The Society's 2015 National Conference will take place June 24-27 in Chicago, Illinois at the Sheraton Chicago Hotel and Towers. Come to Chicago to "Connect, Communicate, Collaborate" with 800 of your colleagues.  

Conference registration is now open online. Members need to log in to receive member rates.

Note: If you are asked to answer questions regarding your conference selections, you must click "SAVE RESPONSES" on the right side of the screen for each set of questions. You will not be able to check out unless you have answered the required questions and saved your responses.

The conference agenda is posted here. Hotel reservation and other information is here.

DGCL Proposals Ban Fee-Shifting Articles/Bylaws, Validate Forum Selection Provisions

Triggered by the Delaware Supreme Court's decision in the May 2014 ATP Tour case, which allowed a membership corporation to enforce a fee-shifting bylaw, on Friday, the Corporation Law Section of the Delaware Bar Association will consider proposed legislation to amend Title 8 of the DGCL that would prohibit adoption of fee-shifting provisions and validate forum selection provisions in corporate charters and bylaws.  

According to the explanatory memo and FAQs, fee shifting provisions deter enforcement of stockholder protections by curtailing stockholder litigation, which acts as a key enforcement mechanism for officers' and directors' adherence to statutory and fiduciary obligations.  

Permitting fee shifting as a limitation on stockholder litigation would be functionally equivalent to permitting corporate charter or bylaw provisions limiting or eliminating fiduciary duties of officers and directors. If investors were to perceive over time that statutory rights and fiduciary obligation had become hollow concepts, investors' confidence could diminish, and capital formation could be adversely affected. Eventually, other regulators would likely feel compelled to step in. The federal government might perceive a need to occupy the field of corporate law in order to maintain this critical aspect of the national and world economy.

The proposed forum selection legislation is intended to ensure that Delaware corporations and their stockholders are not denied access to the Delaware courts. It will ensure that courts outside of Delaware continue to respect provisions that require stockholder litigation to be brought in Delaware, and prohibit provisions that disallow bringing a claim in the Delaware courts.

Also proposed is legislation to address concerns of abuse of Delaware's appraisal statute (DGCL Section 262), which would eliminate "nuisance" appraisal suits by requiring that claims involve at least $1 million or one percent of outstanding shares, and provide a method by which a company can stop appraisal claims from accruing interest. See this explanatory memo, and Wachtell Lipton Trevor Norwitz's post critiquing the proposal.

SEC Advisory Committee on Small & Emerging Companies Addresses "Accredited Investor," Secondary Market Liquidity, Reg A+

At its March 4 meeting, the SEC's Advisory Committee on Small and Emerging Companies adopted and submitted to Chair White this recommendation regarding the "accredited investor" definition. The meeting also addressed Regulation A+ (including proposed state preemption), and various means to facilitate secondary liquidity in shares of small and emerging companies including via "venture exchanges" and reform of Exchange Act Rule 15c2-11's "piggy-back" exception - discussed by Commissioner Aguilar. If interested, access the archived webcast and SIFMA's meeting summary.

In related news, see this recent letter from SeedInvest to SEC Chair White urging the prompt adoption of simple crowdfunding rules. Specifically, SeedInvest - which operates an accredited investor funding platform that serves over 25,000 investors and entrepreneurs in the U.S., seeks rules that '"(i) remove certain onerous (expensive) requirements and (ii) focus on facilitating main street capital raising rather than creating another Wall Street secondary trading market.'" The letter also notes the apparent success thus far of the UK's crowdfunding scheme, which is purportedly characterized by a "light touch" regulatory approach that SeedInvest believes would be effective in the US.

SEC Commissioner Stein Addresses Regional Exchanges and Other Capital Formation Ideas

In related news, last week at the Stanford Rock Center for Corporate Governance, SEC Commissioner Stein discussed the SEC's efforts to promote and enhance capital formation. Specifically, she discussed Regulation A+, crowdfunding, and regional exchanges as one possible way to support investment in companies at the local level.

OSHA Amends SOX Whistleblower Retaliation Complaint Procedures

Last week, OSHA issued a final rule amending the whistleblower procedures under Sarbanes-Oxley Section 806 to reflect Dodd-Frank-imposed amendments and to clarify OSHA's procedures for handling SOX whistleblower claims. The new regulations provide employees an additional 90 days to file retaliation complaints and will now allow allegations to be made orally (in which case OSHA will reduce it to writing), as well as in writing. The rule release responds to concerns expressed by the Society and others during the 2011-2012 comment period.

German Parliament Approves Quota for Female Directors

On Friday, German's Parliament approved - effective 2016 - a 30% quota for women on the supervisory (i.e., non-management) boards of the largest listed German companies. As we previously reported, women currently occupy approximately 19% of supervisory board seats at the top 160 listed German companies - up from 10% in 2011. The companies subject to the new candidate requirement will be required to leave vacant board seats open until they appoint suitable women. According to this ABC News article, an additional 3,500 companies will be required to set their own targets to increase the number of female directors and women in other leadership positions.

U.S. Representative Seeks to Revisit Conflict Minerals Rule

According to this BNA article, Congressman Bill Huizenga (R-MI) is working to address concerns about the impacts of the conflict minerals rule - including that the fact that the requirements allegedly are "not helping the Congolese miners as intended." Congressman Huizenga was one of four House Committee on Financial Services signatories to this recent letter to SEC Chair White expressing concerns about the SEC's recent decision to appeal the U.S. Court of Appeals April 2014 decision that partially vacated the rule. The letter seeks a "detailed written description of the funds and hours expended to date" on the rule, including a seperate list of funds and hours expended to date to defend the rule before the U.S. District Court and Court of Appeals. 

The article quotes U.S. Chamber Center on Capital Markets Competitiveness VP Tom Quaadman as saying that former house hearing and court ruling "could lead to new legislative efforts to address some of the issues the court found objectionable."  

The SEC approved the NYSE's proposed rule change that extends its "late filer rule" - formerly applicable only to Form 10-Ks - to Form 10-Qs and materially deficient filings. As previously reported, the amended standard (Section 802.01E): (i) imposes a maximum period within which a company must file a late Form 10-Q in order to maintain its listing, and (ii) clarifies the treatment of companies whose annual or quarterly reports are defective at the time of filing or become defective at a later date. As has been the case with 10-Ks, the standard provides for an initial 6-month grace period - and an additional 6-month period at the NYSE's discretion - to permit a company's securities to continue trading before delisting procedures commence.

PCAOB Member Franzel Promotes External Auditor Use of Internal Audit, Notes Common Deficiencies  

Earlier this week, PCAOB Board Member Jeanette Franzel spoke at the Institute of Internal Auditors 2015 General Audit Management Conference. Among other topics, her speech provided color around the PCAOB's inspection procedures concerning the independent auditor's use of the work of internal auditors, including common deficiencies. However, she made clear that outside auditors should not avoid reliance on internal audit in an attempt to avoid deficiency findings in this area:  

Such an approach removes professional judgment from the process, potentially causes gaps in the system of assurance over financial reporting, and can put even more stress on an already stressed external audit team. Letting the pendulum swing too far is not a solution audit firms should be using to respond to PCAOB findings in this area. Essential value will be lost if external auditors simply avoid the use of internal auditors' work or turn this process into a massive duplication effort and check-the-box documentation exercise. Effective use of internal audit work to support the external audit enhances assurance not only through the external audit process, but also enhances internal audit's knowledge and experience that can be applied across its assurance functions as the "third line of defense."

Proxy Access Roundup

Investor Proxy Access Proposal Fails at Apple; Apple Proxy Included Robust Statement in Opposition

A shareholder proposal on proxy access submitted by Jim McRitchie reportedly garnered less than 40% support at Apple's annual meeting yesterday. The proposal - which sought proxy access for 3%/3 year holders to nominate up to 25% of the board - was supported by ISS, but opposed by Glass Lewis and CalPERS.
 

Apple's Statement in Opposition detailed "protections" afforded by the SEC's vacated proxy access rule that were lacking in the proposal; highlighted good governance practices (e.g., majority voting, board declassification); and affirmed its intent to consider and engage with its shareholders on a "thoughtfully designed" proxy access scheme. Its statement also addressed attributes of its existing director nomination process, noting that the process serves the best interests of the company and all of its shareholders rather than selective groups of shareholders as would arguably be the case if the proposal were implemented as is.  

Glass Lewis's proxy analysis reportedly stated: '"given the company's increasing responsiveness to shareholders (evidenced by its recent adoption of majority voting and share repurchase activity) and its positive financial performance, we do not believe that adoption of this proposal is necessary at this time."' And CalPERS' opposition to the proposal noted that it "regards this proposal as moot given Apple's willingness to listen and respond to the concerns of its shareholders. We agree that any proxy access provision adopted by the company should be thoughtfully designed. We look forward to continuing discussions with Apple as the company works with shareowners to develop its approach to proxy access, in a way which reflects the company's leadership in corporate governance."

Prudential

Also yesterday, Prudential reported its board's proactive adoption of a proxy access bylaw that will allow a shareholder or group of up to 20 shareholders who own at least 3% of the company's shares for at least three years to nominate directors constituting up to 20% of the board. See also this Wall Street Journal article.

Exelon to Put Both Management and Shareholder Proxy Access Proposals to a Vote

Exelon included in its preliminary proxy both a board proposal and a New York City Comptroller 3%/3 years/25% (of the board proposal) on proxy access. Both are advisory in nature. The board proposal - which would provide proxy access for any shareholder or group of up to 20 shareholders holding at least 5% of the stock for at least three years to nominate up to 20% of the board - touts Exelon's good governance practices and a robust supporting statement, and notes:

The board of directors of Exelon evaluated the proposal and considered the composition of Exelon's shareholders, Exelon's governance practices, and other factors. Exelon also sought input on the subject of proxy access from shareholders holding over 39 percent of Exelon's outstanding common stock. As discussed in more detail below, shareholders' opinions about proxy access are mixed: some shareholders support proxy access consistent with the SEC rule adopted in 2010 (which was subsequently struck down by a federal court); some shareholders support proxy access but expressed concerns about the potential for shareholder abuse of proxy access and disruption of board functions; other shareholders were opposed to proxy access in any form; and many shareholders expressed support for having an opportunity to consider alternatives.

 

Accordingly, the board believes that shareholders should have the opportunity to consider alternative proxy access proposals. The board is therefore presenting for shareholder vote both its own proposal and the New York City Comptroller's proposal for proxy access, which include different standards regarding the appropriate qualifications for shareholders to use proxy access, the number of directors who may be nominated, and other important matters.

The board proposal includes this explanation of the implications of the vote results on the two proposals:

Both the board's proposal and the shareholder proposal are advisory in nature, and each constitutes a recommendation to the board. Shareholders may vote FOR, AGAINST or ABSTAIN on each separate proposal. The board will take into consideration the shareholder vote for and against each proposal and will also seek additional shareholder input on proxy access through Exelon's long-standing program of outreach to its shareholders. If a majority of shares represented at the meeting in person or by proxy and eligible to vote are voted in favor of either proxy access proposal, Exelon intends to bring to a vote at the 2016 annual meeting of shareholders a binding proposal for amendments to Exelon's bylaws to implement some form of proxy access. Abstentions on a proposal will have the same effect as votes against that proposal.

NYC Comptroller Reaches Agreements with Five Companies; Pulls Proxy Access Proposals

In a Glass Lewis-hosted conference call with investors last week, the NYC Comptroller's Office indicated that it had reached agreement on proxy access with some companies and, as a result, had recently withdrawn a handful of the 75 proxy access proposals it initially had submitted. The New York Times reports that agreements were reached with Whiting Petroleum, Big Lots, McKesson Corporation, Staples and Abercrombie & Fitch.

The agreement with Staples provides that the company will submit a binding proxy access proposal to its shareholders for a vote at its 2016 annual meeting that would allow a stockholder or group of up to 25 stockholders holding at least 3% of the stock for three years to nominate up to 20% of the board if the size of the board is 10 or more directors, or 25% of the board if the board is 9 or fewer directors.

The article also quotes remarks recently made by Society President & CEO Darla Stuckey, which parallel some of the concepts included in Apple's Statement in Opposition and Exelon's board proposal (both discussed above):

Darla Stuckey, the chief executive of the Society of Corporate Secretaries and Governance Professionals, said in an email that the proxy access Mr. Stringer was pushing for bypassed company nominating committees that were most knowledgeable about the needs and skills of a board. She said that such access could also open the door to "the nomination of special interest directors with agendas favoring minority shareholder positions." "I do think that N.Y.C.'s efforts are quite bold, and I don't agree that a single proxy access scheme fits all companies - or even 75 companies," Ms. Stuckey said. "Each company has a unique shareholder base. Boards are charged with doing what is right for all of the shareholders."

Glass Lewis Launches Alert Service for Issuers

Glass Lewis launched an alert service to notify companies directly when it publishes a report on their company to its institutional clients. If you want to receive an alert, submit a request to info@glasslewis.com, or use this tool provided by Equilar.

Trends & Strategies Used in Improving CD&A Disclosures

Equilar released this report last week identifying CD&A disclosure trends and highlighting significant changes in CD&A design and content based on its review of six years of S&P 100 company data. Key findings include:

• CD&A length decreased slightly in 2014 despite steady growth over the previous five years.
• Alternative methods of calculating compensation grew more common. Realizable pay was disclosed by 19 companies in 2014 (compared to one company in 2011), and references to realized pay increased to 34 companies in 2014 from nine in 2009.
• "Pay for performance" references increased in the wake of Say on Pay. The number of companies with direct "pay for performance" references in their annual proxies has steadily increased to 84 companies in the S&P 100.
• Shareholder engagement disclosure increased as more companies reached out to investors. Nearly 2/3 of the S&P 100 included disclosure of their shareholder outreach.

Proxy Advisor Say-on-Pay "Against" Recommendations Associated with Lower Subsequent TSR

In this new report, Pay Governance explores the relationship between proxy advisor say-on-pay vote recommendations and TSR. Based on its review of a sample of over 1,200 S&P 1500 companies, it finds that - contrary to investor expectations - proxy advisor say-on-pay "against" recommendations are correlated with lower long-term shareholder value creation as measured by TSR for the subsequent 2-year period studied. The report also describes academic research, which has found no positive stock market reaction to disclosure of changes in executive compensation programs that are influenced by and consistent with proxy advisors' recommended pay policies and practices. Several possible explanations are provided for the study results, including the possibility that proxy advisor-influenced changes to pay programs - which are typically made reluctantly and under pressure - could be harmful to motivation, and thus TSR.

CCMC's 2015 "FAR" Agenda Proposes SEC, Proxy Advisor and Other Regulatory Reforms

The Chamber of Commerce's Center for Capital Markets Competitiveness released its 2015 "Fix. Add. Replace. (FAR) Agenda" last week outlining and prioritizing improvements to the U.S. financial regulatory structure. Suggested additions to the Administration's and Congress' agendas are:

• Economic analysis: Require new regulations to undergo a cost-benefit analysis two years after promulgation to assess costs and allow for correction of unintended consequences
• Disclosure reform: Address "information overload" and ensure that materiality remains the standard for determining disclosure requirements
• Financial reporting: Require PCAOB & FASB to conduct cost-benefit analyses and follow APA and FACA transparency requirements when developing standards
• Proxy advisors: Hold ISS and Glass Lewis to standards to promote accountable, transparent and evidence-based policymaking process; ensure proxy advice correlates to clients' economic interest and doesn't take "one-size-fits-all" approach
• SEC modernization: Link increased funding and resources to progress toward better managed and streamlined agency; enhance existing enforcement programs to ensure fair and consistent examinations and investigations

See also this Reuters article, noting the Chamber's plans to release a report in the Spring recommending steps the SEC should follow when investigating public companies.

CII Seeks SEC's Prioritized Rulemaking on Universal Proxy Ballots

Last week, further to the SEC's recent Proxy Voting Roundtable, the CII sent this letter to the SEC urging the Commission to prioritize rulemaking to implement universal proxies in contested director elections. The letter asserts that:

• A growing number of companies and their lawyers generally support universal proxies
• Universal proxies would reduce investor confusion and costs to vote
• Whether universal proxies would result in election of more shareholder or more company nominees is debatable and irrelevant
• Universal proxy rulemaking would require some implementation guidance from the SEC, but such guidance shouldn't be difficult to develop, complex or voluminous

Investor Coalition Urges Companies to Use New UN Framework to Assess & Report on Human Rights

A more than 60-member North American, European and Australian investor coalition with a combined almost $4 trillion of assets under management released this joint statement urging companies to use a new UN Guiding Principles Reporting Framework (Principles and Implementation Guidance) to assess, manage and disclose their human rights performance and risks. According to the Statement:

Beyond ethical concerns, companies that do not proactively assess and manage human rights risks face potential legal, reputational, and other risks with financial implications. Meaningful disclosure of human rights performance can play a significant role in reducing a company's human rights risks, contributing to a company's competitive advantage, and strengthening its long-term financial stability....

The new framework has reportedly already been adopted by Unilver, Ericsson, H&M, Nestle, Newmont and others.

In related news, ABA President William Hubbard sent this letter last week to Fortune 500 CEOs and GCs seeking their help in eradicating human rights abuses by adopting and implementing anti-human trafficking policies consistent with the ABA's Model Business and Supplier Principles. The ABA also unveiled a new database to assist companies in this effort. See, e.g., Fortune 500 Ecolab's website, disclosing its commitment to abide by the UN human rights standards.

As You Sow just released its 2015 Proxy Preview, which summarizes the 433 proposals purportedly filed to date for the 2015 proxy season. According to the report, corporate political spending disclosure proposals account for about 25% of the proposals; proposals related to climate change and other ESG issues account for another approximately 40%; and human rights and diversity in the workplace proposals comprise most of the balance. Proposals seeking greater board diversity account for 9% of the total - comparable to 2014.

The report further notes that of 113 proposals sought to be excluded via no-action request letters, the SEC has rejected eight and sustained 22, and still needs to weigh in on 62. Apparently, 21 have been withdrawn by the proponents. Also noteworthy - 107 proxy access resolutions have reportedly been filed to date.

This week's highlighted question from the Huddle is:

This question relates to companies with subsidiaries operating internationally that have employees, staff and operate as somewhat independent businesses with a mix of internal and external directors on the Board. I'm wondering about the different models used to provide governance support to these entities. Specifically, how are connections made to ensure local requirements are being met, filings are made and board records are kept appropriately. Are companies providing those services from their parent office or relying on the local businesses to maintain those connections.

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

Based upon my experiences, I have identified a few common trends which I believe are beneficial to mitigating many of the risks that arise when trying to manage subsidiaries around the world. 

1. A central system of record is extremely helpful in aligning entity data and standardizing compliance processes. 
2. Treating subsidiary compliance in the same manner as financial compliance provides better accountability for those involved. Many ultraprecise organizations require that the head of each country or international region provide a quarterly sign-off on their subsidiary structure and compliance with local requirements at the same time that they are signing off on their quarterly financial statements. 
3. If the organization does not plan on using internal employees to act as management, provide staffing and perform payroll functions, partnering with an international provider will generally produce a more standardized process than relying on different unrelated local firms in jurisdictions around the world. 
4. The cost of compliance in jurisdictions outside of the United States is substantially higher on average than the cost of compliance domestically. In addition, the ability to complete filings and retrieve evidence of filings generally takes much longer. Educating other groups in you organization (Tax, Finance, Treasury, Business Unit Leaders) to these differences can prevent misunderstandings when activities need to take place internationally and timing becomes a consideration.

Check out the Society Huddle.