Amazon has amended its corporate governance guidelines to formalize a “Rooney Rule” for director nominees. The company – whose board consists of 7 white men & 3 white women – will now consider at least one woman or minority candidate whenever there’s a board vacancy. In April, Amazon had recommended “against” a shareholder proposal on this topic, but according to this Fortune article – and several notices of exempt solicitations – the company’s unwritten commitment to diversity wasn’t cutting it with employees, shareholders and some members of Congress.
The “Rooney Rule” – named after Dan Rooney, former owner of the Pittsburgh Steelers & former chair of the NFL’s diversity committee – started as an NFL policy that requires teams to interview minority candidates for head coaching and senior operation jobs. It doesn’t give preference to those candidates or impose a quota. This “Harvard Business Review” article discusses Amazon’s new policy – and how to avoid the risk of “tokenism” and resistance to change that can result when there’s a quota mentality. Here’s an excerpt:
Our research, which explored status quo bias, or the desire to preserve the current state of things, found that when there is only one woman or person of color in a finalist pool of job candidates, that candidate stands out so much that they have essentially no chance of being hired. But importantly, we also found that interviewing two women or minority candidates can make the difference and lead to their hiring. So the evidence suggests that mandating diverse candidate slates can improve diversity overall.
This Davis Polk blog notes there are six shareholder proposals on ballots this season that ask for increased board diversity or disclosure about board diversity. And Broc has previously blogged about sample language from other companies that have implemented a “Rooney Rule.”
What’s “Good” Board Diversity? Shareholders Weigh In
This “Rivel Research” survey finds that 67% of institutional investors think that “good” board diversity enhances stock price performance. But “good” diversity is hard to define. It comes down to having board composition that aligns with the company’s business & strategy and helps directors avoid “groupthink.”
About 90% of these shareholders view varied skills & experiences as a “very important” element of diversity – a much higher percentage than gender, geographic, ethnic and age diversity. But at the same time, they don’t think that boards are looking at a broad enough talent pool to find those skill sets: in one shareholder’s words, “the same people get recirculated.”
While most of the shareholders – particularly those in the US – don’t support demographic quotas, almost half of them will vote against boards that lack diversity. And that strategy might be yielding the type of independent thinking they’re looking for, according to this “Harvard Business Review” article:
It’s been found that CEOs who increased the demographic diversity of their boards elicited higher profit margins for the company, but it came at the expense of lower pay for themselves. And using 12 years of data on Fortune 500 companies, other researchers showed that demographically diverse boards are more likely to challenge the authority of the CEO and curtail CEO pay. A McKinsey study showed that only 14% of C-suite executives select board members on the basis of having a “reputation for independent thinking.”
Tomorrow’s Webcast: “D&O Insurance Today”
Tune in tomorrow for the webcast – “D&O Insurance Today” – to hear Holland & Knight’s Tom Bentz, D&O Diary’s Kevin LaCroix, Simpson Thacher’s Joe McLaughlin and Pat Villareal discuss all the latest in the D&O insurance area.
Occasionally, there’s an debate about whether directors should attend senior management meetings. Some think it’s a bad idea because directors might cross the line into operations. This “Stanford Rock Center” article presents the counterargument – by using Netflix as a case-study. At Netflix, directors regularly observe senior management meetings to get an unfiltered understanding of issues & strategies.
Of course, another benefit is that it’s an opportunity for directors to build relationships outside of the C-suite – and it gives them the ability to evaluate senior managers, which can eventually help with CEO succession planning. For more, see our “Checklist: Board Access to Management” – and our “Board Access” Practice Area.
Poll: Should Directors Attend Management Meetings?
Please take our anonymous poll about director attendance at management meetings:
customer surveys
Director Viewpoints: Anxious About Technology
The main finding from the annual “What Directors Think” survey – by NYSE Governance/Spencer Stuart – is that many directors share an “overwhelming concern” of being ill-equipped to keep up with cyber threats & disruptive technology. Here are five other takeaways:
1. Boards’ main strengths continue to center around strategy & finance – only 12% of directors list IT as a skill
2. Cybersecurity, disruptive innovations & succession planning are the main issues for which directors would seek outside advice
3. Directors are changing their tune about cybersecurity regulations – 60% now think they’re a good idea (compared to 22% last year)
4. Nearly 75% support board diversity efforts
5. 57% of directors say an enhanced brand image and reputation – and a greater ability to attract & retain employees – are big benefits of corporate social responsibility programs…but ESG initiatives are at the bottom of their priorities
The hilarious picture below made me want to discuss the topic of “whether it’s okay to use footnotes when you write.” My take is that it depends on the context. In my opinion:
1. They’re okay for court opinions, SEC releases and research papers when authority needs to be cited.
2. But it’s not okay to bury substantive commentary in footnotes, even in the types of documents in #1 above. If it’s important enough to include in a document, put it in the body – don’t bury it in a footnote.
3. It’s never okay for informational articles. You might notice that nearly all of our content doesn’t include footnotes. For example, authority is cited within the body of our Handbooks. And commentary that might be considered as an “aside” is mentioned as an aside within the main body of our stuff. We don’t force our readers to dig around.
The Footnote of All Time
Saw this wonderful picture on @footnoted’s Twitter feed (courtesy of @AcademiaObscura). The footnote in the picture makes fun of footnotes (click the image to enlarge it & read footnote 1 at the bottom):
Poll: The Appropriateness of Footnotes
Take a moment for this anonymous poll to indicate your feelings towards footnotes:
I was excited to get an email from the SEC last night with the title of “Technical Issue Resolved.” Figuring that the SEC was finally ready to be transparent when Edgar goes down – yes, Edgar was down again yesterday – I eagerly opened the email. It said:
A technical issue that arose during routine maintenance caused a cache of previously issues materials to be be resent. The issue has been resolved but you may receive a limited number of additional outdated emails. We regret any inconvenience to you.
In other words, the SEC is willing to be transparent when it accidentally sends out old press releases – but the agency is still not willing to address the “elephant in the room.” As I have been doing for some time (see this blog for one of many), I will continue to hammer home the importance of fixing Edgar – and also hammer home the much easier fix of just informing us when Edgar is down (and then back up)…
More on “Big Brother’ is Watching You (Reading That Proxy)”
Got a number of interesting responses to my blog a few days ago about the SEC’s Edgar logs. This one was my favorite:
In its 2008 interpretive release about ‘use of company websites,’ the SEC was adamant that companies not track visitors to IR websites, in order to maintain anonymity of site visitors – but the SEC not only captures similar information on Edgar but actually makes that information publicly available. I’m baffled by the logic.
Director Compensation: Post-Investor Bancorp Reversal World Ain’t Pretty
We are beginning to see the impact of the Delaware Supreme Court’s reversal in the Investors Bancorp case – and it is not pretty. Two companies/boards recently agreed to settle lawsuits over non-employee director compensation and the attorneys for the parties and the Chancery Court Judge acknowledged that the settlement was influenced by Investors Bancorp.
In Solak v. Barrett, the lawsuit alleged that the directors of Clovis Oncology paid themselves excessive compensation in breach of their fiduciary duties and wasted corporate assets. According to the complaint, non-employee directors received an average of $617,700 in 2015, which was more than twice the average compensation of non-employee directors in the Fortune 50. Clovis is well outside the Fortune 500.
One of the areas that companies most frequently benchmark themselves is insider trading policies/blackout periods. We’ve surveyed that area over a dozen times over the past 15 years. We’re holding our semi-regular webcast about this area next month: “Insider Trading Policies & Rule 10b5-1 Plans.”
Another good source is the NASPP’s “Domestic Stock Plan Administration Survey” that it conducts every three years or so with Deloitte Consulting. Last year’s NASPP survey revealed that 100% percent of respondents to have an insider trading policy – and these other tidbits:
– 81% require officers/directors to acknowledge understanding and/or receipt of the policies of the insider trading compliance program
– 85% require insiders to pre-clear their trades
– 94% prohibit hedging
– 94% also prohibit trading in puts, calls, and similar derivatives
– 80% prohibit pledging
– In-house counsel is most commonly responsible for preparing Section 16 filings (64% of respondents), followed by stock plan administration (31%) and corporate secretary (21%). This was a ‘check-all-that-apply’ question; at some companies, multiple people might have this responsibility.
Insider Trading Policies: The Infographic
Here’s a nifty infographic from the NASPP with some of the survey stats:
Making IPOs Easier: Latest Congressional Activity
This Davis Polk blog lists all the latest attempts by Congress to pass legislation that would enable companies to go public more easily. Also see this Cooley blog about attempts by other organizations to push IPO reform…
Then there is this Kevin LaCroix blog about John Coffee’s views: “Is Over-Regulation Really the Reason There are Fewer IPOs?”…
Recently, John blogged about a Bloomberg piece that covered a study that uses Edgar’s logs – which are publicly available! – to track which SEC filings are being read by hedge funds. The upshot is that you can then infer whether a big name investor was looking into a particular company.
There also is this study that tracks whether mutual funds or proxy advisors are reading your proxy. Here’s an excerpt:
For 97 large mutual fund families and 3,706 companies over seven years, we can determine the precise times when each investor accessed each SEC filing for each company. In addition, for the three most recent calendar years within our sample, we also observe the number of times the largest proxy advisory service company, Institutional Shareholder Services (ISS), accessed each company filing.
We build our dataset using the publicly provided server log files from EDGAR. These files include partially masked internet protocol (IP) addresses, which do not reveal the full identity of the user but which are sufficiently detailed to enable a mapping to the IP address blocks held by institutional investors. Several contemporaneous papers similarly rely on this approach, including for example Chen, Cohen, Gurun, Lou, and Malloy (2017) to study investment decisions; Crane, Crotty and Umar (2018) to study hedge funds; Bozanic, Hoopes, Thornock, and Williams (2017) to study the IRS; and Gibbons, Iliev, and Kalodimos (2018) to study sell-side analysis. However, we are the first to use these data to study the governance-related fundamental research performed by key investors.
The problem is that this approach of using Edgar logs is quite limited. Folks might be accessing SEC filings posted directly on a company’s IR web page. Or in the case of proxies, posted directly on Broadridge’s platform. And of course, folks might be reading proxies in paper. If I was an institutional investor, I would still be asking for paper as that seems like a far easier way to actually read a proxy…
Corp Fin Hires an “Digital Assets & Innovation” Associate Director
As noted in this press release, Corp Fin has hired Valerie Szczepanik as an Associate Director & Senior Advisor for “Digital Assets & Innovation.” Valerie will coordinate efforts across all SEC offices regarding the application of the securities laws to emerging digital asset technologies & innovations, including ICOs and cryptocurrencies. She was hired away from the SEC’s Enforcement Division where she most recently served as an Assistant Director in their Cyber Unit…
Our “Section 16 Forums”: Only a Few Weeks Away!
In response to those doing Section 16 work who have told us that they want to network with those similarly-situated, we are holding a pair of “Section 16 Forums” in June – one on each coast. Hosted by Alan Dye, these are one-day events for all Section 16 practitioners – not just beginners.
Another overseas stock exchange has gotten into the “unilateral” listing business (here’s a blog about the older ones; here’s our “Practice Area” about this stuff). Here’s the intro from this Skadden memo about the latest:
In April 2018, the Moscow Exchange, reportedly the largest exchange in Russia, announced that it intends to admit securities of approximately 50 major U.S. and other foreign companies to public trading in the non-quotation section of the list of securities admitted to trading. The intent of this move is apparently to provide Russian investors with access to a wider range of financial instruments.
Under Russian securities laws, a Russian stock exchange can unilaterally admit foreign securities to trading without the consent of the issuer of such securities. In the last several years, the St. Petersburg Stock Exchange admitted securities of a number of foreign companies to trading in a similar fashion.
Importantly, in the event of such unilateral listing by a Russian stock exchange, responsibilities for public reporting and disclosure requirements, and associated costs, rest with the Russian stock exchange, and issuers of the relevant securities are relieved from such responsibilities and costs.
Insider Trading: Greed Kills
Whenever an i-banker is involved in an insider trading case, I’m shocked. This latest one from the SEC is no different. The dude worked at Goldman Sachs!
According to this article, in 2016, a good performing VP at a bulge bracket firm could expect to make between $375-975k per year – and you know Goldman ain’t at the low end of that. How stupid do you have to be to throw that away? And as noted in this Bloomberg article, some of his inside trades resulted in paltry returns…
1. The SEC All-Stars: A Frank Conversation
2. Parsing Pay Ratio Disclosures: Year 2
3. Section 162(m) & Tax Reform Changes
4. Pay Ratio: How to Handle PR & Employee Fallout
5. The Investors Speak
6. Navigating ISS & Glass Lewis
7. Proxy Disclosures: The In-House Perspective
8. Clawbacks: What to Do Now
9. Dealing with the Complexities of Perks
10. Disclosure for Shareholder Plan Approval
11. The SEC All-Stars: The Bleeding Edge
12. The Big Kahuna: Your Burning Questions Answered
13. Hot Topics: 50 Practical Nuggets in 60 Minutes
14. Dave & Marty: True or False?
15. Steven Clifford on “The CEO Pay Machine”
Reduced Rates – Act by June 29th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a reduced rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by June 29th to take advantage of the discount.
Let’s say you’ve filed a registration statement & one of your directors – we’ll call him “David Dennison,” for absolutely no reason in particular – signed the document through an attorney-in-fact. Is there a possibility that the now famous “he didn’t sign it” defense could call into question the validity of David’s signature?
This Olshan blog says that if you’ve properly complied with the requirements applicable to powers of attorney, there’s no reason to be troubled by the fact that one or more signatories executed the registration statement through an attorney-in-fact:
Proper powers of attorney should cover the specific filing being made by the company and any and all amendments to that filing, as well as all other documents in connection with the filing. The power of attorney, though electronically filed with a typed conformed signature in the document, should be manually executed by the officer or director and the original should be saved for at least five years.
If the power of attorney is in the Signatures section in Part II of the registration statement (with an appropriate reference thereto in the exhibits index), the manually executed original should be saved for five years, and all amendments to the registration statement manually signed by the attorney-in-fact on behalf of the officer or director should likewise be saved.
There are many valid business reasons to utilize a power of attorney and there is no legal reason why a corporate officer or director should not be deemed to have signed a registration statement in reliance upon a valid power of attorney.
Of course, if David subsequently says that the registration statement is “fake news,” that might be another kettle of fish. . .
Should You File That Shelf Now or Later?
Check out this Bass Berry blog if you’re trying to decide whether you should file a shelf S-3 now or wait until you’re planning to do a deal. For non-WKSI’s, the answer is usually easy – since your S-3 won’t automatically go effective, you can’t be sure that you won’t be delayed when you need it unless you get it on file & effective now.
The answer for a WKSI issuer is a little more complicated – and the blog lays out the pros & cons. Here’s an excerpt addressing one of the big reasons that even a WKSI might want to get a registration statement on file before a deal is imminent:
Given the fact that filing a registration statement has the potential to trigger financial statement filing requirements (such as the potential need to file retrospectively revised financials in connection with a change in business segments, the occurrence of discontinued operations, or probable or completed significant acquisitions or dispositions), filing a registration statement on a clear day at a time when such filing does not trigger financial statement filing requirements may prove beneficial in comparison to waiting to file a registration statement at the time of a future public offering when such financial statement filing requirements could be triggered.
Cons include the need to incur the costs associated with registration and the potential adverse effect on the stock price due to the perception that the company is signaling the market that a deal is coming.
Our June Eminders is Posted!
We’ve posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
While accounting departments throughout the nation may be pulling their hair out in an effort to get ready for FASB’s new lease accounting standard, this FEI article says that Wall Street analysts don’t seem to care very much about the new standard. Here’s an excerpt:
Despite the increasing drumbeat of concern regarding implementation of new lease accounting rules from financial preparers, there is palpable ambivalence from at least one major consumer of the new disclosures: Wall Street research analysts. Few, if any, analysts have questioned financial executives about their lease plans during the Q&A sessions of recent earning calls, where a majority of the accounting discussions revolved around revenue recognition issues.
And even once implementation begins in earnest as the 2019 deadline grows nearer, equity analysts admit they see fewer ramifications on their buy/sell decisions and models. “Revenue recognition affects all companies, while with leasing you may have some very specific industries and companies that are impacted significantly. From an equity analysis perspective we expect the lease accounting changes to be less complex,” says Zhen Deng, a senior analyst with CFR.”
This must be very encouraging news for those of you who just spent part of your holiday weekend dealing with some aspect of preparing for the new standard. As a colleague once said to me when a merger agreement I worked all weekend on got tossed into the garbage because the seller decided not to move forward, “Hey, at least it’s appreciated.”
Sell-Side Analysts: Still “Lake Wobegon U” Grads?
Speaking of securities analysts, remember former SEC Chair Arthur Levitt’s famous crack about them? “I worry that investors are being influenced too much by analysts whose evaluations read like they graduated from the Lake Woebegon [sic] School of Securities Analysis – the one that boasts that all its securities are above average.”
Levitt made those comments in a 1999 speech – and despite all of the water that’s gone under the bridge since then, this Marketwatch article says that Lake Wobegon U is still cranking out securities analysts:
There are no companies in the benchmark S&P 500 with majority “sell,” or equivalent, ratings among analysts. For the S&P 500, there are actually 505 stocks because five of the companies in the index have two classes of common stocks. Among the 505 stocks, analysts have majority buy ratings on 266.
For example, there are still 47 analysts who cover Amazon.com Inc. AMZN, -0.12% and 45 rate the stock “buy.”
There’s exactly one S&P 500 stock for which 50% of analysts rate the shares a sell: News Corp.’s class B shares NWS, +0.00% But it turns out that only two analysts cover the class B shares, while 13 analysts cover the class A shares NWSA, -0.06% For class A, four of the analysts rate the shares a buy, with eight neutral ratings and one sell rating.
The article says the same thing that many were saying back in the ’90s – read these reports for the valuable information they provide on companies & industries, but don’t rely on them for recommendations.
A member points out that it should be “Lake Wobegon,” and not – as Arthur Levitt & I originally spelled it – “Lake Woebegon.” I’ve learned my lesson, and that’s the last time I’ll ever rely on a former SEC Chair for spelling advice!
Analysts: From Russia with Guts
So is there any place where analysts call ’em as they see ’em? It turns out that the answer is yes, and it’s in the unlikeliest of places – Vladimir Putin’s Russia. This “FT Alphaville” blog tells the story of a brave man named Alex Fak, who until recently served as the head of research at Russia’s Sberbank. Here’s an excerpt:
Fak – who worked at the FT on a three-month fellowship in 2004 – was asked to resign after publishing a report that opined state gas monopoly Gazprom was ignoring its bottom line and benefiting its top contractors, including companies owned by Putin’s friends.
“Gazprom’s investment program,” which is seeing it spend $93.4bn on mega-projects like the Power of Siberia gas pipeline to China, Nord Stream-2 to Germany, and Turkish Stream, Fak and Anna Kotelkina wrote, “can best be understood as a way to employ the company’s entrenched contractors at the expense of shareholders.”
Fak went on to argue that Gazprom had abandoned other, cheaper capex projects that would have limited contractors’ ability to profit. If Gazprom were to be reformed after a recent government reshuffle and broken up into its components, Fak estimated, it would be worth $185bn – three times its current share price.
The blog says that Fak’s not the first analyst to be punished by a Russian bank for calling out inefficient state companies whose CEOs are “well connected.” Would a U.S. bank do the same? With all the Lake Wobegon U grads out there, it seems unlikely that we’ll ever know.
Broc recently blogged about the rough sledding that GE experienced when it went to shareholders for ratification of its appointment of KPMG – “no” votes represented more than 35% of the votes cast on the proposal at this year’s annual meeting. However, this “Audit Analytics” blog says that the GE result didn’t even manage to crack the ‘Top 3’ no-vote getters for the three years ended December 31, 2017.
For the record, the blog says that the biggest (almost) losers were:
In 2017, 15 companies received more than 20% of votes against ratification. In addition to Planet Fitness, Consolidated-Tomoka Land and Kulicke & Soffa Industries, each received more than 36% of votes against auditor ratification.
Auditor Ratification: So What Happened Next?
I’m sure you’re curious about what our biggest (almost) losers did in response to their high percentage of ‘no’ votes on auditor ratification proposals. I checked the SEC’s Edgar, and the short answer is – nothing. There were no changes in audit firms in response to the votes. In fact, neither of the other two companies referenced by Audit Analytics as having received more than 36% ‘no’ votes in 2017 changed audit firms either.
Of course, these are non-binding votes, because otherwise they’d violate Sarbanes-Oxley’s requirement that the audit committee call the shots on independent auditors. Still, a big no vote sends a pretty strong message – but I guess the bottom line is that “a win’s a win.”
UK shareholders don’t appear as reluctant to pull the plug on auditors as their counterparts here in the US. In fact, this article says nearly 80% of the shareholders of SIG plc, a British construction supplier & FTSE 250 component, voted against the ratification of its auditor – and the firm was fired that same day.
Fake SEC Filings: Rockwell Medical’s Alternative Realities
Last week, Liz sent an email to Broc & me asking if we’d been following the “dueling 8-Ks” from Rockwell Medical. I’d glanced at Matt Levine’s column about it, but it was when she characterized the situation as a “fake filing, but from the inside” that I realized we needed to say something about it here.
If there’s one thing we love on this blog, it’s “fake SEC filings.” But as Liz pointed out, this fake filing is a little different. This excerpt from Matt Levine’s second column about this company’s competing realities summarizes the situation:
We talked yesterday about the mysterious doings at Rockwell Medical Inc., where the universe has split into two alternate realities, in one of which (which I called RMTI-A) the board of directors has fired the chief executive officer, and in the other one (which I called RMTI-B) it absolutely has not, and in fact the directors are themselves in trouble for doing some unspecified bad things. Both sides raced to file dueling 8-Ks explaining their side of the story, leaving investors to try to figure out who is really in charge, the CEO or the board.
Here’s RMTI-A’s Form 8-K – and here’s the RMTI-B’s Form 8-K. This is a strange brew even in a “post-truth” era – but believe it or not, the plot got even thicker. That’s because the company’s largest shareholder amended its 13D to disclose a letter supporting the board’s decision to fire the CEO – and calling for the scalp of the CFO, who the letter claims helped the CEO make his 8-K filing.
The board of RMTI-A then formally terminated the CFO and issued a press release updating shareholders about the week’s festivities. The whole mess has apparently ended up in the lap of some poor state judge in Michigan – who promptly sent both sides to their respective corners & gave them 21 days to try to work things out.
