Current Posts


May 19, 2015 | Ning Chiu

A group of nine public pension fund fiduciaries has filed a rulemaking petition with the SEC to ask for new disclosure about the gender, race and ethnicity of director nominees in proxy statements, along with a discussion of those individuals' skills and experiences that the SEC rules already mandate.

Specifically, the petition asks that the current disclosure of nominee qualification and skills should be in a chart or matrix form and include additional information as to the nominee's gender, race and ethnicity.  The chart is intended to convey attributes identified by the board as minimum requirements for all directors or as necessary for one or more of the directors to possess, and should be presented in XTML format to enable aggregation across companies.

The petition criticizes existing SEC rules regarding board diversity, which asks whether the board considers... Read More

May 14, 2015 | Ning Chiu

In the first of what is promised to be a series, the PCAOB issued a communication to audit committees to highlight key areas of recurring concern in PCAOB inspections of large audit firms and emerging risks to audits. This Audit Committee Dialogue includes questions that the PCAOB encourages audit committees to ask their auditors. 

The biggest issues continue to be the auditing of internal control over financial reporting (ICFR) and assessing and responding to the risks of material misstatement. On ICFR, the PCAOB inspections often found that an auditor did not perform sufficient procedures to test the effectiveness of controls, and where deficiencies were identified, sometimes the auditor did not sufficiently evaluate whether they constituted material weaknesses. Audits of ICFR should identify material weaknesses even before a material misstatement occurs... Read More

May 12, 2015 | Kyoko Takahashi Lin

On April 30, 2015, the Delaware Court of Chancery held for the second time in three years that a decision by a board of directors or a board’s compensation committee to award equity to non-employee directors as part of their annual compensation constituted a self-interested transaction and, when challenged in a stockholder derivative action, that (a) stockholder demand was excused and (b) the decision would be reviewed under the heightened “entire fairness” standard. This holding comes despite the fact that the equity compensation plan in question, which included a per-person limit on grants, was previously approved by the company’s stockholders.

... Read More
May 11, 2015 | Ning Chiu

As companies begin to assess the impact of the SEC's recent pay versus performance rule proposal, which we discussed here, ISS Corporate Solutions reports that performance pay now comprises about 55% of total compensation. 80% of companies are also using long-term performance awards.

Total shareholder return (TSR) remains the top performance metric used for long-term performance awards, with 58% of companies adopting TSR. It is also the sole metric in the SEC rule proposal selected to benchmark a company's financial performance, although unfortunately the SEC requires companies to use TSR to measure not only performance awards, but all compensation “actually paid.”

48% of companies choose earnings instead. Earnings were once the dominant measure until... Read More

May 6, 2015 | Ning Chiu

SEC Chair White urged companies that “it is past time to stop wringing our hands about whistleblowers,” announcing that whistleblowers “provide an invaluable public service” and the SEC views itself “as the whistleblower’s advocate.” 

The SEC’s whistleblower program started four years ago, with the volume of tips increasing by more than 20%. The SEC received over 3,600 tips (about 10 a day) in fiscal 2014, from all states and 60 foreign countries. Most of the tips related to corporate disclosures and financial statements, offering fraud and market manipulation. Whistleblowers have not only provided the SEC with information to open new investigations, but they have also provided the staff with “insider” views on how companies approaches public disclosure, highly technical analyses of fraud schemes and testimony at proceedings, and identified and encouraged additional... Read More

May 4, 2015 | Ning Chiu

This season ISS is tracking only 10 proposals seeking to declassify boards, a two-third drop from the number of proposals in 2014. This is likely attributable to the absence of assistance from the Harvard Shareholder Rights Project. The Harvard group indicated that it has completed the declassification project that it started in 2011 and the clinic is not operating during the current academic year. Of S&P 500 companies, 75% now have annually elected boards.   

Majority voting proposals also dropped, from 50 in 2014 to 10 this year. 86% of large-cap companies use majority voting standards for election of directors. 

Even the number of independent chair proposals decreased, to 42 compared to 63 in 2014. Proxy access proposals instead account for the bulk of governance proposal topics this season. 

Overall, ISS is monitoring around 780 shareholder proposals, 6% less than last year. 60% of those are focused on environmental and social issues.  Many never end up... Read More

May 1, 2015 | Ron Aizen

On Wednesday, the SEC proposed a rule that would require U.S. public companies to disclose, in any proxy or information statement, the relationship between executive compensation and financial performance. Depending on when the rule is finalized, companies may be required to provide this “pay versus performance” disclosure as early as the 2016 proxy season. 

The Davis Polk memo on this proposal is attached here.

April 29, 2015 | Ning Chiu

Dodd- Frank directs the Commission to require public companies to disclose a clear description of the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. Below is a summary of the proposed rules as discussed at today’s SEC open meeting that just concluded. The full rule proposal will provide additional details, and we will issue a memo on the proposal.

At the open meeting, the Commission voted to propose amending Item 402 of Regulation S-K and requiring a new table with a new measure of executive compensation – executive compensation “actually paid” – for the CEO and an average of the same measure for the other NEOs. “Actually paid” compensation will start with the total compensation in the summary compensation table, adjusting for the pension amount reported and including only equity awards that have vested... Read More

April 28, 2015 | Ning Chiu

Senator Tammy Baldwin (D-WI) has sent a letter to SEC Chair White to express her concerns about the increase in stock buybacks and asks for information on Rule 10b-18, including analytic work done by the SEC on the long-term economic impact of the rule, an accounting of investigations by the SEC into possible violations of the rule and an assessment of whether the rule is adequate to foster capital formation and prevent fraud. Rule 10b-18 provides a company with a safe harbor when repurchasing its own stock, so long as it meets the rule’s manner, timing, price and volume conditions.   

The letter focuses on recent research that claims, from 2003 to 2012, S&P 500 companies used 54% of their earnings on stock buybacks, while dividends accounted for an additional 37%.... Read More

April 27, 2015 | Ning Chiu

At ten companies where shareholders have cast votes on proxy access shareholder proposals this season, four companies received more votes in favor of the proposal than against it, while a majority of shareholders did not support the proposal at six companies. 

Counting only “for” and “against” votes, Arch Coal’s proposal received the lowest support at 36%. The company had previously adopted proxy access bylaws allowing shareholders owning at least 5% of shares holding for three years to nominate access candidates, with a maximum number of 20 shareholders permitted to aggregate their holdings. 

Other proposals that did not receive majority support ranged from 39% in favor at Apple, which we previously discussed here, and 42% to 46% support at Domino’s Pizza, PACCAR, Cabot Oil & Gas and VCA. At three companies, the shareholder... Read More

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