Category: Corporate Governance
Is it time to regulate proxy advisory firms?
The idea of regulating proxy advisory firms has been in the ether for quite some time, but it’s an idea that never quite comes to fruition. However, there seems to be a lot of chatter about this topic now, raising the question: is now the time? According to this paper, The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry, from Stanford’s Rock Center for Corporate Governance, while proxy advisory firms influence institutional voting decisions and corporate governance choices to a material extent, it “is not clear that the recommendations of these firms are correct and generally lead to better outcomes for companies and their shareholders.” In that light, the paper suggests that some type of regulation of proxy advisory firms might be warranted to increase their transparency and improve the reliability of their recommendations.
Are non-GAAP financial measures still problematic?
A couple of years ago, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as one enforcement action—toward requiring issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. For example, companies were advised that they needed to present GAAP measures with equal or greater prominence relative to the non-GAAP measures. (See, e.g., this PubCo post.) And, as this article revealed, according to Audit Analytics, in 2016, over 25% of the companies in the S&P 500 index had shifted their presentations to put GAAP at the top of their quarterly earnings releases and 81% made GAAP numbers most prominent, compared with only 52% for the prior quarterly earnings releases. (See this PubCo post.) By the end of 2017, the SEC was apparently sufficiently satisfied with the response that the pendulum had swung back, and there was less staff focus and comment on non-GAAP financial measures. (See this PubCo post.) But is that really the end of the story? How “good” are the numbers that are fed to investors?
SEC to hold another proxy roundtable
SEC Chair Jay Clayton announced earlier this week that the SEC will be holding a roundtable to discuss the proxy process, date TBD. Potential topics include the voting process, retail shareholder participation, shareholder proposals, proxy advisory firms and technology and innovation. In 2010, the SEC issued a concept release soliciting public comment on whether the SEC should propose revisions to its proxy rules to address the infrastructure supporting the proxy system, so-called “proxy plumbing.” Back then, the SEC had decided that it was time to do some maintenance on the creaky old plumbing system. However, as then Commissioner Elisse Walter, quoting Kurt Vonnegut, commented at the 2010 open meeting to vote on the concept release: “It’s a flaw in the human character that everyone wants to build, but nobody wants to do maintenance.” That statement was more prophetic than she probably anticipated when she made it: nothing came of the concept release. Whether more results from this current effort remains to be seen.
CAQ publishes new resource on critical audit matters
In October 2017, the SEC approved the PCAOB’s new auditing standard for the auditor’s report, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, which will require auditors to include a discussion of “critical audit matters.” Given that, for larger companies, CAM disclosure is almost right around the corner, the Center for Audit Quality has made available this new resource, Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements, to help audit committees, investors and other users of financial statements to better understand the concept of CAMs.
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.
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