Category: Corporate Governance
Reasons voiced for lack of women on UK boards—real or comedy parody?
As discussed in this article from the WSJ, the UK government is conducting a review of the reasons underlying the low proportion of women in top executive positions at companies in the FTSE 350 index. According to the article, the goal is to have women occupy at least one-third of board seats by 2020. However, in 2017, 24.5% of the boards seats at FTSE 350 companies were occupied by women compared with 23% in 2016 and 9.5% in 2011. But the most astonishing aspect are the atavistic quotes from a range of FTSE 350 Chairs and CEOs explaining the dearth of women in top positions.
Organizations make recommendations to revitalize the IPO market
In this report, Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public, eight organizations—the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet and the U.S. Chamber of Commerce—joined forces to make recommendations about how to revitalize the IPO market and make public company status more appealing. Many of these recommendations have in the past been the subject of legislation or proposed rulemaking or have otherwise been floated in the ether but, nevertheless, have not advanced. Will the weight of these groups propel any of these recommendations forward?
As proxy season ends, Equilar dives into pay-ratio data
With over 2,000 companies now having reported pay-ratio information for the 2018 proxy season (through May 10), consultant Equilar says it’s time to take a deep dive into the data to see what trends are discernible. Of course, until we have information for several proxy seasons, we really won’t have a very good handle on best practices or even which standards will ultimately take hold. In the meantime, however, Equilar’s analysis of the first year of reporting is a welcome beginning.
Will the call for mandatory audit firm rotation be renewed?
Starting in 2018, new rules required disclosure of auditor tenure in audit reports. (See this PubCo post.) And, for some companies, those tenures can stretch over a century. For example, KPMG reported that it has audited GE since 1909. (See this PubCo post.) According to this press release from the American Accounting Association, for “the first 21 companies of the Dow 30 to release their reports this year, the average auditor tenure is 66 years.” But long auditor tenure has its critics and its fans. Some argue that long tenure can adversely affect auditor independence and objectivity, while others contend that long tenure avoids the time loss and distraction of having to “onboard” new auditors, provides deep institutional knowledge—leading to higher audit quality—and offers cost savings resulting from that familiarity. However, a couple of recent academic studies call those suggested benefits into question. The press release cited above and this article in CFO.com report on new academic research that concludes that, among the Big 4 at least, the longer the tenure, the greater the fee, notwithstanding the reduction in effort required of the auditor over time. And this press release from the American Accounting Association reports on another academic study that, contrary to popular assumptions, found a positive correlation between relatively short audit tenure and the speed of discovery of financial misreporting. Will these studies renew calls for mandatory auditor rotation?
Authors advocate seven steps for effective board evaluations
Having a board evaluation is a regular event for most public companies. But is it a productive practice or just another corporate governance kabuki—a perfunctory, check-the-box exercise with no real impact? “Board Performance Evaluations that Add Value,” posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, suggests that board evaluations can range from “counterproductive exercises, which exacerbate already fractious and poorly performing boards, to truly transformational change leading to superior governance and organisational outcomes.” But what leads to a superior outcome? The authors suggest that positive outcomes are more likely when boards understand the relative advantages and disadvantages of the different types of board reviews, and properly plan and implement the recommendations resulting from the board’s evaluation. Moreover, the authors contend that the evaluation process itself offers benefits as “an effective team-building, ethics-shaping activity. [The authors’] observation is that boards often neglect the process of engagement when undertaking evaluations; unfortunately, boards that fail to engage their members are missing a major opportunity for developing a shared set of board norms and inculcating a positive board and organizational culture. In short, the process is as important as the content.”
Willis Towers Watson offers 2018 say-on-pay snapshot
In this snapshot review by Willis Towers Watson of U.S. say-on-pay and other compensation-related votes, WTW found that average support for say on pay remained high at 91%. In addition, where ISS identified “high” levels of concern leading to negative recommendations on say on pay, 84% related to pay-for-performance concerns (compared to 75% in 2017).
Nontraditional board candidates made headway in 2017
According to a new report from the EY Center for Board Matters, 54% of the 2017 class of directors of Fortune 100 companies served in non-CEO roles and 40% were female. More than half of the Fortune 100 added at least one independent director, slightly less than in 2016, but together, over the two-year period, over 80% of the Fortune 100 added at least one independent director. The result was that, taking director exits into account, “nearly all of the companies experienced some type of change in board composition during this period.” The EY Center’s associate director told the WSJ that the report showed “‘an increase in board diversity along the different dimensions of gender, age, ethnicity and in some cases socioeconomic background,’…. That means demand is growing for people who can offer ‘a more nuanced, multidimensional look’ at what is… happening with regard to consumer demographics, disruptive technology and workforce management, among other areas, she said. ‘The consensus is the best way to provide for boards to be able to see around corners, to ask the right critical questions, to get to the best answer possible, is to have a board that has the right mix of skills, expertise, background and perspective….There’s more openness to considering more and different perspectives.’”
Best Practices Committee offers recommendations for conduct of virtual annual meetings
For most companies, annual shareholder meetings are non-events, with little to no shareholder attendance. That’s why the concept of virtual annual meetings—which allow shareholders to overcome the logistical and financial burdens of attendance in person—was originally viewed as a way to rejuvenate the concept of annual meetings. With virtual technology, large numbers of shareholders were suddenly able to attend meetings on their laptops. Ironically, however, it has been shareholders—the designated beneficiaries of the virtual annual meeting—that have raised objections to virtual-only meetings because they were viewed to insulate management and directors from shareholders, allowing management to avoid uncomfortable questions. (See this PubCo post and this PubCo post.) While the number of virtual-only annual meetings increased from 21 in 2011 to 155 in 2016 to over 212 in 2017, the criticism among some commentators and institutional holders has not abated: critics continue to contend that virtual-only meetings limit an important shareholder right, precluding shareholders from direct eye-to-eye engagement with management and the board. With that in mind, a group of interested representatives of retail and institutional investors, public companies, proxy advisors and legal counsel, known as The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings, have developed a set of best practices designed to ensure that the needs of all constituents are satisfied—to “promote both the reality and the perception of scrupulous fairness.”
SEC proposes amendments to auditor independence rule related to debtor-creditor relationships
The SEC has posted a new rule proposal that would modify the analysis of auditor independence in the context of lending relationships between the auditor and certain shareholders of an audit client during the audit or professional engagement period. Under the current loan provision of Rule 2-01(c) of Reg S-X, some debtor-creditor relationships between an auditor and its audit client are viewed to taint auditor independence. However, the SEC now believes that some of the provisions of this Rule are not as effective as they could be and may present unnecessary practical challenges. The release indicates that the proposed amendments are designed to better focus the loan provision “on those relationships that, whether in fact or in appearance, could threaten an auditor’s ability to exercise objective and impartial judgment.” As Wes Bricker, SEC Chief Accountant, told Bloomberg, “[w]e’re trying to right-size” the Rule.The SEC is also soliciting comment on other potential changes to the loan provision or other provisions of Rule 2-01. Comments are due 60 days after publication in the Federal Register.
Will the DOL put the kibosh on ESG investing?
It would be hard to miss the increased focus of investors—especially institutional investors—on environmental, social and governance issues. From multiple surveys showing the importance to investors of ESG factors to near-campaigns conducted by large asset managers promoting ESG as a component critical to long-term value creation, it sure seemed as if most of the private sector was getting on board. Indeed, in 2018, Laurence Fink, the Chair and CEO of asset manager BlackRock, wrote in his annual letter that, given some of the failures of governments, “society increasingly is turning to the private sector and asking that companies respond to broader societal challenges…. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” [Emphasis added.] But then, near the end of April, the Department of Labor issued a new Field Assistance Bulletin No. 2018-01, which provides guidance for plan fiduciaries about investments under ERISA. While Fink’s letter may have seemed like an assault on Milton Friedman’s theory of the primacy of maximizing shareholder value, the new DOL Bulletin has wrapped Friedman’s theory in an embrace so warm it would make the presidents of the US and France blush. (Ok, that’s a big exaggeration.)
You must be logged in to post a comment.