Category: Corporate Governance

Willis Towers Watson offers 2018 say-on-pay snapshot

In this snapshot review by Willis Towers Watson of U.S. say-on-pay and other compensation-related votes, WTW found that average support for say on pay remained high at 91%.  In addition, where ISS identified “high” levels of concern leading to negative recommendations on say on pay, 84% related to pay-for-performance concerns (compared to 75% in 2017). 

Nontraditional board candidates made headway in 2017

According to a new report from the EY Center for Board Matters, 54% of the 2017 class of directors of Fortune 100 companies served in non-CEO roles and 40% were female.  More than half of the Fortune 100 added at least one independent director, slightly less than in 2016, but together, over the two-year period, over 80% of the Fortune 100 added at least one independent director. The result was that, taking director exits into account, “nearly all of the companies experienced some type of change in board composition during this period.”  The EY Center’s associate director told the WSJ  that the report showed “‘an increase in board diversity along the different dimensions of gender, age, ethnicity and in some cases socioeconomic background,’…. That means demand is growing for people who can offer ‘a more nuanced, multidimensional look’ at what is… happening with regard to consumer demographics, disruptive technology and workforce management, among other areas, she said. ‘The consensus is the best way to provide for boards to be able to see around corners, to ask the right critical questions, to get to the best answer possible, is to have a board that has the right mix of skills, expertise, background and perspective….There’s more openness to considering more and different perspectives.’”

Best Practices Committee offers recommendations for conduct of virtual annual meetings

For most companies, annual shareholder meetings are non-events, with little to no shareholder attendance. That’s why the concept of virtual annual meetings—which allow shareholders to overcome the logistical and financial burdens of attendance in person—was originally viewed as a way to rejuvenate the concept of annual meetings. With virtual technology, large numbers of shareholders were suddenly able to attend meetings on their laptops. Ironically, however, it has been shareholders—the designated beneficiaries of the virtual annual meeting—that have raised objections to virtual-only meetings because they were viewed to insulate management and directors from shareholders, allowing management to avoid uncomfortable questions.  (See this PubCo post and this PubCo post.) While the number of virtual-only annual meetings increased from 21 in 2011 to 155 in 2016 to over 212 in 2017, the criticism among some commentators and institutional holders has not abated: critics continue to contend that virtual-only meetings limit an important shareholder right, precluding shareholders from direct eye-to-eye engagement with management and the board. With that in mind, a group of interested representatives of  retail and institutional investors, public companies, proxy advisors and legal counsel, known as The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings, have developed a set of best practices designed to ensure that the needs of all constituents are satisfied—to  “promote both the reality and the perception of scrupulous fairness.” 

SEC proposes amendments to auditor independence rule related to debtor-creditor relationships

The SEC has posted a new rule proposal that would modify the analysis of auditor independence in the context of lending relationships between the auditor and certain shareholders of an audit client during the audit or professional engagement period. Under the current loan provision of Rule 2-01(c) of Reg S-X, some debtor-creditor relationships between an auditor and its audit client are viewed to taint auditor independence.  However, the SEC now believes that some of the provisions of this Rule are not as effective as they could be and may present unnecessary practical challenges.  The release indicates that the proposed amendments are designed to better focus the loan provision “on those relationships that, whether in fact or in appearance, could threaten an auditor’s ability to exercise objective and impartial judgment.”  As Wes Bricker, SEC Chief Accountant, told Bloomberg,  “[w]e’re trying to right-size” the Rule.The SEC is also soliciting comment on other potential changes to the loan provision or other provisions of Rule 2-01. Comments are due 60 days after publication in the Federal Register.

Will the DOL put the kibosh on ESG investing?

It would be hard to miss the increased focus of investors—especially institutional investors—on environmental, social and governance issues.  From multiple surveys showing the importance to investors of ESG factors to near-campaigns conducted by large asset managers promoting ESG as a component critical to long-term value creation, it sure seemed as if most of the private sector was getting on board. Indeed, in 2018, Laurence Fink, the Chair and CEO of asset manager BlackRock, wrote in his annual letter that, given some of the failures of governments, “society increasingly is turning to the private sector and asking that companies respond to broader societal challenges…. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” [Emphasis added.] But then, near the end of April, the Department of Labor issued a new Field Assistance Bulletin No. 2018-01, which provides guidance for plan fiduciaries about investments under ERISA. While Fink’s letter may have seemed like an assault on Milton Friedman’s theory of the primacy of maximizing shareholder value, the new DOL Bulletin has wrapped Friedman’s theory in an embrace so warm it would make the presidents of the US and France blush.  (Ok, that’s a big exaggeration.)

Shareholder vote on auditors puts the heat on the board

As discussed in this PubCo post, both ISS and Glass Lewis recommended voting against a proposal to ratify the appointment of GE’s auditor, KPMG, at the 2018 GE annual shareholders meeting, a pretty unusual event in itself.  The shareholders meeting was held yesterday, and, in an even more rare occurrence, as reported by the WSJ, 35% of the shareholders did not vote to retain KPMG.  Not exactly token opposition. According to Audit Analytics (reported here), that vote level “represents one of the highest levels of shareholder opposition to an auditor at any company in recent years.”  What‘s a company to do? KPMG signed on to audit GE’s books 109 years ago—as CNN Money points out, that was back when William Howard Taft was president of the United States.

SEC brings enforcement action for failure to timely disclose cyber breach

In this recent Cooley Alert, SEC Issues New Guidance on Cybersecurity Disclosure and Policies, we wrote that the SEC had not yet brought a formal enforcement proceeding for failure to make timely disclosure regarding cybersecurity risks and/or cyber incidents and asked whether an enforcement action might just be on the horizon? In that regard, we noted that, in 2017, the co-director of the SEC’s Enforcement Division had warned that, although the SEC was “not looking to second-guess good faith disclosure decisions,” enforcement actions were certainly possible in the right circumstances.  Indeed, the co-director had cautioned that no one should mistake the absence of enforcement actions for an unwillingness by the SEC to pursue companies with inadequate cybersecurity disclosures before and after breaches or other incidents. Apparently, SEC Enforcement has now identified circumstances it considers to be “right”: today, the SEC  announced “that the entity formerly known as Yahoo! Inc. has agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches in which hackers stole personal data relating to hundreds of millions of user accounts.”