Category: Corporate Governance
Glass Lewis’s expectations in response to new Corp Fin approach to shareholder proposals
You may recall that, last month, Corp Fin announced that it had revisited its approach to responding to no-action requests to exclude shareholder proposals. In essence, under the new policy, 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. (See this PubCo post.) In its most recent proxy guidelines, Glass Lewis explains its expectations from companies in light of the new approach.
SEC proposes new obligations for proxy advisory firms and changes to rules for shareholder proposals
Are issuers precluded from raising concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that form the basis of a recommendation? Are firm conflicts of interest insufficiently transparent? Are proxy advisory firms an effective “market-based solution” helping large numbers of institutional investors with time and resource constraints make better voting decisions? Are proxy advisory firms “faux regulators,” wielding too much influence—with too little accountability—in corporate elections and other corporate matters? Maybe all of the above? At an open meeting this morning, the SEC voted, with two dissents, to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to “modernize” the shareholder proposal rules by increasing the eligibility and resubmission thresholds. These actions represent the third phase of the SEC’s efforts to address the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). As anticipated, at the meeting, the commissioners expressed strong views on these topics, with Chair Jay Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and Commissioner Robert Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” Both proposals are subject to 60-day comment periods. Next up, according to Clayton, proxy plumbing and universal proxy.
Does appointment of a former partner of the client’s audit firm to the client’s audit committee impair audit quality?
Studies of former partners of audit firms that have assumed management positions at audit clients have raised concerns, at least pre-SOX, about potentially lower audit quality, perhaps reflecting hesitation by the audit firm to “challenge aggressive accounting decisions” made by former partners of their firms. But what happens when a former partner joins the audit client’s audit committee? Does the former partner feel pressured not to question the audit firm’s decisions or lose objectivity about the quality of the work of the audit firm? Does the audit firm feel pressured to accept the company’s more aggressive accounting decisions when a former partner sits on the audit committee? In this study, published in Auditing: a Journal of Practice & Theory, a group of academics looked at that question. Their conclusion was that affiliated former partners on audit committees actually led to improved audit processes and outcomes. Why? Applying psychology’s “social identity theory,” the authors posit that the former partners continued to identify with their former firms, but instead of losing their objectivity, the former audit partners “use their knowledge of, and identification with, the audit firm to improve the audit process and the communication between the two parties,” leading to improvement in audit quality.
ISS sues the SEC—what will it mean for regulation of proxy advisory firms?
Today, ISS filed suit against the SEC and its Chair, Jay Clayton (or Walter Clayton III, as he is called in the complaint) in connection with the interpretation and guidance directed at proxy advisory firms issued by the SEC in August. (See this PubCo post.) That interpretation and guidance (referred to as the “Proxy Adviser Release” in the complaint) confirmed that proxy advisory firms’ vote recommendations are, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9. In its complaint, ISS contends that the Proxy Adviser Release is unlawful and its application should be enjoined for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” is contrary to law, that the SEC failed to comply with the Administrative Procedures Act and that the views expressed in the Release were arbitrary and capricious.
Interestingly, the litigation comes right before the SEC is scheduled to consider and vote (on November 5) on a proposal to amend certain exemptions from the proxy solicitation rules to provide for disclosure, primarily by proxy advisory firms such as ISS and Glass Lewis, of material conflicts of interest and to set forth procedures to facilitate issuer and shareholder engagement and otherwise improve information provided. There are various rumors circulating about the details of the proposal, including this Reuters article stating that the proposal would require proxy advisory firms to “give companies two chances to review proxy materials before they are sent to shareholders.” (Note that also on the agenda is a proposal to “modernize” the shareholder proposal rules by changing the submission and resubmission requirements.) Whether the firms’ advice is a “solicitation” takes on particular significance given that the SEC’s anticipated proposal appears to be predicated on the firms’ reliance on the exemptions from the proxy solicitation rules.
Are companies that follow a stakeholder model more “effective”?
New research from the Drucker Institute, published in the WSJ, applied the Institute’s analytical framework to assess companies’ “effectiveness,” defined for this purpose as “doing the right things well.” Notably, the authors of the article find a harmonious congruence—or is it a “harmonic convergence”?—between the “indicators” of effectiveness that make up their model and the various commitments for the benefit of all stakeholders in the Business Roundtable’s new “Statement on the Purpose of a Corporation.” What’s more, the authors suggest that their own framework was created to promote exactly “the kind of stakeholder mind-set that the Business Roundtable has now endorsed.” With that in mind, the authors highlight the group of companies led by CEOs who signed the BRT Statement to see how well these companies fared. While some have viewed the BRT Statement as mere “virtue signaling” (see the SideBar below), the article sets out to measure the extent to which the signatories put their money where their mouths are. How did they do? “Quite well,” but with “notable room for improvement.”
EY analyzes cybersecurity risk disclosure
What are companies disclosing about their efforts to oversee cybersecurity risk? In this article, Ernst & Young analyzes cybersecurity-related disclosures in the proxy statements and Forms 10-K of Fortune 100 companies from 2018 to 2019, focusing on disclosure regarding board oversight, cybersecurity risk and risk management. Building on its similar analysis conducted for 2018 (see this PubCo post), EY detected “modest” enhancements in disclosures compared to the prior year—most significantly regarding board oversight practices—although the depth, detail and company-specificity of the disclosures continued to vary widely. Nevertheless, based on its observations of companies’ activities in the market, EY found that even these enhanced disclosures sometimes failed to capture all of a company’s oversight activities, such as third-party independent assessments or tabletop exercises designed to enhance preparedness. Given that many stakeholders have interests in cybersecurity risk preparedness and board oversight, EY advises, enhanced disclosure can serve to build “stakeholder confidence and trust as the cybersecurity risk landscape evolves and as technological innovations raise the stakes for data privacy and protections.”
How are companies approaching the new requirement for hedging policy disclosure?
At the end of 2018, the SEC dredged up its 2015 rule proposal regarding hedging disclosure (required by Dodd-Frank) and voted to adopt final rule amendments. The amendments mandate disclosure about the ability of a company’s employees or directors to hedge or offset any decrease in the market value of equity securities granted as compensation to, or held directly or indirectly by, an employee or director. As described in the legislative history of the related Dodd-Frank provision, the purpose of the requirement was to “allow shareholders to know if executives are allowed to purchase financial instruments to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform.” As required, companies have now begun to include the new hedging disclosure in their proxy statements. To see how companies were approaching their responses to the new rule, comp consultant F.W. Cook examined the first 40 proxies that contained the new disclosure (covering the period from August 23, 2019 to October 4, 2019) and provides us with a number of observations that may well be helpful as we head into the new proxy season.
Are we misunderstanding the elements that lead to good governance?
What does good governance really mean? What does it mean to follow best practices? Are there really best practices that make sense for all companies? Do we tend to latch onto easily identified and measured structural features that may not really be effective for good governance and ignore qualities that may be more effective but are not as easily identified or measured? Do we even have a common understanding of the meaning of concepts central to governance? These are some of the questions addressed in an interesting paper, “Loosey-Goosey Governance Four Misunderstood Terms in Corporate Governance,” from the Rock Center for Corporate Governance at Stanford.
NYC Comptroller’s Office initiates Boardroom Accountability Project 3.0 promoting adoption of the “Rooney Rule”
And speaking of the NYC Comptroller’s Boardroom Accountability Project, as I just did in this PubCo post on the Project’s push for proxy access, on Friday, Stringer announced the newest phase of the Project, Boardroom Accountability Project 3.0, an initiative designed to increase board and CEO diversity. The third phase of the initiative calls on companies to adopt a version of the “Rooney Rule,” a policy originally created by the National Football League to increase the number of minority candidates considered for head coaching and general manager positions. Under the policy requested by the Comptroller’s Office, companies would commit to including women and minority candidates in every pool from which nominees for open board seats and CEOs are selected. The announcement claims that the Project 3.0 represents “the first time a large institutional investor has called for this structural reform for both new board directors and CEOs.” Notably, the announcement also indicates that the Comptroller’s Office will “file shareholder proposals at companies with lack of apparent racial diversity at the highest levels.” The Comptroller’s Office characterizes the new initiative as the “cornerstone” of its Boardroom Accountability Project that “seeks to make meaningful, long-lasting, and structural change in the market practice so that women and people of color are welcomed in the door and considered for every open director seat as well as for the job of CEO.” Given Stringer’s success with his proxy access campaign, companies should pay close attention.
Does proxy access create leverage—even if no one uses it?
Thanks to thecorporatecounsel.net for catching this announcement from NYC Comptroller Scott Stringer and the NYC Retirement Systems, which reported that, since the inception of the Comptroller’s “Boardroom Accountability Project,” there has been a 10,000% increase in the number of companies with proxy access. Stringer began the Project in 2014 with proxy access proposals submitted to 75 companies. At the time, Stringer viewed the campaign as having been “enormously successful: two-thirds of the proposals that went to a vote received majority support and 37 of the companies have agreed to enact viable bylaws to date.” (See this PubCo post and this PubCo post.) So effective was the proxy access campaign that Stringer leveraged its success and the “powerful tool” it represented to “demand change” through the Boardroom Accountability Project 2.0, focused on corporate board diversity, independence and climate expertise. Now, five years later, the number of companies with “meaningful” proxy access has climbed from just six in 2014 to over 600—including over 71% of the S&P 500—all as a consequence, Stringer contends, of the Boardroom Accountability Project. But, you say, proxy access has hardly ever been used (see this PubCo post), so what difference it make? In Stringer’s view, it makes a big difference.
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