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SEC Recommends Comprehensive Approach to Reg S-K Disclosure Review

On December 20, the SEC released its expected staff report to Congress on public company disclosure elicited by Regulation S-K, which SEC Chair Mary Jo White indicated would serve as a "framework for disclosure reform." The study was required by the JOBS Act.

The staff noted four overall principles to guide the review. First, revisions "should emphasize a principles-based approach" supplemented by rules and guidance. Second, there should be a review of the current scaled disclosure requirements particularly as they relate to emerging growth companies. Third, methods of delivery and presentation of the disclosure should be reviewed; and fourth, the review should strive to "improve the readability and navigability" of disclosure and avoid redundancy.

Specific areas in Reg S-K identified for further review (discussed on pages 99 - 104) include:

• Potential consolidation into one requirement of risk-related disclosures such as risk factors, legal proceedings and quantitative and qualitative information about risk and risk management
• Continued relevance of business and property description requirements in light of changes that have occurred in the way businesses operate
• Ensuring corporate governance disclosure requirements elicit information that is material to investors and avoids boilerplate disclosure
• Executive compensation disclosure, which the report notes is characterized by both companies and practitioners as "lengthy" and "technical"

The staff recommends the SEC undertake a comprehensive review and update of the disclosure rules which will include the review and updating of substantive requirements as well as presentation and delivery issues. This recommendation was made despite the fact that the approach would entail more staff time and resources than a targeted, topic-by-topic approach.

California Expands Whistleblower Protections

The California legislature has passed new laws (here, here and here) effective January 1, 2014 that expand employee whistleblower protections. Under the new laws:

• Employers and others acting on their behalf are prohibited from retaliating against employees who report suspected illegal conduct internally, as well as externally to authorities
• Employers and others acting on their behalf are prohibited from taking action against an employee based on the belief that the employee has disclosed or may disclose suspected illegal activity
• Whistleblower protections also cover employees whose job duties entail disclosing suspected illegal activity (e.g., compliance officers)

Potential consequences for employers violating the law include civil penalties of up to $10,000 per violation. See also this memo from Proskauer on responses to the new laws.

New York Overhauls Non-Profit Corporation Law

Governor Cuomo signed the New York Non-Profit Revitalization Act of 2013 the week before Christmas, marking the first major overhaul of New York's Not-For-Profit Corporation Law in 40 years. Governance-related changes for covered companies include:

• Tightens related-party transaction rules
• Requires every company to have a conflict of interest policy
• Requires every company with annual revenue in excess of $1 million and twenty or more employees to have a whistleblower policy
• Subjects directors, officers, key employees or agents of companies to personal jurisdiction of the NY Supreme Court
• Prohibits company employees, including the CEO, from serving as the chair of the board or holding any other title with similar responsibilities

The Act goes into effect July 1, 2014. A summary of the Act is included here. The Society is a New York Not-for-Profit corporation.

"Confidential Voting" Proposals Seek to Limit Companies from Receiving and Using "Running Tallies"

As we have reported, the change in Broadridge's policy on releasing interim vote results to investors who use exempt solicitations has raised the ire of some investors. While we continue to work on an industry wide solution, some investors have filed proposals on this issue. Unfortunately they are titled "confidential voting," reminiscent of proposals popular in the late 1980's and 1990's. The new iteration of proposals are not what many would expect "confidential voting" proposals to be; rather, they seek to prohibit companies from receiving interim shareholder voting results and using that information to solicit votes - i.e., "to tailor last-minute targeted campaigns and turn results of ballots in the direction they want."

According to this article, activist investors have filed or plan to file confidential voting proposals at a number of companies (including Verizon, Intel, Home Depot and Whole Foods) for the upcoming proxy season. One such proposal filed in 2013 at CenturyLink by the Association of U.S. West Retirees, which the activists indicate serves as a model for the 2014 proposals, received 42% shareholder support. We believe the support level is largely due to the title and investor and proxy advisory firm policies that would support confidential voting in general.

Glass Lewis Releases 2014 Proxy Voting Guidelines

On December 13, Glass Lewis released (to its subscribers) its updated 2014 proxy voting guidelines for the US, Canada, the UK, Asia and certain shareholder proposals. According to the release and this Towers Watson memo, U.S. updates address:

• Compensation committee member and compensation consultant independence
• Shareholder initiatives regarding executive hedging and pledging
• Majority-approved shareholder proposals
• Adoption of short-term (one year or less) poison pills

Canadian updates address Glass Lewis's proprietary pay-for-performance model to evaluate the top five executives for purposes of compensation committee effectiveness and say-on-pay proposal recommendations.

Investor Concerns Trigger Reduction of Disney CEO's Compensation

In acknowledgment of pay-for-performance concerns expressed by the company's investors and the 2012 say-on-pay vote with 42% of shareholders expressing opposition to the company's executive compensation, Disney CEO's compensation was reduced by approximately 15% in 2013 compared to 2012, according to this article. Also notable is the appointment of Twitter co-founder Jack Dorsey to Disney's board of directors to fill the vacancy that will be left by a director who is stepping down after 15 years of service in accordance with the company's Board Tenure Policy included in its Corporate Governance Guidelines.

Apple Files Preliminary Proxy

The Apple preliminary proxy was filed last week and has a few items of note:

• Its explanation of CEO compensation and the outreach done by the Company after a 61% favorable say on pay vote last year, including the description of its Compensation Committee chair meeting with investors.
• There are several interesting proposals, including: proxy access from John Chevedden/ James McRitchie which was denied no action; another from John Harrington that seeks a Board Committee on Human Rights; one from Carl Icahn for a commitment to a $50 billion stock repurchase; and one from The National Center for Public Policy Research, a conservative think tank, seeking a report on Apple's membership in, and payments to, trade associations that educate or promote sustainability practices, which states: "Some trade associations and business organizations have expanded beyond the promotion of traditional business goals and are lobbying business executives to pursue objectives with primarily social benefits. This may affect Company profitability and shareholder value."
• The company conditions its equity awards on clawbacks or recoupment under the Dodd-Frank Act.

Recent No-Action Letters

AT&T was granted no action relief on a proposal seeking corporate transparency:

So that shareholders might rightfully constitute an informal and effective electorate, be it resolved that the proxy materials in respect of Company proposals for stockholder approval include along with its own recommendations, as is now being done in shareholder proposals, the bona fide and material countervailing opinions, arguments and recommendations available to and considered the Board of Directors in determining its recommendations to the company's shareholders.

The Company sought exclusion under Rules 14a-8(i)(1), (2), (3), (7), (8), and (10); the staff granted relief under 14a-8(i)(7) and did not reach the other bases.

Morgan Stanley was granted no action relief on a separation of Chair/CEO proposal under 14a-8(f) where the proponent did not establish proof of ownership of the requisite shares for a year as of the date the proposal was submitted.

Norfolk Southern was denied no action on a John Chevedden proposal for an independent Board Chair. The company sought to exclude the proposal under 14a-8(i)(3) claiming it was materially false and misleading.

Peppercorns: Faruqi Disclosure Only Settlement Approved by Chancellor Strine in Talbots Shareholders Litigation 

On December 16, Chancellor Strine approved a $237,000 settlement in In re Talbots Shareholders Litigation, in which a tender offer of Talbots was challenged under Revlon, but settled after discovery. In an oral ruling, Strine made it clear that he believed this case should not have been brought, but felt compelled to approve it nevertheless. He did so, on what he called the "Chancellor Allen peppercorn theory" under which "basically any peppercorn would justify the release" of claims. Instead of approving it, he added: "if it were a perfect world, this case would have simply been graciously withdrawn by all the plaintiffs' lawyers everywhere and said, 'Our bad. And our apologies to the directors.'"  

Plaintiffs' lawyers in these circumstances are not insurance policies, to get paid for 

providing . . . reassurance to voting or tendering stockholders that what the board of directors is doing is fair and reasonable and in their financial best interests. The premise of this lawsuit was that this was a stinky deal that was the result of a flawed market process by the Talbots board. The result of the plaintiffs' own investigation is that their own theory of the case was refuted by the facts. It's not true, and most of what they got in terms of financial metrics, the bulk of it confirms the fairness of the price that was paid. 

Strine also took issue with the assumption that disclosure only cases start at $400,000-500,000 and then get discounted from there. Rather he said, that number would apply where a settlement resulted in material disclosures, which was not the case here: "I cannot get anywhere close to finding that these things are a material disclosure. Do they provide a fuller picture? Are they interesting to junkies of financial analysis? Sure. And on the peppercorn theory, I give them credit." (Thanks to Kevin Shannon of Potter Anderson & Corroon LLP and Bill Lafferty of Morris, Nichols, Arsht & Tunnell LLP, for providing a copy of the transcript and for participating in the Society's recent Delaware Law Issues Update).

Increased Competition Among Proxy Advisors Could Reduce Favorable Recommendations for Management

This newly released academic paper, "Outsourcing Corporate Governance: Conflicts of Interest and Competition in the Proxy Advisory Industry," by Tao Li of the University of Warwick - Warwick Business School, addresses proxy advisors' influence on voting results, and the adverse implications of conflicts of interest in the proxy advisory industry. The paper suggests that the entry of a new advisory firm would reduce favorable recommendations for management proposals by ISS, given its conflicts of interest in serving both investors and corporations. The paper attempts to show empirically that increased competition from Glass Lewis' entry into the market has "reduced ISS's favoritism to corporate managers." The paper finds that the first year Glass Lewis began to cover a company, "ISS's average "For" recommendations for management proposals dropped by 1.9-2.3%." Explaining further, the author states:

Heightened competition is found to have reduced favorable recommendations for management proposals by ISS, the incumbent advisor widely believed to suffer from conficts of interest arising from serving both shareholders and corporate issuers. This stands in sharp contrast to the role competition plays among credit ratings agencies. In the buyer-pay model adopted by proxy advisory firms, institutional investors now have an outside option (a competitor's reports) generated by competition (see Horner, 2002). The existence of a competitor, especially when it is perceived as less conflicted, can discipline the incumbent advisor. 

While acknowledging the need for further research to account for other potential influencing factors, the author notes the paper's contribution to the current policy debate on the regulation of proxy advisors.

Society Joins in Submission of Comment Letter on Proxy Advisory Firm Best Practices

On December 20, the Shareholder Communications Coalition, consisting of the Society, Business Roundtable and NIRI, submitted comments on the draft Best Practice Principles for proxy advisory firms and other "Governance Research Providers" in Europe and globally. The comments were submitted in response to a public consultation following a European Securities Markets Authority (ESMA) recommendation that the proxy advisory industry should develop a EU code of conduct focused on managing conflicts of interest and fostering transparency to ensure accuracy and reliability of the proxy advisory firms' advice. The Coalition's comments focused on the need for a comprehensive regulatory scheme governing proxy advisory firms based on their significant influence and unique role in the proxy voting process.

The draft Principles don't cover investor oversight responsibilities for the proxy advisory firms they retain. However, the Consultation sought input on that point, and the Coalition noted the need to address it - whether in the draft Principles or elsewhere. In that regard, the UK's Financial Reporting Council, in its recently released annual review of the UK Stewardship Code, and the Stewardship Code itself (which has nearly 300 institutional investor signatories), contemplate investors' responsibility for proper oversight of proxy advisors they retain - as part of their stewardship responsibilities. It's not clear, however, that institutional investors share that perspective. 

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