As you probably know, the SEC maintains a library of blank forms on its website – including all three of the Section 16 forms. It has come to our attention that the SEC currently has an outdated Form 4 posted – one that harkens back to pre-Sarbanes-Oxley days. This form is outdated, even though it has the first-blush appearance of being current with an OMB approval date in the top right corner of September 2018!
For those too young to remember, before Sarbanes-Oxley was enacted in 2001, Form 4 had a due date tied to the end of each month. The outdated form contains Table II language (see Column 9) about “owned as of the end of the month” – rather than language that should read “owned after the reported transaction.” And the heading for Column 10 should actually say: “Ownership Form of Derivative Security: Direct (D) or Indirect (I)”. So make sure you’re not using this blank form as it doesn’t comport with the SEC’s rules. I imagine the SEC will correct this mistake soon…
Gibson Dunn’s Mike Titera notes that because the templates for Section 16 forms are actually controlled by the SEC’s website (unlike other forms that are filed by uploading the document via Edgar), it appears that no one can actually file the old Form 4 on the SEC’s “Forms” page.
With the traffic to the transcript for our recent webcast – “Insider Trading Policies & Rule 10b5-1 Plans” – bearing out that this is the most popular program of the year, I thought I would share some of the practical guidance I learned:
Alan Dye, Partner, Hogan Lovells LLP and Editor, Section16.net: It’s become increasingly clear in recent years that a company’s announcement of a cyber breach can have a material adverse effect on both the company and the company’s stock price, so the challenge in the cybersecurity context is twofold.
First, having a process that allows the technical people who understand when a hack has been attempted or has occurred, and who understand what its consequences might be, to be in a position to identify quickly (in light of the SEC’s release) whether there has been an attempted hack in the company’s data systems that could have resulted in a material breach.
Second, escalating those potential material breaches to a level where the general counsel and other senior managers who are in a position to assess potential materiality can make that assessment and decide whether either disclosure is required, or in this context, a trading blackout is appropriate.
In practice, neither of those steps is necessarily easy. For many companies, an attempted breach of the security systems is a daily occurrence. Most of those occurrences turn out to be insignificant. If every one of those incidents led to an immediate blackout or an escalation of the issue to senior executive levels to assess materiality, the window might never open and the process itself could consume inordinate amounts of time.
The balance that companies try to achieve is to make that process both efficient and effective, without overburdening the process. Companies should consider the development of an incident response plan. Many companies are already considering or implementing an incident response plan.
The incident response plan is separate from the insider trading policy. I don’t think the insider trading policy needs to be bogged down with processes for addressing cybersecurity breaches. What the incident response plan does is establish a process at the technical staff level, so the IT group can identify incidents that might constitute a material breach. The incident response plan also includes escalation protocols. Once a potential material breach has been identified, then the breach is escalated so that the general counsel, senior management, or whoever is going to make the assessment of materiality, and whether to open or close the window, can make that assessment.
That process is not unique to or isolated to the insider trading policy, but it generally is and should be integrated into the company’s disclosure controls & procedures, since a breach raises disclosure issues as well as insider trading policy issues.
That process is going to succeed only if the general counsel and senior management, once an incident has been escalated, understand IT systems and understand the tech-speak that tends to come from the people in the IT department, well enough to make a judgment about its materiality. Some companies go so far as to engage in tabletop exercises, where after they’ve developed and put in place an incident response plan, they simulate a breach and an escalation. That process can familiarize both the technical staff who escalate the issue, and the executives and the GC who must make the determination whether that breach might be material, with the appropriate terminology and the analysis that needs to be undertaken.
It’s a nascent area of insider trading policies, so I don’t pretend to know how it’s all going to play out. There hasn’t yet been any case, to my knowledge, where an incident response plan has been put in place and led to either closing or opening the window. I have seen some simulation exercises and they can be puzzling, initially, to those of us who don’t speak “tech” when it comes to cybersecurity exercises.
Howard Dicker, Partner, Weil, Gotshal & Manges LLP: A company should also consider specifically, by prohibiting or warning against, an employee’s participation in a so-called “expert network.” An expert network is not about artificial intelligence or machine-based learning. Rather, it typically involves a firm. There are companies or firms out there that connect hedge funds and other investors with subject matter experts or industry experts.
These experts speak directly to the hedge funds and receive an hourly consulting fee. Some company employees may be interested in earning extra money this way. Some of the largest SEC insider trading cases have involved expert networks, and the allegations were of company employees tipping information not only about their own company, but also about company customers.
The employees involved were not senior executives who were subject to blackout periods and pre-clearance policies, but rather non-executive employees with a high degree of responsibility within the company. The information shared might not have been obviously MNPI, but it was obviously confidential.
I find that employee and director education and training is particularly critical for avoiding inadvertent disclosures of confidential information, and the related potential liabilities, costs, and damages to the employee, director and the company.
A few months ago, I blogged that National Association of Manufacturers (NAM) had launched an “anti-ESG campaign.” Now, 45 companies that sit on NAM’s Executive Committee & Board are caught in the middle of that organization’s beef with ESG advocacy. Walden Asset Management & CalSTRS announced that they have led more than 80 investors to write letters that urge the companies to distance themselves from NAM’s effort to limit engagements. Here’s an excerpt:
We believe your company may have a very different perspective than that expressed by MSIC & NAM and that your continued affiliation with them could pose reputational risks to your company. Thus, we urge you, as a member of the leadership team of NAM, to question your Association’s research funding priorities and its working alliance with MSIC. In addition, we are interested in your answers to the following questions about your company’s positions on these issues:
– Are you aware of the new NAM paper and its attack on the efficacy of shareholder resolutions and ESG investing factors?
– What are your views on the priorities and objectives of NAM’s, new partner, Main Street Investors, and its work to discredit shareholder resolutions?
– Will you help clarify for the record and the investing public where the company stands on the right of investors to file shareholder proposals and your thoughts on efforts to significantly limit the ability to present such proposals?
If your company’s position differs from that of the MSIC’s stated mission, we ask the company to communicate with NAM’s management your disagreement with the positions being taken by Main Street Investors and urge NAM to distance itself from these positions. We also request that you state this publicly to inform concerned investors.
Gender Pay Gap: Heightened Employee Focus
Here’s something I recently blogged on CompensationStandards.com’s “The Advisors Blog”: We’ve blogged about how activist shareholders increasingly want companies to disclose how they analyze & address gender pay inequity – and about mandatory gender pay reporting for companies with a UK presence. But companies also need to prepare for employee questions. A new Pearl Meyer survey shows that 62% of companies are – or expect to be – fielding gender pay questions from their workforce. Some think that the #MeToo movement has been the “tipping point” to elevate discussions that have been brewing for years.
The survey also shows that employee understanding of pay practices is mediocre at best. Only 8% of respondents believe the quality of their pay communications is “excellent.” Here’s some other key findings:
– In the last two years, almost half of the companies surveyed (48%) have increased compensation communication
– A majority of companies (52%) don’t share information about base salary ranges with all employees
– About two-thirds of managers are trained to have formal compensation conversations with their direct reports, but the majority (70%) of those surveyed believe those conversations are not effective
– Less than a quarter of respondents believe employees can appropriately compare their compensation to colleagues (21%) or compare their compensation to similar positions in other organizations (22%)
– Of the 62% who are or expect to receive questions about gender pay equity, a majority have clear and detailed information ready to share or are currently drafting their responses.
Perks: “If You’ll Be My Bodyguard”
And here’s something else that I recently blogged on CompensationStandards.com’s “The Advisors’ Blog”: I can only speculate about what it’s like to be a VIP tech CEO. One part that doesn’t sound too appealing is having a personal security detail. Because if someone is attacking Mark Zuckerberg, they’re probably after more than his $350 t-shirt. But if there’s a bright side, it’s that you don’t have to pay your bodyguards out of your own pocket – they’re pricey! This article looks at how much a few well-known companies spend on security & travel for high-profile executives – and how they describe those “perks” in their proxy statements:
1. Facebook – $7.3 million for CEO security & $1.5 million for CEO use of private aircraft ($2.7 million for COO)
2. Amazon – $1.6 million for CEO business & travel security
3. Oracle – $1.5 million for Executive Chair home security ($104k & $0 for the co-CEOs)
4. Salesforce – $1.3 million for CEO security
5. Google – $636k for CEO security and $48k for CEO use of chartered aircraft
6. Apple – $224k for CEO security and $93k for air travel
7. Qualcomm – $138k for Chair’s “insurance premiums, security & home office” and $153k for Chair use of corporate aircraft
8. IBM – $178k for CEO use of corporate aircraft
A member emailed to point out that there’s a reason security is expensive:
I met an executive’s bodyguard once. Former cop & one of the friendliest, most down to earth people I’ve ever met. He was very devoted to the executive, for whom he’d worked for nearly 30 years. However, it was also clear to me that this guy knew 6 ways to kill you with a paper napkin.
Remember that our recently-updated “Executive Compensation Disclosure Treatise” has a chapter devoted to perks – with comprehensive guidance on disclosure of airplane use & personal security, among other topics.
Earlier this year, we blogged about evidence from insider gifts that backdating was alive and well. Now a recent study says that there’s a new twist on option backdating – instead of manipulating the timing of equity awards, CEOs are supposedly manipulating the market price of the shares on the award dates.This Stanford article about the study says insiders are reaping the same windfalls that they received when awards were backdated in the old fashioned way.
Here’s an excerpt quoting one of the authors of the study, Stanford Prof. Robert Daines:
In Dating Game 2.0, however, many top executives appear to be reaping the same kinds of windfalls with a new variant on the original scam. Instead of manipulating the dates of option grants to match a dip in the stock price, companies appear to be manipulating the stock price itself so that it’s low on the predetermined option date and higher right afterward.
“I was surprised, because it sounded too cynical at first,” says Daines, who teamed up with Grant R. McQueen and Robert J. Schonlau at Brigham Young University. “But we tested for all kinds of benign explanations and none of them fit the data. The unusual stock patterns happen so often, and they exactly fit with the self-interest of the CEOs and senior executives. Either the CEOs are incredibly lucky or they are manipulating stock prices.”
So how are companies supposedly manipulating the market price? Would you believe “bullet-dodging” & “spring-loading”:
The researchers found concrete evidence for both bullet-dodging and spring-loading in corporate “8-K” disclosures, which companies are required to file when important new developments occur between regular quarterly reports. At companies that issued lots of stock options, the disclosures before an option grant were more likely than not to drive shares down and those that came after an option date were more likely to send prices up. The same pattern showed up with company-issued “guidance” about upcoming earnings and with accounting decisions that effectively shift profits from one quarter to the next.
The more things change, the more they stay the same.
How to Respond to ESG Research Providers
If you are involved with a public company and you haven’t yet heard from an ESG research provider – don’t worry, you will. With ESG becoming more important to institutional investors, many are turning to these providers for assessments of public companies’ ESG performance. The problem is that there are more than 150 of these outfits – and many of them want you to respond to detailed questionnaires. So the question becomes – should you respond to these guys, and if so, how?
This Westwicke Partners blog has some helpful advice on that front. Here’s an excerpt on the pros & cons of responding to these questionnaires:
If you receive a questionnaire from one (or a dozen) of these ESG research providers seeking information on your company’s ESG disclosure and practices, it’s important to consider a few pros and cons of responding:
– Pro: Responding allows your company to better ensure the accuracy of the data used to determine your rating.
– Pro: Responding may set your company apart from those that decline to participate. Many ESG providers give higher ratings to companies that provide more ESG-related disclosures, and some even denote which companies did not respond to their questionnaires.
– Con: Responding can be a significant drain on your organization’s time and resources. Some questionnaires are estimated to take 1,000 hours to complete and require input from as many as 30 employees across multiple departments.
The blog also has pointers on determining how best to participate in the data-gathering process & handling inbound questionnaires from ESG research providers.
FCPA: 2nd Cir. Rejects “Monty Python” Approach to Foreign National Liability
This Drinker Biddle blog notes that the 2nd Circuit recently shot down the DOJ’s attempt to extend the scope of FCPA jurisdiction over foreign nationals. Here’s an excerpt:
The Second Circuit ruled on August 24 in United States v. Hoskins that the Foreign Corrupt Practices Act (FCPA) does not apply to foreign nationals who do not have ties to United States entities for bribery crimes that take place outside of U.S. borders. In doing so, the court rejected the government’s broadened theory of prosecution against Lawrence Hoskins, a U.K. citizen and former executive of the U.K.-based subsidiary of Alstom S.A., a global company headquartered in France that provides power and transportation services.
I’m no FCPA expert, but it sure seems like the DOJ was pushing the envelope in this case. The government’s position reminded me of the old Monty Python “Tax on Thingy” sketch – where at one point Terry Jones says that “to boost the British economy I’d tax all foreigners living abroad.” We’re posting memos in our “Foreign Corrupt Practices Act” Practice Area.
As a Cleveland Browns fan, I thought I’d seen it all over the course of the past two decades – a veritable “12 Days of Christmas” of incompetence & hilarity:
The Browns have been so dependably inept for so long that they’ve lent their name to a new word to describe staggeringly incompetent behavior – “Brownsing.” So, I guess I shouldn’t have been completely surprised when the SEC announced that (now former) Browns LB Mychal Kendricks had been charged with insider trading. But as jaded as I am about my favorite team, this was something new:
The SEC alleges that after meeting at a party, Mychal Kendricks began receiving illegal tips from Damilare Sonoiki, an analyst at an investment bank who had access to confidential, nonpublic information about upcoming corporate mergers. Kendricks allegedly made $1.2 million in illegal profits by purchasing securities in companies that were soon to be acquired and then selling his positions after the deals were publicly announced, in one instance generating a nearly 400 percent return on his investment in just two weeks.
In return for $1.2 million in alleged profits, Kendricks lost a $3.5 million payday from the Browns, will undoubtedly face a significant civil penalty from the SEC, and – because the US Attorney’s Office in Philly has also brought criminal charges – potentially faces up to a year in prison. Yes, this is some next-level Brownsing for sure.
Kendricks isn’t the first NFL player to get on the wrong side of the securities laws. Former NY Giants DB Will Allen pled guilty last year to charges brought in connection with his role in an investment scheme targeting athletes. In 1999, Hall of Fame QB Fran Tarkenton consented to an injunction against future violations of the securities laws, including Rule 10b-5, for his role in an alleged fraud scheme.
Materiality Definition: FASB Goes Back to SAB 99
We’ve previously blogged about FASB’s controversial efforts to amend the definition of “materiality” for purposes of financial statement disclosure. At the end of August, FASB amended Accounting Concepts Statement No. 8 to address materiality.
This recent blog from Cydney Posner says that with the amendment, FASB has hopped into Marty McFly’s DeLorean & traveled about a decade back in time. Here’s the intro:
In 2015, FASB sent a number of stakeholders into a tizzy when it issued two exposure drafts, part of its disclosure framework project, intended to “clarify the concept of materiality.” After hearing from any number of preparers, practitioners and other commenters, FASB has now reversed course.
According to FASB, the “main amendment” in Amendments to Statement of Financial Accounting Concepts No. 8, issued at the end of August, “reinstates the definition of materiality that was in FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, which was superseded in 2010.” In other words, it’s back to SAB 99.
Elad Roisman Confirmed as SEC Commissioner
Yesterday, the Senate confirmed former Senate Banking Committee staffer Elad Roisman to serve as an SEC Commissioner. Once he is sworn in, his appointment means that the SEC will finally have a full slate of 5 Commissioners – at least for now. Commissioner Kara Stein is expected to leave her post at year end.
While media reports indicate that President Trump is likely to nominate Commissioner Stein’s former aide Allison Lee to fill Kara’s upcoming vacancy, that hasn’t happened yet. CNN Congressional Correspondent Phil Mattingly tweeted that it was interesting that Commissioner Roisman’s nomination was not paired with a nominee recommended by the Democrats, as often has been the case..
Tune in tomorrow for the webcast – “Nasdaq Speaks: Latest Developments & Interpretations” – to hear senior Nasdaq Staffers Arnold Golub, Lisa Roberts, Nikolai Utochkin and John Zecca discuss all the latest that Nasdaq-companies need to know.
Narcissism: Not a Desirable Part of a CEO’s Skill Set
This Stanford article says that a recent study concluded that companies led by overconfident, self-centered risk takers are likely to face a lot of lawsuits. Here’s an excerpt:
In an article published in Leadership Quarterly, O’Reilly and colleagues Bernadette Doerr and Jennifer A. Chatman of the University of California, Berkeley, show that narcissistic CEOs subject their organizations to potentially ruinous legal risks as well. Not only are they more likely to become embroiled in protracted litigation, but their personality traits make them less sensitive to objective assessments of risk. Narcissists are less willing to take advice from experts and to settle lawsuits — even when it’s likely that the company will lose.
I’ve gotta say, I’m pretty skeptical about this study – after all, this management style worked well for Hank Scorpio.
Securities Litigation: #MeToo Class Actions the New Normal?
Last week, a shareholder class action was filed against CBS following revelations of alleged sexual harassment by CEO Les Moonves. Over on the D&O Diary, Kevin LaCroix recently blogged that these lawsuits may represent the “new normal” for shareholder litigation. Here’s an excerpt:
The securities suit against CBS follows a now growing list of companies that have been hit with D&O lawsuits following revelations of sexual misconduct by one of the firm’s executives. Earlier this summer, National Beverage Corp. was hit with a securities suit following allegations that its CEO had sexually harassed company employees. Earlier suits have arisen involving Wynn Resorts and 21st Century Fox.
Kevin says it is increasingly clear that the accountability process arising out of revelations of sexual misconduct won’t just target the wrongdoer, but also other executives who allegedly facilitated the misconduct or turning a blind eye.
As noted in this WSJ article, SEC Chair Jay Clayton recently noted in this speech that a concept release on capital formation is on the way. Here’s an excerpt from this recap of the speech by Cooley’s Cydney Posner:
The main topic was the plan to revisit the thresholds that trigger the SOX 404(b) requirement to provide an auditor attestation report on internal control over financial reporting. One thing is pretty clear from this speech: odds are excellent that relief from SOX 404(b) is in the offing for more small companies.
First, Clayton focused on a point that he viewed as “often misunderstood”: that even those companies that are not now required to obtain a SOX 404(b) auditor attestation must still “establish, maintain and assess the effectiveness of ICFR, and, even if not engaged to report on ICFR, independent auditors are still responsible for considering ICFR in the performance of their financial statement only audits. In considering ICFR, independent auditors can better plan their audits and provide management and audit committees with observations about the company’s ICFR. I believe this scaled approach has proven to be appropriate for smaller reporting companies and again reflects the perspective that one size regulation of public companies does not fit all.”
To support that last point, he highlighted the difference in size between the 50th largest exchange-listed company (market cap of approximately $100 billion) and the median exchange-listed company (market cap of less than $1 billion). Moreover, he pointed out, many companies could benefit from relief as there are more than 1,200 exchange-listed companies with a market cap of less than $250 million. (In connection with the expanded definition of “smaller reporting company”—an expansion similar to the one likely under consideration here—the staff estimated that 966 additional companies would be eligible for SRC status in the first year. See this PubCo post.)
Other potential beneficiaries of relief, according to Clayton, are companies with little or no revenue, such as many biotechs. In those cases, he asserted, the money that would otherwise be used for the SOX 404(b) attestation “could instead be used to hire new scientists to advance life-enhancing or life-saving developments.” He concluded by reminding us that he had directed the staff to come up with potential amendments to reduce the number of companies subject to SOX 404(b), while, of course, maintaining appropriate investor protections.
The SEC Conducts Far More Town Halls These Days…
As part of the ongoing effort to promote capital formation, it seems that one of the priorities of SEC Chair Jay Clayton is to engage with small businesses across the country and to conduct town halls with entrepreneurs & retail investors (which Jay started calling “Main Street” investors before the “Main Street Investor Coalition” was formed).
In fact, all five Commissioners attended a town hall in Atlanta in June – and Corp Fin Director Bill Hinman joined Jay recently at a “fireside chat” with the Tennessee Governor at Nashville’s “Wildhorse Saloon”. I don’t recall a Corp Fin Director attending a town hall before – but it’s possible that happened in the past…
By the way, the SEC has a whole page devoted to Chair Clayton’s “fireside chats” – with videos going back to last summer…
Our September Eminders is Posted!
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Here’s the news from Annalisa Barrett: On Wednesday, the California Assembly passed Senate Bill 826, which requires that companies headquartered in the state which are traded on a major stock exchange have women on their boards.
If the bill is signed by Governor Brown, companies with their principal executive offices located in California will face monetary penalties if they do not have at least one female director serving on their board as of December 31, 2019. As of June 30th, among Russell 3000 companies that are headquartered in California:
– 20% of boards (85 companies) had no women
– 38% of boards had one woman
– 29% of boards had two women
– 14% of boards had three women
California’s New Gender Diversity Law: The Details
Annalisa Barrett also sends us these details: The Russell 3000 Index does not include many of the microcap companies headquartered in the California. A recent study of microcap boards nationwide found that most do not have female directors; therefore, it stands to reason that the number of companies affected immediately by the bill is much higher than 85. In fact, Board Governance Research has identified more than 120 California-headquartered companies which have all-male boards.
The bill further requires that nearly all companies headquartered in California have more than one female director by December 31, 2021. The number of female directors required by that date varies by board size, as follows:
– 4 or fewer directors: 1 female director required
– 5-member board: 2 female directors required
– 6 or more directors: 3 female directors required
Based on board size and composition as of June 30, 2018, 377 of the Russell 3000 companies headquartered in California will need to add a total of 684 female directors by December 31, 2021.
Boards which do not add the requisite number of women to their boards by the 2019 and 2021 deadlines will have to pay fines to the Secretary of State. The first time a company is not in compliance, the fine will be $100,000. In the event of subsequent years of noncompliance, the fine increases to $300,000. However, while the monetary impact of non-compliance is important, the reputational damage may be even more impactful. Since the bill requires that the California Secretary of State publish an annual update of compliance, the scrutiny from the press and public will likely lead to negative publicity for any company with an all-male board.
However, one could argue that this negative publicity will occur even if the Governor does not sign the bill. Therefore, companies headquartered in California would be well served to begin the process of identifying female director candidates if they have not already done so. And, given the nationwide attention that the bill is receiving (e.g., this WSJ article), companies across the US with all male boards should expect intensified scrutiny as well.
This WSJ article notes that opponents of the mandate believe it will result in unfair discrimination against men – so they intend to challenge the law in court. It also points out that the legislation provides for creating an extra board seat to accommodate a new female member, rather than removing a man already on the board.
Board Gender Diversity: Russell 3000 Adds Women
Earlier this week, Equilar reported that the percentage of women on Russell 3000 boards has increased for the third consecutive quarter – to almost 18%. And from April to June of this year, 35% of new board seats went to women. However, 485 companies – about 17% of the Russell 3000 – continue to have all-male boards.
Here’s the second “list-of-lists” installment from Karla Bos of Aon (here’s the first one):
1. Things I’ve Moved To My JOMO List – To Practice The “Joy Of Missing Out”
2. Reasons Everyone Should Move Across Country At Least Once
3. The Name Of Every Plant In My Yard, Where I Bought It, What I Paid For It & When I Planted It
4. Barriers I Have Implemented/Need to Implement So Rattlesnakes Can’t Get Into My Yard
5. Home Improvement Projects My Husband & I Want To Do Ourselves
6. Home Improvement Projects My Husband Wants To Do (But I Think We Should Hire Someone)
7. Ways That “Urgent” Work That Gets In The Way Of “Important” Work & How I Try To Balance That
8. My MinimaLIST – Items I Never Use & Should Donate, Items I’ve Donated This Year, Things I Need To Let Go Of
9. Verbal Commands For Our Home Automation System That I Can Never Remember
10. Things I Need To Research & Source Before Buying (AKA What Not To Buy If Enough Time Passes & Apparently I Didn’t Need It After All)
11. Foods My Niece & Nephew Will – And Won’t – Eat These Days
12. Rattlesnake Emergency & Removal Contacts – And What To Do If Bitten
Sustainability Disclosure: “Give The People What They Want”
This recent 31-page report from Ceres – “Disclose What Matters” – benchmarks sustainability disclosure from almost 500 companies worldwide to see whether they’re providing the information that investors actually need.
The report acknowledges that sustainability disclosure has grown by leaps & bounds during a short time period. But some of it’s akin to throwing everything at the wall to see what sticks. According to Ceres, here’s what investors want:
1. Comparability: There’s been a lot of progress here – 70% of companies now use the Global Reporting Initiative Standards, often in conjunction with other overlapping reporting standards. As painful as it might be, it’s time to familiarize yourself with the available standards and help select one or more for your company.
2. Integration: Only about 20% of companies connect the dots to describe how their systems integrate sustainability values & assessments into business processes. Reiterating its spring 2018 report on “systemic” sustainability, Ceres suggests describing the board’s oversight role, materiality assessment processes, how assessment results are used in the business, financial relevance, and stakeholder engagement.
3. Reliability: Only 42% of companies give any indication that there’s been formal assurance for sustainability disclosures, and fewer than 10% provide the “holy grail” of third-party verified disclosures and recommendations for improvement.
The report also includes sector & regional findings – 80% of American companies are classified as “median” or “poor” performers – and provides “best practice” examples.
Transcript: “Retaining Key Employees in a Deal”
We have posted the transcript for our recent DealLawyers.com webcast: “Retaining Key Employees in a Deal.”
According to two recent studies, the days of CEOs staying out of politics are pretty much over. The jury’s out on whether that’s good for business. This Weber Shandwick study says that 46% of people are more likely to buy from a company whose CEO speaks out on an issue (that they agree with), but 35% of people have boycotted a company because of CEO activism. And 7% of people say it’s led them to buy a company’s stock – while 5% say it’s led them to sell. This Morning Consult study reflects similar findings.
With stats like that, you might think CEOs should just avoid risk by keeping a low profile. That might’ve worked 5 years ago – but now a big chunk of people view silence as activism too. This WSJ op-ed suggests that it’s as likely to alienate customers & business partners as public declarations. It contends that the way to simultaneously please the “stick to business” crowd & the “social justice” crowd is to make statements that link the issue to the company’s bottom line – not personal moral views.
Board Oversight of CEO Political Activism
If CEO social & political activism is the “new normal,” the next question is whether – and how – boards can manage the related risks & opportunities. This “Corporate Board Member” article and this NACD article give some recommendations on how to proactively establish CEO communication guidelines that address:
1. The company’s mission, audiences, and relevant social & political issues
2. How to handle specific topics (Practice in advance. Get diverse views to recognize “blind spots.”)
3. Whether & how to use social media
4. Using a “personal opinion” disclaimer for comments related to the CEO’s personal convictions
5. Ways to monitor sentiments of employees, shareholders & other stakeholders – and make timely updates to company policies on evolving issues
6. How the CEO’s internal & external communications will be evaluated as part of the performance review
Earlier this month, I blogged about a heightened focus on “impact investing” among funds, foundations, banks, family offices and pension funds. This study (from an asset manager that specializes in impact investing) suggests that’s probably a result of client demand. About half of the 1000 survey participants were interested in using their investment dollars to make a positive impact on society, in addition to their obvious desire to garner a financial return. Here are the finer points:
– 49% of people found impact investing “appealing” – compared to 38% in 2016
– 56% of Millennials are interested in impact investing – compared to 52% of Gen Xers and 44% of Boomers
– 45% of people say they intentionally choose to do business with companies whose “values align” with their own
– Popular causes for impact investing ranked as healthcare/disease prevention, environment/sustainability, education, mitigating poverty, and alignment with religious principles
Last week, the SEC issued this fee advisory that sets the filing fee rates for registration statements for 2019. Right now, the filing fee rate for Securities Act registration statements is $124.50 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, this rate will decrease to $121.20 per million, a 2.6% decrease. This reduction modestly offsets the price hikes from the past couple of years.
As noted in the SEC’s order, the new fees will go into effect on October 1st like the last six years (as mandated by Dodd-Frank) – which is a departure from years before that when the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
Recently, the NYC Comptroller & NYC Pension funds compiled 18 “best practice” board matrices from companies that were targeted by the “Boardroom Accountability Project 2.0” – which we’ve blogged about on our “Proxy Season Blog.”
Each of the “best practice” companies discloses director skills on an individual basis. When it comes to gender and race & ethnic diversity, the companies are grouped into two categories: (1) voluntary self-identification of individual directors and (2) aggregate board self-identification.
EYCBM’s “Proxy Season Review” (pg. 2) says that 29% of companies in the S&P 500 are now disclosing director-specific skills – and 17% of companies are disclosing skills on an aggregate basis. Those stats are up from 10% and 1% just three years ago.
SEC’s ALJs Get a “Do-Over”
Remember earlier this summer, when SCOTUS held that the SEC’s ALJ appointment process was unconstitutional? At that time, all pending administrative proceedings were stayed – and there was even some question of whether prior ALJ decisions were valid.
Well, it looks like the SEC is now doubling down on its ALJs. Last week, it issued an order to ratify the appointment of previously-approved ALJs and lift the stay on administrative proceedings, effective immediately. But, there will be completely new hearings in front of a different ALJ for all of those stayed proceedings – almost 200 cases! This Ropes & Gray memo analyzes the order. Here’s an excerpt:
First, the Order attempts to confirm that the SEC has appointed those ALJs as per the Appointments Clause of the Constitution, and that the ALJs may adjudicate cases.
Second, the Order addresses the Lucia majority’s only definitive command regarding a remedial scheme – that Lucia be afforded the opportunity for a new hearing in front of a different ALJ than the one who had previously decided his case. In fact, the Order grants all respondents in the newly un-stayed proceedings the “opportunity for a new hearing before an ALJ who did not previously participate in the matter,” and remands all cases pending before the Commission to the Office of the ALJs “for this purpose.”
Moreover, the Order vacates “any prior opinion” the Commission has issued in nearly 130 matters pending before the Commission. Chief ALJ Brenda P. Murray confirmed via notice on August 23, 2018 (the “Notice”) that another nearly 70 cases pending before ALJs prior to the Order would be reheard pursuant to the Order. As a result of this Order, respondents (and possibly the SEC) who received a negative initial decision from an ALJ prior to the SEC’s Ratification Order but have not yet exhausted their appeal, will now get a fresh “bite at the apple” and a completely new hearing before a different ALJ.
