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December 3, 2014
The Society Alert

Legislative and Regulatory News

Company News

Investor News

Society News

Academic Papers

Inside the Huddle

Articles/Postings of Interest
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Registration is open for the Society's full three-day Essentials seminar. Essentials is updated each year to provide the best and most current thinking on governance practices for both public and private companies. The seminar focuses on core responsibilities (such as Boards & Committees, Records Management & Privacy, Regulation & Disclosure), and addresses public company hot topics, shareholder activism, and other new challenges for the corporate secretary. This year we will also discuss how to promote corporate governance in your organization. 

Legislative and Regulatory News

 

Whole Foods Granted No-Action on Proxy Access Proposal
 

The SEC just granted Whole Foods its requested no-action letter in connection with a proxy access proposal submitted by James McRitchie that would have allowed shareholder groups with a 3% stake held for three years access to the company's proxy statement. The company's no-action request was based on its assertion that the proposal directly conflicts with a proxy access bylaw amendment the company plans to submit to its stockholders at its 2015 annual meeting that will permit proxy access for any shareholder (but not a group of shareholders) owning 9% or more of the company's stock for five years. SEC staff agreed - granting the requested no-action based on Rule 14a-8(i)(9).

 

Pay Ratio Disclosure Rule Moved to October 2015 on SEC's Reg Flex Agenda

 

The SEC's latest reg flex agenda defers the issuance of rules to implement the Dodd-Frank-required pay ratio disclosure from October 2014 to October 2015. Based on the proposed rule scheme (which the SEC could modify), the disclosures would be required in 2017 proxy statements assuming the rules are effective in 2015.

 

Also, last week, House Financial Services Committee Chair Jeb Hensarling and Representatives Scott Garrett and Bill Huizenga sent this letter to SEC Chair White expressing their concern about the SEC's recent comments that it was prioritizing completion of the pay ratio rule, which has no rulemaking deadline and "does nothing to address the primary causes of the recent financial crisis." They also criticized the substance and cost implications of the rule.

 

See also this Wall Street Journal op-ed addressing the rule's "excessive compliance costs on public companies with no discernible benefits to investors," and citing this recent Chamber Center for Capital Markets Competitiveness report.  

 

See also this Gibson Dunn blog

 

2014 Whistleblower Report Reveals Program Gaining Steam

 

The SEC's Office of the Whistleblower recently released its annual report to Congress on the Dodd-Frank Whistleblower Program. Highlights include:

  • Nine of a total of 14 awards authorized since program inception were granted in fiscal 2014.
  • The magnitude of the award payments in 2014 was record-breaking. In addition to the $30 million awarded to a foreign whistleblower in September (which we reported previously), awards ranged from $150,000 to $875,000. There were also several sizeable additional payments made to individuals who had received awards in previous years.
  • The agency continues to receive an increasing number of tips - 3,620 in 2014, a 20+% increase in two years.

The report also identifies these commonalities among the "successful" whistleblower reports:

  • The information provided by each award recipient was specific.
  • The alleged misconduct was relatively current or ongoing.
  • Over 40% of the individuals who have received awards were current or former company employees. An additional 20% were contractors or consultants.
  • Of the award recipients who were current or former employees, over 80% raised their concerns internally before reporting their information to the SEC.
  • A majority of the award recipients were not represented by counsel when they submitted their tip, but were represented by counsel when they applied for an award.
  • Only one of the 14 award recipients to date submitted the information anonymously.

The report also highlights the SEC's first enforcement action brought in June under the anti-retaliation provisions of the Dodd-Frank Act, which we reported on earlier this year.

 

See also this Proskauer memo discussing the report.

 

Nasdaq Proposes Staff Discretion for Rule Requiring Companies to Hold Annual Meeting

 

In contrast to the NYSE standards and rules governing other Nasdaq Rule 5000 deficiencies, Nasdaq Rule 5810(c)(1) requires companies to be delisted if they fail to hold their annual meeting as required by Rule 5620. Staff has no discretion to allow companies additional time to regain compliance.

 

As noted in this Stinson Leonard blog, Nasdaq has proposed to amend the rule to include limited staff discretion to provide companies with additional time to solicit proxies and hold their meeting. The proposed rule change describes a variety of reasons why a company may fail to timely solicit proxies and hold an annual meeting that support the proposal. Some of those are the company's failure to obtain a quorum (requiring meeting adjournment and rescheduling), misjudging the time required for the SEC's review of a proxy statement, and periodic report filing delinquencies that trigger delays in the proxy statement.

 

St. Petersburg Exchange to List Foreign Company Shares Without Consent

 

A new Cleary Gottlieb memo reports that the St. Petersburg Exchange (SPE) plans to list the shares of a number of prominent non-Russian companies - including Apple, Google, IBM, McDonalds, Johnson & Johnson and Disney, on an unsolicited and unsponsored basis - i.e., without the involvement or consent of the foreign company whose stock underlies the listing.

 

The companies won't be required to comply with Russian disclosure requirements or otherwise be subject to the Russian regulatory scheme; however, the memo suggests they may want to consider disclaiming (in their SEC filings ) any actions - including disclosures - taken by the Russian exchange in connection with these listings. The SPE is required to publish a prospectus summary in Russian at least three days before trading commences.

 

Germany Advancing Gender Quota for Large Company Boards

 

Last week, Germany's coalition government backed a 30% quota for women on the boards of the largest listed German companies according to this article from DW. Women currently occupy 19% of supervisory board seats at the top 160 listed German companies - up from 10% in 2011, but still far short of the desired 30%. In Germany's two-tiered board system, supervisory boards appoint and monitor management and are filled by investor and employee representatives.

 

The new quota is expected to be in effect in 2016. The companies subject to the new candidate requirement will be required to leave vacant board seats open until they appoint suitable women. The draft bill is scheduled to go before the cabinet this month.

 

SEC Commissioner Aguilar Addresses SEC's Efforts to Support Small Business Capital Formation

 

SEC Commissioner Aguilar's remarks at last month's Government-Business Forum on Small Business Capital Formation emphasized the importance of small businesses to the U.S. economy and - relatedly - the SEC's past and current initiatives intended to facilitate the ability of small businesses to access the capital markets. Noting the heightened and unique risks associated with small and emerging businesses, he discussed ways in which Congress and the SEC have sought to find the proper balance between enabling these businesses to cost-effectively access the capital markets and protecting investors.

 

PCAOB Board Member Shares Investor Concerns About Audit Firm Advisory Services

 

In recent remarks to PLI's Annual Directors' Institute on Corporate Governance, PCAOB board member Steve Harris shared concerns raised by investor groups about the increase in advisory and consulting services by audit firms. After putting the trend in context (e.g., advisory services represent 39% of total revenues across the major U.S. firms - compared to 36% for audit services), he discussed investors' perceived potential threats to audit quality and auditor independence, including:

  • Distraction by firms away from audit and its "core values" (e.g., "public watchdog role," "total independence")
  • Use of inappropriate performance measurements focused on bottom line profitability and revenue growth
  • Independence impairment (due to insufficient monitoring of services and permissible tax consulting work that may "cross the line")
  • Rise of internal conflicts between a firm's practice groups

After noting at the outset the PCAOB's limited authority in the area of corporate governance, Harris indicated that the PCAOB will monitor firms' actions for adverse impacts on audit quality resulting from this trend: "It is the PCAOB's role to monitor the firms' systems of quality control, including how firm leadership is managing all threats to audit quality. And, if the firms fail to manage these threats, take action to the full extent of our authority and influence." 

 

As an aside, note also that the PCAOB just posted its 2015 Budget and 2014 - 2018 Strategic Plan. Among other things, the Strategic Plan addresses the PCAOB's near-term priority to enhance its outreach to, and interaction with, audit committees on areas of common interest such as auditor independence and audit quality.

 

Senate Bill Would Give President Authority to Name NY Federal Reserve President

 

Jack Reed (D-RI) recently introduced a bill that would require the president of the Federal Reserve Bank of New York to be appointed by the President, by and with the advice and consent of the Senate. The bill has been referred to the Committee on Banking, Housing, and Urban Affairs.

 

Company News

 

Windows Open to Submit Glass Lewis & ISS Peer Group Updates 

 

Both Glass Lewis and ISS are now accepting companies' updated peer group information for the 2015 proxy season.

 

For Glass Lewis, U.S. companies in the Russell 3000 and Canadian companies in the S&P/TSX Composite Index can now submit peer group updates through Equilar's Peer Group Update Portal. The updated peer groups will be included in Equilar's Market Peer calculations, which are used in its P4P Analysis and Glass Lewis's pay-for-performance quantitative analysis. The portal is open through December 31st. Changes submitted after that date will be incorporated in Equilar's next update in July 2015. If you have questions about the process, please refer to Equilar's FAQ.  

 

For ISS, any changes to the company's self-selected peer group for purposes of benchmarking CEO compensation should be submitted via this online form by December 11th for meetings scheduled between February 1, 2015 and September 15, 2015. The peer group provided should be the peer group used for benchmarking CEO pay for the fiscal year ending prior to your 2015 annual meeting. For more information, see these FAQs.

 

Survey Shows Increasing Importance of Independent Fairness and Solvency Opinions

 

According to deal lawyers, executives and private equity practitioners, fairness and solvency opinions provided by independent experts who are engaged at an early stage of a transaction are more effective and preferred in defending boards from M&A and other transaction-related litigation. That's the principle takeaway from a new FTI Consulting report, which presents the results of a survey addressing the effectiveness of these opinions in defending boards in today's environment.

 

Key findings include:

  • Most respondents indicated that fairness and solvency opinions were frequently or occasionally used to defend boards in a wide variety of transactions.
  • More than seven times as many respondents believe that independent fairness opinions are very effective in defending board decisions in subsequent litigation than fairness opinions provided by investment banks involved in the underlying transaction.
  • Over 60% of respondents indicated that there has been an increased preference for independent fairness opinions since the 2008 financial crisis. However, a recent study of 50 large M&A transactions between 2009 and 2012 indicated that in only 9% of these cases were fairness opinions provided by an independent advisor. Conversely, 91% were provided by an investment bank that was receiving consideration for services other than the fairness opinions provided.
  • More than 85% of respondents believe that fairness and solvency opinions are more defensible if rendered by providers possessing strong industry experience.
  • 82% of respondents believe that unsupportable management forecasts underlying fairness and solvency opinions are best addressed by opinion providers that request management to adjust such forecasts. Notwithstanding that, nearly half of respondents believe that actual teams underlying fairness and solvency opinions are largely comprised of industry generalists, calling into question the board defense effectiveness of such advisors' forecast change requests.
  • 73% and 90% of respondents believe that fairness and solvency opinions, respectively, are more effective at defending boards when opinion providers are hired at an early stage in a transaction (e.g., before forecasts and deal terms are finalized).

Global Whistleblower Survey Shows Significant Retaliation Concerns Persist

 

More than 37% of employees believe senior management would either treat them less favorably or look for ways to terminate their employment if they blow the whistle, according to this new global survey of more than 2,500 middle and senior managers.

 

Other noteworthy findings including:

  • Over 13% of US respondents said they would blow the whistle if paid to do so - but almost 30% indicated that our U.S. regulatory scheme's dollar incentives wouldn't be likely to encourage whistleblowing.
  • More than 40% of respondents indicated that financial incentives could encourage false claims, and almost 20% said they could encourage secrecy within the organization.
  • 40% of respondents say their organization discourages or actively discourages whistleblowing.
  • 25% said they would go directly to the media (4%), a regulator (14%) or an external organization (7%) to report wrongdoing within their company. 25% of those working in HR would encourage employees to go direct to the media or social media.
  • 12% have been a whistleblower at some stage; 46% would consider blowing the whistle. Just over 8% of U.S. respondents said they would never consider becoming a whistleblower compared to, e.g., 37% of French respondents and 23% of German respondents.

UK Company Board Reduces Incoming CEO's Pay in Response to Shareholder Backlash

 

As noted in this release, the board of directors of a UK company reduced an incoming CEO's pay package in response to shareholder concerns. A shareholder vote on the CEO's pay was scheduled for later this month because it conflicted with the pay policy approved by the shareholders in May 2014. The incoming CEO, who wasn't obligated to join the company if the proposed pay package wasn't approved, has waived his right not to join the company.

 

CAQ/Audit Analytics Report Shows Increased Disclosure in Audit Committee Reports

 

Further to the Audit Committee Collaboration's 2013 "Call to Action" and EY's recent report on disclosure trends (which we reported on previously), this new CAQ/Audit Analytics report reflects their review and analysis of S&P Composite 1500 companies' 2014 audit committee disclosures. Disclosure topics discussed include various aspects of audit committee oversight of the auditors (e.g., audit firm selection, auditor compensation, auditor evaluation) and the audit committee's scope of duties. Although findings are broken out by S&P 500, S&P mid-cap and S&P small-cap companies, the report concludes that many companies of all sizes are disclosing more than what is required. The report also contains sample disclosures from 2014 proxy statements.

 

Investor News

 

Investor Association Releases Best Practice Principles for Hedge Funds

 

The investor-driven non-profit Alignment of Interests Association just released "best practice" investing principles intended to align the interests of investors and their hedge fund managers and "serve as a framework for continued discussion among and between members of the hedge fund industry for the long-term benefit of all its participants."  

 

Noteworthy governance-related principles include:

  • Fund boards should consist of a majority of independent directors, each of whom is reasonably qualified with the skills and experience to fulfill the role. At least one board member should primarily represent outside investor interests.
  • Number of boards each fund's board members sit on should be provided to investors along with any other related information requested by investors.
  • Breach of the governing documents by management should be considered a violation of the applicable standard of care.
  • The following should be disclosed to investors in a fair and timely manner:

      • Non-routine inquiries by legal or regulatory bodies in any jurisdiction (to the extent not prohibited by law).
      • Breach of a provision of the governing documents.
      • Response letters from regulators (to the extent not prohibited by law).
      • Any legal action in which the manager or key personnel are named that may reasonably be expected to impact the manager, key personnel or the fund.
      • Material contingencies or liabilities of the fund or firm.
      • Departure of the portfolio manager, key investment employees, CFO/COO or the general counsel of the firm.
      • Material changes in the actual or beneficial economic ownership of the firm or voting control of the firm.
      • Internal, employee-only funds that are not available to outside investors.

State Street Global Advisors Posts ESG Analytical Framework

 

A recent post by State Street Global Advisors elaborates on the ESG framework it uses to evaluate companies' practices. It is noteworthy because, among other things, it suggests questions for the board and management to consider in developing and reviewing their sustainability policies and procedures, including:

  • What are the strategic objectives based on the material ESG risks and opportunities identified? What policies are in place to help achieve the objectives? How are these articulated in the company's CSR program? How are these objectives communicated to employees?
  • How does the company monitor and measure the progress of its CSR program?
  • How is the value of the CSR program being communicated to investors?
State Street's approach (also available on its website) also provides some welcome transparency for companies seeking to better understand how institutional investors may be interpreting and evaluating their sustainability efforts.

 

Society News

 

David Martin leaves the Society this week after two and a half years as VP Business Development & Research. We will miss him, but our loss is Towers Watson's gain. David begins Monday as a executive compensation consultant in the New York office. Please join us in wishing him well.

 

We are also pleased to note that Society member Randi Morrison has agreed to help draft the weekly Alerts for an interim period-a post she filled for us last year as well.

 

Academic Papers

 

Paper Provides Overview of Compliance Function

 

This new paper authored by an NYU Law School professor and co-director of the Program in Corporate Compliance and Enforcement provides an easy-to-read overview of the compliance function. Among several other topics, it addresses the distribution of the compliance function among the board, management, the CCO (whether or not also the GC) and internal audit; the board's oversight responsibilities; and compliance programs and policies. It's a useful read for those new to the corporate compliance area.

 

Inside the Huddle

 

This week's highlighted question from the Huddle is:

 

Excuse me if this topic has been discussed before, but does your company destroy or retain its Board Self-Evaluations?  

 

This question generated a lot of activity and many excellent answers (too many to note here) including:

We prepare a memo summarizing anonymous results for discussion with the board, which is retained as a permanent record, and destroy the original materials shortly after the meeting in which the results are discussed.

Articles/Postings of Interest

See other recently posted Articles of Interest.


Also, just a reminder that you can find additional topic-specific articles and other resources here.

 


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