On Friday, Corp Fin posted this “Small Entity Compliance Guide” – which summarizes the recent amendments to the smaller reporting company thresholds & clarifies when newly-eligible companies can transition to scaled disclosure. For a summary, see this blog from Cooley’s Cydney Posner. Here are a few key points:
– Companies determine SRC status annually as of the last business day of their second fiscal quarter. If a company doesn’t qualify under the “public float” test, it would then determine whether it qualified based on annual revenues in its most recent fiscal year completed before the last business day of the second fiscal quarter.
– A company that’s newly qualified as an SRC can elect to use scaled disclosure beginning with the second quarter Form 10-Q. A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.
– For purposes of the first determination of SRC status after the September 10th effective date of the new rules, companies will qualify if they meet the revised definition as of the last business day of their most recently-completed second fiscal quarter. Companies can use scaled disclosure in their next current or periodic report due after September 10th (or filed on or after September 10th, in the case of transactional filings without a due date). The guidance has a handy chart that shows when companies with various fiscal year ends can transition.
More on “Who Administers Political Spending Policies?”
We’ve blogged a couple of times about political spending oversight – and the risk that candidates who have received company contributions might end up supporting positions that conflict with the company’s position. For an activist’s view on these risks – and recommended board policies & procedures – check out the Center for Political Accountability’s recently-issued 36-page report.
Recently, Climate Action 100+ – a coalition that includes 225 investors with $26 trillion in assets under management – announced that it’s adding 61 companies to its focus list, bringing the total to 161 companies worldwide. They’re selecting companies based on these criteria:
– Reported & modeled greenhouse emissions data (including emissions associated with the use of their products)
– Materiality to investor signatory portfolios
– Significance of their opportunities to drive the clean energy transition
Since December, 18% of focus companies officially support or have committed to implement recommendations from the ‘Task Force on Climate-related Financial Disclosures’ and 22% have set or committed to set a target for reducing their emissions beyond 2030.
This FEI blog reports that the number of Form 8-K filings peaked in 2005 & is now approaching pre-Sarbanes-Oxley levels. The SEC’s rules expanding the items triggering an 8-K reporting obligation went into effect in August 2004. Over 112,000 8-Ks were filed in 2005 – the first full year of the new regime – and the number’s been on the decline ever since. Last year, approximately 69,000 8-Ks were filed, compared with 65,000 during 2003.
Why the decline? The blog speculates that increased use of social media for communicating information to investors may have something to do with it. But I kind of think that ignores the elephant in the room – the number of public companies has fallen off a cliff.
Here are some thoughts from WilmerHale’s David Westenberg on what’s behind the decline in 8-K filings:
I think the most important reason for the decline in 8-K filings is the change in executive compensation disclosure requirements. This trend is evident when you look at the data on a per-issuer basis. Below is an extract from my IPO book, describing an analysis we did on this subject. I have not yet updated the data for 2017 but do not expect any significant change in this trend.
“Since 2003, many new categories of reportable events were added to the Form 8-K rules, moving Exchange Act reporting closer to a real-time basis. As a result, a typical public company now files many more Form 8-Ks per year than it did prior to the rule changes.
Based on an unscientific sampling of Form 8-K filings by 57 public companies of various sizes across sectors, the median number of Form 8-Ks filed by these companies annually between 2000 and 2002, the three-year period before the rule changes, was 2.67, and the median number of Form 8-Ks filed by the same companies annually between 2005 and 2007, the three-year period following the rule changes, was 13.33.
In the 2000 to 2002 period, the most Form 8-K filings by any of the surveyed companies in any one year was 28; two of the surveyed companies did not make a single Form 8-K filing during this period, and five companies filed only one Form 8-K each.
In the 2005 to 2007 period, the most Form 8-K filings by any of the surveyed companies in any one year was 53, and the fewest was five. Form 8-K filings have since declined in number due to further rule amendments in late 2006 and subsequent SEC staff interpretations regarding the reporting of executive compensation arrangements.
Between 2008 and 2016, among the 38 companies from the original sample that remained independent throughout this period, the median number of Form 8-Ks filed annually was 11.95; the highest number of Form 8-K filings in any one year was 41, and the lowest was four. All of the foregoing data includes Form 8-Ks that are “furnished” under Item 2.02 and Item 7.01 rather than “filed.””
Board Diversity: An Activism Repellant?
If you need another reason to increase the number of women on your board, try this one on for size – there’s a study suggesting a correlation between the number of women directors a company has & the likelihood that it won’t be an activist target. This excerpt from a recent “Corporate Secretary” article lays it out:
According to a study of 1,854 public groups by the Alvarez & Marsal (A&M) consultancy, European businesses that have more female directors are less likely to be targeted by activist investors. The analysis found that companies not targeted by hedge fund activists had, on average, 13.4 percent more women on their boards.
Paul Kinrade, managing director at A&M, said there are many factors that can result in a business coming under scrutiny from activists, including diversity. ‘We would not go so far as to say that gender mix is a primary driver of shareholder activism, but our research shows it is certainly a factor and it demonstrates the value of a greater diversity of thinking at board level,’ he said. ‘A board that contains a broader and more rounded view on the disruptive forces in their given markets will increase a company’s resilience and flexibility.’
The study only addressed European companies, but it would be interesting to see data on the US experience.
Lease Accounting: Things Are Looking Sort of Grim
When we last updated you about the status of implementation efforts for FASB’s new lease accounting standard, nobody was ready, Wall Street analysts didn’t care, but the SEC very much did. According to this recent Deloitte report, the clock is still ticking – but the mood among financial execs is darkening. Here’s an excerpt from the press release announcing the report:
Deloitte’s April 2018 poll of more than 2,170 C-suite and other executives shows confidence is declining as those feeling unprepared to comply (29.5%) nearly double those feeling prepared (15.6%). This represents a drop from January 2018 statistics: unprepared (22.4%) and prepared (19%). Moreover, nearly one-half of executives (49.3%) report they are either “very” or “somewhat” concerned about implementing on time—up from 47.1% in May 2017.
The new standard goes into effect on January 1, 2019, and while FASB continues to try to lift accountants’ spirits by providing additional relief from certain aspects of the new standard, it still looks like things might get ugly.
Yesterday, a federal grand jury indicted Congressman Chris Collins (R-NY) on a variety of fraud-related charges arising out of alleged insider trading in an Australian biotech company for which he served as a director. He was also charged with making false statements to the FBI. Parallel civil securities fraud charges were filed by the SEC (for the newbies out there, the SEC only has the authority to bring civil charges; not criminal).
According to the indictment, Rep. Collins disclosed to his son the negative results of a clinical trial for a drug being developed by his company. In turn, Collins’s son, along with his future father-in-law, allegedly sold shares in the company on the basis of the non-public information about the trial results & tipped other persons who also traded. Both of those men were also indicted.
Rep. Collins’s involvement with this company has been the subject of an investigation by the House Ethics Committee. He has denied the charges made against him.
Members of Congress have long demonstrated uncanny abilities as stock pickers – particularly when it comes to industries for which they have oversight responsibilities. In 2012, Congress enacted the STOCK Act, which was intended to combat legislative insider trading. But according to this “Washington Post” editorial, its results have been mixed. The number of trades by legislators has declined sharply since the statute was enacted, but as this excerpt notes, problematic trading practices remain:
Of the senators who remain active in the stock market, they have a high propensity for trading stocks in businesses they directly oversee from their committees. From these perches, members of Congress often are privy to information that could directly affect the value of stocks, posing a serious conflict of interest when trading in those markets.
Politico found a similarly disturbing trend in both chambers of Congress. Politico identified about 30 percent of members of the House and Senate who are currently active in the stock market. Several of these members play in the markets over which they have some direct legislative responsibility — in some cases, even sponsoring legislation that could have a direct bearing on their stock investments.
Regardless of its outcome, the Collins case is a reminder that insider trading on Capitol Hill remains a live issue – and that there’s still a lot of work necessary to drain this part of the swamp.
More On “To Reg FD & Beyond!” – Mr. Musk, We’d Like a Word With You. . .
In what may be the least surprising development in the history of securities regulation, the WSJ is reporting that the SEC has come knocking on Tesla’s door to discuss Tuesday’s series of extraordinary events:
Securities regulators have inquired with Tesla about Chief Executive Elon Musk’s announcement that he may take the company private and whether his claim was factual, people familiar with the matter said.
The SEC has asked the company whether Mr. Musk’s unusual surprise announcement on Tuesday was factual, the people said. The regulator also asked about why the disclosure was made on Twitter rather than in a regulatory filing, and whether the firm believes the announcement complies with investor-protection rules, the people said.
Meanwhile, there continues to be media speculation about whether Musk’s announcement of a possible Tesla buyout via Twitter violated the securities laws.
Poll: Did He or Didn’t He?
Please take a moment to participate in our anonymous poll:
So, Elon Musk arrived at work yesterday and decided to tweet this:
Utter chaos then ensued. More tweets followed, Tesla’s stock soared, shorts got squeezed, Nasdaq halted trading, Tesla blogged more details, and the stock began trading again & closed up 11% on the day. Meanwhile, people began to chatter about whether Musk violated Reg FD – or whether he might face bigger legal woes.
The Reg FD issue is an interesting one. Over on “Broc Tales,” Broc had a great blog a while back about the perils of CEO social media accounts & the potential need for a “Twitter baby-sitter.” Mindful of the Netflix 21(a) report, I took a quick look at Tesla’s investor page & didn’t notice anything indicating that Elon’s twitter feed would be a channel of investor information – but that’s because it happened so long ago, in a 2013 Form 8-K (hat tip to this MarketWatch article). Tesla did this in November 2013, the tail end of when a slew of companies filed this type of 8-K in the wake of the SEC’s latest social media guidance (companies seem to have stopped filing those 8-Ks, but that’s for another blog). So, maybe there’s an issue – or maybe there’s not?
Elon Musk has 22 million followers & has been using his Twitter account to share info with investors for years, so it seems like a stretch to say that his tweets aren’t a “recognized channel” for Tesla information by now – particularly given that Tesla 8-K’ed about it five years ago. He’s practically. . . umm – is “presidential” the right word? – in his use of social media to get information out, so while I doubt Elon cares much about Reg FD, my initial impression is that he’s got a decent argument that he hasn’t run afoul of it.
In any case, Reg FD just might turn out to be the least of Elon’s problems when it comes to his unconventional approach to disclosure. As Prof. John Coffee noted in this “Yahoo! Finance” article, Musk may face some exposure if he fudged about the financing:
If Musk’s aim was to temporarily boost Tesla’s stock in order to force losses on short sellers, it could be considered stock manipulation, which is illegal. “That’s too inviting to a plaintiff’s lawyer not to sue,” says Coffee. “This would be an attractive lawsuit. The people who think he’s manipulating the market would say they’ve suffered an injury, and you could pull all those losses together in a class action.”
If, on the other hand, Musk can demonstrate that he has actually arranged financing for a private buyout, or made serious efforts to do so, he might be off the hook.
It should be very entertaining to watch this whole thing unfold, but there’s one question that I’m just dying to get an answer to – what did Elon’s lawyers do to make him hate them this much? Tesla lawyers, the Excedrin’s on me!
Sustainability: Beware The Golden State, Delaware Virtue Signalers!
A few weeks ago, I blogged about Delaware’s new voluntary sustainability certification regime. The state’s new statute goes to considerable lengths to disclaim any liability for actions that boards & corporations take with respect to it – but this recent blog from Keith Bishop says “not so fast.”
It turns out that those companies that want to hang out Delaware’s gold star for sustainability may find themselves in the cross-hairs in California. Here’s an excerpt:
California has enacted an extremely broad unfair competition law, Bus. & Prof. Code § 17200, that seeks to protect both consumers and competitors from any unlawful, unfair or fraudulent business act or practice. By proscribing unlawful competition, California’s UCL does not enforce the borrowed statute, but treats them as unlawful practices that the UCL makes independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999).
When the inevitable UCL suit is filed in California against a Delaware corporation for allegedly false or misleading “virtue signaling” under the Delaware statute, the California courts will face interesting questions of conflict of laws and comity.
Looks like there’s still no such thing as a free lunch.
Succession Planning: Most CEOs Say They Weren’t Ready
CEO succession planning has become an increasingly important issue – and as Broc recently noted, one that’s even made an appearance in pop culture. However, if you measure a company’s succession planning efforts by the readiness of a new CEO to grab the reins, this Harvard Business Review article says that there’s a lot more work to be done.
According to the article, 68% of CEOs say that they weren’t fully ready for their job – and as this excerpt suggests, that’s not the only shortcoming when it comes to succession planning:
This signals that something is missing in internal hiring and development processes, and in board management of CEOs. Indeed, among CEOs who’d risen in the ranks through their firms, only 28% told us they’d been adequately prepared for the top job, and among all respondents, only 38% said they turned to their board chairman for honest feedback, while only 28% sought counsel from non-chairmen directors.
Egads! That’s practically the definition of a dysfunctional process.
There’s less than a year to go until the new audit report’s required disclosure of “Critical Audit Matters” (or “CAMs”) goes into effect for large accelerated filers – so the Center for Audit Quality’s “Key Concepts & FAQs” on CAMs are pretty timely. Here’s an excerpt on the process of deciding whether a particular matter is a CAM:
The determination of whether a matter is a CAM is principles based, and the new standard does not specify that any matter(s) would always be a CAM. When determining whether a matter involved especially challenging, subjective, or complex auditor judgment, the auditor takes into account certain nonexclusive factors (as specified in the new standard), such as the auditor’s assessment of the risks of material misstatement, including significant risks.
For example, the new standard does not provide that a matter determined to be a significant risk would always constitute a CAM. Some significant risks may be CAMs, but not every significant risk will involve especially challenging, subjective, or complex auditor judgment.
Similarly, the new standard does not require that matters such as material related party transactions or those involving the application of significant judgment or estimation by management always be a CAM.
Audit Committees: Trend Toward More Proxy Disclosure Continues
We’ve previously blogged about the trend toward more disclosure about various aspects of the audit committee’s work. This Deloitte report on the latest proxy season says that trend is continuing – although at a slower pace. Here’s an excerpt:
Our analysis of the S&P 100 companies demonstrates that companies are indeed voluntarily increasing disclosures included in the proxy, albeit at a slower pace in some areas. 2018 results show that disclosures did not increase by more than 10% in any areas covered, except for one, though 80% of the areas analyzed saw an increase in disclosure over last year. The greatest year-over-year percentage increase occurred in disclosures on the audit committee’s role in the oversight of cybersecurity, which increased by 13% since last year.
Other key observations include increases in disclosures around audit committee practices, specifically discussion of management judgments and/or accounting estimates, which increased 6%, and the audit committee’s review of significant accounting policies, which rose 4 percent. However, the analysis demonstrated only a 2% increase in the discussion of issues encountered during the audit.
The report suggests that the requirement for auditors of large accelerated filers to begin disclosing CAM in their audit reports next year may well trigger an increase in company disclosures in related areas.
Annual Meetings: Big Tech Directors Can’t Be Bothered?
This Reuters article confirms every Big Tech company stereotype you’ve ever heard:
A large portion of Alphabet, Facebook, Netflix and Twitter directors have not attended annual shareholder meetings in recent years, company records and securities filings show, in some cases in growing numbers.
Recent high-profile no-shows at the meetings – which are often the only chance “mom-and-pop” retail investors get to ask directors questions – include Alphabet Chief Executive Larry Page and Facebook board member Peter Thiel. The companies declined to discuss the absences in detail.
While big asset managers can get access to directors, shareholder activists and corporate governance experts say the empty seats at annual meetings mean small investors and campaigners challenging directors to make corporate changes may not get to engage with boards.
The article says that only 4 of 8 Facebook directors showed up at this year’s annual meeting. And only 4 of 11 directors at Alphabet – aka “The Company Formerly Known as Google.” Incredibly, Alphabet’s CEO Larry Page didn’t even show up to his own meeting!
Attendance was even worse for some high-profile tech companies that went the virtual annual meeting route. For example, at Netflix’s meeting, only 2 of 11 directors attended – while the CEO was the only director to attend Twitter’s meeting.
Having your directors blow off your annual meeting is a very bad look for any company – much less companies in a sector that’s getting as much negative publicity as Big Tech is.
It seems that SEC Commissioner Hester Peirce could teach Dale Carnegie a thing or two about how to win friends & influence people – at least on the Internet, where she’s become “Twitter famous” & earned the moniker “Crypto Mom.” According to this “Quartz” article, Commissioner Peirce owes her new-found popularity to her dissent from the SEC’s recent decision to refuse to allow the Winklevoss brothers to list their bitcoin ETF:
Crypto Twitter is rallying behind a sympathetic watchdog at the US Securities and Exchange Commission. Not long after commissioner Hester Peirce dissented from the agency’s rejection of a bitcoin exchange-traded fund, her count of Twitter followers soared.
Peirce’s social media exposure got a boost from a Reddit user who goes by lamb0x, who called for readers on the site to “show her some love from the Crypto Community.” She’s not the first buttoned-down American official to win Twittersphere adoration — the Chair of the Commodity Futures Trading Commission, Chris Giancarlo, had his turn in February after he gave Senators an unexpected education on crypto slang during a hearing.
Giancarlo was dubbed “Crypto Dad” by the cryptorati; inevitably, Peirce earned the moniker “Crypto Mom” from some Redditors.
The article includes a chart showing that Commissioner Peirce’s following on Twitter skyrocketed from around 1000 followers to more than 10,000 after her dissent.
Speaking of Twitter, be sure to follow Broc (@BrocRomanek) and Liz (@LizDunshee) – they tweet interesting & relevant stuff. You can follow me too if you want (@JohnJenkins36), but I mostly just whine about the Cleveland Browns.
SEC’s Proposed Transaction Fee Pilot: “Come at Me, Bro!”
Last March, the SEC proposed to implement a “Transaction Fee Pilot,” which would analyze the effects that fees & rebates have on how brokers route their orders to competing markets. It sounds pretty boring, but the comment process for this one has gone off the rails – accusations of “fearmongering” and “misleading” statements have been hurled by one side, while the other has been accused of “making a mockery” of the comment process.
So what is it about the proposal that’s causing such a ruckus? Well, one reason may be that public company stocks are going to play the role of “guinea pigs.” The SEC wants to create three test groups, each composed of 1,000 listed stocks. Each of these groups would have different levels of permissible transaction fees & rebates. For the remaining 5000 or so stocks serving as a control group, it would be business as usual. As proposed, the Pilot would run for up to two years, and companies would not be permitted to opt out from participating in it.
This “IR Magazine” article says that most major institutional investors are all-in on the Pilot, but that the Nasdaq & NYSE are not happy. In addition to concerns about driving trading away from the exchanges, the NYSE in particular has flagged some potentially significant downside consequences for listed companies:
Consider two hypothetical companies which are similar in profile. Both are large listed financial institutions with similar size, business profile and market capitalization. Company A is included in one of the SEC’s Transaction Fee Pilot. Company B is not included and still benefits from an exchange rebate program. We would expect Company A’s average bid-ask spread to widen due to the reduced or eliminated exchange rebates.
All else equal, Company A will now be a less appealing investment than Company B, as a wider bid-ask spread means that investors’ transactions costs will be higher when trading Company A’s stock compared to Company B’s stock.
The NYSE goes on to point out that wider spreads could make securities offerings & buybacks more expensive, and encourages listed companies to weigh-in through the comment process. Some heavy hitters – including P&G, Home Depot & Mastercard – have done so. One of the points made in several comment letters is the Pilot’s potential impact on peer group metrics. Here’s an excerpt from Mastercard’s letter:
The SEC has stated that stocks would be grouped into the control group and test groups based on stratified sampling by market capitalization, share price, and liquidity. This makes it likely that MasterCard, if included in the Pilot, would be separated from a peer group of companies that market partipants and investors compare to assess MasterCard’s financial performance. This separation could distort peer group metrics and complicate the comparison of peers by investors.
A number of companies have also asked to be put in the study’s control group if the study moves forward. In response, the CII followed up with a letter of its own to the directors of the 37 companies that opposed the proposal expressing its concerns about their opposition and its own “enthusiastic support” for the proposal.
The back-and-forth between one pair of commenters has gotten quite heated. In June, the Investors Exchange submitted a letter characterizing the NYSE’s statements as “fearmongering” built on a set of “knowingly false premises.” That prompted a blistering reply from the NYSE, in which it accused the IEX of “making a mockery of the Commission’s comment process” & targeting the NYSE in an attempt “to blame the NYSE for its own business failures.”
ICOs: The First “Token Securities Exchange” on the Horizon?
While the NYSE & IEX were slinging mud over the SEC’s Pilot Program, crypto-platform Coinbase was taking the first steps toward becoming the first national securities exchange for tokens. This recent blog from Gunster’s Gus Schmidt has the details. Here’s an excerpt:
In order to operate an exchange for securities, an entity must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for alternative trading systems (ATS) under SEC Regulation ATS. An entity that wants to operate an ATS must first register with the SEC as a broker-dealer, become a member of a self-regulating organization, such as FINRA, and file an initial operation report with the SEC on Form ATS.
Because Coinbase is neither registered as a national securities exchange nor operates under an exemption, it cannot operate an exchange-based trading platform for blockchain-based securities. However, the recently announced acquisitions indicate that Coinbase may be headed in that direction. The three companies acquired by Coinbase were:
– Venovate Marketplace, Inc. (registered as a broker-dealer and licensed to operate an ATS)
– Keystone Capital Corp. (registered as a broker-dealer)
– Digital Wealth LLC (registered as an investment advisor)
The blog points out that by acquiring licensed entities, Coinbase may be able to speed up its plan to create an exchange-based trading platform for blockchain-based securities.
We’re feeling pretty lucky around here. Karla Bos reached out to us after reading “The ‘Nina Flax’ Files” – to let us know that she too is a list-maker. Here’s Part I of Karla’s “list of lists” (let Karla know what you think – my personal favorite is #2):
I’ve always been a list-maker, thanks to my parents – family to-do lists for the weekend (equal parts work & play, as I recall, something I’m striving to return to) and lists of summer chores by the day (including the much-despised yardwork, yet ironically I now enjoy it, go figure). But I didn’t fully appreciate until I read Nina’s lists how much I enjoy and rely on lists myself and what they must reveal about me. So I was inspired to make my own “list of lists” – sans my multiple shopping lists – and to make my own versions of many of Nina’s excellent lists:
1. Why Making Lists Keeps Me Sane
2. Why I Look Forward To The Women’s 100 Every Year
3. Multiple To-Do Lists (each with a strategic physical location in addition to electronic reminders): Multi-Week Personal To Do List, Today’s Personal To-Do List, Today’s Business Success (Aka Must-Do) List, Upcoming Personal/Family Appointments
4. Things I Didn’t Realize Were So Hard for Companies When I Was on the Investor Side
5. Things Companies Don’t Understand About the Investors That Vote Their Proxies
6. Ways My Acting School Training Helps Me In Business Every Day
7. What I Learned From Living In a Small Town, a Big City, the Woods & the Desert
8. Things I Do For My Job That Add Value (But Aren’t Billable)
9. What Working From Home Has Taught Me
10. Ways That Companies Inadvertently Offend Their Investors
11. 10 Things (Or More) I Accomplish Before 8:30 am Every Workday
12. Activities I Do/Should Be Doing Every Day To Counteract Too Much Sitting At a Desk
NASAA Proposes “Blue Sky” Updates
NASAA has proposed two rules that would make overdue updates to the ancient “manual exemption” – which is available for secondary resales when companies make certain information publicly available. The proposed rules would encourage states to:
1. Replace “S&P’s Corporation Records” with the OTC website as an information source for the manual exemption and
2. Provide an exemption for companies that have conducted a “Tier 2” Regulation A offering and are current in their ongoing reporting requirements
Is it just me, or do these changes seem overdue? The SEC adopted the Reg A+ changes over 3 years ago – and S&P discontinued their records service in 2016. You’d have thought something would have come along sooner. Comments are due by August 20th. Hat-tip to Latham’s Paul Dudek for bringing this to our attention.
Reduced Rates End Next Week: Our “Pay Ratio & Proxy Disclosure Conference”
This blog from “The Conference Board” discusses “reporting fatigue” on ESG matters. In the growing universe of ratings, rankings and initiatives, it’s hard to know where to focus your limited bandwidth. This Clermont Partners survey of 189 active investors – and related interview – say that annual reports are the #1 source of ESG info for investors, followed by direct questions to the company.
What about sustainability reports? For those of you working on them, I’m sorry to say there might be some leeriness there:
– While 28% of investors said that the reports were helpful, they also said they didn’t answer all of their questions; and
– 63% of the investors said they “don’t spend much time” with them.
But your work is not for nothing. According to this survey, almost everyone turns around and uses some combination of annual, integrated & sustainability reports to answer those direct questions from investors. And when investors look to third-party ratings agencies to fill information gaps, some of that information also comes from sustainability report.
Although depending on the ratings agency, that percentage might not be as high as you think: Broc has blogged on our “Proxy Season Blog” about how company disclosures contribute only about 35% of the data underlying MSCI ratings. Also see these MSCI resources in our “ESG” Practice Area.
This blog from Globoforce’s Derek Irvine discusses why it makes sense for employee engagement surveys to be one component of ratings – organizations that score in the top 25% on employee experience report nearly 3x the return on assets and more than 2x the return on sales as compared to organizations in the bottom quartile.
Human Capital: Investor Coalition Sends 45-Page Survey
The “ShareAction Workforce Disclosure Initiative” – a 100-member investor coalition – recently sent this 45-page survey to 500 companies. The coalition says the survey is a “streamlined solution” that helps companies avoid responding to multiple surveys & data requests. They’re also encouraging companies to make their responsive information public. Here’s a summary of results from their pilot project last year.
ESG Ratings: “Wildly Divergent”?
The American Council for Capital Formation is following up on its hard look at proxy advisors – which Broc blogged about on our “Proxy Season” Blog last month – with a new 17-page assessment of four major ESG ratings agencies. It concludes that output from MSCI, Sustainalytics, RepRisk and ISS Environmental & Social QualityScore is…less than ideal. Here’s an excerpt from the press release (also see this Financial Times article):
The major rating agencies have significant disparities in the accuracy, value, and importance of their individual ratings to investors,and arguably undermine the validity of ESG investment strategies. Findings reveal significant disparities in ratings due to a lack of standardization, inconsistencies, and subjective interpretation influenced by a number of biases – including company size, geography, and industry-specific criteria.
Though modern ESG investing has been practiced for over a decade now, there is still a lack of accurate data to support the evaluation process. To meet growing customer demand and attract ESG-orientated capital, companies have begun making selective and unaudited disclosures in regard to their performance. These disclosures are then utilized by ESG rating agencies, despite the fact that there are neither standardized rules, nor an auditing process to verify company data.
The report is careful to note that it’s not saying one particular method of ESG investment is right or wrong – only that the application of ESG-related metrics & ratings into complex investment decisions remains much more an art than a science. Among other recommendations, the ACCF advocates for standardized ESG disclosures in regulatory filings, in order to help ratings agencies make more consistent judgments. It also says that the agencies should be more transparent in their process – and better adjust for size, industry & jurisdiction.
There’s been a lot of buzz this year about voluntary exempt solicitations – increasingly, these notices are being used to publicize shareholder views on proposals and other topics. Broc blogged about John Chevedden’s first “Notice of Exempt Solicitation” in March – and earlier this week I noted on our “Proxy Season Blog” that it may become a year-round practice. Yesterday, Corp Fin issued two new Proxy Rules CDIs that confirm that voluntary exempt solicitations are okay – if it’s clear who is making the filing.
– Question 126.06 says that the Staff will not object to a voluntary submission of such a notice, provided that the written soliciting material is submitted under the cover of Notice of Exempt Solicitation as described in CDI 126.07 and such cover notice clearly states that the notice is being provided on a voluntary basis. Doing so will make it clear to investors the nature of the submission and that it is being made on behalf of a soliciting party who does not beneficially own more than $5 million of the class of subject securities.
– Question 126.07 says that the Rule 14a-103 information required by Rule 14a-6(g)(1) – e.g. the filer’s name & address – must be presented in an Edgar submission before the written soliciting materials, including any logo or other graphics used by the soliciting party. To the extent that the notice itself is being used as a means of solicitation, the failure to present the Rule 14a-103 information in this manner may, depending upon the particular facts and circumstances, be misleading within the meaning of Exchange Act Rule 14a-9. This requirement applies regardless of whether the filing is voluntary or to satisfy the requirements of Rule 14a-6(g)(1).
For more background & commentary, visit this Gibson Dunn blog. Here’s an excerpt:
While these new CDIs provide helpful guidance on the use of voluntary Notices of Exempt Solicitations, the CDIs may not go far enough to address potential abuses that increasingly are arising when the EDGAR system is used as a platform for disseminating a filer’s views. For example, C&DI Question 126.06 does not expressly require that the filer represent that it is in fact a shareholder.
Absent further guidance from or review and comment on such filings by the Staff, the process allows anyone with EDGAR codes to submit filings unrelated (or only tangentially related) to a proposal, or to set forth disparaging or inflammatory views, subject only to the Rule 14a-9 standard governing false and misleading statements. For example, John Chevedden, who as of July 31 has filed 21 of these filings in 2018, filed a Notice of Exempt Solicitation at Netflix a week after the company’s annual meeting, which contained only a vague and confusing voting recommendation at the very end, and instead was devoted largely to criticizing the company’s decision to hold a virtual annual meeting. However, the Staff has informally indicated that companies should contact them if they believe the PX14A6G process is being abused, and the new interpretations hopefully indicate that the Staff will be more proactive in reviewing and possibly commenting on such filings.
“Passive” Investors: Causing a Rise in Activism?
We’ve blogged a few times about the misnomer of “passive” investors. But whatever we call them, the capital flow to these firms continues to increase. And this “Rivel Research” study indicates that these firms are exercising more & more influence – particularly when it comes to engagement on corporate governance & executive pay. Some active managers aren’t happy about that, because they think their passive counterparts make uninformed decisions that adversely impact stocks that the active funds are mandated to hold.
So what’s an active manager to do? Maybe they write a 17-page client letter to say they’re still better at picking stocks, as described in this WSJ article. Maybe they call them communists. Or maybe, they move away from simply picking stocks and into the potentially more lucrative field of campaigning for stock-enhancing changes – which could also minimize the impact of the passive engagement that they find problematic. This WSJ article credits passive investing with the hot activist environment and increasing involvement of first-time activists.
For tips on communicating with “passive” investors (and active investors that bifurcate the engagement & voting teams), check out this article from Ron Schneider of Donnelley Financial Solutions. He points out that they’re more likely to rely on the proxy statement than IR blasts – so there’s an increasing benefit in providing voluntary proxy disclosure on things like strategy & ESG issues. And as Broc has blogged – it’s best to do this in a thoroughly-bookmarked online document.
Our August Eminders is Posted!
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Yesterday, the SEC announced that it will hold a “proxy process” roundtable this fall. The date & agenda are TBD – but Chair Clayton is asking Corp Fin to reconsider the voting process, retail shareholder participation, shareholder proposals, proxy advisors, technology & universal proxy cards.
This isn’t the first time the SEC has tackled “proxy plumbing.” It issued its first concept release on this topic back in 2010 (see our “Proxy Plumbing” Practice Area). That effort didn’t result in much rule-making – maybe the SEC’s initiatives will be less controversial this time.
ISS Policy Survey: Auditor & Director Track Records, Gender Diversity & More
Yesterday, ISS opened its “Annual Policy Survey” – like last year, it consists of two parts:
1. Governance Principles Survey – 10 questions on high-profile topics. This year’s questions relate to auditor independence & quality, audit committee evaluations, impact of past & present director track records at other companies, board gender diversity and the “one-share, one-vote” principle. This part of the survey will close on August 24th.
2. Policy Application Survey – More expansive portion that can be accessed at the end of the initial survey, allowing respondents to drill down on key issues by region. This part of the survey closes September 21st. According to this Weil blog, the key issues for the Americas region include excessive non-executive director compensation, independent chair proposals, share ownership requirements for binding bylaw amendments and pay-for-performance metrics.
As always, this is the first step for ISS as it formulates its 2019 voting policies. In addition to the two-part survey, ISS will gather input via regionally-based, topic-specific roundtables & calls and a comment period on the final proposed changes to the policies.
Company Prevails Over Disputed Advance Notice Bylaw
A recent advance notice bylaw dispute is a reminder that there’s usually room for interpretation. Check out the intro from Ning Chiu’s blog:
HomeStreet received a 133-page notice the day before the advance notice deadline in its bylaws, alerting the company that Blue Lion intended to nominate two directors and submit two proposals – seeking annual elections and a binding resolution for an independent chairman.
Less than a week later, the company announced that the notice was deficient – attaching a five-page letter to a Form 8-K that it sent to the shareholder. The letter stated that the notice provided by the shareholder failed to meet several of the bylaw’s disclosure requirements, including providing information related to the holder of shares that would be disclosed in a proxy statement governing a solicitation as well as deficiencies in the D&O questionnaires returned by the shareholders’ nominees. Since the deadline had passed, declared the company, the company intended to disregard the nominations and the proposals for the meeting.
As you might guess – Blue Lion didn’t just accept this and walk away. In their view, the notice materially complied with the bylaw. They responded in a 34-page letter – and they took it to court. In this instance, the company prevailed.
According to this Sidley blog, since HomeStreet’s bylaw had been in place since the company’s IPO & was previously-disclosed, the court found that the company hadn’t taken any defensive measures. So, it rejected the argument that Delaware’s “enhanced scrutiny” test should apply. Broc recently blogged about a New York case with a different outcome…
