BlackRock’s Annual Letter to CEOs Focuses on Doing Good and Continues to Emphasize Governance and Strategy

Reports of BlackRock’s annual letter to CEOs have largely focused on Larry Fink’s exhortation that companies must serve a social purpose and “make a positive contribution to society” in addition to delivering on financial performance.

The letter also focused on “a new model for corporate governance,” since index investors who cannot walk away from companies that they disapprove of must be active and engaged agents for their clients.  Shareholder engagement, Fink states, have been too focused on annual meetings and proxy votes, rather than a year-round conversation about long-term value.  The firm intends to double the size of its investment stewardship team over the next three years, to more than 60 people, so that discussions with companies can be “deeper, more frequent and more productive.”

As in previous letters, BlackRock asks that companies explain their strategic framework and explicitly affirm that it has been reviewed by the board of directors.   Continue Reading

ISS Launches Corporate Profile Products for Investors that Includes More Focus on Individual Directors, a Board Skills Matrix and QualityScore Analysis

Recently, ISS announced a new product for investors, called corporate due diligence profiles, that contains a historical review of past ISS recommendations and vote results, measurements of company governance and compensation practices against QualityScore best practices with red flags indicating deviations, as well as charts of each director’s tenure against the TSR at the public companies where that director serve.

We understand from ISS that the product was designed to meet investor demands in reviewing companies for possible shareholder engagement and seeking more insight on individual directors.  While the overall data is not new, as the report aggregates information primarily from prior ISS reports and QualityScore into new formats, companies will likely want to be aware of they are being perceived by investors. Continue Reading

Delaware Case Challenges Forum Selection Provisions by Recent IPO Companies

A complaint for declaratory judgment in the Court of Chancery of the State of Delaware is challenging the forum selection clauses in several recent IPOs.  Plaintiff argues that the provisions adopted by Blue Apron, Stitch Fix and Roku are not permissible under Delaware law.

Unlike the Chevron-style forum selection clauses that make state courts the sole and exclusive forum for derivative actions, claims for breaches of fiduciary duties, claims arising under state law or incorporation documents, or claims governed by the internal affair doctrine of the state, the provisions in question at these IPO companies make federal district courts the exclusive forum for the resolution of complaints asserting causes of action under the Securities Act of 1933. Continue Reading

SEC Staff Decides Special Meeting Shareholder Proposal to Lower Ownership Threshold to 10% of Shares Conflicts with Management Proposal to Ratify Bylaw Set at 25% Ownership Threshold

The SEC has agreed with a company that it can exclude a shareholder proposal that asks the board to amend its existing bylaw to lower the ownership threshold from 25% to 10% of the company’s outstanding shares for calling a special meeting because it conflicts with a management proposal.

The company argued that under Rule 14a-8(i)(9), the shareholder proposal would conflict with a management proposal that it intends to include at its next annual meeting that seeks shareholder ratification of the current 25% ownership threshold included in the company’s bylaws. The staff concurred that the shareholder proposal conflicts because “a reasonable shareholder could not logically vote in favor of both proposals.”

In 2015, after some controversy with proxy access shareholder proposals, the SEC staff issued Staff Legal Bulletin No. Continue Reading

Recent Developments on No-Action Letters Using the SLB 14I

The SEC Staff decided that a no-action letter by Apple citing the recently issued SLB 14I was not excludable based on the information presented. The Staff noted that “We are unable to conclude, based on the information presented in your correspondence, including the discussion of the board’s analysis on this matter, that this particular proposal is not sufficiently significant to the Company’s business operations such that exclusion would be appropriate. As your letter states, ‘the Board and management firmly believe that human rights are an integral component of the Company’s business operations.’ Further, the board’s analysis does not explain why this particular proposal would not raise a significant issue for the Company.”

In another letter from Apple related to a proposal seeking a report on net-zero emission of greenhouse gases where the company had also supplemented their existing ordinary business arguments with a discussion of the board process, the Staff found that the proposal can be excluded based on traditional 14a-8(i)(7) arguments, determining that the proposal seeks to micromanage the company. Continue Reading

SEC’s Fall Regulatory Flex Agenda Is Utterly Familiar

Chairman Clayton had previously stated that the SEC’s regulatory flex agenda, when issued, will provide meaningful insight into his objectives for the Commission.

The Fall 2017 agenda was released late last week with a list of 26 items divided into two stages of rulemaking:  proposed rules and final rules.  There are no surprises for corporate issuers in the modest agenda.  It does not include any changes to existing disclosure rules that have not already been suggested by the prior administration and does not address issues like shareholder proposals, proxy plumbing, or more dramatic overhauls to encourage more capital formation.

The final rules include:

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Where the Final Tax Reform Bill Landed on Executive Compensation

On December 15, the Conference Committee reconciling the House and Senate tax reform bills released its full bill text to be voted on by both chambers of Congress and, if approved, presented to the President. The compensation provisions in the final bill are substantially the same as those in the Senate bill. The most important of these provisions are as follows:

Deduction Limit on Executive Compensation Paid by Public Companies.

The final bill makes the following changes to Section 162(m):

  • The exceptions for performance-based compensation (including stock options) and commissions are repealed.
  • The list of covered employees is expanded to include the CFO.
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ISS Releases Additional Guidance on 2018 Policy Updates

As discussed in a November post, ISS recently published its 2018 policy updates, effective for meetings held on or after February 1, 2018. Last week, the proxy advisory firm released further guidance in the form of three revised policy supplements.

  • Pay-for-Performance Mechanics ISS’ December Pay-for-Performance Mechanics whitepaper describes a revised methodology for 2018 pay-for-performance evaluations. Key 2018 updates include: (a) the introduction of the Financial Performance Assessment secondary quantitative screen; (b) changes to the pay-for-performance quantitative screens for S&P 500 companies; and (c) TSR smoothing for quantitative pay-for-performance screens.
    • Financial Performance Assessment.  The most notable change to ISS’ pay-for-performance methodology is the new quantitative Financial Performance Assessment, which compares a company’s financial and operational performance against its ISS peer group.
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As Spencer Stuart Releases its Latest S&P 500 Board Index, How Does Your Board Compare?

It’s no longer a trendy topic, but instead has become routine, to recognize that investors are deeply interested in board composition.  The 2017 Spencer Stuart Board Index on S&P 500 boards provides a useful and detailed benchmark on some key practices.

Companies continue to add new directors, and many of them are sitting on their first boards.  Slightly more than half, or 52%, of S&P 500 companies added one new independent director to their boards, for a total of 397 new directors, an increase of 15% from last year.   About 45% of the new directors are serving on their first public company boards, with women or minorities making up more than half of those first-time directors, who also tend to be actively employed. Continue Reading

As the Investor Stewardship Group Framework Goes into Effect, Investors Want Companies to Explain Their Governance Practices

The Framework for U.S. Stewardship and Governance launched by the Investor Stewardship Group, which we previously discussed here, becomes effective on January 1, 2018.

According to a press release issued by ISG, beginning with the 2018 proxy season, ISG is “encouraging” companies to explain “how their governance structures and practices align with the ISG’s Corporate Governance Principles and where and why they differ in approach.” Companies are free to choose how and where to disclose their alignment with the Principles, which may be through investor relations, boards, corporate governance websites or shareholder engagement materials.

The release notes that the goal of ISG is to establish the very first broad-based U.S. Continue Reading