In February 2018, SCOTUS handed down its decision in Digital Realty v. Somers, holding that the Dodd-Frank whistleblower anti-retaliation protections apply only if the whistleblower blows the whistle all the way to the SEC; internal reporting to the company alone would not suffice. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language” of the statute. However, by requiring SEC reporting as a predicate, it was widely thought that the decision might have a somewhat perverse impact: while the win by Digital would limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who did not report to the SEC, the holding that whistleblowers were not protected unless they reported to the SEC could well discourage internal reporting by driving all securities-law whistleblowers directly to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor. (See this PubCo post.)
Many have recently lamented the decline in the number of IPOs and public companies generally (about half the number since the boom in 1996), and numerous reasons have been offered in explanation, from regulatory burden to hedge-fund activism. (See this PubCo post and this PubCo post.) In response, some companies are exploring different approaches to going public, leading to a resurgence in SPACs and the launch of IPOs as “direct listings,” which avoid the underwritten IPO process altogether. At the same time, companies are seeking ways to address some of the perceived drawbacks associated with being public companies—including the pressures of short-termism, the risks of activist attacks and potential loss of control of companies’ fundamental mission—through dual-class structures and other approaches. Even the SEC is currently planning a roundtable to address the causes of and potential solutions to short-termism. (See this PubCo post.) Changing dynamics are not, however, limited to the IPO process itself. And one of the most interesting concepts designed to address these issues on completely different turf was just approved by the SEC this month—a novel concept for a stock exchange located in San Francisco, the Long-Term Stock Exchange. The concept has been in the works for a couple of years now and is backed by some heavy-hitting investors. According to the LTSE’s founder and CEO, the “IPO is like a wedding. The IPO process is, what kind of wedding planner do you hire? What kind of wedding do you want to have? But being a public company is you’re now married to the public markets for the rest of your life. People have mostly focused on the IPO process — it’s like making the wedding more efficient….That’s not the problem. The problem is we have to live like this forever.” How will the new Exchange seek to improve this “married life” going forward?
The Department of Justice has just released its updated guidance for Evaluation of Corporate Compliance Programs. The DOJ Manual identifies factors that prosecutors take into account “in conducting an investigation of a corporation, determining whether to bring charges, and negotiating plea or other agreements.” Among these factors is the “adequacy and effectiveness of the corporation’s compliance program.” Although the guidance is designed to assist prosecutors in assessing and making informed decisions about the extent of “credit” to be attributed to a company in light of its corporate compliance program, the factors that prosecutors are advised to consider in evaluating these programs should not be lost on companies seeking to develop and implement their own compliance programs. Of course, the guidance is not intended to be formulaic and recognizes that the relevance and significance of the factors and questions identified will vary depending on a range of company attributes, including “each company’s risk profile and solutions to reduce its risks.”
Here is the lede from this WSJ article: “A stubborn paradox reigns across U.S. boardrooms: Companies are appointing more women to board seats than ever, yet the overall share of female directors is barely budging.” In comments to the WSJ, the managing director for corporate governance research at the Conference Board indicated that, in “the last two decades, there’s been a sweeping revolution in the field of corporate governance…. Yet if you look at the composition of the board, at its core, it remains the same at many public companies and quite resistant to change.’” Why is that? It’s not, as some have suggested, a lack of qualified women board candidates. Rather, according to the Conference Board, it’s that “average director tenure continues to be quite extensive (at 10 years or longer), board seats rarely become vacant and, when a spot is available, it is often taken by a seasoned director rather than a newcomer with no prior board experience.”
An op-ed co-authored by SEC Commissioner Robert Jackson (who is reportedly planning to leave the SEC this fall, although he’s eligible to stay until the end of 2020) and MIT senior lecturer (and former president of Fidelity) Robert Pozen lambasts the use of non-GAAP targets in determining executive pay, absent more transparent disclosure. The pair argue 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.” What’s the bottom line? Where comp committees base comp on a different scorecard than GAAP, they argue, the committee should have to explain their decision by reconciling to GAAP in the CD&A. Will the SEC take heed?
Coming soon to a financial statement near you: CAMs! Late this summer, in audit reports for large accelerated filers with June 30 fiscal year ends, auditors will begin to disclose “critical audit matters.” Under the new auditing standard for the auditor’s report (AS 3101), CAMs are defined as “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria. Compliance will be required for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and for audits of all other companies to which the requirement apply (not EGCs) for fiscal years ending on or after December 15, 2020. With that in mind, the PCAOB has released three new documents offering guidance on CAM implementation: The Basics; A Deeper Dive on the Determination of CAMs; and Staff Observations from Review of Audit Methodologies. (See also thecorporatecounsel.net blog and this article in ComplianceWeek.)
The newest SEC Commissioner, Elad Roisman, who has reportedly gotten the nod to head up the SEC’s efforts regarding proxy advisory firms, told the U.S. Chamber of Commerce in late March that he expects the SEC to issue new guidance, sometime after proxy season this year, regarding the use by institutional investors of proxy advisory firm recommendations, as reported in The Deal. And, according to the WSJ, Roisman has “also questioned whether it was appropriate for the SEC to exempt proxy advisers from some regulations on investment advice, including whether they can both advise a company and make recommendations to its shareholders at the same time.” However, as discussed in this PubCo post, the question of whether proxy advisory firms, such as ISS and Glass Lewis, have undue influence over the voting process and should be reined in has long been something of a political donnybrook. With the issue of proxy advisory firm regulation so politically freighted, will the SEC limit the scope of its effort to guidance to institutional investors or, more controversially, go further and impose regulation on proxy advisors, as many companies have advocated?