In response to this new GAO report on board gender diversity, Rep. Carolyn Maloney (D-NY) sent a letter to SEC Chair White earlier this month urging amendments to the proxy statement rules to require that companies disclose each board nominee’s gender, race, and ethnicity – as was proposed by nine large public pension funds in a March 2015 petition to the SEC.
That petition seeks this amendment to Item 407(c)(2)(v) of Regulation S-K (proposed new text underlined):
Describe any specific minimum qualifications that the nominating committee believes must be met by a nominating committee-recommended nominee for a position on the registrant’s board of directors, and describe any specific qualities or skills that the nominating committee believes are necessary for one or more of the registrant’s directors to possess. When the disclosure for this paragraph is presented in a proxy or information statement relating to the election of directors, these qualities, along with the nominee’s gender, race, and ethnicity should be presented in a chart or matrix form.
The petitioners describe the current diversity disclosure requirement (Item 407(c)(2)(vi)) of Regulation S-X) as inadequate to determine racial and ethnic and even gender diversity in certain cases, but view it as complementary to their suggested approach.
Here are the key findings of the GAO study, which was prompted by Rep. Maloney’s request in May 2014:
In 2014, women comprised about 16% of board seats in the S&P 1500 – up from 8% in 1997
Even if equal proportions of women and men joined boards each year beginning in 2015, it could take more than four decades for women’s representation on boards to be on par with that of men’s.
Even if every future board vacancy were filled by a woman, the GAO estimated that it would take until 2024 for women to approach parity with men in the boardroom.
The GAO identified various factors that may hinder women’s increased representation among directors. These include boards not prioritizing recruiting diverse candidates; few women in the traditional pipeline to board service—with CEO or board experience; and low turnover of board seats
Most stakeholders interviewed supported improving SEC disclosure requirements on board diversity.
The U.S. lags behind other industrialized nations, including Australia, Canada, the UK, Germany and Norway – where serious, concerted efforts have been made to address discrimination against women in the board room.
Among the potential strategies identified in the report for increasing board gender diversity in addition to expanded disclosure requirements are:
– Requiring a diverse slate of candidates to include at least one woman
– Setting voluntary diversity targets
– Expanding board searches beyond the traditional pool of CEO candidates
– Expanding board size to include more women
– Adopting term or age limits to address low turnover
– Conducting board performance evaluations
Rep. Maloney is a senior member of both the House Financial Services Committee (where she serves as Ranking Member of the Subcommittee on Capital Markets) and House Oversight and Government Reform Committee, and Ranking House member of the Joint Economic Committee.
Webcast: “Pat McGurn’s Forecast for 2016 Proxy Season”
Tune in tomorrow for the webcast – “Pat McGurn’s Forecast for 2016 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS to recap what transpired during the 2015 proxy season and what to expect for 2016. Please print this deck in advance…
The SEC is closed today due to the weekend snow storm. See Broc’s earlier blog for the filings impact.
Board gender diversity improved among Fortune 1000 companies on the 2020 Women on Boards’ recently released 2015 Gender Diversity Index. The GDI’s 842 companies consist of the Fortune 1000 companies that remain active since the organization’s tracking began in 2011 based on the 2010 Fortune 1000 list.
Key findings of this year’s report include:
Women now hold 18.8% of board seats – an increase from 17.7% in 2014 and 14.6% in 2011. This compares to 17.9% of board seats on the 2015 Fortune 1000 list – a lower percentage than the GDI Index due to the fact that the majority of new companies are smaller and smaller companies have less gender diverse boards, as well as the fact that companies that drop off the GDI (due to, e.g., M&A, bankruptcy) tend to have one or no women.
Women gained 75 board seats in 2015 – an increase from 52 board seats gained in 2014.
Number of Winning “W” Companies (greater than 20%) has increased to 45%, compared with 40% last year. The number of Zero “Z” Companies (no women) continues to decline, to 9% this year, compared with 11% in 2014.
Percentage of women on boards has increased in all sectors, but five sectors have increased to over 20%: Consumer Defensive, Financial Services, Healthcare, Technology, and Utilities.
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
A joint Nasdaq/US Chamber of Commerce survey of 155 public companies regarding their interactions with ISS and Glass Lewis during the 2015 proxy season revealed that only 25% of companies believed the proxy advisor carefully researched and took into account all relevant aspects of the particular issue on which it provided advice, and only 38% of companies believe that their input into the proxy advisor’s recommendations (to the extent provided) had any impact.
Additional survey results include:
94% of companies had a proxy advisor make a recommendation on a matter in their proxy statement.
Companies asked advisory firms to provide input into the recommendation 47% of the time, and advisory firms permitted that input 53% of the time. As noted, only 38% of companies believe that input had any impact on the final recommendation.
For companies seeking input, companies reported a wide spread in the amount of time the advisors granted them to respond – anywhere from one hour to a month. 24 to 48 hours seemed most common.
For companies that believe they had insufficient time to respond, only 26% expressed their dissatisfaction to the advisory firm and portfolio managers.
More than half of companies (53%) notified the proxy advisor when it relied on inaccurate or stale data to make a recommendation. 43% of companies notified portfolio managers. No companies reported bringing the issue to the attention of the SEC.
38% of companies surveyed reached out to proxy advisors to pursue opportunities to meet and discuss proposal issues. 60% of companies’ outreach resulted in a meeting with the advisor.
20% of companies formally requested previews of advisor recommendations. About half (48%) reported that the advisor accommodated the request. Again, companies reported a wide spread of one day to one month in the time between the preview and the recommendation, with 1 – 2 weeks seeming most common.
84% of companies monitor proxy advisors’ reports for accuracy and reliance on outdated information.
13% of companies took steps to verify the nature of proxy advisor conflicts of interest, and even fewer (6%) reported finding significant conflicts during the current proxy season. While affected companies uniformly notified proxy advisors 100% of the time when the companies discovered apparent conflicts, none notified the SEC.
78% of companies have some form of year-round, regular communication program with institutional investors.
The SEC is closing at noon today due to the expected snow storm. See Broc’s earlier blog for the filings impact.
Congressman Questions SEC on Proxy Advisor Accountability
As discussed in this release, at an October 2015 Capital Markets and Government Sponsored Enterprises Subcommittee hearing: Oversight of the SEC’s Division of Investment Management, U.S. Rep. Ed Royce (R-CA) questioned SEC Director of the Division of Investment Management David Grim on proxy advisor accountability, and suggested that the SEC should be engaging in formal rulemaking on proxy advisors as opposed to simply issuing a staff legal bulletin – as was the case with SLB 20.
Here is a key excerpt:
Following up on the staff legal bulletin on proxy voting that Chairman Garrett and Mr. Huizenga raised earlier: Should proxy advisory firms not be held to the same sort of accountability on corporate reporting and transparency as the SEC requires of the publicly traded companies that they advise on?” continued Rep. Royce.
“With respect to proxy advisory firms and the guidance that the staff did issue, I think it was focused on addressing two important issues as a general matter. One is, with respect to the proxy advisory firms themselves, doing what we can to encourage good disclosure of material conflicts of interests by those proxy advisory firms. The second focus of the guidance was on investment advisors and how they use proxy advisory firms, making sure that their oversight of the proxy advisors is robust and appropriate,” replied Grim.
“I saw the bulletin, one of the things it brought to mind was whether or not we shouldn’t instead be having the Commission have a formal rulemaking on this. And I say it for these reasons: when we get to this question of what are the standards of performance, we’ve got a situation where you’ve got two entities, and they dominate here clearly over 90% of the market, and on top of it have a situation where their reports, I would think, would be subject to public scrutiny, after those reports are prepared. But we don’t have that. So I think taking it higher than a staff legal bulletin and taking it to basically a question of rulemaking on this by the Commission is something I would suggest,” continued Rep. Royce.
As a senior member of the House Financial Services Committee, Royce sits on two Subcommittees: Capital Markets and Government Sponsored Enterprises and Housing and Insurance.
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:
– Crisis Management Planning in 5 “Easy” Steps
– Government Investigations Disclosure: Decision-Making Considerations
– Cyber Insurance in a Nutshell
– Study: Director Appointment Trends
– Board Cybersecurity Oversight: Questions to Ask
Among the noteworthy aspects of the PCAOB’s 5-year strategic plan that was recently approved are its list of accomplishments and progress measures since 2012 and enhanced going-forward strategies relative to its Audit Committee Outreach initiative, which supports one of its principal objectives to “make a positive difference in the market for audit services and advance trends for quality financial reporting”:
Actions Taken since November 2012
Developed materials, such as Audit Practice Alerts Nos. 10, 11, 12, 13, summary reports on inspections observations on internal control over financial reporting audits, triennial inspections, engagement quality review, and risk assessment to engage audit committees in areas of common interest.
Included focused guidance to audit committees in inspection reports, general reports and audit alerts on using the reports and alerts.
Engaged the SAG, IAG and other groups, in discussion to further explore areas of common interest, including an extended discussion at the May 2013 SAG and October 2014 IAG meetings.
Engaged small firm auditors through the Forums on Auditing in the Small Business Environment on the relationship between the auditors and audit committees.
Monitored certain non-U.S. regulators’ respective plans for audit committee outreach initiatives and results.
Enhanced participation by Board members and staff in outreach events focused on audit committee members.
Solicited views and began evaluating feedback from certain audit committee members on how the Board may improve the usefulness of its publicly issued inspection reports.
Issued a communication to audit committees — Audit Committee Dialogue – the first in a series intended to provide insights from inspections of public company auditors that may be helpful to audit committee members in their oversight of auditors.
While the PCAOB admittedly (see PCAOB Chair Doty’s speech) doesn’t oversee audit committees and (appropriately) claims to be cautious about not adding to their “burden,” the outreach efforts both proactively and responsively effect awareness and education and calls for insights from audit committees to assist in their robust oversight obligations, which is a laudable objective.
See KPMG’s Audit 2020 survey report highlighting how technology and the proliferation of data and analytics are (or should be) transforming the audit profession without compromising the fundamental needs for audit quality and accuracy.
Audit Committees: Unfair Scrutiny?
Particularly noteworthy and surprising in SEC Chair White’s and Chief Accountant Jim Schnurr’s addresses at the recent annual AICPA Conference were the sweeping concerns they expressed about audit committee workload, composition, and performance of oversight responsibilities.
Among other things, the criticisms aimed at increasing workload and purportedly corresponding diminishing effectiveness seem unwarranted in the context of the seemingly limitless direct and indirect regulatorily-mandated duties and obligations imposed by SOX, securities laws, NYSE and Nasdaq audit committee-related listing standards and PCAOB standards (among others) – presumably with more on the way (e.g., Audit Committee Disclosure, Audit Quality Indicators).
See this Akin Gump post – and this post and article from the WSJ.
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:
– Cyber Insurance Tips
– Survey: Most CAE’s Report Functionally to Audit Committee
– Startup Board Mistakes
– EU Audit Reforms: Impacts on US Companies
– Compliance Officer-Whistleblowers Raise Concerns
The Financial Stability Board (FSB) announced that an industry-led task force – to be chaired by SASB Chair and former NYC Mayor Michael Bloomberg – will be developing recommendations on voluntary comparable climate-related risk disclosure standards for companies to use with investors and other stakeholders. The work will be conducted in two stages – with the aim of making specific recommendations for voluntary disclosure principles and leading practices by the end of 2016.
Per the release, the wide range of existing disclosure schemes relating to climate or sustainability illustrates the need for consensus on what constitutes effective disclosure. The task force – to be composed ultimately of up to 30 private sector senior technical experts from preparers and users of company risk disclosures, as well as risk analysts – will consider the work of other groups related to effective disclosures and will conduct public outreach during the disclosure development process.
SASB’s December newsletter claims that climate-related issues are reasonably likely to have material impacts in 72 of 79 SICS industries (or 51 of 57 industries for which it has already issued standards) – representing 93% of U.S. equities by market cap. That being the case, CEO and Founder Jean Rogers notes that investors realistically can’t simply divest themselves of those stocks that pose a risk in order to mitigate the effects of climate change; rather, investors need sufficient data about the risks so as to create a responsive investment strategy.
Bloomberg also serves as the United Nations Secretary-General’s Special Envoy for Cities and Climate Change.
See this WSJ article, “Business Supports Climate Deal With Varying Degrees of Enthusiasm,” and additional resources in our “Climate Change” Practice Area.
CalPERS Steps Up Climate Change Engagement
Armed with the results of a recent study that identifies carbon-intensive companies in addition to energy, CalPERS reportedly plans to begin engaging with more companies in its portfolio on climate change. CalPERS’ Investment Director of Global Governance Anne Simpson said that the study completed earlier this year showed that fewer than 100 companies in its $300 billion portfolio were responsible for half of its carbon dioxide emissions, including companies in the construction and materials, basic resources, travel and leisure, chemicals, and food and beverages sectors.
This study means that we can be laser-focused on where we take our engagement,” CalPERS’ Investment Director of Global Governance Anne Simpson said on the sidelines of the Paris climate conference. “We want the underlying companies in our portfolio to be aligned with the transition to a low-carbon economy.”
See also this joint CalPERS and CalSTRS climate change fact sheet, and CalSTRS’ supporting statement on the draft release of the Paris Agreement under the United Nations Framework Convention on Climate Change as part of the Conference of the Parties in France.
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:
– Relationship Between Auditor Tenure & Skepticism
– Disclosure Requirements: Auditor Resignations or Dismissals
– Director Candidates: Background Checks
– Automotive Industry Launching Cybersecurity ISAC
– Survey: Ethics & Compliance Training
The CFA Institute’s recent, creative online forum – “Executive Pay Disclosure in the Say-on-Pay Era” – is a convenient way for practitioners and boards to access the views of key, seasoned stakeholders in executive compensation engagement and disclosure.
In the forum, ISS’s Carol Bowie, Apache director & former Compensation Committee Chair Chip Lawrence, Covington & Burling’s Keir Gumbs, Towers Watson James Kroll, Prudential’s Peggy Foran and NIRI’s Ted Allen weigh in on a series of practical questions posed by CFA Institute Moderator, Matt Orsagh including:
What do investors want from the CD&A section of the proxy statement?
What are some of the most significant improvements you have seen in the CD&A over the past 5–10 years? Please highlight some best practices that investors have found helpful.
What is the state of engagement around executive compensation between companies and investors? How has increased engagement improved the CD&A?
Re: engagement – who should be involved in the process from a companies point of view? At what point does the compensation committee speak with investors about compensation issues?
What process do issuers go through in creating a strong CD&A — who is involved, what is the timeline?
For small-cap and mid-cap companies with limited resources to devote to the CD&A, what are some of the most important things to focus on?
Is the CD&A all about “say on pay” these days or are there other substantive issues at play?
Are there any nascent compensation issues you expect to grow in importance this proxy season or in coming years?
See Matt’s blog about the forum and the CFA Institute’s CD&A Template.
Compensation Peer Group Analytics
Audit Analytics’ recent analysis of Russell 3000 executive pay peer groups revealed these and other interesting findings:
– Notwithstanding the fact that pay benchmarking peers usually include close competitors, companies of similar size and stature, regional companies, etc., 12 of the 13 companies most frequently named as a peer by others (at least 44 times) are considered manufacturing companies according to their SIC codes, and all are mature – with more than half having been public since at least 1965.
– Ten companies listed 100 or more peers (one company listed 366 peers), whereas the typical peer group for this index consists of 17 peers:
– Some companies don’t use any outside peers or other benchmarks.
– The most frequently cited peer company, 3M Company, disclosed in its March 2015 proxy statement the following compensation peer group selection factors:
Peer companies are monitored regularly by the same market analysts who monitor the performance of 3M (investment peers); and/or
Peer companies have similar business and pay models, market capitalization (based on an eight-quarter rolling average), and annual revenues.
Webcast: “Proxy Drafting – Mid-Cap & Smaller Company Perspective”
Tune in tomorrow, Wednesday, January 20th for the webcast – “Proxy Drafting: Mid-Cap & Smaller Company Perspective” – to hear Gunderson Dettmer’s Richard Blake, Denbury Resources’ Sarah Wood Braley, Covington & Burling’s Keir Gumbs, KBR’s Adam Kramer and JetBlue Airways’ Eileen McCarthy provide practice pointers on what approaches to preparing the proxy for mid-cap & smaller companies work best. Please print these “Course Materials” in advance.
FERF & EY recently released the results of their joint Disclosure Effectiveness study, reflecting the survey input of more than 120 executives from various industries – supplemented by interviews of key stakeholders in the financial reporting process such as preparers, investors, audit committee members and legal counsel.
Key findings include:
Almost 75% of respondents are taking action to improve their financial reporting.
The three key focus areas are: disclosing material information and eliminating immaterial information (80%), reducing redundancies and using more cross-referencing (77%), and eliminating outdated information (70%).
Disclosure effectiveness initiatives are predominantly driven by management teams who have questioned the clarity and readability of financial communications. However, a number of other important catalysts were cited – including SEC and FASB disclosure effectiveness initiatives.
Areas that companies have improved the most in their 10-Ks include the MD&A, business section, risk factors, and certain footnotes to the financial statements.
Disclosure effectiveness is a cross-functional effort. Respondents noted that it’s important to engage from the outset those involved in the company’s financial reporting process — including senior executives, controllers/financial reporting, IR, in-house and external counsel, and directors.
Companies cited a number of key benefits to improving disclosures, including receiving favorable reactions from senior management, directors, investors and analysts who found the information easier to read and digest — allowing them to make more informed decisions. In addition to improving financial communications, companies also reported finding meaningful process efficiencies as a result of their efforts.
Regulator and accounting standard-setter support is needed to address some of the challenges with disclosure effectiveness – most notably w/r/t the notion of materiality, which has since been the focus of two FASB proposed ASUs (see Broc’s earlier blog).
Many companies plan to continue the process they have been using to improve disclosures, but have become wiser about potential hurdles, including, e.g., the need to start disclosure effectiveness early and get broader buy-in, especially from the IR team. In addition, companies expressed the need to engage investors – who have increasingly become more sophisticated – to better understand their needs and processes so they can deliver more transparent reports.
FASB Deliberates Next Steps on Disclosure Effectiveness Initiatives
With the December 8th comment deadline just passed, online comments to the FASB’s two proposed ASUs (hereand here) aimed atclarifying the concept of “materiality” for financial disclosure purposes were relatively limited – with investor groups and corporations tending to – not surprisingly – express divergent views as to the benefits of proposals that are anticipated to reduce but enhance overall disclosure. Next steps? FASB will redeliberate its proposed changes based on stakeholder feedback received through the comment letter process.
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:
This recent memo from New York’s State Department of Financial Services (NYDFS) to federal and state banking, securities and insurance regulators contains a robust list of potential new cybersecurity requirements that would apply to NY financial institutions – including a requirement to have a designated CISO responsible for (among other things) overseeing and implementing the organization’s cybersecurity program, enforcing its cybersecurity policy, and submitting an annual report to the NYDFS that assesses the cybersecurity program and risks – and which has been reviewed by the board of directors.
The proposed requirements would apply only to New York financial institutions; however, the memo notes benefits associated with coordinating its efforts with relevant federal and state agencies to develop a comprehensive cybersecurity framework, while retaining the flexibility to address NY-specific concerns. As such, the NYDFS purportedly welcomes dialogue/input on the proposals from other relevant regulators.
Astounding in its depth and breadth, the new regulatory requirements would be expected to cover these areas, at a minimum:
Implementation of written cybersecurity policies & procedures
Implementation of policies & procedures to ensure data security accessible to/held by third parties
Use of multi-factor authentication as it applies to enumerated applications, servers, data
Designation of a CISO with enumerated responsibilities, including annual reporting to the NYDFS
Implementation of procedures to ensure application security
Employment and training of adequate cybersecurity personnel
Conduct of annual and quarterly auditing-related testing and assessment
Immediate notification to the NYDFS of any cybersecurity incident that has a “reasonable likelihood of materially affecting the normal operation of the entity” including (among other enumerated circumstances) any incident of which the company’s board is notified
Potential CISO “Defense”?
Among the potential considerations discussed in this recently released NYSE Governance Services/Veracode report concerning whether a company has made “reasonable efforts” to secure customer data is whether the company has a dedicated CISO.
According to the report – which discusses the results of a survey of 276 public company directors and officers concerning cybersecurity practices and liability – almost 90% of respondents believe that a company that doesn’t make “reasonable efforts” to secure its data should be held liable by regulators, and studies reportedly have shown that that companies that have a dedicated CISO detected more security incidents and reported lower average financial losses per incident. That being the case (if accurate), the report asks whether we can assume that a company lacking a CISO is, in effect, negligent, or failing to make reasonable efforts to secure its data.
Additional noteworthy survey results include:
90% agree that third-party software providers should be held liable when vulnerabilities are found in their packaged software.
65% of respondents say they have already begun or are planning to insert liability clauses into contracts with their third-party providers.
80% of respondents stated they’ve brought the issue of cybersecurity liability to the forefront of their boardroom discussions.
60% of respondents foresee an increase in shareholder lawsuits as a result of heightened corporate cybersecurity liability.
More than half of respondents believe investors will demand greater cyber-incident transparency from companies as a result of the increased public focus on cyber liability.
Majority of respondent companies say they carry some form of cyber coverage.
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:
– SEC Comment Letters: Does Auditor “CC” Signal Materiality?
– EDGAR: Having Trouble Displaying Graphics
– IPOs: Does Loyalty Count?
– Vertical Promotion is Not Always Route to a GC Job
– SEC Approves Proposed Research Analyst Rules
As noted in this release, the PCAOB adopted new rules and related amendments to auditing standards yesterday requiring audit firms to disclose the names of each audit engagement partner – as well as the names of other audit firms that participated in each audit – on a new PCAOB form, Auditor Reporting of Certain Audit Participants, or Form AP. We’ll be posting memos in our “Auditor Engagement” Practice Area.
Subject to the SEC’s approval of the rules, auditors will be required to file a new Form AP for each audit within 35 days after the date the audit report is first included in an SEC filing (or 10 days after the audit report is first included in an IPO filing) disclosing:
Name of the engagement partner;
Names, locations, and extent of participation of other accounting firms that took part in the audit – if their work constituted 5% or more of the total audit hours; and
Number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5% of the total audit hours.
The disclosure requirement for the engagement partner will be effective for audit reports issued on or after January 31, 2017, or three months after the SEC’s approval of the final rules – whichever is later. For disclosure of other audit firms participating in the audit, the requirement will be effective for reports issued on or after June 30, 2017. See also this Cooley blog.
2016 Shareholder Activist Themes & Opportunities
The latest survey from FTI Consulting and Activist Insight explored themes and opportunities activists expect in the coming year, and the investing practices and strategies they plan to employ. Results are based on input from 24 activist firms that have collectively engaged in over 1200 events in more than 10 countries.
Key findings include:
Energy sector was identified among activists as the most significant activism opportunity based on undervaluation, followed by the industrial sector.
Healthcare ranked third, but is tempered by a signficant percentage of respondents reporting limited opportunity in that area – which the authors attribute to debate among activists as to the likelihood of consolidation in the healthcare industry.
Most activists believe that the best activism targets are micro- to mid-cap stocks rather than mega-caps, with the greatest activity expected among small caps.
Activists claim to have much longer holding periods than they’ve exhibited in the past – an average of 3 years compared to an average of 1.5 years two years ago, correlating with an expected increase in operational (as opposed to event-driven) activism – assuming the longer holding periods stick.
80% of investors think merger activism will increase in 2016.
In this podcast, Center for Political Accountability President Bruce Freed discusses the board’s role in corporate political spending, including:
– Why should directors get involved in the company’s political spending activities?
– What is the range of board involvement among companies currently?
– What are the risks of the board not being aware or involved at some level?
– How does a board decide on the appropriate oversight role?
– What/where can boards look to for guidance?
– Once established, how does the board ensure adherence to its political spending policies?
Korn Ferry’s recently released board practices report is particularly noteworthy for its inclusion of Wachtell Lipton Marty Lipton’s thoughts about sensible ways in which boards may ensure they evolve with the times – an increasingly challenging feat in the context of a seemingly continuously changing business environment and rising demands for non-traditional experiences and expertise such technology and cybersecurity.
Among other things, Lipton identifies these potential approaches boards may consider to ensure they – and their mix of skills and experience – remain appropriately current:
Expand the board when necessary to add additional expertise.
Adopt more rigorous director qualifications and focus on director evaluations.
Like the UK, pressures to impose director term limits may increase as a “solution” for board refreshment – but Lipton cautions against arbitrary and black-and-white standards, and justifiably notes the value of board collegiality developed over time.
Consider accessing needed knowledge and capacities with advisory directors or an advisory board.
Boards should have ready access to a wide range of internal and external experts on any issue that requires counsel and comment.
In view of how directors’ oversight responsibilities and the environment within which companies operate are evolving on a macro basis, it seems to me that use of the now-common director skills matrix in its traditional sense may be increasingly inadequate, as it presumes identified skills and attribute gaps will be addressed via new director selection. For sure, that remains one potential (and perhaps the best under the particular facts and circumstances) avenue to pursue – but it makes sense for boards to consider additional, non-traditional ways to add needed expertise, and to employ a mix of strategies to fill the inevitable, evolving gaps.
Companies may be staying or going private so that they can avoid the short-term pressures – e.g., quarterly reporting, earnings projections and associated investor reactions and pressures – associated with being public, according to this recent NYT article, which discusses the findings of this academic paper.
Purportedly consistent with the notion that short-termist pressures distort investment decisions, the paper’s principle findings include:
– Private companies invest substantially more than public ones on average, holding firm size, industry, and investment opportunities constant.
– Private companies’ investment decisions are around 4x more responsive to changes in investment opportunities than are those of public companies.
The article nonetheless cautions public companies against over-reacting to the findings – suggesting and illustrating by example that one way to avoid the potential downsides of being private and reap the benefits of being public is for public companies to behave like a private company as respects maintaining a long-term view and behavior.
Interactive Governance Platform: Bringing Your Proxy to Life
In this podcast, David Weil discusses the recently launched interactive governance platform – iiWisdom, including:
– What is iiWisdom?
– Why should companies have an interactive proxy?
– What is the process from a client’s perspective in working with you on an interactive site?
– How have investors used the site so far?
– Is this a product for institutions, retail investors or both?
– How do you balance what investors want vs. what companies want?
– What are the range of options for companies who want an interactive site?
– What are a few recommendations that people consider to create an interactive proxy?
On Friday, as required by Dodd-Frank, the SEC proposed rules – Rule 13q-1 – that would require resource extraction companies to disclose payments made to the federal government or foreign governments for the commercial development of oil, natural gas or minerals. Here’s the 202-page proposing release. We’ll be posting memos in our “Resource Extraction” Practice Area (see this Gibson Dunn blog for a summary).
This is the second time around for these rules. Rule 13q-1 was initially adopted by the SEC in 2012 – but it was subsequently vacated the next year by the DC U.S. District Court. Then, the SEC was sued for not adopting these rules fast enough – and a court ordered that the SEC move on these rules. As noted in the SEC’s press release, the EU and Canada have adopted transparency initiatives similar to the rules the SEC originally adopted.
The proposal has a two-step comment process: comments directly in response to this proposal are due by January 25th – and “reply” comments, responding only to issues raised during the original proposal’s comment period, are due by February 16th. In drafting its final rules, the SEC can rely on both new comments and comments that were received on the original proposal.
This Cooley blog and Stinson Leonard blog end with an analysis of whether this rulemaking will be challenged in court (again).
In his dissent, Commissioner Piwowar quoted rapper Eminem…
The Guide deliberately sidesteps taking firm positions on certain, currently debated issues, e.g., the association between ESG considerations and financial performance; the “right” perspective or approach for considering ESG issues; whether particular issues are more appropriately classified as only Environmental, Social or Governance. Instead, while it notes areas of current debate on ESG issues, the Guide mainly seeks to educate investors about ESG considerations – making a good case for the notion that investors’ systematic consideration of ESG issues – even based on currently and evolving available information – will likely improve their investment analyses and enable better informed investment decision-making.
This recent reportfrom The Conference Board outlines the key issues for companies relevant to engaging in political activity and suggests various approaches to corporate political spending, disclosure and accountability. Particularly noteworthy are the discussions about board oversight/role of the board and disclosure approaches, and the accompanying examples of board oversight structures and disclosures about their engagement made by Campbell Soup, Microsoft, Noble Energy and others.
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:
– Audit Committee Resource Guide
– Audit Committee Financial Experts: Remoteness Linked to Poorer Earnings Quality
– Federal District Court vs. ALJ: What’s the Difference?
– Audit Committee Role in Internal Investigations
– Non-GAAP Measures: Non-Recurring Items
