While company managements have long engaged with shareholders at annual meetings and investor presentations, the notion of director engagement with shareholders is a more recent development. But why is shareholder engagement increasingly being added to corporate director job descriptions? This article posits several theories for the trend and identifies the most common engagement topics, provides data on the frequency of engagement and highlights emerging practices relating to director engagement.
A recent discussion on the Business Roundtable's adoption of a new statement on the purpose of a corporation concluded by observing (rhetorically) that the question raised by the statement was what all of the signatories would actually do to fulfil their corporate social responsibility commitments. Apparently, some non-governmental organisations are now asking that question for real and, ironically, one of the first recipients is a well-known leader of the pack on commitments to all stakeholders.
In July 2019 Representative Carolyn Maloney contacted Securities and Exchange Commission Commissioner Robert Jackson to solicit his views on legislation that would require public companies to disclose their corporate political spending. In his recent response, Jackson declared that the absence of transparency about political spending has led to a lack of accountability, allowing executives to spend shareholder money on politics in a way that serves the interests of insiders, not investors.
A recent Rock Centre for Corporate Governance paper suggests that the disconnect between observed pay levels and the public's view of executive compensation is stark. The paper was based on a survey conducted in October 2019 of 3,078 individuals – nationally representative by gender, age, race, political affiliation, household income and state residence – to understand the views that US citizens have on executive compensation.
Studies of former partners of audit firms who have assumed management positions at audit clients have raised concerns, at least pre the Sarbanes-Oxley Act, about potentially lower audit quality, perhaps reflecting audit firms' reluctance to challenge aggressive accounting decisions made by their former partners. But what happens when a former partner joins the audit client's audit committee?
Division of Corporate Finance staff recently issued a new Staff Legal Bulletin 14K on shareholder proposals and the 'ordinary business' exclusion. The new bulletin contains an enhanced reminder that it has not been approved by the Securities and Exchange Commission and, like all staff guidance, has no legal force or effect, does not alter or amend applicable law and creates no new or additional obligations for any person.
In a recent report, Intelligize examined data from a survey of 171 compliance specialists at public companies to examine how public company compliance officials are adapting their own corporate disclosure and processes to comply with this new regime. Among the issues considered were the impact of 'dry runs', changes to company disclosures and changes in controls.
Audit reports for most public companies will soon be required to disclose critical audit matters, which are intended to make the audit report more informative for investors. However, over the past several years, companies and their audit committees have gone a long way towards increasing the amount of audit-related information that they provide to investors voluntarily. While year to year the changes appear largely incremental, the change over the entire period is considerable.
The Securities and Exchange Commission (SEC) Division of Corporation Finance recently announced that it is revisiting its approach to responding to no-action requests to exclude shareholder proposals. In essence, the SEC may respond to some requests orally rather than in writing and, in some cases, may decline to state a view altogether, leaving the company to make its own determination.
AS 3101, the new auditing standard for the auditor's report that requires disclosure of critical audit matters (CAMs), is effective for audits of large accelerated filers for fiscal years ending on or after 30 June 2019. Deloitte has reported that an average of 1.8 CAMs were disclosed per audit report and that the most commonly disclosed related to goodwill and intangible assets.
A new milestone has finally been reached for board gender diversity: there are no longer any companies in the S&P 500 with all-male boards. According to a publication on US Board Diversity Trends in 2019, 45% of new board positions among the Russell 3000 were filled by women in 2019. This is up from 34% in 2018 and a substantial improvement compared with only 12% in 2008. Under the new law, public companies will be required to have at least one woman on their board of directors by the end of 2019.
The Financial Accounting Standards Board recently signalled its intent to adopt a new two-bucket approach to stagger the effective dates for new major accounting standards. Under the new approach, the new standards' effective dates would be delayed for entities in bucket two (ie, smaller reporting and private companies, employee benefit plans and not-for-profit organisations) for at least two years after the effective dates for entities in bucket one (ie, other Securities and Exchange Commission filers).
What does it take to plead a Caremark case that can survive a motion to dismiss? A recent case illustrates that a board can help establish one if it simply leaves compliance and risk oversight entirely to the prerogatives of management. However, the case is also a warning that directors should be proactive in conducting risk oversight and could face liability if they fail to make a good-faith effort to implement an oversight system and then monitor it.
The Financial Accounting Standards Board will consider whether the adoption dates for new accounting standards should be delayed for small public companies and privately held businesses. Small business finance professionals at a recent Financial Accounting Standards Advisory Council meeting indicated that, while they may be comfortable following the same rules, smaller companies do not have the same resources as large public companies and need extra time to implement significant new accounting rules.
A compensation consultant recently conducted a spot survey of 135 companies which looked at the prevalence and type of environment, social and governance (ESG) metrics used in incentive compensation plans, including metrics relating to the environment, employee engagement and culture and diversity and inclusion. Efforts to link ESG factors to executive compensation have been a common thread in numerous shareholder proposals.
With 70% of the Russell 3000 annual meetings completed, Institutional Shareholder Services (ISS) has taken an early look at the 2019 proxy season. ISS found increases in opposition to director elections and say-on-pay proposals, as well as increases in the number of and withdrawal rates for environmental and social (E&S) proposals relative to governance proposals. In addition, the disparity between the levels of support for E&S proposals and the historically more popular governance proposals has narrowed dramatically.
Do companies that ignore long-term environmental or social costs in the pursuit of near-term profits pay another price in foregoing potentially long-term sustainable profit opportunities? A recent business case for environmental social governance from Stanford University's Rock Centre for Corporate Governance suggests that, properly analysed, sustainability can not only affect externalities, but also benefit businesses.
The Public Company Accounting Oversight Board recently published new guidance on auditors' communication of critical audit matters (CAMs) in auditors' reports. The guidance includes new frequently asked questions relating to how auditors should describe their principal considerations in determining CAMs, the relationship between CAMs and company disclosures and the treatment of recurring CAMs.
California's new board gender diversity mandate is expected to fuel a greater effort towards board gender diversity. Under the new law, public companies will be required to have at least one woman on their board of directors by the close of 2019. That minimum increases to two women by 31 December 2021 if the company has five directors and to three women if it has six or more directors. While the first of its kind in the United States, this mandate may not be the last.
To fulfil their oversight responsibilities, audit committees typically evaluate external auditors at least annually to determine, in part, whether they should be engaged for the subsequent fiscal year. The Centre for Audit Quality (CAQ) recently published an updated External Auditor Assessment Tool. Like many other helpful CAQ tools, this one provides a number of sample questions to help audit committees satisfy their oversight obligations with regard to external auditors.
The Public Company Accounting Oversight Board recently issued a staff inspection brief discussing its new strategic plan, which includes conducting an ongoing dialogue with audit committee chairs whose companies' audits are subject to inspection. The board reports that its 2019 inspections will focus on, among other things, firms' technological developments, procedures on new accounting standards and systems of quality control.
There has recently been a lot of pressure on CEOs to voice their views on political, environmental and social issues. According to the global chair of reputation at Edelman, the expectation that CEOs will be leaders of change is high. As such, to the extent that CEOs are considering taking stands on contentious social, political or environmental issues, are there effective ways for CEOs to decide when and how to do it?
In October 2018 the Division of Corporation Finance (Corp Fin) issued a staff legal bulletin on shareholder proposals that examined the ordinary business exception under Rule 14a-8(i)(7), addressing (among other topics) the application of the rule to proposals relating to executive or director compensation. Since the government shutdown, Corp Fin has posted several no-action letters that consider the exception in that context – but do they provide any colour or insight?
The Council of Institutional Investors (CII) Research and Education Fund recently released a report regarding disclosures of board evaluation processes in proxy statements. While companies have been discussing their board evaluation processes in their proxies with increasing frequency, the CII suggests that these discussions could be more robust and has identified seven indicators of strong board evaluation processes, including a three-tiered review.
To deter short-termism, which can affect stock repurchases, R&D investments and capital expenditures, among other things, some have recommended that companies should stop giving quarterly guidance, while others have advocated an end to quarterly Securities and Exchange Commission reporting. However, a new theory suggests that getting rid of earnings per share may be the solution.
On the heels of the release of Staff Legal Bulletin (SLB) 14J, Corp Fin recently posted two no-action letters that shed further light on the ordinary business exclusion under Rule 14a-8(i)(7). In SLB 14J, the staff had addressed the nature of the board analysis which they would find most helpful in evaluating a no-action request to exclude a shareholder proposal under Rule 14a-8(i)(7), as well as micromanagement as a basis for exclusion under that same rule. The latest response letters provide further clarity in this regard.
The Centre for Audit Quality (CAQ), working with Audit Analytics, recently released a new edition of its annual Audit Committee Transparency Barometer, which, over the past five years, has measured the robustness of audit committee disclosures in proxy statements among companies in the S&P Composite 1500. According to the CAQ, the bottom line is that the level of voluntary transparency has continued to increase steadily in most areas.
The Division of Corporation Finance (Corp Fin) recently updated its compliance and disclosure interpretations (CDIs) relating to smaller reporting companies. In connection with these updates, Corp Fin has also withdrawn a number of CDIs. Under the new amendments, companies can now be both accelerated filers and smaller reporting companies. Further, in determining whether a company is a smaller reporting company, its annual revenues should be calculated on a consolidated basis.
A recent study showed that in 2018, 428 new directors were elected to boards of companies in the S&P 500 – the most new directors since 2004 – representing an increase of 8% from 2017. Further, 57% of boards added at least one new director and 22% appointed more than one new director. However, overall turnover remained modest. While these new directors added fresh skills, qualifications and perspectives, the study concluded that progress regarding boardroom diversity has been mixed.
While the number of virtual-only annual meetings has increased, 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 this in mind, a group of interested representatives of retail and institutional investors, public companies, proxy advisers and legal counsel have developed a set of best practices designed to ensure that the needs of all constituents are satisfied.
The EY Centre for Board Matters has identified investors' top priorities for companies in 2018, based on its annual investor outreach involving interviews with institutional investors. According to EY, the top investor priorities include board composition, with a particular focus on enhanced diversity; board-level expertise that is more aligned with business goals; and enhanced attention to talent and human capital management.
The new tax act is expected to trigger a spike in the levels of stock buybacks. Since one of the most prolific proponents of shareholder proposals recently submitted a proposal to eliminate the impact of stock buybacks in determining executive compensation, it seems likely that this type of proposal may resurface more frequently, especially if, in light of the recent tax law change, the level of stock repurchases resumes a sustained upward climb.
The National Association of Corporate Directors has released the results of its 2017-2018 Public Company Governance Survey of over 1,000 directors and executives. The survey looked at directors' outlooks for 2018 on key business trends and critical board priorities, the board's role in overseeing an organisation's culture, the state of board risk oversight – especially cybersecurity risk – and the growing challenge of hedge fund activist investors.
The Securities and Exchange Commission Division of Corporation Finance recently revised some of the guidance in its Financial Reporting Manual relating to the adoption of new accounting standards. One revision relates to the adoption of a new accounting standard in the context of a significant acquisition and the second relates to transition period accommodations for emerging growth companies. This new guidance could take on particular significance in the context of the new revenue recognition standard.
According to a recent report, relative total shareholder return (rTSR) is still the most common performance measure used in long-term incentive plans for chief executive officers among S&P 500 companies. However, it has been suggested that rTSR does not adequately reflect individual or company performance, but rather frequently reflected market or industry trends as a whole. The report advocates a different approach based on operating performance measures, such as revenue growth.
The Centre for Audit Quality and Audit Analytics recently posted their annual Audit Committee Transparency Barometer, which measured the quality of proxy disclosures regarding audit committees among companies in the S&P Composite 1500. The report shows continued voluntary enhancements to transparency and broadly increased disclosure around audit committee oversight of the external auditor.
Just in time for the beginning of proxy and shareholder proposal season, the Securities and Exchange Commission Division of Corporation Finance has posted Staff Legal Bulletin (SLB) 14I on Shareholder Proposals. The SLB addresses the scope and application of the rules regarding ordinary business and economic relevance exclusion, the proposals submitted on behalf of shareholders (shareholder proposals by proxy) and the use of graphics and images.
Recently, corporate cultures – or, more particularly, serious lapses in the same – have emerged as flashpoints, often with significant negative press coverage and severe economic consequences. A timely new report from the National Association of Corporate Directors suggests that boards should be paying more attention to the oversight of company culture – not just for scandal avoidance, but also "as a way to drive sustained success and long-term value creation".
International Shareholder Services recently released the results of its 2017-2018 global policy survey. The results reveal mixed views on multi-class capital structures, share buybacks and virtual annual meetings, but strong opinions on board gender diversity. However, although almost 70% of investors viewed as problematic the absence of any women on a board, making board diversity a reality seems to be a tougher proposition.
In 2014 New York City (NYC) Comptroller Scott Stringer, who oversees the NYC pension funds, submitted proxy access proposals to 75 companies – and ignited the push for proxy access at public companies across the United States. The NYC Comptroller's Office recently announced the Boardroom Accountability Project 2.0, which will focus on corporate board diversity, independence and climate expertise. Will Project 2.0 have an impact comparable to that of the drive for proxy access?