Category: Corporate Governance
JOBS Act 3.0?
Will there be a JOBS Act 3.0? The JOBS and Investor Confidence Act of 2018 just passed the House by a vote of 406 to 4, so, even though Senators may often be chary of jumping on the House bandwagon—remember the doomed Financial Choice Act of 2016 and then 2017— the overwhelming and bipartisan approval in the House still makes the odds look better than usual.
So long to mandatory universal proxy?
In this Reuters article, the author delivers the scoop that the SEC has shelved its 2016 proposal to mandate the use of universal proxy cards in contested elections of directors. In case you were thinking that anything from 2016 was probably old and cold anyway, keep in mind that the just-adopted rules changing the definition of “smaller reporting company” were proposed back in 2016. (See this PubCo post.) In fact, the proposed rule mandating the use of universal proxies was still on the SEC’s Spring 2018 agenda for long-term actions, and Reuters reports that “SEC officials have said publicly in recent months that the proposed rule-change remains a priority.” However, “several people familiar with the matter” have now advised Reuters that SEC Chair Jay Clayton “has in fact shelved the proposal.”
SEC Enforcement settles action about perks disclosure
This SEC Order, In the Matter of The Dow Chemical Company, is a great refresher—at Dow’s expense, unfortunately for Dow—on the analysis required to determine whether or not certain expenses and benefits are perquisites or personal benefits that must be disclosed in the Summary Comp Table in the proxy statement. As you probably know, the analysis for determining whether an item is a disclosable “perk” can be very tricky to apply, especially when it involves the use of corporate jets by executives and their friends and families. The SEC claims that Dow applied the wrong standard altogether in its analysis, failing to disclose over a five-year period $3M in CEO perks and understating the CEO’s disclosed perks by an average of 59%. Dow settled the charges for a fine of $1.75M and also undertook to engage an independent consultant that would perform a review of Dow’s policies, procedures and controls and conduct training related to the determination of perks.
Groups take aim—from opposite directions—at shareholder proposals
New groups have recently been formed to take aim at the shareholder proposal process—its use by proponents and its implementation by Corp Fin—from both the right and the left ends of the political spectrum. In one case, the coalition formed is seeking to head off the recent surge of support by various institutional holders of shareholder proposals for environmental, social or governance disclosure or actions. For example, last year, proposals to enhance disclosures regarding climate change won majority votes at three major companies, in large part as a result of support from mammoth asset managers such as BlackRock and Vanguard, and two climate change proposals won majority support this year. It’s also been reported that nine ESG proposals were successful in winning majority votes this year. (See, e.g., this PubCo post.) On the other side is a group that is seeking to reform the shareholder proposal process to reverse a turn, as perceived by the group, by Corp Fin toward exclusion of more shareholder proposals related to ESG issues.
GAO issues annual report on conflict minerals filings in 2017
Under Dodd-Frank, the GAO is required to assess annually the effectiveness of the SEC’s conflict minerals rules in promoting peace and security and to report on the rate of sexual violence in the DRC and adjoining countries. The GAO has released its annual study on conflict mineral disclosures filed with the SEC in 2017. The report is based on a random sample of 100 Forms SD, interviews with company representatives and other stakeholders.
Right after celebrating its second birthday, proposal to change the definition of “smaller reporting company” is adopted (updated)
[This post has been updated to reflect the adopting release, which has now been posted here, as well as posted statements from the Commissioners.] The pressure has been coming from all directions—the Congress, the Treasury—indeed, there’s been nary an advisory committee that hasn’t weighed in on this topic: time for the SEC to change the definition of “smaller reporting company.” After all, the proposal has just celebrated its second birthday—has it aged like a fine wine or is it moldy and stinky like an old piece of cheese? The verdict: moldy cheese that made no one happy, but they all ate it anyway.
Should the prospect of CAM disclosures cause audit committees to rethink company disclosures?
What are auditors and audit committees doing to get ready for the impending disclosure of CAMs in audit reports ? You remember that, under AS 3101, the new auditing standard for the auditor’s report, auditors will be required (in 2019 for large accelerated filers and phased in for others) to include a discussion of “critical audit matters,” that is, “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.” (See this PubCo post.) 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. The selection of and disclosure regarding CAMs will certainly present a challenge for both audit committees and auditors. This article from Compliance Week reports that, beyond that challenge, the prospect of CAM disclosure should precipitate a reassessment by audit committees and companies of related corporate disclosure to ensure that companies stay ahead of the curve.
SEC Commissioner Jackson calls for restrictions on executive sales during stock buybacks
In remarks Monday before the Center for American Progress, SEC Commissioner Robert Jackson discussed his recent research on corporate stock buybacks, in the light of the substantial increase in buybacks following the 2017 Tax Cuts and Jobs Act. His focus: to call on the SEC to update its buyback rules “to limit executives from using stock buybacks to cash out from America’s companies.” If executives are so convinced that “buybacks are best for the company, its workers, and its community,” Jackson suggested, “they should put their money where their mouth is.”
Will pay-ratio results be the catalyst for local action?
Besides shock and awe, did pay-ratio disclosure have any immediate practical consequences? Well, for one, if a company did business in Portland, Oregon, the answer could well be “yes.” You might remember that, at the end of 2016, the Portland City Council, piggybacking on the pay-ratio data that most public companies were required to begin disclosing this year, adopted a measure adding a 10% surcharge to the city’s existing business tax for each company that exceeded a 100-to-1 pay ratio and a 25% surcharge if the pay ratio exceeded 250 to 1. (See this PubCo post.) According to comp consultant Equilar, the median pay ratio for the Russell 3000 was 70:1 (see this PubCo post). So what were the consequences of the Portland surtax—in Portland and beyond?
Consultant Pay Governance analyzes pay ratio
In this analysis, compensation consultant Pay Governance looks at the factors affecting pay-ratio results and, in light of the feverish media coverage that insists on comparing ratios among companies, offers advice on dealing with that onslaught of comparisons. In their analysis, the authors conclude that pay-ratio results are more affected by median employee pay than by CEO pay. And, because median employee pay can be highly variable depending on the company’s industry, geographic location, international operations and business model, pay-ratio comparisons among companies are “fraught with technical and structural issues,” and “potentially problematic,” especially between the companies with the highest and lowest pay ratios. Of course, it was never the SEC’s intent that pay-ratio data be used for comparative purposes across companies; as the SEC made plain in the adopting release, “the final pay ratio rule should be designed to allow shareholders to better understand and assess a particular registrant’s compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one registrant to another.” That caution notwithstanding, the issue continues to confront boards and comp committees, and the authors suggest ways that boards can navigate these shoals.
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