Category: Corporate Governance
How should the board consider security concerns for executives?
After the alarming murder of an insurance company CEO last week, questions about protection and security for CEOs and other executives are suddenly high on the agenda for boards of directors. A big concern: will there be copycat attempts? According to a security officer for a threat management software company, quoted on CNBC.com, “Everyone’s scrambling to say, ‘Are we safe?’….This is an inflection point where the idea of executive protection is now raised to the board level. Everyone I know in the industry is feeling this.” This anxiety is only compounded by the volume of information available online disclosing executives’ addresses and itineraries. As discussed in this new article from the Harvard Business Review, while incidents of workplace violence are “unfortunately too common” in the U.S., CEO targeting is “relatively rare.” But that risk level may have changed: in “today’s world of grievance and anger, easy access to weapons and information, and high-profile attacks on public figures, companies must take seriously their duty of care for executives and employees alike.” The article presents a framework for C-suites and boards “to balance competing interests of need, efficacy, and cost to ensure executive protection….How does a company strike the right approach in preventing the low likelihood, but very high consequence of an attack on a CEO?”
CEO succession: Is it a good idea to appoint a board member to be CEO?
In this article from the Harvard Business Review, the authors, from global leadership advisory firm ghSMART, discuss the growing number of instances in which companies appoint CEOs from the board. According to the article, from 2018 to 2023, 10% (213) of the total number of new CEOs in the S&P 500 and Russell 3000 were appointments from the board, reflecting a threefold increase over the period, and “making board director the fourth-most-common pre-CEO role,” after various executive roles. The authors note that the majority of those 213 CEOs were permanent hires. Interestingly, however, the authors observe that when a company appoints one of its own board members as CEO, the frequent assumption is that there must have been a problem with succession planning: “Maybe the company is desperately trying to get itself out of a protracted period of tumult. Maybe the previous CEO’s departure was unexpected or forced, and only a tried-and-true board member can keep the ship sailing steadily until a permanent replacement can be found. Maybe the CEO’s departure was routine and expected, but somehow the succession-planning process just came up short.” But sometimes, they suggest, the reality is that the board member was actually “the best option” to serve in that role. Why might it be a good idea? What can go wrong? How can the company increase its chances of success? In their article, the authors address these questions.
SEC charges biopharma with misleading investors about status of INDs
The SEC has announced that it filed settled charges against Kiromic BioPharma and two of its executives for alleged failure to disclose in its public statements and filings, including in its public offering prospectus, material information about its investigational new drug applications filed with the FDA for two of its drug candidates—the only two product candidates in the company’s pipeline. What was that omitted information? That the FDA had placed both of its INDs on clinical hold, meaning that the proposed clinical investigations could not proceed until the company first corrected the deficiencies cited by the FDA. Instead of disclosing in its prospectus that the INDs had actually been placed on clinical hold, the company included a risk factor describing the “hypothetical risk of a clinical hold and the potential negative consequences” on the company’s business. In light of the company’s voluntary self-reporting, remediation and other proactive cooperation, there was no civil penalty for the company, but two executives, the then-CEO and then-CFO, agreed to pay civil penalties of $125,000 and $20,000. According to the Director of the SEC’s Fort Worth Regional Office, the resolution of these cases strikes “the right balance between holding Kiromic’s then-two most senior officers responsible for Kiromic’s disclosure failures while also crediting Kiromic for its voluntary self-report, remediation, proactively instituting remedial measures, and providing meaningful cooperation to the staff.”
SEC charges UPS with failure to take goodwill impairment charge require by GAAP
Last week, the SEC announced settled charges against United Parcel Service Inc. for failing to take an appropriate goodwill impairment charge for a poorly performing business unit, thus materially misrepresenting its earnings. As alleged by the SEC, instead of calculating the write-down based on the price UPS expected to receive to sell its Freight business unit—as required under GAAP—UPS relied on a valuation prepared by an outside consultant, but “without giving the consultant information necessary to conduct a fair valuation of the business.” According to the Associate Director of Enforcement, “[g]oodwill balances provide investors with valuable insight into whether companies are successfully operating the businesses they own….Therefore, it is essential for companies to prepare reliable fair value estimates and impair goodwill when required. UPS fell short of these obligations, repeatedly ignoring its own well-founded sale price estimates for Freight in favor of unreliable third-party valuations.” UPS was charged with making material representations in its reporting, as well as violations of the book and records, internal accounting controls, and disclosure controls provisions of the Exchange Act and related rules. UPS agreed to adopt training requirements for certain officers, directors and employees, retain an independent compliance consultant and pay a $45 million civil penalty.
Happy Thanksgiving!
Just in time for Thanksgiving, SEC charges Elanco with undisclosed stuffing—channel stuffing, that is
In this settled action, In the Matter of Elanco Animal Health, Inc., Elanco, a manufacturer and seller of animal health products, such as flea and tick medications, was charged with “failure to disclose material information concerning its sales practices that rendered statements it made about its revenue growth misleading.” As alleged by the SEC, “Elanco would entice distributors to make end-of-quarter purchases in excess of then-existing customer demand by offering them incentives such as rebates and extended payment terms. These incentives allowed Elanco to improve its revenue each quarter, but caused distributors to purchase products ahead of end-user demand. Without these Incentivized Sales, Elanco would have missed its internal revenue and core growth targets in each quarter in 2019.” Essentially, we’re talking here about channel stuffing. As the practice continued, it contributed over the period to “channel inventory increasing by over $100 million in gross value…during 2019, creating a build-up of excess inventory at distributors and a reasonably likely risk of a decrease in revenue and revenue growth in future periods. But, for each quarter during the Relevant Period, Elanco failed to disclose the significant impact of its Quarter-End Incentivized Sales and the reasonably likely risk that these sales practices could have a negative impact on revenue in future quarters.” The SEC charged that these disclosure failures rendered the positive statements that Elanco made about revenue materially misleading. And let’s not forget the disclosure controls violations. In settling the action, Elanco agreed to pay a civil money penalty of $15 million.
PLI panel offers hot tips on accounting and auditing issues
At the PLI Securities Regulation Institute last week, the accounting and auditing update panel provided some useful insights—especially for non-accountants. The panel covered the new requirements for segment reporting, the intensified focus on controls, PCAOB activities (including NOCLAR) and errors and materiality. Below are some takeaways.
Fifth Circuit dismisses NCPPR appeal of Corp Fin’s Rule 14a-8 no-action relief
You might recall that, in 2023, the National Center for Public Policy Research submitted a shareholder proposal to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, NCPPR petitioned the Fifth Circuit for review. The SEC moved to dismiss the appeal. But after the NCPPR filed its appeal, Kroger filed its proxy materials with the SEC and included the NCPPR proposal in the proxy materials to be submitted for a shareholder vote. The proposal received less than two percent of the vote. Now, a three-judge panel of the Fifth Circuit has issued its opinion, dismissing the case for lack of jurisdiction; Judge Edith Jones dissented.
What’s happening with political spending disclosure and accountability?
In this fraught election season and just before tomorrow’s important election day, the Center for Political Accountability has released its annual study, The 2024 CPA-Zicklin Index of Corporate Political Disclosure and Accountability. The report concludes that, overall, leading companies in the S&P 500 have been maintaining “established norms of political disclosure and accountability.” And “companies are not backsliding,” with improvements showing throughout the Index. In 2016, the report discloses, “there were roughly three bottom-tier core companies for every two top-tier core companies. In 2024, over five times as many core companies placed in the top tier as in the bottom.” And keep in mind that those norms have held firm even in the face of “fierce headwinds” against ESG for U.S. companies. In the foreword to the report, former SEC Commissioner Robert Jackson, Jr. writes: “At a moment when our nation is narrowly divided on so much, nearly 90% of Americans agree that corporations should disclose to investors their use of corporate money on politics—even more than the 73% who took that view in 2006. The decades since have seen a financial crisis, a global pandemic and three Presidencies. Those events, and more, have divided voters. Yet the American people have grown even more firm in their conviction that, when corporations participate in the nation’s politics, it is incumbent upon those companies to carefully consider, and explain to investors, how and why they do so.” As Jackson observes, “today, more than 20% of S&P 500 firms scored 90% or above on the Index’s accountability measures, nearly double the number from 2016,” reflecting recognition of “the benefits of independent oversight, careful controls, and transparency.” This information, he maintains, is important for investors to enable them “to decide whether, and how, to invest in American public companies.”
Be sure to VOTE! Election day is tomorrow!
PwC’s 2024 Corporate Directors’ Survey—how are boards addressing the current uncertainty?
The title of PwC’s new 2024 Corporate Directors’ Survey, Uncertainty and transformation in the modern boardroom, might clue you in to one of its themes: uncertainty—anxiety?—arising out of the looming election. According to PwC, the “2024 election matters more than usual. Not only is the American electorate more polarized than anytime in modern history—making corporate leaders’ every statement and decision subject to public criticism—the results could rapidly reshape the business landscape. Which political party emerges victorious in November, in the White House and/or the houses of Congress, may prove enormously consequential for how every industry functions. The impacts could be dramatic.” We may see policy changes on “tariffs, sanctions, treaties and alliances” that might “upend international trade and disrupt supply chains.” We could see revised tax policy and enforcement priorities, transformed attitudes toward DEI and ESG programs, different views on antitrust enforcement, immigration and possibly, “most significant for many industries, the incentives that have fueled recent sustainability investments could grow further—or be diminished.” That makes “a board’s ability to be agile and stay current in the face of uncertainty” more important than ever. To assess the state of current boardrooms, PwC surveyed 500 public company directors, concluding that boards just might be evolving “too slowly to effectively meet the challenges facing companies today and tomorrow, irrespective of potential political disruptions.” PwC attempts to understand what is driving the results and recommends approaches to addressing the issues.
Are ESG performance metrics in comp plans just a layup with little impact?
There’s been a lot of attention lately to the use of ESG metrics as incentives in executive compensation, perhaps because the concept of ESG has become something of a lightning rod in the political landscape—particularly given the fallout from recent court decisions on diversity as well as escalating activity by anti-ESG groups. As discussed below, consultants have found that the use of ESG metrics seems to have levelled out, as some institutional investors have begun to view them cautiously and some academics studies have questioned their rigor and even their benefit. Companies employing ESG metrics as part of their comp plans may want to consider some of the issues raised by these studies, such as level of challenge and transparency, in designing their ESG metrics.
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