It’s big news – although not surprising if you’ve been paying attention. On Friday, at the ABA Annual Meeting, Corp Fin Director Bill Hinman said that the SEC won’t be delaying the implementation of pay ratio (as always, speaking for himself & not the Commission). Bill also mentioned that Corp Fin would be issuing guidance on the pay ratio rules at some point in the near future. It’s still possible that Congress could delay – or repeal – the pay ratio rule. But I wouldn’t make that bet…
We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
Comment Letters: Corp Fin’s New “SWAT”
Here’s the intro from this blog by Stinson Leonard Street’s Steve Quinlivan:
The Office of the Inspector General has issued an evaluation of the Division of Corporation Finance’s disclosure review and comment process. The report begins with a description of the Division’s comment process. Perhaps the most interesting part is the report notes that the Division is developing a new system to improve and streamline certain aspects of the disclosure review process. The new system is called the System for Workflow Activity Tracking, which is referred to as SWAT.
SWAT will automate certain aspects of the review process such as providing notifications of filing review status to other review team members. In addition, according to Division officials, SWAT will generate a draft comment letter based on comments input into and approved within the system. The reviewer or another designated member of the relevant Assistant Director’s staff will review and revise the draft letter to ensure that it meets the Division’s policies for format, tone, and content. Once the draft letter is approved, a final comment letter will be generated within SWAT.
Small & Emerging Companies: Final Report From SEC’s Advisory Committee
Last week, the SEC’s “Advisory Committee on Small & Emerging Companies” held its 22nd – and final – meeting. At least with that Committee name. Per Chair Clayton’s opening remarks, the 6-year-old Committee is going to morph into the “Small Business Capital Formation Advisory Committee” – and the SEC is also creating a new “Office of the Advocate for Small Business Capital Formation.”
According to this Cooley blog, the Committee recommended that the SEC continue to address three main topics:
1. Facilitating Exempt Offerings: This includes a recommendation for regulatory certainty & clarifying guidance for finders, private placement brokers and platforms. The Committee also wants the “accredited investor” definition to capture as many households as possible, while remaining simple to interpret & apply.
2. Reporting Companies: The Committee recommended that smaller reporting companies get the accommodations afforded to emerging growth companies and that the cap for smaller reporting company status be raised.
In addition, the Committee recognized the benefit of board diversity and recommended that the SEC require companies to disclose not just their diversity policy, but directors’ diverse characteristics – as self-reported by directors.
3. Market Structure: Insufficient liquidity is an ongoing concern for smaller companies. The Committee wants the SEC to move forward with creating a separate secondary market for accredited investors to trade small-cap equities – as well as federal preemption for Tier 2 Reg A issuers that are current in ongoing reports.
The Committee also recommended ongoing analysis of tick size – wider trading increments may encourage more support for small & mid-cap equities and improve liquidity.
There are changes afoot in the investment industry. According to this AlphaSense blog, nearly 40% of US equity assets are now held in “passive” funds, and 20% of US equity assets are now using sustainability strategies in investment decisions.
And while most of us have been beating the corporate governance drum for a long time, these converging trends emphasize that there’s an IR opportunity and financial impact. Here’s an excerpt:
The “new” type of activist campaign focuses on corporate governance, and tends to be more successful because the topics align with the proxy voting guidelines of passive institutions. Proxy contests can also benefit from the presence of passive investors because they may be looking to sell poorly performing stocks in their portfolios.
Investors are increasingly interested in expanded communications to include sustainability goals and performance discussions, a.k.a. extra financial, non-financial and other intangible measures.
Between 20-30% of companies have made shifts in their IR strategy as a result of the increase in passive investors and the increasing attention to sustainability. There’s an opportunity for those who can reach this audience.
What aspects of the company’s sustainability story are unknown, unrecognized or misunderstood, that could contribute to value creation if told in compelling and meaningful IR messaging? Where might aspects of ESG be germane to expanded mainstream investor interest and communications? How might developing ongoing relationships with passive investors and sell-side analysts increase shareholder value, not only by increasing demand for the company’s publicly traded equity and debt, but also by decreasing the risk of rogue shareholder votes?
State Street’s Climate Disclosure Guidance
Check out this new “climate disclosure guidance” from State Street. It’s aim is to help investors in “high-impact” sectors – oil, gas, utilities & mining – be able to evaluate climate risk preparedness and business sustainability risks. Consistent disclosures would be a step in the right direction.
State Street also expects companies in “high-impact” sectors to address climate risks in their board committee charters.
1. For our employee determination date, we’re using:
– October 31st (or equivalent for non-calendar year companies) – 26%
– November 30th (or equivalent for non-calendar year companies) – 7%
– Fiscal year end – 36%
– Some other date – 31%
2. When it comes to “CACM,” we’re using:
– Base salary – 24%
– Total cash compensation – 15%
– Total gross compensation – 21%
– Taxable wages – 25%
– Some other measure – 15%
– No CACM, using annual total compensation instead – 0%
3. When it comes to using the de minimis exemption, we’re:
– Yes, we’re using the exemption – 14%
– No, we’re not using the exemption – 51%
– Don’t know yet – 35%
4. When it comes to excluding employees of acquired entities, we’re:
– Yes, we’re excluding – 4%
– No, we’re not excluding – 28%
– We don’t have acquired entities – 48%
– Don’t know yet – 20%
We decided to release these course materials early since so many are grappling now with the type of issues addressed in this “How to” manual. Just like the upcoming “Pay Ratio & Proxy Disclosure Conference” in October will comprehensively address these – and many more – issues. This comprehensive pay ratio event is one that you can’t afford to miss. Also remember that our third pre-conference webcast is September 27th.
Register Now: This is the only comprehensive conference devoted to pay ratio. Here’s the registration information for the “Pay Ratio & Proxy Disclosure Conference” to be held October 17-18th in Washington DC and via Live Nationwide Video Webcast. Here are the agendas – 20 panels over two days. Register today.
Proxy Season: ISS Corporate Solutions Notes 8 Key Trends
Last week, ISS Corporate Solutions issued a press release detailing 8 key trends for the latest proxy season. Here they are:
1. Shareholder proposals seeking more disclosure on climate change preparedness fared well in 2017, and three such proposals—at Exxon Mobil, Occidental, and PPL Corporation — received majority shareholder support.
2. Proxy access proposals topped the chart of the most commonly filed shareholder proposals, and most of the proposals to adopt proxy access that went to a vote received majority support.
3. Taken as a group, political contributions and lobbying proposals were the second most frequently filed shareholder proposals in 2017, and saw a slight uptick from 2016.
4. There was a spike in the number of directors receiving low levels of support from shareholders; 102 directors at S&P 500 companies, or 2.4 percent, received less than 80 percent shareholder support during proxy season, the highest figure since 2011.
5. Median CEO pay at S&P 500 companies rose by 7%.
6. 2017 was the second time that most companies held votes on the frequency of say-on-pay proposals. While shareholders preferred annual say-on-pay votes at 80 percent of companies in 2011, they preferred annual votes at well above 90 percent of companies this year.
7. Despite the increased shareholder interest in annual say-on-pay votes, the median say-on-pay vote result at Russell 3000 companies remained quite high—96.4 percent, a slight uptick from 2016’s median outcome of 96%.
8. Shareholder rights continue to receive focus. One example is companies’ steady march from plurality vote standards in uncontested director elections to majority vote standards.
Proxy Season: How Retail & Institutional Investors Voted
This 6-page memo from Broadridge & PwC takes a closer look at common shareholder proposals for this proxy season – and highlights that institutional investors drove approval of trending ESG issues. For example, institutional investors voted 66% of their shares in favor of climate change proposals, compared to 13% support among retail shares.
Last week, there was a promising development for Regulation A+ – the House passed the “Improving Access to Capital Act,” which would allow reporting companies to use Reg A+. But wait, there’s more! Under this bill, Exchange Act periodic reports would also satisfy the reporting requirements for Tier 2 offerings. Remember, Tier 2 offerings can raise up to $50 million in a 12-month period.
Smaller public companies that are not listed on Nasdaq or the NYSE, and are therefore subject to state securities regulation in respect of their capital raising activities, may find Regulation A+ especially attractive, because an offering under Tier 2 of Regulation A+ is preempted from state securities regulation other than the potential requirement to make a notice filing, consent to service of process, and pay a filing fee.
Meanwhile, Jay Knight & William Lay of Bass Berry have put together this nice set of FAQs on Reg A+ offerings…
Do Audit Tensions Cause “Material Weaknesses”?
A few weeks ago, John blogged about the correlation between late-season auditor dismissals & “bad apples” – companies with restatements, material weaknesses & delistings. This “Audit Analytics” white paper goes further, to suggest that auditor tensions might contribute to the negative events (also see this Compliance Week article).
According to the research, the events associated with higher likelihood of a material weakness in the same year include:
– Changing auditors – and reporting disputes with the former auditor – increases the probability of a material weakness by 12.74%
– Reporting a reissuance restatement or filing two or more financial restatements in the calendar year increases the probability by 19.61%
– Receiving a significant vote against auditor ratification increases the probability by 24.02%
It appears something is seriously amiss here. The study seems to conclude that if the auditors and management get along, the auditors are not near as likely as to report a problem to investors. But if the find themselves at odds, a scorned auditor is willing to tell all. What might be more likely is that companies are firing auditors when there’s a disagreement over a material weakness finding – and the dismissal is reported before filing the annual report.
Survey Results: Compliance Training Still Not a Priority…
As reflected by this 54-page report from Navex Global, despite the flurry of recent scandals, companies aren’t investing in more training – and in some cases, are investing less! Here’s some of the survey’s notables:
– 25% still don’t have a dedicated budget for compliance training (same as last year)
– 93% aren’t even attempting to show a return on investment from training (which helps explain why so little investment is being made)
– Directors are getting trained less than last year – down to 44% compared to 58% last year. Only 17% of new directors are getting training – and only 25% of directors get cybersecurity training.
– Retaliation concerns are lower than expected at 20%
The silver lining is that 31% are actually taking data from their policy/incident management systems – and combining it with training data to create more savvy & efficient programs.
Tune in tomorrow for the webcast – “Non-GAAP Disclosures: Corp Fin Speaks” – to hear Mark Kronforst, the Chief Accountant of the SEC’s Division of Corporation Finance and Dave Lynn of TheCorporateCounsel.net and Jenner & Block provide practical guidance about what to do now with your non-GAAP disclosures given Corp Fin’s CDIs and a year’s worth of Staff comment letters on the topic.
According to “The Conference Board’s” “CEO Succession Practices” report – which analyzes succession events among the S&P 500 – companies are becoming much more communicative about CEO succession plans:
Compared with a year earlier, in 2016 boards were 30 percent less likely to announce that the transition was effective immediately.
Communication practices more commonly include providing earlier notice of the CEO succession event, including the description of the role performed by the board of directors in the CEO succession process, and offering more details on the reasons for the transition.
Check out this handy infographic from Heidrick & Struggles for other notable findings, which include:
– Struggling retailers & wholesalers are driving a record-high succession rate for companies with low TSR.
– Stable succession rates of better-performing companies may indicate that increased scrutiny over executive pay and performance has started to produce results.
– Only six of the 63 CEO positions that became available in the S&P 500 in 2016 were filled by a woman.
– One out of 10 CEO successions in 2016 were navigated by an interim CEO, a role once used only in situations of emergencies and unplanned transitions.
– Only 6.4 percent of the successions in 2016 involved the immediate joint appointment of the new CEO as board chairman, as proxy advisors and the investment community increasingly demand independent board leadership.
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’s a sampling of entries:
– Boards: Portfolio Managers as New Directors
– LSE: Changes AIM Rules to Reflect “Market Abuse Regulation”
– PwC Violates Auditor Independence Standards – Yet Again
– US Foreign Bond Issuers: Fed Cracks Down on Form SLT Reporting
– Delaware Supreme Court Affirms Chancery’s Lack of Damages Award as Remedial Discretion
Cyberattacks are a “dime a dozen” these days. But the one that Equifax disclosed last week has an insider trading twist that all corporate lawyers should be aware of. Reportedly, as noted in this LA Times article, three of the credit agency’s senior executives sold company shares – worth nearly $2 million – after the breach was discovered. But before public disclosure of the breach was made! According to the LA Times article, these sales weren’t likely made pursuant to a Rule 10b5-1 plan.
At this point – as the LA Times article notes – we don’t know if these officers were aware of the breach before they made the sales and/or whether the company’s pre-clearance procedures were adequately followed. Keep tuned (and please participate in our new “Blackout Periods Quick Survey.”
In addition, some are questioning why the company – including the board – didn’t correct vulnerabilities after prior breaches. Read more in this blog by Patterson Belknap’s Craig Newman, which notes that the cyberattack disclosure resulted in the immediate filing of this class action complaint (and subsequently, many more – including a securities lawsuit). Also see this NY Times article.
Given that Equifax’s breach of 143 million records might have personally impacted you – and everyone else reading this – this blog notes steps you might take to help avoid identify theft. People are understandably upset that Equifax is offering folks to use their security monitoring service for free in case they were breached. But it’s not quite “free” – in order to do that, you must first waive any rights against Equifax that you might have due to a breach…
NYC Comptroller & Pension Funds Begin New Activist Campaign
As noted in this Reuters article & this Weil Gotshal blog, the NYC Comptroller & the NYC Pension Funds have sent a letter to 151 companies seeking more board diversity – and a board that is more independent & climate-competent.
They want companies to use this standardized board matrix when making board composition disclosure – and they want boards to work with them (and other large shareholders) to identify suitable director nominees. This 2.0 project follows the “Boardroom Accountability Project” launched in 2014. We’re posting memos about this new campaign in our “Investor Policies” Practice Area.
Tomorrow’s Webcast: “Secrets of the Corporate Secretary Department”
Tune in tomorrow for the webcast – “Secrets of the Corporate Secretary Department” – to hear former Pitney Bowes’ Amy Corn, Primerica’s Stacey Geer and Mondelez International’s Carol Ward as they debunk myths on how to run the corporate secretary department, as well as provide oodles of practice pointers – the agenda includes:
– Scheduling Meetings – Approach & Tips (a/k/a The Calendar Challenge)
– Considerations in Planning Board/Committee Meeting Schedule & Agendas
– Allocation of Duties to – & Among – Committees (Using Charters)
– Committee Calendars (a/k/a Still More Calendar Challenges)
– Develop Annual and Monthly Agenda for Board & Committee Meetings
– Presentations vs Discussions vs Information Items
– Logistical Support – Tips & Pitfalls
– Minutes & Meeting Follow-ups
– Technologies – Portals Are Your Friend
ISS announced yesterday that it’s changing hands – for the fifth time in the past 15 years or so. Genstar Capital, a San Francisco-based private equity firm, is buying the company from the previous PE owner – Vestar Capital Partners – for $720 million.
The ISS press release gives a few details on the expected timing & transition plans:
The transaction is expected to close by early fourth quarter, subject to customary closing conditions.
ISS will continue to operate independently once the transaction is completed and the current ISS executive leadership team will remain in place.
Based on the press release, Genstar has some experience in backing service providers in the financial services sector – and plans to continue ISS’s strategic infrastructure & ESG initiatives.
Blockchain: Here Come the Early Adopters
According to this Bloomberg article, Delaware’s enactment of amendments permitting companies to use blockchain technology for corporate records is already attracting potential early adopters among privately-held companies. Here’s an excerpt:
Medici Ventures Inc.—a venture capital arm of online retailer Overstock.com Inc. that invests in blockchain companies—plans to become one of the early adopters. “Medici Ventures is very excited about the possibilities this forward-thinking legislation from Delaware affords corporations, and plans to offer its shares and begin managing its shareholder records on the blockchain as soon as possible,” Medici Ventures President and Overstock.com board member Jonathan Johnson told Bloomberg BNA in an Aug. 10 statement.
Medici Ventures is an investor in Symbiont, a New York-based financial services firm that is working with Delaware on the infrastructure to support corporate record keeping on a blockchain throughout the company’s life. The Overstock.com subsidiary is one of about two dozen private companies that have expressed interest in using Delaware’s blockchain law.
The article says that – so far – it’s law firms that have expressed the most interest in blockchain technology.
Spanking brand new. By popular demand, this comprehensive “Management Proposals Handbook” covers the entire terrain – in a nifty chart format! – from SEC requirements for typical proposals to common questions about proxy statement distribution. This one is a real gem – 31 pages of practical guidance – and it’s posted in our “Annual Shareholders’ Meetings” Practice Area.
Whistleblower Hotlines: Still a Vital Tool?
Here’s the intro from this blog by Matt Kelly of Radical Compliance:
Recently the chief compliance officer of a global company asked me: does a company need a telephone-based whistleblower hotline anymore? In our all-technology, all-the-time world, could a company phase out telephone hotlines in favor of a web-only reporting system?
The answer to that question requires a bit of finesse. The short answer is yes: in the purest, technical interpretation of corporate governance law and SEC rules, a company isn’t required to provide a telephone hotline as one reporting option. But you would need bulletproof arguments demonstrating why your organization no longer needs a telephone hotline, and never will in the future.
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’s a sampling of entries:
– Confidential Treatment Requests for IPOs: 40% Have Them
– Federal Court Holds Delaware’s Unclaimed Property Estimation Methods Violate the Constitution
According to this Bloomberg article, a lot more companies are disclosing shareholder activism as a risk factor in their SEC filings. Apparently, 65 companies cited “shareholder activism” as a risk factor in SEC filings during the first six months of 2017, more than five times the number that cited activism during the same period three years ago.
Why is risk factor disclosure on the rise? The article suggests that companies are becoming increasingly aware of the prevalence of activism and the potential downside of being a target. The market cap of the companies including activism risk factors ranges from $45 million to $27 billion – although most are small caps & only a few are at the upper end of the market cap range.
The article identifies a number of companies that had activism risk factors in their recent 10-K filings – including:
Another Bloomberg article says that corporate risk factor disclosure about cyber threats is also growing – or maybe “exploding” is a better word:
More public companies described “cybersecurity” as a risk in their financial disclosures in the first half of 2017 than in all of 2016, suggesting that board and C-suite fears over data breaches may be escalating. A Bloomberg BNA analysis found 436 companies cited “cybersecurity” as a risk factor in their Securities and Exchange Commission periodic filings in the first six months of 2017, compared to 403 companies in 2016 and 305 companies in 2015.
There are plenty of sample cybersecurity risk factors to look at – and they run the gamut from boilerplate to highly specific disclosure. Here are a few that I thought were fairly robust:
In addition to activism & cybersecurity, as we’ve blogged before, President Trump is turning up in a lot of “risk factors” sections of SEC filings. In fact, the President is named so frequently in filings that “there’s an app for that” – the “Trump Tracker.”
Here’s an excerpt from this Sentieo blog introducing its Trump Tracker tool:
Today, we are excited to introduce the Trump Tracker. It’s a bot that constantly scans new public financial documents for mentions of President Trump. These documents include all SEC filings, conference call transcripts, investor presentations, press releases, and more. The bot instantly surfaces new mentions of Trump as soon as they’re published, while intelligent queries automatically sort them into topics like Obamacare, Mexico, and NAFTA.
Anyone interested in following the administration’s impact on public companies can engage with the Trump Tracker by checking the dedicated website, following the @trumptrackerbot Twitter account, or signing up for a daily email alert on the site.
Last week, Vanguard released its 2017 proxy voting report – along with an open letter to public company boards from CEO Bill McNabb. The letter stresses Vanguard’s long-term perspective, and sets forth its governance priorities. Meanwhile, the proxy voting report makes it clear that when it comes to asserting those priorities, the world’s largest index fund complex is more willing to throw its weight around.
The message that Bill McNabb delivered in his letter is an increasingly familiar one – it’s time for companies to improve board gender diversity & climate change disclosure. The letter also stressed the importance of engagement:
Timely and substantive dialogue with companies is core to our investment stewardship approach. We see engagement as mutually beneficial: We convey Vanguard’s views and we hear companies’ perspectives, which adds context to our analysis.
Our funds’ votes on ballot measures – 171,000 discrete items in the past year alone — are an outcome of this process, not the starting point. As we analyze ballot items, particularly controversial ones, we often invite direct and open-ended dialogue with the company. We seek management’s and the board’s perspectives on the issues at hand, and we evaluate them against our principles and leading practices.
To understand the full picture, we often also engage with other investors, including activists and shareholder proponents. Our goal is that a fund’s ultimate voting decision does not come as a surprise. Our ability to make informed decisions depends on maintaining an ongoing exchange of ideas in a setting in which we can cover the intention and strategy behind the issues.
The proxy voting report demonstrates that Vanguard continues to ramp up its engagement efforts. In 2017, it engaged with 954 companies – a nearly 40% increase over the 685 companies that it engaged with in 2015.
Moreover, the report shows that Vanguard is willing to vote against management when companies aren’t responsive to its engagement efforts. For example, Vanguard voted for a shareholder resolution calling for a gender diversity policy at a Canadian company because it concluded that the company wasn’t responsive to its concerns about diversity. For the first time, it also supported several climate change proposals – including one at ExxonMobil.
But Vanguard isn’t just sending a message to public company boards – as this Wachtell memo notes, its actions send an equally strong one to activists calling for index funds to relinquish their vote in contested situations:
With respect to activist and academic-sponsored attacks on the major index funds’ ability to participate in contested situations, Vanguard’s commitment to prioritizing responsible and long-term oriented investment stewardship is clear, having refused to outsource voting decisions to proxy advisory firms, doubled their internal team’s size since 2015, developed an intensive sector-based approach to analysis, engagement and voting and accessed the investment talent across Vanguard’s Investment Management Group and the 30 other investment firms managing Vanguard’s active portfolios.
Vanguard has been criticized for not being as active when it comes to governance issues as its peers BlackRock & State Street, but after some prodding from its own investors, it appears that the once slumbering giant is now wide awake.
New SEC Commissioner Nominee: Robert Jackson
On Friday, President Trump nominated Columbia law prof. Robert Jackson to fill one of the two remaining vacancies on the SEC. Here’s the White House’s announcement of Jackson’s nomination. Jackson would fill a Democratic slot on the SEC & would definitely make the meetings more interesting – he’s a leading advocate of a rule mandating disclosure of corporate political spending. In the past, Jackson’s also crossed swords with the SEC over the agency’s FOIA compliance.
In addition to the nomination of a new Commissioner, the SEC recently announced a number of appointments to Chair Jay Clayton’s executive staff.
Our September Eminders is Posted!
We’ve posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
