ISS has announced the launch of Vote Preference, which is a suite of flexible solutions enabling asset managers to offer voting choices directly to their underlying clients. The announcement notes:
ISS Vote Preference allows asset managers to offer their clients multiple ISS policy choices including Benchmark, Sustainability, Taft Hartley, SRI, Public Fund, Board Aligned, Faith-Based, as well as custom voting policies, with ISS vote aggregation and split vote management execution capabilities, leveraging ISS ProxyExchange and API technology. ISS also offers asset managers additional collaboration tools through ISS Communicator which can be tailored to the individual needs of their Vote Preference programs. ISS’ Vote Preference holdings solution allows asset managers to easily automate the display and vote execution of their underlying clients’ respective share percentages and provides a full audit trail of communications and vote history, ensuring accurate and timely record-keeping and reporting.
ISS notes that the new solution is offered in response to the trend that a growing number of asset managers’ underlying clients are seeking greater control over their voting decisions.
In connection with last week’s Special Session: “Tackling Your Pay Vs. Performance Disclosures” over on CompensationStandards.com, I put together some model disclosure that we discussed during one of the three panels. During the program, I described the process of drafting the model disclosure as “psychologically painful,” because the new rule is very prescriptive and elicits quite a bit of disclosure – perhaps more than many had anticipated! As you put “pen to paper” in the coming weeks to draft your new pay versus performance disclosure, I thought I would share some of my five key takeaways from the drafting process.
1. It is a lot of disclosure! My initial thought was that maybe this new disclosure will be similar to the Summary Compensation Table – multiple columns with some footnotes, along with narrative describing the relationships. That was definitely not what the disclosure turned out to be once it was drafted – our model disclosure goes on for 7 pages, which is made up of the main table, an extensive series of footnotes to that table and narrative analyzing the information in the table, which includes a series of graphs comparing the data. For many companies, this would be about the same number of pages of the proxy statement that are dedicated to all of the executive compensation tables combined.
2. The footnotes have footnotes. Item 402(v) is very prescriptive and calls for a great deal of detail to support the figures that are presented in the Pay Versus Performance Table. As a result, our model disclosure has about two and a half pages of footnote disclosure associated with the table itself, with some of the footnotes including more detail in tables that themselves have more footnotes associated with them. There is certainly some opportunity for streamlining here with careful drafting, but the overall takeaway is that there is inevitably going to be a lot of dense footnote disclosure to navigate with the Pay Versus Performance table, no matter how you slice it.
3. “Compensation actually paid,” explained. One of the biggest challenges with the Pay Versus Performance table is trying to explain the complex “compensation actually paid” calculation and providing the supporting data in a manner that is understandable for investors. The “compensation actually paid” concept is something that is entirely new, so investors are going to need a pretty clear roadmap to understand why the numbers came out the way they did given your company’s particular circumstances.
4. Let the disclaimers begin. The concept of “compensation actually paid” is a new one as I mentioned, and it also does not really represent the actual amount of compensation that was earned by or paid to the principal executive officer and the other named executive officers as a group in the years presented. For that reason, our model disclosure included the following disclaimer language: “The dollar amounts reported in column (c) represent the amount of “compensation actually paid” to [the PEO], as computed in accordance with Item 402(v) of Regulation S-K. The dollar amounts do not reflect the actual amount of compensation earned by or paid to [the PEO] during the applicable year.” I believe that it is important to include some sort of disclaimer language along these lines to put the information in context and to convey that, despite the title, “compensation actually paid” is just another theoretical number like realized pay, realizable pay or even the total compensation column of the Summary Compensation Table.
5. Don’t forget the analysis! As Mark Borges pointed out during last week’s program, with so much focus on calculating “compensation actually paid” and preparing the Pay Versus Performance table, it is easy to overlook the importance of preparing “clear” descriptions of the relationships between the various measures of performance included in the table and the “compensation actually paid.” This is the part of the disclosure that will require some careful drafting and consideration of the information about pay versus performance that is discussed in the CD&A. In our model disclosure, we use a combination of narrative and graphics to provide the required “clear” descriptions of the relationships.
If you missed the live event last week, you can still purchase the recording by contacting a member of our Sales Team at Sales@CCRcorp.com or 800.737.1271. Archive sales end November 30, 2022.
The proxy advisory firms and institutional investors have not commented on how they plan to use the new disclosure, and it is expected that many will likely take a wait-and-see approach during the upcoming proxy season. That said, it is still important to draft your new pay versus performance disclosure with an eye toward how the proxy advisory firms and institutional investors will perceive it, and the key watchword we settled on is “consistency.”
You should carefully evaluate whether the new pay versus performance disclosure is consistent with the story that you are telling in the CD&A about the relationship between compensation and performance, which companies will continue to provide and which will not be replaced by the new disclosures. You definitely do not want the new pay versus performance disclosure (which, for most companies, will likely not be presented as part of the CD&A, but rather somewhere further back in the tabular compensation disclosures) to present any “surprises,” because even if the institutional investors or proxy advisory firms are not really using the data as part of their evaluation in the 2023 proxy season, they certainly will not be ignoring the disclosure. Therefore, consistency – and clarity – is the key.
If you missed last week’s Special Session, you can still purchase the recording by contacting a member of our Sales Team at Sales@CCRcorp.com or 800.737.1271. Archive sales end November 30, 2022.
Join us tomorrow at 2:00 pm eastern time here on TheCorporateCounsel.net for our latest webcast, “Dissecting the Quarterly Earnings Process.” Hear from Goodwin’s Sean Donahue, O’Melveny’s Shelly Heyduk and Cooley’s Reid Hooper about the quarterly earnings process, including a refresher on some of the basics, technological advances that can improve the earnings call experience, and pointers on preparing for Q&A in the midst of shifting investor interests.
This webcast is free to members of TheCorporateCounsel.net and is available to non-members for $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
It has been a rough year for digital assets, and the last thing that the crypto market needed was a spectacular scandal of massive proportions. Well, perhaps not surprisingly, we just got one of those in the FTX debacle, which continues to unfold.
One of the more disturbing things I read about the situation over the weekend was this WSJ article, which raised the parallels of the failure of Long Term Capital Management in 1998 and the collapse of Lehman Brothers in 2008. In both of those situations, government intervention was necessary to try to mitigate broader financial and economic impacts. In the case of Lehman Brothers, I still do not think people generally understand how close we came to a “nuclear winter” economic scenario worse than the Great Depression.
While there is nothing to indicate so far that the FTX situation will be on par with those other major failures, it does not give one much comfort to realize that both LTCM and Lehman Brothers were operating within the regulated financial system (although LTCM was certainly on the fringes of that system at the time of its collapse as a hedge fund trading in derivatives), while crypto firms continue to operate in the still largely unregulated Wild West of the digital asset world. As a result, all of those post-Dodd Frank efforts to improve oversight, coordination and transparency in the financial markets for the purpose of preventing another Lehman Brothers collapse are completely ineffective in helping us avoid a more cataclysmic crypto failure that could impact the broader financial markets and the economy.
As the SEC still considers final rules on climate change disclosure, the Biden Administration is pressing forward with proposals to require climate change disclosure from federal government contractors.
As this Morrison Foerster blog notes, last week the Biden Administration unveiled details regarding a forthcoming proposed Federal Acquisition Regulation (FAR) rule on greenhouse gas emissions disclosure for major federal suppliers. Titled the “Federal Supplier Climate Risks and Resilience Rule,” the proposed rule would impose emission disclosure requirements on contractors that received $7.5 million or more in federal contract obligations in the prior fiscal year as a mandatory element of a FAR Part 9 responsibility determination.
Over the past month or so, I have done a lot of speaking about the SEC’s new pay versus performance rules (including our excellent program on CompensationStandards.com last week), and one consistent practice pointer has been to line up your outside valuation service providers now.
Just as everyone seems to be doing their holiday shopping early this year, folks dealing with the pay versus performance rules have been rushing out to engage with outside valuation firms for the purpose of valuing equity awards to compute “compensation actually paid.” Outside valuation firms may be necessary for this purpose because your equity awards may require complex valuation approaches that require significant computer firepower and particular expertise, so it may not be possible for your in-house financial reporting and accounting groups to do the work on their own.
But we have a scarcity problem here, because there are only so many firms that do this sort of valuation work, and there are only so many hours in the day in which they can run their models, so it is important to claim your spot in the queue now before all of the spots are claimed. Reach out today to the firm that you regularly work with, or establish a relationship with a firm if you have not worked with one before, so that you will be ready to compute “compensation actually paid” when the time comes.
Thank you to all of the members of our military – and their family members – for your service & sacrifice for our country. While we are mindful of your contributions every day, they are particularly front-of-mind each year on Veterans Day.
More & more companies are also recognizing veteran status as an element of diversity. In its recently published 2022 Board Index, Spencer Stuart found that 72% of new directors who joined S&P 500 boards in 2022 were from historically underrepresented groups and that 18% of the incoming class was below age 50. Spencer Stuart also observed that disclosure of more expansive “diversity” dimensions are becoming more common for S&P 500 boards. Here’s an excerpt with more detail:
– Seventy-four boards (15%) included LGBTQ+ disclosure in their proxy statement, more than twice as many as in 2021 (32 boards, 6%). This year, 29 boards (6%) identified the LGBTQ+ status of individual directors. On these boards, a total of 45 LGBTQ+ directors were disclosed: 27 unnamed and 18 named, more than three times the number who were named in 2021 (5).
– Twenty-two boards disclosed having a military veteran on their board, up from three in 2021.
– One board disclosed having a director with disabilities.
A search of Form 10-Ks on Edgar also shows that companies are incorporating veteran recruitment as part of DEI programs, and reflecting that in human capital management disclosure. Here’s an example from page 13 of C3.ai’s latest Form 10-K:
Our talent acquisition team engages various constituency groups to recruit qualified under-represented minorities, women, and military veterans to job opportunities. We host tech talks and workshops at top universities across the nation with the Women in Computer Science Associations, the Society of Women in Engineering, the Society of Latinx Engineers, and the Society of Black Engineers. We joined with BreakLine to help support hiring military veterans. Our goal is to find and recruit the best talent in the world.
Whether the service members in your life are continuing a military career or have gone on to join the corporate workforce, please take time today to honor & celebrate them.
As recently as 5 years ago, the director onboarding process at many companies was pretty basic: orientation, review of corporate governance documents & business info, and some management meetings. But with a growing number of first-time directors – and expectations that boards will oversee amorphous E&S issues, corporate culture, cybersecurity, macro-economic & political events – director onboarding has become more important and has expanded in scope.
A WSJ article from earlier this week outlines “new” strategies that can make director onboarding more effective. I was very happy to see Primerica’s Stacy Geer as a source on how she’s used virtual meetings to update their onboarding program. Here’s an excerpt:
She says that the flexibility of online meetings meant the company no longer needs to line up all meetings with management over one or two days. Its new program lasts around a month and includes 15 to 20 meetings with executives, covering topics including strategy, enterprise risk, the role of a director and director liability, she says. It also includes an overview of the board portal and a greater focus on ESG matters, the role of a corporation, and diversity, equity and inclusion.
Other recommendations from the article include providing more opportunities for directors to interact with employees and get a feel for company culture, and education on current macro-factors that are affecting the company’s business and are of interest to shareholders.
Corporate governance is a journey. Some companies are further down the path on this particular aspect, and have been employing a lot of the practices mentioned in this article for years – e.g., setting up a months-long program that arranges for a board mentor, site visits, etc. In fact, our “Director Onboarding” checklist reflects most of the recommendations from the article. So, if you’re not already incorporating some or all of these elements in your program, you wouldn’t be going too far out on a limb to suggest a change, if you think it would help your board.
If you’re already a leader, please drop me a note with things that have worked particularly well for you, and we’ll add them to our checklist to help the community! Email me at liz@thecorporatecounsel.net.
It’s no secret that certain folks at the SEC have been particularly focused on auditor independence as of late. Acting Chief Accountant Paul Munter has issued a couple of statements on the topic, and the Division of Enforcement is casting a net for gatekeeper wrongdoing. One thing that would seem to pretty obviously undercut auditor independence would be to have your independent auditor participate in the CFO interview process, but the SEC brought an enforcement action just a few weeks ago that alleges that an audit partner did this…which would be problematic, if true.
Meanwhile, the Center for Audit Quality has been sharing a series of videos & analyses on the value of auditor independence – including this post in support of the current model of auditor independence, which stems from the Sarbanes-Oxley Act and related reforms.
The CAQ says that criticisms of the current model fail to consider vital regulatory & voluntary components that safeguard auditor independence. One of these factors is the role of the audit committee. Here’s an excerpt:
In addition to the many safeguards that auditors must follow, the Sarbanes-Oxley Act had the wisdom to reinforce the role of public company boards of directors and their audit committee. SOX requires that the audit committee, not the CEO or CFO, maintain sole responsibility for the hiring, firing, compensation of, and oversight of the external auditor. Audit committee oversight is an important ingredient of auditor independence; external auditors are not reporting to the employees whose work they are reviewing but instead to a committee with fiduciary responsibilities to the company and its investors.
With 20 years of SOX under our belts, it is sometimes easy to be lulled into complacency and forget how critical it is to closely monitor the independence of the audit committee. This CAQ post is a reminder of why it matters – and the SEC’s current enforcement focus shows that now is not the time to let down your guard on this topic.
