End of year & pushing out content that I’ve been meaning to blog about. Love this article entitled “The corporate Web site is dead, long live the new corporate Web site.” And in this video, learn about Coca-Cola on brand journalism – “Coca-Cola Journey” – and the death of the press release. Here’s an article analyzing the success of Coke’s journey into storytelling one year later…
The Long Shadow of the Pay Ratio Rule
Here’s something that Mark Borgesblogged a few weeks ago over on CompensationStandards.com:
Although the future of the CEO pay ratio rule is somewhat uncertain, the corporate community continues to move forward to prepare for its eventual effectiveness in 2017 (and the attendant disclosures in the 2018 proxy season). While much attention has been given to the potential impact of this new disclosure, both externally (the various constituencies that will see and react to this information) and internally (your employee population), an ancillary consequence of the disclosure has been less discussed. Specifically, I’m talking about the potential state and local provisions that may tie directly to a company’s pay ratio.
As you may recall, over the past few years there have been a couple of initiatives introduced that would link the operation of a new law or regulation to the disclosed CEO pay ratio. For example, in 2014 a California legislator introduced a bill that would have modified the state’s corporate income tax rate to a sliding scale based on a company’s pay ratio. The rate would have been as low as 7% percent on the basis of net income if the ratio was no more than 25 to 1. At the other end of the scale, the rate would have been as high as 13% if the ratio was more than 400 to 1. Although the bill passed out of two state Senate committees, ultimately it failed on the Senate floor (in a tight 19-17 vote). In addition, in the same year the Rhode Island legislature considered a bill that would have given preferential treatment in receiving state government contracts to companies whose pay ratio between its highest-paid executive and its lowest paid full-time employee was 31-1 or less.
While, to my knowledge, neither initiative has made it all the way through the legislative process, the underlying concept is alive and well. Yesterday, the New York Times reported that the City Council of Portland, Oregon had voted to impose a surtax on companies whose CEOs earn more than 100 times the median pay of their rank-and-file workers. As indicated in the Times, “[t]he tax will take effect next year, after the Securities and Exchange Commission begins to require public companies to calculate and disclose how their chief executives’ compensation compares with their workers’ median pay.”
The article to goes on to say that the idea may not be limited to Portland: “Portland officials said other cities that charge business-income taxes, such as Columbus, Ohio, and Philadelphia, could easily create their own versions of the surcharge. Several state legislatures have recently considered bills structured to reward companies with narrower pay gaps between chief executives and workers.”
It certainly appears that if the CEO pay ratio rule goes forward, we may see more proposed laws and rules that seek to “piggy-back” on the disclosure.
Yesterday, ISS Corporate Solutions issued this primer that provides the basics of ISS Research’s Equity Plan Scorecard methodology that will affect meetings occurring on – or after – February 1st (see Appendix D for the ISS 2017 burn rates).
Climate Task Force Releases Proposed Disclosure Recommendations
Recently, as noted in this Davis Polk blog, the Financial Stability Board issued this 74-page set of recommendations that would enhance climate change disclosure on a global level. Participation would be voluntary. As noted in this article, there’s a recommendation to tie CEO pay to climate risk. There’s a 60-day comment period.
The SEC’s Investor Advocate Report
The SEC’s Investor Advocate has issued its annual report. Love the cover! Meanwhile, President Obama signed the legislation providing the SEC with a Small Business Advocate in the New Year (see John’s blog)…
Continuing my tradition of posting holiday disclaimers or what-not, here’s the intro of a funny take on Dr. Seuss by Lawrence Heim of Elm Sustainability Partners:
Oh, the jobs people work at!
Out west near Hawtch-Hawtch there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch… is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.
Well… he watched and he watched. But, in spite of his watch, that bee didn’t work any harder. Not mawtch.
So then somebody said, “Our old bee-watching man just isn’t bee-watching as hard as he can. He ought to be watched by another Hawtch-Hawtcher! The thing that we need is a Bee-Watcher-Watcher!”
Well…
The Bee-Watcher-Watcher watched the Bee-Watcher. He didn’t watch well. So another Hawtch-Hawtcher had to come in as a Watch-Watcher-Watcher!
And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch, Watch-Watching the Watcher who’s watching that bee.
You’re not a Hawtch-Watcher. You’re lucky, you see!”
Edgar: “Everything Edgar”
Recently, the SEC updated its “Everything EDGAR” page to provide additional information, including Quick Reference Guides…still needs a blog to provide info on outages in my humble opinion…
Check out Alan Dye’s blog on Section16.net about the SEC’s new procedures for setting Edgar passphrases…
Whistleblowers: Yet Another SEC Enforcement Action on Separation Agreements
The SEC’s Enforcement Division is on another whistleblower tear. On the heels of yesterday’s blog about an action involving severance agreements, here’s this settlement with SandRidge Energy over separation agreements. This WSJ article says more of these cases to come…
President-elect Donald Trump’s promise to eliminate regulations on U.S. businesses will likely take years to fulfill given the complex steps involved in reversing them and political and legal challenges from Democratic lawmakers and state attorneys general. Mr. Trump has said his administration will take aim at regulations across industries, and he will be backed by congressional Republicans eager to undo some of the more controversial Obama administration initiatives. Big targets include power-plant regulations and regulatory rules imposed on banks and financial institutions after the financial crisis of 2008, though the effort will also reach deep into the federal bureaucracy to include rules involving labor, telecommunications and health care.
Mr. Trump has a handful of ways to reach his goal, but they mostly point to a slow death of attrition for the Obama rules rather than an immediate elimination. He can opt not to defend rules currently tied up in court. His federal agencies can write new rules to justify revoking the ones he wants to eliminate. He can work with the GOP-controlled Congress to nullify recently completed regulations and restrict funding to certain parts of departments as a de facto way to hamstring a rule’s force.
In some cases, replacing rules will be as arduous as making them in the first place, particularly in the financial sector where some regulations have been issued by multiple agencies. The Volcker rule, which bans banks from making hedge-fund-like wagers, was adopted by five financial regulatory agencies. All five agencies would need to agree to changes for them to apply broadly. The Trump administration could loosen its enforcement of rules promulgated under Mr. Obama. That could make a difference where rules can be interpreted subjectively, such as in the case of the Volcker rule.
But where explicit rules are on the books, companies would be taking a risk by not complying, and there is no guarantee that career government staffers would agree to simply drop their enforcement actions.
Experience shows the difficulty of unraveling rules. Eight years ago the incoming Obama team pledged to review rules from the George W. Bush administration, including many so-called “midnight regulations” that were pushed through as Mr. Bush was preparing to leave office.
But of the more than 4,500 proposed or final regulatory actions cleared by the Bush White House, Mr. Obama repealed just 74 in his first nine months in office, when rules are most-often revisited, according to a 2009 presentation by a former official of the White House Office of Management and Budget. Of those, only 34 were final rules.
Whistleblowers: New SEC Enforcement Action Over Severance Agreements
Yesterday, the SEC announced that Neustar had settled whistleblower charges for routinely entering into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators “in any communication that disparages, denigrates, maligns or impugns” the company. Former employees could be compelled to forfeit all but $100 of their severance pay for breaching the clause.
Just one more enforcement case as the SEC continues to hammer home the need to modify agreements that contain anti-retaliation leanings. Tune in next year to our webcast – “Whistleblowers: What Companies Should Be Doing Now“…
Cybersecurity: Bankers Scared to Give Regulators Data
In the wake of the financial crisis, federal regulators are demanding a vast trove of private data to help them better monitor markets. But in the age of routine, sophisticated hacks, many in the financial industry worry the government will be unable to keep that sensitive information secure.
Investment firms cite numerous breaches at federal agencies, most recently the late-October admission by the national bank overseer that a former employee had downloaded 10,000 records with two thumb drives and took them home.
Industry trade groups also fret about what they consider insufficiently specific assurances that regulators are beefing up cybersecurity commensurate with new demands. The Commodity Futures Trading Commission has drawn industry ire with a project to crack down on rapid-fire trading firms, which includes a provision that would require the firms grant the CFTC access to their confidential computer source code without a subpoena. Last month, the SEC completed new rules to increase significantly the volume of data mutual funds report about their holdings, including derivatives instruments and securities-lending activities, to better track risks across the industry. “We remain concerned about the SEC’s ability to safeguard confidential information, as they provide precious little detail about their plans,” David Blass, general counsel for the Investment Company Institute, a mutual-fund lobbying group, said following the rule’s completion.
This is a fun one! In this 22-minute podcast, our NYC trio – Roshni Banker Cariello and Melissa Glass of Davis Polk, as well as Connor Kuratek of Marsh & McLennan – discuss the latest in random things about life, including:
1. Hometowns
2. Office sizes
3. Deal cubes
4. TV shows about NYC
5. Holiday parties
6. Pencils
This podcast is also posted as part of my “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
I haven’t hashed out all the FAQs. But for the peer group ones, the changes are fairly minor & often ministerial, as reflected in this blackline of those FAQs…
SEC’s Chief Accountant Speaks: Disclose More on New Accounting Standards
As noted in these memos posted in our “Conference Notes” Practice Area, the SEC has posted its annual slew of speeches (see the December 5th stuff) – a total of 10 – made by members of its Chief Accountant’s office at the big AICPA conference.
Chief Accountant Wes Bricker’s speech highlighted what the Staff has been out saying before – that the impact of new accounting standards need to be disclosed more fully. With new revenue recognition (see also this speech) & lease standards becoming effective soon, this is something to bear in mind for this proxy season. Wes also covered questions that audit committees should be asking…
A new Equilar study notes that while more than 1/3rd of the S&P 500 disclose in their proxy statements that they have a CEO succession plan, only about 3% provide any details about what that plan entails. As this excerpt notes, CEO turnover has increased significantly over the past five years:
In the last five years, the number of S&P 500 CEO retirements, resignations or terminations has increased incrementally year over year, to the point where there has been more than 10% turnover at the CEO position every year across the index. As of October 31, 2016, there had been 59 CEOs who had either left their positions or announced that they would before the year’s end, up from 56 in all of 2015 and from 48 in 2012—nearly a 25% increase in a five-year timeframe.
While there’s no line-item requirement compelling disclosure about CEO succession planning, increased investor & proxy advisor scrutiny in recent years has turned up the heat on boards to clarify their strategy and risk oversight in public filings – and if CEO turnover continues at a high rate, pressure for more detailed disclosure may rise.
Post-IPO Governance: How Much Do Companies Change?
This EY study reports on how the governance practices of the IPO class of 2013 have evolved since the time of their IPOs. Findings include:
– The 2013 IPO companies have actively refreshed their boards, ushering in slightly older, more independent directors with more CEO and public company board experience.
– New directors often replace directors representing the early-stage investors who brought the companies public. Reflecting this fact, 65% of the directors who left their positions had an M&A or private equity background.
– They have also brought more women into the boardroom, but still lag behind more seasoned companies. The average S&P 600 small-cap board was 14% female in 2016, compared with 12% for the 2013 IPO companies.
– The percentage of 2013 IPO companies with independent board chairs has increased from 26% to 34%, while the percentage of those with independent lead directors has grown from 35% to 40%.
Interestingly, the 2013 IPO companies have been slow to adopt a couple of the current good governance talismans – annual election of directors (23% to 28%) & majority voting (11% to 18%).
“SEC Small Business Advocate Act” Heads for President’s Desk
This blog from David Jenson notes that the Senate has passed the “SEC Small Business Advocate Act” – and that it will now head to President Obama’s desk for signature. If signed into law, the Act will establish an “Office of the Advocate for Small Business Capital Formation” within the SEC – which will be modeled after the Office of the Investor Advocate established under Dodd-Frank.
The Act would also establish the Small Business Capital Formation Advisory Committee, which would provide the SEC with input on capital raising, reporting and governance issues on behalf of privately held small businesses and public companies with a public float of less than $250 million.
This article touts the benefits of the proposed legislation. Maybe I’m too jaded, but – aside from allowing politicians to boast about how they’re looking out for “small businesses, the real job creators and the engines of economic growth” – I’m skeptical that establishing another bureaucratic cubbyhole in an agency that already has too much on its plate is going to do much to move the needle for small business.
Andrew Abramowitz has an interesting take on the potential for crowdfunding & new Regulation A to tilt the playing field in favor of issuers:
Traditional capital-raising involves spending an enormous amount of time with potential investors, explaining the business, responding to due diligence requests, etc. In addition, when there is an investor syndicate rather than just one investor, the different members of the syndicate may have different requests/concerns, so the process is like herding cats. In contrast, at least in theory, with crowdfunding and Regulation A, once the proper disclosure is prepared and posted for investor review, the investors make their choices, and if there’s enough interest, you just go ahead and close.
Of course, a potential crowdfunding investor can decide to ask detailed questions of the company and try to negotiate terms of the offering. However, the dynamic is different than the venture capital scenario if the questioning investor is proposing to invest, say, $1,000. The company may try to be responsive up to a point, but when the individual investments are in small increments, it’s easier for the company to maintain a take it or leave it attitude.
Time will tell whether there is enough investor interest for crowdfunding to be a workable alternative to traditional methods of fundraising. But if we get to a point where a company only needs to take a week or so to put together the necessary disclosure, rather than taking out a few months or more to negotiate with individual investors, crowdfunding could prove to be an attractive way to do things.
Speaking of crowdfunding’s potential to flip the script – check out VidAngel. This company reportedly raised over $6 million in the first part of its Reg A+ offering in just two days. It took a break to blue sky the deal in more states, reopened it to investors – and promptly raised another $4 million in three days. The deal’s done – but the entertaining video offering circular lives on!
Reg AB: Corp Fin Issues Guidance for ABS Issuers
Corp Fin recently issued 23-pages of guidance for asset-backed issuers to help them file on Edgar, which has undergone programming changes that relate to revised Regulation AB and new Exchange Act Rule 15Ga-2. Not gonna lie – I have no idea what anything I just wrote means, but anyway, God bless. . .
Joe Hall on Life as a Corporate Lawyer
Check out this 30-minute podcast with Joe Hall of Davis Polk in Manhattan, another born n’ bred big legal mind. With nearly 30 years of practice under his belt, Joe leads the corporate governance practice at Davis Polk – one of Broc’s favorite law firms – and has a wealth of capital markets experience, both on the issuer and the underwriter side.
Joe has left Davis Polk twice: once to go in-house for a few years and once to work for SEC Chair Bill Donaldson in DC, during the height of Sarbanes-Oxley rulemaking – but has always returned to what he feels is his true home, Davis Polk.
More recently, Joe has led his firm into the art of podcasting – launching the firm’s “Before the Board” podcast series. Check it out on iTunes & other platforms today!
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
This blog from Covington & Burling’s Len Chazen argues that the migration of fixed income investors to dividend-paying common stocks during 2016 could result in these investors becoming an independent force to be reckoned with in shareholder activism. Here’s an excerpt:
Dividend-minded shareholders are a potential third force in the contest for influence between institutional investors who want the corporation to be managed to enhance long-term profitability, and shareholder activists who want the board to maximize the current price of the stock. As supporters of higher dividends these new shareholders are natural allies of the activists, but unlike the typical shareholder activist, they have a long term stake in the corporation and an interest in limiting stock buy backs and dividends to a level that does not impair the ability of the corporation to continue paying dividends in the future.
Governance Survey: Silicon Valley v. S&P 100
This Fenwick & West study surveys the landscape of Silicon Valley’s governance practices and compares them with those found at S&P 100 companies. Not surprisingly, the study found significant differences between Silicon Valley and Corporate America. Here are some highlights:
– Silicon Valley directors & executives owned larger average equity stakes in their companies than did their peers at S&P 100 (10.3% v. 2.8%).
– The total voting power of Silicon Valley directors & executives also skews higher than the S&P 100 (14.2% v. 4.8%)
– Silicon Valley companies have smaller boards (8.2 directors v. 12.4) & less frequent meetings (8.1 v. 8.9) than S&P 100 companies
– More insiders serve on Silicon Valley boards, but 52% of Silicon Valley boards have an independent chair as compared to only 18% of the S&P 100.
Consistent with other surveys, this study also found Silicon Valley boards to be significantly less gender diverse than their S&P 100 counterparts – 26% did not have a single woman director, while all S&P 100 companies had at least one. As in other surveys, however, this one indicates that there appear to be signs of improvement on the diversity front.
The study also addresses other governance metrics and tracks changes over time.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Issuing Shares Via Blockchain: Delaware Poised to Act
– Describing an Officer’s Duties 101
– Data Privacy: More Federal Agencies Join Enforcement Bandwagon
– Stats: Controlled Companies
– How Law Firms Should Strengthen Their Cybersecurity
John & I had a lot of fun taping our 6th “news-like” podcast. This 8-minute podcast is about the director who was insider trading during a board meeting, placing an order for the target company’s stock when the deal was not yet announced! We also discuss the SEC’s “links to exhibits” proposal.
For those in charge of managing the board, this podcast explains how this SEC enforcement case is your “Golden Ticket”! You want to be aware of this case because it’s a great hook to get the attention of your directors when you’re reminding them of their insider trading & Section 16 obligations. Shucks, it may even help you when you ask for a raise! I highly encourage you to listen to these podcasts when you take a walk, commute to work, etc.
This podcast is also posted as part of our “Big Legal Minds” podcast series. Remember that these podcasts are also available on iTunes or Google Play (use the “My Podcasts” app on your iPhone and search for “Big Legal Minds”; you can subscribe to the feed so that any new podcast automatically downloads…
Cap’n Cashbags: Insider Trading During a Board Meeting
What can be better than a reenactment of how this situation went down? In this 30-second video, a director places a trade with her broker to buy shares in the company being acquired while she is learning about the not-yet-announced deal:
“Off the Record, On the QT, and Very Hush Hush” – Part I
Last week, the US Supreme Court officially removed stock tips from this year’s holiday gift list. In Salman v. United States, the Court unanimously affirmed that a tipper’s gift of inside information can satisfy the “personal benefit” requirement of Dirks v. SEC. The Court rejected the view of the 2nd Circuit’s 2014 decision in U.S. v. Newman, which required a “tangible benefit” in order to support an insider trading conviction. In his opinion, Justice Alito wrote that:
To the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends . . . we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.
This Sullivan & Cromwell memo notes that although Salman resolves uncertainties that Newman created about the personal benefit requirement, it leaves many unanswered questions:
Salman removes the uncertainty about insider-trading liability introduced by Newman, reaffirming the long-standing principle that a mere gift of information to “a trading relative or friend” is sufficient to constitute the requisite “personal benefit” to support liability for both the tipper and tippee. Yet Salman left unanswered important questions about the reach of liability, including:
(1) what sort of relationship is sufficient to meet the “relative or friend test”?
(2) where a tippee is not a “friend or relative,” what constitutes an exchange sufficient to constitute a non-pecuniary “personal benefit”? and
(3) what will constitute legally sufficient proof of knowledge of a “personal benefit” by remote, downstream tippees?
In late November, the UK government issued a “Green Paper” soliciting input on a variety of potential governance reforms. Proposals include pay ratio reporting, enhanced say on pay approval requirements, minimum holding periods for stock awards, & various alternatives for board level stakeholder input.
From an American perspective, the most provocative aspect of the proposals may be the decision to solicit input on whether corporate governance standards should be imposed on the UK’s largest privately held companies. The US hasn’t crossed that particular Rubicon yet – and it will be interesting to see the British reaction to it.
Transcript: “This Is It! M&A Nuggets”
We have posted the transcript for our recent DealLawyers.com webcast: “This Is It! M&A Nuggets.”
