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Largest Companies Continue to Provide Political Spending Disclosure According to Latest CPA-Zicklin Index

Politics and governance intersect in the 2017 version of the CPA-Zicklin Index, which examines the disclosure practices of the S&P 500 companies on political spending, scores those companies and divides them into five tiers.  The score distribution shows a strong positive correlation with the average market capitalization of the companies.

Irrespective of the political environment, companies are continuing to provide more information about their corporate political spending, with an increasing number prohibiting certain types of payments. Fifty companies have been designated “trendsetters” for scoring 90% or above, an increase from 28 companies in 2015 and 41 in 2016.

Political spending disclosure
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Financial Stability Board Task Force Releases Final Climate-Related Financial Risk Disclosure Recommendations

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (“TCFD”), an industry-led group formed at the request of the G20, released yesterday its Final Recommendations Report for “voluntary” climate-related financial disclosure. The TCFD’s mandate is to ensure sufficient climate risk disclosure is available to avoid catastrophic financial market disruption due to climate change impacts.

Why Important?  While a variety of climate change disclosure frameworks already exist, such as those of SASB, GRI and CDP, as noted in our previous post summarizing the TCFD’s December 2016 draft recommendations, these recommendations are particularly relevant because of the FSB’s status as an international body founded by the G7 which coordinates national financial authorities and international standard-setting bodies, including the U.S.
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Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company.
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Financial Stability Board’s Task Force Releases Climate Risk Disclosure Recommendations

The FSB’s Task Force on Climate-Related Financial Disclosure (Task Force) released on Wednesday its Recommendations Report for voluntary climate change disclosure. The Task Force is an industry-led group formed in 2015 by the FSB at the request of the G20. Its goal is to ensure sufficient climate risk disclosure is available to enable informed financial decisions to help avert climate change-based financial market disruption.

The Task Force recommendations, based in part on certain existing disclosure frameworks, call for four categories of disclosure: (i) governance of climate risk; (ii) climate risk management; (iii) climate risk metrics and targets; and (iv) impacts of climate risk on business strategy and planning (strategy).
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Legislation Introduced to Increase Activist Hedge Fund Disclosure

U.S. Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) have introduced The Brokow Act designed to increase oversight of activist hedge funds. Senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) are co-sponsors.

The Act is named for a small Wisconsin town that, according to the press release issued by Senator Baldwin’s office, went bankrupt after an “out-of-state hedge fund closed a paper mill that had provided good jobs to the town for over 100 years.” The release stated that the fund bought up the Wausau Paper Company, “forced out its executives and demanded short-term returns like buybacks at the expense of the company’s long-term future.”
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Case Demonstrates Risks of Selectively Providing Details of an Executive’s Biographical Information

A recent decision by the U.S. District Court for the Northern District of Illinois Eastern Division indicates that companies should be careful about providing some, but not all, of an executive’s background.

The Court decided on a class action complaint against Textura Corporation, its CEO and Chair and its CFO, alleging violation of Section 10(b) of the Exchange Act and Rule 10b-5, and control person liability for the CEO and CFO. These alleged misstatements were revealed in reports issued by a short seller Citron Research, and included omitted material information about the CEO’s background, failure to report related party transactions and misleading analysts with respect to the basis points it earned from certain fees.
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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.”
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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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