TheCorporateCounsel.net

November 27, 2018

ISS’ New “Prelim” Comp FAQs: One-Year Deferral of Director Pay Policy

Last week, as noted in this Steve Quinlivan blog, ISS released five “preliminary” compensation FAQs, which includes a one-year deferral of its controversial policy over excessive director pay. There are no changes to the quantitative pay-for-performance screens nor changes to the passing scores for Equity Plan Scorecard (EPSC) evaluations of stock plan proposals (but there are new EPSC ‘overriding’ factors and a change to the change-in-control vesting factor). “Final” FAQs are expected in a few weeks…

Hats off to my pal – Bass Berry’s Jay Knight – for having his family featured on the season finale of “Property Brothers”! Jealous! Read Jay’s blog about it…

How Often Does the SEC Chair Have Meetings?

I despise meetings. Probably the best part of my current job is that I have very few meetings. By “few,” I mean none. Lucky me! Many of the other jobs that I’ve had were full of meetings. Particularly working in-house. That had multiple meetings every single day. Ugh.

Anyway, how many meetings do you think the SEC Chair has each day? The answer is a lot. The weird thing is that the SEC publishes a regular list of these meetings. Apparently, that’s been going on for some time. No idea why – but the URL for the list has “FOIA” in it. So I imagine that someone made a request. Given my distaste for meetings, I would say that it looks like a tough job…

Tomorrow’s Webcast: “How Boards Should Handle Politics as a Governance Risk”

Tune in tomorrow for the webcast – “How Boards Should Handle Politics as a Governance Risk” – to hear CalPERS’ James Andrus, Downey Brand’s Bruce Dravis, Politicom Law’s Erin Lama and Richard Levick discuss the increasing risks caused by the entanglement of business & politics and how boards oversee the different dimensions of political speech.

Broc Romanek

November 26, 2018

Smaller Reporting Companies: SEC Lists 43 Rules for Review

One of the top priorities for SEC Chair Jay Clayton – and Corp Fin Director Bill Hinman – has been the easing of the burdens of being a public company, with the ultimate goal of convincing more companies to go public. This theme has been mentioned many times over the past few years – including raising the threshold for the definition of “smaller reporting company” earlier this year.

So it’s no surprise that the SEC published a larger list than usual to be reviewed last week as part of the SEC’s annual exercise – as required under the Regulatory Flexibility Act – to review how the agency’s rules are faring for smaller reporting companies. This year’s list boasts 43 rules (compare that to 2004; only 7 rules). Like in prior years, the rules listed for review aren’t limited to rules that affect small companies. Notably, the list doesn’t include the elimination of quarterly reports entirely for smaller companies – which I do think will eventually be proposed based upon comments made by Bill at the ABA meeting a few weeks ago.

Although some of the listed rules don’t apply to public operating companies (ie. apply to mutual funds, etc. instead), some do apply to our community including:

1. Executive pay & related-party disclosures (this is the “biggie” on pages 5-6; rethinking the 2006 rule amendments)
2. Shareholder proposals regarding director nominations by shareholders
3. XBRL
4. E-delivery
5. E-proxy (aka “notice & access”)
6. E-forums
7. Proxy disclosure enhancements (ie. board leadership, comp consultants, board oversight of risk)
8. E-filing of Form D
9. S-3 eligibility

Although this list is open for public comment, the annual list typically results in only an average of one comment per year, as noted in this statement by then-Commissioner Piwowar in ’16…

The Latest “Director Views” Stats

We’ve added this directors survey from BDO to our comprehensive library of governance surveys. The highlights include:

– Total Tax Liability: Only 44% indicate a strong understanding of their organization’s total tax liability and how it impacts the company’s tax strategy.
– Non-GAAP Measures & KPIs: More than three-quarters (76%) of corporate board directors say they do not believe additional guidance from regulators on non-GAAP and other KPIs in their financial statements is necessary. However, when asked if auditor involvement would promote higher investor confidence in non-GAAP measures, a majority (54%) of public company directors say that it would.
– Diversity & Service Limits: When asked if their board was addressing the issue of board diversity, more than 8-in-10 (81%) directors said yes, an increase from 2017, when only 66 % of respondents said the same. Nearly one-fifth (19%) of directors believe their board has room to grow on this measure.
– Sustainability Reporting: While sustainability disclosures were a priority for public company board members in last year’s survey, data indicates the focus on sustainability has perhaps temporarily been put on the back-burner. 74% of public company board directors surveyed do not believe that disclosures regarding sustainability matters are important to understanding a company’s business and helping investors make informed investment and voting decisions.
– Tax Law: 61% of directors note a favorable impact from the Tax Cuts &Jobs Act of 2017, while 39% say this law change had no impact at all on their business.

Broc Romanek

November 21, 2018

Cooking With Snoop Dogg

Mock me all you want, but before I had kids I was a fanatic for live music of all genres – and watching Snoop Dogg in the pouring rain at an “indie” rap festival stands out as one of the most memorable performances I’ve seen. And since one of my other hobbies is cooking, my worlds collided when I read this Bloomberg article about Snoop’s new 192-page cookbook – “From Crook to Cook.”

Apparently, the compilation has all the (cannabis-free) edibles you need for a solid Thanksgiving…and lots more. Snoop is probably picking up some of Martha Stewart’s cooking game, now that they have an (Emmy-nominated!?) VH1 show together – but no doubt his creations have some special twists. If anyone out there actually buys this book and tries a recipe, please let me know how it is. I’m already intrigued by this concept for sweet potato pie, as described by Bloomberg:

“These days everyone is into pumpkin spice, but I skip the pumpkin—sweet potato pie is a real ’hood staple and Broadus family favorite. [Pop-culture fact: Snoop was born Calvin Cordozar Broadus.] A little orange makes the sweet potato flavor stronger, and that’s what you’re here for, right?”

Liz Dunshee

November 20, 2018

ISS Releases ’19 Voting Policy Updates

Yesterday, ISS announced the 2019 updates to its proxy voting policies. We’re posting memos in our “Proxy Advisors” Practice Area (also see this blog from Exequity’s Ed Hauder – and this Davis Polk blog). Here’s the highlights for US companies – except as otherwise noted, the policies apply to meetings held on or after February 1st:

1. Board Diversity: Beginning in 2020 for Russell 3000 and S&P 1500 companies, the chair of the nominating committee (or other directors on a case-by-case basis) will receive an “against” recommendation when there are no women on the company’s board. Mitigating factors include a firm commitment in the proxy statement to appoint at least one female director in the near term, the presence of a female on the board at the preceding annual meeting, or other relevant factors.

2. Economic Value Added Data: During 2019, ISS research reports will feature Economic Value Added data as a supplement to GAAP-based measures that measure the alignment between CEO pay & company performance. Moving into 2020, ISS will consider the inclusion of EVA-based measurements as part of its Financial Performance Assessment methodology.

3. Board Meeting Attendance: ISS is codifying its case-by-case approach to chronic poor attendance without reasonable justification. In addition to voting against the director(s) with poor attendance, it will recommend voting against other directors. After three years of poor attendance, the policy applies to the chair of the nominating or governance committee; after four years, the full committee; and after five years, all nominees.

4. Management Proposals to Ratify Existing Charter or Bylaw Provisions: Similar to Glass Lewis’s new policy on conflicting & excluded proposals, ISS is codifying its policy to vote against individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions – taking into account factors such as the presence of a shareholder proposal addressing the same issue, the board’s rationale for seeking ratification, the actions to be taken by the board should the ratification proposal fail, whether the current provision was adopted in response to the shareholder proposal, previous use of ratification proposals to exclude shareholder proposals, the company’s ownership structure, etc.

5. Board Responsiveness to Ratification Proposals: ISS’s existing responsiveness policy is updated to reflect that failure to act on a failed “ratification” proposal will trigger a board responsiveness analysis at the next annual meeting.

6. Director Performance Evaluations: When identifying companies that have long-term underperformance, ISS will look at three- and five-year TSR during the initial screen – rather than using five-year TSR as part of a secondary step in the evaluation.

7. Reverse Stock Splits: ISS broadened its policy to allow analysts to take a case-by-case approach for companies that are not listed on major stock exchange and may have a legitimate need to carry out a reverse stock split. ISS is also broadening the factors it will consider for all companies – exchange listed and non-exchange listed, where substantial risks exist.

8. E&S Proposals: ISS is codifying its case-by-case approach to E&S proposals – to make more explicit that significant controversies, fines, penalties or litigation are considered.

Proxy Process Roundtable: Worthwhile Written Comments

Last week, I blogged about what it was like to attend the SEC’s “Proxy Process Roundtable” – you can also check out Cydney Posner’s blog for more details on the substantive discussions. One thing I noted was that there were many people on each panel. The SEC invited a lot of speakers in an effort to get a wide range of views. But since time was limited, not everyone got to delve into their specific recommendations – so at many points, people made reference to the written comments that they’d submitted.

During the ABA meeting the following day, Corp Fin Director Bill Hinman noted that over 80% of the comments came in during the last week – and the Staff thinks they’ve been very constructive. Here are some of the many submissions, from panelists and others:

BlackRock
Neuberger Berman
The Capital Group
Glass Lewis
Egan Jones
Nasdaq
Broadridge Independent Steering Committee
Proxy Insight
ISS
Carl Hagberg & Associates

More on “Proxy Season Blog”

We continue to post new items daily on our blog – “Proxy Season 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:

– Math With Broker Non-Votes
– An Anti-ESG Campaign Begins
– Vote Tabulations: A Handy Primer
– Iran Disclosure: Impact of Latest Sanctions
– Revenue Recognition: Corp Fin Comments

Liz Dunshee

November 19, 2018

Earnings Release Headlines: The Problem With Numbers

Nearly 30% of companies highlight quantitative information at the top of their earnings release – and after writing my fair share of headlines, I can understand why! Numbers are succinct, eye-catching, and (presumably) accurate. But a recent study shows that this practice may lead to some pretty big swings in stock price – and might foreshadow lower earnings over the long-term. This article summarizes the findings – here’s an excerpt:

The study of more than 17,000 earnings releases over an 11-year period finds that increasing headline salience (for example, when earnings exceed forecasts, headlining by how much), gives a hefty lift to a firm’s stock price beyond the rise that is normally occasioned by good news. On average, adding one strong performance number to a headline increases a results-inspired boost by an extra one third in the three-day period around the announcement.

Citing psychology research, the professors see this extra boost as due to the effectiveness of headline numbers in attracting investor attention. In addition, “an initial favorable impression can lead investors to underweight contradictory information elsewhere in the report.”

But investors beware: after a quick stock-price lift, salience likely portends a considerable reversal over the 60 days following the earnings announcement, a reversal greater than the initial boost that the salience bestowed. In other words, as the professors write, “investors not only undo their initial reaction due to salient headlines but even revise their beliefs in the opposite direction in the subsequent period.” In sum, “headlining quantitative information incites investor overreaction to the earnings news at the time of the earnings announcement…This suggests that headline salience misleads investors.”

And here are some other interesting takeaways:

– Companies that flaunt strong current results in headlines tend to have lower long-term earnings (beyond the current quarter)

– High salience is strongly correlated with increased insider stock sales in the month following earnings announcements and also with the recent vesting of executives’ stock

– Both 3-day stock returns and 60-day reversals increased with greater headline salience, both being higher as the number of headline statistics increased (for example, from zero to one or from one to two).

– While headline salience is effective when earnings exceed analyst forecasts, that is not the case when they do not. In other words, greater salience does not spur investor interest when earnings barely meet or fall short of predictions.

– Headlined earnings numbers have more effect when expressed as percentages than when stated in dollars.

Farewell to Penny Stocks?

I mentioned in a blog last month that there are an estimated 10k publicly-traded microcaps – but most aren’t listed on an exchange (h/t to Adam Epstein for that stat). But we might see a decline in those numbers if the secondary market evaporates – and there are signs that it’s heading in that direction. Here’s the intro from this Forbes op-ed by Richard Levick:

An event that rather significantly affects the financial markets has just occurred without much if any fanfare in the financial press. Bank of America’s Merrill Lynch announced that, as of September 30, it will not allow clients to sell microcap stocks, known as penny stocks, without a regulatory review and will outright ban sales of the riskiest ones. The bank had already discontinued purchases in July.

If enough other financial institutions follow suit, the penny stock market could disappear altogether. As of this writing, Morgan Stanley and UBS have not followed Merrill’s lead, according to sources cited by CNBC reports, but investors sense a chill wind has begun to blow. Shares from companies valued under $300 million and traded for under $5 on an over-the-counter market are the ones affected – in other words, virtually the entire microcap market.

By the way, catch Richard Levick in our upcoming webcast: “How Boards Should Handle Politics as a Governance Risk“…

Transcript: “Proxy Solicitation – Nuts & Bolts”

We have posted the transcript for our recent webcast: “Proxy Solicitation – Nuts & Bolts.”

Liz Dunshee

November 16, 2018

Proxy Process Roundtable: 8 Interesting Things

Since I was in Washington DC for the Fall Meeting of the ABA Business Law Section, I thought I’d arrive a day early to attend the SEC’s “Proxy Process Roundtable.” Broc encouraged me to share the “look & feel” of the experience for those that have never visited the Mothership. So here’s eight interesting things that I noticed:

1. Lots of Speakers on Panels – There were three panels for the roundtable – each scheduled for 90 minutes. One panel had 10 speakers, another had 11 – and one had 14! That one ended up running over two hours – and one of the panelists didn’t even get to introduce himself till the very end. For comparison, we’re setting the agendas right now for next year’s “Women’s 100” events – and we have 9 speakers for all of our panels for an entire day.

In some cases, it was hard to get a good feel for a speaker’s views & ideas because their speaking time was limited (but some panelists definitely didn’t let that stop them!) – and as a listener it was hard sometimes to stay focused for such a long discussion, with no audience interaction. This is what a 14-speaker panel looks like – a total of 21 people up on the dais with all the SEC officials…

2. Short Opening Remarks – Chair Clayton limited his opening remarks to allow more time for the panelists to share their views. Remarks from Commissioner Stein, as well as Commissioner Roisman and Corp Fin Director Bill Hinman, were also very brief. In fact, the first panel started about 30 minutes early! Bill did take a moment to pay tribute to Evelyn Y. Davis, though.

3. Surprising In-Person Turnout – Broc warned me that the roundtable might be lightly attended. He said that in the old days, the SEC’s open Commission meetings & roundtables were well-attended. But now that they are webcast, people understandably watch online. So it was surprising to see that more than a hundred people were there in person, despite DC having the worst November snowstorm in 29 years. Here’s a picture of what the audience looked like.

4. NAM/Chamber’s Campaign Encouraged Attendance – Recently, the National Association of Manufacturers & the US Chamber have been running ads against proxy advisors – including full-page spreads in the WSJ and Washington Post. They’ve spent six figures on their media campaign! Here’s what the ads looked like. As part of this campaign, the groups operate ProxyReforms.com – a site that had been encouraging folks to attend the last panel of the day (the one about proxy advisors).

5. Minor Infotainment (for a Conference) – Although not as riveting perhaps as “Bodyguard” (new Netflix series that Broc recommends; I haven’t seen it), the panels tended to be more entertaining than a typical conference panel. There were speakers on all sides of the issues & sparks flew on more than one occasion.

Chair Clayton, the Commissioners & Corp Fin Staff emphasized throughout the day that they were hoping to get some specific recommendations. A surprising number of panelists thought the shareholder proposal rules and proxy advisor framework is okay ‘as-is.’

This wasn’t everyone’s view (tended to be people who could be disadvantaged if the rules change, though not in every case) – and there were calls for targeted improvements like giving all companies some time to respond to voting reports before they’re public and some tweaks to the proposal submission thresholds. But when it came to proxy plumbing, there were more calls for change – maybe even a total overhaul. Even speakers that weren’t on that panel said they thought that’s where the SEC should focus its time & resources.

6. A Tweet War? – Recently, John blogged about “Tweet Fight! Nell Minow v. Main Street Investors Coalition.” For this roundtable, there was some live tweeting from the audience under #proxyroundtable – with most of the tweets coming from opposite ends of the spectrum: Main Street Investors Coalition v. ValueEdge Advisors (for whom Nell Minow is a part of) – as well as Minerva Analytics and others.

7. Going Through Security – Broc also shared stories about the old days & how visitors to the SEC used to be able to go upstairs and deliver packages, etc. without even checking in. Now, he warned me to go early, because you need to get a badge & go through a metal detector. They were efficient – but with the large attendance, I’m pretty sure it took me longer than airport security! In the morning line, I happened to befriend a fellow Minnesotan. And it was in the after-lunch line that I learned of the Main Street Investors Coalition’s ad campaign. So it wasn’t time wasted.

8. DC is Magical? – The night before the roundtable, Broc picked me up at the airport and we grabbed dinner at “The Wonderland Ballroom.” We soon met Frank Namin – who saddled up next to us and seemed to be this establishment’s resident magician. We had close-up seats as he fashioned a rose from a cocktail napkin – then levitated it (seriously, it levitated one foot away from us – just stayed floating in the air!) – along with many other illusions. Free entertainment! And nearly as exciting as that “Proxy Advisors” panel…

Broc’s Take: The Proxy Process Roundtable Might Not Mean Much

Broc’s ten cents on this topic is that it’s akin to oral arguments during a Supreme Court case. Broc believes that oral arguments don’t have a major impact how the SCOTUS Justices intend to vote except in rare instances (this study seems to argue otherwise). Broc doesn’t believe the roundtables really mean much – particularly with so many people on each panel. He recalls only one notable instance where a roundtable was truly worth listening too – when Evelyn Y. Davis was on a shareholder proposal roundtable in the early 2000s. Evelyn put on quite a show.

Broc feels there is some value to roundtables. The speakers can connect with each other. And even more importantly, the SEC Commissioners can get a sense of what each speaker is all about – and figure out which ones they might want to contact privately to learn more about a particular idea. But remember, we did this entire “song & dance” over a decade ago with “proxy plumbing” – with a roundtable & everything – and not much came out of that. But maybe this time will be different…

Poll: Will the Proxy Process Roundtable Mean Anything?

Let us know how you feel about the impact of the SEC’s roundtables in this anonymous poll:

web survey

Liz Dunshee

November 15, 2018

Lawyers as Pro Wrestlers

Recently, I paid a visit to my old firm (Fredrikson & Byron) to interview my former colleague Zach Olson, a partner in the M&A group – about his side gig as a professional wrestler. You may have seen John’s blog about Zach’s bold adventures on “The Mentor Blog,” but I wanted to get more info about this unique endeavor – and how a deal lawyer has time (and nerve) for it.

In our 19-minute podcast, Zach confirmed my suspicion that he’ll dive into just about anything he thinks is remotely interesting. We also covered:

– How do you think your skills as a lawyer help you in the ring?
– How do you think your skills as a wrestler help you in negotiations/practicing?
– What’s been the most surprising thing about wrestling since you started?
– What’s the most common question people ask you?

MSCI Plans to Launch New “Dual-Class” Indexes

I have to say, MSCI strikes me as the “middle child” of stock indexes. “Dual-class” (or more) share structures have been a hot-button issue, especially since Snap’s IPO. Unlike FTSE Russell & S&P Dow Jones – which both quickly announced last August that they’d exclude companies with unequal voting rights – MSCI took 18 months to gather everyone’s opinions. And as I’ve blogged, it turns out that institutional investors are more interested in a regulatory fix that encourages equal voting structures, versus restrictions by indexes. So recently, MSCI announced a compromise that’s intended to satisfy everyone.

As described in this WSJ article, in early 2019, MSCI will launch a new suite of market indexes that exclude companies with unequal voting structures. They’ll be an addition to MSCI’s existing indexes, which will continue to include broader investment alternatives. Here’s what MSCI says about its solution (also see this Davis Polk blog – and this “Money Stuff” column that questions the impact of choices like this on so-called “passive” investors):

MSCI supports fully the one share one vote principle as we believe that having equal voting rights should be an important consideration in equity investing. The one share one vote principle has also gathered overwhelming support from participants in the consultation. The treatment of unequal voting structures in equity benchmarks, however, has proven to be a polarizing question among international institutional investors.

For instance, while many participants felt strongly that benchmarks should be adjusted to reflect unequal voting structures, other participants highlighted that the question of unequal voting rights should be addressed holistically by the stakeholders that are responsible for operating, regulating and investing in equity markets. These stakeholders include, among others, securities regulators, stock exchanges, asset owners and asset managers.

MSCI continues to believe that global market benchmarks, such as the MSCI Global Investable Market Indexes, should aim to represent the broadest investment opportunity set available to international institutional investors based solely on the investability of the underlying markets. Investable market benchmarks should not be constrained by specific investor opinions, preferences or constraints including governance issues. This point has been articulated by many international investors, including asset owners and managers globally, who clearly highlighted the critical need to find the right balance between investor views and comprehensive representation of the investable equity universe.

It’s Done: 2019 Executive Compensation Disclosure Treatise

We recently wrapped up Lynn, Borges & Romanek’s “2019 Executive Compensation Disclosure Treatise” — and it’s printed. This edition has the latest insights from the first year of pay ratio disclosure – as well as Corp Fin’s recently-updated proxy CDIs. All of the chapters have been posted in our “Treatise Portal” on CompensationStandards.com.

How to Order a Hard-Copy: Remember that a hard copy of the 2019 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1620-page comprehensive Treatise soon. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.

Liz Dunshee

November 14, 2018

Corp Fin Comments: Does “Public Availability” Mean Improved Disclosure?

This “Audit Analytics” blog discusses an intriguing new study that suggests the SEC’s decision to make Corp Fin comment letters publicly available may have resulted in improved disclosure by companies on the receiving end of those letters. Here’s an excerpt:

It was found that when comment letters are made public, company filings include longer narratives, have a lower chance of restatements, and there were less discretionary accruals in earnings announcements. Those factors provide a more complete picture of the company’s position, benefitting the company, the SEC, and investors or firms who are concerned with company performance.

Well, wadda ya know? They’re from the government, and they actually did help you. . .

GDPR Enforcement: More on “How Will It Work for US Companies?”

Europe’s GDPR has had an enormous impact on companies that do business in the EU, but as we blogged earlier this year, there’s a lot of uncertainty about potential consequences for non-compliance by  US companies that don’t have a major European presence. This Dorsey & Whitney memo reviews the recent experience of an enforcement proceeding involving a Canadian company, and this excerpt speculates on how US authorities might deal with a similar situation:

It remains unclear how GDPR enforcement would play out in the United States. The U.S. currently has no federal law similar to the GDPR. The Trump administration is discussing a U.S. version of the GDPR that would have provisions similar to provisions in the GDPR, but the passage of such a law is not imminent.

To the extent the U.S. enacts such a law, the U.S. might be incentivized to assist with GDPR investigations or enforcement against U.S. entities at least to the extent consistent with the terms of the U.S. law for purposes of encouraging reciprocal comity with the EU. However, given the Trump administration’s foreign policy stance, it is highly unlikely that the U.S. would assist in enforcing violations of any GDPR provisions that go beyond the U.S. law.

If the feds won’t play ball with the EU, there’s another possibility – state regulators. The memo notes that California recently enacted the California Consumer Privacy Act of 2018, which is similar in some respects to the GDPR – and says that it remains to be seen whether the state would assist EU regulators in a GDPR investigation “to encourage reciprocal comity with the EU in connection with enforcement of their respective data privacy laws.”

D&O Insurance: The Outlook

It’s renewal season for a lot of D&O policies – and this Woodruff Sawyer deck reviews market conditions, claims trends and coverage issues. Here’s an excerpt on pricing expectations for the primary layer of coverage:

As we head into 2019 it is increasingly rare that a company will see a year-over-year decrease in the premium paid for the primary layer. Instead, single-digit increases in premium on the primary layer are more and more common (with larger rate increases for companies with less favorable risk profiles). Companies with SIRs below those of their peers face the prospect of larger retentions, though sometimes in exchange for a flat-to-smaller premium increase.

While the market for the primary layer continues to tighten, the market for excess layers – including Side A – remains highly competitive. That competition has generally held premium increases in check, although even these markets are beginning to experience pricing pressure.

John Jenkins

November 13, 2018

Safe Harbor Disclaimers: A License to Lie?

This “IR Magazine” article says that a recent study suggests that critics of the forward-looking statements safe harbor may have a point when they say it gives companies a “license to lie.” Here’s the intro:

When forward-looking statements are accompanied by a legal disclaimer, inexperienced investors are more likely to forgive a company missing its projections – even when management is shown to have knowingly misled investors, according to a new academic study published recently in “The Accounting Review.” The research was led by H Scott Asay of the University of Iowa and Jeffrey Hales of the Georgia Institute of Technology. They contend that legal disclaimers protect public companies from reprisal and therefore harm vulnerable investors in the process – going so far as to cite one attorney’s description that these disclaimers afford management the ‘license to lie’.

The study broke investors into four groups, all of whom were given the same company release to review. They were told that the company missed its earnings projections. The first two groups were told that management acted in good faith. One group’s press release contained a legal disclaimer, while the other group’s did not. Both of the first two groups were less inclined to seek compensation for the missed projections, and the legal disclaimer had no effect on their views.

The second two groups were provided with the same information, except that they were told management knew that it couldn’t hit its projections. Those investors in the group whose press release included a disclaimer were less inclined to seek compensation than those whose press release did not include a disclaimer. The study’s authors contend that this means disclaimers are likely to dissuade investors from pursuing claims – even if they know they’ve been lied to.

China Tech IPOs Raise the CEO “Pig-Out” Bar

A tip of the hat to China’s tech sector – this BusinessWeek article says those companies have no shame when it comes to compensating CEOs for their work in taking a company public:

It’s a good time for founders in China to take their startups public, at least by one measure.

Chief executive officers are beginning to get ten-figure bonuses with their initial public offerings. In the latest example, the CEO of Shanghai-based Pinduoduo, received at least $1 billion of stock without any performance hurdles as his e-commerce company prepares for a U.S. IPO. Lei Jun, the head of Beijing-based smartphone maker Xiaomi Corp. saw a $1.5 billion payday, with no strings attached, when his company went public in July. When JD.com went public in 2014 it incurred $591 million of costs from a stock grant to its chief.

Well, Marx never said that the “Vanguard of the Proletariat” had to serve the revolution for free. Does anybody know if there’s a Mandarin word for chutzpah?

Tomorrow’s Webcast:  “GDPR’s Impact on M&A”

Tune in tomorrow for the DealLawyers.com webcast – “GDPR’s Impact on M&A” – to hear Davis Polk’s Avi Gesser and Daniel Foerster discuss the implications of the EU’s General Data Protection Regulation for M&A transactions. Please print out these “Course Materials” in advance…

John Jenkins

November 12, 2018

New Directors: Finance & Tech Pros in Demand – CEOs Not So Much

According to the latest Spencer Stuart Board Index, financial types & techies top the “Most Wanted List” when it comes to skills desired in new directors on S&P 500 boards. Here some of the highlights when it comes to new director demographics:

– Only 36% of the new S&P 500 directors are active or retired CEOs,board chairs or vice chairs, presidents or COOs. That’s down from 47% a decade ago.

– Board experience is also no longer a prerequisite. One-third of the incoming class are serving on their first public company board.

– Directors with financial backgrounds are a priority, representing 25.5% of the new S&P 500 directors in 2018, up from 18% in 2008.

– 40% of the members of the incoming director class are female, 10% are minority males, and 17% are under 50.

– Of the directors under 50, one-third have tech or telecommunications backgrounds.

The index covers a lot of ground, and includes information about board size ranges, director tenure, board governance practices, director compensation and 1, 5 & 10-year trends in board composition.

Board Composition: Low Turnover Hinders Diversity Push

Spencer Stuart says that the S&P 500 appointed appointed 428 new independent directors in the 2018 proxy year. Although that’s up 8% over the prior year, overall turnover is low, with new directors representing just 8% of all board seats.

While 50% of those new seats went to women or minority men, this WSJ article notes that the low turnover rate slows efforts to promote diversity. It also provides some insight into one reason why turnover may be so low:

“Boards are a little more static than they should be in a world that’s so dynamic,” said Julie Daum, head of Spencer Stuart’s North American board practice. That means there are few opportunities for women and people of color to join boards.

One reason for the low turnover: Directors have been voting to raise their own mandatory retirement ages. Of the S&P 500 companies that have such policies, around 44% set the age at 75 or older, compared with 11% in 2008. Of all S&P 500 companies, 71% disclose a mandatory retirement age.

The article says that the shift to later retirement ages emerged during the financial crisis, when companies were seeking to maximize stability by retaining experienced directors.

Shareholder Engagement: “Top of Mind” Issues for Investors

Interest in off-season engagement with investors is reportedly very high this year. If your company is one of those preparing for a round of shareholder engagement, you should check out D.F. King’s 20-page “Fall Engagement Guide,” which provides a brief overview of the issues that are currently “top of mind” among institutional investors. It’s the perfect type of document to slide across the boardroom table to your CEO or CFO – and to share with your directors.

John Jenkins