Recently, the IRS issued long-awaited initial guidance – via Notice 2018-68 – on how awards made on or prior to November 2, 2017 can continue to qualify for the “performance-based” exception of Internal Revenue Code Section 162(m) – notwithstanding its elimination by the Tax Cuts & Jobs Act last December. Recall that the result of the tax reform amendments is that companies can’t deduct any “covered employee” pay above $1 million (the definition of “covered employee” was also expanded).
Over on CompensationStandards.com, Mike Melbinger is analyzing all of the “ins & outs” of the new guidance on his blog. Here’s his overview of the framework that will apply:
The guidance answers nearly all of our questions, but it’s not nearly as favorable as we hoped – and not even as favorable as we expected. It contains more than 14 detailed examples, which are more helpful than the text itself. However, the guidance (and the examples) are full of twists and turns and exceptions to the exceptions.
One thing the guidance does make absolutely clear is that the first step in determining whether any payment to any person in any year after 2017 is subject to the draconian limits of Section 162(m) is to determine whether there was a written binding contract in effect on November 2, 2017, which created a legal obligation on the company under any applicable law (e.g., state contract law) to pay the compensation under such contract if the employee performs services or satisfies the applicable vesting conditions. Every one of the many examples provided in the guidance begins with a determination of whether the plan or agreement created a legal obligation on the company. In the examples, some do and some don’t.
The existence of discretion to reduce any promised payment does not always make the full payment subject to the deduction limit of 162(m), but it usually reduces the amount of the payment that is grandfathered. However, the failure, in whole or in part, to exercise negative discretion under a contract does not result in the material modification of that contract.
As we predicted in a few blogs from earlier in the year, the accrued benefits and accounts under non-qualified deferred compensation plans are most likely to qualify for grandfathering protection. In many cases, future payments to the company’s CFO will be grandfathered and remain deductible. However, as we feared, benefits and accounts under plans that reserve to the company the right to amend or terminate the plan prospectively (which includes all well-drafted plans) will only be grandfathered to the extent they are legal obligations as of November 2, 2017.
Art Meyers, Takis Makridis and I will be drilling deeply into this topic (among others) at the upcoming NASPP Conference in our session titled: “Hot Topics in Equity Compensation.” The topic heading is deliberately vague to allow us to cover exclusively issues like this, which have developed or evolved since the deadline for submitting topics and materials for the Conference.
Last week, the PCAOB Staff posted this updated “Audit Report Guidance”– updating original guidance that came out in late 2017. The updated guidance doesn’t say anything new about “critical audit matters” – but it gives more instruction for these areas:
– Voluntarily disclosure about audit participants (including sample language)
– Calculating & describing auditor tenure
– Reporting when other regulators require internal control audits
– Explanatory & emphasis paragraphs
– Supplemental & interim financial information
– Special reports
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– A Hostile “Token-Over?”
– Activism: Want a Settlement? It’ll Cost a Comp Committee Seat
– ICOs: A Dip in the Action?
– Cybersecurity: Will the SEC’s New Guidance Spur New Disclosures?
– Sustainability: Differentiator for Sell-Side Analysts’ Survival?
Time for an update on the Wu-Tang Clan’s crypto activities – and I’m afraid the news is bad. Very bad. Remember when I blogged about Ghostface Killah’s planned ICO for his C.R.E.A.M. (Cash Rules Everything Around Me) token? Sadly, this “Digital Music News” story reports that it has, shall we say, “underperformed”:
Back in January, a cryptocurrency company called Cream Capital hoped to raise $30 million through an initial coin offering (ICO). The company was named after the Wu-Tang Clan’s 1993 song, ‘C.R.E.A.M.’, which stands for ‘Cash Rules Everything Around Me’. Wu-Tang’s Ghostface Killah was a founding member of the company, and hoped his involvement with the cryptocurrency would help raise funds during its initial coin offering.
However, it appears as though the ICO hasn’t gone well, as the coin’s value has plunged more than 96% since it launched back in January. The Cream Dividend token initially went on sale back in November of 2017, when coins were sold for as little as $0.02 per coin. The price for the cryptocurrency subsequently spiked in January to a high of $0.12, before riding a downward trending wave. The current value of the coin at the time of writing is just $0.0045, making it a crypto-flop.
So, Ghostface Killah’s C.R.E.A.M. coin has lost 96% of its value. That’s not good – but if it’s any consolation, he’s got a lot of company among much higher-profile cryptocurrencies.
Sarbanes-Oxley Compliance: You Know It Don’t Come Easy. . .
Protiviti recently released its annual “Sarbanes-Oxley Compliance Survey”, which reviews companies’ compliance efforts & the costs associated with them. This year’s survey says even after 16 years, this stuff’s still not easy – costs for many companies continue to rise, & the hours commitment continues to grow. Here’s an excerpt with some of the key takeaways:
– Compliance costs continue to rise for many organizations but remain dependent on size, SOX year, filer status and more – Many organizations experienced increases in their SOX compliance costs during their last fiscal year, and those spending $2 million or more grew as well. However, annual compliance costs did decrease from the prior year for certain groups of companies.
– SOX compliance hours have increased significantly – There are likely many factors at play here, including changing organizational structures resulting from ongoing digital transformation efforts, as well as continuing PCAOB inspections of external auditors that are placing increased demands on their clients to perform more rigorous SOX compliance testing and reporting.
Perhaps surprisingly, the survey also says that the use of automated controls testing & process automation remains low – and that implementing these technologies represents a significant opportunity to improve the efficiency of the compliance process.
Sustainability: More On “Will Delaware’s Statute Move the Needle?”
I’ve previously blogged about Delaware’s new sustainability certification statute. This recent blog from Lois Yurow reviews the statute & considers the “why bother?” question. Here’s an excerpt:
So why would a company bother getting a certificate (and paying fees, and assuming a disclosure obligation)?
Every company is at liberty now, certificate or no certificate, to voluntarily issue a sustainability report. Indeed, 85% of the Fortune 500 published a sustainability report in 2017. No doubt those reports represent a genuine commitment on the part of the issuing companies. Still, it pays to consider who chooses what a given company reports on: what goals it adopts, what metrics it uses to gauge progress, who measures that progress, and what specific information will be shared. With voluntary reporting, companies have almost infinite flexibility.
Under the Certification Act, reporting entities will need to disclose “objective and factual” performance results, and each entity’s governing body will be required to specifically address those results, offering its view of whether they represent success. By imposing these rules, the statute responds to the ever lingering concern that at least some sustainability reports are as much about marketing as they are about real change. The public in general, and investors in particular, may find the Certification Act’s data-heavy reports more valuable.
We’ll see how this plays out – I guess I’m still in the “corporate equivalent of buying a Subaru” camp when it comes to this statute, but this is the first piece I’ve seen that articulates what might be in it for companies that are looking to do more than just signal their virtue.
Earlier this year, we blogged about the GAO’s assessment of the SEC’s efforts to promote better climate change disclosure. According to the GAO, the biggest constraint that the SEC faced in its efforts was its need to rely on self-reporting. But this Bloomberg article says that the SEC isn’t pushing companies to improve disclosure in this area:
The SEC last issued a climate change-related public comment letter in September 2016, when it asked Chevron to expand its risk factor disclosure related to California’s greenhouse gas emission regulations. Typically, the SEC issues such letters to companies with suggestions on how they can fill in gaps. But the agency has been silent during this administration.
The article says that during the Obama administration, the SEC issued 44 climate change-related comment letters, while the SEC under Chairman Jay Clayton hasn’t issued any.
In another climate change disclosure-related development, the WSJ recently reported that SEC has dropped its investigation of ExxonMobil’s disclosures about how it accounted for oil and gas assets. As the WSJ reported in 2016, the investigation centered on the impact of climate change on the company:
The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects.
The SEC’s investigation followed on a similar one initiated by the NY & Massachusetts AGs. That investigation continues, as does private class action litigation surrounding the company’s climate disclosure.
#Crypto Utopia: A Very Deep Dive on the Crypto Economy
Want to get up to speed fast on all things crypto? Check out #Crypto Utopia, a 124-page presentation on the current state of the cryptoeconomy – including an analysis of the market environment and regulatory & legal issues – from Autonomous.com and Latham & Watkins.
This recent “D&O Diary” blog says that the securities class action bar has latched on to Elon Musk’s ill-considered tweetstorm. Here’s an excerpt on the winners of the race to the courthouse:
On Friday, two Tesla shareholders filed separate securities class action lawsuits in the Northern District of California against Tesla and Musk. The first of the lawsuits, filed by Tesla shareholder William Chamberlain, purports to be filed on behalf of a class of shareholders who purchased or sold Tesla shares between August 7, 2018 and August 10, 2018, inclusive.
The second of the two lawsuits, filed by Tesla investor Kalman Isaacs, purports to be filed on behalf of a class of shareholders who purchased Tesla securities after 12:48 pm EST on August 7, 2018 (the time of Musk’s first take-private tweets) and including August 8, 2018. According to news reports, Issacs is a short seller who sustained significant losses purchasing shares at the inflated price to cover his short position. Both complaints allege that Musk’s tweets contained material misrepresentations in violation of the federal securities laws and seek to recover damages on behalf of the plaintiff class.
Subsequently, the class action lawsuits have continued to roll-in – and the alleged class period for the more recent complaints extends from August 7th through August 14th. That time frame includes the dates when media reports began to surface about the SEC’s decision to subpoena Tesla for information surrounding the tweets, when Elon penned a blog purporting to explain what he meant by “funding secured” (we’ll get to that in a minute), and when he apparently had a bizarre house guest.
Since 75% of those of you who took our recent poll are of the view that either Musk’s tweets violated the securities laws or that he is a supervillain, I don’t expect that you’re shedding a lot of crocodile tears over these developments.
Tesla Tweets: “Why, Elon, Why?”
Even if you’re enjoying his predicament (shame on you), you’ve got to be wondering – why on earth did Elon Musk end his tweet with the phrase “funding secured?” Lots of other people had the same question – and so he posted this blog explaining his comment:
Why did I say “funding secured”?
Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction. . .
Yada, yada, yada . . . Anyway, this goes on for another 424 words, making a total of 518 carefully chosen and undoubtedly heavily-lawyered words to explain 2 very ill-considered ones. Still, the manure content in this statement seems pretty high. This “MarketWatch” article says that the SEC still has lots of questions for Elon, so my guess is that his word count will go much higher before this is over (and Broc is quoted in that article).
I recently blogged about how CoinBase is laying the groundwork to possibly become the first “token securities exchange.” If so, it may want to take the recent comments from FinCEN’s Director Ken Blanco in this “ABA Journal” article to heart. He says that financial crimes enforcers are watching the crypto space—and they don’t like what they see.
The Treasury’s Financial Crimes Enforcement Network and the Internal Revenue Service “have examined over 30 percent of all registered virtual currency exchangers and administrators since 2014,” said Kenneth Blanco, FinCEN’s director, in an Aug. 9 speech to the Block (Legal) Tech conference at Chicago-Kent College of Law. “And there is no question we have noticed some compliance shortcomings.” Specifically, Blanco maintains that adequate money laundering controls are not put in place until a trading platform or peer-to-peer exchanger gets an investigation notice.
“Let this message go out clearly today: This does not constitute compliance,” he said. “Compliance does not begin because you may get caught, or because you are about to be discovered. That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate.”
Blanco’s comments were echoed by Amy Hartman, Assistant Director of the SEC’s Enforcement Cyber Unit, who expressed concerns about the potential for fraud associated with stateless virtual currencies & advised any company thinking about a coin offering to “engage competent securities counsel.”
My wife recently announced that we’re having a garage sale – which bums me out because now I have to help her clean the garage so the strangers who stop by to peruse our junk won’t think less of us. Anyway, last Friday, the SEC announced some garage cleaning of its own – in the form of this 314-page release adopting amendments to certain “redundant, duplicative, overlapping, outdated, or superseded” disclosure requirements.
There’s a lot to digest in the release, but this Steve Quinlivan blog provides a helpful guide to the changes. Here’s an excerpt summarizing the revisions to Item 101 of S-K:
The amendments revise Item 101 of Regulation S-K to eliminate required disclosures in the business description regarding:
– Financial information about segments
– Research and development spending
– Financial information about geographic areas, such as revenues from external customers in the issuers country of domicile and foreign countries, but where material must be covered in the MD&A
– Risks attendant to the foreign operations and any dependence on one or more of the registrant’s segments upon such foreign operations, but where material should be covered in risk factors
The SEC’s press release notes that the rule changes are part of Corp Fin’s initiative to review & improve disclosure requirements for the benefit of investors and issuers. We’re posting memos about this in our “Fast Act” Practice Area.
Beyond “Bedbugs”: More Corp Fin Actions to be Posted on Edgar
While this doesn’t appeal to the prurient interest nearly as much as the recent decision to post “bedbug” letters on Edgar, Corp Fin announced yesterday that it has decided to post more Staff actions on Edgar. Here’s an excerpt from the announcement:
Starting October 1, 2018, the Division will begin to release through EDGAR orders we issue granting or denying regulatory relief on behalf of the Commission, as identified below. We intend to continue our efforts to enhance transparency in subsequent phases by releasing additional types of documents, including those memorializing actions or positions taken by the Division staff, such as interpretive guidance and no-action relief.
Orders that will soon become available include Reg A & 1934 Act orders of effectiveness, orders declaring 1933 Act registration statements abandoned, and orders granting exemptions under the tender offer rules. This is pretty prosaic stuff, but stay tuned – availability of interpretive guidance & no-action relief on Edgar could be more interesting.
PCAOB Seeks Comment on Draft Strategic Plan For 1st Time
The PCAOB recently issued a draft of its 5-year Strategic Plan – and the accompanying press release notes that for the first time, it’s soliciting comments from the public. Here’s an excerpt from the press release with an overview of the key goals of the plan:
After its own careful study and a survey of PCAOB staff and the public, the new Board intends to:
– Broaden its approach to driving improvement in the quality of audit services and more clearly communicate how it is driving that improvement.
– Ensure that its inspections and standard-setting activities are responsive to and do not impede technological innovations.
– Engage proactively more often and directly with investors, audit committees, and other stakeholders to encourage relevant and timely conversations about the quality of audit services.
– Optimize PCAOB operations to more efficiently and effectively use resources.
– Reinforce the PCAOB’s culture of integrity, excellence, effectiveness, collaboration, and accountability.
So what’s behind the PCAOB’s decision to seek public input on its strategic plan? Here’s some insight from a recent Gibson Dunn blog:
Coming on the heels of a complete turnover of the Board and the subsequent departure of numerous senior personnel, the process by which the Board is crafting its strategic plan provides further evidence—if any were necessary—that this Board intends to seek out new ways to operate and to fulfill the PCAOB’s mission.
On Friday, President Trump announced via Twitter (naturally) that he had asked the SEC to study the possibility of moving from quarterly to semi-annual reporting for public companies. As we’ve previously blogged, this isn’t a new idea. Less frequent reporting also dovetails with recent calls from a “Who’s Who” of business groups & CEOs to eliminate the practice of providing quarterly earnings forecasts – but even many of these business leaders continue to endorse quarterly SEC reporting.
But if the SEC did move to a semi-annual reporting system, would that really help promote a longer-term focus? Would it even change the practice of releasing quarterly results? This MarketWatch editorial from last year by a group of B-school profs who studied the issue suggests that the answer to both questions may be “no.” Here’s an excerpt:
In 2014, the U.K. followed the E.U.’s directive and eliminated the requirement for quarterly reporting. Yet, less than 10% of all U.K. public companies have so far moved to semi-annual reporting. These were mainly companies involved in the energy and utility sectors, where investments of 20-30 years are typical. However, the investment level of companies moving back to semiannual reporting did not increase more than those companies continuing to report quarterly.
Accordingly, our research strongly suggests that moving from quarterly to semi-annual reporting is not an effective response to concerns about the undue corporate emphasis on short-termism. If quarterly reporting focuses company executives on profit maximization in the upcoming three months, then semi-annual reporting might logically focus these executives on attractive investments in the upcoming six months — not over the next three to five years.
In contrast, another recent study suggests that less frequent reporting may help reduce short-termism – but that study was based on a review of the effect of changes in reporting mandates that occurred long before the advent of the 24-hour news cycle, the Internet & social media.
In our current information-saturated environment, it might be a stretch to conclude that the behavior of public companies & investors would change much based solely on the SEC’s decision to reduce the frequency of mandatory reporting. I doubt companies would alter their internal accounting cycle or stop generating quarterly financials for internal use (and many probably would also voluntarily file 10-Qs). My guess is that our experience would mimic the UK’s – although you never know…
Investor groups are likely to strenuously oppose any effort to move to semi-annual reporting – this press release from the CII in response to the President’s announcement is a case in point. Also see this Vox article – and Cooley blog.
”The Accountable Capitalism Act”: Attacking Short-Termism From the Left
Meanwhile, in a parallel universe, Sen. Elizabeth Warren introduced her own prescription for short-termism – ”The Accountable Capitalism Act”. Under her proposal, all companies with $1 billion in annual revenues would be required to be chartered by the federal government. As this New Republic article explains, those federally-charted companies would also have some pretty unusual governance provisions:
Under the federal charter, companies would be required to consider the interests of workers, customers, communities, and society before making major decisions. Employees would elect at least 40% of all company directors, giving them representation on corporate boards.
That would involve worker representatives in decisions like whether to engage in political spending, which would require sign-off from 75% of all directors and shareholders. Finally, executives who receive shares of stock as compensation would have to hold them for at least five years.
Sen. Warren explained the rationale for her legislation in this WSJ editorial. Here’s an excerpt:
As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” This approach worked. American companies and workers thrived.
Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”
That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer.
I’m no pundit, but I’ll still go out on a limb and say that in the current political climate, my beloved Cleveland Browns have a better chance of winning the Super Bowl than this legislation does of getting enacted.
Poll: What’s The Longest Longshot?
Please take a moment to participate in our anonymous poll:
A friendly competition is brewing between our two “list-makers.” In the first edition of “The ‘Karla Bos’ Files,” Karla said she keeps of list of the 10 things (or more) that she accomplishes before 8:30 am every weekday. Inspired, Nina Flax decided to share her own morning rituals – so eventually we’ll be able to compare how two powerhouse individuals start their day. From Nina:
Here is one for the “Flax-Bos Throwdown of 2018.” Or maybe dance off. Though I don’t know if I’m “Team Britney” or “Team Justin.” Here are 10 things (not more) I accomplish before 8:30 a.m. every workday:
1. Wake Up. This is a MAJOR accomplishment for me. I am not a morning person, never have been. Would much prefer to stay up until 4 a.m. and sleep until 11 a.m. (but who am I kidding, I never get 7 hours of sleep anymore). Now there is child in my life. So, when he wakes up shouting “Papa, the sun is awake!” I too am awake. Even when I’ve been up past 2 a.m. working – or making lists…
2. Scan Email for Urgent Messages. I have taken to putting my phone in airplane mode at night, and leaving it not on the bedside table but on the floor (I think maybe this is helping my sleep?) – but I still scan my emails first. Being in California, I wake up to so many emails every morning from people further east and need to have the peace of mind that I have responded to everything urgent.
3. Kiss Child. Every morning – though sometimes by FaceTime. Funny aside on this. I have a very close friend who works at Facebook. My parents are very close to said very close friend, and when they come to visit me, they like to visit her on campus. I can’t take the time to describe the awesomeness of campus – but a particular focus of my father’s is their meatza (meat pizza). On one of my parents’ first visits to campus, my father said (out loud, he is not quiet and the area we were in was completely open plan): “You know, [friend]. You tell that Mark Zuckerberg that he missed the boat letting Apple get the name FaceTime.” I’m not kidding. It was hilarious.
4. Get Ready for Work. Usually while trying to continue to monitor emails and/or scanning LinkedIn for any interesting news updates. This usually includes cajoling child to brush his teeth. It is a real struggle.
5. Make Sure Creatures are Fed. Well, not all creatures. My husband always feeds the dogs (and in this I will not be upset when he uses the word always – this is different from arguments). But I usually make sure that child and fishy (or, I should say fishy 2.0) will get food – even if this is asking someone else to make sure it happens. That counts, right?
6. Drive to Work; Call Dad. (a) I don’t like to be on the phone at home, (b) somehow even though I live in Silicon Valley there are many dead spots in my house, and (c) I can’t (or at least I’m not supposed to) monitor emails while driving. So I always try to get the most out of my time in the car by making calls. The vast majority of the time one of my calls is to father mentioned above. We kibbitz and I sometimes try to explain how to accomplish various tasks on his iMac or iPad. Which is actually really hard without being able to look at your own screen to explain the way different icons and menus look. The rest of my calls are to colleagues to connect quickly on outstanding tasks, catch up on matters, etc.
7. Park Between the Lines. If you lived around here, you would know that many people do not accomplish this. I really don’t understand it. (My husband if he were talking to you would point out that I too, once, parked outside the lines – and got a ticket.)
8. Shout Hello to My Group. Anyone who sits by me in the office knows when I arrive. I am a big believer in hello’s & goodbye’s (and other things to connect – which I will save for another list).
9. Run to the Kitchen to Get Coffee. I am addicted to caffeine. I am okay with this.
10. Really Start to Work. When I lived in Chicago, trust me, this was a rarity before 8:30 a.m. I never subscribed to the Midwest way of earlier to work (but also was in the office later than most on a regular basis – see accomplishment #1 above).
Limits on Director Information Rights
We’ve blogged a couple of times – see this blog and this blog on DealLawyers.com – about the ongoing dispute between CBS & its controlling shareholder. If you like to “nerd out” on corporate law issues, this litigation just keeps on giving. Here’s the intro from this Francis Pileggi blog:
In the latest iteration of the ongoing litigation, the Delaware Court of Chancery recently provided a textbook summary of the general rule that directors have the right to unfettered access to corporate data, with three general exceptions. In this case, one of those exceptions to the general rule applied to prevent directors who were adverse to a Special Committee from obtaining communications with counsel for the Special Committee.
Lease Accounting: FASB Proposes Changes
It seems that FASB has noticed the sad state of implementation efforts for the new lease accounting standard. Earlier this week, they proposed a few changes aimed at easing the burden. The Exposure Draft addresses these topics:
1. Sales taxes & other similar taxes collected from lessees
2. Certain lessor costs paid directly by lessees
3. Recognition of variable payments for contracts with lease & non-lease components
Lots of interesting stuff in this Davis Polk survey of IPO governance trends among the Top 50 companies by deal size. There hasn’t been much change in the prevalence of defensive measures:
– 90% of companies adopted a classified board
– 94% of companies adopted a plurality vote standard for uncontested director elections
– 84% of companies effectively prohibited shareholder action by written consent
– 84% of companies had provisions prohibiting shareholders from calling a special meeting
– 78% of companies required a supermajority shareholder vote for amending the bylaws
– 90% of companies adopted exclusive forum provisions (up from only 14% in 2011)
When it comes to governance topics that aren’t necessarily enshrined in the articles & bylaws (and, interestingly, that many people agree shouldn’t receive “one-size-fits-all” treatment), more companies have been adopting “shareholder-friendly” practices:
– Average level of director independence was 73% of the board
– Over 80% of companies had fully independent audit, compensation & governance committees
– 52% of companies separated the role of chair & CEO (up from 34% in 2011)
– 38% of companies had an independent chair, and 33% of the remainder had a lead director
Of the 50 companies, 19 listed on the NYSE and 31 listed on Nasdaq. The survey also takes a separate look at practices among the Top 50 controlled companies.
Recently, Aon surveyed 223 institutional shareholders about their “responsible investing” initiatives (also see this Morgan Stanley survey). There’s been a dramatic upsurge of interest in this area – more than a quarter of the world’s professionally-managed assets now have a responsible investing mandate – and the 28-page report cites to a number of large studies that show a link between high ESG rankings & performance. Here’s some takeaways:
– Overwhelmingly, the most common type of responsible investing is incorporating ESG factors into investment decisions – as opposed to applying values-based screens to exclude or include investments (but note that when it comes to active investors, this Clermont Partners survey says that 47% apply a screen – and we’ve blogged about State Street and BlackRock initiatives).
– EU & UK investors are much more likely to have responsible investment policies in place, compared to US investors.
– Only about 35% of respondents (15% of US respondents) said that they use shareholder engagement/activism & proxy voting to express their responsible investment initiatives.
– Climate change is the top concern, followed by other environmental issues, bribery & corruption, weapons manufacturing and human rights.
– Lack of consensus on ESG factors, returns, materiality and definitions hinders progress.
The report also touches on retail investing – ESG assets have more than doubled since 2014. Strangely, this survey found that wealth advisors currently believe there’s low demand for “socially responsible investing” – but they expect growth over the next five years…
Impact Investing: Continued Growth
In this “Annual Impact Investing Survey,” the Global Impacting Investing Network looked at 229 “impact investors” – including fund managers, foundations, banks, family offices, and pension funds. Here’s a few interesting findings:
– 84% of respondents that make both impact and conventional investments noted that their organizations are making more impact investments and are demonstrating greater commitment to measuring and managing their impact. Just 6% of respondents indicated greater reluctance to making impact investments at their organizations.
– Over half of respondents target both social & environmental objectives. An additional 40% primarily target social objectives, and 6% primarily target environmental objectives.
– Most respondents reported using a mix of tools or systems to measure their social & environmental performance. Most commonly, respondents use proprietary metrics and/or frameworks that are not aligned to external methodologies (69%), qualitative information (66%), or metrics aligned with IRIS (59%). Further, two years after the ratification of the Sustainable Development Goals (SDGs) by the UN, three out of four investors report tracking their investment performance to the SDGs or plan to do so in the future.
We have posted the transcript for our recent popular webcast: “Insider Trading Policies & Rule 10b5-1 Plans.”
Getting a “Cyber-Savvy” Board
There was a time – not that long ago! – when data breaches were a rare event, nobody had heard of Cambridge Analytica and AI was mainly a sci-fi movie concept. There was also a time when having one director with “cyber” expertise was enough to signal a board’s commitment to understanding cyber threats & opportunities.
But somewhere along the way, people began to appreciate that boards can’t rely on one “digital director” to solve all of their cybersecurity and cyberstrategy needs – doing that is the corporate-governance equivalent of this overused meme. This Spencer Stuart blog explains how the scenario often plays out with “next-gen” directors who are recruited for their tech skills:
Just because someone has worked at Facebook doesn’t mean he or she knows how to guide a 100-year-old company through a transition to e-commerce. Likewise, someone with digital marketing experience may not know the first thing about cybersecurity.
Boards need to better assess their company’s needs and the candidate’s capabilities, and prospective directors need a better understanding of what board service entails. In addition, boards should know that “next-gen directors,” broadly speaking, are very disinterested in sitting on a board where they aren’t making an impact on real issues: strategy, technology roadmap, etc.
This EY memo elaborates on how directors can use their existing skill-sets to oversee cyber issues – with help from dashboards, crisis planning exercises, third-party experts and resources that identify regular questions for management. And check out this WSJ blog for a story about Avon’s new “digital board” – an advisory group consisting of internal & external members – which will report to the board and executive committee.
The Incredible Shrinking Stock Market?
It’s been a year since we’ve blogged about the dwindling number of public companies. The trend continues – and this study examines the consequences to the general public. It says that the problem isn’t just that there’s a shrinking pie and fewer choices for “Main Street” investors – it’s that society now has less visibility into the privately-held entities that generate jobs & profits.
But for a more positive view, this essay – “Rumours of the Death of the American Public Company are Greatly Exaggerated” – says that everything’s fine. As summarized in this Cooley blog, companies still either go public (eventually) or get acquired by public companies – and the aggregate market cap of the remaining behemoths is higher than ever. The author isn’t as concerned with retail investors “having less scope to capture the upside of fledgling companies.”
Every few years, we survey developments in whistleblower policies & procedures (we’ve conducted several surveys in this area). Here’s the results from our latest one:
1. Over the last year, when it comes to our whistleblower policy, our company:
– Has changed existing policies to address the latest whistleblower developments – 6%
– Hasn’t yet, but intends to change existing policies within the next year – 6%
– Not sure yet if will change existing policies – 53%
– Has decided not to change existing policies – 35%
2. The board committee charged with consideration of the SEC’s whistleblower rules is:
– Has provided incentives for whistleblowers to report internally first – 6%
– Hasn’t yet, but intends to provide incentives for whistleblowers to report internally first – 6%
– Has decided to not provide incentives for whistleblowers to report internally first – 88%
4. Our company:
– Has created a system to alert employees of the benefits of reporting internally (eg. sign updated employee handbook, fill out compliance questionnaires) – 31%
– Hasn’t yet, but intends to create a system to alert employees of the benefits of reporting internally – 6%
– Has decided not to create a system to alert employees of the benefits of reporting internally – 63%
5. Since the SEC adopted its whistleblower rules, our company has had:
– More whistleblower claims reported internally – 6%
– Same number of whistleblower claims reported internally – 94%
– Fewer whistleblower claims reported internally – 0%
Please take a moment to participate anonymously in these surveys:
This “Audit Analytics” blog takes a look at macro trends in 10-K, 10-Q and 8-K comment letters. The average number of days to resolve comments has dropped significantly over the last seven years – from 86 days in 2010 to only 44 days last year.
The total number of comment letters has also steadily declined during that time period. This decrease is due in part to the declining number of public companies – but it also results from Corp Fin’s more recent principles-based approach to comments and a big drop-off in Regulation G-related comments during the last year. Don’t get too carried away with non-GAAP, though – the number of 8-K comment letters on this subject is still well above the low-water mark.
A View on Professors as Expert Witnesses
In this podcast, Professor J.W. Verret discusses Veritas Financial Analytics – the only expert witness firm operated by professors – and more:
– What’s it like being a professor?
– What type of dealings do you have with Congress?
– Why should professors run an expert witness firm?
– How does Veritas Financial Analytics differ from other expert witness firms?
