The DOJ caused a stir late Friday with its announcement that the President intends to nominate SEC Chairman Jay Clayton to replace Geoffrey Berman as the United States Attorney for the Southern District of New York, which is arguably the most prominent prosecutorial position outside of DC. What will this mean for the SEC?
According to this NYT article, Jay notified Staffers on Saturday that he intends to stay at the Commission until he’s confirmed into the new position. It’s not yet clear whether Jay’s nomination will make it through the Senate, or how long it will take, especially since it’s been reported that even those on Capitol Hill were blindsided by the news – and Democrat New York Senator Chuck Schumer, who traditionally would have procedural blocking power over the nomination since it’s in his home state, released a statement calling for Jay to withdraw his name from consideration. Bloomberg also reported that it’s unlikely Jay expected his nomination to spark controversy and require removal of the current occupant from office.
If and when Jay does leave the SEC, many speculate that Hester Peirce, as the most senior remaining Republican Commissioner, would be appointed to the role of Chair for the time-being. She wouldn’t need Senate approval since they’ve already approved her appointment as a Commissioner. The digital token crowd is pretty excited about that prospect – but at this point, it remains speculation.
The effect on rulemaking could be murkier. First, the timing of the Congressional Review Act deadline was already up in the air due to the coronavirus. That’s the Act that marks the cut-off point after which agency rules are vulnerable to repeal by the next Congress, and it’s always especially relevant during a presidential election year. Often, this deadline falls sometime in May, but this article from the Brookings Institute notes that it could be as late as July or even August if Congress continues to meet regularly in the coming months. So, while many think the SEC is unlikely to adopt any more major rules at this point, the door may still be open.
Second, the SEC currently has four commissioners because former Commissioner Rob Jackson stepped down earlier this year – his post had ended last June. John blogged on Friday that the President nominated SEC Senior Counsel Caroline Crenshaw to fill the vacancy, but no timetable has been set for her confirmation. If Jay moves on before Caroline is confirmed, the SEC will be left with just three Commissioners. That’s enough for a quorum under the Commission’s procedural rules (17 CFR §200.41), but as Broc blogged back when Mary Jo White was Chair, it effectively gives each Commissioner “veto power” by not showing up.
If Jay departs after Caroline is confirmed, that would return the number of Commissioners to four – and they might split 2-2 in their decision-making, with Commissioners Roisman and Peirce taking one view and Commissioners Lee and Crenshaw taking another. So, if we’re going to see any further rulemaking, it would most likely have the best chance of getting through with Jay still in the seat as Chair.
“WFH” & Surging Whistleblower Reports
Working from home certainly saves on commuting time. And an unexpected effect of recent stay-at-home orders, which led many to work from home, might be an upsurge in whistleblower tips to the SEC. A recent WSJ article said that over 4,000 tips of potential wrongdoing were reported to the SEC from mid-March to mid-May – an increase of 35% over the same period last year. Among other things, the article cites lawyers as saying the tipsters have more time on their hands. It also says that recent publicity of whistleblower awards may have also led to the upsurge. What kind of tips are being reported? Here’s an excerpt:
In recent months, whistleblowers have raised red flags on possible foreign corruption in health care, pharmaceuticals and technology to the SEC, the Justice Department and the Federal Bureau of Investigation.
Another attorney said some of the whistleblower cases brought to him are connected to the pandemic, such as small, public companies promoting home-testing kits that were allegedly fictional. Others presented more typical infractions such as money-laundering, insider trading, accounting gambits and bankruptcy fraud, unrelated to the pandemic.
Transcript: “Middle Market M&A – The Latest Developments”
We have posted the transcript for our recent webcast: “Middle Market M&A – The Latest Developments.”
As we reach the end of another tough week, I thought this Law.com article about the results of a recent ACC poll on lawyer wellness was worth noting. This may come as a surprise to you, but dealing with a pandemic, quarantine, economic collapse, civil unrest, job security & health worries, Zoom fatigue & unpaid second jobs as homeschool teachers is apparently stressful:
Nearly 50% reported “feeling tired or having little energy” while also having trouble sleeping. More than 43% were experiencing anxiety; 40% had trouble concentrating; nearly 22% reported an “increased use of substances,” such as alcohol and tobacco; and nearly 19% said they’d been depressed. Nearly 44% had anxiety. Unsurprisingly, nearly 50% of respondents reported having trouble switching off from work and nearly 75% were experiencing moderate to very high levels of burnout.
The good news is that 88% of respondents are – like you & me – working from home, which means that we can all enjoy our mental and emotional collapses in our slippers. So, if you’re finding this time to be a tough slog, know that you aren’t alone, and take comfort in the knowledge that human beings can be remarkably resilient creatures, even under the most trying conditions.
I’ll give you an example. During the Falklands War, the H.M.S. Sheffield was sunk by an Argentine missile. That would be enough to ruin anybody’s day, but nevertheless, as the survivors waited for rescue in the ship’s life boats, they sang “Always Look on the Bright Side of Life” from Monty Python’s “Life of Brian.” Since then, the song has become a bit of a tradition among British forces when the chips are down.
We can learn a thing or two from the Royal Navy – after all, they figured out scurvy, right? When things are bad, look for some pleasant distractions to help lighten the load. I highly recommend a nice long daily walk if your schedule & surroundings permit, but I’ve found a few other things during the current troubles that have brought a smile to my face.
For instance, there’s Sponge Bob in box seats at a South Korean baseball game, Vogue’s guide to face mask fashions, and the delightful feeling of schadenfreude that comes from seeing so many people learn the hard way that the “unmute” option on Zoom has the same catastrophic potential as the “reply all” option to an email. I also discovered that religious services are best experienced while reclining in a La-z-boy, & that, if you throw in Peyton Manning & Charles Barkley, anything – even golf – can be interesting to watch. Also, I make a heck of an almond flour banana bread now.
This isn’t much in the face of pestilence, economic turmoil & civil unrest, but these are the kind of small consolations that will get us through – at least until the Visigoths show up. You folks are on your own when that happens, but until then, always look on the bright side of life.
SEC Nominee: Caroline Crenshaw
Yesterday, the White House announced that President Trump would nominate veteran SEC senior counsel Caroline Crenshaw for the Democratic seat on the SEC that was vacated by Rob Jackson’s departure. She joined the agency in 2013 and has served in several capacities, including counsel to commissioners Stein and Jackson.
May-June Issue of “The Corporate Executive”
We’ve wrapped up the May-June issue of The Corporate Executive – and will be mailing it soon! It’s available now electronically to members of TheCorporateCounsel.net who also subscribe to the print newsletter at each of their locations (try a no-risk trial). This issue includes pieces on:
– The Impact of COVID-19 on Executive Compensation
– ISS and Glass Lewis Voting Policy Changes Due to COVID-19
– New Proposed Regulations under Internal Revenue Code Section 162(m)
We lost a securities law legend when Marty Dunn passed away on June 15, 2020. Marty was the most recognizable person in the securities bar, having spoken at so many conferences and events for so long that it is impossible to count them all. Marty was also a key contributor to our publications, serving as an Editor of The Corporate Counsel for the past nine years, as a co-host of “The Dave & Marty Radio Show” on TheCorporateCounsel.net and as a panelist, comedian and puppeteer at the annual Proxy Disclosure Conference. Marty loved the securities laws and spent his life sharing that love with others, always seeking to teach us something new, while at the same time making sure that we did not take it all too seriously.
Marty’s wit and good humor was legendary. He always had a funny story or witty retort when speaking on an otherwise dry panel, and audiences loved him for that. For many years, Marty and I would travel around the country, like a pair of securities law troubadours, bringing the Dave and Marty show to conferences and events, although I must admit that it was mostly the Marty show. We had such a great time on those trips. I will treasure those memories forever.
Marty had spent nearly 20 years at the SEC, where he was responsible for many of the SEC’s most significant initiatives on disclosure, governance and capital-raising, including, among many others, reforming the securities offering process, implementing the Sarbanes-Oxley Act, adopting plain English requirements, implementing electronic proxy delivery, and easing capital formation for small businesses. Marty spent his entire government career in his beloved Division of Corporation Finance, where he held several key positions, including Associate Director, Chief Counsel, Deputy Director and Acting Director. Marty truly loved the SEC and Corp Fin. I can distinctly recall sitting in his office, drafting some new rule, interpretation or regulatory relief, and Marty would say, with a mix of amazement and admiration, “We just made that up!” Marty was the best at taking something complex and making it understandable, as well as taking on the most difficult problem and finding a practical solution for it. These skills made him the great teacher, mentor, regulator and counselor that he was.
After leaving the government, Marty was in private practice at O’Melveny & Myers and Morrison & Foerster. Clients and colleagues sought Marty out for his wise counsel and his aforementioned ability to solve difficult problems with practical solutions. I had the pleasure of working with Marty again for the past seven years and we were able to accomplish so much together, but yet we had so much more that we wanted to do. I am going to miss him as a valued friend, mentor and colleague.
Above all else, Marty was a family man. He loved his family so much and he talked about them all the time. Marty is survived by his wife Linda and daughters Emily, Molly and Maggie, as well as many other family members, friends, colleagues and clients who loved him.
– Dave Lynn
“I Like It Like That” – 2019 Proxy Disclosure Conference
Marty, Carrie Darling & Dave at the Del – Feb 2020
Marty Pitching for Corp Fin’s Softball Team – 1989 (part of our Staff photo gallery)
Several years ago, the SEC approved exchange rules requiring the comp committee to review the independence of a comp consultant before retaining that consultant. The requirement was prompted by concerns about how other lucrative services provided to the company might influence the consultant’s advice to the board. But is the potential impairment of consultant independence by fees for other services the right issue to focus on here?
A recent study from the American Accounting Association study suggests that it isn’t. Instead, the study found that the amount of fees the consultant receives for its advice to the comp committee may have a greater influence on its CEO comp recommendations than other services that it provides to the company. This excerpt from the press release announcing the study explains:
The new research suggests that since 2009 the reward to EC consultants for sumptuous CEO pay packages has had less to do with gaining access to additional company services (in other words, with cross-selling) than with securing repeat EC consulting at high fees. Researchers Jeh-Hyun Cho of Arizona State University, Jeong-Hoon Hyun of NEOMA Business School in France, and Iny Hwang and Jae Yong Shin of Seoul National University, Korea, write that among multi-service providers they “find no evidence that CEO pay is higher when non-EC fees are higher, providing no support for the cross-selling hypothesis.”
In contrast, among the same group they “find strong empirical support for the repeat-business hypothesis suggesting that consultants receiving higher EC fees recommend higher total [CEO] compensation in an effort to secure future engagement with clients.”
The study says that for every 1% increase ($1,770) in the average consultant’s fee, CEOs reap an additional $4,474 in pay. The authors suggest that one reason for the link between higher fees and higher comp is that comp consultant fees are rarely a significant issue for the board during the retention process, because the amount is relatively small in the grand scheme of things. In addition, many firms have spun-off executive comp practices from their broader business, effectively taking cross-selling off the table as an area of potential concern.
Financial Reporting: Covid-19’s Ongoing Impact
Last quarter’s financial reporting was a barrel of laughs, wasn’t it? Well, buckle up, because this Deloitte memo says that Covid-19’s ongoing impact may result in a bumpy ride for many companies in the current and future reporting periods as well. The memo addresses some of the key financial reporting issues and accounting topics that are likely to be confronted as the pandemic’s impact continues to play out. This excerpt addresses some of the considerations that come into play when dealing with modifications of revenue contract terms:
Some companies may seek to mitigate the effects of the pandemic by offering features such as price concessions, discounts on the purchase of future goods or services, free goods or services, extended payment terms, extensions of loyalty programs, opportunities to terminate agreements without penalty, or revisions to purchase commitments.
If revisions are made to a revenue contract, significantly different reporting outcomes may result depending on the nature of the changes. Companies must consider the specific facts and circumstances of changes in contractual terms (including their business practices and communications with customers) to determine whether to account for the impact of such changes at a single point in time (e.g., the quarter ended June 30, 2020) or over a longer period.
Other topics addressed include goodwill impairment, valuation of deferred tax assets, and modification of other contractual arrangements.
EDGAR: Get Those Notarized Authentication Docs In!
In March, the SEC adopted a temporary rule allowing EDGAR filers that were unable to obtain notary services due to the Covid-19 crisis to nevertheless obtain access codes if they subsequently submitted notarized authentication documents. Last week, the SEC issued a reminder that filers who relied or plan to rely on the temporary rule between 3/26/20 & 7/1/20 need to submit the required notarized authentication document as correspondence to EDGAR within 90 days of the date they submitted their application for EDGAR access. Failure to do so may result in suspension of EDGAR access.
Do you remember that “South Park” episode that aired during the financial crisis in which one of the characters deposits a $100 birthday check from his grandmother into the bank? The banker takes the money, “puts it to work” in a mutual fund and immediately announces “. . . and it’s gone!” That episode was the first thing that came to mind when I read this risk factor language in Hertz’s pro supp for a $500 million ATM offering launched in the midst of its Chapter 11 bankruptcy proceeding:
Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.
That’s pretty bleak disclosure, and nobody can say they weren’t warned about the perils of this investment. Even so, Hertz’s decision to tap the public equity market – which the bankruptcy court approved last Friday – in its current financial state definitely raises the bar when it comes to corporate chutzpah. On the other hand, can you blame the company for trying to capitalize on the recent speculative frenzy in its stock in order to increase the size of its bankruptcy estate?
If “Davey the Day Trader” & the gang are willing to sign up to buy stock that the company is basically telling them is worthless, then maybe instead of South Park, I ought to cite 1920s speakeasy impresario Texas Guinan, who famously welcomed her customers by exclaiming, “Hello suckers! C’mon in and leave your wallets at the bar!”
IPOs: Virtual Road Shows On the Rise
The grueling, globe-trotting – “if it’s Tuesday this must be Zurich” – road show process has long been a big part of the IPO experience for management teams & their bankers. In the Covid-19 era, however, this PitchBook article says that virtual road shows may become the “new normal”:
Virtual IPO roadshows likely are here to stay after the pandemic, said Andreas Bernstorff, head of equity capital markets at BNP Paribas. BNP was one of the lead bankers for Peet’s €2.25 billion (around $2.55 billion) IPO on Euronext in May. Bernstorff acknowledged that sizing up a founder or its executives can be more difficult through video without making eye contact or reading body language.
Nevertheless, he said, virtual roadshows have exposed inefficiencies in the IPO process.
“The benefits are obviously avoiding traveling around the world, but also the fact that it can be a faster and more efficient way to reach more investors,” Bernstorff said. “It also has a very distinct benefit of being able, up to a degree, to shorten the period in which one needs to be in the market.”
The article says that fully virtual road shows may not make sense for all issuers. Companies with a low profile and those that operate in volatile markets will likely continue to find it necessary to meet in-person with key investors as part of the marketing process.
Will CLOs Turn the Covid-19 Crisis into a Full Blown Financial Crisis?
If you find yourself sleeping too soundly, check out this article from the July issue of The Atlantic. The article says that collateralized loan obligations, or CLOs, share many similarities with the CDOs that nearly tanked the global financial system a decade ago – and the balance sheets of major banks are full of them.
The problem is that these AAA rated pieces of paper are comprised of a bunch of low-quality corporate debt, and the rash of bankruptcy filings expected in the wake of the pandemic may well upset the applecart when it comes to the default rate assumptions on which those investment grade ratings were based. What’s the worst “worst case” scenario? According to the article, it’s very, very bad.
We’ve just added Bill Hinman – Director of the SEC’s Division of Corporation Finance – as another top-notch speaker at our popular conferences – the “Proxy Disclosure Conference” & “17th Annual Executive Compensation Conference” – which will now be held entirely virtually, September 21-23rd. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get an “early bird” discount – here’s the registration information. Here are the agendas – 18 panels over three days.
Among the panels are:
– Bill Hinman Speaks: The Latest from the SEC
– The SEC All-Stars: A Frank Pay Disclosure Conversation
– The SEC All-Stars: Q&A
– Pay-for-Performance: What Matters Now
– Pay-for-Performance: Q&A
– Directors in the Crosshairs: Pay, Diversity & More
– Dave & Marty: True or False?
– Pay Ratio: Latest Developments
– 162(m): Where Things Stand
– Clawbacks: What to Do Now
– Dealing with the Complexities of Perks
– How to Handle Negative Proxy Advisor Recommendations
– Human Capital: The Compensation Committee’s Role
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 60 Minutes
PPP Loans: Media Giants Seek to Compel Disclosure of Borrowers
A lawsuit filed last week by The Washington Post, Bloomberg, The New York Times, Dow Jones and Pro Publica in a D.C. federal court seeks an order compelling the SBA to produce that information pursuant to outstanding FOIA requests submitted by the companies. The SBA has been slow-walking these requests, and Treasury Secretary Steve Mnuchin recently said that the identities of PPP borrowers won’t be disclosed. He appears to be hanging his hat on Exemption 4 from FOIA.
I guess we’ll see. I’m no FOIA expert, but if the question is whether information about the identity of a private borrower & loan amount are required to be disclosed under a FOIA request, the answer that I’ve seen from lawyers who’ve looked at the issue is yes, that information must be disclosed.
Transcript: “Politcal Spending – What Now?”
We have posted the transcript for our recent webcast: “Political Spending – What Now?”
Rather than thinking about how to refresh the board when directors approach mandatory retirement ages or term limits, a recent opinion piece in Forbes suggests “offboarding” as an alternative method to change board composition. Some might think “offboarding” is a nice way of saying “removal” but here’s what the author says about it:
For many reasons, it is critical for the board’s governance committee to take a closer look at what “offboarding” might achieve as a governance tool. Director offboarding is a focused board process to achieve a structured separation from certain directors without prompting controversy or ill will. It’s intended to allow the board to achieve necessary turnover more quickly and expansively than through term limits or mandatory retirement age, and more gently than through removal.
As defined by NACD and others, “offboarding” processes are grounded in a shared understanding amongst all directors of why an individual was appointed, and of the board’s expectations of performance. From the beginning of board service, directors are ideally made aware of the potential that they may be asked to leave the board before their term has formally concluded. It also involves an ongoing evaluation by the governance committee of the skillsets needed by the board, and conversations on whether individual director backgrounds continue to meet those needs.
The author attributes several factors as leading to more interest in offboarding, the first being that board composition doesn’t change all that fast and governance matters relating to how companies have responded to the Covid-19 pandemic, economic disruption and social unrest are leading to increased focus on board composition.
One effect of the Covid-19 pandemic has been increased concern with director bandwidth. Earlier this year, State Street was the latest asset manager to update its director “overboarding” policy – here’s Sidley’s memo about that. Maybe some directors will scale back board commitments and focus their efforts elsewhere. That’s what Reddit’s co-founder Alexis Ohanian did when he announced he was stepping down from Reddit’s board – he took things a bit further by asking the company to replace him with a black board member – and this week the company did by appointing Michael Seibel, CEO of Silicon Valley startup accelerator Y Combinator.
Aside from concerns about overboarding, the author says many companies will emerge from the pandemic with different competitive footprints and economic models. Although Reddit’s Ohanian may not start a trend and traditional board refreshment methods will certainly persist, maybe increased focus on board composition as a result of current events will lead more boards to consider offboarding as an option for bringing new ideas and perspectives to the boardroom.
Tips for Moving Forward with ESG Reporting & Disclosures
A recent Covington memo provides 7 “what to do” and “what not to do” tips for companies starting down the path of voluntary ESG reporting and disclosures. As investor focus on ESG disclosures sharpens, if companies haven’t already done so, the memo suggests companies start charting a path forward for these disclosures. Covington’s memo notes that despite investor interest, there’s risk courts could find voluntary ESG disclosure materially false or misleading. The recommendations are a good source of helpful tips, here’s what it says about bringing a “securities lawyer eye” to the effort:
– Include forward-looking statement disclaimers and/or other hedging language to clarify that the standards or goals described in the ESG disclosures are not guarantees or promises, as well as the factors that could cause material deviations from these standards or goals
– Frame ESG goals in aspirational language, using words such as “seek,” “expect” or “strive” and avoid making unqualified commitments, using words such as “shall” or “will”
– Challenge comparative and qualitative statements regarding ESG performance such as “best,” “most,” “largest” or “first” and assure that the company has adequate back-up for such statements
– Define in plain English any jargon or terms that lack well-understood definitions that are associated with ESG disclosures
– Cross check the company’s SEC filings against ESG reports to avoid inconsistencies in facts or degrees of emphasis
Resource Explaining ESG Jargon
Keeping up with the latest ESG terminology is nearly impossible as a lot of jargon can be industry specific. That’s why it’s nice to see Latham & Watkins “ESG Book of Jargon” explaining many current ESG-related terms and acronyms. If you’re wondering what something might be referencing, check it out – it’s 151 pages and covers lots of terms and phrases.
Last year, Liz blogged about how disclosure related to a cyber breach presents a tricky issue because disclosure requirements vary quite a bit for companies based on state-specific laws, industry rules, varying international laws and then of course, SEC requirements. Audit Analytics recently issued a report analyzing cyber breach disclosure trends from 2011 – 2019. A chart on the first page of the report shows a dramatic increase in the number of breaches since 2011, with an increase of 54% in the last two years. In terms of disclosure detail, here’s some of what the report found:
– 43% of firms that reported a cyber breach since 2011 didn’t disclose the type of attack – meaning whether it resulted from malware, phishing, unauthorized access, etc.
– For companies disclosing a data breach, since 2011, Audit Analytics found that it took an average of 108 days before companies discovered the breach – with a maximum of 1,625 days and a median of 30 days
– But, it took companies on average another 49 days before disclosing the breach – with a maximum of 456 days and a median of 30 days
– The report mentions, as most already know, that delays in discovering data breaches may raise red flags about internal controls and disclosure delays could lead to SEC action as was the case involving Yahoo! several years ago
– Shedding light on factors that may lead to delays in discovering data breaches and longer disclosure time, the report found companies in certain industries, the type of attack and type of information all impact time to discover a breach and delays in disclosure – the blog provides specifics on these findings
Cyber Breach Disclosure & Insider Trading Risk
The risk of insider trading with cyber breaches originates from several factors – one being delays in disclosure. Based on the average 7-week disclosure delay reported by Audit Analytics, it’s important to keep insider trading risk top of mind now as many have warned about growing prevalence of Covid-19-related cyberattacks –a Baker Hostetler blog discusses those warnings.
In terms of what to do about cyber breach disclosure and risk of insider trading, a recent Greenberg Traurig blog provides a refresher of the issues. Besides investing in IT and security infrastructure and employee compliance training programs, the blog also offers these suggestions about clarifying company policies:
An area where many organizations could focus attention is in clarifying certain policies, in particular, in relation to data breaches. For instance, clarification or heightened emphasis can be given to trading blackout periods. This clarification or heightened emphasis could be included within an incident response plan or other company protocols in the event of a suspected data breach. Such policies must provide specificity as to how such a blackout period will be determined and communicated. Other considerations for incident response plans include limiting who has access to information about an incident, storing incident documentation in access-controlled locations, and implementing a review and approval process for selling stock post-incident.
More on “Change: One Asset Manager’s Call for Companies to do More”
On Tuesday, I blogged about one asset manager calling on companies to take concrete “anti-racism” steps and wondered whether other investors would start using this moment to push for change. Later that day, CII published this “call to action” – noting that many of its investor members have pushed for years for greater diversity & fair workplace treatment, and that we all must do more.
Based on a recent blog in IR Magazine, it sounds like more investors may be stepping up pressure on companies to do more too:
The Interfaith Center on Corporate Responsibility, which represents more than 300 institutional investors with more than $500 billion in assets under management, has a small group of investors working on a formal position about racial equality. ICCR said racial equality has been a prominent talking point since the start of Covid-19 when concerns were raised about the disproportionate effect Covid-19 was having on black Americans. The blog also says that Ceres, which has an investor network that includes over 175 institutional investors with more than $29 trillion in assets under management, is reviewing all policies and practices to achieve a ‘just and sustainable future for all people.’
In terms of what this might mean for shareholder proposals, the blog discusses how some proponents are watching which companies follow through on anti-racism statements. As You Sow is maintaining a database of companies that have published statements on Black Lives Matter and racial equality and it’s interested in which companies follow through on their statements. The blog quotes As You Sow’s CEO as saying ‘veracity and honesty are the most powerful commodities a person and a company can have’ and it plans to use the information gathered in its database to hold companies accountable.
As an aside, messages about hope, justice and change have sprung up around Minneapolis through street art on plywood that businesses used as they boarded up in response to unrest – here’s one photo with a message that seems on point – it’s of a local, boarded up Minneapolis movie theater…
We’ve wrapped up our latest survey on practices relating to board evaluations. Here are the results:
1. When is your company’s board evaluation typically conducted:
– During the fiscal year in which board performance is evaluated – 48%
– Following the fiscal year, but before the proxy statement is filed – 48%
– Between the filing of the proxy statement and the annual meeting of shareholders – 2%
– We do not perform annual board evaluations – 2%
2. In conducting board evaluations, some boards use written questionnaires and some use oral interviews (or both). At our company, we use:
– Written questionnaires only – 39%
– Oral interviews only – 29%
– Both written questionnaires and oral interviews – 32%
3. If written questionnaires are used in the board evaluation process, are copies retained:
– Yes – 39%
– No – 61%
4. Who manages the board evaluation process:
– Non-executive board chair or lead director – 11%
– Chair of governance/nominating committee – 25%
– All members of the governance/nominating committee – 7%
– General counsel/other in-house counsel – 34%
– Outside counsel/consultant – 21%
– CEO – 0%
– Other – 2%
5. Is a written report produced based upon the results of the board evaluation:
– Yes – 51%
– No – 49%
6. How do the minutes reflect the board evaluation results:
– Brief summary of results, without including conclusions – 41%
– Brief summary of results, including conclusions – 16%
– In-depth detail of results – 0%
– Minutes do not reflect results – 43%
Please take a moment to participate anonymously in these surveys:
Last week, the DOJ issued updated guidance on Evaluation of Corporate Compliance Programs. The updated guidance gives some insight into the DOJ’s expectations for corporate compliance programs and it can be used as a guide when reviewing and updating a company’s compliance program. We’re posting memos on the latest guidance in our “White Collar Crime” Practice Area.
Benchmarking Compliance Reporting
For those taking on responsibility for reviewing a company’s compliance program, along with using the DOJ’s updated guidance, NAVEX Global recently issued its Risk & Compliance Hotline Benchmark Report – providing another resource to help see how a company’s risk and compliance program stacks up. The report includes data gathered from over 3,200 of NAVEX’s customers and looks at data using median or midpoint rather than averages to reduce impact from outliers. It’s a 60-page report so it’s chalk full of data, here’s some high-level data points:
– Median hotline/incident reports per 100 employees remained steady at 1.4 – but 19% received 5 or more reports per 100 employees
– Case closure time increased from 40 to 45 days, a 13% increase – the report says best practice average case closure time should be 30-32 days – about 20% of customers take 100 days or more to close cases
– Extended time to close cases may indicate organizations aren’t prioritizing reports or they may not have enough resources to resolve them – the report advises companies to address both potential issues to boost credibility of the compliance program
– Analysis showed that 31% of reporters speak up in 9 days or less after an incident occurs – but 20% of reports come in 60 days or more after an incident occurs
– Delays in reporting incidents could be due to fear of retaliation, lack of awareness or availability of reporting systems and the report advises companies to identify possible causes because delays make it more difficult to close an investigation
As a lifelong Minnesota resident, I was jolted by the killing of George Floyd and the protests and unrest that followed, which are bringing a slew of other historical & current incidents to light. Many CEOs were also moved by these events and quickly issued “anti-racism” statements. But there are already calls for companies to follow those statements with more tangible steps. A recent blog post with a call to action from John Streur, President and CEO of Calvert Research and Management, says Calvert will start holding companies accountable for inaction – so at least some asset managers are using this moment to push for more change. Streur’s post says Calvert will call on companies to do the following:
– Publicly provide the information required to accurately assess racial diversity – Calvert acknowledges that companies aren’t required by law or regulation to disclose publicly the racial makeup of their board and management, but says companies generally have this information to the extent employees have self-identified, and companies should make the information public
– Disclose pay equity information across race and gender
– Make clear to local, state and federal governments that they must address police brutality against black people
– Publicly state what they are doing to combat racism and police brutality
– Take action to address systemic failures in our education system
The blog post concludes by saying that Calvert will take more action to push for changes needed to eliminate racism and police brutality in America. It also says investors need to do a better job of differentiating companies based on where they stand on these issues and hold them accountable for inaction.
Improving Board Oversight of Human Capital Management
As Covid-19 has brought increased focus to workplace safety, employee pay and other human capital issues, a recent EY white paper provides insight from directors to assist with improved board oversight of human capital. The report’s findings are based on a director survey about governance of human capital. Although the report says most boards spend more time on talent strategy than they did just five years ago, it also identifies areas of opportunity for boards, including:
– Making, or reaffirming, oversight of human capital and culture as a strategic priority as 30% of directors indicated that they are either unsure or unable to articulate their company’s cultural strengths and weaknesses
– Enhancing board knowledge and understanding through more regular interactions with and reporting from the CHRO – nearly half of directors surveyed said the CHRO doesn’t regularly report on human capital to the board
– Beyond hearing from the CHRO, bringing an outside perspective into the boardroom is crucial to keeping a pulse on external trends, challenging internal bias, identifying blind spots and bringing an objective viewpoint and new ideas to the strategic planning process
– Regularly incorporating a more comprehensive set of culture and talent-related metrics will make those discussions more robust and productive, and assigning explicit responsibilities at the full board or committee level will provide greater visibility and foster accountability
May-June Issue of “The Corporate Counsel”
We’ve wrapped up the May-June issue of “The Corporate Counsel” print newsletter – and will be mailing it soon (try a no-risk trial). The topics include:
– A Word From Our Founder — What We Each Can Be Doing Now
– Forward-Looking COVID-19 Disclosure: Watch Your Step!
– Corp Fin CDIs and FAQs on COVID-19 Exemptive Order
– Planning for Continuity of Board Operations During the COVID-19 “Emergency”
