SEC Prepared to Adopt Pay Ratio Rules With 5% Carve-Out for Overseas Employees 

Referencing unnamed sources, the Wall Street Journal reported that the SEC is prepared to adopt the pay ratio disclosure rules as soon as next week with a provision that would permit companies to exclude 5% of their overseas employees from the pay ratio calculation. The article notes that such a carve-out would be unlikely to satisfy issuers (most of which would likely not benefit from such a limited exclusion) or investor-proponents of the proposal, who have expressed opposition to permitting exclusion of any categories of employees. As we previously reported, a handful of the most recent comment letters on the proposed rule specifically respond to DERA's analysis of the potential effect on the ratio of excluding different percentages of overseas and other categories of employees.  

Rep. Garrett Calls on SEC Chair White to Justify Universal Proxy Rulemaking  

Last week, Capital Markets and Government-Sponsored Enterprises Subcommittee Chair Rep. Scott Garrett (R-NJ) sent this letter to SEC Chair White (i) expressing concerns about her remarks at the Society's conference last month indicating that she had directed Staff to develop recommendations on universal proxy ballot rulemaking, and (ii) requesting that she respond to enumerated questions about the rulemaking initiative "if the Commission can justify the proposal of such a rule supported by a rigorous cost-benefit analysis." Here is an excerpt: 

Put simply, it is not clear that the SEC has identified a market failure that would warrant such a rulemaking. I am also concerned that instead of directing Commission staff to take a comprehensive approach towards reforming our proxy system, your announcement puts into motion a singular rulemaking that is likely to favor special interest activists over the vast majority of public company shareholders... The potential negative impact that a universal proxy ballot rulemaking could have on public companies and their shareholders absent other changes to the proxy architecture is troubling.  

Senate Appropriations Committee Approves Funding of SEC at FY 2015 Level 

The Senate Committee on Appropriations passed the FY 2016 Financial Services and General Government Appropriations Bill last week on a 16 - 14 vote. The bill funds the SEC at $1.5 billion - equal to the FY 2015 enacted level, with the funding targeting critical information technology initiatives and increased transparency and reporting requirements on agency spending. 

Commissioners Gallagher & Piwowar Suggest SEC Address Improper Collateral Bars 

Last week, SEC Commissioners Gallagher and Piwowar expressed their support of a recent DC Court of Appeals decision that held that the SEC can't apply collateral bars to individuals based on their pre-Dodd-Frank conduct, and recommended the SEC take action to address all such bars "misapplied" since Dodd-Frank's enactment: 

We are pleased with the Court's holding, which vindicates our vocal opposition to such bars since joining the Commission.  Not only have we dissented from every vote to impose such retroactive collateral bars since we joined the Commission, but we have also publicly criticized the majority's legal analysis with respect to the imposition of such bars: Commissioner Piwowar in remarks delivered to the Los Angeles County Bar Association on November 22, 2013, and Commissioner Gallagher in a written dissent in the matter of John W. Lawton dated August 5, 2014.  And we acknowledge that our predecessors, Commissioners Kathleen Casey and Troy Paredes, also were outspoken on the topic of impermissible retroactive application of the securities laws.  

SEC Commissioner Gallagher Criticizes DOL's Fiduciary Rule Proposal

SEC Commissioner Gallagher sent this spirited letter last week to the DOL criticizing its proposed fiduciary rule, and suggesting that the DOL should have pursued - with the SEC - a disclosure-based solution to the "alleged excessive fee problem." Noting that he felt compelled to weigh in despite the rulemaking being "a fait accompli" and the comment process "merely perfunctory," Commissioner Gallagher expressed his view that the rule would harm investors and the capital markets, and objected as a matter of principle to the DOL's judgment usurping that of investors: 

The proposal is grounded in the misguided notion that charging fees based on the amount of assets under management is superior in every respect and for every investor to charging commission-based fees...Proving that the nanny-state is alive and well, DOL is proposing to substitute its judgment for that of investors in deciding the type of financial professional and fee structure all investors should use when investing their retirement savings. In doing so, it has ignored the benefits to investors of a disclosure-based approach to mitigating potential conflicts of interest. Investors benefit from choice: choice of products, choice in advice providers, and choice in making decisions for themselves.  

Commissioner Gallagher's remarks also criticize the DOL's rulemaking process:  

You have stated that you and Chair White have extensively discussed the Fiduciary Proposal. DOL also maintains that the staffs of the two agencies have worked very closely throughout the drafting process. As you know, I was not included in any of these conversations. From a distance - a place where a presidentially-appointed SEC Commissioner should not be in this context - it appears that any interaction between staffs at DOL and the SEC and all of these discussions with Chair White have borne no fruit.

The DOL's 90-day comment period on the proposed rule expired last week. Over 800 comment letters, including these noteworthy letters from the Chamber of Commerce, Business Roundtable, SIFMA and the House of Representatives, were submitted. Commencing with a series of public hearings the week of August 10, the comment period will reopen for 14 days after the posting of the official hearing transcript. See also this Investment News article.

Article Discusses Corporate Secretary's Key Role in Shareholder Engagement

This recent article authored by Wachtell, Lipton, Rosen & Katz's David Katz and Laura McIntosh addresses the Corporate Secretary's important role in shareholder-director engagement as part of a broader discussion about the evolution of governance and engagement as reflected by the 2015 proxy season.

Among other things, the article notes this 2014 ISS engagement study (based on an online survey and in-depth interviews of issuers and investors), which found that when investors seek to engage with directors, they most frequently reach out to the corporate secretary. Quoting the Society's overview of the Corporate Secretary's role, the article notes:

As a primary liaison with investors who is also close to the board and senior management, the corporate secretary is ideally positioned to help directors and chief executives understand and respond to shareholder concerns. Corporate secretaries are expected to monitor corporate governance developments generally and assist the board in regularly updating and refining the company's governance practices as appropriate.

More generally, the article aims to inform directors and other stakeholders about current engagement trends so that boards can best position themselves to achieve the company's longer term strategic objectives.

Costs vs. Litigation Risks Associated with Director Stock Plan Alternatives

Society member Winston & Strawn's Mike Melbinger's recent blog graphically depicts the approximate cost vs. litigation risk trade-off associated with the principle alternatives available to companies to deal with recent litigation over director compensation - ranging from doing nothing to adopting a stand-alone director stock plan.

Importantly, Mike notes that that while doing nothing carries no expense and a low litigation risk, so does adopting a one-page amendment to the company's sotck plan to create formulaic awards for non-employee directors. Maintaining a stand-alone director stock plan reduces the litigation risk substantially; however, this is at the expense of a measurable increase in the company's cost and effort.

See our previous report on the Calma vs. Templeton case, where the Delaware Chancery Court held that stockholder ratification of a compensation plan that doesn't specify the actual compensation or set meaningful limits on the amount to be received by directors will be subjected to the entire standard fairness of review rather than the waste standard of review typically applied to director compensation decisions that involve stockholder ratification.

Almost 30% of Fortune 500 New Independent Board Seats Filled by Women in 2014

Heidrick & Struggles revealed these statistics concerning key attributes of the 339 independent directors newly appointed to Fortune 500 company boards in 2014:

• Average age: 58
• Current/former CEOs: 47%
• Current/former CFOs: 20%
• International experience: 35%
• Retired vs. active executives: 40%/60%
• Diversity: 29% female; 8% African-American; 5% Hispanic; and 5% Asian

Heidrick's review also identified the top three areas of industry experience for new directors as the financial services, industrial and consumer sectors. The least widely selected were life sciences, technology and business services.

Conflict Minerals Supplier Response Rates Vary Widely for 2014 Reporting

Low conflict mineral component supplier response rates are reportedly making it difficult for companies to obtain the necessary information to characterize themselves as DRC Conflict Free. To illustrate the challenge, note that companies that disclosed supplier response rates (47% of Form SD filers) screened an average of 743 suppliers; however, several companies identified more than 10,000 potential suppliers - including Caterpillar, which listed 38,700. Supplier response rates reportedly ranged from 17% to 100%.

Additional 2014 filing statistics from Audit Analytics include:

• Semiconductors and Related Devices companies were the most common filers.
• 20% of filers reported themselves as DRC Conflict Free - down from 21.8% last year.
• 50 companies that characterized themselves as DRC Conflict Free last year changed their determination to DRC Undeterminable/Dual Determination in 2015.

See also our previous report on IPSA filers, and this Source Intelligence blog recounting participants' views about supplier response rate "quantity vs. quality" at a recent conflict minerals conference.

Carpenters Pension Fund Continues Audit Committee Disclosure Campaign

The United Brotherhood of Carpenters Pension Fund reportedly continued its efforts during the 2015 proxy season to effect more robust proxy statement disclosure about the audit committee's oversight of the independent auditor with a letter (see this sample) campaign aimed at 91 of the Fortune 500, specifically seeking these disclosures:

1. Audit committee is directly responsible for the appointment compensation, retention and oversight of the independent external audit firm (The audit committee is also asked to disclose the firm it hired and year it did so.)
2. Tenure of the current audit firm
3. Audit committee is responsible for the audit fee negotiations associated with the retention of this firm
4. Audit committee periodically considers whether there should be a regular rotation of the independent external audit firm
5. Audit committee and its chair are directly involved in the selection of the audit firm's new lead engagement partner
6. Members of the audit committee and the board believe that the continued retention of the audit firm as the company's independent external auditor is in the best interests of the company and its investors.
   

This is the third successive year the Fund has focused on this issue.

Most Proxy Access Bylaws Limit Board Seats for Proxy Access Nominees to 20%

This Sidley Austin memo provides a robust discussion of 2015 proxy access proposals including institutional investor and proxy advisor positions, voting results and typical proxy access bylaw provisions for those companies that have adopted proxy access during 2015. Particularly noteworthy are the graphics illustrating the core terms of the company-adopted proxy access provisions and key facts concerning competing management and shareholder proposals, and this chart:

CALPERS Reports on 2015 Proxy Season; Outlines Sustainability Initiatives

CalPERS reported last week on its principal 2015 proxy season initiatives. Among the results thus far - 51 of 78 proxy access proposals of the 100 proposals CalPERS supported have purportedly been voted on and passed with majority support as of July 22. And two shareholder proposals on climate risk reporting purportedly gained full support, resulting in voluntary agreements on additional disclosure.

The release includes this video, where CalPERS Director of Global Governance Anne Simpson outlines more broadly CalPERS' goals and accomplishments, including these four key sustainability initiatives: (i) strong shareholder rights; (ii) independent, competent and diverse boards; (iii) executive compensation that motivates long-term performance; and (iv) more robust issuer reporting/disclosure.

Former ISS Employee Pleads Guilty to Sharing Voting Information for Perks

USA Today reported that a former ISS employee pleaded guilty in Boston federal court to conspiring over a 6-year period to share confidential information about how ISS's clients had voted on corporate proposals with a large proxy solicitation firm, which could then pass along the information to issuers. The former ISS employee, who allegedly provided the information in exchange for New England Patriots tickets and other perks, is reportedly scheduled for sentencing in January 2016.

Members Discuss Myriad of Proxy Access-Related Issues at West Coast Meeting

Last Friday in San Francisco, Society members CamberView's Abe Friedman and Gibson Dunn's Ron Mueller discussed with Society members detailed terms and voting results, company responses and investor feedback concerning the 2015 proxy access proposals, along with alternative game plans for moving forward - including numerous important provisions and considerations, from both investors' and companies' perspectives, in proxy access terms that companies should consider when evaluating whether and on what terms to adopt proxy access. Members also discussed issues regarding interim voting result requests.

The West Coast proxy access meeting came on the heels of a comparable, successful meeting in New York on July 7, with Society members Morrow & Co.'s Bill Ultan and Davis Polk's Ning Chiu leading the discussion with Society members on these topics.

This week's highlighted question from the Huddle is:

Has anyone adopted or considered adopting term limits for committee chairs?

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

We limit our committee chairs to a five-year term; at the end of that term the director can remain on the committee for a year for transition purposes but then must rotate off the committee.

Check out the Society Huddle.