Come and meet your investors at the Society National Conference. We will have a representative of each of the following institutional investors:

• BlackRock
• CalPERS 
• CalSTRS
• Capital Research and Management Company
• Columbia Management
• Morgan Stanley Investment Management
• State Board of Administration of Florida
• State Investment Board of Washington
• TIAA-CREF
• Vanguard (invited)

First come, first served to small-cap and mid-cap registrants for this Investor Forum!

 

With 28 breakouts to choose from, you can customize your own conference experience. Come to Chicago to "Connect, Communicate, Collaborate" with colleagues and industry experts. 

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

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

If you are interested in making a contribution to the conference fund or other sponsorship opportunities click here.

SEC Proposes Pay-for-Performance Rules on 3/2 Vote

In an open meeting today, the Commission approved by a vote of 3/2 proposed Dodd-Frank §953(a) pay-for-performance disclosure rules. The proposed rules would require proxy disclosure of compensation "actually paid" to the CEO; an average of actual compensation paid to the other NEOs; the registrant's one-year TSR, and a peer group TSR, in a tabular XBRL format for five consecutive years, subject to certain phase-in provisions. In addition, the rules would require disclosure of the relationship between the compensation "actually paid" and the registrant's financial performance in either a narrative or graphic format.

Compensation "actually paid" is proposed to be based on total compensation already reported in the SCT subject to specific adjustments for equity and pension plan valuations. Emerging Growth Companies will be excluded as prescribed by the JOBS Act; however, Smaller Reporting Companies will be covered subject to scaled disclosure requirements and a phase-in period.

Commissioners Gallagher and Piwowar opposed the proposal for a number of reasons, including its prescriptive nature, applicability to SRCs, and potential to encourage companies to think and act short term based on the proposal's emphasis on TSR as the sole measure of financial performance. Registrants would be permitted to include supplemental measures of pay and performance; however, these measures wouldn't be XBRL-formatted and thus not useful for cross-company comparability purposes, which purportedly is among the principle objectives of the rule.

FASB Proposes Significant Changes to Financial Reporting for Not-for-Profits

FASB issued a proposed Accounting Standards Update, "Presentation of Financial Statements of Not-for-Profit Entities," last week for public comment. The proposed ASU reportedly improves current net asset classification requirements and information presented in the financials about a not-for-profit's liquidity, financial performance, and cash flows. These FAQs include FASB's highlights of the key proposed changes. For additional information, FASB is hosting a webinar on May 12 and PwC is hosting a webcast on April 30. Comments on the proposal can be made through August 20 via FASB's website.  

See also this PwC article, which suggests that for-profit companies also consider reviewing and commenting on aspects of the proposal that may portend changes in financial reporting for for-profit business entities.  

SEC Grants Maximum 30% Award in First Whistleblower Retaliation Case 

The SEC announced yesterday a maximum award payment of 30% of amounts collected, or approximately $600,000, to a whistleblower for providing key original information that led to the SEC's enforcement action in In the Matter of Paradigm Capital Management, Inc., the SEC's first retaliation case (which we reported on last year). The SEC charged Paradigm with retaliating against the whistleblower after the firm learned that the whistleblower reported potential misconduct to the Commission.   

IASB Votes to Propose Delay in Effective Date of Revenue Recognition Standard

The International Accounting Standards Board (IASB) voted on Tuesday to propose a one-year delay in the effective date of the new, converged revenue recognition standard. The proposal, which would also allow early adoption, keeps the IASB aligned with FASB, which voted on April 1 to propose a similar delay. FASB issued for public comment today the proposed ASU that would defer the effective date of the new revenue recognition standard by one year.

Financial Industry Seeks More Time to Comment on DOL's Proposed Fiduciary Rule

A group of 16 financial trade groups including SIFMA, the American Bankers Association and the Chamber of Commerce sent this letter to the Department of Labor (DOL) last week requesting additional time (120 days, rather than the 75 days granted) to comment on the recently released proposed fiduciary standard for financial professionals who provide retirement advice. As previously reported, the proposed rule would generally require retirement investment advisers to put their clients' best interests first.

The letter describes the proposal as a "watershed event," warranting additional time for the industry to assess its ability to comply with the exemptions, which are described as "fundamental to the ability of many financial services companies to continue to provide essential services to retirement investors, but which will require significant changes in policies and practices, as well as the production of expansive new disclosure." The letter also notes that the DOL granted a 90-day comment period and a two-week extension on a less voluminous and complex predecessor proposal in 2010.

In addition to Republican opposition, key Senate Democrats reportedly oppose the proposal - having expressed concerns to DOL Labor Secretary Tom Perez that the rule may impede the ability of "average Americans" to get retirement investment advice.

EU Committee on International Trade Votes on Conflicts Minerals Proposal 

On April 14, the EU's Committee on International Trade voted on amendments to the EU's conflict minerals regulation. The proposed regulation covers tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas. According to Squire Patton's blog, the Committee adopted a proposed amended report strengthening the system of due diligence for conflict minerals importers. Members of Parliament voted in favor of a mandatory system of certification for EU smelters and refiners, but rejected amendments seeking to extend the mandatory scheme to those who purchase minerals for the production of goods such as electronics. Amendments that proposed  the extension of the scope of the legislation to other minerals and metals were rejected by the Committee. The full European Parliament is scheduled to vote on the proposal in May.

Earlier this month, a group of high-tech trade associations issued this statement to EU members stating that although the proposed amendments contained many good ideas, they couldn't support concepts that don't adhere to the OECD framework or haven't been subjected to an adequate regulatory impact assessment.

2014 Filings Show Significant Uptick in Climate Change Disclosure Among S&P 500

Research conducted by The Conference Board in collaboration with Bloomberg and GRI reveals that 27% of S&P 500 companies included discussion of climate change risks in their 2014 Form 10-Ks compared to just 5% in 2013. The increased disclosure was most significant among energy companies - with 43% discussing climate change risks in their filings, compared to 10% the previous year.

Additional key findings include:

• GRI reporting continues to rise among U.S. companies, particularly large multinational companies subject to international disclosure requirements.
• Few companies link executive compensation to ESG performance.
• Disclosure of anti-bribery ethics policies showed the greatest increase among all social and environmental practices (disclosed by 59% of the S&P 500, compared to 23% in 2013).
• Human rights policy disclosure increased by 10% year-over-year among the S&P 500.

BRT Comment Letter on SEC Disclosure Effectiveness Stresses Materiality

In its recently filed comment letter with the SEC on disclosure effectiveness, the Business Roundtable (BRT) expressed concerns about efforts by Congress and others to use the securities laws to mandate disclosure about "societal concerns." The BRT called on the Commission to instead use the traditional notion of "materiality" to determine disclosure requirements:

We are concerned that in connection with this Initiative and more generally some groups are seeking to use the federal securities laws to address various societal concerns, without giving effect to the bedrock materiality principle. While we recognize the Commission is well aware of the significance that materiality plays in the disclosure regime, in recent years the U.S. Congress has enacted legislation calling for information, such as that relating to conflict minerals and payments for resource extractions that as a general matter will not be material to investors. Moreover, the disclosure effectiveness initiative has already elicited calls by some commenters for additional disclosure of general societal, rather than investor, interest.

 

The Roundtable appreciates that from time to time issues arise that potentially are material for a significant number of companies. To address these issues, the Commission in the past has provided guidance to issuers about when disclosure might be warranted. We believe this is an appropriate approach.

The letter also urges the Commission's enhanced coordination with FASB to simplify and harmonize their respective disclosure requirements; supports suggestions made in other comment letters to eliminate duplicative and outdated disclosures; and praises the Commission's intent to assess how technology may improve disclosure efficiency and effectiveness.

ICGN Opposes Differential Voting Rights, Describes as Potential Entrenchment Device

The International Corporate Governance Network (ICGN) issued a report yesterday challenging the introduction of differential voting rights as a tactic to promote investors' long-term thinking and share ownership . The opinion piece precedes a May 7 vote by the European Parliament on the proposed revised Shareholder Rights Directive. The controversial proposals would provide additional voting rights and dividends for so-called "loyal" shareholders - purportedly often defined by a 2-year registered holding in a company's shares.

In the report, the ICGN expresses its concerns that differential voting rights may adversely impact minority investors as well as companies' long-term performance, and reiterates its support for the "one share, one vote" principle to ensure that voting rights are aligned with shareholders' economic stakes.

Investor concerns about differential ownership rights are most fundamentally linked to creating classes of common shareholders with voting rights in excess of their economic stake in a company. This is a particular concern in companies with controlling shareholders, where multiple voting rights can serve to entrench the control of significant shareholders and dilute accountability to (if not disenfranchise) minority shareholders-many of whom are the world's largest global investors. While the legislative intent of loyalty shares is to shift control towards longer-term shareholders it is important to recognise the potential negative consequences, including the entrenchment of management or the effect of multiple voting rights serving as an antitakeover mechanism. Investor concerns are that this can be detrimental at both the individual company level and that it can impact the investment attractiveness of markets where differential voting rights are widespread.

In lieu of differential voting rights, the letter encourages responsible stewardship to promote long-term investor thinking via, e.g., stewardship codes, inclusion of responsible stewardship practices in governance principles/guidance, investment management agreements, and other means of development and integration of responsible investment practices into the investment management process.

See also this letter in yesterday's Financial Times opposing the proposed Shareholder Rights Directive's "one-size-fits-all" corporate governance framework.

Staples' Settlement with Activist Investor Prompts Vocal Director Resignation

In a rare but noteworthy occurrence, Staples filed a resignation letter from director Justin King with its announcement of a settlement with activist investor Starboard. The Staples/Starboard settlement included an agreement to nominate one of Starboard's candidates for election to the board. King's opposition to the settlement with Starboard and the appointment of its nominee reportedly prompted his resignation.

Here is an excerpt from King's letter:

The nominee of Starboard that we have agreed to include in our proxy cannot in my view be considered suitably qualified nor independent. The 4 candidates they presented had not been through anything that could be described as a robust independent recruitment process and this is reflected in the last minute nature of the Starboard proposal. Kunal Kamlani does not bring skills that we have previously identified as lacking on the board and I do not believe we would have appointed him subject to our normal process. Given the circumstances I think it also entirely reasonably to question whether he can be viewed as truly independent.

Nonprofit Governance Survey Reveals Concerns, Suggestions for Improvement

A recent governance survey of 924 nonprofit directors conducted by Stanford Graduate School of Business (in collaboration with BoardSource and GuideStar) reveals a number of opportunities for improvement. Key findings include:

• 27% of respondents don't think their colleagues have a strong understanding of the mission and strategy.
• 69% don't have a succession plan in place, and 78% couldn't immediately name a successor if the current executive were to leave suddenly.
• 57% don't benchmark their performance against peer groups.
• 36% of boards never evaluate their own performance.

Recommendations include: 

1. Ensure the mission is focused, and its skills and resources are well-aligned.
2. Ensure the mission is understood by the board, management, and key stakeholders.
3. Establish explicit goals and strategies tied to achieving that mission.
4. Develop rigorous performance metrics that reflect those goals.
5. Hold the executive director accountable for meeting the performance metrics, and evaluate his or her performance with an objective process.
6. Compose your board with individuals with skills, resources, diversity, and dedication to address the needs of the nonprofit.
7. Define explicitly the roles and responsibility of board members.
8. Establish well-defined board, committee, and ad hoc processes that reflect the nonprofit's needs and ensure optimal handling of key decisions.
9. Regularly review and assess each board member and the board's overall performance.

Proxy Access Round-Up

• Voting results. Last week, two proxy access proposals passed and four failed.  Each required 3% ownership for three years, and all were opposed by the company.  See Steve Quinlivan's blog for details. Meanwhile, a shareholder proxy access proposal at Citigroup that was supported by management reportedly passed yesterday with almost 87% support. See also Ning Chiu's blog.
• Community Health Systems includes, but strongly opposes proposal. Community Health Systems included in its proxy statement a 3%/3 years/25% proxy access shareholder proposal, but vehemently opposed it - characterizing the proposal in the board's opposition statement as a solution in search of a problem:

  This proposal advances a solution for a problem that does not exist at our Company, as the Company's current corporate governance policies and practices provide stockholders with the ability to effectively express their views and participate meaningfully in director elections, and ensure that the Board of Directors is accountable to stockholders.

Among the potential adverse implications of the proposal, which are discussed in detail in the opposition statement are that it would:

• Undermine the important role of the independent Governance & Nominating Committee
• Create an uneven playing field and increase company costs
• Increase the influence of special interest groups
• Encourage short-termism
• Disrupt board operations
• Discourage highly qualified director candidates from serving
  
  
• Exempt solicitation filings. Ning Chiu's blog notes that companies with proxy access shareholder proposals are encountering a Notice of Exempt Solicitation (Form PX14A6G) filed by CalPERS and the New York City Pension Funds urging shareholders to vote in favor of the proposals. This Notice filed last week on behalf of Noble Energy is illustrative.

Independent Board Chair Proposal Consistently Rejected

Several meetings with shareholder proposals seeking an independent chair were held over over this past week including:

• Johnson & Johnson reported that its independent board chair shareholder proposal received the support of 36.5% of votes cast.
• Starwood Property Trust disclosed its stockholders' rejection of its independent chair stockholder proposal: 67,123,495 votes "For" the proposal, 105,865,789 votes "Against" the proposal, 1,053,523 Abstentions and 34,202,623 Broker Non-Votes.
• US Bancorp's shareholders rejected a shareholder proposal seeking the establishment of a policy requiring that the board chair be an independent director: 214,832,334 votes "For," 1,107,411,143 votes "Against," 9,714,201 Abstentions and 199,661,800 Broker Non-Votes.
• Textron reported that its independent chair proposal was rejected: 43,711,785 votes for the proposal, 189,976,670 votes against the proposal, 2,960,203 abstentions and 18,762,126 broker non-votes.
• Abbott Laboratories' stockholders rejected a shareholder proposal requesting that Abbott's Board of Directors adopt a policy that the Board Chairman be an independent director, with 29.98 percent of the votes cast voting "For" the proposal.
• Honeywell reported that its shareholders didn't approve a stockholder independent chair proposal: 181,146,210 votes "For," 442,517,385 votes "Against," 2,830,445 Abstentions, and 73,452,451 Broker Non-Votes
• A shareholder proposal at Boeing for an independent board chair reportedly failed: 157,464,739 votes "For," 351,610,310 votes "Against," 5,148,981 Abstentions, and 107,105,363 Broker Non-votes

Political Spending & Lobbying Disclosure Proposals Defeated

Numerous shareholder proposals seeking political spending/lobbying disclosure came to a vote this past week, including:

• Northern Trust disclosed that its stockholder proposal regarding additional disclosure of political and lobbying contributions was defeated: 49,817,144 votes "For," 126,072,776 votes "Against," 25,188,675 Abstentions, and 12,748,515 Broker Non-Votes.
• A shareholder proposal at Johnson & Johnson seeking alignment between corporate values and political contributions received the support of 5% of votes cast.
• Lockheed Martin reported that its shareholder proposal seeking lobbying and political spending disclosure was rejected: 16,383,624 votes "For" the proposal, 234,172,927 votes "Against" the proposal, 10,542,797 Abstentions, and 29,242,573 Broker Non-votes.
• Cabot Oil & Gas reported that a stockholder proposal to provide a report on the company's political contributions was not approved - receiving the support of 32.72% of votes cast.
• AT&T announced in its preliminary results that a shareholder proposal asking the company to issue an annual report on lobbying was defeated by a vote of 66.4% against.
• Honeywell reported that its shareholders didn't approve a stockholder proposal regarding political lobbying and contributions: 184,568,749 votes "For," 341,001,439 votes "Against," 100,923,852 Abstentions, and 73,452,451 Broker Non-votes.
• Pfizer announced that its shareholder proposal regarding report on lobbying activities was not approved based upon the following votes: votes "For": 233,751,666; votes "Against": 3,924,348,188; Abstentions: 163,031,554; Broker Non-votes: 867,165,448.
• At Citigroup, a shareholder proposal that the bank disclose more information about its political lobbying reportedly garnered only about 29% support.
• A shareholder proposal at Boeing to further report on lobbying activities reportedly failed: 89,959,072 votes "For," 353,281,355 votes "Against," 70,983,603 Abstentions, and 107,105,363 Broker Non-votes.

Pay Governance: ESG Stockholder Proposal Trends & Predictions

Pay Governance's new article summarizes trends (including proxy advisor influence) in ESG shareholder proposals, and associated predictions, based on data for Russell 3000 companies with annual meetings held between January 1, 2014 and December 31, 2014. Key findings include:

• Sustainable investing represents approximately 11% of the invested assets under management in the U.S.
• Certain ESG proposals have garnered shareholders support levels at or above 30%.
• ISS recommends "for" about 70% of such proposals, but investors appear to diverge from ISS with generally low levels of support on most proposals.
• ISS appears to recommend "for" proposals requesting additional ESG reporting (i.e., disclosure) and "against" proposals that would place operational limitations on corporate issuers.
• Shareholder proposals seeking inclusion of ESG metrics in executive incentive plans are almost always rejected by ISS and most shareholders.
• Despite the fact that some companies maintain limited ESG metrics in annual incentive plans, executive incentive programs continue to focus on financial metrics that are direct drivers of shareholder value creation.

Shareholder Engagement Webinar Recording, Slides & Related Documents Now Available

On April 17, the Society participated in a two-part webinar, "Shareholder Engagement: Global Perspectives and Trends" hosted by Computershare and the Corporate Secretaries International Association (CSIA). The first panel, "Global Shareholder Engagement," addressed the significant role the corporate secretary plays in communications between investors and corporations. The second panel, "Encouraging and Engaging Retail Voters," shared their views on retail voting and shareholder meetings and the efficiency of modern technologies in the proxy voting process. 

You may access the live recording, slide deck, and links to all of the relevant documents discussed on the call, including Shareholder Engagement Practices for Corporate Secretaries and Virtual Meeting Guidelines, here.

Readability of SEC Comment Letter Responses Linked to More Favorable SEC Review

In this new paper, "The Consequences of Writing Not So Readable Responses to SEC Comment Letters," Cory Cassell, University of Arkansas; Lauren Cunningham, University of Tennessee; and Ling Lei Lisic, George Mason University, provide evidence based on analysis of SEC comment letter communications between 2004 and 2014 that SEC filing review outcomes are more favorable when the company's initial response to the SEC's comment letter is more readable. The authors thus identify readability as a relatively easy and inexpensive way for companies to mitigate the direct and indirect costs (e.g., diversion of time and resources from normal operations and attendant consequences) of comment letter remediation.

Using the Fog index (reportedly the most common measure used in the readability literature ) to measure readability of company responses, the authors find that more readable responses are associated with:

• Lower probability of a multiple-round filing review,
• Shorter response times (i.e., the number of days it takes the SEC to respond to the company's initial response letter and the total number of days it takes to close the conversation),
• Fewer rounds of comments, and
• Lower probability of a restatement stemming from the filing review.

This week's highlighted question from the Huddle is:

I'm interested in hearing whether your independent auditors stay for the entire Audit Committee meeting or whether they make their presentations, have an executive session with the Committee and then leave for the items that are related to the financials or the audit.

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

For regular audit committee meetings, the auditors typically attend the entire meeting except the executive session with management. On occasion, at meetings when financial statements or audit issues are not being discussed (for example, discussion of risk management matters), the auditors do not attend. 

Check out the Society Huddle.

The Art of Serving as a Board Committee Chair

On Inside America's Boardroom, host TK Kerstetter and Jim Loree, Chairman of the Audit Committee of Harsco Corporation and President &s; COO of Stanley Black &s; Decker Inc. discuss the challenges of serving as a board committee chair and specifically the challenges ahead for the chairs of audit committees. Loree also shares his thoughts on how boards must be cognizant of committee chair succession planning when they are in the process of recruiting new directors for the board.