In October last year, Corp Fin issued a new staff legal bulletin on shareholder proposals, 14J, that examined the exception under Rule 14a-8(i)(7), the “ordinary business” exception, addressing, among other topics, the application of the rule to proposals related to executive or director comp. Post-shutdown, Corp Fin has now posted several no-action responses that consider the exception in that context. Do they provide any color or insight?
Much has been written about the problems associated with the prevalence of short-term thinking in corporate America. As noted in a post from The Harvard Law School Forum on Corporate Governance and Financial Regulation, an academic study revealed that “three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report.” (See this PubCo post and this article in The Atlantic.) Apparently, that was no joke. As reported in Forbes, for the first six months of 2018, companies in the S&P 500 spent $367 billion on stock buybacks—which can drive increases in quarterly EPS without increasing the underlying long-term economic value of the company—while capex totaled only $317 billion. ls there a way to engineer a course correction?
Proxy advisor Glass Lewis has posted its 2019 Proxy Guidelines and 2019 Guidelines Regarding Shareholder Initiatives. One of the more striking points is that GL indicates that it may, albeit in limited circumstances, recommend against the members of the nominating/governance committee simply for successfully requesting no-action relief from the SEC to exclude (and presumably excluding) a shareholder proposal, where GL views the exclusion to have been detrimental to shareholders. GL’s new guidance includes the following updates:
New SLB 14J on shareholder proposals revisits the economic relevance and ordinary business exclusions
Corp Fin has just released a new staff legal bulletin on shareholder proposals—we’re up to 14J—that once again examines the exclusions under Rules 14a-8(i)(5), the “economic relevance” exception, and 14a-8(i)(7), the “ordinary business” exception. Notably, these rules were also the subject of SLB 14I. More specifically, the new SLB provides guidance with regard to the following:
the nature of the board analysis the staff would find most “helpful” in evaluating a no-action request to exclude a shareholder proposal,
“micromanagement” as a basis for exclusion under Rule 14a-8(i)(7) and
the application of Rule 14a-8(i)(7) to exclude proposals related to senior executive and/or director compensation matters.
Here’s some news (thanks to compensationstandards.com and Compensia): the structure of the GICS code is changing. “Who cares?” you say. Yep, that’s what I said when I first heard about these changes. (Well, that’s what I said once I figured out that the “Global Industry Classification Standard” (GICS) code is not the same thing as the “Standard Industrial Classification” (SIC) code, a four-digit classification system developed in the 1930s that the SEC uses to classify companies; the SEC requires each company to identify its primary SIC code on the facing page of registration statements. No, SIC codes are not changing.) However, it turns out that the GICS code, a 10-digit classification system developed by MSCI and S&P for use by the global financial community, is employed not only for creating financial indices, but is also critical to the development by proxy advisor ISS of its compensation peer groups and other compensation-related analyses. So, GICS codes matter: for those companies affected, the structural changes could have a significant impact on assessments by ISS of their executive compensation programs. The changes will be effective on September 28, 2018.
You remember, of course, that last month, the president, on his way out of town for the weekend, tossed out to reporters the idea of eliminating quarterly reporting. (See this PubCo post.) The president said that, in his discussions with leaders of the business community regarding ways to improve the business environment, Indra Nooyi, the outgoing CEO of Pepsico, had suggested that one way to help business would be to trim the periodic reporting requirements from quarterly to semiannually. The argument is that the change would not only save time and money, but would also help to deter “short-termism,” as companies would not need to focus on meeting analysts’ expectations on a quarterly basis at the expense of longer term thinking. “We are not thinking far enough out,” he added. (For more on saving time and money through semiannual reporting, see this PubCo post.) But how much impact would a shift to semiannual reporting really have on short-termism?
According to this column in the LA Times, it’s the “single most pernicious idea in modern American finance.” Can you guess? It’s the idea “that the corporation exists to ‘maximize shareholder wealth,’” the columnist proclaims. “As the mantra has evolved since it was declared by conservative economist Milton Friedman in 1970, it has come to mean ‘maximize shareholder wealth to the exclusion of everything else.’ The harvest has been stagnating worker wages, squeezed suppliers, noxious government economic policies, and the steady flow of corporate income to the top 1%. It’s long past time to bury this bad idea in the grave.” Needless to say, many would take issue with the columnist’s view, but probably not Senator Elizabeth Warren, who has recently introduced the “Accountable Capitalism Act,” which would mandate that specified large companies have as a corporate purpose identified in their charters—their new federal charters—the creation of a “general public benefit.”
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.
Here’s some mighty fine reading: Cooley Alert: SEC Amends Rule 701(e) and Issues Concept Release Regarding Rule 701 and Form S-8.