Yesterday, Corp Fin released its first Staff Legal Bulletin on shareholder proposals in three years – Staff Legal Bulletin No. 14H. The heart of this SLB wraps up Corp Fin’s review of Rule 14a-8(i)(9) that kicked off in January after Chair White announced that the Staff would take “no view” on (i)(9) proposals during this past proxy season. This exclusion basis relates to counterproposals – and the use of it came under fire when companies attempted to battle against proxy access shareholder proposals by floating their own access proposals with terms more amendable to them. We’ll be posting the oodles of memos in our “Shareholder Proposals” Practice Area as they come in.
Under the SLB’s new “direct conflicts” standard for counterproposals, Corp Fin will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict.” The SLB provides four examples about how a shareholder proposal & management proposal may be found to directly conflict – or not. In the proxy access context, the upshot is that a more restrictive management proposal – like the one that Whole Foods came up with – will not be considered by Corp Fin as conflicting (and thus won’t be excludable). Overall, (i)(9) will rarely be used as an exclusion basis going forward.
So how will companies that need to place two different types of proxy access proposals on the same ballot explain this confusing scenario to shareholders? Explanatory disclosure, as noted in footnote 22 of the SLB as follows:
Where a shareholder proposal is not excluded and companies are concerned that including proposals on the same topic could potentially be confusing, we note that companies can, consistent with Rule 14a-9, explain in the proxy materials the differences between the two proposals and how they would expect to consider the voting results. As always, we expect companies and proponents to respect the Rule 14a-8 process and encourage them to find ways to constructively resolve their differences.
If companies still seek to rely on (i)(9) because they believe they face “directly conflicting” proposals, they need to consider when to implement their “proposal” to illustrate the conflict to Corp Fin. This timing issue is brought home by footnote 15, which states:
We remind companies that the staff may need a complete copy of a company’s proposal to evaluate a no-action request under Rule 14a-8(i)(9) and that the staff may not be able to agree that the company has met its burden of demonstrating that a shareholder proposal is excludable if those materials are not included with the company’s no-action request. This same principle applies when the staff evaluates no-action requests under Rule 14a-8(i)(10).
The SLB also touches on the Rule 14a-8(i)(7) litigation playing out in Trinity Wall Street v. Wal-Mart by disagreeing with how the majority in the Third Circuit applied the “significant policy exception” to the ordinary business exclusion. More specifically, Corp Fin didn’t endorse the majority’s “new two-part test, concluding that ‘a shareholder must do more than focus its proposal on a significant policy issue; the subject matter of its proposal must ‘transcend’ the company’s ordinary business.’” As noted in this Cooley blog, the Third Circuit’s opinion requested Corp Fin’s views in this area – and now they have it…
The U.S. Chamber of Commerce isn’t planning to mount a legal challenge to the Securities and Exchange Commission’s pay ratio rule. The rule, required by the Dodd-Frank Act of 2010, will force companies to disclose the gap between their chief executive’s pay and that of their median employee by 2017. It formally took effect on Monday, after the Securities and Exchange Commission approved it by a 3-2 vote in August. “We decided not to move forward on [the legal challenge],” said Tom Quaadman, senior vice president for Capital Markets Competitiveness at the U.S. Chamber of commerce. The pay ratio rule won’t affect most companies until 2018, Mr. Quaadman said. The political landscape around the rule could also change in Congress and the White House following the 2016 election, he added. Last month, the House Financial Services Committee sent a bill to overturn the rule to the floor. A vote is still pending.
For now, the Chamber said it is more important to move forward with litigation surrounding its challenge of another Dodd-Frank disclosure rule, the one on conflict minerals, he said. The conflict minerals case “has implications for the pay ratio,” Mr. Quaadman said. The conflict minerals litigation focuses on whether it violates corporate free speech rights by forcing companies to declare their supply chains contain minerals blamed for fueling violence in the Democratic Republic of the Congo. A U.S. Appeals Court reaffirmed a ruling in August that struck down conflict minerals disclosure requirements. But the U.S. Securities and Exchange Commission and Amnesty International filed another challenge against the rule this month. Mr. Quaadman said other groups could still move forward.
Since the pay-ratio rule just took effect, that “opens the door” for a legal challenge from someone, said James Barrall, a compensation attorney at law firm Latham & Watkins LLP. Companies are concerned about the rule because finding their median employee will force them to navigate different payroll systems and wage and benefits rules across disparate countries. They also worry that the disclosure will be hard to compare between companies and industries and will be difficult to explain to their workforce. “This is a complex process that will require significant time and resources, particularly as companies work to report this information for the first time,” said Mike Stevens, a partner in law firm Alston & Bird’s employee benefits and executive compensation group.
Speaking of the rulemaking process, the SEC’s Chief Economist delivered this speech yesterday about economic analysis for rules…
Proxy Advisors: Only Half of Investors Globally Use Them
These survey results from Proxy Insight appear to call into question those that believe that most institutional investors routinely follow the recommendations of proxy advisors to cast their votes, including:
– Only 21% of investors use proxy advisor voting policies
– 71% of investors vote according to their own policies
– 9% of investors delegate voting to sub-advisors or other asset managers
– Nearly 50% use at least one proxy advisor for research or recommendations based on their own policy
I’ve blogged a bit on this topic over the years, arguing that ISS’s influence on voting results is overstated…
Wow, I just learned that Mary Kosterlitz has retired as Chief of the Office of Enforcement Liaison (Jennifer Ours recently retired from that office too). Mary presided as Chief of that Office for two decades, as it grew in size from just her to a handful of Staffers. She was not the first Chief of OEL as Ann Wallace served in that position when OEL was initially created. Mary worked for Ann in OEL before Ann left and Mary took over. Then OEL was dissolved in the late ’90s and Mary served a dual role in the Office of Chief Counsel while also serving as the Enforcement Liaison. OEL became a stand-alone office again in the mid-’00s and the office began to grow.
I actually served as the Enforcement Liaison for a few months in the mid-’90s when Mary went on adoption leave. Mary is as nice as can be. It’s a tough job and you wouldn’t know it because she went about her business so quietly. Her departure makes me feel old – and even sad. There are so many nice people that work at the SEC. I’m sure the new arrivals are just as nice. But I do miss the folks I used to work with…
Anyways, I imagine most out there didn’t even know that Corp Fin had an “Office of Enforcement Liaison” – so you likely don’t know what it does. Not many members of our community would have a situation that would require you to interact with that Office. Here’s the “official” description from the Corp Fin web page:
The Office of Enforcement Liaison (OEL) coordinates matters between the Division of Corporation Finance and the Division of Enforcement. Such matters generally concern tips, complaints and referrals, delinquent filers, and revocation of registrations under Section 12(j) of the Exchange Act. In addition, OEL processes requests for waiver of “ineligible issuer” status, or so-called “WKSI waiver” requests, that may arise under Rule 405 of the Securities Act. “WKSI waiver” requests and related questions should be directed to John Madison. Delinquent filer questions should be directed to Hilda Garrett or Marva Simpson. Questions may be submitted to OEL by phone or online form.
It’s that first sentence above that creates the most work for OEL. The cases that the Enforcement Division brings that touch upon Corp Fin-like issue are among the most complex that Enforcement tackles. An accounting fraud case can take years to develop. And there are many more cases that Enforcement has in the pipeline than those that get brought to fruition. Congrats to Mary & Jennifer on their retirement! I’m sure they will both be be missed!
Carl Icahn: Back Online
Now that’s he’s being mentioned as one of Donald Trump’s advisors, Carl Icahn has launched a new website to express his views. We’ll see how long it lasts given that he’s 79. His old site “Icahn Report” faded after a few years after it’s ’08 launching – and his “Shareholders Square Table” was launched in 2013 and that seems gone now too..
Here’s an article about Carl’s warnings about the world…
Course Materials Now Available: Many Sets of Talking Points!
For the many of you that have registered for our Conferences coming up next Tuesday, October 27th, we have posted the “Course Materials” (attendees received a special ID/PW this week via email that will enable you to access them; note that copies will be available in San Diego). The Course Materials are better than ever before – with numerous sets of talking points comprising 130 pages of practical guidance (not counting the 130 pages of guidance from the related “Pay Ratio Workshop“). We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets and examples. Our expert speakers certainly have gone the extra mile this year! Here is some other info:
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” – on the home pages of those sites – will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list.
– Register Now:– There is still time to register for our upcoming pair of executive pay conferences – which starts on Tuesday, October 27th – to hear Keith Higgins, etc. If you can’t make it to San Diego to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now.
– Registration for Attendance in San Diego – Walk-Ups Only: Starting tomorrow, you will no longer be able to register to attend in San Diego through this site (however, you still will be capable of registering online to watch by video at any time). You can still register to attend when you arrive in San Diego – you just need to bring payment with you to the conference and register in-person.
Don’t forget to check out our “Family Feud” Keynote Session as two families of top lawyers & consultants – “50 Shades of Clawbacks” v. “D’lectible” vie for the prize! Check out our realistic set!
By my count, there have been 97 Commissioners since the SEC was created in 1934. Of those there have been 12 women: Roberta Karmel; Barbara Thomas; Aulana Peters; Mary Schapiro (counted twice); Laura Unger; Cynthia Glassman; Annette Nazareth; Kathleen Casey; Elisse Walter; Mary Jo White and Kara Stein. Here’s the SEC’s list of Commissioners if you want to check my math. Overall, the percentage of women that have served on the Commission is about 12% – with the past few decades running at about a 20% rate.
So from that perspective alone, it’s exciting to see President Obama nominate two women yesterday to be added to the two that currently serve as Commissioners. That means – if confirmed by the Senate – the five Commissioners will be 80% female. Wow! Not sure any other federal agency can match that. Ever (or so I thought – the FTC has all women right now!).
The Republican nominee to replace Dan Gallagher is Hester Peirce, a researcher at George Mason’s Mercatus Center and a former Senate Banking Committee staffer (where she worked with current Commissioner Piwowar). As I’ve blogged before, it helps to obtain the Senate’s confirmation when you nominate one of their own. Hester also used to work at the SEC – she served as a staffer for SEC Commissioner Paul Atkins. I moderated a panel with Hester on it a few years back at our annual executive pay conference.
The Democratic nominee to replace Luis Aguilar is also local to DC. Professor Lisa Fairfax has been teaching at George Washington Law School since ’09; before that she served as a Professor at the U. of Maryland in Baltimore. This NY Times article comments on Lisa not being a “revolving door” nominee – and the fact that she would be only the third black Commissioner…
PCAOB Warns of Deficiencies in Auditor Risk Assessments
As noted in this article, the PCAOB issued a report last week warning about significant deficiencies it is seeing in auditor’s assessment of risks in their clients. The report details concerns about how auditors are implementing Auditing Standards #8-15, known collectively as the “risk assessment standards.”
SEC Brings More Reg M/Short Selling Enforcement Actions
Last week, the SEC announced enforcement actions against six firms for short selling violations, including more than $2.5 million in sanctions – and it barred one firm from participating in stock offerings for one year. This follows similar actions against 23 firms in 2013…
Meanwhile, the NYSE has submitted this petition for rulemaking to the SEC in an effort to have the SEC create a short-sale activity reporting and disclosure regime applicable to institutional investment managers. This follows the NYSE’s 2013 rulemaking petition advocating a more timely mandatory reporting and disclosure of long positions under Section 13(f).
We have posted the transcript for our recent webcast: “Regulation A/A+: Developing Market Practices.” There are many out there doing webcasts – but as far as I can tell, no one takes the time to produce the nicely cleaned-up transcripts like we do. Here’s an excerpt from this webcast’s transcript – with some factoids from Jean Harris of Greenberg Traurig:
The revised Reg. A, Reg. A+, became effective June 19, 2015. Looking at filings since that date, as of last week, there have been 28 filings and 13 private draft filings according to Sebastian Gomez Abero, Chief of Corp Fin’s Office of Small Business Policy. The filings are equally split between Tier 1 and Tier 2. Three have been qualified, one of which had filed before the June effective date of the amended rule.
Sampling the 11 that were filed in September, three filed for around $50 million, three for around $20 million, two for $5 million, one $10 million, one for $1 million and one not yet disclosed.
The $1 million filing is a Tier 2 offering that proposes to allow online shoppers to “earn” shares based on how much they shop. So it is intended to have many investors at very small amounts, just the type of registration that would be difficult if not limited to one or two states. One Tier 2 for $50 million is an unlisted REIT acquiring single tenant buildings, again an offering that would require registration in the states but for the preemption for Tier 2. A bio medical company is using W.R. Hambrecht in a best efforts offering. This is a good example of a company using Tier 2 where it is not sure it can get listed, although it is applying, and will be OTC if not. Were it to file as an emerging growth company, it would have to file with the states.
According to Sebastian, they are seeing a wide variety now that the dollar amount is increased. Reg. A used to be used primarily by local banks or S&Ls usually selling within one state. He indicated every review group has touched a Reg. A offering. They are seeing more real estate related than any other industry group. He also indicated more are being filed with legal counsel. Looking at a sampling of filings, one is a local bank opening a branch in a county in Indiana and intends to offer to residents of that county and the surrounding area. One is for secured notes backed by a pool of short-term real estate loans made to borrowers who are rehabbing houses and selling them. One is building cottages for adults with disabilities around a common club house. One is for cultivating medical marijuana; another is planning on providing facilities for the cultivation of marijuana. They will build and then lease the facilities to licensed marijuana growers and dispensary owners. Another is a soccer club.
Meanwhile, as noted in this MoFo blog, the OTC Markets Group has released updated guides outlining the application process to join their OTCQX Best Market and OTCQB Venture Market trading platforms for companies conducting offerings under Tier 2 of Regulation A+.
IPOs: First “Public Benefit Corporation” Takes the Plunge
As noted in this blog, a few companies have gone public as “Certified B Corporations” (see this blog about Etsy’s filing) – and we now have the first company to file for its IPO as an actual Delaware “public benefit corporation” (PBC). Earlier this month, Laureate Education, a global network of degree-granting higher education institutions, filed a Form S-1 for an IPO led by first tier underwriters…
Risk Factors: The Invalidated EU Data Security Safe Harbor
Pretty interesting dialogue went on recently in the “Q&A Forum” (#8569) about whether companies should be considering a new Risk Factor to cover the EU court’s invalidation of US-EU data privacy safe harbor. I’ll let you peruse the responses to see what you think. And don’t forget our “Risk Factors Disclosure Handbook“…
Corp Fin is in the process of combining the two examination groups devoted to reviewing filings made by financial service firms – AD Offices 7 and 12. So there will now be 11 AD groups; not 12. This restructuring unwinds a small piece of the moves that then-Corp Fin Director Meredith Cross made five years ago by reverting back to having only one banking group. The Assistant Director of AD7 stays the same – Dieter King – as Suzanne Hayes moves over as Assistant Director of AD1 to fill the slot opened up by Jeffrey Riedler’s retirement. Our own “Corp Fin Organization Chart” has been updated for all of these moves…
United’s CEO & The Tricky Disclosure of Health Issues
This WSJ article brought the sad news that the new United Continental Holdings CEO had a heart attack last Thursday. It also raises the tricky disclosure issue about how many details do investors deserve to know. I’ve blogged several times about my own thoughts on this challenging topic (those blogs are linked to from this one). Here’s an excerpt from the WSJ article:
United, in a brief statement early Friday afternoon, said it had been “informed by Oscar’s family that he was admitted to the hospital on Thursday and we will provide further details as appropriate. In the meantime, we are continuing to operate normally.” United declined to comment further on Friday.
Companies whose leaders experience serious illnesses face a delicate balance between investors’ right to know and the desire to protect the executives’ privacy—one that boards often struggle with, management experts said. Apple Inc. long kept co-founder Steve Jobs’s health issues under wraps, even during his two extended medical leaves. Apple board members never disclosed the specific reasons for the absences, decisions that raised the ire of some shareholders. Mr. Jobs died in 2011 after battling pancreatic cancer. More recently, Goldman Sachs Group chief Lloyd Blankfein disclosed a lymphoma diagnosis last month shortly after receiving the news from his doctor. He said he planned to continue working through treatment.
Robert Robins, a retired Tulane University professor of political science who has studied how companies handle executive illness, said United should divulge more detail than was included its brief statement. Mr. Munoz and his fellow directors have an ethical obligation “to be fully candid with shareholders about the nature of his illness and the prospects for his returning to his job,’’ Mr. Robins said. United’s general counsel, Brett Hart, was previously at Sara Lee Corp. when, in May 2010, the food company said CEO Brenda Barnes was taking a temporary medical leave. Sara Lee didn’t provide details about its likely duration or underlying cause, and some shareholders complained about the level of disclosure. Nearly a month later, the food maker said Ms. Barnes had suffered a stroke. She soon stepped down. United didn’t respond to a request to speak to Mr. Hart.
United’s directors Friday were hoping to find out more information about Mr. Munoz’s condition soon, then decide whether the airline requires an interim leader, the person familiar with the situation said. Depending on how long Mr. Munoz is disabled, “there are a few [United] executives who could be interim [CEO] for a short period of time,” this person added. “It could be a mild heart attack, and he could be back in two weeks,” the person said.
On the heels of recent SEC enforcement actions against Chief Compliance Officers (CCO) and associated statements by Commissioners Gallagher and Aguilar and Chair White, the National Society of Compliance Professionals, a financial services industry trade group for compliance officers, sent this letter to SEC Director of Enforcement Andrew Ceresney requesting that the Commission establish policy that permits initiation of enforcement proceedings against CCOs only if they acted intentionally or recklessly – not negligently – to facilitate the underlying primary securities law violation.
See my earlier blog discussing the recent enforcement actions and internal SEC enforcement debate.
Survey: Compliance Officer Increasingly a Stand-Alone Position
This recent annual survey report from Deloitte/Compliance Week – reflecting input from over 350 multi-industry compliance professionals world-wide – generally reveals increasing acknowledgement of the importance of the compliance function.
Key results include:
57% of respondents say their CCO reports directly to either the CEO or the board – the highest level in at least three years
51% say the CCO has a seat on the executive management committee – up from 37% last year
59% say the CCO job is a stand-alone position, compared to 50% in 2014 and 37% in 2013
55% say they regularly brief the board on the company’s overall ethics and culture
Not surprisingly, financial services industry organizations are more likely to have larger compliance program budgets, larger staffs and standalone CCOs, and smaller organizations are less likely to have a designated or standalone CCO.
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:
– Most Common XBRL Errors
– Board Effectiveness: Role of Introverts
– Why Ds & Os Should Demand Indemnification Agreements
– Turnarounds: Tips for Maintaining a Long-Term View
– Information Security: Board Presentation Guidance
Assistant Attorney General Leslie Caldwell has – seemingly appropriately – softened the DOJ’s recently issued updated guidance focused on individual accountability for corporate misconduct. According to the widely reported, so-called Yates Memo (which Broc blogged about last month), in order to qualify for any cooperation credit, companies must (among other things) provide to the DOJ “all relevant facts relating to the individuals responsible for the misconduct.” In a speech announcing the new policy, Deputy Attorney General Sally Yates elaborated:
Effective immediately, we have revised our policy guidance to require that if a company wants any credit for cooperation, any credit at all, it must identify all individuals involved in the wrongdoing, regardless of their position, status or seniority in the company and provide all relevant facts about their misconduct. It’s all or nothing. No more picking and choosing what gets disclosed. No more partial credit for cooperation that doesn’t include information about individuals.
Presumably in response to the backlash, and confusion and uncertainty, about the implications of this aspect of the guidance, according to the WSJ, Assistant Attorney General Caldwell subsequently clarified in remarks before the Global Investigative Review conference in late September that, effectively, companies need only share the information they have and – provided they have conducted an adequate investigation – they will still be eligible for cooperation credit even if they come up empty-handed as to culpable individuals:
Companies seeking cooperation credit “have to work affirmatively” to identify relevant information about culpable individuals and they can’t just disclose general misconduct without identifying the people behind the misconduct, said Ms. Caldwell, but she acknowledged that a company can’t be expected to provide what it doesn’t have, and that some investigations just don’t bear fruit.
“When a company is truly unable to identify culpable individuals, even after an appropriately tailored, careful, thorough investigation, but [it] still provides the government with all the relevant facts, and otherwise assists us in obtaining the relevant evidence, the company will still be eligible for cooperation credit,” she said.
See also this WSJ article noting the DOJ’s current focus on “bigger, higher impact [bribery] cases,” this blog discussing internal audit concerns with the DOJ’s new guidance, this blog addressing the governance implications of the guidance, and oodles of memos in our “White Collar Crime” Practice Area.
Companies with a larger proportion of alumni from their current audit firm among their lower level accounting employees are purportedly significantly less likely to issue financial misstatements and have lower absolute abnormal accruals – so concludes this new paperreflecting the results of a study that examined whether alumni affiliations between companies’ auditors and accounting employees impact audit quality, as measured by financial misstatements and abnormal accruals.
Using the two key measurables of “alumni affiliations” (i.e., accounting employess who previously worked for their companies’ current audit firms) and audit quality based on the two commonly used proxies of financial material misstatements and absolute abnormal accruals, the results suggest that the stronger the connection between auditors and accounting employees, the better the audit quality.
Importantly, however, audit quality varies by accounting employee position level. Strong auditor alumni affiliations among lower level accounting employees have significantly positive effects on audit quality in terms of both reducing egregious misreporting (misstatements) and within GAAP earnings management (abnormal accruals), while alumni affiliations with auditors among middle management only reduce the likelihood of misstatement and, among upper management, only marginally restrain earnings management. The study’s authors surmise that this variability by position level is based on the fact that lower level accounting employees are likely to enhance audit quality given their previous working experience with the auditor (as further discussed in the paper), but have few incentives or opportunities to reduce it.
Given that hiring accounting employees from the company’s current audit firm is fairly common – and the close and ongoing interaction between the audit firm and the company’s accounting employees throughout the year (and during the audit process in particular) – the study’s findings are worth consideration.
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:
– Cybersecurity Tops Director & GC Concerns
– Study: Director Tenure Counterbalances CEO Authority
– Audit Committee Collaboration Releases External Auditor Assessment Tool
– DOJ Furthers Transparency on Corporate Cooperation
– Cybersecurity Preparedness
In conjunction with the SEC’s request for comments on its Audit Committee Disclosure Concept Release, the Institute of Internal Auditors (IIA) has requested that the SEC require all public companies to have an internal audit function or – at a minimum – explain why they don’t.
Assuming the requirement of an internal audit function, the IIA’s comment letter further recommends that, to assist investors’ understanding and evaluation of audit committee performance, audit committees be required to disclose:
– Whether the internal audit function has the stature, independence, and resources to fulfill its mission “to enhance and protect organizational value by providing risk-based and objective assurance, advice, and insight,” and
– Whether the internal audit function is performing in accordance with globally recognized standards, such as the IIA’s International Standards for the Professional Practice of Internal Auditing.
In his recent blog, IIA President & CEO Richard Chambers reiterates the value to good governance and – more specifically – control environment oversight – that an effective internal audit function can provide, while (wisely) being careful to not imply that a company’s success or failure rides on the presence of internal audit.
While I understand the likely resistance to the suggested mandate and believe it is more appropriately the province of the exchanges (e.g., the NYSE already requires its listed companies to have an internal audit function) rather than the SEC, as noted previously, I am a firm believer – based on my personal experience – in the benefits attainable by a strong internal audit function.
Internal Audit: Opportunities to Increase Use of Technology
According to a recent worldwide survey conducted by the world’s largest ongoing study of the internal audit (IA) profession (the Global Internal Audit Common Body of Knowledge (CBOK)), 50% of North American CAEs report using technology appropriately or extensively for audit processes, while 37% report some use of electronic workpapers or other office information technology tools, and 13% rely primarily on manual techniques. CBOK posits that this may be due to inadequate IT expertise on the IA staff, or the risk-taking and creativity associated with finding new ways to use technology that exceed that required for normal IA activities.
Whereas more than 90% of survey respondents worldwide hold four-year degrees or higher, only 1 out of 10 studied computer science or information technology – revealing little change since 2006. CBOK cites as one possible explanation of this the fact that technology is being incorporated into other areas of study, e.g., an information systems course as part of the IA curriculum, AIS as part of an accounting program.
Other notable stats:
57% identified accounting as a major or significant field of study, followed by auditing at 43%.
17% of North American CAEs reported certifications in information systems auditing (such as CISA, QICA, CRISC)
11% relied on academic studies for obtaining their tech skills
3% reported certifications in security for IT (such as CISM, CISSP, CSP, CDP)
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:
– Directors Debate Approaches to Board Refreshment
– SOX Compliance Costs & Audit Scrutiny on the Rise
– Effective Crisis Management: Impediments & Strategies
– Relationship Guidance for GCs & Internal Audit
– Board Effectiveness: Continuing the Journey
Institutional investors are playing an increasingly important role in shareholder activist campaigns according to new survey findings from FTI Consulting/Activist Insight. The 2015 survey of 24 engaged activist firms revealed that 70% expect an increase in cooperation or “future partnerships” with institutional investors and pension funds in pursuing their target companies – and all perceive greater acceptance by these institutional investors.
Additional noteworthy findings include:
300 companies worldwide were subjected to public demands in the first half of 2015 – compared with 142 in all of 2010
96% suggest that M&A activism will increase in general
Number of board seats sought by activists has almost doubled – from 23 between 2010 and 2012, to 43 from 2013 to present
Activists believe that assets allocated to shareholder activism will continue to increase; 86% of surveyed funds expect to engage in new capital-raising over the next 12 months
Activists increasingly believe that the US activism market (i.e., competition for targets) is getting crowded, and are turning their sights toward Canada and Europe
In this new post, Wachtell Lipton’s Marty Lipton aims to encourage major institutional investors to recognize the harmful effects on company behavior and their overall portfolio value associated with the antics of activist hedge funds. The memo identifies three new studies by economists and law professors that Marty claims undermine the reliability of what has been characterized by some as “empirical evidence” allegedly supporting “short-termism, attacks by activist hedge funds and shareholder-centric corporate governance.”
See also this recent St. Louis Post Dispatch article wherein NYC Comptroller Scott Stringer expresses his concern about companies being too eager to succumb to activist demands to avoid a proxy fight to the detriment of long-term shareholder value.
Canadian Shareholder Coalition Seeks Universal Proxy
The Canadian Coalition for Good Governance, Canada’s largest shareholder coalition, is calling on companies and dissidents to voluntarily adopt the use of universal proxies in contested director elections pending sought-after corporate and securities laws reforms that would mandate their use. As blogged previously, on the US front, SEC Chair White indicated in June that she had asked the Staff for rulemaking recommendations on universal proxy ballots.
Matt Orsagh on Bank of America CEO/Chair Split
In this podcast, Matt Orsagh, Director of Capital Markets Policy for the CFA Institute, discusses combined and split CEO/Chair roles in the context of Bank of America’s recent shareholder vote, including:
– What was this vote all about?
– Is Bank of America backsliding on corporate governance?
– Are there potential conflicts of interest in combining the roles?
– What checks & balances do companies implement when they combine the roles?
– What is the trend in combining/separating the roles in the US?
Here’s a note from Lawrence Heim of Elm Sustainability Partners:
Not ones to cry wolf, we had a bit of a shock at the ThomsonReuters Governance and Risk Seminar we participated in this morning. One of the sessions included a representative from the FBI’s International Corruption Unit. Just to be clear, this is the US Federal Bureau of Investigation. The topic was current enforcement of the Federal Corrupt Practices Act (“FCPA”). We asked if matters such as conflict minerals, human rights abuses and human trafficking were on their radar screen, expecting a blank stare or an overly-general “non-answer answer.” Instead, a direct – and rather unnerving answer – was given. To summarize:
– The FBI has already identified linkages between known instances of FCPA violations/concerns (corruption, doing business in ”low integrity countries”) and human trafficking/human rights abuses. Human rights matters are of current interest to them.
– FBI’s FCPA enforcement resources have grown dramatically in recent years.
– FBI has unlimited global reach for FCPA compliance enforcement.
– Conflict minerals experts would do well to have at least a basic understanding of FCPA.
We don’t know what that all means just yet, but we do think it adds another dimension of risk to the SEC filings, compliance status and supplier relationships.
On September 30, the House Financial Services Committee approved, by a vote of 32 to 25, H.R. 414, the Burdensome Data Collection Act, following committee consideration and a mark-up session. Given that the bill is only one paragraph long, there was not too much to mark up. The bill will now go to a full vote of the House. The bill would repeal Section 953(b) of Dodd-Frank, the pay-ratio provision, and make any regulations issued pursuant to it of no force or effect.
Any of this sound familiar? It should. The very same bill was introduced in 2011, but went nowhere. (See this news brief.) With President Obama still holding the veto pen and a substantial constituency supporting the pay-ratio provision, a different result seems unlikely this time.
Europe: Director Duties & Liabilities
This 31-page “Guide to Directors’ Duties & Liabilities” was released last week by the European Confederation of Directors’ Associations. See the heading entitled “Comply-or-explain needs more explanation.” I guess that caption is tongue-in-cheek…
