Particularly given regulators’ aversion to external auditor-provided tax services, this new study: “The Role of Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness” (full study available for purchase) is noteworthy. Among other things, the study found that companies preparing their own tax returns or having them prepared by a firm other than their auditor claim about 30% more aggressive tax positions than companies using their own auditor as the tax preparer, and Big 4 tax preparers in particular are linked to less tax aggressiveness when they are the auditor than when they are not the auditor.
As discussed further in this CFO.com article, the rationale is that the company’s external auditor has much more at risk (i.e. much more to lose) than either the company or another external preparer by taking an aggressive stance:
The study, based on data from S&P 1,500 companies, offers a rationale: “With the joint provision of audit and tax services, auditor preparers bear greater costs, relative to other preparer parties, if a position is overturned due to a tax audit and court action.” The study notes that auditors bear at least two types of risk that do not apply to other preparer types: (1) the risk of a financial reporting restatement due to an audit failure; and (2) reputation risk, in that an auditor’s work is more visible and sensitive to the firm’s leadership. In short, having more to lose than other preparers, auditors tend to be less aggressive in advancing tax-benefit claims.
The findings are worthy of consideration in the context of other concerns – primarily, auditor independence – that regulators have raised about the auditor’s provision of tax services.
Almost half of auditors’ 530 new going concern warnings for fiscal 2014 were issued relative to companies filing for an IPO rather than established companies, according to this recent MarketWatch post on 2015 filings. And the top two reasons auditors cite for giving such an opinion – “net losses since inception” or an “absence of significant revenues” – apply to pre-development stage companies. The post cites research that purportedly shows that over half of companies that filed for bankruptcy between 2000 and 2009 had received going concern warnings from their auditors the prior year.
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Exchanges Get Guidance on Sustainability Disclosure Standards
– Whistleblowers: Speak Now or Get a Smaller Piece
– Audit Committees: Comments to SEC Urge, At Most, Principles-Based Reporting
– Insider Trading: Holiday Card to Directors (With Compliance Reminder)
– Top 10 Mistakes in Selecting D&O Insurance
Not surprisingly (based on my own in-house experience), a positive corporate culture apparently boosts company performance (i.e., higher profits) over time, but company performance doesn’t translate to a positive corporate culture. That’s according to this WSJ article, reporting results from a recent study (abstract here) on the relationship between culture and sales at 95 auto dealerships over a period of six years. Companies that performed well financially reportedly scored low on employee surveys used to evaluate culture, and companies that showed no improvement in culture became less profitable over time.
CIOs/CISOs Pressured to Unleash IT Projects Prematurely
According to this recently published Trustwave Security Pressures Report, a concerning 77% of more than 1,400 IT security professionals worldwide (83% in the US) are pressured to unveil IT projects that aren’t security-ready.
Additional noteworthy key findings based on a late 2015 survey include:
Board Burden: 40% of respondents feel the most pressure in relation to their security program either directly before or after a board meeting – 1% higher than how they feel after a major data breach hits the headlines.
Skills Gap: Shortage of security expertise has climbed from the 8th biggest operational pressure facing security pros to the 3rd biggest – behind advanced security threats and adoption of emerging technologies.
Under Pressure: 63% of respondents felt more pressure to secure their organizations in 2015 compared to the prior 12 months, and 65% expect to feel additional pressure this year. Those numbers grew 9% and 8%, respectively, vs. last year’s report.
Moved to Managed: The number of respondents who either already partner or plan to partner with a managed security services provider rose from 78% in last year’s report to 86% this year.
See the report’s conclusions and recommendations aimed at tempering the pressures and enhancing security, and oodles of additional resources in our “Data Security” Practice Area.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Six Tips for Board Cybersecurity Oversight
– Small Business Administration Launches Cybersecurity Webpage
– Audit Committee Agenda: Non-GAAP Measures
– Factors That Characterize a World-Class Ethics & Compliance Program
– Top 10 Most Commonly Missed Proxy Statement Items
Nearly half of 550 companies worldwide surveyed in 2015 saw their directors meeting with investors in the past year, but North American companies had by far the lowest rate of director/investor interaction (26%, compared to e.g., Developed Asia at 81% and most other regions within the 50% – 60% range), according to BNY Mellon’s 2015 Global Trends in Investor Relations Survey.
Engagement highlights include:
The director most likely to participate in investor meetings is the lead director or board chair, although a corporate “chaperone” is usually still present – with 61% of IROs and 55% of management also in attendance.
Of the companies whose directors participated in investor meetings, most said such participation is standard company practice (54%), and most were prompted by investor request.
24% of companies reported having a written policy regarding interaction between directors and investors.
The most common topics for investor meetings with participation of directors are company strategy (82%) and management performance (50%).
21% that said they do not believe directors should be in direct contact with investors.
The number of companies that have strategies in place to communicate with key investors on corporate governance issues on a regular basis increased from 37% in 2013 to 46% in 2015. Those companies reported that the top issues addressed with key investors were board composition (76%), transparency and disclosure (71%), and remuneration (60%).
More than half of companies still don’t see ESG outreach as part of their investor strategy.
See also MoFo’s blog, which highlights results across various survey topics.
Survey: Strategic Assumption Concerns are Concerning
KPMG’s recently issued report on the board’s role in strategy simply provides more evidence of a trend toward the board’s greater and ongoing engagement with management, scrutiny and healthy challenge of strategic plans and underlying assumptions, and active participation in shaping strategy – from what was historically quite often a once/year cursory review and approval of the management-only developed strategic plan. The report is based on late-2015 roundtable input from more than 1,200 directors and senior executives across the country who shared their views on the board’s role in strategy in the context of increasing global volatility and uncertainty.
Among the noteworthy roundtable survey (of approximately 200 directors & C-suite executives) findings:
95% are either very or somewhat concerned that the high degree of uncertainty and volatility poses a significant threat to their company’s strategy.
78% are either very or somewhat concerned that management tends to use “more of the same” assumptions re: key factors and uncertainties in the external environment in setting strategy.
49% are only “somewhat satisfied” and 14% are not satisfied that management has an effective process to scan and monitor changes in the external environment on a regular basis in order to test the continuing validity of the critical assumptions at the core of the company’s strategy.
See the report’s Ten Recommendations for Strategy Engagement, this Accounting Today article, and my prior blogs on the board’s role in strategy:
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Revenue Recognition Standard: Implementation Benchmarking & Guidance
– SEC Enforcement Action Database Launched
– Cybersecurity: The Board’s Role
– Survey: It’s Time to Brief Directors on Related Party Transactions Standard
– Survey: Corporate Governance & Exec Comp Practices of Top 100 Companies
According to this Bloomberg article, SEC Chief Accountant Jim Schnurr told attendees at the recent “SEC Speaks” conference that the SEC will deem the views of the “FASB/IASB Joint Transition Resource Group for Revenue Recognition” (TRG) to be practical guidance for purposes of implementing the new standard – and will expect companies to adhere to those views despite the fact that the TRG’s views are not FASB or IASB authoritative pronouncements or standards.
Notwithstanding the fact that the release announcing the formation of the TRG – and other information on FASB’s website about the group – specifically disclaim the TRG’s issuance of any guidance, Schnurr reportedly stated: “From a practice point from my office, we would expect a registrant to follow the guidance that comes out of those deliberations’ of the TRG… ‘If a company chose to take a different approach’ from what the TRG concluded, ‘we would expect them to come in and talk to us about why they were not following’ what the TRG had found.'”
Among the noteworthy trends identified in this recent report – SEC Enforcement Activity Against Public Company Defendants: Fiscal Years 2010 – 2015 – from Cornerstone Research and NYU: In the context of increasing scrutiny and challenge of the constitutionality and overall fairness of its administrative proceedings, the proportion of actions the SEC brought as administrative proceedings more than tripled from 21% in fiscal 2010 to 76% in fiscal 2015.
Additional key findings and trends include:
The total number of SEC enforcement actions in fiscal 2015 represented a 7% increase compared to record-breaking fiscal 2014, and was 10% above the median for fiscal years 2010 through 2015. The increase was fueled by a record level of independent actions.
From fiscal 2010 to fiscal 2015, the majority of actions against public company defendants involved either Issuer Reporting and Disclosure or FCPA violations.
The total number of enforcement actions initiated by the SEC generally increased over the past six fiscal years; however, the number of actions against public company defendants remained relatively stable. During this period, the SEC initiated a median of 735 actions per year with the total number of enforcement actions trending upward beginning in fiscal 2014 to a record 807 actions in fiscal 2015.
In fiscal 2015, more than 80% of public company defendants settled concurrently with the filing of the action. Concurrent settlements in civil actions dropped substantially, while concurrent settlements in administrative proceedings increased.
Following the passage of Dodd-Frank in 2010, which enabled the SEC to seek monetary penalties against an array of defendants in administrative proceedings, the majority of large penalties and disgorgements imposed on public company defendants have occurred in administrative proceeding cases.
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– CEOs Claimed Almost Half of New Board Seats in 2014
– Board Approach to Strategy & Risk
– DOJ Compliance Counsel Controversy
– Board Risk Committee Considerations
– Audit Fee Disclosures
According to this recent WSJ article, 2015 reported earnings were 25% lower than pro forma results – the widest gap since 2008, when companies took a record amount of charges. S&P 500 EPS reportedly declined by 12.7% on a GAAP basis, compared to an increase of 0.4% on a pro forma basis.
Although the use of non-GAPP measures is not inherently wrong or bad (and in fact, used properly, can be integral to understanding a company’s period-over-period performance and future prospects), SEC Chair White and other regulators have recently communicated concerns about its misuse or potential to mislead notwithstanding compliance with the letter of the law. Just last week, Chair White reportedly reiterated the SEC’s scrutiny of this area – portending regulation that presumably would aim to curb perceived abuses or the potential to mislead without hampering the clarity that the use of non-GAAP measures can provide.
In December, Chair White cautioned corporate finance and Legal staff and audit committees to be more vigilant and thoughtful about the use non-GAAP measures in her keynote address at the 2015 AICPA conference:
Another financial reporting topic of shared interest and current conversation is the use of non-GAAP measures. This area deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices. Non-GAAP measures are allowed in order to convey information to investors that the issuer believes is relevant and useful in understanding its performance. By some indications, such as analyst coverage and press commentary, non-GAAP measures are used extensively and, in some instances, may be a source of confusion.
Like every other issue of financial reporting, good practices in the use of non-GAAP measures begin with preparers. While your chief financial officer and investor relations team may be quite enamored of non-GAAP measures as useful market communication devices, your finance and legal teams, along with your audit committees, should carefully attend to the use of these measures and consider questions such as: Why are you using the non-GAAP measure, and how does it provide investors with useful information? Are you giving non-GAAP measures no greater prominence than the GAAP measures, as required under the rules? Are your explanations of how you are using the non-GAAP measures – and why they are useful for your investors – accurate and complete, drafted without boilerplate? Are there appropriate controls over the calculation of non-GAAP measures?
And both SEC Commissioner Kara Stein and PCAOB Chair James Doty signaled their concerns about the use by companies and investors of non-GAAP performance-related information in last week’s open meeting to consider the PCAOB’s proposed 2016 budget.
4% of exchange listed companies were named in federal securities class action suits in 2015 – up from 3.6% in 2014 and 3.1% in 2013, and 11% more securities class action suits were filed in 2015 compared to the prior year. These are among the findings and trends identified in the most recent report – Securities Class Action Filings: 2015 Year in Review – from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.
Additional noteworthy findings include:
The Consumer Non-Cyclical sector again had the most filings in 2015. This sector is predominantly composed of Biotechnology, Healthcare, and Pharmaceutical firms, which collectively totaled 43 filings.
Approximately 84% of the 2015 suits were largely based on Exchange Act Section 10(b) and Rule 10b-5. That percentage has been relatively consistent over the last three years. About 15% of the suits filed were based on Securities Act Section 11 – compared to 14% in 2014 and 9% in 2013.
Virtually all of the complaints filed in 2015 alleged misrepresentations in financial documents, which is largely consistent with prior years. About half of the complaints filed in 2015 alleged false forward-looking statements. Only about 11% of those actions were based on a restatement of the financial statements, while 35% alleged violations of GAAP.
Filings against companies in the Financial sector were well below historical averages, declining from 26 in 2014 to 17 in 2015. For the first time since 2006, there were no filings against banks.
IPO activity fell from 207 in 2014 to 117 in 2015, but remained above post dot-com bubble levels.
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Computershare & AST Occupy 63% of Transfer Agent Market
– Survey: Financial Services Risk Management Practices
– Cybersecurity: Reporting to the Board
– Comprehensive Audit Committee Guide
– (Re)configuring Parent & Spin-Off Boards
Institutional investors will seek to “trust, but verify” the performance and governance of their portfolio companies in 2016, according to this recent Russell Reynolds report, which is based in large part on interviews with numerous asset managers, pension funds, shareholder organizations, proxy advisors and activist investors world-wide.
US-specific take-a-ways include:
There will be a focus on improving the quality of engagement between investors and boards, including through individual meetings between investors and board leaders.
Investors are pushing to have boards designate one or two directors as point people who will engage with investors meaningfully and appropriately about the board’s role in strategy development, executive compensation, and CEO succession planning.
Boards will start to look for more investor-savvy directors, whether from the investment community or from the ranks of current and former CEOs and CFOs who have dealt with investors regularly. At the same time, investors will be under pressure to improve the quality of their own engagement with boards—for example, by limiting “gotcha” questions.
Some very large institutional investors will push harder for regular (every third year) external board assessments, following the British and French models.
Board leaders, whether chairmen or lead directors, will see a new focus on their precise roles and responsibilities for board oversight of management (with requests that this be publicly disclosed).
Since the DOL has clarified fiduciaries’ ability to consider ESG factors (see this release), we expect to see more interest from all types of investors in disclosure of environmental and social risks.
See this related Forbesarticle and King & Spalding memo.
New Climate Disclosure Task Force
Late last month, the Financial Stability Board announced the initial membership of its industry-led task force on climate-related financial disclosures including four Vice Chairs to work alongside Task Force Chair, former NYC Mayor Michael Bloomberg – who currently serves as Chair of SASB and United Nations Secretary-General’s Special Envoy for Cities and Climate Change. Members include “data users” JPMorgan Chase and BlackRock and “data preparers” BHP Hilton and Air Liquide, as well as experts associated with Mercer, KPMG, S&P and HSBC. SASB director and former SEC Chair Mary Schapiro is identified on the Task Force website as Secretariat and Special Advisor to the Chair.
The Task Force, which met for the first time earlier this month, reportedly plans to deliver its first report re: current levels of disclosure and the scope of its work in March, and the second report suggesting voluntary disclosure guidelines by year-end.
See my earlier blog regarding this new Task Force.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Study: Experience With Board Gender Quota Increases Director Support
– FEI Disclosure Effectiveness Review: A Preview
– Survey: Progress Slowing on Board Gender Diversity
– Username/Password Breaches: Notification & Other Considerations
– Social Media & the Securities Laws
This paperdocuments the not insignificant psychological effects of M&A transactions on employees, which – left unaddressed – can correspondingly undermine productivity, realization of expected benefits from the transaction and shareholder value.
According to the paper, research shows that more than half of merger failures are due to failure to attend to the “people factors” – which are often neglected due to management’s focus on the myriad operational-related issues inherent in the merger process. While the percentage of mergers deemed to be “failures” varies depending on, e.g., the source and definition of what constitutes a failure, this paper asserts that most commentators agree that between 50% and 70% of mergers fail to achieve their objectives.
Psychological Impacts of “Merger Syndrome”
Anxiety – Employees face uncertainty about job prospects and impact on career
Social Identity – Employees lose their old organizational identity
Acculturation – Employees must adjust to a new culture and form new relationships
Role Conflict – Employees face uncertainty about where they stand in the post-merger organization
Job Characteristics– Employees must adjust to changes in their jobs as certain functions are changed to eliminate redundancies
Organizational Justice– Employees lose trust if the company is unfair or not transparent about who they promote or lay off
While each of these psychological issues and suggested antidotes are discussed in detail, the table on the last page does a nice job of summarizing each issue, its sources, predicted outcomes, and suggested management actions to avoid or mitigate the potential for undesirable consequences.
An Attack on the Hedge Fund Activism/Positive Long-Term Value Link
This recent paper investigates the association of hedge fund activism and long-term firm value, concluding that:
Positive long-term association between hedge fund activism and long-term firm value documented in prior studies is likely affected by selection bias – as activist hedge funds tend to target poorly performing companies.
Once such selection bias is incorporated into the analysis, evidence shows that companies targeted by activist hedge funds improve less in value after their campaigns than ex-ante similarly poorly performing control companies that are not subject to hedge fund activism – suggesting that the hedge fund activism decreases – rather than increases – a company’s long-term value relative to comparably situated non-targeted control companies.
Findings are consistent with the authors’ hypothesis that the ability of activist hedge funds to substantially influence a firm’s investment policy exacerbates a company’s “limited commitment” problem toward long-term value creation and stable stakeholder relationships. The “limited commitment” problem (discussed further in the paper) purportedly arises out of the inability of public shareholders vested with strong exit rights and exposed to informational inefficiencies to credibly commit to long-term investment strategies or engage in long-term cooperation with other firm stakeholders.
See also this noteworthy Short-Term Thinking infographic from the New York Times.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Director Exit Interviews
– Data Breach Derivative Suit Protection: Action Items
– How to Calmly Effect Emergency Succession
– Non-GAAP Disclosure Compliance Tips
– Redefining the Board’s Role in Strategic Planning
The seemingly positive SEC press release touting improvements in credit rating agency processes based on 2015 annual examinations (summary report) and reporting (annual report) notwithstanding, this NY Times article portrays the progress of the Big 3 rating agencies (S&P, Moody’s and Fitch) in particular in a much less favorable light based on a close read and analysis of the same underlying information contained in the SEC’s December 2015 reports.
By way of background, in August 2014, in response to the alleged role of flawed credit ratings on asset-backed and other securities in the financial crisis, the SEC adopted Dodd-Frank-mandated rules aimed at improving the quality of credit ratings by addressing, e.g., agency internal controls, conflicts of interest, procedures designed to protect the integrity of rating methods, and their transparency/accountability.
Contrary to the outwardly reassuring picture conveyed by the SEC release, the NY Times recounts these concerning findings from the SEC reports:
Two of the larger companies “failed to adhere to their ratings policies and procedures, methodologies, or criteria, or to properly apply quantitative models.” These failures occurred on numerous occasions.
Errors seem common. Because of a coding mistake, a structured finance deal made by one larger ratings agency didn’t reflect its actual terms. It took some time for this error to be detected and when it was, the transaction’s rating took a substantial hit.
A larger ratings agency employee noticed an error in the calculations used to determine certain ongoing ratings, but in subsequent publications, the company disclosed neither the mistake nor its implications. This ratings agency also inaccurately described the methodology it used to determine some of its official grades.
The analysts at one larger ratings agency learned of flaws in outside models used to determine ratings. But no one at the company assessed the impact of the errors or told others about them as required under its procedures. The SEC also identified instances where substantive statements made by this agency in its rating publications directly contradicted its internal rating records.
Policies and procedures at one larger credit ratings agency did not prevent “prohibited unfair, coercive or abusive practices.” As a result, the agency gave an unsolicited rating to an issuer that was “motivated at least in part by market-share considerations.” Such a practice would allow an agency to gain an issuer’s business by offering a better rating than a competitor.
At the same agency, two grades assigned by ratings committees were changed at the urging of “senior ratings personnel.” This not only violated the unnamed firm’s policies and procedures, but also resulted in a misapplication of the company’s ratings criteria.
Consumer Federation of America’s Micah Hauptman made these remarks: “These failures are eerily familiar, right? Sales and marketing concerns influencing the production of ratings. Credit ratings agencies that didn’t have policies and procedures in place to manage issuer-pay conflicts. These are the exact same deficiencies that caused the 2008 financial crisis, and that the Dodd-Frank Act was supposed to address.”
See these August 2014 statements from SEC Chair White and Commissioner Stein upon adoption of the new credit agency requirements.
Credit Rating Agencies: Random Selection
Under Presidential candidate Bernie Sanders’ plan to reform Wall Street, companies would no longer be allowed to select their rating agency:
Reforming Credit Rating Agencies
We cannot have a safe and sound financial system if we cannot trust the credit agencies to accurately rate financial products. And, the only way we can restore that trust is to make sure credit rating agencies cannot make a profit from Wall Street. Investors would not have bought the risky mortgage backed derivatives that led to the Great Recession if credit agencies did not give these worthless financial products triple-A ratings – ratings that they knew were bogus. And, the reason these risky financial schemes were given such favorable ratings is simple. Wall Street paid for them. Under my administration, we will turn for-profit credit rating agencies into non-profit institutions, independent from Wall Street. No longer will Wall Street be able to pick and choose which credit agency will rate their products.
Senators Al Franken (D-Minn.) and Roger Wicker (R-Miss.) reportedly offered a proposed amendment during the deliberation of Dodd-Frank to effect random assignment of rating agencies to companies – with an incentive for more business based on ratings accuracy, but the proposal morphed into a study. The two since have continued to push for reform.
Moody’s Evaluation of Cyber Risk: Credit Rating Impacts
In this podcast, Christian Plath, VP – Corporate Governance Analyst at Moody’s, discusses the credit rating impacts associated with companies’ cyber risks with reference to Moody’s recent cyber risk report (see this overview), including:
– How has Moody’s view of cyber risks vis a vis its credit analysis evolved over the past few years?
– How does Moody’s evaluation of cyber risk in its analysis differ from its evaluation of other types of risks – if at all?
– What can companies do to mitigate the potential for cyber risk to adversely affect their rating?
– Could a lack of preparedness or an acute vulnerability for a cyber attack ever be a justification to downgrade an issuer?
Ongoing challenges to the constitutionality of the SEC’s administrative proceedings ranks at the top of Baker Hostetler’s informative Top 10 list of SEC Enforcement Highlights of 2015.
According to the latest Cornerstone report, the SEC reportedly filed 76% of its enforcement actions against public companies as administrative proceedings in 2015 – more than triple the number and percentage of actions filed as administrative proceedings since 2010. This controversial issue – namely, the Appointments Clause constitutionality of the appointment of the arguably “inferior officer” administrative law judges who preside over the administrative proceedings, and the related constitutionality of the proceedings themselves – simply refuses to go away pending definitive resolution by the courts.
Here is the complete Top 10 list:
SEC Administrative Proceedings Challenged as to Constitutionality
SEC Claims Against Compliance Officers
Policing Manipulative High-Frequency Trading
First SEC Action to Enforce Cybersecurity Policies
SEC Presses Insider Trading Actions With Mixed Success In Post-Newman Era
SEC Charges Private Equity Giant With Misallocating Broken Deal Expenses
SEC Brings Enforcement Actions Over “Spoofing”
CFTC Brings Action against “Flash Crash” Trader
SEC Actions Protecting Whistleblowers
First Circuit Court of Appeals Vacates SEC Order Not Based on “Substantial Evidence”
See also the OIG’s recently issued final report of investigation into allegations of bias on the part of the SEC’s ALJs – concluding that there is no evidence to support the allegations.
Is the Yates Memo Unconstitutional?
This recent Corporate Counsel article authored by Paul Hastings Paul Monnin and Eric Stolze – Everything Old Is New Again: Why the Yates Memo is Constitutionally Suspect – does a convincing job of pointing out the several aspects and implications of the DOJ corporate cooperation policies espoused by the September 2015 so-called Yates Memo that raise potential constitutionality issues. Aside from potential constitutional challenges, the memo identifies the not unlikely adverse effects of the policy on internal corporate dynamics. It’s definitely worth a read.
See Broc’s and my earlier blogs on the Yates Memo and our oodles of memos about it in our “White Collar Crime” Practice Area.
Marsh: Cyber Insurance Trends
In this podcast, Marsh Cyber Practice leader Tom Reagan discusses key cyber insurance trends in the context of Marsh’s recent benchmarking report, including:
– Can you describe the overall trends in frequency of acquisition of cyber coverage?
– What are the top reasons companies are purchasing cyber coverage?
– What are the overall trends in terms of coverage limits?
– Are there any industry-specific trends?
– Can you describe the current state of knowledge – or perhaps confusion – about cyber insurance coverage?
– What are the overall pricing and insurance market trends?
– Is there anything companies can do to better position themselves before they seek to acquire or renew coverage?
ESMA’s (European Securities and Markets Authority) follow-up analysis of the proxy advisory industry’s self-regulatory code of conduct, aka, Best Practice Principles for Providers of Shareholder Voting Research and Analysis, found that although the industry is “moving in the right direction,” the Best Practice Principles Group (composed of ISS, Glass Lewis, Manifest Information Services Ltd, PIRC Ltd, and Proxinvest) should focus on: (i) improving its own governance – including the transparency of the group and its internal structure and the degree to which the BPP would appear to be workable from a practical point of view, and (ii) further clarity and transparency around the monitoring process it conducts to evaluate the effectiveness of the BPP – including any changes to the BPP resulting from its self-monitoring process or new market developments.
Conclusion Regarding Governance Approach
To summarise, ESMA’s expectations in relation to the governance of the BPP are to date partly fulfilled. While the drafting phase met ESMA’s expectations, both in terms of structure and process, there is room for improvement and open issues to be resolved in a number of other areas related to the on-going work which needs to be carried out to ensure the successful evolution of the BPP.
As for the BPPG’s structure and independence, it can be recalled that in its Final Report ESMA indicated that the industry committee was expected to be transparent about its composition and status, including the selection of its chair. While ESMA considers that the BPPG fulfilled these expectations regarding the drafting process, it highlights that the on-going monitoring work should also be based on a clear and sound governance structure.
Regarding the BPP being workable, the principles and guidance provided by the BPP are clear and the comply-or-explain system is widely understood as the most effective means to signal compliance with self-regulatory codes. However, signatories’ compliance statements do not always clearly point out when elements of the BPP framework are not complied with nor do they highlight the reasons for non-compliance or alternative practices applied
As for the monitoring framework, ESMA considers that it is not at this stage possible to draw a final conclusion as some developments are not yet completed. A feedback mechanism has been set up and the structure of a comparative framework established, although neither had been used at the closing of ESMA’s review in October 2015. The BPPG has announced that it will undertake a biannual review; however, there are no details available on this to date. ESMA encourages the BPPG to provide more information on these initiatives and to take them forward as substantively as possible in order for stakeholders to have confidence in the role of the BPP in addressing the areas identified in ESMA’s Final Report.
UK Group Aims to Improve Investor Compliance with Stewardship Code
The UK’s Financial Reporting Council (FRC) announced plans to evaluate institutional investor compliance with the Stewardship Codeand report on its findings publicly beginning in July 2016. The Stewardship Code, directed at institutional investors with holdings in UK-listed companies and – by extension, to their service providers such as proxy advisors – purports to establish areas of good practice to which investors should aspire, and operates on a comply-or-explain basis.
The FRC indicates that the quality and quantity of stewardship has improved over the past five years – but not consistently and transparently. The objective of the new evaluation scheme is to improve signatories’ reporting of their stewardship activities against the principles of the Code.
Stewardship and the Code
1. Stewardship aims to promote the long term success of companies in such a way that the ultimate providers of capital also prosper. Effective stewardship benefits companies, investors and the economy as a whole.
2. In publicly listed companies responsibility for stewardship is shared. The primary responsibility rests with the board of the company, which oversees the actions of its management. Investors in the company also play an important role in holding the board to account for the fulfillment of its responsibilities.
3. The UK Corporate Governance Code identifies the principles that underlie an effective board. The UK Stewardship Code sets out the principles of effective stewardship by investors. In so doing, the Code assists institutional investors better to exercise their stewardship responsibilities, which in turn gives force to the “comply or explain” system.
4. For investors, stewardship is more than just voting. Activities may include monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration. Engagement is purposeful dialogue with companies on these matters as well as on issues that are the immediate subject of votes at general meetings.
5. Institutional investors’ activities include decision-making on matters such as allocating assets, awarding investment mandates, designing investment strategies, and buying or selling specific securities. The division of duties within and between institutions may span a spectrum, such that some may be considered asset owners and others asset managers.
6. Broadly speaking, asset owners include pension funds, insurance companies, investment trusts and other collective investment vehicles. As the providers of capital, they set the tone for stewardship and may influence behavioural changes that lead to better stewardship by asset managers and companies. Asset managers, with day-to-day responsibility for managing investments, are well positioned to influence companies’ long-term performance through stewardship.
7. Compliance with the Code does not constitute an invitation to manage the affairs of a company or preclude a decision to sell a holding, where this is considered in the best interest of clients or beneficiaries.
See this robust listof organizations that have published a statement of commitment to the UK Stewardship Code, including these statements from BlackRock,Vanguard, ISSand Glass Lewis.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Report: Steady Rise in Voluntary Audit Committee-Related Disclosures
– Guide to Pro Forma Financial Information
– IIA Calls on SEC to Mandate Internal Audit Function
– Compliance Officers Call for SEC Enforcement Guidelines
– Study Estimates Almost 20% of Directors Nearing Retirement