Big Daddy is back from vaca and has something for you that is spanking brand new! Posted in our “Annual Shareholders’ Meetings” Practice Area, this comprehensive “Annual Report & 10-K Wrap Handbook” provides a heap of practical guidance about how to deal with Rule 14a-3. This one is a real gem – 43 pages of practical guidance.
More on “Should CEOs Even Be on Boards?” v. “Should CEOs Conduct CEO Successions?”
Recently, I blogged on the topics of “Should CEOs Even Be on Boards?” v. “Should CEOs Conduct CEO Successions?” and asked for feedback. Here are two differing views that I received:
– Kris Veaco notes: “I’m not a fan of hard and fast rules – no CEO as Chair, no CEOs on boards. I believe it all depends on the board, the personalities and experience of the particular CEO. I’ve worked with boards where the CEO was a member and boards where the CEO was not a member. In any event, the CEO’s voice is one of many and brings to the discussion information on the business that is useful to the other members of the board. Executive sessions would exclude the CEO in any event. It should depend on the particular situation.”
– Jim McRitchie notes: “Ideally, CEOs shouldn’t be on boards. I used to head California’s cooperative development program before it was killed. The co-ops and credit unions I dealt with had boards that didn’t include the CEO. CEOs attended the meetings and made many of the presentations but they didn’t get a vote and it was very easy to meet without them and discuss their performance and succession planning. Many of the large co-ops failed but it certainly wasn’t because of separating the two positions.”
Transcript: “Divestitures: Nuts & Bolts”
We have posted the DealLawyers.com transcript for the webcast: “Divestitures: Nuts & Bolts.”
In a perfect world, you would never need to inform your directors that their communications and materials are subject to a discovery request. However, in the real world, it happens, and be assured that it’s never a pleasant experience – even under the best of circumstances. This Nelson Mullins blog provides a checklist of issues to consider to minimize the negative implications of such a request:
Some issues to consider as you explore information governance, litigation readiness and the Board:
– Information governance policies. What types of Board related information might be subject to corporate information governance polices? How are these policies and any requirements communicated to the Board?
– BYOD (Bring Your Own Device)- in specific. Do Board members use their own personal devices to receive Board-related information and communicate in connection with that information? If yes, consider whether user guidelines and device registration requirements may be appropriate.
– Commingled information. Have Board members been informed about possible risks of commingling Board information with other business or personal information? Do they understand that if they save or download Board information to personal devices, systems or email accounts, such information or communications might come under scrutiny and be discoverable?
– E-books, Board portals. Does your Board use these? If yes, consider: encryption and security requirements.
– Avoid storing unique information on personal devices or systems. Consider implementing practices to centralize Board information, and to design e-Board books and Board portals so that there is nothing unique on an e-Board book or device that is not on a centralized server.
– Communicate,train, acknowledge and improve. Train Board members on information governance expectations, risks and requirements.
See this associated Inside Counsel article for a more detailed discussion of these considerations.
Implementing an Information Governance Program
Management of board information – whether electronic or print – and including distribution, retention and destruction of emails, draft minutes and other materials, should be just one aspect of a comprehensive information management approach. In addition to realistically characterizing less-than-ideal, but common, records management practices, this Mayer Brown memo about establishing an information governance program provides helpful tips for establishing a best practice program that can minimize the risks and costs associated with the lack of a comprehensive, coordinated approach.
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:
– Study: CEO Succession Planning Preparedness Lags Importance
– Should Boards Have Technology Committees?
– Delaware’s Unclaimed Property Voluntary Disclosure Program: June 30th Deadline!
– Study: IPO Companies Have More Freedom on Governance Practices
– New Intrastate Offering Exemptions: Not Useful
The PCAOB’s recent amendments to Auditing Standard No. 12 addressing financial relationships and transactions with the company’s executive officers (which Broc blogged about here) have not received much attention in view of the concurrent adoption of Auditing Standard No. 18 concerning Related Party Transactions. However, it’s worth specifically noting that amended Auditing Standard No. 12 requires auditors to obtain an understanding of the company’s policies & procedures for authorization and approval of executive officer expense reimbursements – an area that is often ripe for criticism and improvement. Even in the absence of conduct in this area that would appear to pose a risk of material misstatement based on a point-in-time review, a company’s executive expense approval process, as evidenced by the documentation (not just the paper policy, which may differ), reveals a lot about its corporate culture and tone at the top – which influence pretty much everything else.
One great way to see if your current process is working effectively and to have support vis a vis management for updating your policies & procedures is to have your Internal Audit department (assuming functional reporting to the audit committee) or an external audit consultant (if you lack resources in-house, or an independent internal audit of this area isn’t feasible under the circumstances) conduct an executive expense audit and make recommendations to management and the audit committee based on those results. Having once gone the latter route while serving as GC & Secretary, I highly recommend it – as this is one of those times when it makes sense to obtain a view from an outside consultant who is experienced in internal auditing, knowledgeable of mulitiple companies’ expense controls and internal controls generally, and has no ties with company management.
We have posted lots of memos about these new and amended PCAOB standards here in our “Related Party Transactions” Practice Area.
Is There a “Proper” CEO Expense Approval Process?
Perhaps prompted by the amendments to Auditing Standard No. 12, the “proper” approach to CEO expense approvals was recently bantered about on Proformative, an online resource primarily geared toward finance professionals – but often also of interest from a legal perspective. A member anonymously questioned on the site’s Q&A forum who should approve CEO travel expense reimbursements – the board or the CFO? He noted that many boards meet just monthly, which could make timely board approval difficult – but that the CFO of his company had not properly vetted senior management expenses in the past.
I thought this was a great question and, while I couldn’t resist contributing my own views based on past experience, I imagine there are multiple, sound approaches to the CEO expense approval process. My own view is that – outside of expenses that fall within objective, pre-established standards that apply to all executives in terms of dollar amounts and expense types such that the CFO (or whoever else internally is charged with expense approvals) isn’t capable of being pressured (directly or indirectly) to approve potentially questionable expenses – a formal process should be established so that the audit committee chair, independent lead director or board chair (or other designated independent director) reviews & approves the expenses. This is because – realistically, CFOs – or other subordinates of the CEO – often are not in a position to deny approval, ask probing questions about expenses that appear questionable or even demand additional supporting documentation.
Other views communicated by members in the forum were generally comparable – i.e., charge the CFO with approval of routine expenses as specifically defined by pre-established parameters via a written policy, and charge the audit committee or other independent directors with approval for any expenses that fall outside of those parameters. However, one company President/co-founder indicated that getting the board involved in this type of activity – even if just for the CEO – is difficult barring some evidence of problems that would trigger more robust board oversight. Unfortunately, based on my own experience, I think that that is what often occurs – a real problem that ultimately prompts intense board focus and development of a new process that includes some sort of board oversight as a component. It would seem like the more conservative, “safer” approach is to build that board oversight into the process in the first instance – recognizing the inherent difficulty in charging a subordinate with approval responsibility for outside-the-norm expenses. That said, I would be very interested in hearing others’ views on this if anyone is willing to share theirs.
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:
– Study: Board Oversight of Sustainability
– Board Committee Structures Logically Circumstances-Driven
– Climate Change Disclosure: Heads I Win, Tails You Lose?
– Hut, Hut, Hike! First Fantex IPO in NFL Player
– Insider Trading: Big “Downstream Tippee” Case Might Change Standard
The results of this recent director survey, Conflicts in the Boardroom, caught my eye – primarily because it’s an unusual survey topic but an inevitable occurrence for most boards at some point regardless of size, structure or internal cohesion. Given that these conflicts/disputes have the potential to significantly impact the board’s day-to-day functionality as well as overall oversight effectiveness, it’s worth our understanding how directors most frequently encounter conflicts, their reactions, and what they want in the way of skills training to more effectively manage these situations.
Key findings include:
– Almost 30% of respondents had experience with a boardroom dispute affecting the company’s survival. Short of that, commonly cited impacts include:
Wasting management time
Distracting from core business priorities
Reducing trust among board members
Affecting the functioning of the board
Affecting the efficiency of the organization
– Most common subjects of board disputes were, in descending order of frequency: 1) financial, structural, or procedural workings of the organization; 2) personal behavior and attitudes of directors; 3) strategy development, including M&A
– Most difficult factors in resolving board disputes were issues related to competing factions on the board—“handling the emotions of those involved and separating personal from business interest”
– While about 48% of respondents attempt to mediate board disputes, 34% admit to frequently being an active party in the dispute – and 25% frequently take a side of an active party.
– Directors are much more confident that they can resolve an internal board dispute than an external dispute involving the board and external stakeholders.
– Disputes are most commonly resolved through internal negotiation (61%) or internal mediation (25%). Boards are very reluctant to resort to litigation to resolve disputes.
– Over 67% of respondents reported that they have encountered unresolved issues. 24% of small company respondents reported that issues are frequently not resolved – whereas only 6% of medium company, and about 16% of large company, respondents reported frequently unresolved issues.
– Directors are extremely interested in receiving training for dealing with personal factors: 75% described training in the “ability to deal with different personalities” as very useful.
– A gender difference emerged regarding the kinds of skills desired: women are far more interested in receiving training in negotiation skills; men are more interested in training on how to deal with different personalities.
Toolkit for Resolving Boardroom Conflicts to the Rescue!
The Global Corporate Governance Forum publishes this free toolkit offering practical guidance on how to prevent and resolve boardroom conflicts/disputes (both internal & external) short of litigation. The toolkit addresses (1) the rationale for applying ADR-like processes to these sorts of conflicts, (2) implementation/use of dispute resolution mechanisms and services, and (3) associated necessary skill sets and training for directors to effectively manage these types of disputes.
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:
– Auditor Engagement Letters: No Company Intervention in Auditor-Directed Work
– PCAOB Roundtable: Mixed Views of Proposed Changes to Auditor’s Report
– Perceived Board Effectiveness Linked to How Board Allocates its Time
– FINRA: Pre-IPO Selling Procedures Need to Be Adequately Supervised
Recently, the SEC announced the payment of a $400,000 award to a whistleblower that went to the SEC to report a fraud after the subject company failed to address the whistleblower’s concerns. In the announcement, the SEC stated that “[t]he whistleblower had tried on several occasions and through several mechanisms to have the matter addressed internally at the company.” When it became clear to the whistleblower that the company would not address the concerns raised, the next stop was the SEC. The SEC’s announcement did not provide any details regarding the nature of the problem or the circumstances of the whistleblower’s complaint.
It is somewhat hard to believe that this type of situation still arises with all of the procedures set up in the post-Sarbanes-Oxley era to avoid the problem of a whistleblower not being heard by the appropriate people and necessary action being taken by the company. In retrospect, the company might have been wise to take the whistleblower’s concerns more seriously – if they had, the chances of an SEC enforcement action might have been more remote.
NIRI’s New Earnings Call Survey
In this Davis Polk blog, Ning Chiu discusses the highlights from a recent NIRI survey concerning earnings call practices. The full survey results are available only to NIRI members, but the highlights indicate that earnings calls are widely embraced by companies and mostly done on a quarterly basis, with three-quarters of the respondents indicating that the calls take place the same day the company issues its earnings release. The majority of companies that were surveyed held calls that lasted between 46 and 60 minutes. In terms of announcing the calls, practices vary, with 25% of the respondents indicating that they announce the call as early as a month in advance, while about 33% announce the call two to three weeks in advance, and another quarter announce only one to two weeks before the call. The most popular day for earnings calls is Thursday, with almost half of the respondents indicating that they hold the calls during market hours. Not surprisingly, most of the companies responding to the NIRI survey (80%) did not use other media (i.e., Twitter) during the call.
Tough Love at Our Pair of Conferences
Have you ever wanted to throw a panelist off of a panel? I suspect the thought may have crossed the minds of many who have seen me on a panel in the past. At our just-announced plenary session – “Top Compensation Consultants: Survivor Edition” – you will have plenty of opportunity to jettison panelists as the panel goes on!
While the SEC grapples with its disclosure effectiveness efforts, FASB is moving forward with its accounting simplification efforts. Last month, FASB issued a pair of proposed ASUs as part of its Simplification Initiative, which is an effort on the part of the FASB to try to increase the usefulness of financial information for investors and decrease the costs and complexity for those preparing financial statements. Comments on both of the proposed ASUs are due by September 30, 2014.
In Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, the FASB proposes to eliminate the concept of “extraordinary” items from GAAP and would thus eliminate the requirement to separately present extraordinary items in the income statement and include disclosure about such items in the notes to the financial statements. As proposed, presentation and disclosure requirements would still apply to items that are either unusual or infrequently occurring.
In Simplifying the Measurement of Inventory, FASB proposes to scrap the lower of cost or market measurement standard in favor of a lower of cost and net realizable value. As a result, the proposal contemplates that preparers would no longer need to consider replacement cost and net realizable value less and appropriately normal profit margin, which, in addition to net realizable, currently constitutes “market.”
Updated Comfort Letter Guidance
Last week, the AICPA issued SAS 129, which amends the guidance in SAS 122 on comfort letters. The amendment addresses the auditor’s responsibilities when engaged to issue comfort letters to requesting parties in connection with a nonissuer entity’s financial statements included in a registration statement or other securities offerings. Through this amendment, the AICPA is seeking address unintended changes to previous practice as a result of its Clarity Project (not to be confused with the FASB Simplification Initiative). The amended comfort letter guidance is effective for comfort letters issued on or after December 15, 2014, but early implementation is encouraged.
A Season of SEC Investor Alerts: This Time, Unregistered Offerings
The SEC’s Office of Investor Education and Advocacy has been busy this summer, publishing numerous investor alerts on a wide variety of topics. Yesterday, the office turned to unregistered offerings, publishing “10 Red Flags That an Unregistered Offering May be a Scam.” When Rule 506(c) of Regulation D was adopted pursuant to Title II of the JOBS Act, many feared that the rule would facilitate scammers trying to use the lifting of the ban on general solicitation as a way to reach more potential victims. This new investor alert is directed at educating investors about any sort of scams involving private placements and unregistered offerings, not just those involving a general solicitation.
Alas, the long, slow plodding implementation of the Dodd-Frank Act can make us sometimes forget about the legislation that was implemented by the SEC in relatively short order − the Sarbanes-Oxley Act of 2002, and, in particular, the internal control provisions of SOX. The SEC’s Division of Enforcement sent us a SOX reminder last week when the SEC announced partially settled administrative proceedings against the CEO and former CFO of a company for violating the SOX internal control and certification provisions. The SEC alleges that the CEO and former CFO represented in a management’s report on internal controls that the CEO participated in management’s assessment of the company’s internal controls, when he didn’t actually participate in the evaluation. Moreover, the CEO and former CFO were alleged to have each certified that they had disclosed all significant deficiencies in internal controls to the outside auditors, when they allegedly misled the auditors about their controls by withholding from the auditors information about inadequate inventory controls and improper accounting practices. It is not too often in the years since SOX was enacted that we see these sort of standalone internal control/certifications cases, often times the charges on these points are a sideshow to a much bigger case about and accounting failure.
The Dark Side of Social Media
The SEC’s Office of Investor Education and Advocacy recently published an Investor Alert to warn investors that promoters may use social media channels to spread false and misleading information about stock, mostly penny stocks. This of course is nothing new, given that the “pump and dump” is a tried and true market manipulation method that sleazy promoters love to utilize. The difference with social media is the ability to reach larger numbers of people with minimum effort and at a relatively low cost. The alert provides tips as to how to spot the red flags of a social media based investment fraud, but I have my own tip that I always tell my kids: “Just because it is on the internet doesn’t mean it is true.”
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:
– Study Reveals Board & C-Suite Diversity Stats & Strategies
– Conflict Minerals Survey: Many Companies Unprepared
– Notes: PCAOB’s Meeting on Auditor’s Reporting Model
– Europe: Mandatory Auditor Rotation Moves One Step Closer
– SEC Whistleblower Office Makes Additional Award, Denies Others
First off, I am not changing the focus of this blog to meat and meat by-products, although that would be a pretty interesting blog come to think of it.
Earlier this week, the U.S. Court of Appeals for the District of Columbia Circuit issued an en banc opinion in the appeal of American Meat Institute v. U.S. Department of Agriculture, upholding a Department of Agriculture rule requiring “country of origin” labeling for meat products. The outcome of this case may give the SEC some hope that the Court will reverse the three-judge panel’s holding that the Dodd-Frank Act conflict minerals disclosure rules violate the First Amendment in National Association of Manufacturers, et al., v. Securities and Exchange Commission. This is because a central issue with regard to the standard for review in the National Association of Manufacturers case was also at issue in American Meat Institute.
In American Meat Institute, the en banc court reheard the case in order to interpret a 1985 Supreme Court case, Zauderer v. Office of Disciplinary Counsel, on the issue of compelled commercial speech. The Court considered whether the government can only require disclosures when its aim is to prevent deception, or whether it has broader authority that would cover other types of speech. In Zauderer, the Supreme Court held that rational basis review applies to certain disclosures of “purely factual and uncontroversial information,” but the DC Circuit had previously limited Zauderer to situations where disclosure requirements are “reasonably related to the State’s interest in preventing deception of consumers.” The opinion in American Meat Institute took a broader interpretation, indicating that Zauderer actually extends beyond situations involving deception, so as to encompass the meat labeling disclosures that were at issue in that case.
In National Association of Manufacturers, the three-judge panel found that the rule violates the prohibition against compelled speech. The panel held that “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of freedom of speech under the First Amendment.” This sort of disclosure, the panel reasoned, was similar to requiring issuers to “disclose the labor conditions of their factories abroad or the political ideologies of their board members” which would be “obviously repugnant to the First Amendment” and should not face a relaxed standard for review just because Congress used the “securities” label. Given the revisiting of the DC Circuit’s interpretation of Zauderer in the American Meat Institute opinion, that outcome now could change, although there are certainly distinctions between the two cases. Now, it just remains to be seen what will happen to the SEC’s request for a rehearing of National Association of Manufacturers en banc by the DC Circuit.
More on Cybersecurity: PwC and IRRC Report on Opaque Disclosures
A report released this week by PwC and the Investor Responsibility Research Center Institute indicates that while companies must disclose significant cyber risks, “those disclosures rarely provide differentiated or actionable information.” The report goes on to examine key cybersecurity threats to corporations and provides information to investors for the purpose of evaluating investment risk, business mitigation strategies, and the quality of corporate board oversight.
Our August Eminders is Posted!
We have posted the August issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
There has certainly been no shortage of attention paid to cybersecurity issues over the past couple of years, and one thorny issue that has plagued lawmakers and others is how to you compel companies to improve their cybersecurity efforts when there is no direct regulatory authority to do so. As is often the case, the SEC comes to mind, because it is the one agency that has some regulatory authority over large companies across all industries. Unfortunately, the SEC largely only regulates the disclosure by these companies (and, indirectly, through oversight of the stock exchanges, corporate governance standards), making it difficult to use the SEC’s powers to compel business decisions with respect to information technology resources. As we all recall, the Staff’s cybersecurity disclosure guidance was one effort in this regard, and as Broc recently noted, enforcement cases may be another tool. One tried-and-true tool is, of course, the bully pulpit, and Commissioner Luis Aguilar delivered a speech back in June expressing his views on what boards should do to ensure that their companies are addressing cybersecurity risk. In Commissioner Aguilar’s view, cybersecurity risk must be considered as part of a board’s overall risk oversight responsibilities. Commissioner Aguilar strongly recommended that companies consider the Framework for Improving Critical Infrastructure Cybersecurity, released by the National Institute of Standards and Technology in February 2014, which is intended to provide companies with a set of industry standards and best practices for managing their cybersecurity risks. Given that some have suggested the Framework will become a baseline for best practices by companies, Commissioner Aguilar expressed his view that boards should work with management to assess their policies against the guidelines in the Framework. While the speech represented just the views of Commissioner Aguilar and not the Commission as a whole, it would certainly appear that the Framework is something that companies should review and carefully consider now, rather than after something bad happens to their information systems.
Tune in on September 16th for our webcast – Cybersecurity: Working the Calm Before the Storm – to find out what you should be doing now to address cybersecurity risks…
More on Implementing COSO 2013
Implementing the new COSO standard continues to be a hot topic, and Edith Orenstein recently recounted in FEI Daily’s Financial Reporting Column a program in which three financial executives described their implementation efforts to date. One of the executive described the process as “evolution, not revolution,” and they all provided some practical tips on implementing the new standard. For more background on the new COSO standard and the steps you need to take to implement the standard, take a look at the May-June 2014 issue of The Corporate Counsel.
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:
– SEC Warns On Incentivizing Employees to Only Whistleblow Internally
– JOBS Act Related Bills Move Forward
– Reg 506(b) Offerings Continue to Dominate Regulation D Practice
– “Does Your Board Have a Duty of Imagination?” Egads…
Yesterday, the U.S, Chamber of Commerce’s Center for Capital Markets Competitiveness released a set of recommendations for the SEC as the agency considers how to make disclosure more effective. The report contains both near-term and long-term recommendations for improvement, and among the near-term recommendations are suggestions to address identified reporting requirements that are obsolete or duplicative of other disclosures (e.g., Item 101 of S-K disclosure of acquisitions, financial disclosure by geographic region, disclosure of where an investor can get copies of filings). Longer-term improvements suggested by the Center include addressing the problem of duplication among SEC filings, modernizing the presentation and delivery of public company reports, and reforming disclosures for CD&A and MD&A. No doubt we will see other reports along these lines as various groups attempt to provide the SEC with input on where to take its ongoing disclosure effectiveness project.
Why is Disclosure Reform So Hard?
The report from the Center for Capital Markets Competitiveness cites a number of the Commission’s prior efforts toward reforming disclosure, many of which did not yield much in the way of tangible results (remember the 21st Century Disclosure Project?). In fact, during my time at the Commission, I can’t think of any time where disclosure reform wasn’t somewhere on the agenda. Unfortunately for those who have been interested in accomplishing change in this area, other agenda items tend to crowd out the disclosure reform topic (e.g., the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act), and disclosure reform is usually easy to push to the back burner because no one will squawk when it ends up there. And that leads to yet another problem, which is that there is no one unified voice calling for less or more effective disclosure. Many in the corporate community certainly think that more effective disclosure would be nice to have, while investor groups will sometimes express the view that more disclosure is better. As a result, other than individuals within the Commission who have been interested in this topic, there is no one force pushing forward the efforts. Lastly, a disclosure effectiveness effort is swimming upstream against a current of ever-increasing disclosure about random things that have no relevance whatsoever to what investors want to know (e.g., conflict minerals, Iran sanctions, resource extraction issuer payments), which makes it difficult to focus on real change. Hopefully, this time is different.
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:
– Insider Trading: 2nd Circuit Forces Tipper’s Disgorgement Even When Tippee Had No Direct Economic Benefit
– SEC Grants More Rule 506 Bad Actor Waivers
– Financials: FASB Proposes Decision Process for Determining Notes
– Audit Committee Members’ Failure to Respond to Red Flags Establishes Scienter
