I’ve blogged a few times about the impact that retail investors could begin to have on proxy voting – here’s a write-up from last spring about how increasing retail involvement could make voting outcomes less predictable, particularly if they take on a “gaming” aspect akin to the meme-stock frenzy. Now, investors’ wait for an easy way to actually do this is over: the new “iconik” app will encourage users to crowdsource their voting power, along with offering commission-free trading. The app’s website includes this “voting agreement & revocable proxy,” along with this summary of what the founders hope to accomplish:
– On iconik, people run campaigns to help make changes at publicly traded companies. Campaigns can be about almost anything, from better corporate governance to increasing share value (and everything in-between).
– Simply purchase shares and delegate your voting rights to the campaign organizer. You will always own the shares, but now those voting rights are going towards something that matters.
Because fractional shares may not include voting rights, shareholders who want maximum voting power need to buy individual stocks. So, that could prevent this from taking off in force. But as I wrote a few months ago, many retail investors today feel like they’re more likely to vote and care about E&S issues. iconik’s CEO was inspired by the meme stock rally, and he’s banking on the possibility that retail investors are willing to sacrifice diversification for influence.
This DealBook article notes that the platform launched with two active campaigns. One is targeting Meta (Facebook) – to shut down hate speech on the platform. The other is going after JPMorgan Chase – to stop lending to fossil fuel companies.
iconik likely isn’t going to be the only game in town here when it comes to crowdsourcing voting activities. In late summer, I noted that Robinhood acquired Say Technologies, which appeared to be a play into the voting & engagement space. Stay tuned.
– Liz Dunshee
I blogged yesterday about the SEC’s proposed amendments to the Rule 10b5-1 safe harbor. Orrick’s JT Ho, Carolyn Frantz and Soo Hwang kindly provided this guest post to outline what steps companies should consider taking right now, in light of this proposal:
Earlier this week, the SEC proposed amendments – subject to a 45-day comment period – to add new conditions to the availability of an affirmative defense under Rule 10b5-1 and add new disclosure requirements regarding insider trading policies and procedures of issuers as well as the timing of stock option grants. Many of the proposed amendments, such as a statutory cooling-off period for 10b5-1 plans, were expected and aligned with the recommendations issued by the Investor Advisory Committee in September 2021.
However, the proposed amendments requiring that companies publicly disclose their “insider trading policies and procedures,” as well as the timing of stock option grants to directors and officers, were not as widely expected. We expect that companies will likely wait for the SEC’s final rules before formally modifying their 10b5-1 guidelines, though they would be well advised to brief their treasury departments and individuals using those plans about the potential changes now. Outside of 10b5-1-specific issues, however, we believe there are several steps companies should take now in advance of potential required disclosure, including:
• Reviewing and updating their insider trading policies;
• Creating or reviewing formal written insider trading procedures; and
• Reviewing stock option grant timing practices, or creating stock option grant timing policies.
Potential Updates to Insider Trading Policies
The SEC’s proposed amendments do not precisely specify what types of information about company insider trading policies would need to be disclosed, though indications are that significant detail will be expected. The proposed rule contemplates that companies would provide detailed information to allow investors to assess the sufficiency of insider trading policies and procedures. Elaborating, the SEC explained:
“For example investors may find useful, to the extent it is included in the issuer’s relevant policies and procedures, information on the issuer’s process for analyzing whether directors, officers, employees, or the issuer itself when conducting an open-market share repurchase have material nonpublic information; the issuer’s process for documenting such analyses and approving requests to purchase or sell its securities; or how the issuer enforces compliance with any such policies and procedures it may have. Furthermore, the disclosure under proposed Item 408 could address not only policies and procedures that apply to the purchase and sale of the registrant’s securities, but also other dispositions of the issuer’s securities where material nonpublic information could be misused such as, for example, through gifts of such securities.”
Given the complexity and importance of insider trading policies, we believe companies should begin reviewing their policies before they must be described in SEC filings. Aside from 10b5-1 plan related issues, we note several issues that, in our experience, may need to be updated in company insider trading policies:
• Preclearance procedures – upcoming public and investor scrutiny may result in companies wishing to adopt preclearance procedures, or expand the scope of individuals covered by them, and may also occasion a reevaluation of issues like the length of time after pre-clearance during which a trade may be made.
• Scope of insider trading definitions – Especially in light of the SEC’s recent insider trading complaint against an employee of a biopharmaceutical company for trading in the stock of a competing company about which the employee did not have direct information, many companies are updating their definitions of insider trading.
• Gifts – some insider trading policies do not have clear guidance for whether, and when, gifts are subject to the policy’s restrictions. The SEC’s proposed rule specially calls out gifts as an area for disclosure.
• Definition of material non-public information (“MNPI”) – insider trading policies often include lists of examples of MNPI. Companies have recently been updating these lists to include issues of growing significance, such as cybersecurity and certain sustainability matters.
Formalization of Insider Trading Procedures
In addition to disclosure about insider trading policies themselves, the SEC’s proposed rule contemplates required disclosure about insider trading procedures. Many companies do not today have formal written procedures for insider trading. We anticipate that many companies will wish to adopt such procedures well in advance of any disclosure requirement, to provide an opportunity for multi-stakeholder review and to ensure that the procedures work well in practice before they are revealed publicly. Such procedures could include: a discussion of the availability of the insider trading policy, the type and frequency of training about that policy, the process for determining whether a potential trader possesses MNPI, the process for creating documentation about preclearance and other decisions, the process for creating and enforcing special blackout periods, the process for reporting and investigating potential violations, and principles guiding the consequences for violations.
Stock Option Grant Timing
Under the proposed rules, companies would be required to disclose in a new table any option awards to named executive officers or directors that are made within a certain timeframe within the release of material nonpublic information such as an earnings announcement. Such disclosure will likely lead to even more scrutiny regarding the timing of option grants. Companies should begin considering their practices now, and determine whether to adopt a formal policy regarding the timing of stock option grants, if they do not already have one. Such policies can help address the potential shareholder claims that can arise when stock options are granted during closed windows or just prior to the release of MNPI.
I blogged earlier this week about current focus areas for the SEC’s Office of the Chief Accountant. One of those focus areas is revenue recognition – and on the same day that Paul Munter published that year-end statement, the Enforcement Division also announced that it had charged a former NYSE-listed company and three former execs (the CFO, CAO, and Controller) with violations of the antifraud, reporting, books and records, and internal accounting control provisions of the federal securities laws. The company (which is now PE-owned) agreed to a $2 million civil penalty and a permanent injunction. The individuals are facing injunctions, disgorgement with interest, civil penalties and D&O bars.
The violations stemmed from an alleged revenue manipulation scheme and misreporting of key metrics, including adjusted EBITDA. Here’s one of the opening paragraphs in the complaint (also see this Cooley blog):
The scheme entailed entering a series of revenue adjustments to make it appear that ARA had beat, met, or come close to meeting various predetermined financial metrics, when in fact its financial performance was materially worse. Wilcox, Boucher, and Smith intentionally, recklessly, and negligently engaged in acts, practices, and courses of conduct related to those revenue adjustments that caused ARA to overstate its revenue, net income, and other financial metrics throughout this period.
Basically, according to the SEC, the defendants determined what revenue they wanted the company to have for a month or a quarter. Then, they had staff members make topside adjustments to revenue at various corporate clinic locations, until they met the predetermined number. This was at odds with the fact that the company’s internal controls called for any adjustments to be made based on actual patient payment details. The defendants allegedly applied various manipulations to arrive at their predetermined numbers, including use of a “contractual adjustments spreadsheet” as a “cookie jar” to find topside revenue when they needed it.
I don’t want to get too into the weeds because revenue recognition is complicated and I’m not an accountant, but it seems pretty obvious that it’s a no-no to decide what you want your revenue to be and then make adjustments to arrive at that figure. As I blogged just a few months ago in regards to an EPS enforcement action, the SEC really does frown upon earnings management, and it’s pretty likely that they’ll spot it.
In other news, the SEC also announced a $5 million whistleblower award this week, so there continues to be a pretty big incentive for folks who pick up on fraud to go to the Commission…
– Liz Dunshee
We’ve seen some notable numbers and stories around whistleblowers this year, including the multi-million dollar award that the SEC announced this week. While Frances Haugen and Tyler Shultz/Erika Cheung are currently top of mind, there was a time – 20 years ago! – when the world was abuzz about Sherron Watkins, who raised concerns internally at Enron and later testified before Congress about those warnings.
A recent Bloomberg article checks in on where the major Enron players are today, and reports that Watkins now teaches business ethics. Here’s a Houston news outlet with a couple of short video interviews in which Sherron shares what the company’s collapse looked like from the inside – and how it still feels like yesterday to her.
– Liz Dunshee
Dave blogged recently about the SEC’s approach to crypto enforcement – and a unique action to halt the effectiveness of a Form 10 registration statement that had been filed to register two tokens. Cornerstone Research also recently released updated data on cryto-related SEC enforcement actions through the third quarter of 2021. Here are key findings:
– In the first nine months of 2021, the SEC brought 19 enforcement actions related to cryptocurrency. Twelve were litigated in U.S. district courts, and seven were resolved within the SEC as administrative proceedings.
– Cryptocurrency enforcement activity in Q1 2021 was largely in line with the activity in Q1 2020. In Q2 2021, enforcement activity slowed down as senior positions were filled under Gensler. It bounced back in Q3 2021, with nine cryptocurrency enforcement actions.
– Since the first action in July 2013, the SEC has brought 94 cryptocurrency enforcement actions as of Sept. 30, 2021:
• 55 litigations
• 39 administrative proceedings
– Liz Dunshee
Yesterday, the SEC gave notice of an open meeting for next Wednesday, December 15th. There are a total of five items on the agenda – a very full meeting! Of most interest to this crowd are these two:
– Share Repurchase Disclosure Modernization: The Commission will consider whether to propose amendments to modernize share repurchase disclosure, including more detailed and more frequent disclosure about issuer share repurchases and requiring issuers to present the disclosure using a structured data language.
– Rule 10b5-1 and Insider Trading: The Commission will consider whether to propose amendments to Rule 10b5-1 and new disclosure regarding 10b5-1 trading arrangements and insider trading policies and procedures, as well as amendments regarding the disclosure of the timing of certain equity compensation awards and reporting of gifts on Form 4.
– Liz Dunshee
With the SEC continuing to signal that it will likely propose climate disclosure rules in the near future for US public companies, this is an interesting announcement:
A global alliance of leading financial institutions, investors and companies today aims to shape the future of ESG data in the ESG Book, a new central source of accessible and digital corporate sustainability information.
Developed by Arabesque, the ESG Book, which supports the 10 principles of the United Nations Global Compact, makes sustainability data more widely available, makes it comparable to all stakeholders, and allows businesses to create their own data through a digital platform. Allows you to become an administrator and provides a framework-neutral ESG. Provides real-time information and promotes transparency.
The ESG Book is available to all businesses, investors, standards setters, and other stakeholders and follows five principles based on its mission to create ESG data as a public good.
So, companies can submit the info that investors want to a publicly accessible, centralized platform – through which investors can analyze comparable data points? Arabesque’s president told Reuters that he aims for this platform to be the “Spotify of ESG,” but it sure sounds closer to Edgar. That said, the release identifies the founding group of supporters as including:
The World Bank’s International Financial Corporation, UNCTAD, Global Reporting Initiative, Bridgewater Associates, Swiss Re, HSBC, Deutsche Bank, HKEX, Allianz, Glass Lewis, Cardano Development, QUICK, Bank Islam, Goldbeck, Werte Stiftung, WBCSD, Climate Leadership Coalition, Climate Governance Initiative, Climate Policy Initiative, Climate Bonds Initiative, Responsible Jewelery Council, GeSI, and Arabesque.
In other words, none of the biggest asset managers have joined by name – yet – and the focus appears to be more Europe and emerging markets-based. (However, Bloomberg reported a couple of months ago that US investors are banding together on their own private project.)
It remains to be seen what level of participation this will garner on the corporate side, particularly in the US, and how it could change disclosure practices. The platform automatically maps data points to various established reporting frameworks – e.g., GRI, TCFD, SASB, and possibly others – so you only have to enter it once. You can also add info in “real time” outside of the annual reporting cycle (just like you can post your sustainability report and other voluntary info to your website at any time). This would all be subject to the liabilities that attach to voluntary disclosures rather than SEC filings.
Adding your sustainability disclosures to the cloud-based ESG library would probably make it easier for investors to find the data they’re interested in and track progress, right alongside info from other companies. But isn’t that what Exchange Act reporting is for?
– Liz Dunshee
I continue to team up with Courtney Kamlet of Vontier to interview women (and their supporters) in the corporate governance field about their career paths – and what they see on the horizon.
Our two latest episodes provide real-world insights on board diversity and board excellence:
– A 22-minute conversation with Patricia Lenkov about her journey to become the Founder & President of Agility Executive Search and author of the newly released book, Time’s Up: Why Boards Need to Get Diverse Now
– A 37-minute conversation with Bev Behan about founding Board Advisor and authoring several corporate governance books, including Becoming a Boardroom Star.
– Liz Dunshee
Yesterday, ISS announced its policy updates for next year. Here’s the policy document. Here are highlights from the 17-page executive summary:
Say-on-Climate Management Proposals: ISS is codifying the framework developed over the last year for analyzing management-offered climate transition plans put up for shareholder approval, incorporating feedback received during this year’s policy development process including from the Climate Survey. For transparency, page 4 of the policy lists the main criteria that will be considered when analyzing these plans (a non-exhaustive list).
Say-on-Climate Shareholder Proposals: “Say-on Climate” shareholder proposals emerged late in 2020 and increased in 2021, generally asking companies to publish a climate action plan and to put it to a regular shareholder vote. This policy establishes a case-by-case approach toward such proposals and provides a framework of analysis that will allow for consistency of assessment across markets. (See page 5 of the policy for factors that ISS will consider.)
Board Accountability on Climate: In response to the 2021 Climate Policy survey, high percentages of investor respondents supported establishing minimum criteria for companies considered to be strongly contributing to climate change. Therefore, ISS is for 2022 focusing on the 167 companies currently identified as the Climate Action 100+ Focus Group, and will recommend against incumbent directors – usually the appropriate committee chair in the first year – in cases where the company does not have both minimum criteria of disclosure such as according to the Task Force on Climate-related Financial Disclosures (TCFD) and quantitative GHG emission reduction targets covering at least a significant portion of the company’s direct emissions. (Page 12 of the policy lists the “minimum criteria” and more details.)
Board Gender Diversity: ISS adopted a U.S. board gender diversity policy in 2019, which went into effect in February 2020, for companies in the Russell 3000 or S&P 1500 indices. Based on institutional investor feedback in 2021, after a one-year transition period, the current U.S. board gender diversity policy will be extended to all companies covered under U.S. policy, taking effect beginning in 2023.
Board Racial & Ethnic Diversity: ISS’s previously adopted policy on board racial & ethnic diversity will go into effect this year. That means that for companies in the Russell 3000 or S&P 1500 indices, ISS will generally recommend a vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Unequal Voting Rights: Due to the strong support expressed through the survey results and roundtable discussions, ISS will remove the safe harbor for older companies with unequal voting rights. After a one-year grace period, starting in 2023, ISS will generally recommend against relevant directors at all companies with unequal voting rights, irrespective of when they first became public companies.
Shareholder Proposals on Racial Equity and/or Civil Rights Audits: ISS will take a case-by-case approach on shareholder proposals asking companies to conduct an independent racial equity and/or civil rights audit. Page 23 of the policy provides criteria for assessing whether such an audit would likely be beneficial to shareholders. Factors include whether the company has developed a process or framework for addressing inequalities internally, whether the company has engaged with stakeholders and made racial justice efforts, and whether the company has been the subject of recent controversy.
ISS also updated its policy on proposals authorizing additional common or preferred stock and on its burn rate calculations for equity plans. In addition, the proxy advisor updated its FAQs about compensation policies and the COVID-19 pandemic. We’ll be posting memos about the policy changes in our “Proxy Advisors” Practice Area.
– Liz Dunshee
Yesterday, the SEC Staff issued a statement that reminds companies of their disclosure obligations around the imminent LIBOR transition. This Stinson blog provides a summary:
The publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities will cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023. The statement discusses the generally preferred alternative rate – the Secured Overnight Financing Rate (“SOFR”).
The statement said the SEC staff encourages companies to provide qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past December 31, 2021 or June 30, 2023, as applicable, to provide context for the status of the company’s transition efforts and the related risks. For example, companies with material risk related to outstanding debt with inadequate LIBOR fallback provisions should consider disclosing how much debt will be outstanding after the relevant cessation date and the steps the company is taking address the situation, such as renegotiating contracts or refinancing the obligations. To the extent that a company has or is taking steps to identify and assess LIBOR exposure and mitigate material risks or potential impacts of the transition, the company should consider providing investors insight into what the company has done, what steps remain, and the timeline for further efforts.
According to the SEC, companies generally include disclosures about the LIBOR transition as part of risk factors, recent developments, MD&A and/or quantitative and qualitative disclosures about market risk. To the extent a company provides this disclosure in response to more than one disclosure requirement within a filing, the SEC encourages companies to consider providing a cross-reference or otherwise summarizing or tying the information together so an investor has a complete and clear view of the company’s plan for the discontinuation of LIBOR, the status of the company’s efforts, and the related risks and impacts. The SEC staff expects disclosures to evolve over time as companies provide updates to reflect transition efforts and the broader market and regulatory landscape.
– Liz Dunshee
