The Council of Institutional Investors has announced that it has filed petitions with the NYSE and Nasdaq requesting that each exchange amend its listing standards to address the issue of multi-class capital structures (i.e., share structures that have unequal voting rights for different classes of common stock). As requested by the petition, the amendment would require that, going forward, companies seeking to list with multi-class share structures include provisions in their governing documents that would sunset the unequal voting at seven years following an IPO and return the structure to “one-share, one-vote” structures, “subject to extension by additional terms of no more than seven years each, by vote of a majority of outstanding shares of each share class, voting separately, on a one-share, one-vote basis.” According to CII, unequal voting rights impair the ability of shareholders “to hold executives and directors accountable.” But companies contend that these measures are being adopted for a valid reason: to protect the company from unwanted interventions by hedge-fund activists with short-term goals and perspectives. Accordingly, the debate has centered around whether these measures are a legitimate effort to protect companies from the pressures of short-termism exerted by hedge-fund activists and others or are a mechanism that causes shareholders to cede power without providing accountability. Of course, the answer depends on where you sit.
A couple of years ago, a group of CEOs of major public companies and institutional investors, including Jamie Dimon, Warren Buffett, Larry Fink and Mary Barra, among others, developed a list of “commonsense corporate governance principles,” designed to generate a constructive dialogue about corporate governance at public companies. As discussed in a new open letter, the group believes that its principles—along with other sets of principles developed by the Investor Stewardship Group, the Business Roundtable and the World Economic Forum—have become “part of a larger dialogue about the responsibilities and need for constructive engagement of those companies, their boards and their investors.” The group views the discussion as particularly important in light of the “precipitous decline” in the number of public companies, which the group attributes, in large part, to the short-termism of public market participants. In that regard, in its letter, the group endorsed the principles developed by these other groups “as counterweights to unhealthy short-termism,” and revisited its own principles in a new updated Version 2.0. According to the press release, the signatories to Version 2.0 (including a number of well-known new signatories) have committed to apply the principles in their own businesses and call on others to join their ranks.
SEC issues Section 21(a) investigative report regarding the implications of cyberscams for internal controls
Today, the SEC issued an investigative report under Section 21(a) that advises public companies subject to the internal accounting controls requirements of Exchange Act Section 13(b)(2)(B) of the need to consider cyber threats when implementing internal accounting controls. The report investigated whether a number of defrauded public companies “may have violated the federal securities laws by failing to have a sufficient system of internal accounting controls.” Although the SEC decided not to take any enforcement action against the nine companies investigated, the SEC determined to issue the report “to make issuers and other market participants aware that these cyber-related threats of spoofed or manipulated electronic communications exist and should be considered when devising and maintaining a system of internal accounting controls as required by the federal securities laws. Having sufficient internal accounting controls plays an important role in an issuer’s risk management approach to external cyber-related threats, and, ultimately, in the protection of investors.”
As discussed in this PubCo post and this PubCo post, the role of proxy advisory firms has once again risen to the forefront as a sizzling corporate governance topic, just in time for the SEC Proxy Roundtable on November 15. In advance of the event, interested parties are marshalling their arguments and beginning to present their cases.
The public debate about hedge-fund activism has long been informed by academic literature that found increases in shareholder value and operating performance after activist interventions. But do hedge-fund activists actually do any long-term good for the companies that they target? Long-Term Economic Consequences of Hedge Fund Activist Interventions, from the Rock Center for Corporate Governance, examines just that question. The answer? Not so much. But not so much harm either.
A new rulemaking petition advocating that the SEC mandate environmental, social and governance disclosure under a standardized comprehensive framework has just been submitted by two academics and multiple institutional investors, representing over $5 trillion in assets. Not only is ESG disclosure material and relevant to understanding long-term risks, the petition contends, but the variety of approaches currently employed highlight the need for a more coherent standard that will provide clarity, completeness and comparability. In the past, concerns have been raised about whether uniform disclosure rules could really be effective for ESG. Can those concerns be overcome?
Are we just reading the wrong newspapers and reports or does it seem that auditors—although they spend hours and hours performing audits—rarely identify instances of fraud? Most companies rely on their auditors to uncover irregularities and breathe a sigh of relief when the audit comes up “clean.” Is that reliance misplaced? Probably so, according to this article from CFO.com. “Audits almost never find fraud,” the author writes; the data shows that “external audits find it 4% of the time, and internal 15%.” Instead, the author suggests, to detect fraud, management should look in a different direction.