SEC Staff Issues Interpretative Guidance on Pay Ratio Disclosure Rules

Yesterday, the Staff released five questions and answers regarding compliance with the pay ratio disclosure rules, including responses to:

  • Use of a consistently applied compensation measure (CACM).  The rules permit companies to use CACM instead of annual total compensation to identify the median employee, such as information derived from tax and/or payroll records. The Staff noted that the appropriateness of any CACM will depend on a company’s particular facts and circumstances. One example the Staff uses is that total cash compensation could be a CACM unless the company also distributed annual equity awards widely among its employees. It is not expected that CACM would necessarily identify the same median employee as if a company used annual total compensation instead.
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State Street Warns Companies Against Settlement Agreements with Activists that Focus on Short-Term Goals

Activist campaigns targeting companies with market capitalizations above $500 million have resulted in approximately 13% of total new board appointments in 2016 so far. As of August 2016, 49 companies have settled with activists by conceding 104 board seats, which is nearly the same number as during all of 2015. Less than 10% of board seats gained by activists in 2015 and 2016 were through a proxy contest, compared with 34% in 2014.

The increasing number of settlements in activist situations has led to a report by State Street Global Advisors (SSGA). The investor is concerned that the rapid rise in settlement agreements may represent a focus on short-term priorities at the expense of “near-permanent” index investors. Continue Reading

SEC Staff Continues to Reject Attempts to Exclude Proposals to Amend Existing Proxy Access Bylaws

The SEC staff has denied another no-action letter seeking to exclude a shareholder proposal to amend an existing proxy access bylaw on the grounds of substantial implementation, similar to its decision on the H&R Block proposal, which we previously discussed here. H&R Block’s proposal has been voted on and received about 30% support, with ISS recommending in favor and Glass Lewis opposing.

In this case, Microsoft adopted a proxy access bylaw in August 2015. The proposal that Microsoft received this summer requested an “enhancement package” to the existing bylaw that included: (a) the number of candidates not to exceed the greater of one quarter of the directors then serving or two; (b) no limit on the number of shareholders that can aggregate their shares to achieve the ownership threshold; (c) no limit on shareholder re-nomination based on the support received in a prior election; and (d) the board should defer decision about the suitability of nominees to the vote of shareholders. Continue Reading

ISS Releases Survey Boards That Will Inform 2017 Policy Changes

ISS has just released the results of its survey on potential policy changes.  We previously discussed the survey questions here. The global survey attracted 439 responses, from 417 organizations. 120 of the respondents were institutional investors, representing 115 organizations, including 73 asset managers or investment managers, 16 mutual funds, 15 government or state-sponsored pension funds, three foundations/endowments, three insurance companies (investment side), two alternative asset managers, and two labor union pension funds. Six responses were received from investor coalitions or consultants or NGOs with an investor perspective. 270 corporate issuers also took part in the survey.

In late October, ISS will release draft policies that will be subject to a public comment period before they are finalized. Continue Reading

Implications for Issuers from Recent Auditor Independence Enforcement Cases

The SEC recently found that EY violated the auditor independence rules in two cases based on the audit partners’ close personal relationships with members of the issuer finance teams.  In addition to a specific list of prohibitions, the SEC rules on auditor independence includes a catch-all that an accountant is not independent if a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not capable of exercising objective and impartial judgment.  We focus here on the consequences of those cases for issuers, including additional inquiries that audit firms may pose to management regarding their knowledge of any personal relationships between their employees and the engagement team.  Continue Reading

Public Officials Weigh in on SEC Regulation S-K Concept Release

Current and former holders of political office are among the many who wrote in to the SEC with comments on its Regulation S-K concept release. Former New York City Mayor Bloomberg, current chair of the Sustainability Accountability Standards Board (SASB) weighed in, favoring disclosure about sustainability and climate risks, particularly sector-specific standards.

Three U.S. senators (Senators Whitehouse, Markey and Boxer) urged the Commission to provide investors with more information about the risks associated with climate change. Another letter signed by six Congressmen (Cartwright, Lieu, Lowenthal, Pocan, Ellison, Tonko) echoed this view. In addition, thirteen U.S. senators, led by Senator Franken, want the SEC to require large public companies to include country-by-country reporting of certain financial, tax and operational data in their annual reports, primarily to provide enhanced tax disclosure that would make more clear the amount of corporate profits residing in other countries. Continue Reading

A Snapshot of the SEC Whistleblower Office

Andrew Ceresney, the director of the Division of Enforcement at the SEC, gave a speech recently about the success of the SEC whistleblower program. It contained some interesting data that provides a sense of the SEC’s efforts:

  • The SEC has paid out over $107 million to 33 whistleblowers involving case with more than $550 million ordered in sanctions.
  • 18 dedicated staff members at the SEC are responsible for the initial review and intake of tips, as well as tracking them and evaluating award claims.
  • There has been a 30% increase in tips since inception, from 3,001 in fiscal 2012 to nearly 4,000 last year.
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2017 Proxy Statement Reminders

While several major SEC disclosure requirements remain in the proposal stage and the pay ratio disclosure does not come into play until the proxy statement for 2018 meetings, companies should be aware of a few new items for the 2017 proxy statement:

  • Audit Committee Communications with Auditors.  Item 407 of Regulation S-K requires the audit committee report to state whether the committee has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
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A Look at Retail Shareholders and Other Results from the 2016 Proxy Season

73% of the shareholders at large-cap companies and 77% of those at mid-cap companies are institutional investors, according to the latest edition of ProxyPulse, a joint publication by Broadridge and PwC that examined 4,200 annual meetings held between January 1 and June 30, 2016. But retail investors play an important role in contested issues, and they tend to side with the company. During the 2016 proxy season, only 15% of retail shareholders supported proxy access shareholder proposals compared to 60% of the institutions that voted.

An analysis of retail shareholders found some interesting differences relative to the U.S. population. Only 20% are less than 40 years of age compared to 31% of the overall population, and 22% have graduate degrees, 11% more than U.S. Continue Reading