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Recent Developments Relating to Corporate Governance

Despite a political agenda packed with important issues like tariffs, immigration and a Supreme Court nomination, there have been a number of recent federal and state legislative developments relating to public company corporate governance topics that are of interest.  In particular, the Senate Banking Committee has recently considered bills relating to the role of proxy advisory firms and disclosure of cybersecurity experience at the board level; there have been calls by lawmakers for regulation of executive sales following announcement of stock buybacks; the Senate Committee on Appropriations is proposing to direct the SEC to report on the decline in public companies; a bill implementing gender quotas on boards progressed through the California State Senate; and Delaware adopted a voluntary sustainability certification and reporting regime. 
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Cyber Breach Center Post: Two Recent Cases Highlight the Insider Trading Risks Associated with Cyber Breaches

The recent convictions of two traders for using hacked press releases and the settlement of SEC insider trading charges against a former Equifax manager highlight the significant insider trading risks companies face when dealing with a cyber event. Potential considerations for companies as they consider these risks highlight the intersection between cybersecurity and corporate governance. The full blog post is available at our Cyber Breach Center, here.

To subscribe to our Cyber Breach Center, click here.
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Another Equifax Employee Accused of Insider Trading

On July 29, Equifax determined that it had been subject to an IT breach that included sensitive information. A crisis team was formed to determine the scope of the intrusion and begin a notification and remediation plan. Many of the employees who were working on this project were not told the company’s systems had been attacked, rather, they believed they were working for an unnamed potential client that had experienced a large data breach.

This was the case for a software product development manager working at a unit of the company which sold personal security and identity theft defense products and services to clients.
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SEC Division of Corporation Finance Chief on Rule Changes that Could Improve Executive Compensation Disclosure

In a speech focused on executive compensation disclosure, Keith Higgins raised a number of possible rule changes that he believes could make executive compensation more useful to investors.  In light of the fact that the Commission recently issued a concept release about the audit committee report, and the audit committee report is the model for the compensation committee report, he questioned whether the compensation committee report should be revised to require more insight into the information the committee used and the factors it considered in evaluating executive compensation.

Some might be inclined to point out that information about the thinking behind the decisions made by compensation committees is already available in CD&As, another area he covers in his speech. 
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Getting The Deal Through – Corporate Governance 2015

Davis Polk lawyers have once again authored the “Global Overview” chapter of Getting The Deal Through – Corporate Governance 2015, an annual guide that examines issues relating to board structures and directors’ duties in 32 jurisdictions worldwide.

As we note in our chapter, corporate governance is no longer just a hot topic; it is a permanent element in corporate valuation.

  • In the U.S. portion of our chapter, we discuss, among other things, shareholder activism, shareholder proposals and shareholder engagement. We also discuss some recent, high-profile issues in the financial institution corporate governance area.
  • In the Europe portion of our chapter, we discuss, among other things, compensation reform measures, and social, environmental and diversity centered disclosure.

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Study Finds Most Clawback Policies Follow Similar Patterns and Warns of Possible Accounting Consequences as Policies Innovate and Evolve

The most common trigger for clawback of compensation is the occurrence of a restatement of financial results, according to a PwC study of 100 large public companies’ proxy disclosure from 2009 to 2012. Evidence that the employee was directly involved in conduct that led to the restatement was required under 73% of those policies, and in many cases, the restatement needed to be material or the amount recouped was limited to the excess of the amount paid due to the restatement.   

Personal misconduct, including violation of a company’s ethics policy or code of conduct, may also lead to clawbacks at 84% of companies.
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Shareholders Sues Darden on Advanced Notice Bylaw Changes

Amid pressure to separate parts of its restaurant chain, Darden had decided to spin off Red Lobster. Two hedge funds, Barrington Capital and Starboard Value, previously proposed more drastic upheaval, such as splitting the restaurants into two groups representing mature businesses or faster growing lines. In December 2013, Starboard reported it held approximately 5.6% of the stock. Starboard is currently soliciting shareholder consents to call a special meeting to consider a non-binding proposal prior to the company’s September annual meeting, that urges the Darden board not to approve any agreement or proposed transaction involving a Red Lobster separation or spinoff unless the transaction would require shareholder approval.
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Initial Comments on Pay Ratio Rules

Comments on the SEC pay ratio rule proposal are due on December 2.  Fifty-seven short letters from individuals have already been submitted and made public as of September 24. They do not respond to the 60 specific questions raised in the proposal, a misleading number in any case because almost all of the questions include more than one line of inquiry. 

All but a handful were overwhelmingly supportive of the disclosure, with many citing value in transparency. A few expressed concerns that the permitted flexibility might allow room for manipulation, “….what’s stopping any issuer from merely making an educated or best guess and reporting that number as the median,” but most merely want the proposal to be adopted. 
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