Category: Corporate Governance
The end of Section 162(m)?
In case you missed it, according to this article in Bloomberg BNA, the new tax proposal would eliminate tax benefits under IRC Section 162(m), which allows companies to deduct executive compensation over $1 million (in addition to regularly deductible compensation up to $1 million) so long as it is performance-based and meets certain other conditions, such as shareholder approval and approval by a committee of “outside directors.” According to the article, the proposal would retain the $1 million cap on deductible compensation but eliminate the exemption for performance-based pay that exceeded the cap.
’Tis the season: Corp Fin issues new SLB regarding shareholder proposals
Just in time for the beginning of proxy and shareholder proposal season, Corp Fin has posted Staff Legal Bulletin No. 14I, Shareholder Proposals. The SLB addresses four issues:
the scope and application of Rule 14a-8(i)(7) (the “ordinary business” exclusion);
the scope and application of Rule 14a-8(i)(5) (the “economic relevance” exclusion);
proposals submitted on behalf of shareholders (shareholder proposals by proxy); and
the use of graphics and images consistent with Rule 14a-8(d) (the 500-word limitation).
Does an unfavorable say-on-pay vote mean what it says?
Not really, according to this study by academics from the University of Pennsylvania Law, Rutgers Business and Berkeley Law Schools to be published in the Harvard Business Law Review. Say on pay was initiated under a Dodd-Frank mandate adopted against the backdrop of the 2008 financial crisis, largely in reaction to the public’s railing against the levels of compensation paid to some corporate executives despite poor performance by their companies, especially where those firms were viewed as contributors to the crisis itself. Say on pay was expected to help rein in excessive levels of compensation and, even though the vote was advisory only, ascribe some level of accountability to boards and compensation committees that set executive compensation levels. So far, however, say-on-pay votes have served largely as confirmations of board decisions regarding executive compensation and not, in most cases, as the kind of rock-throwing exercises that many companies had feared and some governance activists had hoped. The study reported that, since 2011, the average annual percentage of say-on-pay votes in favor has exceeded 90%, while “the percentage of issuers with a failed say on pay vote has never exceeded 3% and, in 2016, that number dropped to just 1.7%.” The study examined what the few failed (or low) votes really meant.
NACD report on “Culture as a Corporate Asset” couldn’t be more timely
Recently, corporate cultures—or, more particularly, serious lapses in same—have emerged as flashpoints at many businesses and even entire industries, often with significant negative press coverage and severe economic consequences. As a result, this new report from the National Association of Corporate Directors, The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset, couldn’t be more timely. The report suggests that boards would be well-served by paying more attention to oversight of company culture—not just for scandal avoidance, but also “as a way to drive sustained success and long-term value creation.” A “healthy culture,” the report asserts, can serve as “a competitive differentiator.” The report includes a Toolkit with sample documents, questions and other useful materials.
PwC’s 2017 Annual Corporate Directors Survey shows directors “clearly out of step” with institutional investors on social issues
In its Annual Corporate Directors Survey for 2017, PwC surveyed 886 directors of public companies and concluded that there is a “real divide” between directors and institutional investors (which own 70% of U.S. public company stocks) on several issues. More recently, PwC observes, public companies have been placed in the unusual position of being called upon to tackle some of society’s ills: in light of the “new administration in Washington and growing social divisiveness, US public company directors are faced with great expectations from investors and the public. Perhaps now more than ever, public companies are being asked to take the lead in addressing some of society’s most difficult problems. From seeking action on climate change to advancing diversity, stakeholder expectations are increasing and many companies are responding.” But apparently, many boards are not taking up that challenge; PwC’s “research shows that directors are clearly out of step with investor priorities in some critical areas,” such as environmental issues, board gender diversity and social issues, such as income inequality and employee retirement security.
CAMs are here! SEC approves new PCAOB standard to enhance auditor’s reports
Yesterday, the SEC approved the PCAOB’s proposed rules requiring changes to the auditor’s report, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, along with related amendments to other auditing standards. The new auditing standard for the auditor’s report, while retaining the usual pass/fail opinion, will require auditors 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.” The new CAM disclosure requirement will apply (with some exceptions) to audits conducted under PCAOB standards, including audits of smaller reporting companies and non-accelerated filers (although at a later phase-in date). The SEC also determined that the new standard, other than the provisions related to CAMs, will apply to emerging growth companies. As Commissioner Kara Stein observed in her statement, the new “standard marks the first significant change to the auditor’s report in more than 70 years.”
Treasury report recommends actions to increase access to capital
The Treasury Department recently issued a new report, A Financial System That Creates Economic Opportunities—Capital Markets, that, in its recommendations, not surprisingly, echoed in many respects the House’s Financial CHOICE Act of 2017. Having passed the House, the CHOICE Act has since foundered in the Senate (see this PubCo post). The recommendations in the Treasury report addressed approaches to improving the attractiveness of primarily the public markets, focusing in particular on ways to increase the number of public companies by limiting the regulatory burden. According to this Bloomberg article, SEC Chair Jay Clayton “called the report ‘a valuable framework for discussion’ among market participants ‘that will most certainly benefit the American people….We appreciate Treasury’s willingness to seek the SEC’s input during the drafting process, and we look forward to working alongside other financial regulators and Congress as we pursue our three part mission to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.’”
SEC proposes FAST Act Modernization and Simplification of Regulation S-K
The SEC has now posted its release regarding FAST Act Modernization and Simplification of Regulation S-K, which proposes amendments to rules and forms based primarily on the staff’s recommendations in its Report to Congress on Modernization and Simplification of Regulation S-K (required by the FAST Act). (See this PubCo post.) That Report, in turn, was premised on the review that the SEC conducted as part of its Disclosure Effectiveness Initiative and the related Concept Release, which addressed a broader range of potential changes. (See this PubCo post and this PubCo post.) A new approach to confidential treatment, not addressed in the Report, is also proposed. As indicated by the title, the proposed amendments are intended to modernize and simplify a number of disclosure requirements in Reg S-K, and related rules and forms, in a way that reduces the compliance and cost burdens on companies while continuing to provide effective disclosure for investors, including improvements designed to make the disclosures more readable, less repetitive and more easily navigable.
In Senate testimony, SEC Chair offers insights into his thinking on a variety of issues before the SEC
In testimony last week before the Senate Committee on Banking, Housing and Urban Affairs, SEC Chair Jay Clayton gave us some insight into his thinking about a number of issues, including cybersecurity at the SEC, cybersecurity disclosure, the regulatory agenda, disclosure effectiveness, the shareholder proposal process, climate change disclosure, conflict minerals, compulsory arbitration provisions, stock buybacks, the decline in IPOs and overregulation (including some interesting sparring with Senator Warren). Whether any of the topics identified as problematic result in actual rulemaking—particularly in an administration with a deregulatory focus—is an open question.
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