Category: Corporate Governance
SEC charges PwC with independence violations
Last week, the SEC announced settled charges against PwC and one of its audit partners for violations of the auditor independence rules. As described in the Order, the violations included “performing prohibited non-audit services during an audit engagement, including exercising decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions.” PwC was also charged with “improper professional conduct” in connection with 19 engagements by failing to comply with PCAOB rules requiring an auditor to “describe in writing to the audit committee the scope of work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion.” According to the Order, the failure to properly advise these audit committees prevented them from examining whether the non-audit services affected PwC’s independence. Notably, because it issued an audit report stating that it was independent when it was not, PwC was also charged with having caused its audit client to violate the Exchange Act by filing with the SEC an annual report that contained materially false or misleading information and that failed to include financial statements audited by an independent public accountant, as required. The SEC concluded that these violations reflected “breakdowns in [PwC’s] system of quality control to provide reasonable assurance that PwC maintained independence.” In addition to requiring PwC to pay disgorgement and penalties, the SEC censured PwC. For companies, it is important to keep in mind that the consequences of violations of the auditor independence rules apply not just to the audit firm, but also to the audit client. An independence violation may cause the audit client to violate the Exchange Act, as in this case, and/or lead the auditor to withdraw its audit report, requiring the audit client to have a re-audit by another audit firm. Audit committees need to be on the alert for the possibility of auditor independence violations and be vigilant regarding the performance of non-audit services.
SEC Commissioners testify to House Committee
All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative’s own party. There were, however, some notable exceptions, such as Representative Katie Porter’s pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.
SEC charges Nissan and former CEO with fraud for concealing compensation
Yesterday, the SEC announced settled fraud charges under Rule 10b-5 against Nissan, its former CEO Carlos Ghosn, and Gregory Kelly, a former director, related to the failure to disclose over $140 million to be paid to Ghosn in retirement. (Here is the SEC’s Order and the complaint against Ghosn and Kelly filed in the SDNY.) Of course, you may be aware that Ghosn and the former director have been arrested by Japanese authorities and are awaiting trial, so these SEC charges were probably not the biggest glitch in their career paths. Nevertheless, the SEC’s action does stand as a warning that the SEC remains on the lookout for efforts to hide or disguise compensation from required public disclosure, especially where CEO discretion regarding compensation is largely unconstrained.
Is pay for performance a mirage?
Yes, it can be, according to the Executive Director of the Council of Institutional Investors, in announcing CII’s new policy on executive comp. Among other ideas, the new policy calls for plans with less complexity (who can’t get behind that?), longer performance periods for incentive pay, hold-beyond-departure requirements for shares held by executives, more discretion to invoke clawbacks, rank-and-file pay as a valid reference marker for executive pay, heightened scrutiny of pay-for-performance plans and perhaps greater reliance on—of all things—fixed pay. It’s back to the future for compensation!
ISS releases 2019 Global Policy Survey
ISS recently released the results of its 2019 Global Policy Survey. In this year’s integrated survey, the topics included board gender diversity, overboarding, sunsetting of multi-class capital structures, combined chair and CEO roles and climate change risk. The respondents included 128 investors (including 88 asset managers, 24 asset owners, four advisors and 12 other investors), and 268 non-investors (including 227 corporate issuers, 19 advisors, six corporate directors and 16 other non-investors). Highlights of the survey are summarized below.
SEC’s OCA updates auditor independence FAQs
The SEC’s Office of Chief Accountant has updated its FAQs regarding auditor independence. The new and revised questions relate to the general standard for independence, prohibited non-audit services, partner rotation, definitions and miscellaneous other independence issues. It is important to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw its audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should be another menu item on the audit committee’s plate.
EY discusses voluntary audit committee disclosures
By now, we all know that, sooner or later, audit reports for most public companies will be required to disclose critical audit matters, which are intended to make the audit report more informative for investors. (See this PubCo post.) But, as this article from the EY Center for Board Matters reports, over the last several years, companies and their audit committees have gone a long way toward increasing the amount of audit-related information they provide to investors voluntarily. To carry out its assessment, EY reviewed audit-related disclosures in the proxy statements of Fortune 100 companies over the period from 2012 to 2019. While year to year, the changes appear largely incremental, the change over the entire period is considerable.
Corp Fin changes approach to responding to no-action requests to exclude shareholder proposals
As foreshadowed by Corp Fin Director Bill Hinman at an event in July put on by the U.S. Chamber of Commerce (see this PubCo post), Corp Fin has announced that it is revisiting its approach to responding to no-action requests to exclude shareholder proposals. In essence, the staff may respond to some requests orally, instead of in writing and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. How will companies respond?
SEC’s Investor Advisory Committee adopts “proxy plumbing” recommendations
Yesterday morning, at a telephonic meeting of the SEC’s Investor Advisory Committee, the Committee voted to adopt revised recommendations addressing “proxy plumbing”—the panoply of problems associated with the infrastructure supporting the proxy voting system. (See this PubCo post.) The recommendations were originally presented at a meeting of the Committee in late July, but the Committee elected to study the proposal further and offer revisions before voting. The changes are fairly nuanced, now also including some minority views. For the most part, the recommendations would not “reinvent” the proxy voting system, instead targeting improvements that are considered essentially “low-hanging fruit.” However, there appeared to be a consensus that eventually more would need to be done. The recommendations were adopted by a majority of the Committee with two dissents. Will the SEC pay attention?
A new shareholder proposal regarding firearms—is it just the beginning?
In a post last month, I noted that, notwithstanding the growth in the number of shareholder proposals related to corporate social responsibility, for the 2019 proxy season (unlike 2018), we did not find any shareholder proposals that were submitted for shareholder votes directly addressing gun safety (although some did indirectly). I wondered out loud whether, in light of current events and the renewed national debate on gun safety—not to mention the gridlock leaving government incapable of doing anything—investors, customers, employees and other stakeholders might turn to companies to “do something.” Would they begin to apply more pressure to companies involved with firearms, including retailers and banks, to reexamine their relationships with the gun industry? It turns out that at least one of them has. Will others follow?
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