We’ve posted oodles of memos about the SEC’s Section 21(a) Report on initial coin offerings that John recently blogged about.
A number of articles written since the SEC’s Report indicate that the SEC’s position might not slow down the use of ICOs – instead, they will be offered to accredited and/or off-shore investors. For example, see this Reuters article – and this TechCrunch interview. This trend started even before the SEC’s Report was issued.
In fact, the Reuters article seems to indicate that some ICOs are going forward even with US investors that aren’t accredited. Either these companies are total gunslingers – or they don’t know what a shot across the bow looks like. Or more likely, they don’t believe the SEC’s position is a strong one. Or perhaps the word hasn’t gotten out.
As noted in this Gibson Dunn blog, Delaware Governor Carney recently signed Senate Bill 69 into law – effective August 1st – amending Delaware’s General Corporation Law to allow companies to utilize blockchain technology to maintain and distribute certain corporate records.
ICOs: What Are the Open Issues?
There certainly have been a ton of law firm memos on the SEC’s Section 21(a) Report on initial coin offerings! Some of them spot open issues, including this Cleary Gottlieb blog. Love that the Howey test & the whole “definition of securities” analysis is getting so much play! Securities law geek heaven…
The United States is not the only country grappling with this issue. This Morrison & Foerster memo examines a similar situation in Singapore…
ICOs: What Types Are There?
In this blog, Steve Quinlivan reviews the type of ICOs that have been conducted so far…
Speaking of algorithms, this memo discusses how management & boards should be analyzing algorithmic risks…
This recent Washington Post article describes the current state of the US Chamber of Commerce. Here’s an excerpt:
And in an era that allows virtually unlimited independent political spending, they can form their own more focused, and perhaps more effective, associations. Many lobbyists who represent companies individually think the Chamber has taken on the lumbering character of its aging building, a 92-year-old limestone edifice lined with Corinthian columns overlooking the White House.
“If there was a time in the past when they needed the Chamber for access to the White House, that’s kind of gone,” said a public affairs consultant who had worked with three Fortune 500 companies that have weighed leaving the Chamber. “Companies have the tools to create coalitions of like-minded firms on issues that are important to them.”
Here’s a note that I received from a member in response: “They are losing influence with the White House because Trump and the Bannon wing would rather listen to the Breitbart crowd and the alt-right. My guess is the generals high up in the administration also have no time for the Chamber. However, the Chamber still has good access to members of Congress since members rely more on that constituency. The Chamber’s future may lie with the state governors and legislatures, which is where there is some possibility of real work getting accomplished. Washington has become a three-branch circus.”
DERA’s 315-Page Report: Access to Capital & Market Liquidity
A few days ago, the SEC’s Division of Economic and Risk Analysis (DERA) published this 315-page report describing trends in primary securities issuance and secondary market liquidity, and assessing how those trends relate to post-crisis regulatory reforms. The report was requested by Congress as part of the 2016 appropriations process.
The report includes a survey &analysis of recent academic literature, as well as original analyses drawn from publicly available databases and non-public regulatory filings. The report examines the issuance of debt, equity and asset-backed securities, as well as activity and liquidity in U.S. Treasuries, corporate bonds, single-name credit default swaps, and bond funds. Specifically, the report identifies trends for unregistered offerings – including Reg D and Regulation Crowdfunding, as well as fixed income transactions, fixed income quotations, and broker-dealer financial positions…
Pay Ratio: Survey About Your Disclosure Intentions
We have posted a new anonymous “Quick Survey about Pay Ratio Disclosure” to learn whether folks are intending to disclose the bare minimum about pay ratio – or whether they intend to provide explanations, alternate ratios, carve-outs, etc. This is different than our recent survey about pay ratio readiness. Please take 10 seconds to participate…and also complete this “Quick Survey on Director Compensation.”
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
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.
The principles are designed to promote fair and accurate cybersecurity ratings – in response to the recent emergence of several ratings companies that collect and analyze publicly accessible data to analyze a company’s cybersecurity risk posture. The ratings are increasingly used by insurers – as well as in M&A and other business decisions.
The data for risk ratings is typically collected without the target company’s knowledge and comes from a variety of sources – e.g. hackers’ forums, darknet data, Internet traffic stats, port-scanning tools & open-source malware intelligence sources. Ratings companies then use proprietary methodologies and algorithms to analyze the data and assign a grade.
Importantly, however, cybersecurity ratings have the potential for being inaccurate, incomplete, unverifiable and unreliable – if, for example, the source data is inaccurate or the methodology doesn’t account for risk mitigations in place at a company.
The principles developed by the consortium were designed to increase confidence in and the usability of fair and accurate cybersecurity ratings by addressing the potential problems. The principles were modeled after the Fair Credit Reporting Act.
We don’t know if cybersecurity risk ratings will become anywhere near as important as credit ratings – but keep them on your radar. The signatories to the principles include Aetna, American Express, Bank of America, Chevron, Eli Lilly, Fannie Mae, FICO, Goldman Sachs, Home Depot, Honeywell, JP Morgan, Microsoft, State Street & lots of other big names.
When is “Hacking Disclosure” Required in SEC Filings?
By now, most companies have a cyber incident response plan – which should include contacting a securities lawyer to evaluate disclosure requirements. As outlined in this Goodwin memo, these decisions continue to depend on a fact-specific materiality analysis:
What is “material” ends up being far less clear, and there is plenty of room for a public company to determine in good faith that a specific cyber incident does not require separate disclosure. Where the obligation is unclear, a company’s reluctance to disclose is understandable: Disclosure may highlight vulnerabilities, and will bring unwelcome attention from customers, regulators and others. The plaintiffs’ bar will also circle, smelling the possibility of a class action, and they will not view the company and its managers as the victims.
While the SEC won’t second-guess a good-faith analysis, they also won’t shy away from investigating disclosure lags – see this WSJ article about whether Yahoo’s data breach should’ve been reported sooner to investors.
The memo identifies factors affecting disclosure decisions – such as the significance of other notice obligations, existing risk factors & potential remediation costs. Since the decision will probably have to be made quickly, it’s not a bad idea to create a decision tree in advance. Our “Cybersecurity Disclosure Checklist” is a good starting point, and check out this blog as well…
Cyber Insurance: Is Everyone Doing It?
According to this AM Best article, companies paid over $1 billion in cyber insurance premiums in 2016 – but the market might grow to $20 billion by 2020! Of course, this depends on whether last year’s 34.7% increase in premiums is a sustainable trend versus a one-off response to noteworthy breaches.
The article also notes ongoing uncertainty among insurers about pricing & risk exposure – so maybe some companies are getting bargains. But standalone policies now account for about 70% of coverage – which (from insurers’ perspectives) is improving the accuracy of their evaluations.
See this “Insurance Journal” article for intel on providers & other trends. And see this article about how Senator Mark Warner has sent a letter to the SEC outlining his concerns about more transparency if market participants get hacked…
Only 42 venture-backed companies went public in the United States in 2016 – including eight incorporated outside the United States – making it the most challenging year by number of IPOs and by aggregate offering amount raised since the recessionary times of 2009. The average offering amount per IPO in 2016 was only $77.3 million—the lowest average since 2003.
Venture-backed IPOs in 2017 are on pace to surpass the levels reached in 2016, both in number of IPOs and aggregate offering amount raised. In the first six months of this year, 31 venture-backed companies have gone public in the United States, including seven incorporated outside the United States. And the Snap IPO in March raised $3.4 billion—nearly $70 million more than all venture-backed IPOs in 2016 combined. Here’s the latest “Venture-Backed IPO Survey” from Gunderson Dettmer, focusing on key governance & disclosure items.
Of the 34 venture-backed companies that the firm reviewed:
– All are incorporated in Delaware
– 52.9% listed on the Nasdaq Global Market, 32.4% listed on the Nasdaq Global Select Market, 11.8% on the Nasdaq Capital Market and 2.9% on the New York Stock Exchange
– Average time from incorporation to IPO was just over eight years
– Average time from initial registration statement submission to the SEC to pricing the IPO was nearly 8.5 months
– 30% included a directed share program component in the IPO
– Only seven of the companies completed follow-on offerings in 2016
Companies were also taking advantage of Jobs Act accommodations – 100% submitted a confidential registration statement & 88% provided two years of audited financials.
Voting Rights: CalPERS Wins “Dual-Class” Suit
Recently, CalPERS notched a win for investors in the battle over “dual-class” voting structures. The pension giant sued Interactive Corp last year when it attempted to create a new non-voting class of stock that would have given perpetual voting control to the board chair – despite the fact that he owned only 8% of outstanding economic rights.
After months of litigation, the company has abandoned its proposed issuance. Here’s an excerpt from this “Harvard Law” blog:
By shedding the light of litigation on IAC’s non-voting share plan, CalPERS achieved a significant victory for shareholders’ core right to vote. This result should make founders and controllers considering copying the trend of non-voting stock issuances think twice – as institutional investors will act decisively to defend and assert their right to vote when faced with these threats. Such protective actions will continue to promote open and responsive capital markets, and the long-term value creation that comes with them.
Tune in tomorrow for the webcast – “Controlled Companies: Trends & Unique Issues” – to hear Jane Freedman, Dorsey’s Cam Hoang and Davis Polk’s Sophia Hudson discuss the unique issues involved with controlled companies.
Last year, we blogged about the Financial Stability Board’s formation of an industry-led “Task Force on Climate-Related Financial Disclosures.” Now, the Task Force has issued its 74-page final report – Recommendations of the Task Force on Climate-related Financial Disclosures – along with supporting materials – which provide a standardized framework & guidance for voluntary climate-related financial risk disclosures in SEC filings.
While lots of climate change disclosure principles exist – here’s one of our many earlier blogs – this Task Force is significant because it was organized by the G20 – which coordinates national financial authorities & standard-setting bodies, including the SEC. Also, the press release highlights that companies with a combined market cap of $3.5 trillion – and financial institutions responsible for assets of $25 trillion – have committed to support the recommendations.
The recommendations boil down to four thematically related areas: governance, strategy, risk management, and metrics & targets.
– Governance: organizations are encouraged to disclose their governance around climate-related risks and opportunities, including board oversight and management’s role in assessing and managing these risks and opportunities.
– Strategy: one of the centerpieces of the recommendations and likely the most controversial and difficult, is the TCFD recommendation that organizations disclose the actual and potential material impacts of climate-related risks and opportunities on their businesses, strategy and financial planning, including (i) climate-related risks identified in the short-, medium- and long-term (not defined); (ii) the impact of such risks on the organizations’ businesses, strategy and financial planning; and (iii) the resilience of the organizations’ strategy under different climate-related scenarios including a 2ºC or lower scenario. Importantly, the TCFD is not recommending any specific 2ºC scenario, instead providing criteria to aid each organization’s design of its own 2ºC scenario.
– Risk Management: the TCFD recommends disclosure of processes for identifying, assessing and managing climate-related risks and a description of how these processes are integrated into the organization’s overall risk management.
– Metrics & Targets: if material, the TCFD recommends organizations disclose (i) the metrics used to assess climate-related risks and opportunities in line with their strategy and risk management processes; (ii) their Scope 1, 2, and 3 greenhouse gas emissions (defined as direct emissions, indirect emissions from consumption of purchased power and other indirect emissions through the organization’s value chain) and related risks; and (iii) the targets used and the organization’s performance against such targets.
Recently, ISS teamed with UK & EU organizations to launch “Climetrics” – the first climate rating system for funds. Here’s an excerpt from the ISS announcement:
The rating – symbolized by “green leaves” issued on a scale of one to five– will enable investors to gauge and compare the climate impact of investments in funds and potentially encourage growth in climate-responsible fund products.
The equity fund market – worth more than €3 trillion in Europe – could be a significant lever for mitigating climate change. But, despite fast-growing institutional and customer demand for climate-conscious investing, to-date no rating system has allowed investors to compare funds’ climate-related impacts.
Climetrics will rate European funds based on the climate change impact of their portfolio holdings – as well as the asset managers’ application of climate impact as an investment & governance factor and the funds’ ESG policies. Investors can see the ratings for free on climetrics-rating.org.
Preparing For – & Responding To – Climate Change Proposals
Last month, we blogged about a possible trend: climate change proposals passing with historic levels of support. This recent Weil blog lays out suggestions for companies and boards who’ve received climate and sustainability proposals & engagement requests – or who want to prepare in advance.
Conveniently, Annex A of Weil’s blog also summarizes and links to the voting policies for a number of institutional investors. Check out this blog from Dorsey’s Cam Hoang for info on the pressure that these investors are getting to change their E&S policies.
Over the years, we’ve blogged about the extent to which ISS influences voters at institutional investors (here’s an example). Different studies (or anecdotes) show different things – and the debate continues. This recent article from “Proxy Insight” (pg. 6) indicates that some investors that are considered “passive” may be more on auto-pilot than some would think. Here’s an excerpt from that article:
Looking at Proxy Insight’s ISS Vote Comparator table, for most of these investors this is not a right they often feel compelled to exercise. The majority of them vote 99-100 percent in accordance with ISS. Of course, this correlation makes the investors a reliable source for discerning ISS recommendations.
However, we thought it would be interesting to look at what issues would make auto-voters override the voting recommendations of ISS, providing some insight into the proposals that matter most to these investors. To do this we have taken the ten largest investors by assets under management who vote in accordance with ISS, and analyzed those proposal types where they override most frequently. These include say on pay, the re-/election of directors and auditor ratification.
Say on pay is not only one of the most frequently voted issues for auto-voters, but is also usually near the top (see Table 3) when it comes to the disparity between investor voting and ISS recommendations. This is unsurprising, given that say on pay is one of the most contentious proxy voting topics, which is seemingly never out of the news.
However, as Table 1 illustrates, even on contentious issues auto-voters receive a correlation with ISS that ranges in the high 90s. Moreover, the lower correlation on exclusively ISS against recommendations (Against recs (%)) indicates that the auto-voters are more passive than ISS, overriding the proxy adviser in order to vote with management. Other proposals near the top of the list include the approval of stock option plans and restricted stock plans.
Note that the meaning of “passive” depends on one’s perspective. To some, it’s voting with management. But others could say that breaking with ISS for the say-on-pay vote is the definition of “active” – given the time & effort required for an institutional investor to override a default voting policy.
Conference Hotel Nearly Sold Out: “Pay Ratio Conference”
If you plan to attend in Washington DC (rather than by video webcast), be warned that the Conference Hotel for our “Pay Ratio & Proxy Disclosure Conference” on October 17-18th is nearly sold out. The Conference Hotel is the Washington Hilton, 1919 Connecticut Ave NW, Washington, DC 20009. Reserve your room online or call 202.483.3000 to make your reservations.
Be sure to mention the “Proxy Disclosure Conference” to get a discounted rate. If you have any difficulty securing a room, please contact us at info@compensationstandards.com or 925.685.9271.
ISS Policy Survey: Pay Ratio & More
Yesterday, ISS opened up its “Annual Policy Survey,” which is being undertaken in two parts this year:
1. Governance Principles Survey – Initial, high-level survey on high-profile topics including “one-share, one vote,” pay ratio disclosures, the use of virtual meetings, and board gender diversity. In this survey, ISS is asking companies (i) how they plan to analyze pay ratios and (ii) what is their view on how shareholders should use pay ratio disclosures. This survey closes on August 31st.
2. Policy Application Survey – More expansive portion that can be accessed at the end of the initial portion, allowing respondents to drill down into key issues by market and region as well as by topics such as responsible investment, takeover defenses and director compensation. This survey closes October 6th.
After analysis of the survey responses, ISS will open a comment period for all interested market participants on the final proposed changes to their policies as always…
Next Pay Ratio Webcast: Tune in on Tuesday, August 15th for the second of our monthly pre-conference webcasts on pay ratio: “Pay Ratio Workshop: What You (Really) Need to Do Now.” The speakers for the August 15th webcast are:
– Mark Borges, Principal, Compensia
– Keith Higgins, Partner, Ropes & Gray LLP
– Scott Spector, Partner, Fenwick & West LLP
Recently, Broadridge reported an increase in virtual meetings in 2016 – see this list of who’s holding them. Of 187 virtual meetings, 80% were “virtual-only” – compared to 67% in 2015. And of the 44 companies that held a hybrid meeting in 2015, 12 of them switched to virtual-only in 2016. Just one company switched from virtual-only to hybrid.
We’ve blogged before about opposition to virtual-only meetings – from New York’s Comptroller and from CII – but we’ve also heard from companies that have escaped criticism by proactively discussing the costs & benefits with shareholders.
In response to widespread adoption of proxy access – and the possibility that some companies may be including provisions that impair proxy access utility – CII has updated its “best practices” for implementing these bylaws (originally issued in 2015).
The 8-page chart weighs in on newly-identified provisions, recognizes where CII’s preferences deviate from prevailing market practices, and explains why CII opposes the following provisions:
– Requirements for nominators to hold stock after the annual meeting
– Restrictions on re-nominations
– Limitations on nominees’ third-party compensation arrangements
– Automatic suspension of proxy access for all shareholders in the event of a proxy contest
– Unlimited indemnification requirements on nominating shareholders
Here’s CII’s member-approved policy:
Companies should provide access to management proxy materials for a long term investor or group of long-term investors owning in aggregate at least three percent of a company’s voting stock, to nominate less than a majority of the directors. Eligible investors must have owned the stock for at least two years. Company proxy materials and related mailings should provide equal space and equal treatment of nominations by qualifying investors.
To allow for informed voting decisions, it is essential that investors have full and accurate information about access mechanism users and their director nominees. Therefore, shareowners nominating director candidates under an access mechanism should adhere to the same SEC rules governing disclosure requirements and prohibitions on false and misleading statements that currently apply to proxy contests for board seats.
Transcript: “12 Strange Things in the Securities Laws”
We’ve posted the transcript for our popular webcast: “12 Strange Things in Securities Laws.” Here’s what we covered:
1. The Section 4(a)(3) Dealer’s Exemption
2. Sometimes Rules Don’t Mean What They Say
3. Transactional Registration & Control Securities
4. How Small Non-Executive Officer Shareholders Can Be Section 16 Reporting Persons
5. The Trust Indenture Act – What Is It?
6. The Need to Know Some GAAP
7. “Legal” Insider Trading
8. Tender Offers for Minority Stakes in Private Companies
9. Statutory Underwriters” and “Public Offerings”
10. A Lot of What Goes Into SEC Filings Isn’t Dictated by Rules or Staff Guidance
11. The Case of the Missing Fourth Quarter
12. Federal and State Filing Notice “Requirements”
If we didn’t get to your favorite “strange thing” – drop us a line!
Proxy access “fix-it” proposals – which ask companies with mainstream proxy access bylaws to make them more shareholder-friendly – were prevalent during this proxy season. We don’t expect the trend to go away anytime soon – we’ve already seen two versions of the proposals & a third is now on the map!
Companies have been seeking no-action relief to exclude the proposals as “substantially implemented” – but Corp Fin denied many requests. Now a new “fix-it” proposal has emerged, and was also required to be included in the company proxy statement. Here’s a teaser from Ning Chiu’s blog:
Like the later season proposals, this type also asks that a company amend the restrictions on the size of the nominating group, but this time from 20 shareholders to an unlimited number of shareholders, and without any other proposed revisions.
The SEC staff recently rejected a company’s request for no-action relief on the basis of substantial implementation, after extensive correspondence between the parties involving 5 letters from the issuer and what must be an unprecedented 21 letters from the proponent. The volume of correspondence likely led to the staff’s taking more than three months from receipt of the initial no-action letter to publish a decision.
In other proxy access news, a different company changed its aggregation limit to 50 to negotiate a withdrawal on a similar proposal.
So although the proposals that went to a vote have been averaging less than 30% support among shareholders, they aren’t without risk…
Comments are due this month. If approved by the SEC, parts of the new standard will be effective in 2018.
Name Change: “NYSE MKT” Is Now “NYSE American”
To the delight of “MKT” haters, the NYSE’s previously-announced rebranding to “NYSE American” is now effective, with most of the website now revamped.
The name change was accompanied by other updates designed to facilitate trading in small & mid-cap companies, including expanded trading hours and assignment of an “electronic designated market maker) – with quoting obligations – to each listed security. Hat tip to Goodwin Procter’s John Newell for alerting us to this development!
We’ve blogged many times about the debate over dual-class share structures. Investors have been voicing concern since Snap’s IPO in March.
Last week, FTSE Russell was the first index to announce that it will exclude Snap & other “dual-class” companies that afford minimal voting rights to shareholders – including existing constituents who don’t conform to the new requirements within 5 years. Yesterday, S&P Dow Jones followed suit with an even more sweeping announcement – however, existing constituents are grandfathered in and not affected.
Here’s the nitty-gritty on Russell’s new policy:
– To be listed on FTSE Russell indexes, more than 5% of a company’s voting rights must be held by unrestricted shareholders (as defined by FTSE Russell).
– For potential new constituents, including IPOs, the rule will apply starting with their September semi-annual and quarterly reviews.
– For existing companies, the rule will apply starting September 2022, thus affording a five-year grandfathering period. About 35 companies would need to increase public voting rights to avoid exclusion.
– The rate at which the hurdle is set, along with its definition, will be reviewed in the light of subsequent developments on an annual basis.
– Companies like Facebook & Alphabet – which have multi-class structures but afford more than 5% of voting rights to shareholders – can still be included.
And for S&P’s policy:
– Effective immediately, the S&P Composite 1500 and its component indices – S&P 500, S&P MidCap 400 and S&P SmallCap 600 – will no longer add companies with multiple share class structures.
– Existing index constituents are grandfathered in and are not affected by this change.
– The methodologies of other S&P and Dow Jones branded indices – including S&P Global BMI, S&P Total Market and indices for particular market segments – remain unchanged at this time.
Both indices conducted surveys on this topic a few months ago. Russell’s survey results showed that 68% of responding investors wanted the index to require some minimum threshold for the percentage of voting rights in public hands. Their final rule will be published at the end of this month – and may incorporate additional feedback that Russell receives following its announcement. As noted in this blog, MSCI has made a similar proposal.
If a company is excluded from the indexes, it’s harder – or impossible – for some fund managers to buy its stock. But it appears that many institutional investors favor exclusion – as it aligns with their policies to support “one share, one vote” proposals.
SEC Commissioners: Will Robert Jackson Be Nominated?
John blogged a few weeks back about Hester Peirce being (re-)nominated as a SEC Commissioner. Now it’s rumored that Columbia Professor Robert Jackson would be nominated to fill the open Democrat slot on the SEC’s Commission. I would stress that this is merely a rumor.
Here’s an excerpt from this WSJ article by Andrew Ackerman:
If Mr. Jackson is nominated, Senate lawmakers would likely seek to speed up his confirmation by pairing him with Hester Peirce, a Republican tapped earlier this month to fill another SEC vacancy. Both would join an SEC down to just three members: Democrat Kara Stein, Republican Michael Piwowar, and Jay Clayton, the chairman, who is an independent.
Mr. Jackson has written on securities topics such as executive compensation and corporate governance. In 2014, he helped uncover a flaw with the SEC’s corporate-filing system that allowed hedge funds and other rapid-fire investors to gain access to certain market-moving documents ahead of other users of the system. The SEC pledged to correct the flaw.
A 2015 research paper he co-wrote suggests corporate insiders might trade on material, nonpublic information before their companies are required to publicly report the information. He is also among a group of 10 academics to petition the SEC in 2011 to require public companies to disclose their political-spending activities.
Our August Eminders is Posted!
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It’s hard to believe that Sunday was the 15th anniversary of SOX. Around here, we aren’t just dwelling on the “Sarbanes-Oxley Blues” – we’re also sharing personal reflections on the landmark law. Here are mine:
I was a college junior when Enron & WorldCom imploded & my accounting friends lost their Arthur Andersen offers. Despite massively changing the oversight framework for financial reporting, I don’t recall SOX being discussed in my business classes – or during my following years in law school.
When I became a bright-eyed law firm associate, it felt like SOX had always existed. The rules seemed natural to me: Why wouldn’t the CEO & CFO read SEC filings & certify their accuracy? Why would anyone other than independent directors oversee financial reports? Is there anything more suspenseful than monitoring the 404(b) phase-ins & exclusions – a tradition that lives on even today?
I’m more realistic after 10+ years of explaining – and helping in-house counsel explain – the reasons for SOX & related rules to execs who weren’t always keen on “independent oversight” or “transparent disclosure.” This EY memo suggests that financial reporting has improved. But executives continue to gamble with misleading & opaque financial calculations – and it’s clear that SOX didn’t save us from a “check-the-box” mentality. We keep playing the same game by different rules – forgetting the main principles.
Broc’s 10¢ on Sarbanes-Oxley
Broc has these five random thoughts about Sarbanes-Oxley:
1. I never liked calling it “SOX” – and I really disliked those that called it “Sar-Box.”
2. As I’ve blogged before, Sarbanes-Oxley was somewhat of a surprise at the time because the legislative bill seemed dead. Then WorldCom collapsed & Congress passed the legislation in a hurry. In this blog, Lynn Turner notes that there was some thought put into the bill.
3. It’s interesting to recall what the top issues were initially. In August 2002, the biggest concern involved CEO/CFO certifications and the mechanics of how those newfangled things worked, which really weren’t fully ironed out for several months. With a smile, I remember the chaos as I put together a last-minute teleconference regarding certifications (just two-days notice) and we had an incredible turnout as the first batch of certs were due to be filed the next week. It was wild, man. Better than Woodstock.
Can you imagine that internal controls were nowhere on the radar screen at the time? In fact, my March 2003 webcast on the topic (which I appropriately labeled then as a “sleeper,” thanks to a memorable conversation with John Huber) remains the most sparsely-attended webcast I have held in my 15 years of hosting them. Look back at the law firm memos drafted right after SOX was passed and you will not find anyone predicting that Section 404 was something formidable. That was because we all only had the bandwidth to tackle the numerous new requirements that were applicable immediately – and Section 404’s implementation seemed so far away.
4. Sadly, Mike Oxley passed away a few years ago. It was a thrill to interview Mike at our conference. A true gentleman. You could see why the people in his hometown voted him into Congress. Mike had six “hole-in-ones” during his lifetime. Six!
5. Way back then, I light-heartedly created a character named “Billy Broc” Oxley in jest. Dave was “The Animal” Sarbanes. We made short funny videos for a feature called “The Sarbanes-Oxley Report.” My favorites remain “Bad Hair Day” – and “Billy Broc’s Dream.” The margins were fabulous…
John’s 10¢ on SOX
John has these random thoughts about Sarbanes-Oxley:
Enron, WorldCom, Tyco – I can remember when these were some of the most respected and admired companies in America. I think that’s what made the corporate scandals of the first years of the 21st Century so shocking. These guys were the bluest of the blue chips, and the revelation of their greed and corruption was a cold slap in the face to investors and ordinary Americans. The scandals fundamentally changed the way a lot of people thought about American corporations and those who ran them.
And that begat Sarbanes-Oxley, an entirely necessary statute for which I have no love whatsoever. Yes, corporate governance changes had to be made, and there’s a lot – particularly in the area of internal controls – that Sarbanes Oxley set in motion that has benefitted corporations and investors. But a big price has been paid too.
The exponential growth in demands made on directors in the name of “good governance” has left them with less and less time to focus on the business. Boards have become more bureaucratic and internally focused. Consultants and governance experts have multiplied. Corporate governance flavors of the month have proliferated and become “must haves.” Disclosure documents have become increasingly full of trivial information that’s costly to generate.
Too often, I think, investors and companies have drunk the Kool-Aid without really examining the underlying principles. For instance, I wonder, in 50 years, if people will still think it was a good idea to require a majority of the board of the world’s largest corporations to be comprised of outsiders, with no prior experience in the company’s business? In an environment where directors who make compensation decisions are only liable for “waste”, is 40 pages of executive comp disclosure really good for much more than providing CEOs with a chance to pour over competitors’ disclosures and come up with a detailed wish list of their own?
And don’t get me started on the Governance Industrial Complex. . .
But in the end, corporate tool that I am, I still have to concede that Cassius was right – “the fault, dear Brutus, is not in our stars, but in ourselves.” We’re sleeping in the bed that we made.
