Independent Chair Proposals and the Relevance of Supporting Statements

So far this season 44 shareholder proposals asking companies to appoint independent chairs of boards are on annual meeting ballots. None of the ones voted on have passed, although eight have received support over 40%, an increase from 2016. This includes several companies with robust lead directors. In the meantime, the number of large-cap companies that combine the chairman and CEO roles have grown, to about 50% of the S&P 500 compared to 43% last year.

In recent years, few companies have submitted no-action requests to exclude these shareholder proposals, since the text of those resolutions and the arguments against them have largely been settled. Continue Reading

The Financial CHOICE Act and the Debate Over Shareholder Proposals

A lively debate is erupting over a provision in the House-approved Financial CHOICE Act that would increase the stock ownership threshold for submitting shareholder proposals in the company’s proxy statement from the current level of $2,000 to 1% of common stock outstanding, and would extend the stockholding duration requirement from one year to three years.

The New York State Comptroller, who manages $186 billion in retirement funds but whose ownership of any particular company is often less than 1%, called it “outrageous and inequitable that we would not be able to make requests of corporate boards through shareholder resolutions.” Other critics of the proposed change have pointed out that even investors with small holdings can have good ideas, and the Wall Street Journal quoted an asset manager’s view that “Shareholder proposals provide an early warning of risks a company may not be aware of, as well as an opportunity to gauge investor sentiment on a wide range of issues.”

These may be valid observations, but they overlook the fact that the owner of a single share is usually able to present a proposal for a vote by the shareholders, and for this reason the by-laws of most companies typically impose no minimum ownership or duration requirements whatsoever. Continue Reading

Company Protests ISS Policy on Draft Reports in Vote No Campaigns

Mylan recently publicly protested what may be a little known ISS policy that impacts the provision of draft reports to S&P 500 companies.

CalSTRS, the New York City Comptroller’s office, the New York State Comptroller’s office and PGGM jointly launched a campaign asking the company’s investors to withhold support for six of the company’s board candidates up for election and the say-on-pay vote, filing exempt solicitation materials that show up under the company’s Edgar documents.

As a result, according to a letter the company sent to ISS which it made public, ISS determined that the company would not be provided with a draft voting report. Continue Reading

SEC Emphasizes Role of Audit Committee in New Developments and Continuing Trends in Auditor Oversight

A recent speech by the SEC Chief Accountant provided guidance for audit committees on several key areas of responsibilities in new developments, and on perennial issues of auditor evaluation and independence.

New Revenue Recognition StandardAudit committees should understand management’s implementation plans and the status of the progress on the new revenue recognition standards, including any required updates to internal control over financial reporting. The audit committee should also communicate with auditors about any concerns the auditors may have regarding management’s application of the standard.

Auditor IndependenceAudit committees should “own” the selection of the audit firm, including making final decisions in the negotiation of audit fees. Continue Reading

Congressional Lawmakers Push SEC Chairman to Focus on Board Diversity Disclosure

Two letters from members of the House of Representatives directed Chairman Clayton to continue his predecessor’s efforts toward requiring companies to provide more information on the diversity composition of their boards.

Citing research that found that only half of S&P 100 companies referenced gender when disclosing their board diversity, Representatives Carolyn Maloney (D-NY) and Donald Beyer (D-VA) asked Clayton to consider the SEC staff’s review of the existing rule previously ordered by former SEC Chair White. In March, Representative Maloney reintroduced a bill on board gender diversity that would require the SEC to establish a group to study and make recommendations on ways to increase gender diversity on boards. Continue Reading

PCAOB Adopts Requirement to Disclose Critical Audit Matters in Auditor Reports

Dear Audit Committee Member: 

Yesterday, the PCAOB decided to adopt a new auditor reporting standard that includes the communication of critical audit matters (CAMs).  The rules are subject to approval by the SEC.   

A lengthy runway is provided before full compliance is required.  Provisions other than those related to CAMs will take effect for audits for fiscal years ending on or after December 15, 2017.  If your company is a large accelerated filer, provisions related to CAMs will apply starting with the audits for fiscal years ending on or after June 30, 2019.  This means that a fiscal year-end large accelerated filer may first have CAMs included in the auditor report filed with the Form 10-K for the year ended December 31, 2019.    Continue Reading

Criticism of Governance Provisions in Proxy Contest Leads to Reincorporation

Among the settlement terms in the proxy contest between Arconic Inc. and Elliot Management is an agreement to reincorporate to Delaware due to the corporate governance provisions in the company’s charter.

As the surviving company of Alcoa Inc., which spun off parts of its business into a new entity called Alcoa Corp., the renamed Arconic was governed under a charter that staggered board elections and required 80% of outstanding shares to amend the terms for fair price protection, change the classified board or remove its directors. About eight years ago, shareholder proposals favored by a majority of the votes cast asked the board to amend those provisions. Continue Reading

Significant Changes to the Auditor’s Report Considered by the PCAOB at Open Meeting

Six years after the initial concept release, the PCAOB announced that it will hold an open meeting next Thursday, June 1, to consider adopting standards on the auditor’s report and proposing updated requirements for auditing accounting estimates and an auditor’s use of the work of specialists.

In 2013, the PCAOB proposed rules to require the inclusion of critical audit matters (CAM) in the auditor’s report. After a public comment period and several roundtables that criticized the overly broad scope of CAM, the rule was repurposed in May 2016, as we described here.

The 2016 proposal modified the prior definition of CAM by adding a materiality standard, limiting the source of potential CAM and narrowing the definition. Continue Reading

Activist Files Suit Over Board Disqualification Bylaw

Activist Stilwell Funds has sought to invalidate and enjoin the enforcement of HopFed Bancorp’s bylaws on director qualifications, filing suit in the Delaware Court of Chancery. The activist owns 9.5% of the company’s shares.

Stilwell Funds had previously nominated Robert Bolton, who was elected to the company’s board at the 2013 meeting. In the complaint, the activist alleged that Bolton was excluded from committee service, and also barred him from major board deliberations by contending that he was affiliated with Stilwell. The complaint stated that the board even refused to reimburse Bolton for travel expenses to board meetings, and also discouraged his efforts to attend meetings by phone. Continue Reading

Will the Pay Ratio Disclosure Affect U.S. Competition?

Among the commenters who responded to then Acting Commissioner Piwowar’s request to examine the pay ratio disclosure rules, one company declared that the rule “is one more nail in the coffin for U.S. manufacturers…who are already at a significant disadvantage to competitors overseas.”

Companies and their representatives stressed the cost burdens associated with putting together the data. Besides the direct costs of hiring consultants and advisers, companies cited internal man hours spent locating and compiling the information, and facing multiple unforeseen complications. Equally burdensome and no less challenging will be the additional time and effort after the ratio is disclosed in managing both external and employee communications, with many concerned about employee morale. Continue Reading

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