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SEC Provides Analysis of Effects of Excluded Employees on Pay Ratio

Last week, the SEC Division of Economic and Risk Analysis posted for public comment an analysis related to the proposed pay ratio rule that considers the potential effects on the accuracy of the pay ratio calculation of excluding different percentages of certain categories of employees (e.g., employees in foreign countries, part-time, seasonal or temporary employees). The Society's 2013 comment letter sought (among other things) exclusion of part-time and seasonal employees.  

In the absence of comprehensive company data on point, projections of the potential effects were based on other studies, aggregate statistics, and other assumptions. The analysis illustrates that the potential effects of various exclusions under alternative scenarios and assumptions run the gamut - from a pay ratio decrease of .7% to an increase of 15%. Comments on the proposed rule and analysis are due by July 6.  

Small & Emerging Companies Advisory Committee Addresses Disclosure Reform 

Disclosure effectiveness and intrastate crowdfunding were among the principle topics discussed at the SEC Advisory Committee on Small and Emerging Companies meeting last week. Division of Corporation Finance Karen Garnett identified these Reg. S-K focal points:

• Whether changes are needed to principles/prescriptive-based requirements to allow investors to make better informed decisions;
• Whether there are opportunities to update and modernize requirements;
• How to tailor disclosure to make it more readily available to investors; and
• Whether scaled disclosure requirements work and are effective in reducing compliance burdens for public companies.

Also noteworthy - Corp. Fin. Director Keith Higgins purportedly characterized full Edgar modernization as a 10-year process, but noted that there are things the Commission can do in the interim to make information more easily available to investors. Also, Chair White, in her opening remarks, acknowledged the rapid growth in intrastate crowdfunding legislation, and committed to completing the JOBS Act-related crowdfunding rulemaking this year.  

Democrats Propose Dodd-Frank Changes to Counter Republican Proposal 

Leading Democrats on the Senate Banking and House Financial Services committees introduced legislation proposing modest changes to the Dodd-Frank Act purportedly intended to provide targeted relief to small financial institutions. Unlike the Senate Banking Committee's Republican-only supported Financial Regulatory Improvement Act of 2015 (reported on here), the Democrat's Community Lender Regulatory Relief and Consumer Protection Act (summary here) doesn't increase the asset threshold used to define systemically important institutions or propose changes to the Federal Reserve System. However, it exempts small banks and credit unions from some federal mortgage underwriting standards and provides other relief.
 

See also this Wall Street Journal article, where Senate Banking Committee Democratic Ranking Member Sherrod Brown agreed that the current $50 billion threshold for systemically important institutions is too low, and indicated his willingness to support an increase in the future. 

Senate Judiciary Chair Laments Rise of the "Administrative State"

The Senate Judiciary Committee held a hearing today titled "Examining the Federal Regulatory System to Improve Accountability, Transparency and Integrity." In his prepared statement, Committee Chair Chuck Grassley discussed the rise of a fourth branch of government - i.e., the administrative state "'of sprawling departments and agencies that govern with increasing autonomy and decreasing transparency.'" In addition to calling for the Judiciary Committee's greater oversight of adherence to the APA, Grassley noted the absence of meaningful public participation in the rulemaking process due to agencies simply "going through the motions of notice-and-comment" while driving their own agenda. He also called on Congress to assume responsibility for the regulatory system's lack of accountability and transparency:

It's equally important that Congress recognize its own responsibility in the expansion of the administrative state. For too long, Congress has delegated in broad strokes, asking the agencies to sort out the details. If Congress is going to ask courts to tackle the tough questions, it needs to be willing to do so itself by reasserting its lawmaking power-and by speaking clearly and precisely when it chooses to use that power.

 

What's clear is that the status quo is not acceptable. Today, small businesses and entrepreneurs operate in a regulatory environment that provides little relief from excessive red-tape, and one that offers little certainty upon which to base risk and investment. Agencies are falling far short of their duties to weigh the costs and benefits of new regulations, and there's little the courts can do to hold them to account. And regulations with hundreds of millions-and even billions-of dollars in impact are being imposed on the U.S. economy, all without a sufficient check by Congress. In order to promote job growth and the American economy, we all must do better.

SEC Reportedly Investigating Activist Coordination for Potential 13(d) Violations  

The Wall Street Journal reports that the SEC is investigating whether certain activist investors secretly coordinated their efforts in targeting particular companies in violation of SEC disclosure and reporting requirements. Investors who jointly agree to buy, sell or vote securities are required to disclose those arrangements and to designate themselves as a group if they together own at least 5% of the company's stock or are soliciting votes from other shareholders. The SEC's Division of Enforcement has purportedly opened multiple investigations and sent requests for information to a number of activist hedge funds.  

SEC's Schnurr Discusses Aims of Forthcoming Audit Committee Concept Release  

In his remarks last week before the Annual SEC and Financial Reporting Institute Conference, SEC Chief Accountant James Schnurr indicated that the forthcoming Audit Committee Disclosure Concept Release will seek feedback from investors on how they use audit committee disclosures, as well as the usefulness of potential enhancements. He elaborated: 

I am particularly interested in learning more from investors, audit committees, auditors, and others regarding current audit committee disclosures related to oversight of the independent auditor and whether the disclosures should be refined to provide more insight into the information the audit committee used and the factors they considered in executing their oversight of the external auditor. This feedback will be critical to the staff in understanding the nature of the information investors are seeking and how audit committees consider what information to report.  

Commissioner Gallagher Posts Chart Revealing Regulatory Burden on Banks  

SEC Commissioner Gallagher published this updated chart last week to reflect significant FINRA rules and amendments imposed on financial services firms since the enactment of Dodd-Frank in July 2010 that were not included on the original chart he released in March. As previously reported, Gallagher's stated objectives in publishing this information are to prompt "much-needed debate" about the regulatory burden, and robust analysis going forward. 

SIFMA Proposes Best Interests Standard for Broker-Dealers 

Last week, SIFMA proposed its own version of a best interests fiduciary standard for broker-dealers serving retail clients. While noting its long-standing support for a uniform fiduciary standard, SIFMA CEO Kenneth Bentsen articulated numerous concerns about the DOL's recently released proposal and concerns about potentially inconsistent compliance schemes as the SEC/FINRA also undertakes rulemaking: "With multiple regulators considering different approaches which could result in bifurcated standards, redundant compliance regimes and investor confusion, we believe this offers a path forward." The Investment Company Institute (ICI) made this statement in support of SIFMA's approach.  

ESMA Seeks Input on Changes From Proxy Advisor Best Practice Principles

On Monday, the European Securities and Markets Authority (ESMA) published this Call for Evidence on the Impact of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis. The purpose is to gather information on how stakeholders perceive the most recent proxy seasons since the Best Practice Principles were published. Specifically, ESMA is seeking feedback in response to series of questions geared separately toward proxy advisors, investors, issuers and other stakeholders. Comments are due by July 27, 2015.

Does Tennessee Law Make Corporate Directors Personally Liable?

While it's fairly normal course for lawyers to take and defend opposing viewpoints, a debate on the meaning and implications of a recent change to Tennessee's corporate code being played out in the Nashville Business Journal is unusual. The amended code provides that "directors shall cause a dissolved corporation to discharge or make reasonable provision for the payment of claims and make distributions of assets to shareholders after payment or provision for claims" - a provision which Nashville attorney and Nashville Business Journal guest columnist Keith Dennen asserts makes directors personally liable for the debts of a failed business. 

That assertion triggered this strong rebuttal by Tennessee Bar members (who helped draft the law) claiming that the amendment, which purportedly mirrors provisions of the MBCA, imposes no new duties on directors and in fact creates a safe harbor against liability provided directors follow statutory dissolution procedures.

Activist Influence Rising Despite Higher Company Win Rate on Board Seat Contests

FactSet's analysis of proxy fight statistics for the 2015 proxy season to date reveals an ongoing increase in activist influence. While the company win rate for board seat proxy contests is up, so are settlements and non-proxy fight campaigns resulting in board seats. Specifically:

• Company win rate for board seat proxy contests that went to a shareholder vote is approximately 62% - a 57% increase over 2014's win rate of only 39%.
• Of the proxy contests that went to a shareholder vote where vote results have been disclosed, activist candidates have received support from approximately 33% of the votes outstanding - compared to an average of 42% in 2014.
• The number of proxy fight settlements or withdrawals after the company has made material concessions is the highest in any year since FactSet began tracking proxy fights in 2001.
• The number of non-proxy fight activist campaigns that have resulted in a board seat is the most in any comparable period - 46 as June 1, compared to 34 and 11 such campaigns resulting in board seats in the same periods in 2014 and 2013, respectively.

OCC Discusses Board's Role in Fostering Healthy Corporate Culture at Large Banks 

In his prepared remarks before the Prudential Bank Regulation Conference yesterday, Comptroller of the Currency Thomas Curry emphasized the importance of risk-focused incentive compensation (see the Dodd-Frank required rulemaking status here), and the board's role in creating and maintaining the proper corporate culture at large banks. As to the latter, he noted:

Healthy culture starts at the top, and we look to the board of directors and senior management to set a tone that encourages ethical and responsible behavior and demands individual accountability for failure to act accordingly. It's the job of the board, in combination with management, to articulate what the institution stands for-as well as what it does not stand for-and to make clear what is not acceptable behavior. We don't expect directors to manage the bank, but we do expect the board to look at high level issues that relate to culture, from the compensation structure to how management deals with deviations from the standards the board has established.

Proxy Access

• Stockholder proxy access proposals were reportedly not approved at New York Community Bancorp, T-Mobile, Urban Outfitters, and Walmart,
• Alliance Data Systems, Nabors Industries, Priceline Group, and Vertex Pharmaceuticals announced that their shareholders approved stockholder proposals to adopt proxy access.

Other Proposals

• Google reported that all of its director candidates were elected, despite ISS's recommended withhold votes for its compensation committee members and one additional director. Additionally, none of the five stockholder proposals, including those relating to a lobbying report and majority vote standard for election of directors, were approved.
• LinkedIn reported that a stockholder proposal regarding board diversity was not approved.
• Nabors Industries announced that its shareholders approved a stockholder proposal regarding sustainability reporting, and a management-proposed bylaw amendment to change the voting standard so that broker non-votes aren't counted in determining the outcome of shareholder proposals. Nabors also reported that, pursuant to its policy, the board rejected the tendered resignations of four directors who had failed to receive a majority vote based on a determination that acceptance of the resignations would not be in the company's best interests.
• Priceline Group reported that a stockholder proposal concerning stockholder action by written consent was not approved.
• Urban Outfitters and T-Mobile reported that shareholder proposals regarding human rights reporting were not approved.
• Walmart announced that none of its shareholder proposals, including those relating to clawbacks and an independent chair policy, were approved.

Non-Proxy Access Proposals Gain Little Support in 2015

Proxy Monitor's just released mid-season report on voting results at the 250 largest companies reveals these 2015 meeting trends as of May 22:

• Overall level at which shareholder proposals have been introduced is the highest since 2010 - driven primarily by the increase in number of proxy access proposals
• Excluding proxy access proposals, 72% of which have received majority support, only 3.5% of shareholder proposals have received majority support.
• To date, 44% of shareholder proposals have involved corporate governance issues, followed by social policy issue proposals at 42%, and executive compensation proposals at 14%.
• The most frequently introduced proposal by subtype relates to environmental issues (57 proposals), followed by political spending/lobbying (47 proposals), and separate chair/CEO (39 proposals).
• One-third of shareholder proposals have been sponsored by the well-known corporate gadflies, followed by social/religious/policy institutional investors (29%), and pension funds (24%)

Investors Announce "No" Votes for Dual-Class Share Voting Structure Proposal 

CalSTRS announced that it will vote its 4.3 million shares against a proposal (Resolution 7) at Toyota's annual shareholder meeting next week that would create a dual-class share voting structure:  

CalSTRS does not believe that the creation of a dual class of common stock aligns with the 'one-share one-vote' principle that CalSTRS supports. It is not in the best interests of all existing Toyota common stock shareowners - particularly foreign shareowners, such as CalSTRS...CalSTRS believes that a single class of common stock represents the best practice in governance. A structure that sustains "one-share one-vote" equally aligns shareowners' economic interests.

Investor Commends Companies for Effecting Board Gender Diversity

Last week, investment adviser Pax World Management, a member of the Thirty Percent Coalition, publicly commended Roper Technologies and Stericycle, Inc. for nominating women to their boards in April. The appointments purportedly follow positive engagement by Pax and the Thirty Percent Coaltion with both companies over the past several years, and each company's inclusion of gender and ethnicity in their director qualification criteria included in their corporate governance documents (Roper, Stericycle).

Federal Judge Rules SEC's Use of In-House Judge 'Likely Unconstitutional' 

On Monday, the U.S. District of Georgia preliminarily enjoined the SEC from continuing with an administrative proceeding in an insider trading case on the basis that its planned use of an ALJ appointed by the SEC's Office of Administrative Law Judges likely violated the Constitution's Appointments Clause. In Hill v. Securities Exchange Commission, the court ruled that SEC ALJ's are characterized under the Appointments Clause as "inferior officers," which must be appointed by the president, heads of department or the Judiciary. The accused, Charles Hill, who purportedly denies the SEC's insider trading allegations against him, challenged the SEC's planned use of in-house judge James Grimes on constitutional and other grounds. See Tom Gorman's blog. 

NACD Urges Court to Protect Directors From "Unreasonable Risk of Litigation"
 

The NACD submitted this amicus curiae brief to the Delaware Supreme Court in the In re Rural/Metro case (which we reported on here and here) calling on the court to reverse an earlier decision by the Delaware Court of Chancery that found that the directors breached their fiduciary duties when they approved the sale of the company. The NACD explains the basis for its involvement in this recent blog:

In our  Rural/Metro brief, we spoke on behalf of the directors in this case (who, because they had settled out of court, could not directly represent themselves);  far more importantly, however, we spoke on behalf of all directors in every state, addressing the legal principle at issue. We urged the Delaware Supreme Court to reverse Chancery's finding that Rural/Metro's directors had breached their fiduciary duties when they approved the company's sale. NACD believes the Court of Chancery's decision may expose directors of Delaware corporations to an unreasonable risk of litigation and personal liability for good-faith decisions made on the basis of their reasonable business judgments and in consultation with expert advisors. 

Study Reveals "Penalties" Associated With SOX 404 Compliance

Dan Goelzer's latest Audit Committee and Auditor Oversight Update discusses a study (available for purchase on the American Accounting Association website) that found that companies that disclose material weaknesses in their SOX 404 reporting in advance of a restatement are more likely to be penalized than those who do not - suggesting a disincentive for compliance with SOX 404.

Specifically, the study - based on an analysis of 659 companies that restated their financials between November 14, 2004 (i.e., effective date of SOX 404 internal control reporting requirements) and the end of 2010 - revealed that advance notice of internal control weaknesses in SOX 404 reporting:

• Increases the likelihood of an SEC enforcement action by approximately 6%
• Increases the likelihood of class action lawsuits by 5% - 10%
• Increases the likelihood of top management turnover by 15% - 26%
• Increases the likelihood of a change in auditors by 6% - 9%

Goelzer comments:

The study's findings may provide interesting insight into SEC enforcement policy.  The study should not, however, be used as a guide to corporate disclosure policy.  If the Commission were to uncover evidence that a company intentionally withheld disclosure of a known material weakness, it is quite likely that it would bring enforcement action against the individuals - including, if applicable, audit committee members who made that decision or were aware of it.

This week's highlighted question from the Huddle is:

Which types of meetings, if any, outside of Board and Committee meetings, are Directors paid a meeting fee? Some examples that I have heard about being paid are periodic meetings with the company's regulator and in-depth one-on-one meetings with Management.

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

In my experience, if there is an established per meeting fee, directors are only paid for board meetings (regular and special) and committee meetings attended, not for meetings with management or regulators. The annual retainer fee is deemed to cover meetings with management and others. 

Check out the Society Huddle.