Category: Corporate Governance
New CDI addresses diversity disclosure
Corp Fin has posted a new Compliance & Disclosure Interpretation under Reg S-K that relates to diversity disclosure. The new interpretation applies to both Item 401— Directors, Executive Officers, Promoters and Control Persons and Item 407—Corporate Governance.
NYC Comptroller goes straight to court to compel inclusion of shareholder proposal—is this the Comptroller’s new normal?
Post-shutdown, the SEC is starting to catch up on no-action requests to exclude shareholder proposals, posting several new entries at the end of last week. While most of the responses reflected withdrawals of requests in light of withdrawal of the subject proposal, one of the more interesting withdrawal letters relates to a decision to include a shareholder proposal. The proposal, submitted by the New York City Employees’ Retirement System and other pension funds overseen by NYC Comptroller Scott Stringer, sought to have TransDigm Group Incorporated, a manufacturer of aerospace components, adopt a policy related to climate change. After the company sought no-action relief from the SEC staff—and notably well before the government shutdown and before the SEC had even responded to the company’s request—the proponent pension funds filed suit in the SDNY seeking to enjoin the company from soliciting proxies without including the shareholder proposal and declaratory relief that the exclusion of the proposal violated Section l4(a) and Rule l4a-8. Will the Comptroller use the same tactic of circumventing the traditional SEC process and commencing litigation for any proposal the pension funds submit in the future? Will going straight to court be the new normal?
Have we reached an inflection point on environmental and social shareholder proposals?
In this thoughtful article from the Managing Editor at ISS Analytics, The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018, the author contends that, notwithstanding high-level data showing relatively static median vote support for shareholder proposals over the last 19 years, that data is deceptive: “the reality is that investor voting behavior among owners of U.S. companies has changed significantly—perhaps almost revolutionarily—over the past two decades.” What’s more, “the most significant change in investors’ voting behavior pertains to environmental and social issues, as these proposals are earning record levels of support in recent years.”
When it comes to ICFR, the SEC will not tolerate if you do not remediate
Now back to work, SEC Enforcement once again takes up the issue of internal control over financial reporting. In this instance, the SEC announced settled charges against four public companies for failing to remediate internal control weaknesses—for years! We’re talking seven to ten years. The companies seemed to be under the misimpression that, as long as they disclosed the material weaknesses, they were in the clear. But they learned the hard way that that was not the case. According to Melissa Hodgman, an Associate Director in Enforcement, “Companies cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation. We are committed to holding corporations accountable for failing to timely remediate material weaknesses.”
CII advises on disclosure of board evaluation processes
The Research and Education Fund of the Council of Institutional Investors has released a new report regarding disclosure of board evaluation processes in proxy statements. Robust board evaluation processes are considered a key element in strengthening board effectiveness and, as a result, institutional investors have expressed an intense interest in the review process. While companies have been discussing their board evaluation processes in their proxies with increasing frequency, CII suggests that these discussions could be more robust.
New House bill to curb potential abuse of 10b5-1 plans
As noted in thecorporatecounsel.net blog, the Chair of the House Financial Services Committee, Maxine Waters, has introduced H.R. 624, the “Promoting Transparent Standards for Corporate Insiders Act,” which could require some significant tweaks to Rule 10b5-1 plans and disclosure about them. Co-sponsored by the Ranking Republican Member on the Committee, Patrick McHenry, the legislation would require the SEC to conduct a study of whether specified amendments to the rules governing 10b5-1 plans should be adopted, report back within a year and then adopt rule amendments consistent with the findings of the study. The high-level bipartisan sponsorship of the legislation suggests that there is a reasonable chance that it could move forward, but certainly does not guarantee that it will survive in the Senate. You might recall that the JOBS and Investor Confidence Act of 2018 (the erstwhile JOBS Act 3.0), which included similar provisions regarding Rule 10b5-1, passed the House by a vote of 406 to 4, but made no progress in the Senate. (See this PubCo post.) The new leadership must think that the chances for enactment are better with a standalone bill.
BlackRock CEO promotes corporate “purpose”: should corporations step into the governmental vacuum?
In this year’s annual letter to CEOs, BlackRock CEO Laurence Fink once again advocates the importance of a long-term approach, at the same time mourning the prevalence of political dysfunction and acknowledging the resulting increase in public anger and frustration: “some of the world’s leading democracies have descended into wrenching political dysfunction, which has exacerbated, rather than quelled, this public frustration. Trust in multilateralism and official institutions is crumbling.” For a moment, I thought he was going to veer off into “American carnage,” but instead his focus is on the responsibility of corporations to step into the breach: “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others.”
LIBOR phase-out—issues to consider
You may recall that at the end of last year, SEC Chair Jay Clayton and Corp Fin Chief Accountant Kyle Moffatt were warning at various conferences about some of the risks the SEC was monitoring, among them the LIBOR phase-out, which is expected to occur in 2021. As reported by the WSJ, Moffatt indicated that “to the extent that the phaseout of Libor is material to a company,…we would definitely expect a company to disclose that fact and describe the implications of the phaseout, including any associated risks, to investors.’” (See this PubCo post.) But, in making that assessment and any related disclosure, what should companies consider?
Should we get rid of EPS?
Much has been written about the problems associated with the prevalence of short-term thinking in corporate America. As noted in a post from The Harvard Law School Forum on Corporate Governance and Financial Regulation, an academic study revealed that “three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report.” (See this PubCo post and this article in The Atlantic.) Apparently, that was no joke. As reported in Forbes, for the first six months of 2018, companies in the S&P 500 spent $367 billion on stock buybacks—which can drive increases in quarterly EPS without increasing the underlying long-term economic value of the company—while capex totaled only $317 billion. ls there a way to engineer a course correction?
IPO mix and match?
You might want to take a look at this interesting column from Bloomberg’s Matt Levine, talking about some recent developments in the IPO market. Apparently, a second company is contemplating conducting an IPO through a direct listing, a listing process run outside of the conventional underwritten offering in which the company files with the SEC to allow certain of its outstanding shares to be sold directly into the market, without the traditional help from the underwriters in marketing the deal. Although the company does not raise any funds itself, it becomes a public company and provides a market in which shares may sold by selling shareholders at prevailing market prices. The process may be particularly appealing to companies that are very well known and well funded, but want to trade publicly, since the costs of going public are generally lower and the process can be somewhat quicker than a traditional IPO.
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