Recently, the NYSE issued this proposal to change the price requirements for its shareholder approval rules so they would be similar to what the SEC just approved for Nasdaq. As noted in this Cooley blog, the NYSE proposal would:
– Change the definition of market value for purposes of the shareholder approval rule and
– Eliminate the requirement for shareholder approval of issuances at a price less than book value but greater than market value.
More on “Insider Trading: Congressman Allegedly “Tipped” Sellers”
A while back, John blogged about a federal grand jury indicting Congressman Chris Collins (R-NY) on a variety of fraud-related charges arising out of alleged insider trading. I just wanted to circle back to the case to highlight how an insider trading case can impact an entire family. As John noted, the case resulted in the Congressman’s son and father-in-law also being charged.
But they aren’t the only ones facing challenges. The son’s fiancee was suspended from appearing or practicing before the Commission as an accountant. For five years. She lost her job at PwC too. She is only 25 years old. And as noted in this article, her mother also had to pay some money to the SEC. Don’t do it. Don’t insider trade…
Audit Committee Disclosures: The Trends
From this report on audit committee disclosures from the “EY Center for Board Matters,” here are the latest trends:
– In 2018, 71% of companies disclosed the length of auditor tenure. In 2017, the percentage was 64%, and in 2012 it was 25%.
– Sixty-two percent of companies disclosed the factors used in the audit committee’s assessment of the external auditor qualifications and work quality, while in 2017 and 2012 the percentage was 58% and 18%, respectively.
– In 2018, the percentage of companies disclosing that the audit committee considers non-audit fees and services when assessing auditor independence increased to 89% from 86% in 2017. In 2012, 12% of companies disclosed this information.
– The percentage of companies providing an explanation for a change in all fees paid to the external auditor decreased slightly from 45% in 2017 to 44% in 2018, while just 10% of companies made these disclosures in 2012. However, in 2018 only 16% provide an explanation for a change in the audit fee itself.
Over the years, I have blogged many times about Evelyn Y. Davis – one of the more well-known shareholder proponents of all-time. I am sad to say that Evelyn passed away a few days ago. Here’s the press release from her foundation. This CBS News article notes she was a concentration camp survivor. Here’s a few of the things I’ve blogged about EYD over the years:
1. Shareholder Proposals: Evelyn Y. Davis (“Dougie” Version)
From 2014: I’ve vowed to step up my style of making videos – and one of my new styles is the jump-cutting that has made the Green brothers so successful. So see if you like this new version of my educational video about Evelyn Y. Davis:
2. Evelyn Davis: Your Stories
From 2016: I’m starting to collect anecdotes about Evelyn – please send me your stories (as always, I won’t share them with attribution unless you give me permission). Here’s the first batch:
– You are aware of her prostitution arrest at the United Nations (sexpionage is what the press called it) and her “business services” at a Lexington Avenue hotel in New York. Brief accounts in editions of New York Post and New York Daily News. This one comes from Jim Patterson.
– When my father was 94 last year and found out that Evelyn was still around and kicking, he was shocked – “that woman was old when I was young!” He was CFO of a company 40 or so years ago and had to deal with her. Mostly, he had to stop her from attacking his outside lawyer, who was a very good looking guy.
– I remember her and Donald Trump going at it at the Alexander’s meeting many moons ago.
3. A Podcast with Evelyn Davis’ Former Husband
From 2016: In this podcast, Jim Patterson discusses the life of his former wife, Evelyn Y. Davis, including:
– Can you tell us about Evelyn’s childhood? For example, how did Evelyn’s childhood arrest with her mother and brother by the Nazis in Amsterdam in the final months of WWII affect her life?
– How did you meet Evelyn?
– Can you tell us a story to illustrate how Evelyn felt about her activism work?
– Can you tell us a story about how Evelyn liked to stir it up sometimes at annual shareholder meetings?
– What was her “contribution” to financial reporting/journalism?
– I know Evelyn was active with charitable efforts. Can you tell us about that?
4. Evelyn Y. Davis: The Pictures
From 2016: Please send me your pictures of EYD too! From Jim Patterson, here’s a pic of Evelyn from her 1st issue of “Highlights & Lowlights”:
Here’s EYD at a 1972 AT&T annual shareholders meeting:
5. Evelyn Y. Davis: Retired?
From 2012: For many of you, the news that Evelyn Y. Davis is slowing down at age 82 will come as a mid-proxy season boost. As noted in this Reuters article, Evelyn has been skipping annual meetings this year – and even has halted production of her 47-year-old self-published newsletter “Highlights & Lowlights,” a $600-an-issue review of her governance battles that regularly features photos of her with bemused CEOs. Although Evelyn still has been submitting shareholder proposals to companies, I haven’t heard of her actually attending a meeting for the past two years.
For those of you who have never had the pleasure, go ahead and ask an old-timer for their favorite EYD story. Many of them are unsuitable for print in this family blog. I do note that she is partial to men, particularly if they are CEOs of a Fortune 50 company. Evelyn always had remarkable success with access to the powers that be – and making the CEO available to her often was a wise decision as it made it more likely that she wouldn’t turn your shareholders meeting into a complete spectacle. One day I’ll collect stories to post (including my own). I do note that Evelyn has been quite a philanthropist over the years, particularly in the effort to preserve Chicago history.
Until I post some stories, you’ll have to live with this great WaPo piece from ’03 – and this picture of Evelyn’s pre-bought tombstone in DC (I believe its two divorces behind):
A few months ago, I blogged about the dominance of white people in our industry. I heard some nice feedback. But I particularly liked this one from Carl Hagberg because he offered these concrete suggestions:
I agree that boards – and white people in general – are afraid to talk candidly about race and this needs to stop. In response to your request for ideas, here are a few things that enlightened companies can be doing about it:
– A growing number of companies have been demanding that the law firms they use must have a significant percentage of women and minority group members on the teams for every single company project they are awarded. Many law firms are struggling hard with this – which is precisely the point.
– Smart companies are bidding-out a growing percentage of their legal work – and not only demanding the same degree of diversity for the teams assigned to their projects, but awarding extra points in the evaluation of bids for pro-bono work – where it is easy to specify that diversity efforts and pro-bono work with minority groups will receive extra “extra points.”
– Companies should also be demanding – and rewarding strong diversity efforts – and actual results – at ALL of their service suppliers – like transfer agents, proxy solicitors and advisors, financial printers. And yes, in the selection of Inspectors of Election too.
I know that is extremely hard to diversify. I know from my own experience how hard it is – and why. Take a look at my article about “The Prevalence of Old White Men at Shareholder Meetings.” But if the clients don’t push harder for change, nothing WILL change!
And then Jenner & Block’s Jolene Negre sent me these common approaches:
– Mansfield Rule – Consider diverse candidates for open leadership positions (including board seats)
– Diversity training to give boards the tools they need to think and talk about race as it relates to their businesses
– Some major companies offer financial incentives to law firms staffing those companies’ matters with diverse legal teams (and penalize firms that do not)
“UTBMS”? What The…
Are “matter codes” frustrating – or practical? A new manual – “Best Practices for Using UTBMS Codes for Merger & Acquisition Transactions” – shows how codes can be used in the deal space. Having not been in a firm now for decades, I had no idea what “UTBMS” was. And my initial response was “there needs to be a manual for this!?!”
But I asked around – and here’s what I learned. “UTBMS” stands for the “Uniform Task Based Management System.” It’s how many big company clients wants you to enter your time now so that their outside consultants can flyspeck everything you bill – and it can be helpful for GCs who love all this data analytics stuff. It takes forever to enter your time now – client, matter, service code, and then an individual task code. If you talk with a client on the phone, you’ve got to enter code 9915, “Communicate (with client)”. You need to break down everything you do into these task codes e.g., “Review and Analyze,” “Research,” “Communicate (in firm),” “Communicate (opposing counsel).”
The list is endless – and god help you if you combine two service entries into a single code. The activity codes are useless for transactional work, but you still have to use them. Sounds like it’s not much fun… but that some firms have fully embraced project management now (see “SeyfarthLean” web page)…
ESG Risks Influences Foreign Sovereigns Ratings
As noted in this report, Moody’s says that changing environmental, social & governance considerations can affect sovereign ratings. Moody’s report points out that – while ESG is often spoken of as a single, homogeneous category of risk and while the three overlap in some respects – they are also quite distinct from one another. Of the three E, S and G risks, G has the strongest quantitative relationship with both sovereign ratings and Moody’s four methodology factors: economic strength, institutional strength, government fiscal strength, and susceptibility to event risk.
Here’s another “list” installment from Nina Flax of Mayer Brown (here’s the last one):
Before I begin this list, I am going full “open kimono” on some of my crazy here. My husband counted a while ago the number of books I had bought for our son – at the time I think we were still under 1000. We have two shelves in his closet that are taken up by “closet books” (i.e. books for him when he is a bit older), we have three book shelves in his room for books, we have three ledges in his room covered with books, we have two baskets around his reading chair in the hallway upstairs filled with books, we have books in various places in his playroom, we have two baskets downstairs with books by his work table, we have board books all along our fire mantle and another area in our living room storage area with more books.
I love books and I want my son to love books. And I love having so many options for books always in the house because (i) I love reading to my son and (ii) I feel personally satisfied by reading stories to him when I don’t have the bandwidth at the moment to read my own long books. I am fully aware that this is an addiction – I am okay with that.
As for what I consider Amazon “stalking” – (i) it is on a wish list, (ii) I regularly check that wish list, (iii) I monitor for price drops, (iv) I consider when checking my wish list whether to purchase the item, (v) I sometimes read updated reviews/see if another newer product should replace the stalked product on my list, etc. However, books are rarely replaced or removed from lists.
1.Gail Gibbons Books: If you have kids and haven’t read How A House Is Built, you should read it; I have read it about 100 times (not kidding – it is a popular and ongoing request). Gail Gibbons is an author I came across when looking for train books, and we now have over 15 of her titles. They are entirely digestible for children, but fun for adults too, and always well illustrated. I have a separate “Gail Gibbons Wish List.”
2. Other Children’s Books: For this category of things I stalk, I actually have three wish lists – “Most Desired Books,” “Science Books” & “Other Books”. I really am not kidding. I check “Gail Gibbons” and “Most Desired Books” frequently to see if any prices have dropped – and books only make it on my Most Desired Books if I have read them or watched a YouTube video of someone else reading them or am reasonably confident that I will definitely like them (e.g., in Spanish and written by an author that I have already purchased books from).
3. Books for Me: Paper copies are usually on the “My Most Desired Things” wish list. I am currently obsessed with the Taschen Basic Art Series. Also, every time I hear about a book I think I might want to read, it gets added to my “Kindle Books” wish list or my “Work Books” wish list.
4. Random Things I Think I Might Want But Don’t Want to Spend Money On (Yet): Which either fall on the “My Most Desired Things” wish list or my “Other Things I Might Want” wish list (the former checked more frequently because, as mentioned above, it also includes books, the latter checked less frequently because it does not include books). These include refillable dental floss made from silk, a wood rotating Scrabble board, a larger Klean Kanteen coffee mug (the one I have definitely is too small for my caffeine addiction, and they have cool new caps), a Buddha Board, puzzles that are beautiful and hard, a tagine, and an under desk elliptical (it has good reviews, and I do have a standing desk…). I promise that the way I have things grouped makes sense (to me).
5. Survival Supplies: I am not a doomsday survivalist, but moving to California and shortly thereafter experiencing two minor earthquakes during the night has made me curious about supplies. I stalk the more “normal” ones that I might actually use, like a hand crank back-up power turbine or a medical kit, as well as those that if I camped might make sense but maybe could be included in a birthday or father’s day gift for my husband, like a stormproof match kit or wound sealing powder or sponge.
6. Socks: I have supported and continue to support a local non-profit that provides assistance to homeless pregnant women. They are always in need of supplies for the babies and siblings, and in the winter (even though it is not THAT cold here), what could be better than knowing you helped someone have warmer feet? I can regularly find good quality socks for under $1.00/pair because of my “Socks” wish list.
In case this wasn’t apparent, one of the reasons I love stalking on Amazon is because I have so many lists, and regularly create new wish lists, move things around, delete old ones, etc. It is list heaven. It used to have a cherry on top, but then Amazon deleted the ability to filter by discount – I am still not pleased and hoping they bring that function back.
We continue to post new items daily on our blog – “Proxy Season Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Proxy Advisors: Six Senators Support House Bill
– Another Year, Another No EYD
– ISS Summary: How Proxy Season Is Faring
– How Blockchain May Be Used in the Proxy Process
– Communicating Culture: Amazon’s Shareholder Letter
Yesterday, the SEC adopted rules to update how mining companies disclose their “property” – including how they disclose mineral resources & reserves – so that the SEC’s requirements are closer to what is required globally from mining companies. Here’s the SEC’s press release – and the 453-page adopting release.
The old rules – including the now-obsolete Guide 7 – permitted the disclosure of non-reserve estimates only in limited circumstances. But that will now change. There is a two-year transition period so that mining companies won’t need to comply with the new rules until its first fiscal year beginning on or after January 1, 2021. We will be posting memos in our “Mining Companies” Practice Area.
Say-on-Pay: Rite Aid With a 84% Vote “Against”!
As noted in this Bloomberg article, Rite Aid received a 84% vote ‘against’ on its say-on-pay. I was pretty sure that was a record low…but surprisingly, it’s not even the leader in the clubhouse for 2018! For example, Nuance Communications got only 10% in favor. Some bigger names also got clobbered – Wynn Resorts was at 20%, and Bed, Bath & Beyond was at 21%…
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
This unique 62-page study from the IRRCi & Annalisa Barrett examines governance practices at 160 companies with less than $300 million in market cap (that works out to about 10% of all exchange-listed microcaps – though keep in mind there are about 10k publicly-traded microcaps when you count all the ones that aren’t listed on a major exchange). Here’s some interesting takeaways (also see this survey of 2017’s “Micro IPOs”):
– 73% are listed on Nasdaq, 19% on the NYSE American, and 8% on the NYSE
– 32% of the studied companies have been public for 10-20 years – and only 6% were founded in the last 5 years
And here’s how the microcaps compare to Russell 3000 companies on some governance “hot topics”:
– 93% have a one-share, one-vote structure
– Director tenure & age is comparable, but boards tend to be smaller (7 directors on average, versus 9) – and less diverse (61% are all-male)
– 62% separate the Chair/CEO roles (comparable to the Russell 3000) – but among companies that combine the role, 70% lack a lead independent director
– 71% of companies have three committees – audit, compensation & nominating/governance (even though Nasdaq doesn’t require a standing nominating committee)
– Only 11% have adopted a majority standard for director elections
– Median director pay was just under $75k – and 32% still pay board meeting attendance fees
– Only 16% disclose having director stock ownership guidelines
Why the discrepancies between small & mid-sized companies? Lots of us are probably hoarse from repeating that the markers of good governance aren’t “one-size-fits-all.” And when it comes to private ordering via shareholder activists, it looks like these companies either fly under activists’ radar (for now) or have too much insider ownership to be worth targeting. Insiders own 10% or more of the stock at over half of the studied companies – and only one of them had a shareholder proposal in last year’s proxy statement.
Comment Trends: Corp Fin’s “Top 10”
This 120-page report from EY – and the related 14-page summary – note that Corp Fin issued 25% fewer comment letters last year. The volume is down by more than half since 2014! It remains to be seen whether the SEC’s cybersecurity focus and companies’ adoption of new accounting standards will reverse that trend. For now, you can get your ducks in a row on these “top 10” most frequent areas of comment:
1. MD&A: especially disclosure of key performance indicators (note, in her speech last week, SEC Commissioner Kara Stein floated the idea that auditors could be more involved in assessing the accuracy of KPI disclosure)
2. Non-GAAP: continued focus on concepts from May 2016 CDIs – especially CDIs 100.01, 100.04, 102.07 and 102.11 (I blogged more about this yesterday)
3. Fair Value Measurements: be ready to justify your valuation techniques & inputs
4. Segment Reporting:Staff is looking for inconsistencies between filings and other public information, and expects companies to monitor for changes on an ongoing basis
5. Revenue Recognition: companies can provide a better understanding of their judgments on performance obligations, etc.
6. Intangible Assets & Goodwill: especially the impairment analysis, recognition & measurement
7. State Sponsors of Terrorism: liquidity, risk factors & results of operations for companies with operations in identified countries
8. Income Taxes: including deferred tax assets and accounting for tax reform
9. Acquisitions & Business Combinations: requests for analysis to ensure that the company properly applied the Regulation S-X “significance” tests
10. Contingencies: focus on disclosure about reasonably possible losses and the clarity & timeliness of loss contingency disclosure
PCAOB Opens Door to “CAM” Improvements
This recent speech from PCAOB Chair Bill Duhnke says that the PCAOB is already planning a post-mortem review of the “critical audit matters” requirement – and will consider changes if necessary. Here’s an excerpt (also see this WilmerHale blog):
Once the initial implementation of critical audit matters begins in June 2019, we plan to assess experiences and results, and determine whether we need to take further action—including whether to issue guidance or amend the standard. As part of this assessment, the staff plans to engage with auditors, investors, financial statement preparers, and audit committee members, through requests for comment, interviews, surveys, and other outreach to learn about their experiences.
After a reasonable period of time following completion of implementation in December 2020, we will conduct a post-implementation review to analyze the effectiveness of the new requirements. As part of that exercise, the staff will reevaluate the costs and benefits of the standard, including any unintended consequences, to understand the overall impact on the audit profession, public companies, and users of financial statements. To the extent that review suggests changes should be made, we will consider such changes at that time.
And according to Chair Duhnke, that’s not all that the PCAOB is planning – several standard-setting projects are in the works, which could impact accounting estimates and require more rigorous evaluations of specialists that are engaged by auditors. And here’s a couple of other things for audit committees to expect:
– Audit firms will be ramping up their quality control procedures, since that’ll be a focus for 2019 inspections
– More interaction with the PCAOB during the inspection process – a knock on your door doesn’t necessarily signal that your company’s audit firm is in trouble
According to this Audit Analytics blog, 97% of the S&P 500 use at least one non-GAAP metric in their SEC filings. That’s up from 76% in 2016, and only 59% in 1996.
And not only are more companies using non-GAAP metrics, the number of metrics used in each filing has shot up. This CFO.com article says that the number has tripled in the last 20 years – from 2.35 to an eye-catching 7.45. It also says that when it comes to Reg G compliance, there’s room for improvement:
Under Regulation G, which sets forth the regulatory framework companies are required to follow in presenting non-GAAP metrics, any EBITDA metric that excludes from income any items other than interest, taxes, depreciation, and amortization must be labeled as “adjusted EBITDA.”
However, according to Audit Analytics, among 46 companies that labeled a non-GAAP metric as EBITDA in 2017, more than half (24) excluded an item other than those. For example, two companies excluded acquisition-related items and two others excluded impairment-related costs.
There’s nothing inherently wrong with using non-GAAP metrics – in many cases, shareholders think that information is useful. But proper labeling and reconciliation is key – Corp Fin is still commenting on this – and in a speech last week, SEC Commissioner Kara Stein even floated the idea that auditors could take on a greater role in public disclosure, including offering assurance about the fair presentation of non-GAAP measures. All that to say, just because you might see other companies intentionally or unintentionally hide the ball, that doesn’t mean you should do it too. Check out our “Non-GAAP Handbook” for all the latest guidance.
Non-GAAP Comments: No More “Low-Hanging Fruit”?
It’s not just your imagination – Corp Fin’s been issuing fewer non-GAAP comments this year. But as detailed in this Audit Analytics blog, the number & percentage of these comments are still above 2015 levels.
Although non-GAAP comments continue to focus on areas that were clarified in the May 2016 CDIs, this Cooley blog points out that the Staff has moved on from easy-to-fix issues like undue prominence (possibly because companies have self-corrected). Now, they seem to be more focused on whether there’s adequate disclosure for individually-tailored accounting adjustments and “free cash flow” presentations. Here’s more detail:
– 12.3% of the non-GAAP comments referenced individually-tailored accounting – and this WSJ article explains how complex the topic can be. The Staff typically requests that companies remove individually-tailored recognition & measurement adjustments from non-GAAP measures – or explain how they considered the guidance in Question 100.04 of the non-GAAP CDIs and concluded that the adjustments were appropriate.
– The percentage of companies receiving comments referencing presentation of free cash flow & CDI 102.07 has increased significantly since 2016. And an increasing percentage of companies received a comment on the required presentation of the three major categories of the statement of cash flows when a non-GAAP liquidity measure is used (Question 102.06). Since the presentation of free cash flow is a non-GAAP liquidity measure, an increase in comments related to the three major categories of the statement of cash flows may indicate that companies are receiving both comments related to one item of financial reporting.
In monitoring SEC comment letters, we came across this SEC comment letter recently made public. While we acknowledge the term “pro forma” is often used by companies when adjusting their GAAP results to provide additional meaningful information to investors, this comment by the Corp Fin Staff serves as a reminder that the Staff generally dislikes non-GAAP measures titled as “pro forma” when the information is not presented in compliance with the pro forma rules in Article 11 of Regulation S-X.
In this situation, the company agreed to delete the words “pro forma” and instead use the words “as adjusted.” The comment was issued in connection with the Staff’s review of an initial public offering Form S-1.
This Proxy Insight article compiles annual voting data from the 10 largest mutual funds and compares how they voted on high-profile proposals (also see this Willis Towers Watson summary of recent stewardship reports). Here’s a couple highlights:
– The four biggest asset managers voted to ratify GE’s auditor – even though a shocking 35% of GE’s shareholders voted “against”
– For executive pay, Vanguard and State Street are following through with more stringent policies – and Goldman Sachs supported 8% fewer say-on-pay proposals than last year (and they’re not alone – as I recently blogged on CompensationStandards.com, enhanced policies led CalPERS to vote against 43% of say-on-pay proposals this year)
Also, if your shareholder base includes pension funds, a recent study says you’ll have a harder time getting their support – even if ISS & Glass Lewis recommend in favor of the board’s recommendations. This article explains:
Pension funds were 36.2 percent more likely than mutual funds to vote in favor of shareholder proposals, and 7.1 percent less likely to vote for management proposals, according to finance and accounting professors Ying Duan, Yawen Jiao, and Kinsun Tam. “They are most supportive of shareholder proposals submitted by other public pension funds, followed by those submitted by labor unions,” the authors added.
Beyond being more prone to support other shareholders, pension funds were also likelier to vote against recommendations made by proxy advisors. According to the study, only two of the 48 funds — the Orange County Employees Retirement System an Oregon Public Employees Retirement System — always followed the guidance issued by their proxy firms.
Corp Fin’s “Financial Reporting Manual”: Now Mobile-Friendly!
Over a year ago, Edgar was hacked – and we speculated about applying insider trading law to “hack & trade” schemes. This blog from John Stark – President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement – outlines successful enforcement efforts under this theory from 2005 – 2016, and criticizes the lack of any more recent action. Here’s an excerpt:
Since the EDGAR data breach, the SEC has not brought any outsider trading cases — zero, zilch, nada – and the topic of outsider trading seems markedly absent from the current laundry list of SEC enforcement priorities and concerns.
Indeed, a recent NYT op-ed by SEC Commissioner Robert J. Jackson, Jr. and former SDNY U.S. Attorney Preet Bharara entitled, “Insider Trading Laws Haven’t Kept Up With the Crooks,” hinted at a significant rift within the SEC Commissioners about outsider trading, raising questions whether the SEC will file any future outsider trading cases ever again.
But this threat must be stopped. No longer are social security numbers, credit card information and the like the primary focuses of hackers. Information is the target – and public companies and the SEC in its EDGAR database have a lot of it. Indeed, crooks from anywhere in the world can now use their cyber-wares to orchestrate corporate espionage and remotely trade stock based on stolen secrets.
The SEC should get with the virtual program and redouble its efforts at policing outsider trading, an alarming and futuristic category of wrongdoing. The SEC has experienced first-hand the humility and alarm of playing the dupe in some offshore outsider trading scheme, and is clearly the best equipped to fight back. For more than 80 years, the SEC’s dedicated and vigilant enforcement staff has stood as a proud sentinel for investors, and SEC Chairman Clayton should cut the SEC enforcement staff loose and refuse to allow a preposterously strict reading of the ’34 Act’s broadly vested anti-fraud provisions to stand in its way.
– Board Gender Diversity: The policy announced last year will take effect in 2019 – Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members, but they’ll closely examine the company’s disclosure of its board diversity considerations and other relevant contextual factors.
– Conflicting & Excluded Proposals: The policy lays out how Glass Lewis will evaluate conflicting proposals on special meeting rights – for one thing, they’ll typically recommend against members of the nominating & governance committee when a company excludes a shareholder proposal in favor of a management proposal of an existing special meeting right. And in limited circumstances, Glass Lewis may recommend against members of the governance committee if a company excludes any conflicting proposal based on no-action relief, if Glass Lewis believes the exclusion is detrimental to shareholders. See this blog from Davis Polk’s Ning Chiu.
– Diversity Reporting: Glass Lewis will now generally recommend in favor of shareholder proposals requesting additional disclosure on employee diversity and those requesting additional disclosure on the steps that companies are taking to promote diversity within their workforces.
– Environmental & Social Risk Oversight: Glass Lewis has codified its approach to reviewing how boards are overseeing environmental and social issues – if mismanagement of these risks has threatened or diminished shareholder value, Glass Lewis may recommend against the directors responsible for E&S oversight.
– Officer & Director Compensation: In its say-on-pay recommendation, Glass Lewis will consider excise tax gross-ups, severance and sign-on arrangements, grants of front-loaded awards, clawback provisions, and CD&A disclosure for smaller reporting companies. And they’ve clarified their approach to peer groups, pay-for-performance, the use of discretion, director compensation and bonus plans.
– Auditor Ratification: Glass Lewis will consider additional factors for auditor ratification proposals, including the auditor’s tenure, a pattern of inaccurate audits, and any ongoing litigation
or significant controversies which call into question an auditor’s effectiveness. In limited cases, these factors may contribute to a recommendation against auditor ratification.
– Virtual Shareholder Meetings: The policy announced last year will take effect in 2019. For companies opting to hold their annual meeting by virtual means, and without the option of attending in person, Glass Lewis will examine the company’s disclosure of its virtual meeting procedures and may recommend voting against the members of the governance committee if the disclosure does not ensure that shareholders will be afforded the same rights and opportunities to participate as they would at an in-person meeting.
– Written Consent Shareholder Proposals: In instances where companies have adopted proxy access and a special meeting right of 15% or lower, Glass Lewis will generally recommend against shareholder proposals requesting that companies adopt a shareholder right to action by written consent.
– Clarifying Updates: No changes here, but Glass Lewis has codified its approach to director and officer indemnification, quorum requirements, director recommendations on the basis of company performance, and OTC-listed companies.
Dual-Class: CII Petitions Exchanges to Require Sunset
On Wednesday, CII announced that it had filed an NYSE petition and a Nasdaq petition to curb listings of dual-class companies. Specifically, the petitions ask the exchanges to amend their listing standards to require that – going forward – companies seeking to list that have multiple share classes with differential voting rights include in their governing documents provisions that convert the share structure within seven years of the IPO to “one, share-one, vote.”
The petitions have support from BlackRock, T. Rowe Price, CalSTRS and CalPERS. CII cites several factors that support the concept of time-based sunsets, and also observes:
The SEC believes it lacks the statutory authority to compel U.S. exchanges to amend their listing rules. Over the past year, providers of benchmark indexes — FTSE Russell, MSCI and S&P Dow Jones — have stepped into the breach, with varying curbs on multi-class companies in indexes that are used widely by institutional investors. A listing standard would put all dual-class companies on the same footing.
Director Survey: Lots of Underperforming Colleagues
– 45% of directors think that at least one person on their board should be replaced – and only 30% think their board is “very effective” at dealing with underperforming directors
– 94% agree that board diversity brings unique perspectives to the boardroom – and 84% think it enhances board performance. But 52% think board diversity efforts are driven by political correctness – and 48% think shareholders are too preoccupied with the topic
To me, these responses imply that directors do see the value in diversity – but are frustrated about being pushed to refresh their boards (even underperforming directors have staying power) and look for new directors outside of their typical network. Which means they’ll get to it when they’re good & ready, dagnabbit! Also, keep in mind that over 75% of the survey participants aren’t diverse and are likely accustomed to the status quo (the survey details some pretty wide gaps in perspective between female & male directors).
The survey also looks at other “hot topics,” like cybersecurity and the board’s evolving role in overseeing corporate culture. Here’s what directors think about those subjects:
– 87% of directors think that inappropriate tone at the top leads to problems – while 79% also blame middle management and 74% point to “short-termism”
– 71% think that employee engagement surveys are one of the best ways to scope out problems with corporate culture
– The percentage of directors that said company strategy should “very much” take social issues such as health care, resource scarcity and human rights into account increased between 7 to 10 percentage points from last year
– Boards continue to shift responsibility for oversight of cybersecurity – 36% of directors say the job falls to their full board, up from 30% last year – and 21% say their board has moved cybersecurity oversight from one committee to another
Corp Fin has long permitted businesses acquired during the current fiscal year to be excluded from management’s report on internal control over financial reporting – but a recent study says that you may want to think twice before you opt to do that. This “Audit Analytics” blog discusses the study’s conclusions. Here’s an excerpt:
A recent academic paper provides some insight into acquisitions that may generate negative returns to investors. In the “Costs and benefits of internal control audits: Evidence from M&A transactions”, Kravet found evidence that acquisition targets that were excluded from the assessment of internal controls by the acquiring companies generated statistically significant negative stock returns of 0.8% at the time of the exemption announcement (typically, months after the acquisition news hits the market).
The authors identified statistically significant negative returns of 8.8% and 12% for the period of two and three years after the exemption announcement, indicating that negative outcomes are not fully priced at the announcement date. In addition to negative stock returns, Kravet associated acquiring companies that elect to exclude acquisition targets from control assessments with other negative outcomes, such as higher likelihood of goodwill impairments, lower return on investment, higher probability of a financial restatement and overall lower quality of financial reporting.
As a practical matter, the blog says that a company’s decision to take advantage of the SOX 404 exemption for a newly-acquired company provides an early warning that it may need more scrutiny on a going forward basis.
More SOX 404: Management-Only Reports & Auditor’s Attestations
Audit Analytics seems to be locked-in on Sarbanes-Oxley 404 reporting lately – in addition to its analysis of the potential “red flags” associated with excluding acquisitions from management’s report on ICFR, this recent blog discusses its report on 14 years of trends in auditor’s attestations & management-only SOX 404 assessments.
If you’ve ever read Audit Analytics’ stuff, you know that there’s great information there, but pulling it together sometimes takes a little effort. Fortunately for me, Cooley’s Cydney Posner’s done that work so I don’t have to. Check out this excerpt from her recent blog summarizing the report’s conclusions about trends in auditor attestations:
Starting in 2004, there were 454 adverse auditor attestations (or 15.9% of the total population of attestations). That number increased in 2005 to a high of 492 (although declining as a percentage to 12.6%), but then tiptoed down to a low of 141 (3.5%) in 2010.
Arguably, following SOX, the introduction of auditor attestations imposed some discipline on the process, which led initially to the identification of more ICFR issues, but declined thereafter as companies began to get a better handle on the process. After that, the number steadily rose again to hit 246 (6.7%) in 2016, which the analysis attributes to more aggressive oversight from the PCAOB. In 2017, the number of adverse attestations declined to 176 (4.9%), a 28% decrease and the first decline since 2010.
Cydney points out that trends in the management-only assessments that non-accelerated filers provide don’t exactly line-up with those for reports including auditors’ attestations:
The first year non-accelerated filers were required to make assessments was 2007. In that year, there were 1,089 adverse assessments, representing 30% of small companies. The number rose to a high of 1,727 (34.9%) in 2010—curiously, a year when adverse auditor attestations were at their low point. Unlike auditor attestations, the numbers were almost identical for the period from 2011 to 2013 at around 1,616; however, the percentages varied from 35.6% to 39.5%.
Although the number dipped in 2014 to 1,556, the percentage of smaller companies with management reports showing ineffective ICFR reached a high in that year of 40.8%, then dipped every year after. In 2017, the number fell to 1,191 (38.1%). The most startling aspect of the analysis here is that at least one-third of non-accelerated filers disclosed ineffective ICFR every year, reaching a high of almost 41% in 2014.
Transcript: “Blockchain in M&A”
We have posted the transcript for the recent DealLawyers.com webcast: “Blockchain in M&A.”
