Does the health of the economy depend on getting the role of shareholders right?

by Cydney Posner

Are shareholders really the “owners” of corporations? Even though shareholders have no responsibilities to the corporations they “own”? Should corporations be managed for the sole purpose of maximizing shareholder value?  Are shareholders even unanimous in that objective? Is shareholder centricity really the right model for good governance of corporations? What changes in corporate governance have been fueled by the shareholder primacy model?  Do those changes make sense?  What has been the adverse fallout from the current fastidious devotion to shareholder preeminence?  These are just some of the issues addressed in this terrific piece by two Harvard Business School professors, Joseph L. Bower and Lynn S. Paine, in the Harvard Business Review. In their view, the “health of the economic system depends on getting the role of shareholders right.”  Highly recommend. Continue reading

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Will dual-class structures torpedo the business judgment rule?

by Cydney Posner

While there has certainly been a lot of debate about the merits and demerits of dual-class stock, one interesting angle was raised by Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance Delaware Law. In an interview reported in Bloomberg BNA, Elson predicts that expanded use of dual-class corporate structures will lead the Delaware courts to reconsider the business judgment rule.  For companies with no- or low-vote classes of shares, is the business judgment rule in jeopardy?   Continue reading

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House passes Financial Choice Act of 2017. What now?

by Cydney Posner

The Financial Choice Act of 2017 has been passed by the House (almost surreptitiously, given the unwavering focus on the Senate hearing today). According to the WSJ, the House vote was 233 to 186.  The bill, sponsored by Jeb Hensarling, Chair of the House Financial Services Committee, was framed as a Republican proposal to reform the financial regulatory system and relieve business community of the affliction of Dodd-Frank.  The subtitle on the WSJ article tells you how to think about this for now:  “Financial Choice Act is Republicans’ opening bid to loosen regulation; unlikely to become law.” Reuters  also described the approval of the bill as “a move that is expected to die in the Senate,” but relegated the sentiment to the first paragraph. Continue reading

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Pay for performance — more style than substance?

by Cydney Posner

Comp Committees appear to have gotten the message when it comes to executive pay for performance.  As discussed in this article in the WSJ, executive compensation “is increasingly linked to performance,” but investors are now asking whether the bar for performance targets is set too low to be effective. Are companies just paying lip service to the concept? Continue reading

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The CAMs are coming: PCAOB adopts new standard to enhance audit reports

by Cydney Posner

Yesterday, as anticipated, the PCAOB adopted, subject to SEC approval, a new auditing standard for the auditor’s report that, while retaining the usual pass/fail opinion, will require auditors to include a discussion of “critical audit matters,” that is, “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” The new CAM disclosure requirement will apply (with some exceptions) to audits conducted under PCAOB standards, including audits of smaller reporting companies and non-accelerated filers (although at a later phase-in date), but will not apply to emerging growth companies. Here are the press release and related fact sheet.

SoapBox: I don’t think I’d be going too far out on a limb if I predicted that we might see some disputes erupt over CAM disclosure. Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria. But will auditors’ judgments about which CAMs were the real nightmares be called into question? Will the new disclosure requirement precipitate many auditor-management squabbles over the CAMs selected or the nature or extent of the disclosure?  And just how enthusiastic will the CFO be about the prospect of the auditor’s sharing with the investing public the convoluted nature or opacity of the company’s policies or the struggles involved in performing the audit or reaching conclusions about the financials? Although the adopting release suggests that the process will be an iterative one between management and the auditors, how much input will auditors really allow audit committees or managements in reviewing the auditors’ selection or disclosure? Will auditors’ use the new disclosure requirement as leverage to compel managements to include disclosure in the notes or MD&A that management may not view as necessary?  Because the trigger for CAM consideration is whether a matter has been or is required to be communicated to the audit committee, will the new requirement have the effect of chilling communications among auditors, audit committees and managements, a concern often mentioned in comments on the proposal? Or will the new standard ultimately end up just producing more boilerplate, as auditors (and companies) find comfort in conformity?

Notably, the PCAOB expects little chilling effect: “For matters required to be communicated to the audit committee, the Board believes there should not be a chilling effect or reduced communications to the audit committee because the requirements for such communications are not changing. It would seem that any chilling effect would more likely relate to matters that are not explicitly required to be communicated to the audit committee, although given the broad requirements of [the relevant standard], the Board believes that there may be few, if any, relevant communications affected by that possibility.”

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ExxonMobil shareholders approve climate change proposal — are shareholder proposals on climate change becoming a thing?

by Cydney Posner

Are we witnessing the beginning of a new trend?  The history of shareholder proposals to enhance disclosure regarding climate change has been a dismal one. But suddenly, this proxy season, we have climate change proposals succeeding at two — and, as of today, three — major companies. Is this the start of something big? Continue reading

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Does it pay to challenge the SEC over non-GAAP financial measures?

by Cydney Posner

As discussed in this article, the WSJ engaged Audit Analytics to perform an analysis of SEC comment letters and company responses regarding the use of non-GAAP financial measures. What did they find?  Companies are winning the argument more often than you might think. Continue reading

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