Category: Executive Compensation
Corp Fin posts new CDI regarding safeguards for electronic delivery of information under Rule 701
Yesterday, Corp Fin posted a new CDI 271.25 regarding permissible safeguards for protection of Rule 701(e) disclosures that are furnished electronically. You may recall that Rule 701—which provides an exemption from registration under the Securities Act for offers and sales to employees, directors and consultants under compensatory benefit plans and contracts—requires companies to deliver to the employee/investor a copy of the applicable benefit plan or contract, and, if the company sells, in any consecutive 12-month period, securities with a value in excess of $5 million, the company must deliver, a reasonable period of time before the date of sale, specified other information, including financial statements and information about the risks associated with the investment, much of which is likely to contain confidential or sensitive material.
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.
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.
Will a new securities exchange be effective to promote long-term value creation?
Many have recently lamented the decline in the number of IPOs and public companies generally (from about 8,000 in 1996 to about 4,000 now, according to EY), and numerous reasons have been offered in explanation, from regulatory burden to hedge-fund activism. (See this PubCo post and this PubCo post.) In response, some companies are exploring different approaches to going public, leading to a recent resurgence in SPACs (see, e.g., this WSJ article), while others are flirting with the possibility of “direct listings,” which avoid the underwritten IPO process altogether (see, e.g., this article discussing the pending NYSE rule change to facilitate direct listings). At the same time, companies are seeking ways to address some of the perceived afflictions associated with being public companies—including the pressures of short-termism, the risks of activist attacks and potential loss of control of companies’ fundamental mission—through dual-class structures and other approaches. Changing dynamics are not, however, limited to companies. And one of the most interesting proposals designed to address these issues is being introduced on completely different turf—a novel concept for a stock exchange, the Long-Term Stock Exchange. According to the LTSE blog, “[w]hile other proposed solutions target the IPO process, the LTSE’s mission is to transform the public company experience by relieving the short-term pressures that plague today’s businesses and laying the foundation for a healthier public market ecosystem.”
Corp Fin issues interpretive guidance on the calculation of pay-ratio disclosure
Yesterday, Corp Fin issued new Guidance on Calculation of Pay Ratio Disclosure regarding the use of statistical sampling in connection with the pay-ratio disclosure requirement, which mandates public company disclosure of specified pay-ratio information, beginning with the upcoming 2018 proxy season. The new guidance provides a fairly expansive reading of the use of reasonable estimates, statistical sampling and other reasonable methods. But prepare yourself, it also uses terms such as “multimodal,” “gamma distribution” and, my favorite, “lognormal,” surely all firsts for this PubCo blog. (Wikipedia defines a “lognormal”distribution as “a continuous probability distribution of a random variable whose logarithm is normally distributed.” Does that help?) Whether or not you are mystified by some of the terminology (as am I), it is clear that the leitmotif (take that, statisticians) of the new guidance is that you can use or combine any number of different methodologies and estimates so long as they are all reasonable and appropriate under your particular facts and circumstances.
SEC issues guidance in connection with pay-ratio disclosure (updated)
This afternoon, the SEC announced that it had adopted interpretive guidance in connection with the pay-ratio disclosure requirement, which mandates public company disclosure of specified pay-ratio information, beginning with the upcoming 2018 proxy season. Generally, the guidance provides a more expansive reading of three topics: company reliance on reasonable estimates, the use of existing internal records to determine the median employee and non-U.S. employees, and the use of other recognized tests and criteria (such as published IRS guidance) to determine employee/independent contractor status. At the same time, Corp Fin issued separate guidance regarding the use of statistical sampling (to be addressed in a subsequent post) and updated CDIs on topics related to the new SEC guidance. For a more complete discussion of the pay-ratio rule, see our Cooley Alert, SEC Adopts Final Pay-Ratio Rule.
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