This Stinson blog highlights things to think about for the upcoming proxy season. Here’s an excerpt discussing a few things to watch for in D&O questionnaires:
NYSE listed issuers who have detailed questions in their D&O questionnaires which reflect the current version of Item 404 of Regulation S-K should not need to update their D&O questionnaires. It may be worthwhile for NYSE listed issuers to double check their audit committee charters to make sure the charters reflect other changes made by the rule amendments.
As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition or “grandfather” rule. While likely few compensation arrangements are still grandfathered, this should be confirmed before eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members or references to §162(m) in compensation committee charters.
Nasdaq issuers may wish to begin modifying their D&O questionnaires to prepare for disclosures for the Board Diversity Matrix which is discussed below.
Other reminders from the blog include double-checking whether you’re due for a say-on-pay frequency vote, complying with the new MD&A rules (listen to our recent webcast), complying with modernized property disclosure if you’re a mining registrant, using Inline XBRL, and potentially using the SEC’s amended shareholder proposal thresholds to evaluate whether a proposal must be included in the company’s proxy statement (part of the transition rule is still in effect).
As we look ahead to the upcoming annual reporting season, don’t forget about new Item 9C of Form 10-K, which was added under the “Holding Foreign Companies Accountable Act.” The Stinson blog points out that the HFCAA will affect your Form 10-K even if you’re not directly impacted by the law:
The HFCA Act became law on December 18, 2020. Among other things the HFCA Act requires the SEC to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report where that registered public accounting firm has a branch or office that:
– Is located in a foreign jurisdiction; and
– The PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.
We do not expect the HFCAA to affect the issuers we work with. We do note however that the SEC interim amendments requires companies subject to the interim rules to make certain disclosures in new Item 9C to Form 10-K captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.” As such issuers should include the Item and caption in their Form 10-K and indicate the item is not applicable where appropriate.
We’ve blogged about the HFCAA a few times – including back in March, when the SEC adopted interim final rules, and in late summer, when SEC Chair Gary Gensler talked about additional disclosure requirements for China-based companies.
This Gibson Dunn blog reports that the PCAOB recently adopted a final rule to implement the Holding Foreign Companies Accountable Act and govern PCAOB determinations about oversight of registered public accounting firms outside of the US. The rule requires SEC approval before it goes into effect. In testimony before the House Committee on Financial Services earlier this week, SEC Chair Gary Gensler said that he hopes the Commission can collect public comments and finalize it before year-end.
The blog explains what the HFCAA and the PCAOB rule require. It also notes that if another bill that was passed by the Senate this summer gets signed into law, it would reduce the time period for delisting foreign companies under the HFCAA to two consecutive years, instead of three years. Here are the 3 main takeaways:
1. China and Hong Kong – The Two Jurisdictions Where Registrants Currently Run the Risk of Delisting.
2. The PCAOB Affirmed That Its Analysis Applies to Distinct Legal Entities, Not Networks.
3. Commission-Identified Issuers Are Subject to Reporting and Disclosure Requirements.
See the full blog for details – as well as the memos in our “Audit Documentation” Practice Area. The SEC also just approved a Nasdaq rule change to adopt additional listing criteria for companies in jurisdictions without PCAOB inspection.
IR Magazine & Broadridge recently published survey results from 315 investor relations professionals about their views on retail investors. Here are 5 key findings:
1. Nearly three in 10 companies have seen an increase in retail investment in the past 12 months. More than a quarter have seen an increase from three years ago.
2. While 55 percent of IROs are happy with their current level of retail investment, just over a quarter would like to see a higher proportion of shares held by retail investors. But nearly half of IROs in companies with more than 20 percent retail investment would like to see such retail investors hold fewer shares.
3. Press releases and IR websites are the most effective ways for IROs to communicate with retail investors. A strong ESG story can promote retail shareholder loyalty.
4. The adoption of virtual AGMs has resulted in greater retail investor attendance.
5. The biggest challenge retail investors bring is a perceived lack of knowledge, compared with institutional investors. Communications is the biggest challenge for small caps.
A recent Squarewell Partners report (download required) of the 100 largest US & European companies by market cap confirms that things are getting back to “normal” in some ways. For example, 75% of big companies have increased their dividend to be paid out of 2020 earnings, compared to 2019. That includes nearly all companies within the Health Care & Materials sectors (in the Energy, Financials & Utilities sectors, however, nearly a third of companies have decreased their dividends, and buybacks have not yet returned to pre-pandemic levels).
Yet, when it comes to proxy season, “normal” might be less company-friendly than the “Before Times.” Support for shareholder proposals is up and support for management proposals and director elections is down. Here are some of the key takeaways:
– Half of the companies that held their AGM between 1 January 2021 and 30 June 2021 received at least one ESG-related shareholder proposal. Most companies targeted were in the US.
– Governance-related proposals made up over half of all ESG-related shareholder proposals filed, followed by social- and environmental-related proposals. Overall, 14 proposals were approved by shareholders, with environmental-related shareholder proposals receiving the highest average support at 44%.
– 31 of the 88 companies that held their AGM during the period under review saw at least one agenda item receiving 20% or more opposition, namely to a pay-related and/or director election proposal. More than half of the most contested votes took place at US companies.
– 38 companies had at least one director with 10% or more opposition, with several of these directors being held accountable by investors for overseeing pay/governance failures as committee members. For example, the chair of Rio Tinto’s sustainability committee received only 74% support due to an ongoing ESG controversy.
– 27 companies saw at least 10% opposition to their say-on-pay/remuneration report proposals, with the most common reason for opposition being a misalignment between pay and performance. Eight companies received at least 10% opposition to their remuneration policy proposals.
– ISS and Glass Lewis had recommended against less than half of the proposals where significant investor opposition was registered on director elections and/or pay-related proposals, confirming a trend that investors are applying their own guidelines which are stricter than the policies adopted by the two leading proxy advisors.
The bright spot for companies is that, despite the high-profile Exxon outcome, only nine companies were the subject of traditional activist campaigns this past year. Also, this report just covers very large companies. Smaller companies may not be facing these same pressures on shareholder proposals, but they do have their own issues.
If, as the IR Magazine/Broadridge survey suggests, people are worried about retail shareholders lacking the knowledge they need to make informed votes, and if people are also worried about index investors being conflicted due to their “universal ownership,” why not… find a way to give more power to your long-term shareholders whose portfolios are more concentrated in your company’s stock? This academic paper from GW Law prof Lawrence Cunningham proposes that important votes be subject to an additional condition: that they be approved by a majority of shares owned by “quality shareholders.”
The “MoQ” model would be “an additional separate vote of those with the longest holding periods and highest concentration.” Here’s more detail from the paper:
MoQ conditions should hold at least some appeal for all constituents—directors, shareholders judges and scholars. By adding a MoQ clause, a board would signal the corporate importance of long-term focused shareholders. Directors have long deployed many tools available to sculpt their shareholder base, from corporate communications to dividend policy. The MoQ adds a powerful new tool to the toolbox. The MoQs strategic and tactical appeal will vary with context, concerning the vote topic, board composition, shareholder makeup, and corporate financial condition.
Some shareholders might balk at first, indexers to guard their influence and transients to protect arbitrage options. But both cohorts still vote in the usual shareholder approvals, retaining power. And if the work of quality shareholders on the MoQ adds value, as fact patterns such as the Dell case suggest it likely would, all other shareholders benefit too. Individuals, still owning at least one-third of all public equity, and lately exerting considerable power, should also welcome the proposal.
On Thursday, the SEC posted notice & immediate effectiveness of an NYSE proposal to make Juneteenth National Independence Day an Exchange holiday. As Lynn blogged earlier this year, the exchanges were left to make their own determinations of operating status when Juneteenth was declared a Federal holiday. It was very short notice for them to do anything for the 2021 observance, but this WSJ article explains that SIFMA made a recommendation back in July that the exchanges would close on the holiday beginning in 2022.
Under this change to NYSE Rule 7.2, the Exchange will be closed on June 19th of each year going forward. If the holiday falls on a Saturday, the Exchange will be closed the preceding Friday – and if it falls on a Sunday, the Exchange will be closed the succeeding Monday. This rule change brings the number of NYSE market holidays to ten.
The rule is immediately effective – but may be temporarily suspended within 60 days if the Commission decides that it needs to take that action for the protection of investors or the public interest, and it would then institute proceedings to determine whether the proposal should be approved or disapproved. The rule doesn’t apply to other exchanges – they’ll have to propose their own amendments.
Juneteenth commemorates the day in 1865 when enslaved Black people in Galveston, Texas were finally informed they were free. It had been recognized by most states as a holiday before being declared a Federal holiday in June of this year. Check out this PracticalESG.com blog for ideas on how your company can observe the occasion next year.
To the jubilation of proxy statement drafters and voting tabulators everywhere, late last week, the SEC gave notice of an NYSE proposal to amend the definition of “votes cast” for items that require shareholder approval under NYSE Rule 312.07 (e.g., equity compensation plans, certain stock issuances). This White & Case memo explains (also see this Cooley blog):
The NYSE’s proposal would amend Section 312.07 of the NYSE Listed Company Manual to provide that a company must calculate “votes cast” on a proposal subject to that section “in accordance with its own governing documents and any applicable state law.”
Effectively, this means that the NYSE would change its current policy of requiring companies to count abstentions as votes “against” a proposal subject to NYSE rules – even when applicable state law would consider abstentions to have no effect on the outcome of the vote. The Exchange has observed that its current policy has historically caused confusion among listed companies, and the Exchange believes that this rule change will avoid any complications among issuers and shareholders when different voting standards are applied under the NYSE rule, a company’s governing documents, and/or applicable state laws. The rule change will also result in NYSE being consistent with Nasdaq in their treatment of abstentions.
The memo cautions that even if this rule change is approved, you’ll still have to carefully review disclosure about voting standards and ensure votes are properly tabulated in light of numerous standards under state law and companies’ governing documents.
There’s a 21-day comment period for the proposal, and the SEC will either approve or disapprove of the rule change within 45 days of publication in the Federal Register.
California Superior Court Judge Maureen Duffy-Lewis issued her ruling on September 28th on the parties’ respective motions for summary judgment in Crest v. Padilla (Cal. Super. Ct. Case No. 19STCV27561). In this case, the plaintiffs are seeking a judgment declaring that any and all expenditures of taxpayer funds to enforce and carry out the provisions of California’s female director quota law (SB 826) are illegal. SB 826 is codified at Sections 301.3 and 2115.5 of the California Corporations Code.
The basis for the plaintiffs’ claim is Art. I, Section 31 of the California Constitution which forbids the state from discriminating against, or granting preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.
Judge Duffy-Lewis denied both motions on the grounds that there are triable issues of material facts. While the fundamental question presented by the case appears to be legal, the ruling notes that each side provided with their moving papers “substantial amounts of extrinsic evidence” and that each side disputed facts presented by the other.
As this Cooley blog reports, Crest v. Padilla was the first complaint filed against California’s board gender diversity law, back in 2019. It’s framed as a “taxpayer suit.” There are several pending challenges to SB 826, as well as AB 979, which is the California statute that requires representation on boards from underrepresented communities.
On Friday, ISS announced the results of its 2021 benchmark policy survey. 159 investors responded – as well as 246 companies, directors, advisors and other company-related folks. Here are some of the highlights (see my blog on CompensationStandards.com for details about ESG metrics and other exec comp-related findings):
1. Racial Equity Audits: The survey evidences a philosophical split on these proposals. Almost half of investors chose “most companies would benefit” and almost half chose “it depends on company-specific factors.” About a tenth of investor respondents chose that most companies would not benefit from an independent racial equity audit. That percentage was higher for non-investor respondents. The case-by-case analysis approach was by far the most popular answer for non-investor respondents. Investors & companies said that involvement in controversies was a factor that could merit a recommendation in favor of a racial equity audit proposal.
2. Virtual-Only Meetings: When asked which practices would be considered problematic related to a company’s virtual-only meeting, the top three most concerning practices according to investor respondents were management unreasonably curating questions, the inability to ask live questions at the meeting, and question and answer opportunities not provided. Each of these practices were considered problematic by at least 90 percent of investors. The majority of investor respondents indicated that problematic practices related to virtual meetings could warrant votes against directors.
3. Pre-2015 Poor Governance Provisions: As time goes by, there’s less of a reason to distinguish between companies that went public prior to 2015 and were allowed to continue “poor governance provisions” – such as multi-class shares, supermajority voting requirements, and classified boards – and those that have gone public since then. A high percentage of investor respondents supported ISS revisiting this policy and considering issuing adverse director recommendations at any company that maintains these poor governance provisions. A little over half of non-investors answered the same way.
4. Recurring Adverse Director Recommendations: ISS’ current policy is to recommend against director nominees every year while certain poor governance provisions – such as supermajority vote requirements – are maintained. In some cases, the company has sought shareholder approval to eliminate supermajority vote requirements, but the proposal has failed (because it is hard to get the supermajority support). On this question, the most popular answer indicated by investors was for ISS to continue to recommend against directors every year there is not a management proposal on the ballot to reduce the supermajority vote requirement.
The most popular answer choice among non-investors was that a single try by the company to get shareholder support for a provision to remove the supermajority standard is enough. The second most popular choice among investor respondents was that if a company has tried and failed for several years to eliminate the supermajority vote requirement, ISS should stop recommending against directors. When asked how many years the company should offer the proposal, three years was the most popular answer choice.
5. SPACs & Proposals with Conditional Poor Governance Provisions: Current ISS policy is to evaluate SPAC transactions (business combination with a target company) on a case-by-case basis, with one of the main drivers being the market price relative to the redemption value. However, due to the mechanics of SPACs and considering SPAC investor voting practices over recent years, ISS is considering changing its policy to generally favor supporting the transaction. Responses on the survey showed that most institutional investors did not own SPACs. Among those who did, the response was split, but a preference not to change ISS’s policy received a slightly higher response.
ISS noted that it was seeing instances where shareholders were asked to approve a new governing charter with poor governance or structural features as a condition for a transaction to close. The proxy statements will commonly state that these closing conditions may be “waived” by the parties to the transaction if they are not approved by shareholders, but there is the risk that waiving the provisions would jeopardize the transaction. When asked what the best course of action was in this case, a strong majority of both investors and non-investors responded that ISS’s current policy was the right way forward: to support the transaction but make note of disapproval with any poor governance provisions.
Don’t miss our “Navigating ISS & Glass Lewis” panel coming up next Thursday, October 14th, at our virtual “Proxy Disclosure & Executive Compensation Conferences” – which runs October 13th – 15th. We’ll be discussing policy expectations, engagement do’s & don’ts, and more. You can still register – and anyone who has a paid subscription to any one of our sites gets a discount! Check out the agenda – 18 panels over 3 days.
