessions over 3 days, including a dialogue with Corp Fin’s Renee Jones and essential guidance from lots of other heavy-hitters. Sign up online, email sales@ccrcorp.com, or call 1-800-737-1271.
In addition, check out the agenda for our “1st Annual Practical ESG Conference” – which is happening virtually on Tuesday, October 11th. This event will help you avoid ESG landmines and anticipate opportunities. You can bundle the Conferences together for a discount.
Across the pond, 54% of FTSE 100 companies now have voluntarily established a dedicated ESG committee, according to a recent Bloomberg article. Here’s what the article says about US practices:
Large US companies appear to be moving less quickly. An analysis for 2020-2021 showed that only 13% of S&P 500 companies assign responsibility to an ESG/sustainability committee, while 7% indicated that the full board has primary ESG responsibility, according to data compiled by Deloitte. Meanwhile, 53% of S&P 500 boards use the nominating and governance committee for primary oversight.
For more resources, see our the memos in our “ESG” Practice Area here on TheCorporateCounsel.net and the even more comprehensive page – including checklists, surveys & more – about “Board Oversight of E&S Issues” that we have going on PracticalESG.com. If you’re not already a member with access to this guidance, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Here we go again, this time from a new report on board refreshment policies from The Conference Board, ESGAUGE, and other collaborators:
As US corporations seek to increase diversity of backgrounds, skills, and professional experience on their boards, they face a central hurdle: limited board turnover that creates few openings for new directors. Indeed, the percentage of newly elected directors in the S&P 500 has remained flat over the past several years.
Broc griped about the stalemate on board diversity as far back as 2017, and The Conference Board’s recommendations to overcome the impasse are pretty much unchanged from when I blogged about the lack of director turnover and its impact on board composition over a year ago. In that regard, consistency is a good thing – it now just requires execution. Here’s what the current-year analysis says:
Companies have a variety of board refreshment tools at their disposal to increase diversity of backgrounds, skills, and professional experience on their boards. The tools that focus on triggering discussions of turnover or reinforcing a culture of board refreshment may be particularly valuable.
These include overboarding policies, policies requiring directors to submit their resignation upon a change in their primary professional occupation, guidelines on average board tenure, individual director evaluations as part of the annual board self-evaluation process, and informal discussions that set an expectation that directors do not need to serve until they are required to leave, but rather should consider whether their contributions are still relevant to the needs of the company. Unlike policies that mandate turnover, such as term limits and retirement policies, these more flexible tools can lead to a more thoughtful process in proactively aligning board composition with the company’s strategic needs.
An encouraging finding from this report is that there has been an uptick in individual director evaluations & use of independent facilitators:
Almost all companies disclose conducting some form of annual board evaluation (which, for NYSE companies, is mandated by listing standards) — and the combination of full board, committee, and individual director evaluations is growing in popularity. As of July 2022, 99 percent of S&P 500 and 97 percent of Russell 3000 companies disclosed carrying out board evaluations. In the S&P 500, conducting full board, committee, and individual director evaluations has become the most common practice (52 percent of companies reported this combination as of 2022 compared to 37 percent in 2018). Indeed, in the S&P 500, the practice of conducting only board and committee evaluations has declined from 58 percent in 2018 to 46 percent as of 2022. Although the Russell 3000 has seen a similar pattern, with a rise in full board, committee, and individual evaluations (from 18 percent in 2018 to 34 percent as of July 2022), 60 percent of Russell 3000 companies continue to conduct only full board and committee evaluations.
Companies are increasingly disclosing their use of an independent facilitator for board evaluations — and larger companies are more likely to disclose hiring an independent facilitator than their smaller counterparts. As of July 2022, 29 percent of S&P 500 companies and 15 percent of Russell 3000 firms disclosed hiring an independent facilitator for board evaluations versus 14 percent of S&P 500 and 6 percent of Russell 3000 companies in 2018. In 2022, 42 percent of the largest companies, with annual revenues of $50 billion and over, disclosed their use of an independent facilitator, but only 5 percent of the smallest companies with annual revenues of under $100 million did so.
