Register now for the Society's 68th National Conference centered around the theme of Resilience from June 25-28, 2014 at the Westin Copley Place Hotel in Boston, MA. Rooms at the Westin are sold out, but an alternate list of hotels is here. This year's conference will feature break-out sessions tracking skills-based, Large-Cap, Small & Mid-Cap, Private and Not-for-Profit Company and Specialty topics.

Society Securities Law Committee Meets with Corporation Finance Staff    

On Wednesday, members of the Society's Securities Law Committee, chaired by Bob Lamm, met with staff from the SEC's Division of Corporation Finance, as it does annually.

The agenda was lengthy, including status of pending rulemaking, proxy advisory firm issues, shareholder proposals - including the real party in interest issue, proxy plumbing, cybersecurity risk disclosure, social media disclosure, disclosure effectiveness, and others. If you are a member of the SLC but couldn't attend, please check the Committee page on Society Connect for a summary thanks to Ning Chiu of Davis Polk.

House Bills Introduced to Make FASB Independent and on Corporate Inversions 

On May 20, H.R. 4678 was introduced by Rep. James Renacci (R-OH) and assigned to the House Oversight and Government Reform and the House Ways and Means Committees with bipartisan support. The bill would establish FASB "as an independent establishment to develop Federal financial accounting concepts and standards and provide guidance to users of Federal financial information, and for other purposes." 

Also on May 20, H.R. 4679 was introduced by Rep. Sander Levin (D-MI) "to amend the Internal Revenue Code of 1986 to modify the rules relating to inverted corporations." The bill was assigned to the House Ways and Means Committee.  

And, for financial institutions and internet and broadcast providers, S. 2329, the Hezbollah International Financing Prevention Act of 2014 passed the Senate this week. The bill seeks to prevent Hezbollah from gaining access to international financial institutions by prohibiting foreign institutions from maintaining correspondent accounts or payable-through accounts in the U.S. if the accounts facilitate the activities of Hezbollah which are blocked by the International Emergency Economic Powers Act. The bill also provides that the President submit a list of "all satellite, broadcast, Internet, or other providers that knowingly transmit or otherwise broadcast the content of al-Manar TV" including who has been sanctioned, who has not, and if not, why. 

Chair White Speeches this Week Note "Too Big to Jail" Controversy, Disclosure Effectiveness, and More 

Chair White gave two speeches this week. The first, to the NYC Bar Association's Third Annual White Collar Crime Institute on May 19, titled Three Key Pressure Points in the Current Enforcement Environment highlighted the current enforcement program. The three pressure points she described as: which regulators are involved, which defendants are charged, and what is the appropriate resolution. With respect to individual liability, she noted that Section 20(b) was being used more frequently. And, she tried to dispel the myth that corporations are not being charged criminally: 

... on the controversy du jour related to criminal charges against corporations - the "too big to jail" - or more accurately - the "too big to indict and convict" debate...At the SEC, of course, as you know from our cases, no firm is too big to charge...But is any company or financial institution too big to indict criminally? The answer is also no. We criminally charged financial institutions and other companies several times when I was U.S. Attorney - Daiwa Bank, Republic Securities, and Bankers Trust, as well as Con Edison. And other prosecutors have done the same...So, no - no corporate entity is too big or too complex to indict. (footnotes omitted). 

In the second speech, on May 20, to the Financial Accounting Foundation Trustees Dinner, she covered IRFS, Enforcement, Rulemaking and Disclosure Effectiveness. On the latter, she highlighted the audit committee report as something that needs a re-examination: 

Although it is not part of the Disclosure Effectiveness Project, I also have asked the staff to examine the existing audit committee report to make it more useful to investors. The audit committee plays a critical role in financial reporting oversight, and investors have expressed interest in increased transparency into the audit committee's activities. The audit committee reporting requirements have not changed significantly in a number of years and I think it is time to take a look at whether improvements can be made.

Commissioner Piwowar Comments on Cost Benefit Analysis 

In remarks to the First Annual Conference on the Regulation of Financial Markets, on May 16, Commissioner Michael S. Piwowar, spoke on the importance of the Division of Economic and Risk Analysis as well as the need for a review of the equity market structure.

NYSE Withdraws Proposal to Relax Director Independence Requirements in Spin-off Context

Weill Gotshal is reporting that the New York Stock Exchange is no longer moving forward with a proposed rule change "to clarify that in certain limited circumstances a director may be deemed independent of a company that has been the subject of a spin-off transaction regardless of the fact that such director or his [or her] employer had a relationship with the former parent of such spun-off company." Weill doesn't expect any imminent changes to the current NYSE rules, and advises that "A director of a spun-off company listed on the NYSE could not be considered independent until at least three years post-spin if he or she was an executive officer or employee of the former parent company at the time of the spin-off."

Bloomberg and Schapiro Say "Give investors access to all the information they need"

In a Financial Times op-ed (subscription required) this week, former NYC Mayor Michael Bloomberg and former SEC Chairman Mary Schapiro explain the need for non-financial reporting, and particularly on sustainability issues. Bloomberg and Schapiro, as the Chair and Vice Chair of SASB, note that the organization is creating "industry-specific measurement and reporting standards on non-financial data" that "are designed for use" in a company's MD&A section of SEC filings. The op-ed is notable, and attempts to clarify the conundrum created by the use of the word "materiality" to those already charged with (and fulfilling) the disclosure obligations.

To be clear: these standards are not an attempt to change any laws about what businesses must disclose. It remains up to each board to decide what information is material to their investors. Rather, our aim is to make disclosure more cost-effective for companies and more useful to their owners.

Study Finds Company Execs Spend "Considerable" Time Managing Shareholders, Prefer Long Term Shareholders 

Stanford's Rock Center for Corporate Governance and Business School partnered with NIRI on a recently released study: 2014 Study on How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making. The authors  surveyed 138 investor relations professionals at North American companies about "the investment horizon and expectations of their shareholder base and the impact that these have on corporate decision-making."  Findings include:

• Companies believe that short-term investors distract from strategic decisions
• The ideal shareholder base consists of long-term investors - still "long-term" is not that long
• Companies want to increase ownership of management, employees and pension funds
• Companies don't want hedge fund or private equity investors
• Companies believe that their stock price would be higher if they had their ideal shareholder base
• Senior leaders spend considerable time managing their shareholder base
• Companies rely on road shows and investor conferences - fewer companies actively reach out to potential investors.

Tapestry Networks Lead Director/General Counsel Event Discusses Who Should Hold Corporate Secretary Title

Thanks to Broc Romanek for alerting us to this Tapestry Networks Viewpoints (sorry we missed when it came out last Fall) that covers an issue that is near and dear to the Society's heart. The viewpoints, titled The general counsel's relationship with the lead director and the board, also touches very briefly on whether a General Counsel should take the Corporate Secretary title. The General Counsels present at the Tapestry event seem to have been split on the issue, with the publication quoting one GC advocating for holding both titles: "without that role, there's a disconnect between the general counsel and the board." On the other hand, a "GC who is not corporate secretary said that the corporate secretary role 'is very substantive and demanding if done properly. When someone else handles those responsibilities, it frees me up to be a better member of management.'"

Meeting Results 

Select annual meeting results are below.

Goldman Sachs and JPMorgan Chase recently held their meetings. Goldman directors received an average of 97% support, say on pay received 83% support (despite Glass Lewis opposition), and a proposal to establish proxy access received only 3% of votes cast. JPMorgan's 8-K is not out as of press time, but the press is reporting that its say-on-pay vote received approval of 78% of votes cast (Glass Lewis also opposed).

In a vote that received some press coverage, Chipotle, which has co-CEOs, saw its say on pay vote receive only 23% support. The three directors up for election received an average of 98% support, though none of the three was on the compensation committee. The combined 2013 total pay for the co-CEOs as disclosed in the summary compensation table was just under $50 million. CTW Investment Group filed a number of Forms PX14A6G (including at least a couple that repeated CTW tweets) urging shareholders to oppose the advisory resolution. ISS also opposed the say-on-pay resolution.

Allstate faced shareholder proposals seeking a report on lobbying expenditures and a report on political expenditures; both received 9% of votes cast. A shareholder proposal seeking a policy on retention of stock by senior executives received 27% of votes cast.

Dean Foods also faced a proposal requesting an annual report on political expenditures; it received 41%. A proposal asking the Board to adopt a policy limiting the acceleration of equity awards of named executive officers pursuant to a change in control passed with 60% of votes cast voting in favor. A stockholder proposal related to water stewardship in the agricultural supply chain received only 4% of votes cast.

Kinder Morgan faced three environmental related proposals. A proposal requesting the company prepare a report on its response to climate change received 25% of votes cast; a request for report on methane emissions and pipeline maintenance received 16% and a request for an annual sustainability report received 22%.

A proposal at Western Union to establish a Board Committee on human rights received 7% of votes cast.

Google received a number of shareholder proposals. A proposal requesting that all outstanding stock have one-vote per share received 24% of votes cast. A proposal requesting an annual lobbying report received 8% support; a proposal that the company adopt a majority vote standard for the election of directors received 24% and a proposal requesting that the company establish a policy for an independent chairman of the board received 13% of votes cast. A proposal that the company adopt a set of principles to address the impact of Google's tax strategies on society, with particular focus on Google's employees, customers and suppliers received only 1% of votes cast.

Supplemental Filings Are Increasingly Stronger in Tone

Informatica "strongly disagrees" with ISS's say on pay negative recommendation in what appears to be a disconnect between its prior years' reports and recommendations. Informatica claims that ISS has been in favor of pay for the prior 3 years where the company has changed little to its program, and in fact made the pay for performance connection stronger. Moreover, TSR in 2013 was negative 18 but positive for 2014. Thus the company says the recommendation is "unwarranted" and "inconsistent".

BioMed Realty Trust challenges ISS's pay for performance analysis for not taking into account realized pay:

ISS' analysis is inherently flawed and fails to properly account for our CEO's total realized compensation, which we believe is the appropriate measure of the link between pay and total stockholder return (TSR) performance . . . When taking into consideration total realized compensation . . . while the company's TSR decreased 1.6% over 2013 and was approximately in line with our peer group's TSR decline of 1.4% over the same period, our CEO's total 2013 realized compensation decreased 7.3% year-over-year and total 2013 realized compensation for our other executive officers decreased 11.6% year-over-year. . . .

BioMed also explains the rigors of its performance measures and takes issue with the ISS peer group for not being "right sized."

OraSure Technologies, Inc. files interesting, pointed, materials on the issue of time-based versus performance-based vesting for equity awards. The company stands its ground in support of the Compensation Committee's decision to continue to award time-based options:

Both ISS and Glass Lewis assert that our Compensation Committee's response to the failed SOP vote in 2013 was not robust enough. Each report apparently reached this conclusion, at least in part, because we did not adopt performance-based vesting for equity awards and instead elected to continue our practice of making annual time-vested equity awards, comprised of 60% stock options and 40% restricted shares.

 

Contrary to the positions of ISS and Glass Lewis, we did not ignore the comments we received from stockholders regarding performance-based equity. To the contrary, the Board and Compensation Committee highly values the input received from our stockholders regarding all issues discussed during our outreach efforts, including statements supportive of performance-based equity awards. However, after careful consideration of this input, the Board and Compensation Committee decided to continue with time-vested equity awards that consist of 60% stock options for two primary reasons.

 

First, stock option awards are already performance-based. As explained in our 2014 Proxy Statement, the exercise price of our stock options is set at the average of the high and low sales price of our common stock on the date of grant. Thus, executives will receive absolutely no value for their stock options unless the price of our stock appreciates from the value on the date of grant. Second, the Board and Compensation Committee were concerned that using performance metrics such as revenue growth or improved profitability, while appealing on the surface, may unintentionally create a disincentive for management to make certain investment or strategic decisions that would adversely affect our ability to meet the financial metrics required for vesting even though the decisions are in the long-term best interests of the Company. For these reasons, we decided not to adopt additional performance criteria at this time. However, the Board and Compensation Committee remain open to considering equity awards with performance vesting in the future as the Company's business grows and continues to mature.

 

In short, we strongly disagree with ISS and Glass Lewis that equity with performance vesting would necessarily be a better approach for OraSure. In fact, although our stockholders did suggest we should consider performance equity, their overwhelming view was that they did not want to micromanage our business and that ultimately our Board and Compensation Committee should structure the executive compensation programs in a manner believed to be in the best interests of the Company. Indeed, both ISS and Glass Lewis made similar comments when we discussed our programs with them several months ago.

US Mobility, Inc. files a supplemental proxy to correct what it calls a "complete[] mis-characteriz[ation]" by ISS, with statements in the report that are just "wrong."  The ISS statements and responses are below.

1. The company committed to relatively high guaranteed target pay opportunities to the CEO for an extended period regardless of future company performance. . .

 

Company Response: Our CEO's amended employment agreement provides that the CEO would be awarded long-term performance incentive opportunities in the form of equity or equity based compensation for the five years through 2017 (not six years as ISS mistakenly reports). These awards are irrefutably subject to performance goals established by the Board of Directors ("Board") at the time of grant...The ISS Report's conclusion that the CEO's target incentive opportunities are "regardless of future company performance" is both false and misleading. These equity awards are not and have never been "guaranteed." Achievement and payment of these awards is absolutely dependent on future performance.

 

2. Further, NEOs were granted equity under a 2011 incentive program, goals for which were modified in 2012 without sufficient disclosure of what adjustments were made...

 

Company Response: This statement, too, is flatly wrong. The NEOs added to our 2011 LTIP in 2013 were under an earlier LTIP that expired in 2012, and these NEOs were properly added to our 2011 LTIP as part of the integration of our wireless and software businesses into a single, focused unified communications business. Setting new enterprise-wide goals - which are fully disclosed in our proxy statement on page 20 - was not only appropriate but has aligned all of our senior executives to a common objective of expanding critical communication services to US and global health care customers.

 

3. Finally, the company lowered consolidated revenue goals below actual performance from the prior year, contributing to above target overall STI payouts...

 

Company Response: Our revenue has declined every year over the past decade despite our increasing margins, steady cash dividends and stock repurchases. ISS appears to have read our proxy in a complete vacuum, not understanding our business or our ongoing shift from paging services to software based critical communications. Our STIP goals every year have reflected the overall revenue decline resulting from our paging business. For the first time ISS criticizes us for having lower revenue goals, not even recognizing how we preserve and create stockholder value in a declining business and keep management highly incentivized to create that value...(emphasis added)

Staples, Inc. strongly disagrees with ISS's recommendation against say on pay and details the various misinterpretations and mischaracterizations of their plan as well as addressing the alleged lack of detail in the proxy. Staples also addresses the separation of chair-CEO proposal thus:

• "The proxy advisors fail to address any risks to stockholders associated with the disruption of Board leadership structure during this time and the possible displacement of the director that is most familiar with our day-to-day operations."
• "The Board is in the best position to evaluate who should be Chairman and how it should structure its leadership. This year, the Board has determined that the combined role of the Chairman and CEO provides for a single, clear focus for command to execute Staples' strategic initiatives and business plan."
• "An arbitrary one-size fits all approach to public company governance is not appropriate."

Similarly, Career Education Corp's materials explain misunderstandings by ISS and Glass Lewis with respect to various aspects of their compensation plans. 

And, SL Green Realty Corp makes similar complaints:

We believe that the qualitative analysis that appeared to lead to your recommendation (i) contained certain critical and material factual errors and mischaracterizations, (ii) inappropriately disregarded our superior performance and the strong alignment between our performance and our CEO's compensation as evidenced by the results of your own quantitative analysis and (iii) arbitrarily focused on a few selective aspects of our executive compensation program as opposed to considering it as a whole.

Entravision Communications Corp includes in is supplemental materials information about its stock incentive plan and a say on pay proposal (which was not included in its proxy).

Green Dot files supplemental materials to challenge ISS's changed shareholder value transfer test in connection with a recommendation against its incentive plan:

We had specifically calculated our share request to stay below the SVT% cap of 19%; however, our calculation included (but ISS' calculation did not include) the conversion into Class A common stock of all shares of our Series A Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock held by Sequoia Capital in connection with the previously announced distribution of such shares which is expected to be completed in 2014. Excluding the conversion of the preferred shares, a share request of 2.1 million is required to meet the SVT% cap of 19%. Including the conversion of the preferred shares, our 3.4 million share request meets the SVT% cap of 19%. While we disagree with the ISS's methodology in this case, if proposal no. 4 is approved by our stockholders, we expressly commit that we will NOT grant awards in excess of 2.1 million additional shares until substantially all of the Series A shares have been converted.

Green Dot also responded to the following ISS's concerns on its say on pay proposal: "large" RSU grants made to the CEO, a new employee grant to the CFO and off-cycle grants to executives to compensation for "underwater" options. With respect to the RSU grants, the company noted that the CEO had received no grants since 2011 and that the new hire grant was targeted at 50% of the median of its peers.

Kilroy Realty Corp filed an investor presentation highlighting achievements, shareholder engagement, changes to its pay plan and also notes that proxy access is not in the best interests of shareholders.

However, later in the same week Kilroy agrees to adopt proxy access.  "Under the bylaw amendment, a stockholder that has held at least 5% of the Company's shares for a three-year holding period would be eligible to nominate up to one quarter of the number of directors then serving, subject to certain procedural and disclosure requirements."

Principal Financial Group filed to add disclosure about its burn rate, overhang and dilution with respect to its stock incentive plan, even as it noted that both ISS and GL recommended in favor of the plan.  See also MoSys filing to explain its dilution and burn rate under an equity plan up for approval.

TimeWarner filed a glossy, very slick summary that it uses in its investor outreach. The summary includes a business overview, and sections on operating strategy, financial performance highlights, executive compensation measures, CEO pay, and corporate governance practices (with a non-GAAP reconciliation annexed). See also National Holdings Corp, and Spark Networks.

1st United Bancorp files a one line statement to satisfy an inquiry by ISS on director related party transactions.

Synageva BioPharma files additional information on its stock incentive plan. See also American Eagle Outfitters.

Second Circuit Reverses Dismissal of Suit on LIBOR Manipulation; Tests Efficient Market Theory of Loss Causation

Late last month, Carpenters Pension Trust Fund et al. v. Barclays PLC, et al., the Second Circuit reversed in part and affirmed in part the district court's dismissal of plaintiffs' securities fraud claim alleging the manipulation of LIBOR by Barclays. Specifically, the Second Circuit held that the District Court "erred in concluding, prior to any discovery, that plaintiffs failed to plead loss causation. Plaintiffs' allegations, among others, that the June 28, 2012 decline in Barclays' stock price resulted from the revelation of Barclays' misrepresentations of its 2007-2009 LIBOR rates and defendant Diamond's conference call misrepresentation of Barclays' borrowing costs present a plausible claim. We also hold that the District Court correctly concluded that Barclays' statements in its SEC filings relating to the company's internal control requirements were not materially false."

The Second Circuit found that the period of time between when the false statements about Barclays' borrowing costs were made, and when they were admitted 2009 to 2012, even though distant in time, were nevertheless sufficient to plead loss causation -- under an efficient market theory:

We cannot conclude, as a matter of law and without discovery, that any artificial inflation of Barclays' stock price after January 2009 was resolved by an efficient market prior to June 27, 2012. The efficient market hypothesis, premised upon the speed (efficiency) with which new information is incorporated into the price of a stock, does not tell us how long the inflationary effects of an uncorrected misrepresentation remain reflected in the price of a security. We agree with the Eleventh Circuit that, in general, "[s]o long as the falsehood remains uncorrected, it will continue to taint the total mix of available public information, and the market will continue to attribute the artificial inflation to the stock, day after day." Findwhat Investor Group v. Findwhat.com, 658 F.3d 1282, 1310 (11th Cir. 2011). In this case, whether the effects of Barclays' wilfully false LIBOR representations dissipated before June 2012 is a question of fact. 

What is the Purpose of the Corporation, Study Asks

The Aspen Institute Business and Society Program recently released a report, Unpacking Corporate Purpose: A Report on the Beliefs of Executives, Investors and Scholars, to "better understand the attitudes and beliefs of investors, corporate leaders, and scholars about the purpose of the corporation." Twenty eight actors were interviewed to explore their personal beliefs and perceptions of others beliefs. Most respondents said that they agree with the "conventional wisdom" in the U.S. context that corporations are "either legally or ethically obligated to maximize shareholder value." The authors looked at arguments made for and against shareholder primacy, as well one theme that both groups can agree on, their "contempt" for short term approaches that have negatively affected businesses.  Society Chair-Elect Doug Chia was interviewed for the report.

See also this Time article on the study.

We are starting a new feature in the Alert to highlight the discussions that take place on the Huddle, and to give those of you who don't regularly visit the Huddle an idea as to what kinds of questions are posted. This week there were several good questions, and we chose one on minutes. A member asked:

We currently reflect in our Board and Committee minutes when directors join/leave/rejoin meeting sessions, as well as officers, employees and other presenters. We always reflect all attendees at the beginning of the minutes and note that such attendees were present "for all or part of the meeting." In part because our Committees meet simultaneously, there are a lot of "comings and goings" between the sessions. We document these comings and goings as they occur during the meeting, but because of the above dynamic, it's becoming potentially distracting in the minutes. We are thinking through the pros and cons (privilege, who's in the room for certain discussions, etc.) of detailing the comings and goings of officers, non-officer employees, and third-party presenters (e.g., independent auditor). What are current best practices in this area, and what issues have any of you encountered with various approaches to documenting this dynamic in the minutes? Thanks.

Here is one of the many great answers:

I note the attendees as usual at the beginning of the minutes, and add the qualifier "attended as noted" behind anyone who was only there for a portion of the meeting. Then, I add a quick break in italic font in the minutes if someone joins or departs (e.g. "At this point Messrs. X and Y joined the meeting." I do not capture things like restroom departures unless a director is absent for a vote or substantive discussion. Usually what I am capturing is the coming and going of members of management who are present only for a defined portion of the meeting.

Don't hesitate to post your questions to the Huddle. Contact National Office staff if you need help. Staff is also available to post your question to the Huddle on your behalf without attribution.

Internal Audit and the Board 

On This Week in the Boardroom, TK Kerstetter, Chairman, NYSE Governance Services - Corporate Board Member interviews Warren Stippich, Partner & National Governance, Risk and Compliance Solutions Leader, Grant Thornton. 

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