Hot Topics in Corporate Governance. November 14, 2017

Transcription

1 Hot Topics in Corporate Governance November 14, 2017

2 Changes at the SEC New Chair: Jay Clayton New Director of the Division of Corporation Finance: Bill Hinman Two open Commission seats remain, with two nominees going through the process Hester Pearce and Robert Jackson The nominees have cleared the Senate Banking Committee and are waiting for Senate approval Expected focus for the new Commission: Capital formation, disclosure reform and other deregulatory measures 2

3 The Financial CHOICE Act The Financial CHOICE Act is the latest legislative proposal to address the Dodd- Frank Act If adopted, the Financial CHOICE Act would change several disclosure and governance provisions applicable to public companies The House approved the Financial CHOICE Act in June 2017 The prospects of the Financial CHOICE Act being approved in its current form by the Senate are slim Rep. Hensarling, Chairman of the House Financial Services Committee and the key sponsor of the bill, has indicated that he does not plan to seek re-election 3

4 Financial CHOICE Act (continued) Title II of the Act would address civil money penalties that may be sought by the SEC and the PCAOB Title III of the Act would significantly change the financial rulemaking process for financial regulators Title IV of the Act would require proxy advisory firms to register with the SEC 4

5 Financial CHOICE Act (continued) 5 Title VIII would address a number of Dodd-Frank Act provisions, including: A Say-on-Pay vote would only occur in those years in which the executive compensation of an issuer has materially changed from the previous year Direct the SEC to revise the shareholder proposal holding requirements to 1% of the issuer s voting securities for three years Prohibit an issuer from including in the issuer s proxy materials shareholder proposals made by persons in their capacities as proxies, representatives, agents or other persons acting on behalf of a shareholder Prohibit the SEC from requiring proxy solicitations to use a universal ballot for director elections Provide that any clawback rule would apply only when the officer had control or authority over the financial reporting that resulted in the accounting restatement Repeal certain provisions of the Dodd-Frank Act, including CEO pay ratio disclosure Employee and director hedging disclosure Conflict minerals disclosure Resource extraction issuer disclosure Mine safety disclosure

6 Regulatory Reform Proposals 6 In October 2017, the US Treasury Report addressed: Repeal of conflict minerals, mine safety, resource extraction and pay ratio provisions Changes to shareholder proposal rules The $2,000 holding requirement for shareholder proposals should be substantially revised by the SEC and the SEC should explore options that better align shareholder interests (such as considering the shareholder s dollar holding in company stock as a percentage of his or her net liquid assets) when evaluating eligibility, rather than basing eligibility solely on a fixed dollar holding in stock or percentage of the company s outstanding stock The resubmission thresholds for repeat proposals should be substantially revised by the SEC from the current thresholds of 3%, 6%, and 10% to promote accountability, better manage costs, and reduce unnecessary burden SEC changes to remove duplicative disclosure requirements The report urges the SEC to proceed with the proposal it issued in August 2016 that would remove SEC disclosure requirements that duplicate financial statement disclosures already required under U.S. GAAP The report also urges the SEC to implement the proposals from the FAST Act report on disclosure effectiveness, and the SEC proposed rule changes in October 2017 The lack of transparency with proxy advisory firms, with no specific recommendations

7 CEO Pay Ratio is a Go The SEC adopted Item 402(u) of Regulation S-K pursuant to Section 953(b) of the Dodd-Frank Act The rule is effective for calendar year companies for fiscal year 2017 (with disclosure in the 2018 proxy statement) On February 6, 2017, the then-acting SEC Chairman requested comment on the rule On September 21, 2017, the SEC signaled that implementation would not be delayed and indicated that the SEC would generally take a hands off approach, as long as a reasonable attempt was made to compute the CEO pay ratio SEC and Staff guidance provides flexibility to issuers 7

8 CEO Pay Ratio is a Go (continued) Key considerations for the first year of CEO Pay Ratio disclosure: The potential investor response likely to be limited in at least the first year The potential media response compensation is often an area of local and national media interest The potential employee response communications with employees may be necessary What is next for the CEO Pay Ratio rule? Would likely remain in effect until the authorizing provision from the Dodd-Frank Act is repealed The SEC or SEC Staff may offer further guidance CEO pay ratio disclosures are unlikely to be reviewed and commented on by the SEC Staff 8

9 Disclosure Effectiveness Exhibit hyperlink rules went into effect September 2017 In 2016, the SEC issued a concept release and related proposals and published a Staff study mandated by the FAST Act 9 On October 11, 2017, the SEC proposed changes to Regulation S-K based on the FAST Act study: Limit the period-to-period comparison required in MD&A Changes to confidential treatment process Limit the two-year look back requirement for exhibits to newly reporting companies Clarify that disclosure regarding properties is required only if material Require inline XBRL tagging for cover page information Require disclosure of legal entity identifiers Require links to information incorporated by reference from previously filed documents

10 Sustainability SASB pivots, focusing on promoting voluntary adoption of standards based on materiality rather than waiting for SEC-imposed rules ESG proposals continue to dominate the shareholder proposal landscape, and the support for ESG proposals continues to climb NACD released its sixth annual Governance Challenges 2017: Board Oversight of ESG: Integrate ESG initiatives into company strategy Ensure key functional leaders proactively apply ESG in business operations Use executive compensation to support ESG goals Improve disclosure on the impact of climate change Engage shareholders on ESG issues 10

11 Proxy Access More than 60% of S&P 500 companies have implemented proxy access Proxy access bylaws and key their terms are now well-established: An ownership requirement of at least 3 percent of a company s shares for at least three years An ability to nominate candidates for up to 20 percent of board seats, with a minimum of two nominees; A 20 shareholder limit on the ability of shareholders to aggregate to meet the 3 percent ownership requirement (with related funds counting as one shareholder for aggregation limit purposes) Loaned shares counting toward the ownership requirement so long as the shares are recallable upon reasonable notice. Shareholder proposals seeking to adopt or change proxy access bylaws continue 11

12 Shareholder Proposals in the Spotlight Exchange Act Rule 14a-8 permits eligible shareholders to submit a shareholder proposal to be included in the issuer s proxy statement unless it violates one of the rule s eligibility or procedural requirements The Business Roundtable published a whitepaper in 2016 suggesting changes to Rule 14a-8, the Financial Choice Act includes potential changes and the October 2017 Treasury report recommends changes Areas that could be revisited include: Eligibility requirements Resubmission thresholds Proposal by proxy No-action letter process 12

13 Shareholder Proposals in the Spotlight (continued) On November 1, 2017, the SEC Staff issued Staff Legal Bulletin No. 14I (CF), which addresses: a revised framework for analyzing no-action requests under Rule 14a-8(i)(5) (the economic relevance exception), which should expand that exclusion s availability in no-action requests under Rule 14a-8(i)(5) and Rule 14a-8(i)(7) (the ordinary business exclusion) in which the significance of the proposal to the company s business is at issue, the need for a welldeveloped discussion of the board s analysis of the proposal and its significance to the company s business enhanced information requirements for proposals by proxy situations in which graphs or images may render a proposal excludable The SEC Staff has signaled a different approach to shareholder proposals which may give companies a broader ability to seek to exclude shareholder proposals 13

14 Virtual Annual Meetings In recent years, an increasing number of companies have opted to hold annual shareholder meetings exclusively online CalPERS, CII and activist investors have opposed virtual annual meetings Neither ISS nor Glass Lewis have directly opposed virtual meetings in their guidelines, although ISS has indicated that it may make adverse recommendations where a company is using virtual-meeting technology to impede shareholder discussions or proposals Existing platforms such as the Broadridge virtual meeting platform can facilitate a virtual or hybrid annual meeting 14

15 Governance Themes from the 2017 Proxy Season Shareholder proposals seeking more disclosure on climate change preparedness fared well in 2017, and three such proposals at Exxon Mobil, Occidental, and PPL Corporation received majority shareholder support The 2017 proxy season saw a spike in the number of directors receiving low levels of support from shareholders; 102 directors at S&P 500 companies, or 2.4 percent, received less than 80 percent shareholder support during proxy season, the highest figure since 2011 and a substantial increase from 57, or 1.3 percent, during the 2016 proxy season As in 2015 and 2016, proxy access proposals topped the chart of the most commonly filed shareholder proposals, and most of the proposals that went to a vote received majority support 15

16 16 Governance Themes from the 2017 Proxy Season Taken as a group, political contributions and lobbying proposals were the second most frequently filed shareholder proposals in 2017, and saw a slight uptick in support from 2016 Shareholder rights such as majority voting and the right to call a special meeting continue to receive focus A continued focus on gender and other diversity on boards of directors: BlackRock, State Street Global Advisors, and Vanguard all have taken public steps this year to promote and advocate for greater board diversity A continued focus on board tenure considerations The New York City Comptroller and the New York City Pension Funds recently announced the Boardroom Accountability Project 2.0, a three-pronged initiative focusing on board diversity, director independence, and climate expertise

17 Compensation Themes from the 2017 Proxy Season Median CEO pay at S&P 500 companies rose by 6.8 percent in 2017 Performance-based compensation continues to grow in popularity The 2017 say-on-pay frequency votes underscore an increased focus on engagement annual votes were preferred at well above 90 percent of companies this year Despite the increased shareholder interest in annual say-on-pay votes, the median say-on-pay vote result at Russell 3000 companies remained high 96.4 percent, a slight uptick from 2016 s median outcome of 96.1 percent. Over 80 compensation proposals were filed by shareholders for 2017 meetings (representing a decline in compensation proposals), but more than a third were withdrawn or omitted; shareholder support has been lackluster 17

18 ISS Policy Survey Results The takeaways: Pay ratio Most investors say they will evaluate pay ratio figures for cross-company and year-over-year comparisons Virtual-only meetings Many companies express comfort with virtual-only meetings, but investors are skeptical Board gender diversity A majority of investors and companies agree that the absence of a female on the board is problematic Multi-class capital structures Investors believe that unequal voting rights are inappropriate, particularly some time after the IPO Cross-border share issuance proposals Investors are mixed on how these proposals should be treated

19 ISS Proposed Policy Changes for 2018 On October 26, 2017, ISS released proposed changes to its 2018 U.S. voting policies for comment and the changes include: a new policy that would explicitly provide for adverse vote recommendations for board committee members who are responsible for approving or setting non-employee director compensation when there is a pattern (i.e., two or more consecutive years) of excessive non-employee director pay without a compelling rationale or other mitigating factors an alteration to ISS s current voting policy on director elections at companies that maintain a poison pill with a term longer than one year, which ISS considers a long-term poison pill ISS would recommend votes against all board nominees, every year, at companies that maintain a long-term poison pill that has not been approved by shareholders a new policy regarding gender pay gap shareholder proposals under the proposed new policy, ISS will make voting recommendations on a case-by-case basis on shareholder proposals requesting reports on a company s pay data by gender, or a report on a company s policies and goals to reduce any gender pay gap, taking into account several specific factors Revised guidelines for the 2018 season are expected soon 19