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

Shareholder Proposal Update

A recent Bloomberg report found that 226 no-action letters requesting to exclude shareholder proposals were submitted to the SEC in the first quarter of 2017, a 10% increase over the prior year.

After the SEC staff decided that proxy access proposals seeking to change the group aggregation limit from 20 shareholders to 40 or 50 shareholders could be excluded, which we previously discussed here, more companies then sought no-action letter relief for those proposals. It is no surprise then that the report noted that the top shareholder proposal topic for no-action letters in the first quarter was proxy access, followed by social and environmental issues. Continue Reading

Spending Bill Prohibits SEC from Any Political Contributions Disclosure Rulemaking

The congressional spending proposal that has dominated the news maintains the SEC budget for fiscal 2017, allowing the SEC to operate with the same funding since the last fiscal year ended September 30, 2016.

Similar to prior appropriations bills, this proposal continues to prohibit the SEC from using any funds to issue rules or regulations regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations. Unlike the CHOICE Act, the bill does not stop the SEC from continuing its work on any of the Dodd-Frank mandated rulemaking.

According to Bloomberg, the SEC is bracing for future budget cuts and has imposed a hiring freeze in some departments while eliminating some contract positions. Continue Reading

NYSE Proposes to Require Advance Notice of All Dividend and Stock Distribution Announcements

In mid-April, the NYSE made a rule filing with the SEC to require listed companies to give notice to the Exchange at least 10 minutes before any public announcement about dividends or stock distributions.

Notification at least 10 minutes prior to public release of a dividend announcement is already required when the Exchange’s immediate release policy is in effect. Between 7:00 a.m. ET and the time the NYSE closes (usually 4:00 p.m. ET), companies are required to call the Exchange’s Market Watch team at least 10 minutes before any material news announcement. Companies must be prepared to discuss the content, and email a copy of, that announcement to the NYSE. Continue Reading

Financial CHOICE Act Imposes Sweeping Shareholder Proposal Reforms

The modified version of the legislation, CHOICE Act 2.0, released by House Financial Services Committee Chairman Jeb Hensarling (R-TX), is mostly known for proposing major financial regulatory reforms. Tucked into the lengthy bill, however, are several significant changes that would completely overhaul the shareholder proposal process. Some are similar to proposals by the Business Roundtable, which we previously discussed here.

Ownership Threshold.  Currently, Rule 14a-8 allows any shareholder who owns at least $2,000, or 1%, of a company’s stock to offer a proposal for inclusion in the company’s proxy statement for the annual meeting. The CHOICE Act changes that ownership and holding requirement to permit submission of proposals by only a shareholder owning 1% of the company’s securities entitled to vote on the proposal, or such greater percentage as determined by the SEC, so long as the shareholder has held the stock for a minimum of three years. Continue Reading

Vanguard Explains Updates to Its Voting Policies on Environmental and Social Proposals

Vanguard has updated its proxy voting guidelines. Previously, the policy for how the investor will vote on environmental and social proposals indicated that, absent a compelling economic impact on shareholder value, the fund will typically abstain from voting on these proposals. This reflected the belief that these decisions should be the province of company management unless they have a significant, tangible impact on the value of a fund’s investment and management is not responsive to the matter.

The revised guidelines state that the fund will evaluate each proposal on its merits and may support those where the investor believes there is a “logically demonstrable linkage” between the proposal and long-term shareholder value. Continue Reading

Board Trends at the S&P 1500 Companies

ISS Board Practices show the continuing strength of key governance trends and the differences in practices between large- and mid-cap companies. Directors elected annually and by majority vote has become the norm at about 90% of large-caps, compared to around 60% of mid-caps. The adoption of both practices continues to rise each year.

Large-caps tend to be much less inclined to separate CEO and chair roles, however, especially as more investors accept lead directors with robust responsibilities as demonstrating appropriate independent leadership. 35% of mid-cap companies, but only 26% of large-caps, have independent chairmen. More than half of the large-caps continue to combine the CEO and chair roles, a trend that has actually increased from last year when it was only 43%. Continue Reading

Virtual-Only Annual Meetings Come Under Criticism

The growth of holding annual meetings online (virtual-only meetings) by more than 150 companies last year, up from 21 five years ago, has agitated some investors. The New York City Comptroller has announced that this month its pension funds will decide on proposed changes to its guidelines to vote against directors on governance committees where companies host virtual-only meetings. If approved, the policy would apply to S&P 500 companies in 2017, unless companies agree to change their practices at the next meeting, and all portfolio companies in 2018. The Comptroller wants to encourage in-person or hybrid (both in-person and webcast) meetings instead. Continue Reading

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