As reported in Bloomberg, FASB will soon be considering whether the mandatory adoption dates for major new accounting standards should be delayed for small public companies and privately held businesses. According to the article, testimony from some small business finance professionals at a recent meeting of the Financial Accounting Standards Advisory Council indicated that, while they may be comfortable following the same rules as bigger companies, smaller companies “don’t have the same resources as large public companies so they need extra time to implement significant new accounting rules.” However, there seemed to be a fair amount of pushback from some commentators at the meeting, which could impact FASB’s decision.
Today, SCOTUS decided Kisor v. Wilkie, an important case that raised the question of whether to overrule the decades-long deference of courts to the reasonable interpretations by agencies (such as the SEC) of their own ambiguous regulations, often referred to as Auer deference (or Seminole Rock deference, referring to Auer’s antecedent). SCOTUS, with Justice Kagan writing the majority opinion (with Chief Justice Roberts as the swing vote), said no. Justice Gorsuch (and three other Justices) would overturn Auer. According to Gorsuch, the majority’s decision was “more a stay of execution than a pardon.”
In a recent speech to the American Enterprise Institute, SEC Commissioner Hester Peirce continued her rebuke of the practice of “public shaming” of companies that do not adequately satisfy environmental, social and governance (ESG) standards—hence the title of her speech, “Scarlet Letters.” According to Peirce, in today’s “modern, but no less flawed world,” there is “labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people. In our purportedly enlightened era, we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender. After all, naming and shaming corporate villains is fun, trendy, and profitable.” Message delivered.
In May 2019, comp consultant Mercer conducted a spot survey of 135 companies, looking at the prevalence and types of ESG (environmental, social and governance) metrics used in incentive compensation plans, including metrics related to the environment, employee engagement and culture, and diversity and inclusion. The survey found that 30% of respondents used ESG metrics in their incentive plans and 21% were considering using them. Mercer observes that with the “growing expectations for organizations to operate in an environmentally and socially conscious way, [ESG] incentive plan metrics are increasingly being considered as effective tools to reinforce positive actions.”
Allison Lee has finally been confirmed by the Senate as an SEC Commissioner. As a result, the SEC now has a full complement of Commissioners. Lee fills the Democratic seat formerly occupied by Kara Stein and, in fact, was her counsel for just over a year. In total, she was at the SEC for 13 years, including as Senior Counsel in Enforcement. Here is the statement of congratulations from the rest of the SEC.
You might recall that, in April of this year, SEC Commissioner Robert Jackson co-authored an op-ed (with Robert Pozen, MIT senior lecturer and former president of Fidelity) that lambasted the use of non-GAAP financial metrics in determining executive pay, absent more transparent disclosure. The pair argued that, although historically, performance targets were based on GAAP, in recent years, there has been a shift to using non-GAAP pay targets, sometimes involving significant adjustments that can “be used to justify outsize compensation for disappointing results.” On the heels of that op-ed came a rulemaking petition submitted by the Council of Institutional Investors requesting, in light of this increased prevalence, that the SEC amend the rules and guidance to provide that all non-GAAP financial measures (NGFMs) used in the CD&A of proxy statements be subject to the reconciliation and other requirements of Reg G and Item 10(e) of Reg S-K. But how pervasive is the use of NGFMs in executive comp? This article from Audit Analytics puts some additional data behind the brewing controversy about the use of non-GAAP financial measures in executive comp—and the level of increase is substantial.
The SEC has adopted final amendments to the auditor independence rules relating to lending relationships between the auditor and an audit client or certain shareholders of the audit client. As noted in the press release, the SEC had become aware of circumstances where the existing rules captured attenuated “relationships that otherwise do not bear on the impartiality or objectivity of the auditor. The amendments are intended to focus the rules on those lending relationships that reasonably may bear on external auditors’ impartiality or objectivity and, in so doing, improve the application of the Loan Provision for the benefit of investors while reducing compliance burdens.” Although the issues associated with this independence rule have created the severest compliance challenges for companies in the investment management industry, the final amendments will apply to entities beyond that industry, including operating companies and registered broker-dealers. The final amendments will become effective 90 days after publication in the Federal Register.
Today, the SEC posted its new, much anticipated concept release seeking public comment on ways to harmonize and streamline the patchwork universe of private placement exemptions and “to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.” The comment period will be open for 90 days from publication in the Federal Register.
With 70% of the annual meetings for the Russell 3000 having now taken place (1,812 companies), in this article, ISS takes an early look at the 2019 proxy season. In brief, ISS found increases in opposition to director elections and to say-on-pay proposals, as well as increases in the number of, and withdrawal rates for, environmental and social (E&S) proposals relative to governance (the “G” in ESG) proposals. In addition, the disparity in the levels of support for E&S proposals relative to the historically more popular governance proposals has narrowed dramatically.