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Since the beginning of this month (July 2018), the SEC has brought two enforcement cases involving perquisites disclosure – one involving Dow Chemical, and one involving Energy XXI.  As my estimable friend Broc Romanek noted in a recent posting, over the past dozen years, the SEC has brought an average of one such case per year.  It’s not clear why the SEC is doubling down on these actions, but regardless of the reasons, it makes sense to pay attention.

The SEC’s complaint in the Dow Chemical case is an important read, as it summarizes the requirements for perquisites disclosure.  Among other things, it’s worth noting the following:

  • While SEC rules require disclosure of “perquisites and other personal benefits”, they do not define or provide any clarification as to what constitutes a “perquisite or other personal benefit.” Instead, the SEC addressed the subject in the adopting release for the current executive compensation disclosure rules, and it has also been covered in numerous speeches and other statements over the years by members of the SEC staff.
  • For those of you who prefer a principles-based approach to rulemaking, you win. Specifically, the adopting release stated as follows:

“Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following:

  1. An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  2. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The SEC has also noted on several occasions that if an item is not integrally and directly related to the performance of the executive’s duties, it’s still a “perk”, even if it may be provided for some business reason or for the convenience of the company.

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No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.

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If you find the title of this posting confusing, let me explain:  On June 28, the SEC announced revisions to the definition of “smaller reporting company”that will significantly expand the number of companies that fit within that category (i.e., “smaller gets bigger”).  As a result, more public companies will be able to reduce the disclosure they are required to provide under SEC rules (i.e., “which means less”).  The new definition will go into effect 60 days after publication in the Federal Register.

Background

The SEC adopted the reduced disclosure requirements applicable to smaller reporting companies, or SRCs, in 2007. These reduced requirements were intended to ease the costs and other burdens of disclosure for small companies.  The reduced requirements enabled SRCs, among other things, to:

  • present only two (rather than three) years of financial statements and the related management’s discussion and analysis;
  • provide executive compensation for only three (rather than five) “named executive officers”;
  • omit the compensation discussion and analysis in its entirety;
  • present only two (vs. three) years of information in the summary compensation table; and
  • omit other compensation tables, pay ratio disclosure, and narrative descriptions of various compensation matters.

In addition, SRCs that are not “accelerated filers” (companies that must file their Exchange Act reports on an accelerated basis) need not provide an audit attestation of management’s assessment of internal controls, required by the Sarbanes-Oxley Act.  More on this below.…
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A few weeks ago, I attended the “spring” meeting of the Council of Institutional Investors in Washington (the quotation marks signifying that it didn’t feel like spring – in fact, it snowed one evening).  These meetings are always interesting, in part because over the 15+ years that I’ve been attending CII meetings, their tone has changed from general hostility towards the issuer community to a more selective approach and a general appreciation of engagement.

So what’s on the mind of our institutional owners?  First, an overriding concern with capital structures that limit or eliminate voting rights of “common” shareholders.  CII’s official position is that such structures should be subject to mandatory sunset provisions; that position strikes me as reasonable (particularly as opposed to seeking their outright ban), but it’s too soon to tell whether it will gain traction.

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It may be nice to be your own boss, but setting your own compensation – and, at least arguably, giving yourself excessive pay – may get you in trouble.  A number of boards of directors have found that out, as courts have given them judicial whacks upside the head for paying themselves too much.  Not surprisingly, shareholders have gotten on the bandwagon as well.

Executive compensation – at least for public companies – has to be scrutinized and blessed by independent directors and, since the advent of Say on Pay, approved by shareholders (albeit on a non-binding basis).  In contrast, directors have long set their own pay, with little or no scrutiny and no requirement for independent review, much less approval.  (Director plans generally must get shareholder approval if they provide for equity grants, but neither the overall director compensation program nor specific awards have to be approved.)…
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Yes, it’s that time of year again.  Turkey, Black Friday, decking the halls, office parties, and the annual issuance of ISS’s voting policies for the coming year.

To make sure I’m on Santa’s good list, I need to be honest – and, to be honest, the 2018 changes seem rather benign.  In fact, as noted below, ISS hasn’t gone as far as some of its mainstream members in terms of encouraging board diversity and sustainability initiatives.

Here’s a quick rundown on the key changes for 2018:

  • Director Compensation: Director compensation – or at least excessive director compensation – has been looming ever larger as a hot topic in governance.  ISS continues the trend by determining that a two-consecutive-year pattern of excessive director pay will result in an against or withhold vote for directors absent a “compelling” rationale.  Since the policy contemplates a two-year pattern, there will be no negative voting recommendations on this matter until 2019.

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The still relatively new SEC Chair, Jay Clayton, has let it be known that one of his missions is to improve the health of our IPO market and, thereby, to improve our capital markets generally.  His minions – including a senior SEC Staff member I recently heard in Washington – have been spreading this gospel according to Jay.

I wish him (and them) luck, but I wonder if the mission is impossible.  I’m thinking of some recent articles, including one by the inimitable Andrew Ross Sorkin entitled “Fixing the ‘Brain Damage’ Caused by the I.P.O. Process”, that makes the resuscitation of IPOs seem unlikely.  As if the title weren’t off-putting enough, one of the executives quoted in the article described his company’s IPO process as “a way of living in hell without dying”.  Not a good start.

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Photo by Jeffrey Beall

Last year, Congress required the SEC to review the public company disclosure requirements in Regulation S-K and make detailed recommendations as to how those rules might be changed to modernize and simplify the requirements while still requiring disclosure of all material information. The ultimate goal was to reduce burdens on public companies while improving readability and navigation of public company filings, including through reducing repetition in such filings. On November 23, 2016, the SEC released its initial recommendations in a report (the “2016 Report”). The 2016 Report which served as the basis for proposed rules, which were set forth in a 253 page rules release on October 11, 2017. While the proposed rules largely implement the recommendations from the 2016 Report, the proposed rules deviated in certain respects from the recommendations in the 2016 Report. Specifically, the release contains proposed changes to the following provisions under Regulation S-K:

  • Description of Property (Item 102);
  • Management’s Discussion and Analysis (Item 303);
  • Directors, Executive Officers, Promoters, and Control Persons (Item 401);
  • Compliance with Section 16(a) of the Exchange Act (Item 405);
  • Outside Front Cover Page of the Prospectus (Item 501(b));
  • Risk Factors (Item 503(c));
  • Plan of Distribution (Item 508);
  • Material Contracts (Item 601(b)(10)); and
  • Various rules related to incorporation by reference.

Additionally, Some of the proposed amendments would require additional disclosure or incorporation of new technology. These include proposed changes to:

  • Outside Front Cover Page of the Prospectus (Item 501(b)(4));
  • Description of Registrant’s Securities (Item 601(b)(4));
  • Subsidiaries of the Registrant (Item 601(b)(21)(i)); and
  • Various regulations and forms to require all of the information on the cover pages of some Exchange Act forms to be tagged in Inline XBRL format.

While somewhat underwhelming with regard to the actual relief provided, the proposed changes are certainly a step in the right direction for improving the disclosure requirements for public companies. Nevertheless, the proposals seem to be relatively minor in nature and won’t likely do much for public companies as far as reducing their disclosure burdens. Below is a summary description of the material changes proposed in the release:…
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With Chair Jay Clayton and Corp Fin Director Bill Hinman now in office for several months, the SEC seems to be gaining traction in a number of areas of interest to
public companies.

Pay Ratio Disclosures

As we noted in a Gunster E-Alert, on September 21, the SEC issued interpretations to assist companies in preparing the pay ratio disclosures called for under Item 402(u) of Regulation S-K.  The consensus (with which we agree) is that the interpretations will make it much easier for companies to prepare their ratios and related disclosures and hopefully to reduce litigation exposure associated with those disclosures.

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Some of you may remember Christopher Cox, who served as SEC Chair from 2005 to early 2009, when he was succeeded by Mary Schapiro.  His name doesn’t come up often, perhaps because his legacy was a weakened Commission tarnished by, among other things, the financial crisis and the Madoff scandal.

While Chairman Cox may not have been responsible for either of those debacles, he did leave another unpleasant legacy – XBRL.  He was among the biggest cheerleaders for XBRL, claiming that it would enable investors to compare companies within and across industries and would perform various other miracles.  Suffice it to say it hasn’t done that.  Aside from the fact that it’s time-consuming, it has failed to provide the benefits of comparability.  As a client recently said,

“[E]ven if two companies use the same taxonomy/tagging for Cost of Sales, they probably are not consistent in the underlying details that go into Cost of Sales.  One company might classify certain components as G&A instead.  There are many other examples.  Consistency is very important for one company’s reporting from period to period, however comparisons of competitors’ financials will always be approximations at best.”

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