Davis Polk Briefing: Governance

President Nominates 2 New SEC Commissioners

Fri, 24 May 2013 08:10:00 GMT

President Obama has named Kara Stein, Democrat, and Michael Piwowar, Republican as nominees for SEC Commissioners. Both are currently Senate aides.

Ms. Stein is currently legal counsel and senior policy advisor to Senator Jack Reed, who is a senior member of the Senate Banking Committee, and would replace Commissioner Elisse Walter. If confirmed, her term would expire in June 2017.

Mr. Piwowar is an aide to Senator Mike Crapo and the Banking Committee’s Republican chief economist. He is being nominated to replace Commissioner Troy Paredes with a term to expire in June 2018 if confirmed.

CII Asks SEC to Require Broadridge to Provide Vote Tallies to Proponents

Tue, 21 May 2013 06:50:00 GMT

The Council of Institutional Investors is urging the SEC to take action in response to news reports that Broadridge will discontinue its practice of providing voting tallies to proponents of shareholder proposals. It is unclear whether many were even aware that Broadridge was providing this information to shareholder proponents who used the company to distribute materials to investors.

Its letter urges the SEC to immediately end the “patently unfair and arbitrary change in practice” as well as to determine whether regulatory reform is necessary. The letter indicates that Broadridge’s decision, the timing in particular, “raises deeply troubling questions about the fairness and impartiality of the proxy system,” a repeated theme throughout the brief communication.

CII expands its outrage with respect to the availability of vote tallies by complaining generally about Broadridge’s near monopoly over proxy distribution, advocating for additional time to further consider proposed changes to the NYSE rules related to fees charged for distributing proxy materials. These are fees that issuers ultimately pay, and represent a highly expensive burden for many companies.

CII complains that, given its broad coverage, Broadridge should be obligated to, on its own or as required by regulators, demonstrate “fairness” to all interested parties. CII also cites the prior Broadridge practice of having a “vote all items with management” button, which was removed after involvement by the SEC staff, and its belief that Broadridge processes shareholder communications to investors more slowly, as further evidence that Broadridge is biased toward issuers. Ultimately, CII wants the SEC to prioritize a review of the role of proxy distributors and “lack of impartiality in the proxy process.”

Apparently a spokesman for Broadridge has indicated that they would like the SEC to settle the issue, so there may be additional interest in having the SEC weigh in.

Three Social Proposals Win Majority Support at One Company

Mon, 20 May 2013 14:07:00 GMT

The events at CF Industries' annual meeting last week set several records for shareholder proposals. All four shareholder proposals on its ballot passed. That alone is fairly unusual, but three of them were focused on social issues.

A proposal seeking disclosure of corporate political contributions won 66% of the votes, a marked difference from the prior record of 53% for the same proposal at Sprint two years ago. Another proposal asking the company to provide a sustainability report on ESG issues resulted in the highest support any socially oriented proposal has ever received, with 67%. Finally, a proposal seeking board diversity passed with 51% of the shareholders in voting in favor, even though Glass Lewis recommended against it. Glass Lewis supported the other two proposals. ISS favored all three.

The success of these social proposals is surprising, while the overwhelming support received on the fourth proposal asking the board to eliminate supermajority voting standards is consistent with how these types of proposals have fared at other companies.

There were no obvious signs of any active campaigns against the company. At this year's meeting, the company also included its own proposal to move to annual elections for directors after two consecutive years of shareholder proposals seeking declassification were supported by more than 90% of votes cast each time. The company action may have been prompted by the strong opposition the lead director encountered last year, winning only 44% in favor of his election, for not acting on the proposal.

It appears that prior to the lone declassification proposal in 2011, the company traditionally did not receive shareholder proposals. After not responding, in 2012 the company faced the declassification proposal again, as well as a majority voting proposal, both of which passed handily. The results this year continue the rare tendency of every shareholder proposal obtaining a majority of votes.

Chairman White Speaks on Political Spending and Cybersecurity Disclosure

Mon, 20 May 2013 06:47:00 GMT

According to several news outlets, Chairman White declared during her testimony before the House Financial Services Committee on Thursday that "no one is working on a proposed rule," in response to questions about whether the SEC will require companies to disclose political contributions. The Chairman indicated that the SEC's review of the rulemaking petition soliciting this disclosure is "not completed."

The Washington Post reports that House Republicans were disturbed to learn that the SEC is considering such a petition, believing the initiative to be "highly partisan" in light of the controversy surrounding the IRS' examination of certain groups. Representative Scott Garrett of New Jersey pressed Chairman White to commit that the SEC will not be "bullied by these outside radical groups." However, Chairman White declined to take a position. The petition has gained more than 500,000 comments, largely in support, much of which are signed form letters.

Chairman White has also responded to an April letter from Senate Commerce Committee Chairman Jay Rockefeller about cybersecurity disclosure. Senator Rockefeller previously asked the SEC to elevate its existing SEC staff guidance on disclosure obligations regarding cybersecurity risks and incidents to a Commission level. In his view, the disclosures remain insufficient for investors to determine the costs and benefits of companies' cybersecurity practices.

Chairman White's letter stated that after undertaking a review of compliance with its guidance beginning in 2012, the SEC staff has issued comments to about 50 public companies. The staff is evaluating the impact of the guidance and Chairman White has asked them to provide her with a briefing on the current disclosure practices, compliance and any recommendations for future actions.

Considerations for Rule 10b5-1 Plans

Wed, 15 May 2013 09:27:00 GMT

When we wrote that Rule 10b5-1 plans were back in the news in our January memo, it turns out that this continues to be accurate even now as the Wall Street Journal recently reported on the Council of Institutional Investors’ follow-up letter urging the SEC to regulate these trading plans. Richard Sandler in our capital markets practice discusses some of the main issues surrounding these plans and the CII proposal.

Initial adoption of plans. What should companies consider in terms of allowing executives to adopt these plans?

Since the benefits of Rule 10b5-1 are only available if an insider adopts a plan while not in possession of any material nonpublic information, the window period immediately after the company announces earnings would be the best time for executives to adopt plans. CII asks that the SEC permit insiders to adopt plans only during open trading windows. In addition, CII would like the SEC to ban the ability to adopt multiple, overlapping plans.
Waiting period before first trade. Is a waiting period before the first trade under the plan recommended?

While a delay is not required, a waiting period after adoption, and before the first trade, is viewed as a good risk management strategy. The purpose of the waiting period is to help support a conclusion that no trading took place based on inside information.

There is some debate as to how long the waiting period needs to be. While the CII recommendation is for three months or more, this is a longer time period than most practitioners would employ. Current practice varies from 10 days to the next open window.
Modifications to the plans. What are the concerns with permitting modifications or amendments to the plan?

The CII proposal would prohibit frequent modifications or cancellations of 10b5-1 plans. It is hard to argue that a constant pattern of plan amendments and modification may not be problematic. If the amendments are extensive, consideration should be given as to whether it becomes akin to adopting a new plan that should have the same safeguards discussed above.
Termination or cancellation of the plans. What if an executive changes his or her mind and would like to terminate a plan?

A plan can be terminated or suspended at any time, even if an insider has material nonpublic information. In our experience, an executive may wish to terminate a plan before impending bad news to avoid looking like his sales were affected by the news, even if his plan was put into place way before. In the event of a termination, companies need to give careful thought as to when it would be appropriate to put another plan in place.
Disclosure of the plans. Should companies disclose that their executives have entered into 10b5-1 plans?

CII would like companies to disclose adoptions, amendments, terminations and transactions. Currently, companies take different approaches as to announcing the initial adoptions of plans. We suggest that Form 4s disclosing sales under the plans indicate that those sales are made pursuant to a 10b5-1 plan.
Oversight by the company. What kind of oversight mechanisms should companies have in place?

We believe that at a minimum, most companies require pre-approval of an executive’s entry into a plan, if not pre-approval of the plan itself. Some companies consider imposing certain limits regarding the percentage of holdings that can be subject to the plan, establishing rules for setting price floors, or disallowing certain types of plans that give brokers the ability to determine whether, how and when to make purchases. Not surprisingly, CII is seeking expansive board involvement, including having boards adopt policies covering plan practices, monitor plan transactions and ensure that the policies are consistent with any hedging, holding and ownership requirements.

Occidental’s Interesting Majority Vote Provision and Recent Governance Changes

Mon, 13 May 2013 09:23:00 GMT

The resignation of Occidental’s chairman at the company’s annual meeting, which has been widely reported, was subject to an unusual majority vote provision. 76% of the votes cast opposed Mr. Irani’s election to the board. As is fairly common with majority voting, the company’s bylaws require any nominee who receives a greater number of votes against his election than in support of such election to tender his resignation. However, rather than having the board consider whether to accept the director’s resignation and publicly announce its decision within 90 days, Occidental’s bylaws provide that the resignation becomes effective upon the earlier of acceptance by the board or October 31 in the year of election. In other words, the bylaws do not allow the board to reject the resignation, for any reason.

The majority vote bylaw was adopted in 2011 following the outcry over the compensation paid to Mr. Irani, who was then CEO of the company. As a result of the most recent controversy, Occidental made additional governance changes. Some of the more unconventional reforms the board adopted include the rotation of the positions of independent chairman and committee chairs every five years, prohibiting former CEOs of the company from sitting on its board and having the mandatory retirement age for CEOs set at 68. Both executive and director compensation, which had been subject to criticism, were also decreased, with the CEO promising to forego any bonus and certain other compensation during his remaining tenure. In addition, the company pledged to have an independent chairman elected from among the independent directors and create a committee focused on management succession.

Activists Unite to Obtain Majority Support for Shareholder Proposal to Split a Company

Thu, 09 May 2013 13:11:00 GMT

In an unusual collaboration, Relational Investors and CalSTRS succeeded this week in having a majority of shareholders support CalSTRS’ shareholder proposal recommending that the board and management "act expeditiously" to engage an investment bank to effectuate a spinoff of Timken's steel business. CalSTRS’ precatory resolution was favored by 53% of the votes cast. Given that insiders and affiliates own about 15% to 17% of the company, the activists claimed that at least 65% of non-affiliates supported the proposal.

Timken indicated that its board would evaluate the results and announce its next steps within 45 days. Relational and CalSTRS are threatening a proxy contest if the company does not follow through with the proposal’s request. The two investors reportedly own 7% of the company together, although the company disclosed that CalSTRS’ share ownership represents less than 1%.

While being far short of a proxy contest, the activist campaign was intense, as evidenced by the number of exempt solicitations filed by Relational and CalSTRS beginning in November, and additional soliciting materials submitted by the company in response. Each side also used social media, with dueling websites devoted to its version of the debate (Unlocktimken.com from the activists and TimkenDrivesValue.com by the company.)

ISS and Glass Lewis both supported the shareholder proposal. CalSTRS also took issue with the election of several director nominees, including the cousin of a founder serving as an independent director of the audit committee. In another example of how the activists’ collaboration shifted the usual allegiances, a union of steelworkers strongly opposed the proposal.

Relational Investors argued that since the proposal is non-binding, a “yes” vote carries “no downside,” but a “no” vote could send share price lower. Since the proposal was announced in November, the stock price has increased by 38%.

Shareholder proposals on major business strategies is uncommon. According to the Wall Street Journal, only 10 other such proposals to break up a company or divest assets have been made since 2005. Other companies also received proposals calling for board review of major transactions this year, but many were excluded on grounds of vagueness or under the ordinary business exception when the proposals combined both non-extraordinary and extraordinary transactions. The success of this one, however, could inspire other examples that withstand SEC challenge, and generate active campaigns.

Compensation Committee Listing Standards: Who is an “Adviser to the Compensation Committee”?

Wed, 08 May 2013 09:15:00 GMT

A key question under the new standards taking effect July 1 (described in our client memo here) is whether a particular firm or person should be deemed to be serving as an “adviser to the compensation committee” and therefore subject to the requirement that the committee make a prior determination as to independence. Advisers retained directly by the committee are of course covered by this term, but what about advisers to the company who also provide advice to the committee? We think that a company adviser who regularly presents to the committee should be deemed an adviser to the committee, and therefore should be subject to an independence determination now. Companies should also consider making a predetermination as to other advisers who have been retained by the company and who may be called on to provide advice to the committee. The reason to consider predetermining independence now is that the determination should be made prior to the committee receiving the advice. If you would like company advisers to be able to provide advice to the committee if an unplanned situation develops during the year, predetermining independence now could avoid a scramble later.

Remember that the new rules merely require compensation committees to consider the independence of their advisers. They do not provide or imply that committees must or should retain independent advisers. Thus a finding that an adviser is not independent should not of itself impair the committee’s ability to rely upon the advice. Nor is any aspect of the mandated independence review required to be disclosed publicly, other than proxy disclosure concerning compensation consultants. This disclosure requirement does not apply to other advisers such as legal counsel.

Focusing on Compensation Committee Charters Part II – for Nasdaq Companies Only

Tue, 07 May 2013 09:17:00 GMT

We previously discussed the requirements for NYSE companies here. Today, Cindy Akard talks about the required changes to committee charters for Nasdaq companies.

Are any charter amendments required by July 1?

No. Compensation committees have additional responsibilities by July 1 related to compensation committee advisers, but they can reflect these in a committee charter, committee resolution or other board action. However, some Nasdaq companies might want to go ahead and amend their charters by this July 1 deadline, because they will eventually have to include these additional responsibilities in the charters by the later deadline in 2014.
Can you summarize the resolution, action or the amendments to the charter that are required by July 1?

In a charter, resolution or other board action, Nasdaq-listed companies must provide the compensation committee with the authorization to engage their own advisers and be directly responsible for the appointment, compensation and oversight of their work. The committees must have appropriate funding to pay the advisers. Before engaging these advisers directly, or even receiving advice from any other advisers, the committees must take into account specific independence factors.
Are there additional changes to the charter required in the future?

Yes. By the earlier of October 31, 2014, or their first annual meeting after January 15, 2014, Nasdaq rules state that compensation committee charters “must specify” the adviser requirements noted above, as well as the scope of responsibility of the compensation committee and how it is carried out, the committee or board’s responsibility for determining CEO and executive officer compensation and that the CEO may not be present during voting or deliberations on his or her compensation.
In addition, if a committee charter addresses committee member independence, companies may want to reflect the requirement to evaluate and determine membership under the new independence standards.
When is certification to Nasdaq required?

A certification is required within 30 days after the final implementation deadline in 2014. We understand Nasdaq is planning to provide a form of certification.
Where can we find these rules?

Nasdaq has updated its Marketplace Rule 5605(d), with the effective dates listed in Rule 5605(d)(6).

Focusing on Compensation Committee Charters Part I – for NYSE Companies Only

Mon, 06 May 2013 09:15:00 GMT

Recently, we reminded companies of the upcoming deadlines related to the new listing exchanges' rules on compensation committees in this client alert. In two separate posts, we talk about the required changes to committee charters. Kyoko Takahashi Lin addresses questions in Part I of this post, which focuses specifically on NYSE listed companies. We will turn our attention to Nasdaq companies in Part II.

Can you summarize the amendments to the committee charters that are required by July 1?

NYSE listed companies must provide in their compensation committee charters the authorization for the committees to engage their own advisers and be directly responsible for the appointment, compensation and oversight of their work. The committees must have appropriate funding to pay the advisers. Before engaging these advisers directly, or even receiving advice from any other advisers, the committees must take into account specific independence factors.
How do the authorizations available for compensation committees differ from the authorizations available for audit committees?

Rule 10A-3 gives audit committees the authority to engage advisers and requires companies to provide for appropriate funding for the advisers and compensation to the outside auditors, as well as administrative expenses of the committee. The audit committee is directly responsible only for the appointment, compensation and oversight of the outside auditors, and must assess only the independence of such auditors.
Do you think it is necessary to replicate the NYSE requirements exactly in the charters?

No, the charters just need to be clear as to the committees’ additional responsibilities and authorizations. Some companies already provide all of their board committees with the ability to engage and pay for advisers, so in those situations companies may only need to make a few adjustments to that language in the charters, and also add the requirement to conduct independence assessments.
Are there additional changes to the committee charters effective in the future?

No, although if a committee charter addresses committee member independence, companies may want to update that section at the time the requirement to evaluate members under the new independence standards become effective, which is the earlier of October 31, 2014 or their first annual meeting after January 15, 2014.
Where can we find these rules?

The NYSE has updated its listed company manual. Please read carefully as currently both the existing and new provisions (that will be effective later) are in the manual.

Proxy Access Proposal Passes at Verizon

Fri, 03 May 2013 14:56:00 GMT

According to a press release from the Association of BellTel Retirees, 53% of shareholders at Verizon supported a proxy access proposal asking the company to amend its bylaws allowing shareholders owning at least 3% of shares for 3 or more years to nominate candidates to the board.

The release indicates that this outcome represents their “10th proxy victory in 15 years” at Verizon of shareholder proposals either receiving majority support or resulting in negotiated changes at the company, including one of the first say-on-pay proposals on the ballot before the advisory vote became law. The company’s press release states that the board will consider the outcome of the vote.

Other upcoming proxy access votes this season include iRobot (May 22), Goldman Sachs (May 23) and Netflix (June 7), but all three have the “retail” versions which are unlikely to fare as well. These proposals seek to give proxy access rights to (a) shareholders owning at least 1% but less than 5% of shares for 2 years and/or (b) 50 or more shareholders who have each held for at least 1 year a number of shares of stock that, at some point within the preceding 60 days, was worth at least $2,000, and collectively at least one half of one percent but less than 5% of shares. IRobot failed in its attempts to have the proposal excluded by the SEC under Rule 14a-8 on the basis of vagueness and ordinary business.

A Range of Support for Shareholder Proposals on Political Contributions

Thu, 02 May 2013 10:44:00 GMT

While the tug-of-war over getting the SEC to adopt future rules requiring companies to disclose political contributions, and dueling legislative initiatives encouraging or prohibiting such disclosure, are making headlines, there has been less attention paid to the very current situation faced by nearly a hundred companies this season in terms of shareholder proposals on the topic. The proposals covering corporate political activities encompass a wide range of focus and, consequently, significant variation among the vote results.

A shareholder proposal requesting that the company adopt a policy to prohibit the use of funds for political purposes received 4% support at Starbucks, while proposals asking companies to screen their corporate contributions against candidates whose voting records are “inconsistent” with corporate values were favored by only 6% of shareholders at Johnson & Johnson and 5% at Praxair.

On the other hand, traditional proposals asking companies to report on political contributions, lobbying expenditures, or both, have received much higher support from shareholders. Lobbying proposals won 37% at Visa and 42% at Marathon Oil, while proposals seeking reports on political contributions obtained 39% favorable votes at BB&T and 31% at Northern Trust. At AT&T and Citigroup, however, about 25% of shareholders endorsed the proposals.

ISS has been making recommendations for proposals requesting disclosures on a case-by-case basis, based largely on whether a company has an existing report that provides certain information, particularly policies and oversight mechanisms. In our experience, if a company meets nearly all of the criteria in the ISS policy statement, the report ISS issues may provide a sense of what additional changes the company can adopt that will cause ISS to recommend against the proposal. These may include additional disclosure, or clarifications, regarding management or board oversight. Having ISS side with a company can decrease support levels substantially.

Disclosure of political contributions was also part of the groundbreaking News Corp. corporate governance settlement, which has led some to speculate that future shareholder derivative suits may include efforts to obtain this disclosure.

Recent European Compensation Developments

Tue, 30 Apr 2013 18:24:00 GMT

The Eurozone crisis and ensuing populist resentment over perceived compensation excesses have given rise to a recent wave of compensation measures and restrictions in Europe. As we explain in our memo, the measures range from a cap on financial institution bonuses (the so-called “banker bonus cap”) in the EU, binding say-on-pay votes in several European jurisdictions and even criminal sanctions for violating compensation restrictions and corporate governance requirements in Switzerland. Simon Witty, a partner in our London office, explains the key aspects of these developments.

What is the banker bonus cap?

Under CRD IV, which is slated to go into effect for credit institutions (including banks) and investment firms (such as broker-dealer or wealth management firms) in January 2014, the basic rule is that bonus payments will be capped at 100% of total fixed pay or, with shareholder approval, 200% of total fixed pay. “Shareholder approval” means approval by either 66% of shareholders owning half the shares represented or, failing that, 75% of all shares represented. The effective bonus cap can go up by up to 25%, if the pay is in the form of long-term deferred instruments (i.e., instruments deferred for a period of at least five years).

But there is a lot more to the banker bonus cap than just the cap. There are, for example, rules on how much of the bonus must be comprised of equity compensation or certain capital instruments, how much must be deferred and for how long, clawbacks, mandatory deferrals or holdbacks for discretionary pension benefits and the collection of information for individuals who are paid €1,000,000 or more in any given fiscal year.
Who will the banker bonus cap apply to?

As to which institutions, the cap will apply to all credit institutions and investment firms in the EU. The non-EU subsidiaries of institutions headquartered in the EU will also be caught, as will the EU subsidiaries of institutions headquartered outside the EU.

For example, if a financial institution is headquartered in London, all of its relevant employees (including relevant employees located in New York or Hong Kong) will be affected, and, even if a financial institution is headquartered in New York or Hong Kong, its relevant employees working for an EU subsidiary will be affected.

As to which employees at those institutions, the cap will not apply to all employees of a particular entity; rather, it will only affect employees whose professional activities have a material impact on the risk profile of the relevant financial institution. Examples of these employees are senior management; risk-takers; employees engaged in control functions; and employees whose total pay takes them into the same bracket as senior risk management and risk-takers.
Which companies will be affected by the proposed say-on-pay requirements?

The EU has announced a proposed mandatory EU-wide say-on-pay initiative. The U.K. is expected to implement a binding say-on-pay vote by October 2013, plus other related requirements. Another country that has received significant press coverage is Switzerland – its “Minder Initiative” introduces a binding say-on-pay vote, together with other executive compensation measures, which will come into force by March 2014. Germany and Spain have also announced say-on-pay initiatives, which will likely be binding.

Our current understanding is that these developments will just affect the companies incorporated in those jurisdictions. In contrast to the CRD IV compensation restrictions, which will apply to non-EU financial institutions (at least partially), we do not have any reason to think for now that the say-on-pay initiatives will apply to, for example, U.S. or Hong Kong companies.
How will binding say-on-pay work?

In the U.K., the jurisdiction for which there is currently the most information, a binding shareholder vote will be held at least every three years on a company’s remuneration policy report, which is prospective in that it will set out the company’s future policy regarding the compensation (including “loss of office” payments) of directors, including executive directors. A company will continue to have an advisory shareholder vote each year on its remuneration implementation report, which is retrospective in that it will set out how the company’s compensation policy was implemented in the past fiscal year.

Recent Court Decisions on Challenges to Resource Extraction and Shareholder Proposal Rules

Mon, 29 Apr 2013 15:42:00 GMT

The D.C. Circuit has dismissed for lack of jurisdiction the case brought by the American Petroleum Institute and others against the SEC rules requiring certain companies to disclose payments made to foreign governments relating to the commercial development of oil, natural gas or minerals. The case will now be decided in the U.S. District Court for the District of Columbia, where the petitioners had also filed suit "out of an abundance of caution.”

The Commission had not disputed the Circuit Court’s right to hear the petition for review, but intervenor Oxfam America argued that the petitioners must first sue in district court. Exchange Act Section 25 establishes the framework for initial appellate review of Commission actions. Congress created original appellate jurisdiction over challenges to certain Commission rules in 1975, because it believed that the district court's factfinding function is rarely necessary in these cases.

In this case, the D.C. Circuit determined that absent a statutory grant of original appellate jurisdiction under Section 25, a party must first file in district court. While certain enumerated sections of the Exchange Act specifically give the appellate court jurisdiction, the Commission did not rely on any of those sections when it published the resource extraction rule. In fact, the Court noted that Section 25 is limited to Exchange Act provisions directly relating to the operation or regulation of the national market system, a national clearing system or the Commission's oversight of the self-regulatory organizations.

In another case, the U.S. District Court for the Southern District of New York found that the 2010 amendment to Rule 14a-8(i)(8) did not change its original holding in Lucian Bebchuk against Electronic Arts, Inc. In February 2008, the plaintiff submitted a shareholder proposal to the company to amend its bylaws and require management to allow shareholders to vote on all "qualified proposals." Qualified proposals include all submissions made on behalf of any shareholders owing at least 5% of stock that are valid under state law and did not deal with ordinary business operations. Before the SEC could respond to a no-action letter request from the company, plaintiff filed suit.

In November 2008, the district court held that the proposal was contrary to the proxy rules because it eliminated the discretion of the company and dismissed the complaint under Rule 14a-8(i)(3). The court found that the plaintiff’s proposal contradicts the purpose of Rule 14a-8 given that different grounds are available for exclusion of shareholder proposals, which the plaintiff’s proposal would not recognize.

Plaintiff appealed and while appeal was pending, the SEC adopted the proxy access rules in 2010 and amended Rule 14a-8(i)(8). The Second Circuit then remanded to the district court to determine the relevance of the proxy rule changes to this case.

Protests Continue at Bank Annual Meetings

Thu, 25 Apr 2013 06:41:00 GMT

With over 50 S&P 500 meetings scheduled for this week, the proxy season begins in earnest. Similar to last year, the Wells Fargo meeting on Tuesday appears to be one of the first targets of protestors. Reports indicate that while many proclaimed their grievances outside, the meeting was disrupted by dozens who had to be removed, in particular one individual who tried to make a citizen’s arrest of the CEO. The demonstrators complained about the bank’s consumer lending and mortgage practices. There was also some grumbling about the location of the meeting site being in Salt Lake City, after 15 years in San Francisco. Goldman Sachs is also holding its meeting in Salt Lake City this year.

In Pittsburgh, a group of Quakers asked PNC Financial to cease providing financing for projects that use mountaintop removal to produce coal. News reports indicate that they heckled the CEO about a dozen times and tried to interrupt the meeting, which ended after a brief 20 minutes. US Bancorp shareholders gathered in Boise to protest the bank’s foreclosure practices and payday loans.

This “week of action” for 99% Power is focused on Wells Fargo, Sallie Mae, WalMart and Bank of America with a full schedule of events, so more demonstrations may be planned.

Meanwhile, other high-profile meetings proceeded rather peaceably. The big news for the 850 attendees at Coca-Cola’s annual meeting was the surprise appearance of Warren Buffet, the company’s largest shareholder. At GE, a shareholder proposal seeking an independent chairman only received 25% in support. The proposal also failed at Wells Fargo.

Update: NYSE Proposal to Eliminate Voting Standard Removed; Nasdaq FAQs Address Approval

Wed, 24 Apr 2013 15:43:00 GMT

The NYSE has removed its proposed rule filing to the SEC to eliminate its separate voting standard for matters requiring shareholder approval from its website, which we had previously discussed here.

Under Nasdaq, Rule 5635(e)(4) indicates that a “majority of the votes cast on the proposal must be voted in favor of the proposal” where Nasdaq requires shareholder approval. An FAQ indicates, however, that Nasdaq does not define the term “votes cast.” It expects companies to calculate the “votes cast” in accordance with its governing documents and any applicable state law.

Nasdaq's Internal Audit Proposal Criticized

Tue, 23 Apr 2013 09:22:00 GMT

Perhaps owing to more controversy than expected, the SEC has filed a notice to solicit additional comments on Nasdaq's proposal to require that listed companies establish and maintain an internal audit function. The Commission had until April 22 to approve or disapprove the proposal, but has delayed that decision until June 6 in order to consider the 38 comments that were received and seek more comments.

The majority of the comment letters came from CFOs of Nasdaq-listed companies, who complained about the cost burden. Several sought an exemption based on market cap, noting that compliance with SOX already requires the maintenance of effective internal controls with oversight by independent auditors, making this proposal redundant. Many of these companies indicated that compliance with regulatory requirements currently constitutes a significant expense to their relatively modest revenue base, and that this additional requirement is particularly unnecessary for companies that do not have complex businesses. Some of the smaller reporting companies noted that this proposal would defeat the purpose of the exemption available from SOX 404(b) requirements. The biotechnology industry was heavily represented in the comments.

There was also criticism that the requirement to provide management and the audit committee with ongoing assessment of the company's risk management process and system of internal controls was particularly inflexible and likely to increase expenses. In addition, some commenters believe that the outside auditors should not play a role in budgetary and staffing discussions for internal audit functions. The Society of Corporate Secretaries and Governance Professionals recommended that the proposed rule apply only to financial reporting risk, and that Nasdaq increase the implementation period and include a cost-benefit analysis, particularly with respect to the impact on smaller companies.

The Institute of Internal Auditors, however, fully supports the proposal, and in fact suggested that Nasdaq require internal audit functions to follow globally recognized professional standards.

Sustainability Accounting Standards Board Develops Industry Standards of Sustainability Disclosure for SEC Filings

Mon, 22 Apr 2013 08:43:00 GMT

Following up on our earlier report, yet another group is determined to require public companies to disclose sustainability issues in SEC filings. The Sustainability Accounting Standards Board (SASB) held a conference recently to discuss its standard-setting process. While its name invokes an immediate similarity to FASB, SASB has no official designation, although its advisory council includes an impressive list of industry, sustainability and financial professionals affiliated with Deutsche Bank, ISS, J.P. Morgan, Goldman Sachs, Morgan Stanley, BlackRock, AllianceBernstein, CalPERS, Ernst & Young, PwC and McKinsey, among others.

After being informed by the SEC of its reluctance to consider a separate line item requirement for environmental, social and governance (ESG) disclosure because of differences among industry sectors, SASB has begun drafting, and plans to adopt by the second quarter of 2015, ESG disclosure standards for 88 different industries in 10 sectors: (i) health care; (ii) financials; (iii) technology & communications; (iv) non-renewable resources; (v) transportation; (vi) services; (vii) resource transformation; (viii) consumption; (ix) renewable resources & alternative energy; and (x) infrastructure. Once released, SASB will request that the SEC adopt these standards, with the goal of requiring this disclosure in MD&As for Form 10-Ks and Form 20-Fs.

Conference panelists included Sandy Frucher, Vice Chairman of the NASDAQ OMX Group, and Bob Herz, FASB Chairman. NASDAQ is also involved with similar attempts by the Ceres-led investor group working to effect listing standards. Mr. Frucher stressed that “nonfinancial [ESG disclosure] is essential for investors to make a decision” and that there is a need for a “uniform standard.”

SASB reportedly meets with the SEC quarterly, and is also working with the PCAOB to devise standards to develop external auditing of sustainability disclosure. Lest companies think that these efforts will not have any impact, companies may recall that the 2010 SEC interpretive guidance on climate change disclosure was largely driven by Ceres.

SASB invites interested companies to join their industry standards working groups, and has published a timeline of its plans for releasing exposure drafts by industry for public comment. The current financials industry working group represent companies with more than $1.3 trillion market cap, including Morgan Stanley, Bank of America and Citigroup, and investors with more than $5 trillion in assets under management.

NYSE Proposes to Eliminate Separate Voting Standard

Wed, 17 Apr 2013 09:11:00 GMT

Companies seeking approval of equity compensation plans as required under NYSE rules have often struggled to understand, and describe in proxy statements, the application of the NYSE voting standard alongside the state law provisions, for determining approval of the plan. The NYSE has now proposed to eliminate its own separate voting standard.

Where the NYSE makes shareholder approval a prerequisite to the listing of any additional or new securities, Section 312.07 mandates that the proposal obtain a minimum vote of a majority of votes cast, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal. This provision can be baffling, for example, if the treatment of abstentions under applicable state law differs from how abstentions are calculated under the NYSE voting standard. In some states, a “votes cast” standard would not include abstentions. In addition, the 50% requirement layers another level of complexity with respect to broker non-votes, which would be applied toward state law quorum obligations.

The NYSE proposal to remove its own voting requirement, which will also affect other NYSE-required votes, including issuances of over 20% or more of a listed company’s outstanding common stock or voting power, recognizes that it is unnecessary and confusing to mandate two separate voting standards to any proposal subject to the NYSE rules, while applying only the state law requirement for all the other proposals. Nasdaq does not have a similar requirement.

The NYSE has requested that the SEC approve the proposed rule change on an accelerated basis so that, in the case of companies holding shareholder votes on proposals currently subject to Section 312.07, such proposals would be subject only to the requirements of state law.

Majority Voting for Director Elections in the News

Tue, 16 Apr 2013 10:48:00 GMT

Recent controversy surrounding Hewlett-Packard’s board elections have put the spotlight on referendums for directors, with the New York Times alone running three stories on the subject over two weeks. The first article complained about the difficulty of removing directors after HP’s board members all received majority support even in the face of several active and well-publicized “vote no” campaigns. The article blamed large shareholders, intimating that they tend to be mutual funds and asset management companies that may have inherent conflicts of interest, and criticized HP’s biggest shareholder for supporting management’s recommendation on directors 100% of the time from January 2009 to June 2012.

Then, after the announcement that two HP directors are leaving the board and a third is stepping down as chairman, additional articles focused on other boards where directors did not actually receive majority support from shareholders, but continued to govern. Only a small number of directors receive less than majority support, .36% last year (or 61 directors out of over 17,000 up for election). Of those 61 directors, 51 remained on their boards, according to ISS. This time, the plurality voting system came under attack as “an electoral system unworthy of Soviet-era sham democracies.” 78% of S&P 500 companies have majority voting for uncontested board elections, while overall only 45% of the S&P 1500 have joined the movement. Prior efforts by the Council of Institutional Investors to provoke the Delaware legislature to amend its corporation laws were mentioned. Apparently, North Dakota is the only state that bars plurality voting. No major company is incorporated in that state.

Several companies were highlighted in this article, but the most interesting may be Iris International in confronting the “what-if” scenario that is often considered by companies debating whether to adopt majority voting. After adopting a resignation policy coupled with plurality voting in January 2010, the entire board received more “withhold” than “for” votes at the May 2011 meeting when ISS recommended against board members for deciding earlier in the year to retain a poison pill without subjecting it to shareholder approval. Pursuant to their majority voting policy, all nine directors tendered their resignations. At the same time that they announced the meeting results, the board firmly rejected those resignations, attributing the outcome to ISS influence. Later that year, the company terminated its rights plan. The company has since been acquired.

Finally, a DealBook article cites to a study that found that director turnover does not depend on company performance, as there was less than a percentage point difference between companies that were deemed to have performed well or poorly. The biggest driver causing new faces on boards is mandatory retirement age.

Ceres-Led Investor Group Proposes to Make Corporate Sustainability Disclosure Part of Listing Standards

Fri, 12 Apr 2013 09:26:00 GMT

Directed by Ceres, the Investor Network on Climate Risk (INCR) has published a consultation paper (free registration required) with recommendations for integrating sustainability disclosure requirements into listing rules. INCR includes notable investors such as BlackRock and others traditionally associated with being active on corporate social issues, including Boston Common Asset Management and the AFL-CIO.

The group is concerned that the ability to factor sustainability issues into investment decisions is difficult due to what they perceive as inconsistent and insufficient corporate reporting. In addition, INCR members have heard from companies that have been reluctant to report on sustainability that they are not certain what specific information investors need and how it will be used. INCR members have been in discussions with NASDAQ OMX and several other stock exchanges, and the paper is in response to those exchanges urging INCR to develop more clarity and consensus on “a unified sustainability disclosure listing standard that could be adopted by all stock exchanges.”

The three segments of a listing requirement being proposed for listed issuers globally include:

Materiality assessment in annual financial filings where management is expected to discuss its approach to determining the company’s material environmental, social and governance (ESG) issues, with key components that include: (a) how the company determined its material ESG issues; (b) who was involved in that determination; (c) which ESG issues were determined to be material and why, including a discussion of risks and opportunities related to each issue and the connection to financial performance and business strategy; and finally (d) a periodic review of the assessment and reporting on the frequency of scheduled reviews.
A Global Reporting Initiative (GRI) content index, with every company providing a hyperlink in its annual financial filings to such an index, which will inform investors about the availability and location of a company’s ESG data.
Corporate ESG disclosure about the following categories of issues, using a “comply or explain” approach: climate change; diversity; employee relations; environmental impact; government relations; human rights; product impact; and safety and supply chain.

The consultation paper notes that about 3,400 companies published a sustainability report as of 2011, and few companies discuss material ESG information in their financial filings. Bloomberg published corporate ESG data for over 5,000 companies in 2011, with more than 120 ESG indicators on display.

The paper contains a number of questions seeking feedback. The initial comment, or consultation, period ends on May 1, 2013. INCR intends to host meetings to discuss the comments with other investors, and Nasdaq has committed to engage in discussions with other stock exchanges as well as the International Organization of Securities Commissions (IOSCO).

Annual Meeting Preparation: What Will You Do if a Proponent Does Not Show to Present the Shareholder Proposal

Tue, 09 Apr 2013 09:36:00 GMT

As companies prepare for annual meetings, they should consider in advance their preferred approach if the proponent or a designated representative does not attend the meeting to properly present the shareholder proposal that it submitted.

Rule 14a-8(h)(3) permits a company to exclude, for two years, any shareholder proposals from a proponent who fails to appear and put forward the proposal at the annual meeting, unless the proponent can demonstrate good cause. As evident in a recent SEC staff decision disagreeing with Sprint's argument to exclude a proposal on this basis, any ambiguities are likely to be viewed in the proponent's favor.

At the 2012 annual meeting, Sprint's ballot included a shareholder proposal from the AFL-CIO and another from the Office of the New York Comptroller on behalf of several New York City pension funds. Several days prior to the meeting, the New York City pension funds informed the company that the same representative designated to present the AFL-CIO proposal would also be presenting the funds' proposal at the company's meeting.

According to transcripts, after the AFL-CIO representative made a lengthy statement about the union's proposal, the Chairman then called upon him to present the New York City pension funds' proposal. The representative responded, "Well, actually I was only here to present the first one." The Chairman stated, "But you're tagged with this one too, buddy," after which the representative agreed that he was indeed "tagged with this one. I'll just stand here and introduce myself again and say that the AFL-CIO urges you to support this proposal." He did not name the pension funds' proposal, read the resolution or mention the pension funds. He later informed the company that he was surprised and unaware that he was responsible for presenting more than one proposal.

Recently, Sprint submitted a no-action letter to exclude another proposal that the New York City pension funds submitted to the company for the 2013 meeting, on the basis that no representative attended the 2012 meeting to present their 2012 proposal. In its response letter arguing that the 2012 proposal was properly presented, the pension funds used the transcript records to note that the Chairman had specifically called upon the AFL-CIO representative to present the pension funds' proposal, and the Chairman then reminded the representative of this when he indicated no awareness of the proposal. In addition, the pension funds pointed out that the company's Form 8-K announcing the 2012 meeting results reported the votes for the pension funds' proposal, without asserting that the proposal had not been properly introduced.

Companies may want to anticipate in their annual meeting scripts the possibility that the appropriate representative of a shareholder proposal may not be present at the annual meeting, and provide the chair of the meeting with explicit statements that could preserve their ability to make Rule 14a-8(h)(3) arguments in the future.

Practical Advice on How Companies Can Use Social Media to Comply with Regulation FD

Fri, 05 Apr 2013 10:11:00 GMT

When the SEC began an investigation of whether a Facebook post by the Netflix CEO violated Regulation FD, companies became alarmed that it represented the regulator's views that social media should not be used to disclose important information to the market. As we explain in our memo, the SEC has recently issued a report that affirmed the availability of social media as an appropriate channel of dissemination, but only in accordance with specific principles that builds on its prior guidance from 2008. Joe Hall, a partner in our capital markets group, explains the key aspects of how companies can avail themselves of this benefit without tripping the regulatory requirements.

What is most helpful about the new guidance that the SEC has given companies about Regulation FD compliance in the context of social media?

The SEC has now said that the key to satisfying Regulation FD depends on whether the company has adequately informed investors, the market and the media that it will use social media to communicate information. This emphasis on advance notice takes us away from the prior focus on whether a company's website was already a recognized channel. Companies can now take concrete steps to take advantage of social media for this purpose.

What's the first step a company should take if it decides that it wants social media to be a Regulation FD distribution source?

Companies need to decide which channels they want to use and be specific in identifying the precise location where material information will appear, such as the specific URL, Twitter handle or Facebook pages, rather than generic home pages. It can also be helpful to tell investors when you will provide information in some cases, such as an upcoming earnings release, as well as where.

Once a company identifies the social media venues, how should they communicate that to investors?

Companies should prepare a brief statement explaining what they plan to disclose, and where they plan to disclose it. This paragraph should be published regularly in annual and quarterly reports, as part of press releases (perhaps in "about the company") and on the home page of the corporate website. Changes should be publicized well in advance.

Given that many companies may be adding to the number of different places that investors are expected to find information, can "push" technology help alleviate the possible burden to investors in terms of keeping track?

It would be ideal for companies to have mechanisms available for investors to receive alerts when there is new information, such as the ability to subscribe to RSS or other feeds. Companies should make clear what feeds are available and how to subscribe, and give sufficient time to investors to do so before using the particular channel.

What are your thoughts on whether companies will start using social media to comply with Regulation FD?

We expect that practice will continue to vary on whether companies will use social media this way and for what types of information. An important point to keep in mind is that once a company has announced to the market that it will be using, for example, the CEO's Facebook page to distribute important information, the company needs to use it the way it described. Sporadic or inconsistent use may prevent the development of the kind of market following that the SEC is clearly looking for.

Glass Lewis Blog Provides News and Perspectives; Link to Bloomberg Calendar for Upcoming Meetings

Thu, 04 Apr 2013 00:26:00 GMT

Glass Lewis is often criticized for its lack of transparency, which is wanting even by the standards of proxy advisory firms. It does not provide companies with a free copy of its own voting report, which can lead companies to be completely unaware of Glass Lewis negative recommendations and confused about the cause of a downturn in votes, never mind giving draft copies in advance to the S&P 500 companies like their rival ISS. It only makes available a brief version of its policies that is so condensed and vague in parts that it is difficult to determine with any certainty exactly when, for example, the proxy adviser will recommend against a director’s election.

The Glass Lewis blog, however, can be a source of governance information and even the barest of insight on the firm's perspectives. Examples of Proxy Talk, where a company's representatives explain its positions on proxy voting items for annual meetings and proxy contests, is now available for those issuers who are considering whether this would be a useful means of shareholder engagement. "Proxy Season Insider" highlights the key issues for major upcoming annual meetings, and also gives a sense of where Glass Lewis stands, such as “we believe careful consideration should be given to Kforce’s shareholder outreach activity during the past year and the program modifications intended to reign in pay levels in future years.”

As these meeting summaries and perspectives are public, unlike many other proxy commentary which are available only to subscribers of the information, companies should also be aware of any Glass Lewis abstract on their meetings that may be picked up by other media.

Another useful resource for tracking the proxy season as it gets underway is the Annual Meeting Calendar for S&P 500 companies run by Bloomberg.

Say-on-Pay Results Reflect Need to Understand Proxy Advisory Firm Methods

Wed, 03 Apr 2013 07:28:00 GMT

According to the latest Semler Brossy report, only three Russell 3000 companies (Nuance Communications, Digital Generation and Navistar) have failed their say-on-pay vote, with Navistar receiving only a startling 18% in favor. ISS has been recommending against companies about 9% of the time, and companies facing ISS opposition received 24% less support on average. Interestingly, ISS continues to reverse unfavorable recommendations. It did so for 17% of companies in 2012 and most recently for both Hewlett-Packard and Kaman Corp., after the company removed excise tax gross-ups from an executive's renewed change-in-control agreement.

In a recent analysis, the consulting firm discussed why a company may encounter a significant reduction in votes from one year to next. While only a small number of companies see a truly meaningful reversal, the firm urges that “the low frequency of this event belies the significant risk companies may face if they become complacent in their approach…Garnering strong support in one year is certainly no guarantee for future Say on Pay success and no company is necessarily immune from such a reversal of fortunes.” It concluded that when a company's TSR performance declined and pay was not adjusted accordingly, the more thorough qualitative review ISS conducted once companies failed the first quantitative review identified problematic practices that were probably in existence in prior years. Companies may be "caught off-guard,” and therefore unprepared to respond, since those same practices that may never have even been mentioned in prior ISS voting reports were suddenly cited as the reasons that investors should vote against the proposal. Semler Brossy recommends being prepared, including "preemptive conversations" with the proxy advisers rather than making supplemental filings after-the-fact.

In our view, this reflects the need for companies to understand, as outlined in the somewhat dense ISS white paper on their say-on-pay analysis, that an initial quantitative screen by ISS represents exactly what it sounds like: a test of a few numerical-based factors focused on the size of the overall compensation paid and the company's TSR performance, relative to peers. A more holistic approach, the so-called qualitative review, to the company's compensation program is not undertaken unless ISS believes that the initial test reflects a “misalignment” between pay and performance. In other words, a favorable recommendation by ISS in any one year is not a wholesale endorsement of the company's compensation structure, and in fact, ISS may have many issues with those practices if it actually has to get to the next step of examining them.

PCAOB Proposes Framework to Reorganize Auditing Standards

Mon, 01 Apr 2013 10:07:00 GMT

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. A comparison with the existing standard is provided in an appendix. Comments are due by the end of May.

Chamber of Commerce Issues Principles for Companies, Proxy Advisors and the Investors that Hire Them

Wed, 27 Mar 2013 12:46:00 GMT

As proxy season gets under way and the usual agitation over the influence of the proxy advisory firms begins, the Chamber of Commerce is trying to set some ground rules for the three main parties involved in annual meetings: companies, investors and the advisors that issue voting recommendations.

According to the “Best Practices and Core Principles for the Development, Dispensation and Receipt of Proxy Advice” published by the Chamber’s Center for Capital Markets Competitiveness, ISS and Glass Lewis constitute 97% of the proxy advisory business, and one employs 180 analysts to evaluate 250,000 issues at thousands of public companies over a 6-month period. The report is concerned that, through their recommendations on voting matters, the advisors “have become de facto corporate governance standard setters for public companies.”

The principles suggested for the proxy advisory firms include permitting companies to view drafts, ensuring adequate resources and appropriate diligence, disclosing interactions with those who may have interests in the advice such as proponents of shareholder proposals, giving their investor clients both the advantages and disadvantages of any voting advice, and providing all interested persons with detailed information about their methodologies and modeling. For public companies, the report addresses both their purchase of services (presumably from ISS) and engagement with proxy advisory firms. The report urges companies to gain a thorough understanding of the advisory firms’ positions on issues, disclose publicly any changes made as a result of interactions with the advisory firms, and consider whether independent directors should be consulted before engaging with advisory firms.

But the most interesting aspect of these principles may be those targeted at the institutional investors that hire and use the proxy advisory firms. The Chamber exhort these investors to exercise independent judgment and recognize that their responsibilities extend not only to investment, but also to voting, decisions. Investors should retain proxy advisors only after being comfortable that they have sufficient experience and controls to render accurate advice. In addition, the policies and practices for selecting those advisors should be developed or approved by an independent authority within the investment organization.

Reuters has reported that some fund managers are skeptical of the Chamber’s ability to convince investors to adopt these guidelines, from concerns related to costs and efficiencies, and more recently also reported that the Investment Company Institute has issued a statement in response regarding fund managers’ fiduciary duties to vote.

Large Companies Tend to Adopt More Restrictive Director Independence Criteria

Mon, 25 Mar 2013 10:06:00 GMT

We spoke with Agenda for its recent article, "Large Companies Have Strictest Director Independence Standards" (subscription required), which explored the Conference Board's 2013 Director Compensation and Board Practices report. The report showed that one-fifth of companies in the financial services sector and one-fifth to one-quarter of companies in other industries have director independence policies that go beyond what the applicable securities exchanges require. In addition, the largest companies are more likely to maintain more stringent independence standards.

The article provides examples of different types of restrictive standards that some companies are following, such as a longer look-back period for examining certain relationships, or a lower threshold amount for the receipt of direct compensation. We also mentioned that there may be limits to the amount of charitable contributions donated to nonprofit organizations with which directors have affiliations, which is not prohibited under the securities exchanges' director independence rules.

The Conference Board report reached a similar conclusion as to the prevalence of other governance practices among large companies, such as the tendency to have higher representation of independent directors overall.

Hewlett-Packard Directors Win Re-Election Despite Challenging Campaigns

Thu, 21 Mar 2013 09:34:00 GMT

Hewlett-Packard’s annual meeting yesterday was preceded by a bustle of activity around the agenda items, with a string of news reports announcing that as many as 5 of its 11 board members were the targets of different “vote no” campaigns, primarily due to questions surrounding the company’s acquisition of Autonomy.

Investor groups differed on who they thought should be held responsible. The New York City Comptroller’s Office and CtW Investment Group filed notices of exempt solicitations to explain why they were voting against two of the company’s longest-serving directors, the chair of the finance committee and the chair of the audit committee. In addition, CtW criticized the proposal to ratify the company’s auditors, not only over their work on the acquisition but also for the amount of non-audit fees reported. CtW claimed that those fees, at 40% of the total, is twice the average for public companies.

The company responded with a letter from the lead director defending his two fellow board members, as well the executive chairman of the board, an additional subject of opposition for activists like AFSCME. The lead director himself, and the chair of the technology committee, were later added to the list of directors being attacked by shareholders such as the Florida State Board of Administration, which did not lay blame on the chairman. The proxy advisory firms added to the conflicting perspectives, with ISS and Glass Lewis both recommending against the two longest-serving directors, but diverging otherwise. ISS urged that shareholders also vote against the chairman, while Glass Lewis focused instead on the lead independent director and the head of the technology committee, due to their longer tenure.

The controversy was further aggravated by an open letter that the founder of Autonomy posted, widely reported by the press, on the day of the meeting. The letter was addressed to HP shareholders and contained a list of questions that they recommend that shareholders ask the board at the meeting, relating to the impairment charge and the acquisition.

Ultimately, all of the directors were re-elected to the board. According to news reports, the votes in favor of the chair of the finance committee, the chair of the audit committee and the chairman of the board ranged from 54% to 59% in favor. The chair of the technology committee received 70% support, while 80% of shareholders voted to re-elect the lead director. The auditor was ratified with 85% of the vote, and the company’s say-on-pay vote, which ISS changed its initial recommendation to eventually support, was approved by 75% of the shareholders. Most stories completely overlooked the management’s proxy access proposal that we previously discussed here, which was reportedly approved.

Divergent SEC Staff Decisions on Independent Chair Proposals

Wed, 20 Mar 2013 08:21:00 GMT

Is there a difference between a shareholder proposal that asks that the Board's chairman be an independent director as defined by the rules of the New York Stock Exchange and who has not previously served as an executive, and one that asks that the chairman be an independent director (by the standard of the New York Stock Exchange), who has not previously served as an executive?

Yes, according to the SEC Chief Counsel’s office in its decisions on three recent proposals. The Staff last year declined to permit the exclusion of GE's proposal, and other similar proposals which requested independent chairs by reference to the “standard of the New York Stock Exchange," who were not former executives. The Staff has now, however, concurred with KeyCorp, Chevron and Ashford Hospitality Trust on three proposals that link director independence “as defined by the rules of the New York Stock Exchange.” All of the companies had argued that the proposals were vague and misleading under Rule 14a-8(i)(3).

Like GE and other similar proposals that were required to be included in proxy statements last year, the proposal in KeyCorp also requested that the chairman not have previously served as an executive. The proposals in Chevron and Ashford Hospitality Trust, which faced a binding bylaw proposal, did not include the prohibition on former executives. Those proponents later attempted to change their proposals to mirror the ones that used the "New York Stock Exchange standard” instead, but the revisions were rejected as being akin to an untimely second proposal.

Unlike the previous year, the Staff went to unusual lengths to explain its position in each of these three no-action letters, noting that the proposals referred to the “rules of the New York Stock Exchange" or the “New York Stock Exchange listing standards” for the definition of an "independent director," but does not provide information about what this definition means, when the definition is a central aspect of the proposal. The Staff pointed to its Legal Bulletin 14G, which indicated that they consider only the information contained in the proposal and supporting statement and decide whether, based on that information, shareholders and the company can determine what actions the proposal seeks. According to the Staff response, because the proposal does not provide information about what the New York Stock Exchange's definition of "independent director" means, they believe shareholders would not be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.

Verizon faced a proposal that contained a lengthy list of relationships that would disqualify a chair from being deemed independent, without mentioning any stock exchanges. The Staff disagreed with Verizon’s claim that the myriad of requirements could be subject to conflicting and confusing interpretations.

Companies' ISS QuickScores Revealed, See How the Dow 30 Fared

Mon, 18 Mar 2013 09:22:00 GMT

ISS QuickScores are now publicly available on companies' Yahoo Finance pages, under the Business Summary link. The Corporate Governance section reports, as of March 1, 2013, a company's overall score, which gives the decile rank relative to index or region, ranging from “1” (low governance risk) to “10” (higher governance risk). Each of the pillar scores for Audit, Board, Shareholder Rights and Compensation, based on specific company disclosure, is also shown. There is no underlying detail on how the scores were compiled. While we do not yet know whether these metrics will influence investors, companies should be aware that this information is currently easily accessible.

ISS has not yet, and may not, publish any indication on the relative distribution of the scores. Our own analysis of the Dow 30 suggests that these large companies may tend to skew toward the lower risk end of the range, and may not be representative. The overall average score was "3," with only four of the 30 companies receiving scores of "6” or higher. Twelve companies, or 40%, including 3M, Boeing, Chevron, Cisco, Home Depot, Intel, Pfizer and Wal-Mart, were given the "lowest risk" score of "1."

This trend was also evident in at least two of the pillars. Besides the Audit category in which every company but one obtained the score of “1,” in the Shareholder Rights pillar all but two companies scored below "6.” Shareholder Rights examines companies' takeover defenses such as the availability of poison pills, annual board elections, supermajority requirements, the right of shareholders to call special meetings and act by written consent.

The most challenging pillar for this group appears, perhaps surprisingly, to be in the Board category. Two companies received "10"s, which were likely related to specific director issues that they faced, but overall slightly more than 40% of the companies scored "6" and above. Only McDonald’s achieved a “1,” though 13 companies received “2”s, including AT&T, DuPont, Exxon, Johnson & Johnson, J.P. Morgan, Merck, United Technologies and Verizon. As for the compensation pillar, almost 75% of companies received scores between “1” to “5.” As much of the underlying data could be using 2012 proxy information, we will look to update it in the future to assess the variable nature of the ISS product.

Early Examples of Companies Disputing ISS Say-on-Pay Recommendations

Thu, 14 Mar 2013 14:15:00 GMT

So far, as we launch into the proxy season, only a handful of companies have filed additional soliciting materials to dispute proxy advisory firm recommendations. These materials were almost ubiquitous last season, and it is unclear whether the recent changes in the formulation of comparative peer groups by the advisory firms will curtail their numbers.

Piedmont Natural Gas Company provided in detail several points of contention with the ISS negative recommendation. In particular, the company argued that of the 12 peers that ISS used to compare their CEO compensation, 8 had not yet filed their most recent proxy statements. In addition, ISS' constraints around the revenue size and market capitalization in selecting the peer group, the company complains, resulted in ignoring several peers that the company believes to be more relevant to their business.

National Fuel Gas Company faced a similar issue with respect to ISS using essentially 2011 executive compensation as a basis for evaluating their say-on-pay vote, as nearly 75% of the peer group compiled by ISS had not yet filed proxy statements for 2013 meetings. According to their filing, ISS attempted to adjust for this issue by simply increasing the total compensation of those peers by nearly 7%, which the company argued was "a crude general assumption" and not an accurate basis for comparison.

In what may serve as a warning to pay careful attention to the disclosure areas that the proxy advisory firms are most likely to examine, Hillenbrand indicated in their filing that ISS had erroneously concluded that they do not benchmark at the 50th percentile because “the language of our proxy statement did not state this point clearly.” All three companies received above 75% in support.

Hewlett Packard has yet to hold its meeting but has made several filings. In the midst of confronting efforts by CtW Investment Group targeted at their auditor ratification proposal and the election of several directors, the company announced recently that ISS has reversed its recommendation and is now supporting the company's say-on-pay vote. The first release provided no explanation but then a filing the next day highlighted recent changes which the company had disclosed in its Form 10-Q. The company had added total shareholder return as a metric to its 2013 awards and the compensation committee also committed to undertake a review of its compensation programs with a view towards including relative performance metrics in 2014 and future compensation plans.

Proxy Access Proposal Fails at Disney and Shares the Spotlight with Other Issues

Mon, 11 Mar 2013 13:44:00 GMT

At its meeting last week, Disney’s proxy access proposal received 40% in support. As we previously discussed here, the SEC Staff did not permit the company to exclude the proposal from its proxy statement.

While it is probably too early to think that proxy access shareholder proposals have exhausted their 15 minutes, they have largely been in the background this season, as ISS reports that only a few were submitted. In this case, the company’s proxy access proposal was overshadowed by continuing agitation over Disney’s decision in 2011 to appoint the CEO as the chairman of the board, after having an independent chair since 2004. The week before the meeting, CALSTRS and PGGM filed a notice of exempt solicitation urging shareholders to support both the proxy access and independent chair shareholder proposals and also vote against Disney’s say-on-pay resolution due to the “guaranteed minimum target values and a guaranteed five year term for the CEO.”

The company responded with a terse two-sentence statement emphasizing its exceptional results in 2012 with 76.3% total shareholder return, and 139% over the CEO’s tenure. This defense was followed by another notice of exempt solicitation, this time from Connecticut Treasurer Denise L. Nappier, the proponent of the independent chair proposal. The Treasurer’s letter accused Disney of deliberately avoiding shareholder input on recombining the CEO and Chairman roles by timing the announcement of the change in 2011 after the deadline for accepting shareholder proposals had passed, and argues that the two roles should only be combined in “extraordinary circumstances,” a stricter standard than making decisions in light of the “best interest” of the company. The proposal ultimately received 35% in favor.

Say-on-pay was also a focus of the Treasurer’s letter, which attacked the CEO’s “guaranteed target pay opportunities” and “guaranteed long‐term incentive award target.” The letter indicated that ISS estimated $100 million as the value of the CEO’s severance payments.

58% of shareholders voted for Disney’s say-on-pay resolution, similar to 2012 when 57% supported it. TheCorporateCounsel.net reports only three failed votes so far at smaller companies, but Disney, and previously at Apple where say-on-pay received 61% in support, shows that say-on-pay continues to be challenging even at companies with stellar financial performances.

Securities Exchanges Rules Involving Risk Management Are Proposed and Debated

Fri, 08 Mar 2013 08:52:00 GMT

In another move that more closely aligns Nasdaq listing standards with those of the NYSE, Nasdaq has filed a proposed rule change with the SEC that would require its listed companies to have an internal audit function by December 31, 2013. Companies looking to be listed on Nasdaq after June 30, 2013 will need to put this in place prior to listing. The role may be handled internally or outsourced to a third party other than a company's independent auditors. The proposal is subject to comments and SEC approval.

An internal audit function is identified in Nasdaq’s rule filing as being necessary to provide management and the audit committee with ongoing assessment of a company’s risk management processes and system of internal control. The proposed rule gives the audit committee sole responsibility to oversee the internal audit function, which cannot be allocated or delegated to another board committee.

In another matter also related to a stock exchange regulation of audit committee responsibilities, the New York City Bar Association Financial Reporting Committee has asked the NYSE to consider revising its rules regarding the extent to which audit committees shoulder the burden for risk management oversight. NYSE requires audit committees to discuss policies with respect to risk assessment and risk management. Commentary to these rules indicates that the audit committee is not required to be the sole body responsible for risk assessment and management, but it must discuss guidelines and policies to govern the process by which this activity is undertaken.

The Financial Reporting Committee letter expressed concern that the NYSE rules not only call upon audit committees to assume oversight responsibility for risks beyond those associated with financial reporting, but also that the level of responsibility the committees must undertake is unfortunately ambiguous. The letter argues that audit committees are already burdened with their existing duties and also do not possess particular expertise in broader subjects of risk management that may expand to operational and environmental risk, for example. The letter suggests perhaps a more useful approach would be to vest in the entire board the responsibilities for the allocation of risk management oversight instead.

Amicus Submission to SEC Questions Regulation FD Case Against Netflix

Wed, 06 Mar 2013 14:22:00 GMT

Professor Joseph Grundfest at Stanford Law School and The Rock Center for Corporate Governance suggests that the SEC should not initiate enforcement action against Netflix in his article, “Regulation FD in the Age of Facebook and Twitter,” which was sent to the SEC as an Amicus Wells Submission. At issue is whether Netflix violated Regulation FD because of a posting made by the CEO to his Facebook page that claimed monthly viewing exceeded 1 billion hours for the first time.

The article contends that the posting contained no material information as the market was already aware at the time that the company was delivering close to a billion hours for the month as evidenced by several press reports. The viewing metric was not linked to any compensation scheme and did not affect the company’s valuation. In addition, the message was written in the form of a congratulatory note to certain employees and not designed to influence investors.

Central to the dispute is the use of social media to communicate corporate information. The article claims that the Netflix CEO posting was reasonably designed to provide “broad non-exclusionary distribution” and did not constitute selective disclosure. The CEO’s Facebook page had 205,000 followers, as proven by the rapid and wide dissemination of his message through Twitter feeds and also traditional media. Unlike the 13 prior Regulation FD cases, the message was broadly accessible by the general public instead of targeting the investment industry insiders central to the objectives of Regulation FD. In previous precedents where companies were found to have violated Regulation FD, the companies controlled the recipients, with the largest group numbering 200, whereas Netflix made no efforts to limit who saw the posting.

The article argues that Netflix’s actions are not inconsistent with prior Staff guidance regarding the use of company websites and Regulation FD. While the SEC’s 2008 guidance favored advanced notification that material information may be communicated through company websites, that guidance also indicated that use by investors and the market of the company website can substitute for the company actions to alert the market to information being available.

Professor Grundfest raises an interesting question of whether Regulation FD would survive a constitutional challenge as a restraint on truthful speech, particularly as applied to this case. The debate may focus on whether the SEC’s explicit preference for using press releases, Form 8-Ks and static webpages violate the First Amendment as discriminating against social media, in the absence of any showing that social media is less effective in achieving the regulation’s objectives. It may be possible to characterize Regulation FD as a prohibited content-based regulation which limits truthful, material speech when expressed by certain persons (the issuer) to certain recipients (investors), that cannot be made through any communication means other than those explicitly endorsed (Form 8-Ks).

Bringing forth a case against Netflix may also be futile, since the investigation has already obtained the remedy it seeks and chilled the use of social media without making a contemporaneous 8-K filing. The article references numerous law firm memos advising companies to exercise extreme caution in using social media to disclose information.

Federal Court Enjoins Apple’s Charter Proposal for Violating SEC “Unbundling” Rules – A Timely Reminder

Mon, 04 Mar 2013 09:27:00 GMT

As widely reported, on February 22 in Greenlight Capital, L.P. v. Apple, Inc., a federal court in New York enjoined Apple shareholders from voting on a proposal that combined four charter amendments into a single proposal. The Court found a strong likelihood of success on the merits that Apple violated the SEC’s so-called “unbundling” rules, which require proxies to identify clearly and impartially “each separate matter” and give shareholders the ability to vote for, against or abstain from “each matter.”

The decision should come as no surprise since it is consistent with how practitioners and members of the SEC Staff have applied the unbundling rules in the past. When the SEC Staff have decided to review a proxy statement, they have frequently requested issuers to unbundle in the M&A and recapitalization contexts and proposals to amend a company’s governing documents, including preferred stock rights. Admittedly, there are examples of proxy statements that are inconsistent with this articulated approach, in some cases most likely because the SEC Staff did not review the proxy.

Although the Apple decision should not change the norm, it highlights the risk that a “bundled” proposal could be enjoined and is therefore a timely reminder of the need to think about the application of the unbundling rules with respect to all proxy statements. The risk of litigation, alone, may induce companies to act more conservatively by unbundling important management proposals.

SEC Staff Declines to Exclude Proposals on the Basis of Inflammatory or Incorrect Supporting Statements

Mon, 04 Mar 2013 09:09:00 GMT

Companies with shareholder proposals are often frustrated by what they view as offensive, or merely wrong, supporting statements that accompany the resolutions. The supporting statements at times target specific directors with provocative claims of failed oversight. Several companies this season tried to exclude proposals, including asking to omit only a portion, on the basis that those supporting statements were false and misleading under Rule 14a-9. The Staff disagreed.

Boeing failed to convince the Staff that a proposal seeking an independent chairman which contained a supporting statement that focused on their CEO's responsibilities on other companies’ boards would confuse shareholders in thinking that the proposal is actually about limitations on board service. The Staff also disagreed that statements in a proposal at UMB Financial impugned the character, integrity or personal reputation of directors or made charges concerning improper, illegal or immoral conduct or associations without factual foundations. UMB Financial had protested against statements which questioned whether the family of the former and current chairman “dominated” the company and made allegations of "nepotism." The Staff differed with Wendy's views that references to a GMI report about the board, statements regarding long director tenures and advanced ages and one director's past involvement with a public company bankruptcy were irrelevant to the subject matter of the proposal, which was focused on accelerated vesting of equity upon change of control, and instead merely constituted an opportunity to "attack" individual directors.

The Staff did not allow portions of proposals to be omitted even when a company demonstrated that the statements were simply untrue. Allergen tried to exclude portions of a proposal seeking to give shareholders the right to act by written consent that the company objected to as false and misleading, including statements regarding a former president who the proponent claimed acted as interim CEO, and his reported compensation. Allergen noted that the former president was never the company's CEO and the information in the supporting statement, including compensation, seemed to be about an entirely different company where their former president now serves as CEO. The company also asserted that, contrary to the claims in the proposal, it does not pay performance share units at all and again, it is the other company that pays these types of units. Allergen also protested as false the proposal’s claims that the company still has a poison pill, which had instead been allowed to expire in 2010, and that the company was transitioning to annual elections when the company had completed declassification by the 2012 meeting. The Staff denied exclusion on the basis that Allergen did not demonstrate objectively that these portions are materially false or misleading.

Companies Can Access Their ISS QuickScore

Wed, 27 Feb 2013 09:05:00 GMT

Companies can now obtain their ISS QuickScore via the ISS data verification site. The QuickScores will also be provided on companies’ ISS proxy research reports, and beginning the second week of March, on companies’ Yahoo! Finance page.

We previously explained QuickScore here. QuickScore is ISS’ new governance rating product that essentially replaces GRID (governance risk indicator) and prior to that, CGQ (corporate governance quotient). Companies receive scores from 1 (lowest risk) to 10 (highest risk) on 4 components (board structure, shareholder rights; compensation and audit) in addition to an overall score. While the ISS white paper and the data verification site provides the questions and answers that were used to derive the scores, it is generally not possible to determine any one question’s weight. Companies with a premium membership rather than the free login have the ability to obtain peer data and other information.

A key point to remember is that the score is based off the most recent proxy statement, which for most companies will be the 2012 proxy statement. It will be updated after a company files the proxy for the 2013 annual meeting. While many of structural governance provisions may not change year-to-year, such as whether a company has a poison pill, the compensation section is the most variable in that it has a pay-for-performance analysis that is derived directly from actual pay data and includes several of ISS’ calculations of CEO pay and TSR relative to peers. Companies with poor ISS recommendations in 2012 will likely see a low compensation score at the moment. The corollary is true as well, in that it also means that companies’ compensation scores may decrease after ISS reviews the data for the 2013 meeting.

Two Company Wins for Say-on-Pay Proxy Disclosure Lawsuits (Symantec and Apple)

Tue, 26 Feb 2013 12:20:00 GMT

In our recent client alert, “Recent Developments in Executive Compensation,” an open question was the fate of Gordon v. Symantec Corp. (and similar cases) after the court denied a preliminary injunction to enjoin the company’s say-on-pay vote. At the time of our client alert, a demurrer to the plaintiff’s class action complaint was pending.

On February 22, 2013, the judge in Symantec (the same judge who granted a preliminary injunction in Knee v. Brocade Communications Systems Inc. to enjoin a vote on an equity plan proposal) issued an order sustaining the defendants’ demurrer to the plaintiff’s complaint. The Symantec court noted that once the shareholder vote on Symantec’s say-on-pay proposal was held at its annual meeting in October 2012, the direct disclosure claim was no longer available to the plaintiff and the plaintiff’s claim then became a derivative claim subject to a pre-suit demand requirement.

The court further stated that the plaintiff, as a substantive matter, failed to plead a sufficient disclosure claim. In other words, the plaintiff failed to demonstrate how the information she claimed should have been disclosed (e.g., fair summary of the competitive market analysis performed by the compensation consultant, other non-compensation consulting and business services that the compensation consultant performed, criteria used to select Symantec’s peer group, etc.) could be viewed as significantly altering the total mix of information already made available to Symantec’s shareholders.

Even though the plaintiff still has ten days to amend her complaint and this judge’s ruling in Santa Clara California State court is not binding on other courts, this result is welcome news for U.S. public companies. It reinforces the notion we posited in our client alert – at least with respect to say-on-pay proposals, these lawsuits are likely to face significant obstacles.
The hope is that this may augur a dismissal of at least one other similar lawsuit in the near future. Specifically, the parties in Gordon v. Cisco Systems, Inc. (which is pending before the same judge in Santa Clara California State court) stipulated that the demurrer in Cisco should be deferred until a decision in Symantec had been reached, because (i) the issues that were raised in Cisco are substantially similar to the issues that were under consideration in Symantec at the time and (ii) both actions involve the same plaintiff, the same plaintiff’s counsel and the same counsel for defendants. Now that Symantec has been decided, it is likely only a matter of time before this result will be replicated in Cisco.

It is also worth noting that, while all the reports on the recent lawsuit against Apple’s proxy statement in the Southern District of New York focused on the unbundling claim made by Greenlight for the charter amendment proposal, as we previously discussed here, little known is that the judge in that case also dismissed efforts by another plaintiff to enjoin the say-on-pay proposal. That plaintiff had claimed that Apple’s use of terms like “experiences,” “input” and “peer group data,” when describing the compensation committee’s judgment in granting long-term equity, failed to provide sufficient information. The judge found, however, that since the plaintiff did not identify any material omission in the proxy and since the compensation discussion and analysis section included in the proxy statement was compliant with the SEC rules, the plaintiff was unlikely to succeed on the merits.

Nonetheless, the Symantec and, in the say-on-pay preliminary injunction context, Apple successes do not mean that U.S. public companies should relax and assume that the plaintiffs’ bar will be deterred. At least one law firm that has been particularly active in filing these types of lawsuits has recently identified several more companies which it is investigating for potential breaches of directors’ fiduciary duties in connection with say-on-pay proposals. Given that the proxy season is upon us, we continue to recommend that companies pay extra attention to their executive compensation disclosure.

SEC Commissioners Take Divergent Views on Corporate Governance and Related Disclosure Regulations

Tue, 26 Feb 2013 09:31:00 GMT

With annual meeting season looming, SEC Commissioner Luis Aguilar recently advocated for improved proxy disclosure, noting that many companies "continue to fall short of providing the robust, clear and useful disclosure required by law." Acknowledging that the rules requiring disclosure of board diversity allowed diversity to be defined in any number of ways, he indicated that “to truly meet the needs of investors, a proxy statement would need to state the gender and racial or ethnic background of incumbent directors and nominees,” and whether those aspects of diversity are taken into account when considering board candidates. In fact, in his view, “if a company has no women or persons of color on its board, it should state whether or not it has considered increasing the size of its board to enhance diversity – and if not, why.”

He also urged all issuers to discuss the role of compensation and risk management. While such disclosure is required only if the risks are material, he believes that company assessments of risks and rewards in compensation plans are "inherently material" to investors. In fact, beyond specific pay schemes, he notes that the pay ratio between CEO compensation and median employee pay can create enterprise risk, including employee, customer and shareholder discontent.

He criticized the discussion of board leadership structure and risk oversight found in most proxy statements as being boilerplate and failing to account for a company's specific circumstances. Finally, he supports mandatory disclosure of corporate political spending.

A month earlier, Commissioner Gallagher decried the “law of unintended consequences” in efforts to federalize corporate governance regulation to cover “social and political issues rather than issues that would be material to investors.” In particular, the governance aspects of Dodd-Frank rulemakings appear, in his view, to “affect the behavior of companies and boards rather than to provide information that investors would find useful.” For example, he questioned the benefit of the not-yet-proposed requirement on disclosing the ratio of CEO pay to median employee pay. He then pointed to proxy advisory firms as the group that will really benefit from Dodd-Frank (in addition to lawyers and accountants) given their increased influence, and stressed the importance of ensuring that institutional investors are not overly relying on those firms’ analysis.

Finally, Commissioner Gallagher concluded that state law represents a better, more flexible means of regulating corporate governance and urged that the Commission “resist the urge to intrude upon state matters absent compelling reasons to do so.”

NY State Withdraws Political Spending Lawsuit Against Qualcomm After Company Agrees to Disclosure

Mon, 25 Feb 2013 08:42:00 GMT

New York State Comptroller Thomas P. DiNapoli on Friday issued a press release announcing that the New York State Common Retirement Fund has withdrawn the lawsuit it filed in early January against Qualcomm over political spending disclosure, after Qualcomm implemented and publicly posted what the release calls an “industry-leading” Political Contributions and Expenditure Policy. The lawsuit, which we previously discussed here, sought Qualcomm's books and records under Section 220 of the Delaware corporation law.

The press release includes statements from both Qualcomm's CEO and Chairman and Mr. DiNapoli extolling the importance of increased transparency about corporate political spending. According to the release, the company’s policy will include information on contributions to political candidates and parties, and expenditures to trade associations and Section 501(c)(4) organizations, as well as contributions to influence ballot measures. 501(c)(4) groups, whose primary purpose must be focused on “social welfare” in order to stay tax-exempt, have come under increasing attention for their involvement in the political process while being able to maintain donor anonymity.

The Center for Political Accountability weighed in and in the same release announced that the Qualcomm disclosure "puts it near the top" of its CPA-Zicklin Index, which we described here. According to the CPA, 107 large public companies have agreed to disclose corporate political spending so far.

The 4-page Qualcomm policy indicates that political expenditures require the approval of certain members of management and oversight by the board’s governance committee. The company plans to update the policy twice a year for information on specific political contributions, dues to U.S.-based trade associations that received payments of at least $25,000 (and the portion of those dues and special assessments that were used for activities that are not deductible if such information is available after making reasonable efforts), payments of $10,000 or more to social welfare organizations, and contributions to influence the outcome of ballot measures. The policy states that the company does not plan to make independent expenditures on behalf of federal candidates.

While some had expected a decrease post-election, ISS reported that, like last year, it is tracking more than 110 shareholder proposals on the topic this season.

Proxy Season Preparation for NYSE Companies

Fri, 15 Feb 2013 00:30:00 GMT

The NYSE sent a reminder to its U.S.-listed companies earlier this week, covering a range of regulatory requirements. The key points focused on the annual meeting and proxy statement include:

Using egovdirect to provide notification of the record date and meeting date to the Exchange, as we discussed here;
Giving the Exchange at least 10 calendar days prior notice of a record date, including any changes, and ensuring the record date is 30 calendar days from the meeting date as the Exchange recommends;
Sending broker search cards at least 20 business days before the record date, which the NYSE emphasizes is mandatory;
Sending three copies of the proxy materials (including the proxy card) to the Exchange at the same time when they are first sent to shareholders;
Confirming that the disclosure of voting standards in the proxy statement reflects the recent changes to NYSE rules on broker discretionary voting, which eliminated the ability for brokers to cast votes without instruction on many management proposals such as declassification, adopting majority voting, eliminating supermajority requirements, and providing the rights to call special meetings and action by consents. In addition to auditor ratification, some management proposals may still be deemed broker "may vote" items, so companies should inquire early with the Exchange in order to include accurate proxy disclosure; and
Providing as necessary interim written affirmation of changes to the board within 5 business days after the change, and then the annual written affirmation and CEO certification 30 days after the meeting.

Brief Supporting Conflict Mineral Lawsuit Against SEC Cites Harm to the Republic of Congo

Mon, 11 Feb 2013 09:38:00 GMT

A group of academics and former government officials who are referred to as experts on the Democratic Republic of Congo (DRC) have filed an amicus brief in support of the lawsuit challenging the SEC's rules on reporting of conflict minerals. The brief argues that if the SEC had properly evaluated the costs and benefits, it would have concluded that the rule will worsen conditions in the DRC due to the expense associated with compliance by companies. The group is concerned that companies will cease sourcing minerals from the DRC altogether, harming the livelihood of miners. In addition, those costs will prevent companies from investing in traceability programs that would have enabled them to determine whether minerals are from mines controlled by armed groups. Without such programs, a legal market for DRC-sourced minerals cannot develop and the SEC rule will in effect benefit those armed groups which are best equipped to smuggle minerals out of the DRC.

This expert group indicated that its goal is not to support the commercial interests of the petitioners that brought the suit, which includes the Chamber of Commerce and the Business Roundtable, but rather to emphasize that the SEC rule fails to advance the statute’s objective to weaken armed groups in the DRC. The brief describes the history of the warfare in the DRC that led Congress to adopt Section 1502 in the Dodd-Frank Act, with the perverse effect of forcing thousands of miners to flee from their only means of support and abandon mine sites, due to the increased strength of the very armed groups that the statute wanted to help eradicate. The brief emphasized that the SEC should have considered these consequences in its cost-benefit analysis, and that the Commission further exacerbated the issues when using its discretion in adopting the rules.

By reference to the petitioners' brief, the experts claim that the SEC went beyond the requirements of the statute and allege that the Commission expanded its intended reach. According to the petitioners' brief, by its terms Section 1502 applies only if conflict minerals are necessary to the functionality or production of a product manufactured by a company, which should mean that the statute apply only to manufacturers. However, in adopting the rule, the SEC indicated that the statute would be internally inconsistent if companies that merely “contract to manufacture” these products were not also required to file reports, since the legislation mandates that any conflict mineral reports also include a description of “products contracted to be manufactured.”

The SEC’s brief is due on March 1st and final briefs are due near the end of March. Amnesty International has indicated that it intends to file an amicus brief in support of the SEC. As we describe in this memo, Form SD for inclusion of the conflict minerals disclosures is required to be filed beginning May 31, 2014.

Examining Apple’s Disputed Proposal to Amend its Charter

Fri, 08 Feb 2013 11:21:00 GMT

There has been much in the press about David Einhorn’s lawsuit seeking an injunction against Apple over a proposal in its annual meeting proxy statement, with various reports indicating that Einhorn is focused on Apple’s vast cash position and the possibility of the company distributing preferred stock to its shareholders. The suit also alleges that Apple improperly bundled several matters into one proposal in violation of Rule 14a-4(a)(3).

Apple’s proposal as described in its proxy statement seeks shareholder approval to amend the company’s charter to (a) implement majority voting for the election of directors; (b) eliminate “blank check” preferred stock; (c) establish a par value for the company stock and (c) make conforming changes. Apple discloses that the majority voting amendment is needed to conform to the California Corporation Code that applies to companies that have adopted majority voting. Unlike Delaware, the California statute provides that the term of an incumbent director in an uncontested election who fails to be elected shall end the earlier of 90 days after voting results are determined or when the vacancy is filled.

David Einhorn and Greenlight Capital filed a notice of exempt solicitation on February 5th announcing its lawsuit, and included a copy of the letter it sent to Apple shareholders asking them to vote against this proposal because it “would eliminate preferred stock from Apple’s charter and thus restrict the Board’s ability to unlock the value on Apple’s balance sheet.” The notice states that they have had ongoing discussions with Apple about the possibility of distributing perpetual preferred stock to shareholders, which Apple rejected definitively in September 2012. Greenlight then initiated the lawsuit after Apple informed them recently that while it will continue to evaluate Greenlight’s ideas, it will not withdraw the charter amendment and also refused to unbundle the proposal.

In response, Apple filed additional soliciting materials on the same day reiterating its commitment to thoroughly evaluate Einhorn’s proposal and emphasizing that its proposal would not prevent the company from issuing preferred stock, but only requires that shareholders must approve such issuances. Since Apple’s proposal would be in line with what activists of a different stripe would considered “good governance,” it is not surprising that CalPERS also filed a notice of exempt solicitation to support the company.

Because of the management proposal, Apple filed a preliminary proxy statement first with the SEC. There is no indication whether the SEC staff reviewed it before the final proxy materials were distributed. A majority of the company’s outstanding shares are needed to approve the proposal at the meeting scheduled for February 27th.

Rulemaking Petition Urges the SEC to Shorten Section 13(f) Reporting Deadlines

Thu, 07 Feb 2013 14:22:00 GMT

A rulemaking petition to the SEC has been submitted by the NYSE, along with the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute, asking the Commission to amend the deadline for beneficial ownership reporting rules under Section 13(f). Institutional investment managers who exercise investment discretion of over $100 million must file a Form 13F within 45 days after the last day of each calendar quarter. The Petition seeks to shorten that deadline to two business days after the end of the quarter.

The Petition argues that under existing requirements, an investment made on January 1st may not be reported until more than four months later, on May 15th, by which time the information may very well be stale. The rule has been in place for over 30 years without reflecting major advancements in technology. The Petition cites to many of the other areas where the Commission has shortened reporting deadlines, particularly for public companies, in the interest of increasing transparency and providing the market with faster information.

Companies that wish to support this Petition may contact of the organizations listed and submit comment letters to the SEC, even in brief form. Almost all of the thousands of comment letters sent in to support the rulemaking petition on political contributions disclosure that we previously discussed here are only a few paragraphs in length, some as short as one sentence.

This is the second rulemaking petition submitted to the SEC so far this year. The first is from the Council of Institutional Investors asking the Commission to adopt several requirements related to Rule 10b5-1 trading plans, such as limiting adoption of these plans to during open trading periods, prohibiting the adoption of multiple plans, requiring mandatory delays between adoption and first trade and restricting the number of modifications and cancellations.

For our recent discussion of the controversy surrounding 10b5-1 plans and what companies should be thinking about, see "Rule 10b5-1 Plans: What You Need to Know" >

NYSE Amends Company Notification Rules with Focus on Use of egovdirect.com

Tue, 05 Feb 2013 09:55:00 GMT

The SEC recently approved amendments to the NYSE Listed Company Manual to provide a uniform method for companies to give notice to the NYSE when required to do so under various sections of the Manual. Prior to these amendments, companies were permitted to provide notice of certain events using different methods that varied from section-to-section, and that in some cases asked for multiple notices (for example, telephone calls followed by faxes). At least 3 sections still referred to sending notices by telegrams. With particular relevance to the proxy season, the NYSE has also clarified that only 3 copies of the proxy statement (instead of 6) need to be sent at the same time they are issued to shareholders.

Section 204.00 now provides that if a provision of the Manual requires companies to give notice to the NYSE and references that section, then companies should give notice through a web-based system. The NYSE has posted on its website [https://usequities.nyx.com/listings/notification] that egovdirect.com is the web-based portal that companies must use for announcing shareholder meetings, setting of record dates, the closing of transfer books, dividends and stock distribution actions and redemption notices. Companies that need information about egovdirect should email egovdirect@nyx.com or call 212.656.4651.

If a provision in the Manual requiring notice to the NYSE doesn’t specify following Section 204.00 specifically, such as notification of changes in transfer agents or changes in auditors, then companies may either use egovdirect or alternative methods. In emergencies such as the lack of internet access or technical problems with egovdirect, companies may telephone the NYSE and confirm by fax.

Verbal communication must continue to be given about press releases disclosing material corporate developments during market hours (between 9-5 EST) at least 10 minutes prior to the release, together with a copy of the text sent through either egovdirect.com or emailed to nyxalert@nyx.com (instead of only by email as previously required).

Questions about the new notification requirements can be directed to NYSE’s Corporate Actions & Market Watch team (877.699.2578 or 212.656.5414).

Western Union Seeks to Exclude Norges Bank Proxy Access Shareholder Proposal by Submitting Its Own Version

Mon, 04 Feb 2013 10:15:00 GMT

In what may be a first, Western Union is seeking to exclude a proxy access shareholder proposal from Norges Bank by arguing in a no-action letter request that the company is submitting its own conflicting management proposal. The Norges Bank shareholder proposal urges the board to adopt a bylaw amendment so that a shareholder, or a group of shareholders, owning 1% or more of company stock continuously for a year would be able to include their board candidates in the company’s proxy statement.

The company argues that, pursuant to Rule 14a-8(i)(9), the shareholder proposal should be excluded because it would directly conflict with the company proposal that it intends to include in its 2013 proxy materials, which would ask shareholders to vote on a bylaw amendment permitting shareholders who own 3% or more of company stock continuously for 3 years to nominate directors for inclusion on the company’s proxy. The company’s letter cites numerous precedents of other no-action letters that succeeded under Rule 14a-8(i)(9) related to shareholder proposals asking for shareholders’ ability to call special meetings, changes to simple majority vote provisions and the right for shareholders to act by written consent.

A proliferation of letters making Rule 14a-8(i)(9) arguments, which form the most common (and usually the only) basis for excluding those types of governance shareholder proposals, have dominated the SEC shareholder proposal no-action letter process in the last few years. Western Union concludes that the same reason that the SEC staff granted exclusion in those cases, namely because the company proposal seeks to provide shareholders with the same right sought in the shareholder proposal, but at a different ownership threshold, should also apply to its no-action letter, since its proxy access ownership threshold is different (and therefore “conflicting”) from the threshold sought in the Norges Bank shareholder proposal.

Interestingly, it appears that Norges Bank has changed the form of proxy access shareholder proposal that it submitted to numerous companies in 2012 by no longer making the bylaw immediately binding upon approval, but instead making the proposal precatory, or advisory, as is the general norm for shareholder proposals.

Companies Need to Verify Data for ISS QuickScore Product by February 15th

Mon, 28 Jan 2013 09:49:00 GMT

ISS has announced a replacement to its GRID (governance risk indicators) product named QuickScore. 3,000 U.S. companies by market cap, with the largest 500 compared separately from the remaining U.S. coverage universe, will be assessed on four categories: board, compensation, shareholder rights, and audit, and will also receive an overall Governance QuickScore and assessment.

Globally, 40-80 governance factors are being measured where companies are judged to either meet, exceed or “fall short” of what ISS deems to be market best practices. Each factor falls within one of the subcategories in the four categories. For example, the subcategories within the “Board” category include board and committee composition, board practices and policies and related party transactions.

What appears to distinguish this product from GRID is the attempted linkage to financial metrics. For each governance factor, ISS will analyze the correction with 16 performance and risk factors that include 2 market-related factors (such as Tobin’s Q, the market measure of firm value), 9 profitability factors (such as EBITDA and net profit margin), 2 risk-related factors (such as volatility and the Z score of Altman’s bankruptcy measure) and 3 valuation factors (such as price to book, cash flow and earnings ratios). The higher the correlation, the higher the weights allocated for each of the ratings factors. The algorithm then creates a raw score for each of the four categories that translates into a QuickScore (between 1 to 10 with 1 being indicative of lower governance risk) based on the raw scores of other companies in the index or region, so this is a relative standard that measures companies against each other.

The important things to keep in mind:

The data site for issuer verification starts January 28th and remains open until February 15th, but companies that submit requests for corrections by February 8th will receive earlier feedback (by February 15th) than those that apply later. ISS intends to launch the product in late February/early March. Whether or not the product turns out to be meaningful to investors, companies would still benefit from having the information on which the scores are based be accurate, so they should take the opportunity to verify the underlying data.

Only the subcategories for each of the four categories are shown in the report, so unlike GRID, the report will now have a standardized appearance across companies. There may be a red flag or a green star (replacing the arrows that were used in GRID) next to a particular subcategory to highlight either significantly positive or negative impacts on the score. While the scores for each of the four categories are absolute, the overall score (the QuickScore, which is highlighted in a big box on the side) is based on a relative evaluation to other companies. With a simple scoring system of only 1 to 10, it will be much easier to spot companies that ISS believes to have governance issues, which may turn out to be the biggest impact of this product.

The technical document is global so note that only certain questions apply to U.S. companies. While the document lists the factors in each category, there is no way to tell how the answer affects the scoring. For example, one question asks “what is the independent director composition of the board?” There is no indication of what percentage of independent directors would be considered best practices, neutral or poor practices. Unless more information is forthcoming, QuickScore is unfortunately truly opaque at the moment.

No-Action Letter Challenge to New Version of Retail Proxy Access Proposal

Fri, 25 Jan 2013 09:35:00 GMT

Perhaps the surprise of the proxy season so far is the relative quiet with respect to proxy access shareholder proposals, as there have been few reports of companies receiving them. This may follow the general trend that there appears to be less shareholder proposals this year overall, or it may be an indication that the traditional institutional proponents are following through on their original plan of targeting these proposals only at a few select companies.

While companies have not publicly declared receiving them and the traditional data sources are not showing much, recently a no-action letter by iRobot Corporation arguing that a proxy access proposal should be excluded on the basis of vagueness and ordinary business indicates a new retail version has been submitted to companies. The proposal seeks nominations by (a) any group of shareholders who have held at least 1% but less than 5% of shares continuously for at least 2 years or (b) any group of shareholders of whom 50 or more have each held continuously for 1 year shares worth at least $2,000, and collectively represent at least one-half of 1% but less than 5% of shares. Each group may nominate up to 24% of the board.

The proposal represents a change in ownership thresholds from prior retail versions of proxy access rights, which we previously discussed here. Those proposals had received low support as a result of negative recommendations from ISS and Glass Lewis, which criticized the proposals for setting the ownership levels so low that shareholders with as little as $100,000 at stake (50 shareholders with the Rule 14a-8 amount of $2,000 each) could make access nominations. If the iRobot proposal survives the SEC no-action request (one argument being made is that the ownership thresholds as written are vague and indefinite), it will be interesting to see if the proxy advisory firms find these standards to be more appropriate.

ISS Updates Pay-for-Performance White Paper with Details on Realizable Pay and Peer Groups

Thu, 24 Jan 2013 15:00:00 GMT

ISS has updated its pay-for-performance white paper, which is used to explain how it develops recommendations for say-on-pay votes, to include additional information on its recently announced changes involving peer groups and realizable pay.

Peer Groups. ISS will start with the creation of what it calls a "seed group" of peers that include all companies within a subject company's 4- and 6-digit GICS groups. Companies will be divided into one of four market-cap categories, and peers will be selected within a range of .4X to 2.5X of the revenues or assets (for financial institutions), unless the company's revenues or assets exceed $5 billion. Size parameters are crucial, as the methodology will strive to maintain the company within 15% of the median size of the peer group.

Once this "seed group" is created, peers will be chosen based on a priority list that ranks the subject's own 8-digit GICS group first, followed by the company's self-selected peers’ 8-digit GICS group if those GICS groups are deemed underrepresented, then the company's own 6-digit GICS group and its self-selected peers' 6-digit underrepresented GICS groups. The desired peer group is between 14 to 24 companies.

While most of the discussion surrounding ISS’ change in peer group methodology has been focused on the inclusion of the company’s own named peers in the proxy statement, it is clear that this will only happen if several criteria are met, including the size range and whether those peers’ 8- or 6- digit GICS groups already include many companies in ISS’ initial seed group.

Realizable Pay. This will only factor into a qualitative review of S&P 500 companies and be discussed in cases where the initial quantitative analysis shows a high or medium concern. For these companies, ISS will review whether the total pay granted during a three-year measurement period is significantly higher or lower than its "realizable" value at the end of that period, as part of the qualitative review. The result may mitigate (if realizable pay is lower than granted pay) or exacerbate (if granted pay is higher) the ISS analysis.

Realizable value depends on a specified measurement period and will be calculated as the total of the sum of salary, bonus, short-term (annual) awards, the earned value or target value of long-term awards, the value of share-based awards based on stock price, Black-Scholes value of stock options, change in pension and deferred compensation and “all other” compensation as reported. Companies that have been reporting a version of “realizable pay” will likely find that ISS will calculate values that may be quite different from their own.

SEC Approves NYSE and Nasdaq Listing Standards for Compensation Committees

Thu, 17 Jan 2013 09:58:00 GMT

The SEC has approved new listing standards governing compensation committees as proposed by NYSE and Nasdaq in accordance with the Dodd-Frank Act. The standards are essentially adopted as proposed, which we previously discussed here. A detailed memo will follow on the final listing requirements. Below are a few highlights:

Different Standards for Compensation Committee Independence. The SEC has accepted the different approaches taken by NYSE and Nasdaq with respect to additional independence factors governing compensation committee members. For NYSE-listed companies, boards must consider (a) the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company and (b) whether the director is affiliated with the company. However, Nasdaq has adopted a provision stating that each member of a compensation committee must not accept directly or indirectly any consulting, advisory or other compensatory fee from the listed company, to align the standard with the requirements for audit committees. Like the NYSE, for Nasdaq companies affiliate status is to be evaluated by the board as a factor in assessing independence, rather than acting as a strict prohibition.
SEC Statements on Compensation Committee Advisers. A compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser, other than in-house legal counsel, only after taking into consideration the six adviser independence factors set forth in Rule 10C-1. The SEC and the exchanges have taken pains to clarify that the committees may select, or receive advice from, any compensation adviser they prefer, including ones that are not independent, so long as the independence assessment is conducted. While the SEC has declined to give any particular guidance on which advisers would be subject to these rules, the Commission notes that “compliance with the rule requires an independence assessment of any compensation consultant, legal counsel, or other adviser that provides advice to the compensation committee, and is not limited to advice concerning executive compensation.” In response to comment letters, the SEC indicates that it anticipates that compensation committees will conduct such an independence assessment at least annually.
Additional Nasdaq Requirements. Like the NYSE currently requires, Nasdaq-listed companies must now adopt compensation committee charters with specified responsibilities and authority. In addition, companies must certify that they have adopted such a charter and that their compensation committee will review and reassess the adequacy of that charter on an annual basis. A separate certification is required 30 days after the final implementation deadline.
Timing of Effectiveness. Most standards other than director independence, including the requirement to assess the independence of compensation committee advisers, become effective on July 1, 2013. Companies will have until their first annual meeting after January 15, 2014, or, if earlier, October 31, 2014, to comply with the compensation committee member independence standards.

Chamber of Commerce Criticizes Rulemaking Petition on Corporate Political Disclosure

Wed, 16 Jan 2013 00:08:00 GMT

The Chamber of Commerce has come out swinging in its 30-page comment letter on the SEC rulemaking petition urging public disclosure of corporate political spending, which we previously discussed here. Its main arguments include:

There is no rational justification for the rule as the disclosure would not be useful to shareholders. The Chamber criticizes the rulemaking petition for relying on the proliferation of shareholder proposals on the topic as demonstrating widespread shareholder support for public disclosure of political contributions, noting that the votes in favor remain low and the proposals are submitted by a minority, though vocal, group of shareholders. In addition, the rulemaking cannot be justified on the crux of the theories that underlie the petition, namely that corporate political activity harms shareholder value and the board and management are unable to manage the associated risks.

The rulemaking would impose substantial costs on corporations and the costs would outweigh any benefits. The Chamber alleges that the real purpose of the petition is as an attempt to silence corporate political activity, as public disclosure would lead to attacks by opponents of corporate political views and companies would come under immense pressure to cease being involved in the political process. The Chamber also points out that the proponents of political contributions shareholder proposals are generally organizations (such as labor unions and pension funds) that tend to take opposing views on numerous public policy issues from public companies, and they would not be subject to the same disclosure requirements that they are seeking from companies.

The SEC lacks statutory authority to impose the rule. The Chamber takes issue with the petition’s argument that the SEC can promulgate proxy disclosure that is immaterial, so long as shareholders have evidenced an interest in the information.
The rule would violate the First Amendment. The petition singles out for regulation only public companies’ political activity, with no corresponding obligations on other entities. In addition, the effect would ultimately discourage corporate participation in the political process and companies would face threats and harassment.

If the SEC were to proceed, the Chamber makes clear that the Commission would face significant opposition, as the letter warns that “A number of recent Commission regulations have been set aside by the courts for failing to satisfy this standard—the Commission should not waste precious public resources on a rulemaking exercise that is similarly doomed to failure.” On the other side, a group calling itself the Corporate Reform Coalition recently held a press conference urging the SEC to begin rulemaking.

Examining Hewlett-Packard’s Proposed Proxy Access Rights

Tue, 15 Jan 2013 08:55:00 GMT

HP’s preliminary proxy statement filed recently included a company proposal to allow any shareholder, or no more than 20 in number, who hold 3% or more of HP shares continuously for 3 years to nominate candidates to the company’s board. This threshold tracks the previously adopted SEC proxy access rules. However, HP limits the number of candidates to 20% of the board, or the closest whole number below 20%, while the SEC rules had allowed for 25% and a minimum of one director. Currently, HP has 11 directors so the company’s proposal would permit 2 nominees.

Also similar to the SEC rules, if HP decides to include a shareholder nominee on the company proxy card as a company nominee, the company can count that nominee toward the 20% cap. However, the HP proposal indicates that this quota is considered fulfilled even if the nominee later withdraws from the ballot. If the number of submissions for access candidates exceed the 20% limit, the order of priority follows the SEC rules, with each group of shareholders being allowed to nominate 1 candidate and those who hold more shares being given preference.

Some of the information requirements are somewhat more stringent than the SEC rules, as access candidates under HP’s proposal must not only represent that they do not intend to cause a change of control, but because HP permits cumulative voting, the nominating shareholders may not cumulate their votes in favor of their nominee. Unlike the SEC rules, a shareholder nominee must complete a D&O questionnaire, comply with all policies and guidelines applicable to all directors, and meet not only the independent director listing standards of the NYSE and SEC but also any additional independence standards imposed, and disclosed, by the company on all its independent directors.

Director qualifications under HP’s proposal forbid as a nominee anyone who was an officer or director of a competitor within the past 3 years, serves as a director on more than a specified number of other public company boards or is a named subject of a pending criminal proceeding or has been convicted of a criminal proceeding in the last 10 years. In addition, again going beyond the SEC rules, an access candidate who did not receive at least 25% of the votes cast cannot be nominated again for two subsequent annual meetings, and no such nominee is required to be included if shareholders had already made a director nomination through the company’s advanced notice bylaws.

While the SEC rules prohibited nominating shareholders from making or causing the company to make in the proxy statement false and misleading statements, HP’s proposal requires the nominating shareholders to assume all liability stemming from any legal or regulatory violation arising out of such shareholders’ information that is provided to the company or from the shareholders’ communications with other HP shareholders.

Additional Amendments to Proposed Listing Standards on Compensation Committees and Advisers

Fri, 11 Jan 2013 10:11:00 GMT

Both the NYSE and NASDAQ have filed further amendments to their proposed listing standards on compensation committees and their advisers. The amendments copy directly from the exception in Item 407(e)(3)(iii) of Regulation S-K with respect to the proxy disclosure rules for compensation consultants.

The amendments clarify that a compensation committee is not required to conduct the independence assessment of an adviser whose role is limited to (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors, and that is available generally to all salaried employees or (b) providing information that either is not customized or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.

The SEC enhanced proxy disclosure rules in December 2009 permitted these exceptions in response to commentators who suggested that broad-based, non-discriminatory plans and the provision of information, such as surveys, that are not customized, should not be treated as compensation consulting services that would raise conflict of interest concerns.

The NYSE amendment also added language indicating that nothing in the section requiring a compensation committee to consider the specific adviser independence factors is intended to limit compensation committees from selecting or receiving advice from any adviser that they prefer, including ones that are not independent. NASDAQ already had a similar statement.

ISS Provides Guidance on Compensation-Related Voting Policies

Fri, 11 Jan 2013 09:58:00 GMT

On December 20th, ISS issued two extensive FAQs on their voting policies. This post covers the compensation items (a previous post covered the non-compensation items).

Although the compensation FAQs contain a number of items previously posted by ISS, there are a few new items worth noting, including:

For the CEO Tally Sheet table, how the present value of all accumulated pension benefits (qualified and non-qualified) is calculated (page 7).
The FAQs explain the methodology used in evaluating a company’s pay for performance, including how an initial quantitative analysis affects the ultimate vote recommendation for say-on-pay proposals and the factors that ISS considers when it conducts a qualitative review (such as the ratio of performance- to time-based equity awards, benchmarking processes and realizable pay vs. grant pay) and how ISS will treat CEOs who have not been in the position for three years (pages 9-11).
The FAQs indicate that realizable pay, which is only relevant for S&P 500 companies where the company’s initial quantitative screen shows a high or medium concern, will include all amounts actually paid or realized during the specified measurement period. ISS does not use the intrinsic value of stock options for its realizable pay calculation, because it views as important the economic value of underwater options (pages 9-10).
In exceptional cases, an ISS peer group can contain 12 companies (page 17).
For companies with fiscal year-ends subsequent to December 31, 2012, ISS will provide the opportunity to communicate changes made to its peer group (page 18).
The FAQs discuss the issues surrounding problematic pay practices, including how ISS views the grant of retention awards to executives who did not receive a payout after a performance cycle ended due to failure to achieve goals (pages 19-21).
The FAQs elaborate on ISS’ say-on-golden-parachutes policy, such as how ISS would treat: (i) a company that technically triggered a change in control but did not experience a bona fide change in control, (ii) performance measures that would not have been achieved in the absence of a decision to accelerate performance-based awards, (iii) the determination of whether specific payouts are “excessive” and (iv) existing problematic change-in-control severance features (pages 22-23). ISS indicates that the best practice for paying out performance-based awards is pro rata vesting of the award based on current achievement. In determining whether a golden parachute payout is excessive, ISS considers factors such as the value of the payout on an absolute basis, or one or total payouts relative to the transaction’s equity value.
The FAQs address how ISS would determine the cost of an equity compensation plan for newly public companies and companies with limited partnership units (pages 24-25).

Will the SEC Propose Rules on Corporate Political Spending by April 2013?

Wed, 09 Jan 2013 11:32:00 GMT

According to a post on the Harvard Law School Forum on Corporate Governance and Financial Regulation, the SEC has updated its entry in the Office of Management and Budget’s Unified Agenda to indicate that it plans to issue proposed rulemaking requiring public companies to disclose their political spending this April. The post goes on to discuss the SEC rulemaking petition that was submitted by the Committee on Disclosure of Corporate Political Spending, co-chaired by Lucian Bebchuk and Robert Jackson. They report that the petition has received more than 300,000 comment letters in support.

The rulemaking petition supports the concept providing public information but does not give more than a general framework for the specific disclosure than might be proposed, including the possibility of a de minimis exemption. However, one comment letter signed by some of the same institutional investors who are proponents of shareholder proposals seeking political contributions reports not surprisingly advocates for the type of content and form of disclosure that are similar to the requests in their shareholder proposals. This includes information on policies and procedures for political contributions and expenditures as well as more broadly, contributions and expenditures that are “used to participate or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office, and used in any attempt to influence the general public, or segments thereof, with respect to elections or referenda.”

As for the OMB Unified Agenda, the SEC list contains fairly extensive and ambitious timetables, and include the possibility of rulemaking on the Dodd-Frank executive compensation topics (pay-for-performance, pay ratio, clawback and employee and director hedging) in February 2013 and other timing that has already been missed, including the crowdfunding rules, scheduled for December 2012.

Second Circuit Finds No Liability Under Short-Swing Profit Rules for "Pairing" Transactions That Relate to Two Different Classes of Equity Securities

Wed, 09 Jan 2013 09:45:00 GMT

The Second Circuit recently issued a decision that relates to whether a sale of one class of equity security and a purchase of a different class of equity security issued by the same company can be "paired" under Section 16(b) of the Exchange Act to result in required profit disgorgement by the transacting insider. The Court held that, absent any guidance from the SEC, an insider's purchase and sale of shares of different types of stock in the same company does not trigger liability under Section 16(b) where those different classes of securities are separately traded, nonconvertible and have different voting rights.

Section 16(b) provides for the disgorgement of any profit realized by an issuer insider (including a greater than 10% beneficial owner of the issuer, an officer or a director of issuer, each as defined under the Section 16 rules) from any purchase and sale, or any sale and purchase, of any equity security of the issuer within a period of less than six months. Between December 4, 2008 and December 17, 2008, John Malone, a director and large shareholder of Discovery Communications, engaged in 9 sales of Series C stock and 10 purchases of Series A stock. The two classes of equity securities are separately registered and traded (with different ticker symbols on NASDAQ) and they are not convertible into each other. Series A has voting rights while Series C does not. In addition, during 2008 and 2009, Series A generally, though not always, traded at slightly higher prices than Series C.

In upholding the lower court's decision, the Second Circuit relied largely on a plain reading of Section 16(b)'s use of the singular term "any equity security," which supports an inference that transactions involving different equity securities cannot be paired. The Court noted, however, that Section 16(b) could apply to transactions where different classes of securities are not meaningfully distinguishable. Here, the Court distinguished the two classes of securities because they have different voting rights, are not convertible into each other and do not have a fixed value relative to each other.

NY State Comptroller Sues Over Political Spending Disclosure

Thu, 03 Jan 2013 17:30:00 GMT

As media outlets are reporting, New York State Comptroller Thomas DiNapoli announced that the NY State Common Retirement Fund has filed suit in Delaware court against Qualcomm for the right to inspect its books and records to determine how shareholder funds are being spent for political purposes. According to the press release, in 2011 and 2012, the Fund filed 27 shareholder proposals asking for disclosure of political spending, reaching agreement with 10 companies. In addition, they support the rulemaking petition submitted to the SEC regarding disclosure of political expenditures.

The complaint states that shareholders have an interest in “knowing how corporate funds are spent, especially in the political arena, in order to monitor the actions of corporate fiduciaries, to exercise responsible decisions when voting annually for the election of corporate directors, and to hold corporate fiduciaries accountable for their stewardship of the corporation.” It further claims that without disclosure, shareholders cannot “assess the level of risk to their investments in a given company.”

Mr. DiNapoli is quoted in a New York Times article as saying, “We’ve done the petitions and the letter-writing. We’ve done shareholder resolutions. Rather than continue to be rebuffed, we’re taking this new approach.”

The press release and the complaint also cite to Qualcomm’s ranking under the Corporate Political Accountability Index, which we previously discussed here.

Georgeson’s Annual Review Offers Detailed Examination of 2012 Shareholder Proposals and Proxy Contests

Thu, 03 Jan 2013 10:16:00 GMT

In the midst of shareholder proposals season as submission deadlines have largely passed and companies are analyzing the proposals received, Georgeson’s 2012 Annual Corporate Governance Review offers an interesting retrospective on 2012 events that continues to be informative for this coming season. Analyzing shareholder proposals for the S&P 1500 in the first six months of 2012, the report found that while 454 proposals were submitted, only 269 were ultimately voted on as the remainder were either withdrawn or omitted after negotiations or through the SEC no-action letter process. These figures are fairly steady from 2011 and represents a sharp drop from 2008, when perhaps due to the recent onset of the economic crisis, 652 proposals were submitted (with 339 voted on).

While it is no longer surprising to those with experience in shareholder proposals, the report indicates that the majority of proposals (109) in 2012 were from individual shareholders (45 from the ever prolific John Chevedden alone), 70 originated from labor unions and 57 through public pension funds. The report lays out the details of who submitted what types of proposals, for those companies interested to learn more about particular proponents.

Most useful for companies may be the voting results of proposals, which are organized in summary form but also in detail by company, topic and sponsor. Since many of the proposals received in 2013 are similar to past topics, this can provide a quick reference guide for voting results on a particular proposal, and also a roadmap for finding examples of opposing statements.

In addition to shareholder proposals, the report gives the results of say-on-pay votes for each S&P 500 company, a review of contested solicitations (defined as campaigns where dissidents distributed separate proxy cards) and other actions by activists, which were waged without distributing proxy materials and focused primarily on seeking greater support for shareholder proposals or “vote no” campaigns aimed at directors.

In addition to all of the data points, the report highlights the continued trend toward, and rising importance of, active company discussions with shareholders about ballot items. This evolution in engagement is perhaps the overall theme of the report. As Rhonda Brauer, Senior Managing Director-Corporate Governance at Georgeson, remarked to us, “We saw 2012 as the Year of Engagement, with a marked increase in company-shareholder engagement that went beyond the traditional proxy season to a year-round phenomenon. Topics ranged from executive compensation and board structure and composition, to negotiations with shareholder proponents over potential or the withdrawal of shareholder proposals, to simply open-ended discussions to facilitate better understanding on all sides. We see this phenomenon continuing into 2013 and beyond.”

ISS Provides Guidance on Governance Voting Policies

Wed, 02 Jan 2013 11:25:00 GMT

On December 20th, ISS issued two extensive FAQs on their voting policies. A separate blog will cover the compensation items.

The non-compensation FAQs cover old ground in many respects, including ways to correct factual errors, engagement with ISS, policies related to poison pills and additional information on ISS’ specific definitions of director independence.

A few items worth noting include:

Steps issuers can take to reverse negative recommendations, and the necessary timing of such actions (page 5);
The factors that determine whether ISS believes an executive or director has pledged a significant amount of stock, the potential impact on director elections and how to mitigate a negative vote, including adopting a forward-looking anti-pledge policy and reducing the amounts pledged over time (pages 10-11); and
The types of responses to majority-supported shareholder proposals that ISS believes to be sufficient implementation with respect to popular governance proposals that sometimes pass, such as declassification, independent chair, majority voting, right to call special meetings, right to act by written consent and elimination of super-majority voting provisions. While the statements show a willingness to be flexible in some areas such as phased-in declassification and a lead director in lieu of an independent chair, they appear to be fairly restrictive with respect to, for example, majority voting (resignation policies are not sufficient) and special meeting and written consent provisions (certain restrictions are not acceptable) (pages 11-14). ISS positions in these areas, coupled with their new policy that beginning for 2014 elections they will recommend against directors for failure to implement a shareholder proposal that received a majority of votes cast, may increase the pressure on boards to take actions upon receipt of the proposals that are somewhat more favorable to the company, in order to avoid the possibility of having the proposals pass and then being forced to adopt narrower provisions.

The FAQs also provide a number of alternative means of communicating with ISS on various issues.

SEC Denies Disney Right to Exclude Proxy Access Proposal

Thu, 20 Dec 2012 01:00:00 GMT

On December 13, the SEC declined to permit Disney to exclude a proxy access shareholder proposal submitted by Legal and General Assurance (Pensions Management), in conjunction with its client, Hermes Equity Ownership.

The proposal requested that Disney’s board adopt a bylaw that would allow a holder of 3% of its stock for at least three years to nominate up to 20% of the directors. The ownership requirements of the proposal closely resembled those of the SEC’s vacated proxy access rule and was substantially similar to two other proposals that were approved by a majority of shareholders at Chesapeake Energy and Nabors Corp. at their 2012 annual meetings.

Disney sought to exclude the proposal as vague and indefinite under Rule 14a-8(i)(3), arguing that the proposal’s requirement that the nominating party provide Disney with information required by SEC “rules” about the nominating party and the board nominee was vague and misleading because it did not describe the substantive provisions of such rules. Disney also argued that the proposal was subject to multiple interpretations and its references to both SEC rules and to “any federal regulations” was vague and misleading.

In response, counsel to the shareholder proponent argued that the proposal “is a garden-variety ‘proxy access’ proposal” whose “central aspect” is the request of proxy access for owners of 3% of the stock for three years for up to 20% of the board. As such, the proponent argued that the language cited by Disney as vague and misleading was a secondary element of the proposal. The shareholder also disputed the claim that the wording was vague and subject to multiple interpretations. Disney then submitted a second letter to the SEC refuting the claims in the proponent’s response.

The SEC did not agree with Disney’s views, including its argument that the proposal’s reference to the SEC’s “rules” made it vague and indefinite and therefore subject to exclusion subject to Rule 14a-8(i)(3). In contrast, in the 2012 proxy season, the SEC had found that proxy access proposals which referenced “SEC Rule 14a-8(b) eligibility requirements,” without specifically describing such requirements, were subject to exclusion as vague and indefinite. In those letters, the SEC reasoned that the specific eligibility requirements were a central provision of the proxy access proposal in question.

A copy of the correspondence can be found here.

Nasdaq Files Amendment to Proposal Governing Compensation Committees

Tue, 18 Dec 2012 09:30:00 GMT

Nasdaq has filed an amendment to its proposed listing standards with respect to compensation committees, as referred to in our recent post. The key provisions include:

Effective Dates. Changing the date of effectiveness to July 1, 2013, rather than immediate effectiveness upon SEC approval, for when compensation committees must have the specific responsibilities for considering the independence of advisers and the authority necessary relating to the retention and oversight of those advisers. The effective dates of the provisions as to the compensation committee independence standards continue to be companies’ first annual meetings after January 15, 2014 or October 31, 2014. These dates are now aligned with the effectiveness of the NYSE proposal.

Certification Form. A form of certification that companies must provide to Nasdaq within 30 days after the final implementation deadline is attached to the amendment.

Adviser Independence Factors. A clear statement in the amendment filing that companies need only consider the six specified independence factors when evaluating adviser independence. This is different from the NYSE proposal that also contains a catchall provision requiring the committee to consider all factors relevant to an adviser’s independence from management, including the six enumerated factors. The text of the proposed listing standards has been modified so that the committee needs to consider these factors when selecting, or receiving advice from (emphasis added), a compensation consultant, legal counsel or other adviser to the committee, other than in-house legal counsel.
Outside Legal Counsel. A clarification that those independence considerations must apply to any legal counsel other than in-house counsel, in response to a comment letter speculating that the proposal could be read to apply only to independent legal counsel.

As we previously noted, the SEC has designated January 13, 2013, to take action on the NYSE and Nasdaq proposed listing standards.

Commentators Raise Concerns with the SEC About Proposed Listing Standards for Compensation Committees

Mon, 17 Dec 2012 15:12:00 GMT

Most of the 15 comment letters on the proposed listing standards for compensation committees by the NYSE and Nasdaq focused on committee member independence. Some commentators, including AFSCME and Teamsters, argued that the standards do not go far enough and should include additional specified factors with respect to personal and business relationships between compensation committee members and senior management, directors fees and disclosed related party transactions. They also objected to Nasdaq’s proposal to retain the allowance for exceptional circumstances according to which a board may have a non-independent director serve on the compensation committee for up to two years.

Two commentators, including the Society of Corporate Secretaries and Governance Professionals, questioned Nasdaq’s prohibition on the acceptance of consulting or other fees for determining compensation committee independence. Nasdaq has since submitted a comment letter defending its proposed standards as to compensation committee member independence from all of the comments received.

As to the proposal governing compensation advisers and conflicts of interest, the Society’s letter on the NYSE standards advocated that the list of six specified factors should represent the exclusive determinations necessary for conducting the conflict inquiry and what appears to be a catchall provision should be eliminated, or alternatively, the NYSE should specify any additional factors that should be examined rather than include vague reference to “all factors.” In addition, the Society recommended, for both NYSE and Nasdaq standards, that the conflict determination (a) be limited only to those advisers who provide advice on executive compensation, not director compensation and general employee benefits matters, (b) should not include persons that provide a range of services, such as survey information, that the committee may also use and (c) should be restricted to the lead individual providing the advice and not to others who may contribute to the advice.

While Nasdaq’s comment letter did not address these adviser issues, in response to one commentator’s proposed reading that the adviser standards govern only independent legal counsel, Nasdaq responded that it intends to clarify through a rule amendment that the compensation committee must consider the adviser independence factors when selecting any advisers other than in-house counsel.

In filing a notice to extend its consideration of the proposed listing standards in late November, the SEC has designated January 13, 2013, as the date to take action on the proposals. Some of the proposed listing standards under Nasdaq become effective upon SEC approval, as we described previously in our client memo.

A Case to Exclude the Triennial Say-on-Pay Shareholder Proposal

Fri, 14 Dec 2012 14:30:00 GMT

The United Brotherhood of Carpenters has sent a number of companies shareholder proposals seeking (a) triennial say-on-pay votes and (b) a vote not only on the overall executive compensation but also on different components, such as annual pay, long-term incentives and post-employment compensation.

The SEC has posted the first of the likely many no-action letters to exclude the proposal. In the letter, BorgWarner refers to the SEC final release in adopting Rule 14a-21, which implemented both the say-on-pay vote and the vote required once every six years on how frequently the say-on-pay vote should occur (the frequency vote).

At that time, the SEC adopted an amendment to Rule 14a-8(i)(10) to allow companies to exclude a shareholder proposal that seeks advisory votes to approve the compensation of executives as disclosed under Item 402 of Regulation S-K, or that relates to the frequency vote, so long as the company adopted a policy to implement the frequency that is consistent with the choice of the majority of votes cast. In this case, BorgWarner decided to adopt annual say-on-pay votes consistent with the selection made by more than 70% of shareholders.

The company also argues that the annual say-on-pay vote that it is currently providing is substantially duplicative of the approach in the shareholder proposal that seeks a view on multiple parts of the executive compensation, and that a number of questions raised by the language of the proposal renders it vague and indefinite under Rule 14a-8(i)(3).

Evolution in Political Contributions Shareholder Proposals and CPA Disclosure Guidance

Fri, 14 Dec 2012 00:38:00 GMT

Political contributions shareholder proposals continue to be a perennial favorite among activists even post-election, as we are seeing a proliferation of those proposals already. There appears to be more variety in the resolutions compared to years past, so that instead of just asking for a broad set of disclosures on all activities, some proposals are narrowly focused on lobbying, board-level policy-making or payments to tax-exempt organizations.

The focus on corporate involvement with the political efforts by tax-exempt organizations seemed to have also moved beyond just trade associations, as proponents are raising concerns over the activities of other “social welfare” entities under IRS 501(c)(4). This group could include the so-called “superPACs” that were widely covered by the media during the election frenzy.

ISS has come under some scrutiny for sometimes favoring corporations that already provided some level of political contributions and lobbying disclosure when evaluating voting recommendations on shareholder proposals in 2012. The ISS policy on this matter provides them with a fair amount of discretion, so we may see some shifts there as well in 2013.

In response to what they view as “partial disclosure” by companies in many respects, the Center for Political Accountability has published a one-page summary of what they consider to be key components of sufficient disclosure, including policies, levels of disclosure and board oversight. The CPA is often involved in some ways with these proposals, and is best known for its index ranking companies’ disclosure, which we previously discussed in detail. Companies receiving these proposals and interested in assessing what proponents expect can look to this information as starting points for possible discussions.

Update on Company Court Action to Exclude Declassification Shareholder Proposal

Thu, 13 Dec 2012 08:46:00 GMT

We previously reported on an interesting action by National Fuel Gas Company (NYSE:NFG) regarding a shareholder proposal submitted by the Harvard Shareholder Rights Project, on behalf of a public pension benefit trust, seeking declassification of the company's board of directors. The company had sought a declaratory judgment in U.S. District Court for the Western District of New York, arguing that the proponent was unable to credibly or accurately represent that the proponent intends to hold the securities through the annual meeting, as required by Rule 14a-8, because the proponent had delegated to a money manager the investment discretion over the proponent's National Fuel stock. The company further alleged that the proponent had also delegated voting authority to the same money manager, whose Form 13F reported that the money manager had sole voting authority over the proponent's National Fuel stock, so that the proponent was not entitled to vote at the meeting as required by Rule 14a-8.

We understand from the company itself that the proponent has since withdrawn the shareholder proposal, and the company then voluntarily dismissed the lawsuit. According to the company, this represents an appropriate outcome given the procedural issues surrounding this proposal.

Another SOX Clawback from Executives Without Wrongdoing

Fri, 07 Dec 2012 13:26:00 GMT

A federal district court in Texas recently upheld the right of the SEC to seek clawbacks of bonus and other compensation under Section 304 of Sarbanes-Oxley from executives who have not been accused of any wrongdoing, by denying the executives’ motion for summary judgment. In the case, SEC v. Baker, the SEC is seeking reimbursement of bonuses, incentives and compensation from the CEO and CFO of Arthrocare in connection with the company’s restatement of its financial statements. The restatements were due to alleged fraud by two senior vice presidents of Arthrocare. The SEC did not allege that the CEO and CFO committed any conscious wrongdoing.

As we have discussed, the SEC had previously sought clawbacks under Section 304 from executives not charged with personal wrongdoing. The current case in Texas is apparently only the second time that a federal court has upheld the right of the SEC to seek clawbacks where the SEC has not alleged that the executives in question participated in the wrongful conduct. (The first case, SEC v. Jenkins, was decided by a federal district court in Arizona.) The court in Baker rejected the argument that the language of Section 304 required the misconduct of the officer from whom the reimbursement was being sought and found that Section 304 “require[s] only the misconduct of the issuer”. The court also rejected arguments by the defendants that Section 304 is unconstitutional and that they are protected by the Civil Asset Forfeiture Reform Act. In addition to cases where courts have upheld the right to clawbacks, the SEC has previously reached settlements to clawback compensation under Section 304 with executives not charged with personal misconduct.

Prior to these cases, it had been generally viewed that the clawback provisions of the Dodd-Frank Act, which provide for disgorgement regardless of whether misconduct has occurred, are broader than those of Sarbanes-Oxley. While the Dodd-Frank provision remains broader in many respects, this court case brings Section 304 one step closer to the Dodd-Frank provision.

NYSE Webcast Panel Previews the 2013 Proxy Season

Fri, 07 Dec 2012 10:26:00 GMT

Last week I participated in an NYSE-sponsored webcast hosted by Judy McLevey at the NYSE. Our panel discussed the issues that may affect the upcoming proxy season. The other panelists consisted of a group of recognized experts including Carol Bowie from ISS, Andrew Letts from State Street, Jim Parsons from Exxon Mobil, and Darla Stuckey from the Society of Corporate Secretaries and Governance Professionals. An archive of the webcast is available here.

Some of the main points reviewed included:

New Policies and Investors’ Use of Proxy Advisory Firms. Carol described the major parts of the new ISS policy updates and Darla discussed Glass Lewis changes. Both Carol and Andrew emphasized that large institutional investors follow their own guidelines, and use the proxy advisory firms’ reports as additional input to inform their voting decisions. Andrew explained State Street’s own say-on-pay analysis, and noted that the perception that some investors merely follow ISS may be somewhat due to the fact that investors’ guidelines or perspectives are often similar to ISS policies. Darla then reflected on issuer responses to the new policies, with issuers generally pleased that the proxy advisory firms have reevaluated and changed their peer group methodologies for 2013 in response to criticisms. Jim stressed that while the proxy advisory firms can play an important role for investors in analyzing company actions, a board’s decisions should be given deserving weight.

Say-on-Pay. Given that small-cap companies will be subject to the say-on-pay vote for the first time in 2013, the panel offered some advice. Companies should focus on making their proxy disclosure simple and concise, as investors may only spend a few minutes on any single proxy given all the other ones competing for their limited attention. Jim discussed Exxon’s strategies for anticipating and responding to potential criticisms, including having "fresh eyes" look at the proxy disclosure this past year to ensure that the company’s communications were clear to those not involved in the compensation or drafting process. Carol noted that ISS had always reviewed small-caps executive compensation programs in evaluating the compensation committee members, so this does not represent much additional work for ISS.

Importance of Shareholder Engagement. Jim emphasized the need for year-round dialogue with investors, which is becoming more like traditional investors relations in terms of its regular occurrence, rather than only during the annual meeting cycle. Andrew noted that most major investors are global ones and it’s standard operating procedure to have such engagement in many other markets. He also advised that companies should understand that it can be difficult to get the attention of even their top ten shareholders, as one company may represent only a very small portion of an investor’s overall portfolio. Finally, he recommended that companies not focus entirely on say-on-pay when talking to investors about governance issues.

Proposed Rule Changes to NYSE Notice Procedures

Thu, 06 Dec 2012 11:58:00 GMT

The SEC has published a notice to solicit comments on proposed rule changes by the New York Stock Exchange to its Listed Company Manual.

The NYSE’s proposed rule changes would require listed companies to utilize a web portal operated by the NYSE, www.egovdirect.com, or a designated email address when providing certain notices to the NYSE as required under its Listed Company Manual. The current listing requirements require notification via various methods, such as fax, telephone, telegram, letter, or email, that vary depending on the event requiring notification. The proposed rules would apply to some, but not all, of the events requiring notification by the Listed Company Manual, including: fixing a date for the closing of transfer books or taking of a record of shareholders; any dividend action or action related to a stock distribution; fixing a date for any meeting of shareholders; publicity and notice of partial or full redemptions; setting a date for any meeting of shareholders; and notification by the transfer agents of shares outstanding at the end of each calendar quarter. The proposals also provide that, in emergency situations, notification may be provided by telephone and confirmed by fax.

The NYSE also proposed two clarifying changes. First, where material corporate developments are disclosed between 9:00 a.m. and 5:00 p.m. EST, the proposed rules clarify that verbal communication should be given to the NYSE at least 10 minutes before the public release of information and a copy of the text of the announcement should transmitted via the proposed web-based notification procedures at least 10 minutes before the release of the information. Second, the proposed rules would make changes to make clear that notices of redemption should be made by telephone and a web-based transmission of text in accordance with the proposed rules, by removing the requirement of delivering notices of redemption by hand.

Finally, the proposal would reduce the number of copies of a proxy statement that a listed company is required to submit from six to three and would make certain other administrative changes.

Comments on the proposed rules are due by December 18, 2012.

ISS Gives Information on Its Peer Group Selection and Asks Companies to Provide Input Now on Any Changes Since 2012 Disclosures

Wed, 05 Dec 2012 11:56:00 GMT

ISS has released a detailed set of FAQs on how it will select a company's peer group for purposes of conducting its pay-for-performance analysis. ISS uses this peer group to measure a company's total shareholder return and CEO pay in deciding how to recommend for the say-on-pay vote.

The FAQs provide information on how ISS will select 14-24 peers from the company's own GICS code, as well as the GICS code of the peers named in the subject company's proxy statement. Subject to size constraints based on revenues or assets and market value, ISS describes the order in which peers will be selected from the potential universe of companies that will come up based on those GICS codes. Other questions address the use of size parameters, which are clearly key to the selection process, the GICS industry groups (financial services) where assets will be used instead of revenue, and what happens if a company discloses using more than one peer group.

In addition, by December 21st a company can inform ISS of any changes to its peer group since the 2012 disclosures, as a source of input into the ISS peer group selection.

While more information is always useful, this is unlikely to mean that companies will be able to proactively figure out the ISS peer group themselves given the complexity of GICS, the number of potential companies that ISS can choose from under this method and the use of what they term “manual judgment” in the selection process. It appears that again companies will not know who they are being measured against until they receive the ISS report.

For those companies that may have faced a say-on-pay issue last year because of perceived faulty peer groups used by ISS, note that in back-testing this new method against their analysis applied in 2012, ISS indicates that more than 95% of companies would have received the same pay-for-performance analysis.

Survey May Influence Efforts to Alter ERISA Rules Affecting Notice and Access

Tue, 04 Dec 2012 13:30:00 GMT

More than 18 months ago, we alerted readers about a request for information by the Department of Labor (DOL) seeking suggestions from interested parties on the possibility of using electronic media by employee benefit plan sponsors to furnish information to participants. The current ERISA rules under the DOL prevent companies from taking full advantage of using notice and access in lieu of paper copies of proxy statements for employee benefit plan participants as a practical matter. We wrote a comment letter to the DOL in support of moving toward easily sending plan participants electronic versions of a company’s annual proxy statement.

However, a recent survey by the AARP, titled “Paper by Choice,” will likely retain the status quo for the time being. In response to concerns that the financial services industry is lobbying to allow retirement plan providers to send out plan documents electronically as the default method, the survey found that of the slightly over 1,000 respondents, 75% of those over the age of 25 prefer paper over online communications and 62% currently receive only paper copies.

Many have criticized the survey as biased, primarily because it failed to ask participants about work-related computer access, which is the touchstone the DOL uses in its electronic delivery safe harbor, and although it asked those surveyed if they read disclosures electronically, no similar question was asked of those receiving disclosures by hard copy. Nonetheless, the survey will still likely influence the DOL’s thinking about converting plan participants from paper to electronic, holding back efforts to give companies the ability to avoid stratifying notice and access mailings and moving completely to electronic means of delivery.

Register for the ISS Policy Webinar

Mon, 03 Dec 2012 12:00:00 GMT

At its upcoming webinar, ISS will likely discuss a new process for companies that are changing their own peer group selections from 2012 to 2013 to inform ISS of those changes prior to issuing their proxy statements, so that ISS can be aware of the companies’ most recent peer selections as ISS constructs its own groups for purposes of its proxy voting recommendations. As we explained in our memo, the peer group formulation was part of the recent ISS policy update.

All the more reason to join ISS as it hosts a webinar on its global policies for the 2013 proxy season this Thursday, December 6th at 11:00 AM EST. Register here.

The webinar promises to highlight ISS' proxy voting guidelines in its major markets and provide a preview of the key issues institutional investors and issuers will face in the coming year, including for US companies: (a) pay for performance such as peer group construction methodology and use of realizable pay and (b) its policy on board responsiveness to majority – supported proposals and pledging of company stock.

ISS' annual FAQ are also expected later in December.

Glass Lewis Releases 2013 Voting Guidelines

Thu, 29 Nov 2012 14:43:00 GMT

Glass Lewis recently released its 2013 Proxy Season Guidelines for the 2013 proxy season, which will go into effect for shareholder meetings taking place after January 1, 2013, an abridged version of which is publicly available. These updates should be viewed in conjunction with Glass Lewis’s policies on its say-on-pay analysis, which it updated in July, as discussed here.

One of the more notable changes is regarding board responsiveness to a “significant” shareholder vote. Glass Lewis’s new policy provides that it will scrutinize board responses to any vote by 25% or more of shareholders (excluding abstentions and broker non-votes) against management’s recommendation on any proposal, including “against” or “withhold” from a director nominee, “against” a management-sponsored proposal or “for” a shareholder proposal. Glass Lewis will assess board responsiveness on a case-by-case basis and will include a review of the company’s public disclosures following the annual meeting at which the vote took place.

Similarly, Glass Lewis’s policy is that at companies that received a shareholder vote of greater than 25% against their say-on-pay proposals, the board shall demonstrate engagement with and responsiveness to shareholders and that they will look for disclosure to this effect. In the absence of such disclosure, Glass Lewis will recommend holding compensation committee members accountable.

The updates also provide that in evaluating proposed equity-based compensation plans, plans shall not count shares in such a way as to understate the potential dilution or cost to shareholders (the “inverse” full-value award multipliers); should not contain excessively liberal administrative or payment terms; and should select performance metrics that are challenging and appropriate.

SEC Releases Its Fiscal Report

Wed, 28 Nov 2012 08:57:00 GMT

The SEC released its 151-page financial report for its fiscal year ended September 2012. The report discusses all of the different areas that the SEC is responsible for, but the governance community is likely most interested in the following in terms of historical and anticipated activities, and some of the more intriguing factual details:

Enforcement is the headline item noted in the report. The SEC brought 734 enforcement actions, the second highest number filed in a single year (735 were filed in 2011). The report credits innovations, including priority focus on cultivating in-depth expertise in financial markets and products, flatter management structures, better use of technology and enhanced ability for using tips. 21 months is the average amount of time between opening an inquiry and commencing an enforcement action.
Corporation Finance's Disclosure Operations focused on several key elements of pre-IPO disclosures, including the use of non-GAAP measures and disclosure of dual-class structures, non-financial metrics used by the company, stock valuations and shareholder rights. It takes an average of 25 days to issue initial comments on a filing.
The new SEC website increased daily hits by almost 300%, to 39 million a day. 48% of public companies were reviewed in 2012.
Nearly 4,000 people work at the SEC, and the SEC has adopted a "pay for performance" approach for its non-bargaining unit employees.

2013 initiatives cited include the Commission’s intention to:

"Propose and adopt" rules to implement the four executive compensation-related provisions of the Dodd-Frank Act, including clawback policy, pay and performance disclosure, pay ratios and employee and director hedging.
Develop recommendations for an interpretive release addressing issues raised in the "Proxy Plumbing" concept release.
Prepare a concept release to seek comments on modernizing 13(d) and 13(g) reporting.