I was attending the Society for Corporate Governance National Conference this week, and it reminded me of how beneficial it is to network with new contacts and meet with old friends at a good old-fashioned in-person conference. While conference content can be easily streamed through virtual channels, there is really no substitute for getting out there and making that human connection. My experience this week made me even more excited to see all of you in San Francisco on October 14th & 15th at our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences.”
In case you missed my sales job earlier this week, the early bird rate for the Conferences expires on Friday, July 26, so you should act now to lock in that rate and secure your spot at the conference. You will not want to miss all that we have planned for you and the great practical guidance that our talented speakers will provide.
As I officially enter my thirtieth year of practicing securities law, I think it is only natural to look back and reflect on some the lessons that I have learned over the years. Also, as we slog through the dog days of summer, new developments in the world of securities law and corporate governance are few and far between, forcing your intrepid blogger to dig deep for content. So today I launch my mini-series of blogs on some of my top lessons learned.
I begin with some of my formative experiences as a newly minted lawyer working in Corp Fin at the SEC, where I had the benefit of some great mentors who literally taught me everything I needed to know about the securities laws, as well as how to practice law in a regulatory environment. The time was the last half of the 1990s, and there was a little something called the Internet that was changing just about everything, and spawning and extraordinary IPO boom as innovative companies seemed to be born every day and shortly thereafter go public. As an examiner reviewing IPO filings in Corp Fin, I found myself on the front lines of an enormous market bubble that spectacularly burst soon after I left the SEC. Reviewing all of those Form S-1 registration statements definitely brought about a few lessons learned:
1. Be Skeptical, But Open-Minded: I distinctly recall sitting in the office looking at all of the Form S-1s that were being filed and being very skeptical (along with my colleagues) of the freshly-minted business that were seeking to go public. When the Form S-1 for Amazon.com was filed, we wondered aloud why anyone would buy books using the Internet when they could go to their local bookstore or Barnes & Noble. When the Form S-1 for eBay was filed, we scoffed that it seemed unlikely people would be excited about buying used Pez dispensers through an Internet-based auction. When the Form S-1 for Yahoo! was filed, we just scratched our heads. While there were certainly both winners and losers in that timeframe, I had a good lesson in being open to the possibility of new business ideas and ways of doing things, while maintaining a healthy degree of skepticism to ask the tough questions and seek the best disclosure for investors so they could make an informed investment decision.
2. Don’t Overdo It: If you can imagine, back in those days of that late 1990s Internet boom it was not uncommon to send an initial comment letter on a Form S-1 that had over 150 comments. In retrospect, that seems like an extreme result, and if I had it to do all over again, I would likely be more circumspect in the comments that I would raise. All of the commenting tended to drag out the process, but I would say that they approach undoubtedly elicited better disclosure and more accurate financial statements. With the benefit of perspective, I am not sure how much incrementally better the disclosure was as compared to the effort of dealing with all of those comments.
3. Communications Matter: There once was a time when Section 5 of the Securities Act was sacrosanct and gun-jumping was an issue that the Staff of Corp Fin was very concerned about, because the whole point of the Securities Act registration provisions is to channel the communications about the offering into a prospectus that includes the material information about the company and the offering, so that investors can make an informed investment decision. As a result, ginning up interest in an IPO through news articles and other extraneous communications is problematic because investors do not get the full picture that way. I got to defend the ramparts of Section 5 with a 1999 offering by a company called Webvan, which no one remembers today but was a once a highly anticipated IPO of a business delivering groceries ordered on the Internet. A Forbes article ran during the IPO that had some wild claims by the CEO, and the Staff came down hard on the gun-jumping violation, forcing a delay of the IPO to facilitate a cooling-off period following the media hype. Of course the IPO went on to be a big success but the company was bankrupt within a few years – a little bit of healthy skepticism might have gone a long way with that one!
4. Stick to the Fundamentals: One of the challenges faced during the 1990s Internet IPO boom was that many of the companies going public had not been in existence for very long and had not generated profits or revenues that would typically be used to determine their value, so they turned to a wide range of alternative measures outside of the financial statements as a means for describing their market opportunity. This trend presented a considerable challenge to the Corp Fin Staff, because there was no real framework in the SEC’s rules for dealing with disclosure about the number of “clicks” or “eyeballs” that a company cited as proof of concept. The experience really emphasized for me that there is really no substitute for the information provided in financial statements and MD&A for getting a true picture of the fundamentals of a company for the purpose of making an investment decision.
5. What Goes Up Must Come Down: We all know how the 1990s Internet boom ended up – with a pretty spectacular bust that resulted in quite a few companies with good ideas going out of business or never realizing their full potential due to a lack of access to capital. In looking back today, it seems to me that the overall frenzy that fueled the bubble was just unnecessary – we would all have been better off if those companies has spent more time in gestation and had not flocked to the public markets before they were ready. Investors ended up losing a lot of money just because the market collectively suspended belief for a few years and was willing to let too many companies go public before it was their time. I think this is definitely a lesson learned that we should keep in mind today
While I mentioned the looming resource extraction issuer disclosure deadline back in the March, I feel compelled to mention it again because we now find ourselves just a couple months away from when affected issuers will be required to file a Form SD to disclose the payments contemplated by the rule. I feel that because the rule has had such a tortured history, it is somehow sneaking up on us now, with the Form SD deadline being 270 days after the end of the resource extraction issuer’s fiscal year. The SEC has had the notion of revisiting the resource extraction issuer disclosure rule on its Reg Flex Agenda for some time, but now all hope is lost that any changes will be made or a delay in the deadline will be adopted before the September 26, 2024 Form SD filing deadline for calendar year end companies.
If your company falls within the definition of a resource extraction issuer and you have not yet started preparing your Form SD, I encourage you to check out our “Resource Extraction” Practice Area.
We have posted the transcript for our recent CompensationStandards.com webcast, “Proxy Season Post-Mortem: The Latest Compensation Disclosures,” during which I was joined by Mark Borges, Principal, Compensia and Editor, CompensationStandards.com and Ron Mueller, Partner, Gibson Dunn & Crutcher, for a discussion focusing on the “lessons learned” that companies can start carrying forward into next proxy season. The webcast covered the following topics:
– The State of Say-on-Pay During the 2024 Proxy Season
– Highlights and Tips from this Year’s CD&As
– Best Practices for Disclosing Incentive Compensation Adjustments and Outcomes
– Trends in Disclosure Regarding Operational and Strategic Metrics
– Pay-versus-Performance: SEC Staff Guidance Issues and Year 2 Enhancements
– Compensation Clawback Policies – Multiple Policies/Potential Disclosure Issues
– Proxy Advisory Firms – Is Their Influence Starting to Wane?
– Perquisites Disclosure and Recent Enforcement Focus
– Shareholder Proposals – Company Strategies; No-Action Trends; Activists and Universal Proxies
– Rule 10b5-1 Plan Disclosure Developments
– Pending SEC Rulemaking
It is always great to be on a webcast with rock stars like Mark and Ron. As I said during the webcast, getting together for this annual webcast always feels like when the Rolling Stones get together for their latest tour! If you do not have access to all of the great resources on CompensationStandards.com, I encourage you to sign up today.
As we know all too well, public companies these days are awash in policies and procedures. I think that is generally a good thing, because policies and procedures are critically important for ensuring that public companies comply with SEC and stock exchange requirements and a wide range of other important laws and regulations. One of the big risks of having so many policies and procedures is that sometimes policies may fall into the category of “set it and forget it,” which can create risks for the company and its directors and employees and could potentially defeat the whole purpose of having the policy in the first place.
One policy that unfortunately sometimes falls in to the “set it and forget it” category is the Regulation FD policy and broader policies around public disclosures and investor relations. A Regulation FD/investor relations policy is not specifically required by SEC rules or stock exchange listing standards, but these types of policies were nonetheless adopted en masse way back when Regulation FD was originally adopted in the Summer of 2000. Because the violative conduct contemplated by Regulation FD was different from what was addressed in insider trading policies, many companies felt compelled to adopt Regulation FD policies to provide clear guidelines and procedures for disclosing information in compliance with Regulation FD. The “set it and forget it” risk arises in that Regulation FD has not been substantively changed over the past 24 years, so companies have not had much prompting to go in and take another look at their Regulation FD policies.
Another consideration is the fact that Regulation FD is only part of the story when it comes to the policies and procedures that a company must implement with respect to its overall investor relations and public communications approach. For that reason, many companies have expanded their Regulation FD policies, or adopted separate policies, to address the full range of policies and expectations surrounding communications with the investment community, quiet periods, earnings releases and conference calls, guidance, review of analyst models and reports, dealing with leaks and rumors and the use of social media and other alternative communications channels. These policies and procedures that warrant a frequent review and refreshment, as methods of communication and market norms continue to evolve. To facilitate that review, here is my top ten list of items that should be considered:
1. Does your policy specify authorized spokespersons that can speak to the investment community on behalf of the company, and are the appropriate spokespersons listed? Are others speaking on behalf of the company in practice, but are not identified as authorized spokespersons?
2. Does your policy identify what information is considered “material nonpublic information,” and is that aligned with your insider trading policy?
3. Does your policy contemplate an obligation to immediately advise someone in the organization of any instances of potential intentional or non-intentional disclosure of material nonpublic information?
4. Is your Regulation FD policy aligned with other company policies addressing public disclosure and the communication of information to the general public and the investment community?
5. Do the company’s policies addressing investor relations matters (either as part of the Regulation FD policy or as a standalone policy) provide guidelines for earnings releases, earnings calls, pre-release situations, providing and updating guidance, participation in presentations and meetings and communicating with analysts (including the review of analyst models or reports) that are consistent with the company’s practices?
6. Should the company implement a “quiet period” prohibiting communications with the investment community around the time when earnings information for a quarter is known in order to minimize the risk of selective disclosure, or if the company has implemented a quiet period policy, is that period of time still appropriate?
7. Do the company’s policies addressing investor relations matters provide guidelines on how the company should respond to leaks and market rumors, generally with a “no comment” policy?
8. Do the company’s policies addressing investor relations matters specify a consistent approach for protecting forward-looking statements and complying with non-GAAP financial measure requirements?
9. Do the company’s policies addressing investor relations matters provide guidelines regarding the use of social media and other internet communications?
10. Do the company’s policies addressing investor relations matters prohibit sharing analyst reports and information from such reports to avoid the risk of adoption or entanglement?
For more information about these policies, check out our “Regulation FD” Practice Area. If you are not a member and do not have access to all of the practical resources found in our practice areas, sign up to be a member of TheCorporateCounsel.net today.
Governance professionals recognize that corporate governance is based on a mosaic of different inputs, which range from specific laws and rules to norms and best practices. In corporate governance land, it can sometimes feel like there is a lot of gray, rather than black and white requirements dictated by state law, the SEC and the stock exchanges.
In our “Q&A Forum” (#12,264), a member recently asked about the enforceability of provisions specified in a company’s corporate governance guidelines, which is a document familiar to many of us who practice with public companies. The member asked:
NASDAQ listed issuer (DE corporation) adopts corporate governance guidelines and includes a disclaimer regarding their purpose. If the guidelines include a section stating that directors either “shall” or “should” notify the board and receive board approval prior to taking on new directorships at outside public companies, what is the risk involved if a director doesn’t give prior notice or receive approval and accepts a directorship at another company without disclosing it to the board? Would this be a breach of duty of care of that particular director? Does the “must”, “shall” or “should” language make any difference in determining if there is a breach of the duty of care?
NASDAQ doesn’t require corporate governance guidelines, and neither does the SEC. The issuer has a code of ethics and conduct, as I understand it is required by the SEC, but the code doesn’t speak to this. The only other potential issue I see is with the state of incorporation’s corporation law. I don’t see anything regarding this in DE but would love more insight into that. The only thing I can think of would potentially be a breach of duty of care, but on the other hand, (a) accepting an outside directorship isn’t an action being taken by that director on behalf of the corporation or pursuant to the corporation’s governance and (b) it is my understanding that the corporate governance guidelines aren’t enforceable, whether or not the language is “shall” or “should”.
Am I missing something regarding Delaware law?
John responded:
The board has established a policy that it expects directors to follow. I don’t think a single incidence of noncompliance with that policy necessarily automatically results in a breach of the individual director’s fiduciary duty, but I think there are situations in which it could rise to such a level.
For example, if the director’s failure to comply with that policy resulting in the director accepting a seat on a board that would create an unlawful interlock, or if that director’s action also resulted in violation of an overboarding policy, or if the director’s failure to comply was willful, a plaintiff might have some fun with it. Remember, the director has accepted a position for which he or she will receive remuneration in violation of the policy, and I think a plaintiff who was inclined to bring a case might focus on that in an attempt to turn a care claim into a loyalty claim.
The other thing to keep in mind is that since this is a board policy, it implicates the entire board’s duty of oversight, and in an absolute worst-case scenario, might expose the other directors to a Caremark claim. This seems pretty far from rising to that level, but the takeaway is that if a board establishes a policy, it needs to be followed and violations of the policy appropriately sanctioned. The sanction doesn’t have to be draconian, but the board should address the violation in some fashion. Assuming there are no aggravating factors, perhaps requiring the director to undergo additional training on board policies and procedures might be appropriate.
I think this is a very timely question, because it seems to me that overboarding provisions of corporate governance guidelines are getting tested more and more these days, as public companies seek to refresh their board while the crop of qualified director candidates seems to remain in short supply. I increasingly find myself suggesting that companies periodically educate their boards about the corporate governance guidelines, so that directors are better attuned to the expectation that they provide timely notice of a potential new board position or executive role so that appropriate decisions can be made by the board and the individual director and embarrassment (or worse) can be avoided. I am afraid that corporate governance guidelines can drift into the category of policies that reside on the company’s website but are off the radar of those two whom the bulk of the provision apply – the members of the board of directors.
Summer is marching on and that means we have less than two weeks left before the early bird rate for our “2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences” expires on Friday, July 26th. As I have noted many times, we have put together an extraordinary group of speakers who will cover a wide range of timely topics over two full days of sessions on October 14th & 15th in San Francisco.
Our early bird in-person Single Attendee Price is $1,750, which is discounted from the regular $2,195 rate! If you can’t make it to the Conferences in person, we also offer a virtual option so you won’t miss out on the practical takeaways that our speakers will share, and we offer discounted rate options for groups of virtual attendees. You can register now by visiting our online store or by calling us at 800-737-1271.
On Friday, the SEC’s Small Business Capital Formation Advisory Committee released the agenda for its upcoming meeting on Tuesday, July 30, 2024, which will include “an exploration of recent changes to the U.S. Small Business Administration’s (SBA) Small Business Investment Company (SBIC) program.” This program will be open to the public via a webcast available on www.sec.gov.
At the meeting, the Committee will hear observations on the state of small business capital raising and discuss recent changes to the SBIC program designed to increase access and diversify funding for small businesses, start-ups, and fund managers. The SEC’s announcement of the meeting notes:
SBICs are privately-owned and operated investment funds that make investments in U.S. small businesses and are licensed by the SBA. SBICs may obtain access to SBA-guaranteed loans to match privately raised capital, which increases the amount of capital these funds can invest in American small businesses.
To facilitate the discussion, members will hear from an SBIC fund and a practitioner who will, among other things: provide an overview of the SBIC program and recent changes, including the introduction of a new type of SBA-guaranteed loan to private funds; address the regulatory framework governing SBICs; and share their views on successes and challenges to date. The discussion will commence with remarks by Committee member Bailey DeVries, who leads the SBIC program in her role as the SBA’s Associate Administrator and Head of Office of Investment and Innovation.
The full agenda, meeting materials, and information on how to watch the meeting are available on the newly revamped www.sec.gov.
Speaking of the SEC’s newly revamped website, the SEC issued a notice on Friday indicating that, due to a technological error, members of the public trying to use the agency’s online comment form may have received a message indicating that they were unable to complete the submission during the period May 30 until June 26, 2024.
The notice indicates that the technological error affected online forms that can be used to submit comments on Commission rulemakings, self-regulatory organization matters, Public Company Accounting Oversight Board proposed rule changes, and other matters open for public comment. Commenters were able to submit comments during this time by sending an email to rule-comments@sec.gov or by sending the comments letters in paper to the SEC’s address.
The notice indicates that the SEC has now been resolved, and commenters can submit their comments now using the online portal. There is no need to resubmit comments that were previously submitted via alternative means and are now posted on the SEC’s website.
The ESG world hasn’t been static and neither have demands on your time and needs for usable information. Therefore, starting next week, you’ll notice some changes for the summer that enhance our service and value to members. We will be improving curation of external resources and creating more original practical content you can use for your organization or in advising clients. Practicality and usability of the website and its content remain core, but there will be more information geared to new and mid-level ESG practitioners. PracticalESG.com will better help them understand ESG generally, how that fits in to company practices/operations and support their professional growth cost effectively.
– In-house staff can use our focused resources to get up-to-speed quickly to support managers and executives efficiently;
– Outside advisors can also learn key topics and respond quickly to needs of their supervisors and inquiries from clients.
In bettering our resources, you will see more focus on a smaller number of major issues at the moment:
– EU sustainability regulations
– The hard-dollar business case for ESG/linking to business fundamentals (and by extension – protecting your department funding and job)
– CSO burnout
– AI in ESG
– Simplifying ESG/sustainability communications
Don’t worry – we will still cover other important ESG topics but we’re improving resources that are most relevant. And we continue to rely exclusively on experienced professional staff and guest contributors, not AI. One noticeable change will be the blog schedule – blogs will be published Tuesday through Thursday only so we can invest our time in serving you best.
I encourage you to sign up today for PracticalESG.com if you are not already a member. PracticalESG.com is a trusted resource for practical ESG guidance, updates and more. You can access a wide range of resources that are critical to anyone who must stay abreast of ESG matters for their job. You can sign up online, contact a Specialist at Sales@CCRcorp.com or call 1-800-737-1271.