The Course Materials alone are worth the price of admission. But this 4-hour audio-only event is paired with our much lengthier “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that are being held in October. Register Now! Here’s a list of the 9 panels for the “Pay Ratio Workshop” (& the agendas for all three events):
– “Overview: The Final Rules”
– “Getting Ready for Compliance: Sampling & Other Data Issues”
– “Streamlining Your Compliance Efforts”
– “Board Presentations: What To Tell Boards Now”
– “Disclosure: Handling the Transition Period”
– “Parsing Model Disclosures: US-Only Workforces”
– “Parsing Model Disclosures: Global Workforces”
– “Parsing a Recent Pay Ratio Disclosure”
– “How to Handle PR & Employee Fallout”
In the wake of the pay ratio rules being adopted, get a handle on what you need to do now during tomorrow’s “Pay Ratio Workshop.” The Course Materials for tomorrow include 22-pages of annotated model pay ratio disclosures (in Word to facilitate your starting point!) – and 128-pages of detailed analysis of executive pay disclosures made during the 2015 proxy season. The Course Materials alone are worth the price of admission.
But there’s more! This 4-hour audio-only event is paired with our much lengthier “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that are being held in October. Register Now! Here’s a list of the 9 panels for the “Pay Ratio Workshop”:
– “Overview: The Final Rules”
– “Getting Ready for Compliance: Sampling & Other Data Issues”
– “Streamlining Your Compliance Efforts”
– “Board Presentations: What To Tell Boards Now”
– “Disclosure: Handling the Transition Period”
– “Parsing Model Disclosures: US-Only Workforces”
– “Parsing Model Disclosures: Global Workforces”
– “Parsing a Recent Pay Ratio Disclosure”
– “How to Handle PR & Employee Fallout”
Below are the results from our recent survey on board portals:
1. When it comes to board portals, our company:
– Doesn’t have one and isn’t considering using one in the near future – 3%
– Doesn’t have one but is considering whether to use one – 13%
– Adopted one within the past two years – 16%
– Adopted one more than two years ago – 68%
2. For those with board portals, our company:
– Licensed an off-the-shelf portal – 94%
– Built it in-house – 0%
– Hired a service provider to build a custom portal – 6%
3. For those with off-the-shelf board portals, we have:
– Asked whether our vendor has ever had a security breach – 13%
– Investigated our vendor’s security – 70%
– Plan to investigate our vendor’s security in the near future – 10%
– Not worried about our vendor’s security – 7%
Check out this D&O Diary blog (& this Mintz Levin blog and Reuters article) about a recent decision in Harman International Industries Securities Litigation, in which the US Court of Appeals for the DC Circuit held that – despite cautionary language – the “safe harbor” under the PSLRA for forward-looking statements was not applicable for certain statements. The ruling noted that “safe harbor” protection was not available because the cautionary language was misleading in light of historical facts and was not tailored to the specific forward-looking statements the company made. The Court’s decision serves as an important reminder to keep cautionary language up-to-date. Here’s an excerpt:
The PSLRA safe harbor was designed to facilitate dismissal of challenges to forward-looking statements at the pleadings stage, before any discovery. But as Harman shows, even on a motion to dismiss, courts will take a hard look at the cautionary language and dismiss the complaint only if the cautionary language truly is meaningful. That means eschew boilerplate, be specific, don’t misstate historic facts and, above all, update your language as things change.
See also this blog that looks at the risks of disclosure post-PSLRA. Here’s an excerpt:
What role does public disclosure by a defendant firm play in the outcome of securities fraud class actions? In a recent article we study this question and find when a defendant firm discloses more via press releases and conference calls, it is more likely to experience an adverse outcome in litigation. While the possibility of private legal liability likely improves the quality and integrity of disclosure, it may also make firms reluctant to release information to financial markets. These compelling findings should be of interest to companies and legal practitioners as they evaluate corporate disclosure decisions and policies, as well as to legal scholars and lawmakers by improving our understanding of the relation between disclosure and private litigation.
In the wake of the pay ratio rules being adopted, this is one of the topic du jours. And it’s one that will be tackled during our “Pay Ratio Workshop” next Tuesday, August 25th during the panel entitled “How to Handle PR & Employee Fallout.” Register Now! This is an audio-only event (whose archive will be up immediately if you can’t attend live).
Here’s a list of the nine panels that will span over four hours of practical instruction on Tuesday:
– “Overview: The Final Rules”
– “Getting Ready for Compliance: Sampling & Other Data Issues”
– “Streamlining Your Compliance Efforts”
– “Board Presentations: What To Tell Boards Now”
– “Disclosure: Handling the Transition Period”
– “Parsing Model Disclosures: US-Only Workforces”
– “Parsing Model Disclosures: Global Workforces”
– “Parsing a Recent Pay Ratio Disclosure”
– “How to Handle PR & Employee Fallout”
ESG: 75% of Investors Consider
Recently, the CFA Institute released these survey results showing that nearly 75% of respondents said that they take ESG issues into consideration in the investment process. In addition, 64% of respondents consider governance issues, 50% consider environmental issues and 49% consider social issues. Only 27% don’t consider ESG issues…
Corp Fin: Shelly Luisi Promoted to Associate Director
Congrats to Shelly Luisi for her promotion to Associate Director in Corp Fin! As noted in this press release, Shelly previously served as a Senior Associate Chief Accountant in the SEC’s Office of the Chief Accountant. I believe this is the first time that someone from OCA was promoted into a Front Office gig within Corp Fin…
Yesterday, the DC Circuit Court of Appeals finally issued its opinion on rehearing in NAM v. SEC and, by a 2-1 vote, reaffirmed its earlier decision that the SEC’s conflict minerals rules violate the First Amendment to the extent they require companies to describe their products as not being “conflict free.” The DC Circuit first issued its ruling in April 2014, but parts of the opinion were called into question by a subsequent DC Circuit opinion in American Meat Institute v. Department of Agriculture. Yesterday’s opinion reconsidered the earlier holding in light of American Meat.
The Corp Fin Staff has been rumored to be waiting for this ruling before it issues any further interpretive guidance on the conflict mineral rules. One area where guidance would be helpful concerns the interplay between the DC Circuit opinions and the rule’s two-year transition provisions, which – but for the DC Circuit’s ruling – would otherwise cease to apply to Forms SD filed in 2016. A recent Wall Street Journal article posited that issuers would have to begin obtaining third party audits over their conflict minerals reports in 2016, but the court’s holding calls this conclusion into question because the audit requirement is premised on the same constitutionally infirm language the court struck down. Corp Fin Director Keith Higgins issued a statement in April 2014 indicating that an independent private sector audit “will not be required unless a company voluntarily elects to describe a product as ‘DRC conflict free’ in its Conflict Minerals Report.”
Is Director Higgins’s statement still valid? Should issuers make any other changes to conflict minerals reporting in the future? The Staff may now feel empowered to answer these questions. The next Form SD is due May 31, 2016.
Pay Ratio Rules Published in the Federal Register
Yesterday, the SEC’s pay ratio rules were published in the Federal Register – so they have an effective date of October 19, 2015. That’s not the compliance date however…
In the wake of the pay ratio rules being adopted, you need to get a handle on what to do now – as there are tasks you should be accomplishing way ahead of your disclosure obligation. Tune into our “Pay Ratio Workshop” next Tuesday, August 25th – an audio-only event (whose archive will be up immediately if you can’t attend live). Register Now!
Here’s a list of the nine panels that will span over four hours of practical instruction on Tuesday:
– “Overview: The Final Rules”
– “Getting Ready for Compliance: Sampling & Other Data Issues”
– “Streamlining Your Compliance Efforts”
– “Board Presentations: What To Tell Boards Now”
– “Disclosure: Handling the Transition Period”
– “Parsing Model Disclosures: US-Only Workforces”
– “Parsing Model Disclosures: Global Workforces”
– “Parsing a Recent Pay Ratio Disclosure”
– “How to Handle PR & Employee Fallout”
Why the SEC’s Pre-Existing Relationship Test is the Mirror Image of California’s
Here’s a blog by Keith Bishop comparing one of the new CDIs to California’s limited offering exemption…
Check out this Bloomberg article entitled “SEC Allows Tweets for Startups Raising Money”…
This new paper discusses the results of a survey of approximately 400 public and private company CFOs about earnings quality, with an emphasis on GAAP-conforming earnings misrepresentation (i.e., not fraud).
Key results include:
– CFOs say that the key characteristics of high quality earnings are sustainability, the ability to predict future earnings, and backing by actual cash flows. More specific features include consistent reporting choices through time, and minimal use of long‐term estimates. The factors that determine earnings quality are about half controllable (corporate governance, internal controls, proper accounting and audit function), and half noncontrollable or innate (nature of the business, industry membership, macroeconomic conditions).
– CFOs believe that in any given year 20% of companies intentionally misrepresent their earnings using discretion within GAAP. The magnitude of the typical misrepresentation is quite material – about 10 cents on every dollar. While most misrepresentation results in the overstatement of earnings, a full one‐third of firms that are misrepresenting are intentionally lowballing their earnings.
– Main consequences from poor earnings quality are investor confusion and lack of trust in management, leading to stock price declines and higher cost of capital. CFOs acknowledge that investor confusion could also result in higher bid‐ask spreads and lower analyst following but think that such effects are minimal for most sizable firms. In addition, firms with poor earnings quality frequently attract considerable short interest.
– CFOs provide a list of red flags (see Table 2, pg. 17) that outside observers like analysts and investors can use to identify poor earnings quality. Lack of correlation between earnings and cash flows is the top choice, followed by unwarranted deviations from industry or other peer norms. Presence of lots of accruals and one‐time charges, and consistently beating analyst forecasts, also score highly.
The chief motivations to misrepresent earnings are to influence stock price and in response to outside pressure to hit earnings benchmarks. Here is a relevant excerpt:
Most CFOs think there is unrelenting pressure from Wall Street to avoid surprises. As one CFO put it, “you will always be penalized if there is any kind of surprise.” As a result “there is always a tradeoff. Even though accounting tries to be a science, there are a hundred small decisions that can have some minor impact at least on short‐term results. So that is a natural tension, and one that, depending on the company, the culture, and the volatility of the company, can be a source of extreme pressure or it can be a minor issue.”
Replacing quarterly financial reports with less frequent updates was reportedly among the ideas suggested at the Institute of Corporate Directors’ recent conference in Toronto. The theme of the conference was short-termism. Quarterly reporting, aka, quarterly capitalism, is deemed to drive a short-term outlook and short-term behaviors, as companies repeatedly scramble to meet earnings expectations.
The Financial Post article notes the recent change in the UK by the FCA that allows companies to forgo mandatory quarterly reporting and report only twice a year. The UK’s largest asset manager, Legal & General, recently announced that it had sent a letter to each of the FTSE 350 company boards supporting the change and asking those companies to discontinue quarterly financial reporting:
“Reporting which focuses on short-term performance is not necessary to building a sustainable business as it may steer management to focus more on short-term goals and away from future business drivers… ‘For many businesses, we believe, reducing the time spent on frequent reporting could help management to focus more on long term strategies and articulate more on market dynamics and innovation drivers that will enhance their performance over time.'”
See also this FT article and my previous blog on earnings call practices.
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:
– “Fresh Eyes” in the Boardroom
– Survey: Auditor Evaluations Falling Short
– Governance Roadshows for Mid-Caps
– Reframing the Board Succession Dialogue
– Adapting to Mainstream Shareholder Activism
Deloitte’s recently released 2015 M&A Trends Report reveals a booming, wide-reaching M&A environment spanning small, mid-sized and large public and private companies and private equity firms, multiple industry sectors, and domestic and overseas markets. The report reflects the results of an early 2015 survey of more than 2,000 public and private companies and over 400 private equity firms.
Noteworthy findings include:
– Strong interest in overseas expansion. Among private equity respondents, 85% indicated that their deals involve acquiring a company domiciled in a foreign market – up from 73% last year. And 74% of the corporates are investing overseas – up from 59% last year.
– 39% of corporates expect to tap into the robust M&A environment to pursue divestitures – up almost 25% from last year.
– 85% of corporates anticipate acceleration of – or at least sustaining – last year’s M&A pace; only 6% expect deal-making activity to decrease.
– 94% of private equity firms forecast average to very high deal activity – up from 89% last year.
– Private equity firms anticipate ramping up both add-on acquisitions and portfolio exits.
Note that global M&A value in the first half of this year reportedly hit an 8-year high – second only to the all-time record set in 2007.
Deloitte’s report also notes that the vast majority of corporate and private equity respondents said that their deals fell short of financial expectations. See my earlier blog on tips to achieve post-merger integration success.
Directors with Foreign Experience Linked to Improved Company Performance
This interesting paper discusses the results of a study about the impact of directors with foreign experience on company performance in emerging markets based on unique, but purportedly adaptable, data from Chinese markets.
The authors demonstrate these impacts associated with foreign directors on the board:
– Increased company valuation, productivity, and profitability
– Improved corporate governance, as evidenced by a decreased propensity to manage earnings (captured by estimated discretionary accruals)
– Greater likelihood of international acquisitions (suggesting a broader range of investment opportunities) and other indications of internationalization, e.g., increased exports and engagement of foreign investors for capital-raising
The authors note that these benefits associated with foreign directors on the board may be presumed to result from their exceptional talent or their foreign experience – but that evidence suggests foreign experience plays the greater role.
See also my earlier blog concerning the underrepresentation of directors with international experience on S&P 500 boards, and this tip from DuPont’s CEO: “Be Wary of the Jet-Lagged Director.”
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:
– 2015 Challenges & Practical “To Dos”
– Gender Balance on Boards: Five Steps to Achieve Success
– Inside Baseball: Working for an Independent Auditor
– Japan: A Proposal to Allow Only Long-Term Investors to Vote
– What’s Up with IPOs?
When President Obama signed the JOBS Act in 2012, one of the primary purposes was to ease the cumbersome IPO process by creating a confidential submission process. Well, according to this WSJ article, it looks like companies filing confidential IPOs are getting another benefit – M&A visibility. The article provides examples of companies that seem to have utilized the IPO on-ramp to facilitate an M&A transaction.
Here’s an excerpt:
Since the owners of a company preparing to go public want to monetize their investment, the very existence of the confidential filing can accelerate a sale process for a company, and ultimately lead to a less risky outcome for private-equity and venture-capital investors, who can get paid in one fell swoop once an acquisition closes.
On a related subject – as we blogged about in July – the House of Representatives passed a bill to reduce the amount of time that a company must publicly disclose its IPO prior to its roadshow – from 21 days to 15 days. See this WSJ blog discussing the potential change.
Retail Investors: Open to Activist Investor Viewpoints?
A recent survey by the Brunswick Group counters beliefs that retail investors are always “pro-management” in any voting contest. The survey examined the views of 801 US-based individuals who play an active role in their personal investment decisions.
Two-thirds are aware of shareholder activism and 74% think shareholder activism adds value to companies “by pushing corporate executives and boards to make decisions about issues that company management is otherwise unwilling to make.” Most of these investors say that activists force companies to aim for long-term value creation for shareholders, while only a slight majority indicate that companies are already doing enough to return value to shareholders. 51% do not believe that boards of directors are working in retail investors’ best interest.
Interestingly, excessive executive compensation or executive compensation that is not viewed to be tied to a company’s performance is the main reason that a retail investor would support an activist proposal. Retail investors also tend to trust the financial press as the best source of information during a campaign, although a large majority would also read materials from the company as well as the activist investor and research the issue online.
The importance of retail investors, particularly in close contests, has been of increased interest lately and could be the subject of more focus as activism increases. The survey indicates from other sources that as of July 2015, 300 companies have already been subjected to activist campaigns, a 23% increase over the same period last year. Moreover, in 2014, a reported 249 companies were targeted by activists that had not experienced campaigns in previous years.
Podcast: Recap of ’15 Proxy Season
In this podcast, Jamie Carroll Smith of the EY Center for Board Matters reviews the 2015 proxy season, including:
– What are the proxy access takeaways from this year’s proxy season?
– How has investor engagement during this year’s proxy season evolved?
– How have activist hedge funds impacted this year’s proxy season?
– What was the volume of shareholder proposal submissions during this year’s proxy season?
– What were the topics of interest?
As reported by this WSJ blog, the US Court of Appeals for the DC Circuit is currently rehearing the question of whether the conflict minerals rules violate the First Amendment – to the extent that they require a company to report that its products “have not been found to be ‘DRC conflict free.’” In case you’ve blocked out the case, here’s our blog with an analysis of the Court’s appeal decision from last year. Apparently, the fate of the rehearing may hinge on a decision the Court made in a recent meat labeling case. Here’s an excerpt:
In April 2014, the three-judge appeals court panel decided that the requirement in the SEC’s rules to mandating that companies label their products as “conflict free” or not violated free speech rights. But just weeks later, the court heard arguments in a case brought against the U.S. Department of Agriculture by the American Meat Institute on requirements to label meat with a country of origin. That case led to a different outcome.
The Court is now considering how that meat labeling case impacts the conflict minerals decision.
Also check out this Cooley blog & WSJ blog that discuss this Tulane study about conflict minerals compliance. Meanwhile, this WSJ blog reports how ethical investors are using conflict mineral reports.
Pay Ratio: SEC Commissioner Piwowar Doubles Down (On His “No”)
Here’s something that Broc blogged on “The Advisors Blog” a few days ago: As I have blogged before, it used to be rare that a SEC Commissioner put a dissent to a rulemaking in writing. Now in this age of partisan politics, that is fairly common. But in a new “first,” SEC Commissioner Piwowar has penned a second dissent to the pay ratio rulemaking! Here’s his first dissent.
The second dissent could be a blueprint for how a complaint would look if this rulemaking is challenged in court. It claims the SEC violated the Administrative Procedure Act in adopting the rule and similar legal mumbo jumbo (eg. the SEC acted in an “arbitrary & capricious” manner, a phrase that describes a standard of review used when a government agency’s actions are challenged under administrative law). This is interesting because Piwowar is not a lawyer, he’s an economist…
Pay Ratio Workshop: Discounted Rate Extended to August 21st! – We received so many requests to extend the deadline for our discounted rate that we have done so for our upcoming “Pay Ratio Workshop” that will be held on Tuesday, August 25th. This event will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new “audio-webcast only” event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available now through August 21st!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
Podcast: “Dead Hand” Proxy Puts
In this DealLawyers.com podcast, Brad Davey & Chris Kelly of Potter Anderson & Corroon discuss “dead hand” proxy puts, including:
– What is a “dead hand” proxy put & where do you typically find them?
– Why have these provisions received so much attention lately?
– How have the Delaware courts treated these provisions?
– What should be done now with existing debt instruments & credit agreements that contain “dead hand” proxy puts?
– How should debt instruments & credit agreements be drafted moving forward?
Who said the Ukraine is weak? (Kramer did.) Yesterday, the SEC announced fraud charges against 32 defendants for taking part in a global scheme that involved hacking into news wires to obtain nonpublic information from 150,000 earnings announcements over 5 years (but they only traded on 800 of those 150k). Those charged include two Ukrainian men – Ivan Turchynov and Oleksandr Ieremenko (hope they keep those names for the movie) – who allegedly did the hacking & 30 others who then traded on it, generating more than $100 million in profits. 150,000! 5 years! $100 mil!
This quote from this Washington Post article gives a sense of the brazenness of this scheme:
The hackers, who called the early-accessed filings “fresh stuff,” masked their movements through proxy servers and stolen employee identities, and recruited traders with videos showcasing how swiftly they could steal corporate data before its release. Traders kept “shopping lists” of the releases they wanted from select public companies, many of whom were large Fortune 500 conglomerates with heavy interest in market trading.
For each press release, there is a window of time between when the issuer provides a draft press release to the Newswire Service and when the Newswire Service publishes the release (the “window”). This window varied between a number of minutes and a number of days.
Are companies really giving their earnings releases to the wires days in advance? Obviously, not a good idea! Keep your confidential information under your control for as long as you can!
As an aside, here’s my 1st blog about this type of problem from 2010 – but these initial incidents didn’t appear to involve hacking, just premature “hidden” posting of earnings releases by companies. In these initial cases, companies were posting their releases early – but the URLs weren’t fully hidden. They weren’t linked to from anywhere on the corporate site yet – but they were posted early and bots were able to sleuth them out.
Particularly because – in some cases – the URLs for these releases followed a corporate convention so that even a human could have sleuthed it out by just typing in a specific URL (eg. URL for last earnings release ended in “3rdQ” – so next release would be “4thQ”). I don’t believe there’s been this type of incident recently – the Twitter snafu back in May didn’t seem to involve a URL sniffing bot per this blog…
Transcript: “Cybersecurity – Governance Steps You Need to Take Now”
We have posted the transcript for our recent webcast: “Cybersecurity: Governance Steps You Need to Take Now.”
7th Circuit Opens Door to Data Breach Class Actions
On July 20, 2015, the U.S. Court of Appeals for the 7th Circuit issued an opinion that could dramatically change the class action landscape for companies that are victims of hackers. In Remijas v. Neiman Marcus Gp., the 7th Circuit reversed the district court, ruling that Neiman Marcus (NM) customers whose credit card information was compromised had standing to bring a class action suit against the retailer.
