The role of Nominating & Governance Committees is getting more attention right now due to directors’ concerns about being targeted in contests under the “universal proxy” regime and the SEC’s focus on director skills and board oversight of cyber and climate risks. A recent “blueprint” from NACD & Korn Ferry (available to NACD members) compiled feedback from nominating-governance committee chairs & members at a dozen companies – resulting in recommended approaches to these 5 topics:
1. Setting board culture and expectations for directors
2. Aligning board composition with corporate strategy
3. Fostering continuous improvement in board performance
4. Improving oversight of cross-board matters that often fall to the nominating and governance committee
5. Overseeing board involvement with shareholders and other key stakeholders
This blueprint is intended to translate principles from a framework that an NACD Commission released last fall into committee-level practice tips and examples. The appendices also include templates for:
– Board Member Expectations and Responsibilities
– Questions to Consider When Updating the Nominating and Governance Committee Charter
– Inventory of Director Skills and Experiences
– Board Matrix
When it comes to board composition, your nominating & governance committee’s efforts to align director skills with corporate strategy are a major piece of the puzzle. Communicating those efforts – and the value of your directors – is also key when it comes to director elections. We’ll be discussing “Director Skills & Backgrounds: Why Your Disclosures Need a Refresh… & How To Do It” at our “Proxy Disclosure & 20th Annual Executive Compensation Conference” – which is coming up virtually on September 20th – 22nd. Hear from Davis Polk’s Ning Chiu, Gunster’s Bob Lamm, Labrador’s Judy Mayo, and Veaco Group’s Kris Veaco about the board evaluations, the recruiting & nominating process, and useful proxy disclosures.
In addition, our expert panel of Latham’s Michele Anderson, Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Sidley’s Kai Liekefett, and Wachtell Lipton’s Elina Tetelbaum will share practical guidance for the second year of the universal proxy regime.
The full conference agenda shows all the “can’t miss” info that we’ll cover during this three-day event. Sign up today! You can register online, by emailing sales@ccrcorp.com or by calling 800.737.1271.
John blogged last week about the difficult decision of whether to pre-release earnings. Anyone who has dealt with this knows that it is an incredibly nuanced, emotional, and high-risk issue for companies and executives. If you’re in the position of advising on this topic – whether as in-house or outside counsel – you need to be able to put yourself in the shoes of the people who will actually be delivering the bad news. That goes for executives who will be facing investors, as well as anyone who has to talk to their own higher-ups. A member sent these thoughts:
The executives often struggle with the human fear of eventually needing to speak to analysts on an earnings call and investors in 1:1’s following disappointing results. For them, any sense of a lack of candor is both embarrassing and subject to being shamed or yelled at. Discussions of pre-releasing can be particularly difficult because people may feel like they are being punished for “doing the right thing” in trying to be candid.
One suggestion for practitioners – especially in-house folks – is to not overlook the auditors. Their fear factor will go off the charts if pre-releasing is brought up. The engagement partner will worry about the national office, the national office will worry about the PCAOB pulling their papers, and all will worry about getting sued if there is a stock drop. Also, if a company pre-releases, it blows-up the timeline for the auditors quarterly procedures – or worse still, their audit. As such, getting the auditors to provide some form of indication whether they are in a position to wrap procedures quickly and with confidence becomes essential. Obviously, if a company goes out early, and the auditors find something that is not immaterial and which impacts the pre-released revenue or earnings, you’ve got a problem. This is less of an issue on the balance sheet but even a goof in the share count by a junior accountant which would have been caught in a normal cadence can cause mayhem for earnings.
And, yes, you are correct to identify the precedent issue. Fairly or unfairly, pre-releasing essentially creates a tolerance range for future results. You can disclaim that point with words, but your actions will speak louder, and they’ll hem you in.
For most companies other than smaller reporting companies, the upcoming Form 10-Q for the quarter ended June 30th will be the first report in which disclosure (and tagging) under new Item 408(a) of Regulation S-K is required. This somewhat confusing disclosure requirement applies when any officer or director adopts, modifies or terminates a Rule 10b5-1 plan, or adopts or terminates any “non-Rule 10b5–1 trading arrangement.”
A recent presentation from Latham & Georgeson suggests model disclosure for this new line item. Check out page 7 of the deck to see sample language & format for these scenarios:
In this 22-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Maria Doughty. Maria is President and CEO of The Chicago Network, which is an organization of Chicago’s most influential senior executive women leaders and whose purpose is to empower women – of all colors, everywhere – to lead. Before that, she was the Director of Public Policy and Regulatory Examinations and Corporate Counsel for Allstate Insurance Company, where she worked for more than 20 years! Listen to hear:
1. What led Maria to leave Allstate after 20+ years and join The Chicago Network as CEO, and what the mission of The Chicago Network means to her
2. Maria’s advice for women who want to advance in board service – including her views on the value of a legal background for aspiring & current directors
3. How board experience helps women become better leaders
4. What’s surprised Maria in her career
5. What Maria thinks women in the corporate governance field can add to the current conversation on the role of corporations in society
Last month, SolarWinds filed an 8-K disclosing that certain of its current and former executive officers and employees, including its Chief Financial Officer and Chief Information Security Officer, received “Wells Notices” from the SEC’s Division of Enforcement in connection with agency’s investigation of the massive Russian cyberattack against the company. A recent BankInfoSecurity.com article says that the SEC’s unusual decision to name a corporate CISO as a potential target in an enforcement action might be a signal as to what the agency is focusing on:
It’s unusual for a CISO to receive a Wells Notice, and this SEC move could signal a whole new set of potential liabilities for CISOs, Equifax CISO Jamil Farshchi wrote in a LinkedIn post on Monday. Usually, a Wells Notice names a CEO or CFO for issues such as Ponzi schemes, accounting fraud or market manipulation, but those are unlikely to apply to a CISO, he said.
Farshchi speculated that the notice might be related to “a failure to disclose material information – things like failing to disclose the gravity of an incident or failing to do so in a timely manner could conceivably fall into this category,” he said, adding that it’s too early to know if any action will follow the Wells Notice.
“But if this is about disclosure, it shows the SEC isn’t sitting around waiting for cyber regs to be issued,” he added. “They’re taking action today.”
The issuance of a Wells Notice to SolarWinds’ CISO has attracted a lot of attention in the cybersecurity industry – and that’s likely not an unintended consequence. Maybe I’m just a cynic, but SolarWinds CISO strikes me as exactly the kind of high-profile individual that the SEC’s Division of Enforcement likes to have as a poster child when it wants to send a message through an enforcement action.
The Delaware Chancery Court recently dismissed a books & records action against The Walt Disney Company premised on alleged breaches of fiduciary duty by the company’s board arising out of its decision to publicly oppose Florida’s “Don’t Say Gay” legislation. The plaintiffs’ contended that the directors breached their duty of loyalty by placing their personal beliefs ahead of the company’s interest by taking positions that impaired its value.
This excerpt from a recent Wilson Sonsini memo on the decision summarizes Vice Chancellor Will’s reasoning:
The court conducted a trial on a paper record, and that record reflected an appropriately engaged and deliberative board. As the controversy first flared, the Disney board convened a special meeting and, shortly thereafter, held a regularly scheduled meeting to discuss the issues. Board minutes captured the board’s engagement. The record showed that Disney leadership took an increasingly public stance in the face of intensifying criticism from its employees and creative partners. Accordingly, the court noted, the board’s decision did not come “at the expense of stockholders.” Rather, the board was motivated by an understanding that “a positive relationship with employees and creative partners is crucial to Disney’s success.”
As such, the court determined that “[i]t is not for this court to question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value.” Meanwhile, no evidence supported the plaintiff’s allegation that the directors’ personal beliefs or their support of organizations that opposed HB 1557 swayed them to act contrary to the interests of the company and its stockholders.
Based on her analysis, Vice Chancellor Will ultimately concluded that the plaintiff did not establish a proper purpose for inspection because it did not sufficiently allege potential wrongdoing by the board. In an era where companies increasingly find themselves caught in the crossfire of contentious social issues, boards and their advisors are likely to find this excerpt from the Vice Chancellor’s opinion on the latitude that directors have under Delaware law exercise their business judgment to be of some comfort:
Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues. Given the diversity of viewpoints held by directors, management, stockholders, and other stakeholders, corporate speech on external policy matters brings both risks and opportunities. The board is empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).
Speaking of books & records, Keith Bishop recently blogged about some changes to Nevada’s corporate inspection statute. One of these changes authorizes a Nevada corporation’s board of to require a stockholder exercising inspection rights to agree to enter into an appropriate confidentiality agreement with the company. That’s a helpful revision, but I thought that the second change Keith points out is more interesting:
The bill makes other changes to the inspection statute, NRS 78.257, and one of those changes may allow corporations to impose limitations on inspection of certain records in their articles or bylaws:
The right of stockholders to inspect the [corporate records] books of account and financial statements of the corporation in accordance with this section may not be limited in the articles or bylaws of any corporation.
Thus, the current statute prohibits limitations on inspection of “corporate records” and the bill would limit the prohibition to “books of account and financial statements”.
Nevada already takes a more restrictive approach to stockholder inspection rights than Delaware does, and this change gives Nevada corporations an even greater ability to limit those rights. In recent years, Delaware courts have taken an increasingly broad approach to what may be regarded as corporate “books & records” subject to inspection – including, in some cases, director email communications. By narrowing the statutory language, Nevada corporations will likely be able to make it even more difficult for stockholders to reach these materials through pre-litigation books & records requests.
As Allison Frankel noted in a column earlier this year, Nevada’s management-friendly approach to its corporate statute is something that some high-profile Delaware corporations have decided to take advantage of by reincorporating there. Plaintiffs opposing those efforts have accused the state of having a “no liability regime” – and based on recent case law, they may not be far off in that characterization.
The need to consider updating earnings guidance through a pre-release usually arises because management expects that the company’s results may depart significantly from its previous guidance. Deciding whether to issue a pre-release is a high-stakes decision that requires management to weigh often significant liability and credibility risks. Despite that, this isn’t a topic that I’ve seen a lot written about, at least until now.
Fortunately, this recent Sidley memo provides helpful guidance to companies that find themselves thinking about issuing a pre-release. It addresses some of the key considerations surrounding an earnings pre-release, including the applicable legal requirements, management credibility issues, Reg FD compliance & litigation and risk management. This excerpt highlights the need to ensure that management has a high degree of confidence in the information it discloses in a pre-release:
If a company has determined to pre-release its results, it should do so only when management is highly confident in the accuracy of the numbers, or at least a relatively narrow range. Having to make more than one pre-release, or ultimately reporting final financial results that materially differ from those reported in the pre-release, may backfire and end up harming rather than helping the company’s credibility with investors and analysts. When preparing the pre-release, companies should ensure that no material information is omitted that might render the disclosure materially misleading or inaccurate.
The memo reminds companies that a decision to issue an earnings pre-release is one that requires input from several different constituencies, including the CEO, CFO, CLO, head of investor relations, key board members (including the audit committee) and, typically, outside legal counsel. It also points out that once a company decides to pre-release, its actions will likely be viewed as creating a precedent for the future by investors and analysts.
We’ve blogged previously about the beneficial ownership reporting obligations that will be imposed on a range of private companies under the Corporate Transparency Act. This Dechert memo provides a handy reference tool for companies concerning what they will be required to disclose once FinCEN implements the reporting system on January 1, 2024 (companies organized prior to that date will have until January 1, 2025 to come into full compliance).
The memo also addresses several FAQs on various aspects of the reporting system, including the type of information that will be collected, the definition of “beneficial owner,” the timing of filing disclosure reports, and the entities that are subject to – and exempt from – compliance with the Act. As this excerpt on applicable exemptions indicates, the good news is that many businesses will not be subject to a reporting requirement:
The CTA and Final Rules provide 23 categories of business entities that will not be considered reporting companies. For example, public companies, registered broker dealers, and certain investment companies, investment advisers, banks, bank holding companies, credit unions, money-transmitting businesses, commodity trading companies, pooled investment vehicles, 501(c) tax-exempt entities, inactive business entities and insurance companies will not be required to submit their beneficial ownership information. A more detailed analysis of some of these exemptions is available in our November 2022 OnPoint and in the Frequently Asked Questions published by FinCEN available here.
Perhaps most relevant to clients contemplating non-public M&A transactions, business entities in the two following groups will be exempted from disclosing beneficial ownership details:
– any business entity that (i) employs more than 20 employees on a full-time basis in the U.S.; (ii) filed in the previous year income tax returns in the U.S. demonstrating more than $5,000,000 in gross receipts or sales (including the receipts or sales of subsidiaries and other entities through which such entity operates), and (iii) has an operating presence at a physical office within the U.S.; or
– any business entity owned or controlled by a business entity that is itself exempt from the beneficial ownership disclosure, with some limited exceptions.
As a result of the large operating company exemption, many larger operating companies and their subsidiaries will be exempt from having to disclose beneficial ownership details. However, smaller operating companies and passive holding companies may need to submit disclosure reports if no relevant exemption applies.
The SBA recently released its Inspector General’s report estimating the amount of fraud in the agency’s pandemic assistance programs. The report’s conclusions are jaw-dropping. Check out this excerpt from the press release announcing the findings:
Over the course of the Coronavirus Disease 2019 (COVID-19) pandemic, SBA disbursed approximately $1.2 trillion of COVID-19 Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP) funds.
In the rush to swiftly disburse COVID-19 EIDL and PPP funds, SBA calibrated its internal controls. The agency weakened or removed the controls necessary to prevent fraudsters from easily gaining access to these programs and provide assurance that only eligible entities received funds. However, the allure of “easy money” in this pay and chase environment attracted an overwhelming number of fraudsters to the programs.
We estimate that SBA disbursed over $200 billion in potentially fraudulent COVID-19 EIDLs, EIDL Targeted Advances, Supplemental Targeted Advances, and PPP loans. This means at least 17 percent of all COVID-19 EIDL and PPP funds were disbursed to potentially fraudulent actors.
The SBA issued a reply taking exception to the Inspector General’s report and portraying the SBA Staff & its IG as being joined at the hip in the pandemic response:
However, we are concerned that the white paper’s approach contains serious flaws that significantly overestimate fraud and unintentionally mislead the public to believe that the work we did together had no significant impact in protecting against fraud.
I love the reference to “the work we did together” – which the SBA’s response uses more than once, just in case anybody missed the point. In other words, “I don’t have a problem – but if I do, then we have a problem.” Besides, what’s $200 billion among friends?
