Category: Corporate Governance

SEC approves changes to NYSE shareholder approval rule

On March 20, the SEC approved the 2018 NYSE proposal to amend Sections 312.03 and 312.04 of the NYSE Listed Company Manual, modifying the price requirements for purposes of determining whether shareholder approval is required for certain issuances. As previously noted in this PubCo post, this proposal is remarkably similar to the one that the SEC approved for Nasdaq in 2018 (see this PubCo post), so its approval here was not unexpected.  Just like the Nasdaq rule, the NYSE modification:

changes the definition of market value for purposes of the shareholder approval rule to the lower of the closing price and five-day average closing price; and
eliminates the requirement for shareholder approval of issuances at a price less than book value but at least as great as market value.

SEC adopts amendments for FAST Act Modernization and Simplification of Regulation S-K

Yesterday, once again without an open meeting, the SEC voted to adopt amendments designed to modernize and simplify disclosure requirements for public companies.  The final amendments, which were adopted largely as originally proposed in October 2017 (see this PubCo post), are based primarily on the staff’s recommendations in its Report to Congress on Modernization and Simplification of Regulation S-K (required by the FAST Act).  (See this PubCo post.) That Report, in turn, was premised on the review that the SEC conducted as part of its ambitious housekeeping effort, the Disclosure Effectiveness Initiative.  (See this PubCo post and this PubCo post.)  As discussed in the associated press release, the amendments are expected to “benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information.” Other expected benefits are lower costs and burdens on companies, improved readability and navigability of disclosure documents and reduced repetition and disclosure of immaterial information.

You may recall that one of the most innovative aspects of the original proposal was a new approach to confidential treatment, which would allow companies to redact confidential information from exhibits, but eliminate the need for advance submission of formal confidential treatment requests.  With some modifications, that approach has been adopted and will become effective immediately upon publication of the final amendments in the Federal Register. The remainder of the final amendments will become effective 30 days after publication in the Federal Register, with the exception of new cover page data-tagging requirements, which are subject to a three-year phase-in.

Micromanagement? Significant policy issue? Staff no-action letters address Rule 14a-8(i)(7) exclusion

What seems to be the Rule 14a-8 exclusion du jour? My vote goes to Rule 14a-8(i)(7), the “ordinary business” exclusion—sort of a perpetual home renovation project for the staff.   As you may recall, in Staff Legal Bulletins 14H, 14I and 14J issued over the last few years, the staff has addressed the scope and application of the exclusion—specifically the “significant policy exception,” the need for a board analysis, “micromanagement” as a basis for exclusion and the availability of the exclusion in the context of executive comp. (See this PubCo post, this PubCo post and this PubCo post. Some recent no-action letters related to use of the exclusion in connection with executive comp are discussed in this PubCo post.) Some of the staff’s most recent guidance has been viewed to expand the potential for companies to rely on the exclusion, and a slew of letters addressing requests for no-action relief under Rule14a-8(i)(7) has recently been posted. Not surprisingly, many of the proposals address current topics in the news: climate change, sexual harassment and mandatory employee arbitration, allocation of corporate tax savings, and even immigrant detention. As BlackRock CEO Laurence Fink has previously observed, in the face of political dysfunction “and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues.” (See this PubCo post.) To provide a flavor of current trends,  this post discusses several of these letters below.

PCAOB to engage in “proactive communications” with audit committees; sample questions for audit committees

In this PCAOB staff inspection brief, issued at the end of last week, the PCAOB discusses its new strategic plan, which includes conducting “an ongoing dialogue” with audit committee chairs when their companies’ audits are subject to PCAOB inspection.  The purpose is to provide the committees with “further insight” into the PCAOB process, including the inspections, and to obtain the views of committee chairs. The brief also outlines what audit committees should expect from the PCAOB’s 2019 inspections and provides a number of sample questions that audit committees may want to consider asking their auditors with regard to current inspection issues. The PCAOB expects to publish additional updates for audit committees regarding observations and findings.

Are the insights of internal auditors about risk getting through to boards?

Internal auditors are worried that boards are not paying enough attention to—wait for it—internal auditors. Probably most often, we consider the internal audit function in the context of financial reporting, but its brief can extend to many other risk areas.  To be sure, the speed of technological development and disruption has accelerated the development of risks—exhibit one being the development of the internet, which has led to risks related to cyberattacks and privacy. A 2019 report regarding a survey by the Institute of Internal Auditors of over 500 chief audit executives (CAEs) concluded that these developments “place an even higher value and urgency on assuring that boards have complete and accurate information on which to base their decisions…. In today’s dynamic risk environment, CAEs must do more than simply understand and fall in line behind the board’s view on risk. This new outlook must center on assuring the board has a comprehensive and unencumbered understanding of the organization’s risk universe.” Nevertheless, according to the President and CEO of the IIA, CAEs responding to the survey said that “internal audit rarely reviews information provided to the board, with 6 in 10 [CAEs] reporting they provide such assurance only for unusual situations, or never.” As a result, there were “serious questions about whether internal audit’s insights and recommendations are getting through to boards.”

SEC Commissioner Peirce “airs her grievances” with CII

Happy International Women’s Day! To celebrate, let’s hear from Hester Peirce, the only woman SEC Commissioner.  (Irony intended.)

In a speech delivered a few days ago to the Council of Institutional Investors, after expressing her gratitude for those contributions by CII to the public debate that Peirce views favorably (regarding proxy voting, stock buybacks and disclosure reform), she takes the opportunity to “air her grievances,” citing as a model Seinfeld’s 1997 Festivus episode. (“I got a lot of problems with you people, and now you’re gonna hear about it.”) What’s her complaint?  It’s the focus of CII and other investors on what she views to be “non-investment matters at the expense of concentration on a sound allocation of resources to their highest and best use. Real dollars are being poured into adhering to an amorphous and shifting set of virtue markers.” And the pressure on the SEC “to get on the bandwagon and drag others with us is pretty intense. We are being asked more and more to shift securities disclosure to focus more on matters that do not go to an assessment of how effectively companies are putting investor money to work.”

Activist CEOs speak out—is there a way to do it better?

It feels like CEOs are stepping into it—the political fray, that is—all the time these days. And recently, there has been a lot of pressure on CEOs to voice their views on political, environmental and social issues. According to the Global Chair of Reputation at Edelman, the expectation that CEOs will be leaders of change is very high. Last year, Edelman’s Trust Barometer showed those expectations at a record high of 65 percent; “[t]his year, the call to action appears to be yet more urgent—a rise by 11 points in the public’s expectation that CEOs will speak up and lead change. Today, some 76 percent of respondents believe CEOs need to step up.”  Similarly, in this year’s annual letter to CEOs, BlackRock CEO Laurence Fink focused on the responsibility of corporations to step into the breach created by political dysfunction: “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others.” In the absence of action from government, he counsels CEOs, “the world needs your leadership.”  (See this PubCo post.) To be sure, a number of CEOs have jumped in to meet this challenge. But this study, “The Double-Edged Sword of CEO Activism,” suggests that, notwithstanding the public perception of widespread CEO activism, the incidence of CEO activism is actually relatively low. And public reaction seems to vary depending on the topic, but can, in some cases, lead to consumer backlash.  Is there a better way to handle it?  The authors of this article think so.