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SEC Sustainability Disclosure Search Tool Released This Week

Ceres, an environmental nonprofit organization, released this week an SEC Sustainability Disclosure Search Tool. This tool, available here, is the next step in Ceres’s campaign for increased, and more transparent and comparable, climate change and other sustainability disclosure. (See prior blog posts on this topic available here, here, and here.

The search tool allows registered users to access summary reports which reproduce the climate change, carbon asset risk, hydraulic fracking and water disclosure filed with the SEC by 5,300 public companies, spanning various industries (such as Banks & Financial Services, Mining and Oil & Gas) and indices (S&P 500, Russell 3000 and FT Global 500).
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Corporate Political Spending Disclosure Reviewed in 2015 CPA-Zicklin Index

With the backdrop of the focus on next year’s presidential election and frequent reports regarding political spending, the Center for Political Accountability has published the 2015 CPA-Zicklin Index. In its fifth annual report, for the first time, the Index examines all S&P 500 companies, rather than only the top 300. Many companies that were not previously evaluated will find themselves with low scores. Shareholder proposals seeking information on political contributions and lobbying expenses are perennial favorites of social activists.

Among the top 300 companies that have been reviewed in past reports, an increasing number are providing more disclosure. Becton Dickinson, Noble Energy and CSX Corporation received the highest overall scores.
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Changes in Final Pay Ratio Disclosure Rules

The SEC held an open meeting today to adopt the final rules requiring pay ratio disclosure, which were just released. A company’s first reporting period for the pay ratio disclosure is its first full fiscal year beginning on or after January 1, 2017. This appears to mean the 2018 proxy statement for companies with fiscal years ending December 31st.

In her opening comments, Chair White noted that the Commission received over 287,000 comment letters, including more than 1,500 unique letters, that both criticized and endorsed the pay ratio rule. In her view, the Commission’s responsibility is to implement the mandates of Congress in a cost-effective way: “It is the law and we’re required to carry it out.”

We will issue a detailed memo.
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SEC Issues Concept Release on Additional Audit Committee Disclosure

The SEC recently issued a concept release seeking public comment on whether to expand disclosure requirements about audit committees. The primary focus of the concept release is on the audit committee’s responsibilities for oversight of the independent auditor. However, the SEC has invited public comment on other aspects of the audit committee’s role beyond those involving the auditor, such as its oversight of financial reporting, internal controls and risk.

Read the Davis Polk memo on this release »
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Increase in Disclosures on Shareholder Engagement, May Impact Director Elections and Say-on-Pay

EY Center for Board Matters reviewed the proxy statements of S&P 500 companies and found a dramatic increase in the number of companies that disclose shareholder engagement from five years ago. Based on 444 proxy statements available as of the middle of June, 56% discussed talking to shareholders, compared to 6% in 2010. 

Eighteen percent disclose that board members were involved in the engagement, usually the compensation committee chair or members, lead director, board chair or the nominating and governance chair or members. Slightly less than half indicate that changes were made as a result of the conversations with investors. Not surprisingly, 82% of those changes relate to executive pay, as it has been clear by now that the say-on-pay vote has essentially required companies with approval ratings of 75% or below to reach out to shareholders due to the policies of the proxy advisory firms.
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Investors Push SEC for Better Climate Risk Disclosure from Oil and Gas Companies

Ceres, on behalf of institutional investors representing nearly $2 trillion in assets under management, sent a letter to the SEC on April 17, 2015, requesting that the agency scrutinize the lack of “carbon asset risk” disclosure in oil and gas company filings. The letter defines “carbon asset risk” broadly to include risks associated with capital expenditures on high cost/carbon intensive oil and gas exploration projects, government efforts to limit carbon emissions and the possibility of reduced global demand for oil as early as 2020. Ceres claims that carbon asset risks are material “known trends” requiring disclosure under SEC rules. The New York State Office of the State Comptroller and the New York City Office of the Comptroller simultaneously sent a letter to the SEC in support of Ceres’ request.
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SEC Charges Company and Former Executive with Improper Perks Disclosure

The SEC charged that the former CEO of Polycom used corporate funds to pay for about $190,000 of personal perks for several years that were not disclosed. During that time, the CEO’s total compensation as reported ranged from more than $4 to over $7 million annually.

The SEC complaint contains numerous allegations that the former executive had falsified expense reports and provided fake business descriptions in order to obtain reimbursement for personal meals, clothing, entertainment and travel. 

The company was charged with inadequate proxy disclosure from 2010 to 2013.  It appears that at least one incident of the CEO’s abuse of expense reporting was uncovered by the company in 2011, but the full scope was unknown to the company and the CEO’s activities continued. 
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Lawsuit Alleges Breaches of Fiduciary Duty and Failure to Properly Disclose Related Party Transactions for Personal Aircraft

A derivative suit filed in the United States District Court for the Western District of Washington alleges that Nordstrom violated securities laws in not fully disclosing aircraft-related costs in its proxy statements and that the board breached its fiduciary duties in approving the related party transactions without analyzing the actual expenses.

Nordstrom maintained an aviation department for its two company planes and eight personal planes owned by members of the Nordstrom family.  According to the complaint, for many years the proxy statements have disclosed that the company charged the Nordstrom family market prices for these related party services, and that the payments received from the Nordstrom family exceed the estimated cost to the company of providing these services.
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Evolution of Clawback Policies and Accounting Implications

Several shareholder proposals this season ask boards to adopt clawback policies that would be triggered by any misconduct resulting in a violation of law or policy that causes significant financial or reputational harm, where a senior executive either committed the misconduct or failed to supervise subordinates.  The proposals also ask those companies to disclose to shareholders the circumstances of any recoupment and any board decision not to pursue recoupment.

This type of clawback policy, particularly the disclosure component, is unusual.  PwC’s study on clawbacks as disclosed in proxy statements found that 90% of clawback policies are triggered by a financial restatement. 
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Investors’ Views on Effective Proxy Statement Disclosures

More than half of the 64 investors who responded to a survey conducted by the Stanford Rock Center for Corporate Governance, RR Donnelley and Equilar between September and December 2014, complained that proxy statements are too long.  

80% of those who responded believe proxy voting increases shareholder value, but since 26% hold more than 3,000 publicly traded U.S. stocks and 71% have engaged with about a quarter of those companies in the last year, it is not surprising that investors’ ideal length for proxy statements would be 25 pages, which is a far cry from the average of 80 pages among Russell 3000 companies.
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Report on SEC Comment Letter Trends Highlight Issues for 10-K Disclosure

Deloitte recently published a 127-page report on SEC comment letter trends that companies may find useful as they prepare their annual 10-K disclosures.

Recognizing that Keith Higgins and other SEC staff members have admonished companies not to provide disclosure merely because it is known to be a “hot button” that may generate an SEC comment, with similar advice from the staff that even the receipt of an SEC letter with specific comments is supposed to be the beginning of a discussion rather than a set of demands, companies should still be aware of the topics that generate the strongest staff focus.
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Top Five Considerations for Improved Proxy Disclosure from Investors’ Perspectives

RR Donnelley’s survey from last year on how investors view proxy statements continues to be worth considering now, as companies begin preparing their public disclosure documents for the 2015 proxy season. The survey results show that a mix of presentation and substantive issues are compelling for investors, and boil down to five key points.

Impressive online appearance.  A key consideration, often overlooked, is to recognize that major institutional investors are using online platforms to review proxy statements. Many companies have spent vast amounts of resources to make their documents more readable, but the focus has continued to be on the visual effect of hard copies.
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Oil and Gas Companies Agree to Disclose Hydraulic Fracturing Risks in SEC and Other Public Documents

Anadarko Petroleum Corporation and EOG Resources, Inc. agreed with the New York State Attorney General earlier this month to provide additional disclosure regarding hydraulic fracturing risks in, and outside of, their SEC filings. These agreements, available here and here, effectively set forth disclosure checklists for the companies’ annual reports on Form 10-K for any material financial effects of current and future hydraulic fracturing regulation, litigation and impacts to drinking water, air and the environment resulting from hydraulic fracturing, including disclosure of each company’s management of these matters. In addition, Anadarko and EOG agreed to publicly disclose (outside of their SEC filings) detailed information regarding hydraulic fracturing risk mitigation techniques, chemical and greenhouse gas information and injury rate and spill statistics.
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Large European Companies Now Required to Provide Mandatory Environmental, Social and Governance (ESG) Disclosure

The European Council adopted on September 29, 2014, a Directive requiring large public interest entities with more than 500 employees to disclose in their annual reports “relevant, useful information” necessary for an understanding of such companies’ environmental, social, employee, human rights, anti-corruption and bribery matters. These companies will also be required to disclose board diversity matters. The disclosure would focus on the companies’ governing policies, related risks and the management of such risks. The Directive will become law 20 days after it is published in the European Union Official Journal (which is expected in due course). Member states will have two years to transpose the Directive into national legislation.
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Study Reflects Key Trends in Governance and Executive Compensation Practices at the Largest Companies

91% of big companies disclose the existence of anti-hedging policies and 66% mention anti-pledging policies, according to the Meridian 2014 Governance and Design Survey, which examined the 250 largest public companies by revenue and market capitalization.  Anti-pledging policies generally prohibit all pledging of company shares, although 18% allow some pledging with approval by the board or management.

Other notable governance structure developments include:

  • Majority voting and classified boards.  89% use majority voting standards for director elections, but only 79% of those companies accompany that with  mandatory resignation policies.  While there has been a movement toward annual elections,  21% continue to have a classified board. 

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Twelve Senators Urge SEC Not to Delay Conflict Mineral Disclosure

Senate Assistant Majority Leader Dick Durbin (D. Illinois) and a group of 11 other senators are urging the SEC to move forward with the initial deadline of May 31 (or June 2, 2014 for this year) for public company due diligence and reporting of conflict minerals.  The letter stated that the SEC rule was “drafted in a balanced and thoughtful way that followed Congressional intent,” and given what the Senators view to be “strong court decisions” affirming major portions of the rule, a delay in implementation is not necessary while the free speech issues cited by the recent appeals court decision are resolved.
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SEC Cybersecurity Roundtable Panel Debate Public Disclosure and Board Roles

The need for disclosure about cybersecurity breaches must be balanced against other factors, urged some of the panelists at the SEC’s roundtable on cybersecurity when the discussion focused on this topic.

While the SEC in its own 2011 guidance for companies questioned whether disclosure of historical attacks would make companies more vulnerable to future breaches, at least one panelist was equally concerned that the disclosure was more likely, based on historical examples, to bring about a rash of litigation. That creates a strong disincentive to disclose breaches, especially if a company can conclude that it does not otherwise have a disclosure obligation. 
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SEC Warns Against Agreements Restricting Whistleblowers and Continues to Discuss Reforms Focused Proxy Advisers and Disclosure Requirements

Sean McKessy, the Chief of the SEC’s whistleblower office, recently warned companies not to be “creative” in trying “get people out of our programs.” He was referring to concerns regarding confidentiality, separation or employee agreements that require employees to agree that they will not report issues to a regulator in order to obtain the benefits under the contracts. His admonishment went so far as to indicate that the Commission will examine not only the companies that may have these types of agreements but will also “go after” the lawyers who prepared them, reminding people that the SEC has the power to revoke attorneys’ ability to appear before the Commission and indicating that the SEC is actively looking for these types of situations.
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SEC Pay Ratio Rule: Davis Polk Comment Letter

As discussed previously here, the SEC solicited comments on its proposed “pay ratio” rule, as mandated by Section 953(b) of the Dodd-Frank Act, that requires companies to disclose the median annual total compensation of all employees, as well as the ratio of that median to the annual total compensation of the company’s chief executive officer. Davis Polk has submitted a comment letter with the following recommendations, which are focused on easing companies’ compliance burdens:

  • More flexible timing for determining the “median employee”: providing companies with the option to select a date prior to the company’s fiscal year end as the calculation date for purposes of determining the median employee, so as to allow companies to perform the median employee analysis outside of the crush of the busy fiscal year end.

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Joe Hall Discusses PCAOB’s Audit Report Proposals on Spreecast

TheCorporateCounsel.net hosted a Spreecast with Davis Polk’s Joe Hall and re: The Auditors’ Francine McKenna focused on the PCAOB’s new audit report proposal, which we address in this memo

On the Spreecast, Joe summarized the proposals’ main requirements, and focused on a few key points that companies may want to think about. One proposal would require the auditor to discuss “critical audit matters” in the audit report. Joe questioned whether this would result in much new information for investors beyond what a company already discloses in its “critical accounting policies” discussion, and was skeptical that it would produce anything like a robust and individualized discussion about the company’s financials.
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Initial Reactions to the SEC Pay Ratio Rule Proposal

By now, the governance community is well aware that the SEC proposed the pay ratio rules yesterday at an open meeting, which we discussed here. The initial reaction has demonstrated the divisive nature of the disclosure.

The AFL-CIO lauded the SEC for finally passing the proposal three years after passage of the Dodd-Frank Act. While the SEC release is clear that the Commission is uncertain about the exact benefits of the pay ratio disclosure, the AFL-CIO, a persistent advocate of the pay ratio disclosure, believes that the information will “help investors evaluate CEO pay levels in a broader context.” According to their calculations, the ratio of the S&P 500 CEOs was “354 times more pay than rank-and-file workers” in 2012.
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SEC Approves Proposing Pay Ratio Rules for Public Comment

At the SEC’s open meeting today, the Commissioners approved in a 3 to 2 vote (Commissioners Gallagher and Piwowar dissenting) the proposed so-called “pay ratio” rules, mandated by Section 953(b) of the Dodd-Frank Act, that require companies to disclose the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company’s chief executive officer. 

Based on the summary read at the meeting, the proposed rules will provide companies with “significant flexibility” to determine the median total compensation for their employees. Companies will be allowed to use any “consistently applied compensation measure” (for example, wages recorded for tax filing purposes), including the use of reasonable estimates.
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Studies Reveal Companies Disclosing Cybersecurity Risks, to a Degree

22% of the Fortune 501 to 1000 companies remain silent about their cybersecurity risks, compared to 12% of the larger Fortune 500 companies, according to a September report released by the Willis Group. Other than this key difference, the report found that the public disclosures by smaller companies were similar to the findings in the Willis Group’s prior study published in June, which focused solely on the Fortune 500. In both cases, the primary risks identified included: loss or theft of confidential information, reputational harm, direct loss from malicious acts caused by hackers or viruses, and liability concerns from system breaches or failures.
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PCAOB Proposes Framework to Reorganize Auditing Standards

The PCAOB has proposed a framework for reorganizing existing auditing standards based on topics. Currently, existing standards consist of “AS Standards,” which are new or amended standards adopted by the PCAOB, or “AU Sections,” which are interim auditing standards originally from the American Institute of Certified Public Accountants that the PCAOB adopted in April 2003. Over time, some AU sections became superseded and replaced by PCAOB rules.

The topics will be grouped into the following categories: general auditing standards for broad principles and activities; audit procedures; auditor reporting; matters relating to SEC filings; and other matters. Certain interim standards will also be replaced in the process, but the changes are not expected to impose new requirements on auditors.
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