Image by Kevin Phillips from Pixabay

Spoiler alert – despite the title and the creepy photo, this is not about zombies, vampires, or anything else of a spooky nature.  Rather, it’s how we can hopefully make some of the deadwood in our proxy statements meaningful.

I realize that the upcoming proxy season already poses a bunch of challenges; just thinking about the SEC’s over-the-top rules on pay versus performance alone could bring on a couple of migraines.

However, a recent article on SEC comment letters to some major companies reminded me that we also face challenges associated with long-standing, important disclosures that tend to be ignored once they’ve been drafted, no matter how much time has passed.  For example, the SEC comments referred to in the article asked companies to do a better job explaining how their boards oversee risks.  What is the timeframe over which you evaluate risks?  Does the board use outside advisors to help them think about the unthinkable?  How does the risk oversight process align with disclosure controls?  Another area of comment related to board leadership: What exactly is the role of the board chair (or lead independent director)?  Does he or she represent the board in communications with shareholders?  Are there circumstances in which he/she could override the CEO on risk matters?  Are there circumstances in which the board would separate (or combine) the positions of board chair and CEO?  And so on.

As noted, I view these as important disclosures.  Sure, when the rules were changed a dozen or so years ago to require these disclosures, we thought they were pains in the neck (or other parts of our anatomy); we reviewed many companies’ proxy statements to see how they handled the issues; we may have agonized a bit about what to say; and then we more or less forgot about the disclosure, other than the occasional tweak in subsequent years.  You are free to disagree, but I think we owe it to our shareholders, if not to ourselves, to make these disclosures meaningful.

Now that I’ve gotten that off my chest, I want to focus on one particular set of disclosures that consistently disappoint me – specifically, the so-called “director skill set” disclosure called for by Item 401(e) of SEC Regulation S-K.  For those of you who haven’t committed all of Reg S-K to memory, the requirement is as follows:

“[F]or each director or person nominated or chosen to become a director, briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director” 

Again, when this requirement was first instituted, many of us groaned.  We looked at a bunch of so-called leading companies’ proxy statements and debated pithy topics like whether we should provide this skill set disclosure in narrative, full-sentence form or the radical bullet-point approach.  Really.  And then, whatever we decided to do, we’ve tended to stick with it ever since.

At the time, I made the following two suggestions to my then employer:

  • For at least some directors – say, the board chair and the chairs of the board committees – do a little video clip in which each would explain what she/he contributed to the board. Embed a link to the video in the proxy statement; after all, if a picture is worth a thousand words, a video would be a multiple of that.  This suggestion was greeted with groans – we’d have to draft scripts, fit video shoots into already complex schedules, etc.  And it wouldn’t be cheap. OK, I figured that would be a losing proposition.
  • A less technical approach would be to ask each director to draft a sentence or three that we could then edit and include in the proxy statement, all in the first person. I actually thought this was reasonable, but if the first suggestion elicited groans, this one was met with outright derision.  I believe my (least) favorite response was “What? We can’t ask our board members to do that!”  To this day, it seems to me that when you’re paying someone hundreds of thousands of dollars a year and putting your company in his/her charge, asking him/her to draft a sentence or three wasn’t such a big deal.

And so it went, and so it goes.  I still don’t think either idea is bad, and I still see the same tired, old language in most proxy statements.  In some cases, the language has been supplemented or replaced with graphics that range from harmless to incomprehensible, but no one seems to care (presumably including the SEC, which didn’t raise the subject in that recent spate of comment letters).

That said, I’m really not wedded to either of these approaches or to any particular approach.  What I do think was best expressed by one of my favorite people on the institutional investor side of the discussion, who once told me that companies need to explain why each member of board is better than having an empty seat at the board table.  It seems to me that that is a reasonable goal and one towards which we should all strive.

Boards of directors have a lot – maybe too much – to do.  Subjects long believed to be the province of management are now viewed as being in the board’s wheelhouse, and when a problem arises with respect to any of those subjects, the first question asked by investors, regulators, the media, and others is often “where was the board?”  So it is with a degree of reluctance that I am writing to suggest another subject that I believe boards need to address.

Some background may be in order.  A few weeks ago, I attended a meeting of the American Bar Association International Law Section in Madrid.  (How a US-centric lawyer ended up at that meeting is a tale for another day.)  The trip, the city, and the conference were wonderful; I met some extraordinary people and was beyond grateful that I was able to go.  I also learned a lot, mostly on things like international trade and customs law, cross-border discovery, and other topics that I don’t often encounter in my practice.

Another panel that I thought had little to do with my practice turned out to be the most compelling panel of them all, and it definitely is relevant to my practice and to the observation above about the ever-growing responsibilities of the board.  The title of the panel was “Recognizing Human Trafficking as a Common Occurrence During Conflict, and Building Protection and Anti-Trafficking Strategies into Global Responses”.  I suppose the title of the panel could have been more succinct, but – as the moderator of the panel suggested – a more helpful change might have been to give a trigger warning before the panel got underway. Continue Reading Yet another thing for boards to consider

Since the 1980s, Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”) has enabled Delaware corporations to provide exculpation from breaches of the fiduciary duty of care to directors – but not officers – in certain circumstances.  Officers can now come in from the cold, as Section 102(b)(7) has now been amended to provide similar protection for certain officers.  Specifically, the amendments, which became effective on August 1, 2022, allow Delaware corporations to provide exculpation from breaches of the duty of care to specified officers in certain circumstances. The new provisions allow a qualifying officer to be exculpated from such claims made directly by stockholders but do not provide relief in connection with other fiduciary duties, derivative actions, or actions brought by a corporation’s board against its officers.

We view this amendment as a major forward step.  If your company (or any subsidiary) is a Delaware corporation, you should seriously consider amending its certificate of incorporation to provide this protection.  And if you are an officer of a Delaware corporation, you should make sure your board of directors is aware that this protection is available and urge your board to take the steps needed to provide the protection..

Continue Reading Coming in from the cold: Delaware provides exculpation protection to corporate officers

I have long thought that the SEC is among the best, if not the best, government agency.  Over the years, I’ve worked with and gotten to know many folks on the SEC’s staff, who have consistently impressed me as bright, hard-working, serious about the SEC’s mission, and very nice people.  I am sure that most people on the staff continue to possess these and other great attributes.

However.

As with most organizations, the tone at the top is critical.  And, at least from outward appearances, the tone at the top of the SEC is at best dismissive, if not hostile, towards business, and disingenuous.  I’m not saying that the SEC should bow to corporate America’s wishes and do its bidding.  But it’s in the interest of our capital markets and the participants in those markets that the SEC consider a wide range of views and engage in thorough and thoughtful deliberation (part of what is known in the corporate world as the fiduciary duty of due care) before making decisions.

That does not seem to be the case.  In the last year or so, the SEC has repeatedly demonstrated fealty to the institutional investor community by such things as announcing, early in Chair Gensler’s tenure, that the SEC would not enforce rules providing for a more level playing field between companies and proxy advisory firms, adopted by the SEC barely two years earlier, and then formally rescinding those rules (see here).  I’m not saying those rules were perfect – far from it; in fact, they met the classic definition of compromise, in that all sides were dissatisfied with the outcome.  However, they were a start, and instead of getting rid of them the SEC could and, IMHO, should have worked to improve them. Continue Reading Rooting for the other guys?

Image by WikiImages from Pixabay

Hating lawyers may not have started with Shakespeare, but he didn’t help things when he wrote “The first thing we do, let’s kill all the lawyers” in Henry VI.  Any lawyer who’s been practicing law for more than a couple of weeks knows that part of the price of bar admission is having to endure lawyer jokes (most of which aren’t very good) and experiences like having a client say to you at the outset of your first meeting, “just so you know, I don’t like lawyers” or words to that effect.

It’s particularly painful, however, when an attack on our profession comes from one of our own, who also happens to be a member of the Securities and Exchange Commission.  I refer to a March 4 speech by Commissioner Allison Herren Lee in which she notes her “deep regard for the ideals of public service that our profession represents” and that her “belief in the ideals of the profession – ideals I know you all share – has only grown stronger with time” but then goes on to castigate corporate lawyers for failing to fulfill our “role…as gatekeepers in the capital markets.”  She distinguishes corporate lawyers from litigators – a dubious distinction that suggests we should be less zealous in representing our clients than our litigation colleagues – and says that in passing Section 307 of the Sarbanes-Oxley Act (more on that below) “Congress was concerned…that counsel often acted in the interests of the executives who hired them rather than the company and its shareholders to whom their duty and responsibility is [sic] owed.” Continue Reading Who needs Shakespeare when you’ve got the SEC?

I hope you will forgive me for this digression when there are so many things to talk about in our wacky worlds of securities law and corporate governance.  However, though I am tempted to rant about the SEC’s proposals on climate change and cybersecurity disclosures, I’ll save that for another day.  Today, I have decided to take a few minutes to reminisce about my encounters with Madeleine Albright, who died this week.

Yes, my encounters.  Plural.

I first met Secretary Albright when she was the United States Ambassador to the United Nations.  Our UN ambassadors’ official residence then and, I believe, now is a suite high up in the Waldorf Tower, a relatively exclusive building adjacent to the famous Waldorf-Astoria on Park Avenue in New York.  One of our daughters had just run in her first New York Marathon, and my wife and I had flown up from Florida, hired a car for the day, and had the wonderful experience of seeing her run in each of the five boroughs of New York City.  We had also purchased VIP tickets so that we could be in the stands next to the finish line in Central Park and see her complete the race.  It was an exhilarating day.

Continue Reading A Reminiscence

Remember those three monkeys – see no evil, hear no evil, speak no evil?  Well, that’s kind of how the SEC views the internet and social media.  Time after time after time, the SEC has cautioned that social media are fraught, to the point that I sometimes wonder if there is a watermark, visible only to securities lawyers, in every SEC pronouncement about the web and social media that says “PROCEED AT YOUR PERIL!”  And, unfortunately, many (too many, IMHO) SEC attorneys follow the SEC’s lead and either don’t encourage or actively discourage clients from taking advantage of the opportunities afforded by technology.

An example may be helpful.  Several years ago, when I was in-house, we decided to include in our proxy statement a live link to something on our website.  When we sent our draft proxy statement to outside counsel for the customary rules check, one of the comments we received was a strong admonition to remove the link or at least not make it “live.”  The rationale was that there might be something on our website that we wouldn’t put in an Exchange Act filing and that the link would somehow suck all that bad stuff into the proxy statement and lead to liability. Continue Reading Note to SEC: The internet and social media are here – deal with it!

Image by Gerhard G. from Pixabay

It’s time for my annual posting on my 10 favorite books of the prior year.  In last year’s version, I said that 2020 was an “annus horribilis” – the term used by Queen Elizabeth following the death of Princess Diana.  Well, I don’t know how to say “2021 may have been even worse” in Latin, but being someone who searches for the bright side (possibly even when there isn’t one), I will say that I continue to be grateful for books.  I read voraciously, constantly, no matter how bogged down with work or other things I may be.  Books take me away from the world — not always to a better place, but even a negative distraction is a distraction.

So here goes.  Remember that my top 10 are all books that I read in 2021, not just books I read that were published in 2021. Continue Reading Another Year, Another Top Ten List

I suppose I should be getting tired of writing about enforcement actions involving nondisclosure of perquisites (for example, see here), and that you’re getting tired of reading about them.  However, the topic is hard to resist, whether due to schadenfreude (look it up) or other factors.

The most recent such enforcement action, announced in late November, told a story similar to those told before – a CEO who used corporate aircraft for personal travel, used corporate credit cards for personal expenses, and so on, resulting in a failure to disclose more than $425,000 in “perks” over a two-year period.  The CEO also pledged all of his company stock in violation of a shareholders agreement that required the prior written consent of the company, but that’s another story.  Suffice it to say that the company and the CEO were hit with a variety of charges, including a failure to maintain accurate books and records.

If this elicits yawns or eye-rolling that we’ve seen this movie before, so be it.  However, there is a twist.  Specifically, the SEC’s report noted that the CEO did not disclose the relevant information in his questionnaires – and in some cases had not completed a questionnaire at all.  I don’t recall the SEC focusing on the lowly D&O questionnaire in the past.  Anyone who has pulled his or her hair out trying to get a director or officer to complete a questionnaire is now smiling and saying “Ha!  It serves him right!”  (The same goes for all those directors and officers who complete every questionnaire by saying “please fill it out for me” or “no change from last year” regardless of whether there are changes.) Continue Reading Another perquisites enforcement action…with a twist or three

I’ve been known to make some weird connections in this blog, so if you’re wondering what’s with the title of this posting, read on.

Some years ago, my wife and I took a fabulous trip to Egypt.  One of the many fascinating things and people we learned about was Hatshepsut, a Pharaoh who ruled Egypt from 1479 to 1458 BC, or thereabouts.  She’s been called Queen Hatshepsut, but technically that’s not correct, because she was literally a Pharaoh – a title that our guides told us was an exclusively male title for which there was no female equivalent.

Hatshepsut is believed to have been a very successful leader, opening trade routes and creating a boom in the construction of many grand temples and so on – something one of our guides referred to as an “edifice complex.”  However, after her death, her son, Pharaoh Tutmosis III, and possibly his son (to say nothing of the patriarchy) sought to eradicate her existence.  Her name was removed from records and many of her statues and images were defaced or destroyed.

But enough ancient history. Continue Reading Why Is the SEC Like Pharaoh Tutmosis III?