Remind me again, what’s Section 162(m)?

Image by Gerd Altmann from Pixabay

In general, Section 162(m) of the Internal Revenue Code provides that a publicly held corporation shall not be allowed a deduction for any “applicable employee remuneration” to any “covered employee” that exceeds $1,000,000.  Applicable employee remuneration generally means compensation for services performed.  Though the definition has changed over time, “covered employee” originally captured a company’s CEO as of the last day of the taxable year, as well as the next three most highly compensated officers.

Insert the TCJA

The Tax Cuts and Jobs Act of 2017 (the “TCJA”) took the first stab at widening the net used to determine who is a “covered employee.”  Specifically, the definition was expanded to include any person who served as CEO or CFO during the taxable year, in addition to the next three most highly compensated officers.  Additionally, the definition was expanded to include any individual who was a “covered employee” for any taxable year beginning after December 31, 2016.  The TCJA also made other notable changes to Section 162(m), including the elimination of an exception for qualified “performance-based compensation” approved by stockholders.  The practical effect of this was to eliminate the need for stockholder votes to approve plans providing for “performance-based” compensation, because the compensation in question would be non-deductible whether or not it was performance-based.
Continue Reading Run for “Covered!” The American Rescue Plan Act casts a wider net on Section 162(m) “Covered Employees”

Image by mohamed Hassan from Pixabay

In the last several days, the SEC has engaged in a skirmish, and possibly an opening battle, against SPACs.  A recap follows.

The first shot was fired on March 31, when the Staff of the SEC’s Division of Corporation Finance and the Office of Chief Accountant issued separate public statements about a number of risks and challenges associated with taking private companies public via “deSPAC” transactions.

The CorpFin statement covered a lot of territory, pointing out the following pitfalls, among others, facing companies that go public via a deSPAC.  These pitfalls reflect that such companies are subject to rules governing shell companies that do not apply to companies going public through conventional IPOs.

  • Financial statements for the target must be filed with an 8-K report within four business days of the completion of the business combination.  The usual 71-day extension for such financial statements is not available.
  • The combined company will not be eligible to incorporate Exchange Act reports or proxy or information statements until three years after the completion of the business combination.
  • The combined company will not be eligible to use Form S-8 for the registration of securities issuable under compensation and benefit plans until at least 60 calendar days after the combined company has filed current Form 10 information. (This information is customarily included in a “Super 8-K” filed within four business days after closing of the deSPAC transaction.)
  • For three years following the completion of the deSPAC transaction, the company will be unable to use some streamlined procedures for offerings and other filings, such as using a free-writing prospectus.

The statement also reminds companies that public issuers are required to maintain accurate books and records as well as internal control on financial reporting – both areas that have been the basis for enforcement actions by the SEC.
Continue Reading Caveat Everybody — The SEC Takes Aim at SPACs

Image by Tumisu from Pixabay

I have long been a champion of shareholder engagement.  Since as far back as the 1980s, I have believed that companies and investors alike greatly benefit from engagement; I even advocated for engagement by individual directors – a view that generated some strong adverse commentary from those in the corporate community who disagreed with me.  It’s therefore extremely gratifying to me that what was a rare and often disparaged occurrence has become the norm.  Even prestigious law firms that referred to director-investor meetings as “corporate governance run amok” now embrace the practice.

I also admit that, despite my disagreement with the principles behind say on pay votes, such votes have had the very positive unintended consequence of making engagement commonplace.  In fact, there is so much engagement going on that some investors can’t find the time to meet with the companies they own.

So far, so good.

However, I believe that things may be going too far.  I refer, specifically, to the new movement to have a “say on climate” vote at every public company’s annual meeting (or, as the corporate community increasingly refers to it, the annual general meeting, or AGM – as opposed to an annual “specific” meeting, I suppose).  The vote would be similar to the say on pay vote – advisory, non-binding, and so on.  I have not yet heard anything about a second advisory vote to determine how often a say on climate vote would need to be taken, but I would not be surprised to learn that it’s under consideration somewhere.
Continue Reading Say what???

Image by Reindert from Pixabay

In 1729, the great satirist, Jonathan Swift, penned an essay called “A Modest Proposal.”  The essay suggested that rather than allowing poor, starving children to be a burden on society, they should be fattened up and eaten.

How does this relate to corporate governance, you ask?  Well, here goes.  Anyone who has ever had children or spent any time around children knows that at some point most rug rats become incessant and indefatigable interrogators, their favorite question being “why?”  “Why do I have to eat vegetables?” [Because they’re good for you.] “Why?” [Because if you don’t eat vegetables you won’t grow to be big and strong] “Why?” [Because vegetables have vitamins and minerals that you need] “Why?”  And so on.  These wee tads are never satisfied with any answers, regardless of their logic or compelling authority; thus, responses like “Because I’m your father and I make the rules” go unheeded.  The “whys” just keep on coming, ad nauseam (literally).
Continue Reading A Modest Proposal II: Don’t eat children; put them on boards instead!

Image by OpenClipart-Vectors from Pixabay

In case you missed it, there was a rather provocative article in a recent issue of The Wall Street Journal entitled “How to Give Shareholders a Say in Corporate Social Responsibility” (subscription required).  It was written by a professor and an executive fellow at London Business School and suggests that “if companies are going to pursue goals beyond profits, investors should be allowed to weigh in.”  Specifically, it proposes “to give investors a ‘say on purpose’ vote, similar to the two-part ‘say on pay’ votes that investors have in Europe.”  The article goes on:

“Here is how it would work. A company issues a statement… stating its purpose beyond profits…. [I]t would clarify the… trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs). Every three years, investors would have a ‘policy vote’ on this statement, to convey whether they buy into it and the trade-offs it implies. An investor would vote against it if he or she disagrees with the priorities, or if it is so vague it gives little guidance on what the company stands for.”

Now I grant you that say on pay votes have generally benefited both companies and investors by encouraging and facilitating engagement between the two.  I also grant you that among the topics investors and companies might discuss is how companies should address their “purpose.”  But voting on it?  I beg to differ.
Continue Reading Say on What???

Image by Hans Braxmeier from Pixabay

It’s no secret that the smaller a company’s market cap, the less likely it is to be concerned with governance “nice-to-haves,” such as independent board leadership, annual elections of directors, and board diversity.  Over the years, I’ve heard time and time again, “next year is the year when all these things will begin to trickle down to the smaller-cap companies.”  After a while, these assurances began to sound like the old line about quitting smoking – “I can quit whenever I want – after all, I’ve done it many times.”

Perhaps the great governance trickle-down has begun.  On December 1, 2020, Nasdaq announced that it had filed with the SEC a proposed change in its listing standards that “would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors [and] to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.”  An “underrepresented minority” is “an individual who self-identifies in one or more of the following groups: Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander or Two or More Races or Ethnicities.” If adopted, the proposal would be implemented based on a company’s listing tier and would eventually apply to the roughly 3,000 companies listed on Nasdaq.
Continue Reading Has the great governance trickle-down begun? Nasdaq pushes for board diversity

Image by 192635 from Pixabay

When a company issues bad or less-than-good news on a Friday or the eve of a major holiday, say just before July 4th, investors and the media generally squawk like the proverbial stuck pig.  And there is some justification for that squawking.  After all, good news and bad news should be treated in a similar manner, and IMHO it’s too cute by half when a company tries to sneak something past the public at an odd time in the hopes that it won’t be noticed.

However, it appears that Institutional Shareholder Services does not regard itself as subject to the same concerns.  Specifically, on November 2, the eve of what was arguably one of the most newsworthy if not significant elections in recent history, ISS snuck out an announcement that, effective January 2, 2021, it would no longer provide draft proxy voting reports to the S&P 500.  Apparently, ISS – which has long been criticized for limiting the distribution of draft voting reports to the S&P 500 – has decided that the way to eliminate that criticism is not to send out draft reports at all.

Instead, ISS will send out proxy voting reports to its clients — i.e., investors — earlier and will send reports to all issuers at the same time at no cost.  Thus (according to ISS), companies will have the time to provide feedback, and we’re assured that its “formal ‘Alert’ process” will enable companies to correct any errors and investors to change their votes.  Anyone who’s gone head-to-head with ISS knows how well that process works; corrective alerts can get lost in the shuffle, votes don’t get changed, etc.  And this new policy will almost surely lead to a big increase in the number of alerts.
Continue Reading ISS Tries to Hide in Not-So-Plain Sight

Image by Sammy-Williams from Pixabay

One of the principal duties of corporate directors and officers is the duty of confidentiality.  That’s not just my personal opinion; it’s supported by case law, corporate governance treatises, law review articles, and more.  Generally viewed as a subset of the duty of loyalty, the duty of confidentiality means that directors and officers are expected to keep their knowledge of the company to themselves or, at a minimum, to disseminate it on a strict “need to know” basis.

My conviction (all puns intended) was reinforced some years ago, when Rajat Gupta, the former CEO of McKinsey and a member of the board of Goldman Sachs, among others, was convicted of insider trading for spilling secrets he learned in Goldman’s board room to Raj Rajaratnam.  Following his conviction, there was a flurry of activity among corporate governance nerds (present company included) as to the appropriateness and reasonability of asking directors and officers to enter into confidentiality agreements with the companies they served.  It seemed to me at the time that asking a member of your board – a person charged with oversight of your company, and effectively your boss – to sign a confidentiality agreement might be viewed as insulting or worse.

Events, both recent and not-so-recent, are changing my mind.  To start with the not-so-recent, in my many years of in-house practice, I came across the occasional director or officer who, to put it bluntly, was a media whore.   They love seeing their names in the paper and being quoted as authorities.  I get that; I’ve been quoted in some publications, and it’s very nice.  However, in at least one case, a director’s leaks to a reporter resulted in my getting calls from that reporter, literally demanding that I provide information, some of which was clearly privileged, arguing that if it was good enough for a board member it was good enough for me.  (I declined.)
Continue Reading Shhh!

Image by Alexas_Fotos from Pixabay

For both public and private companies, it’s important to determine the skills and other attributes needed to form a good or, hopefully, great board.  Of course, there are basics that always apply, such as integrity, intelligence, and a good mix of collegiality and candor.  However, once you get past those basics, it’s desirable to figure out what the organization really needs.  If the company has a consumer-facing business, you probably want to have a director or two with experience in that and related fields, such as marketing.  If it’s a defense contractor, you likely need someone with expertise in government relations.  And so on. However, in searching for and, hopefully, finding those board members, it’s also desirable to find individuals whose abilities extend beyond a single area of experience or expertise.

The notion of avoiding such “one-trick ponies” came to me while reading an article in a recent article in the Financial Times.  Since a subscription may be needed to access the article, the headline reads “US companies urged to appoint Covid-19 experts to boards.”  In fairness, the headline was a bit misleading; the article itself said that “the dean of Harvard’s school of public health has called on companies to put public health professionals [i.e., not Covid-19 experts] on their boards… to manage a pandemic threat that could hang over businesses for years.”
Continue Reading One-trick ponies and hordes of directors

Image by Gerd Altmann from Pixabay

From where I sit, the SEC under the chairmanship of Jay Clayton has generally done a good job for public companies.  It has adopted a number of rules and amendments that make disclosure more effective without appreciably adding to – and in some cases reducing – the burdens on public companies.  Examples include streamlining financial disclosure requirements, rationalizing the definitions of “smaller reporting company”, “accelerated filer”, and “large accelerated filer”, and revising the rules governing financial statements of acquired and disposed businesses (although the latter do not take effect until 2021). And let’s not forget the very recent rule changes affecting proxy advisory firms, including a critical requirement that those firms provide companies with their voting recommendations.

While I wish that the SEC had also focused on proxy plumbing, it’s still a pretty good record, and it’s only a partial listing.

However (you knew there would be a “however”), I’m profoundly disappointed in the SEC’s proposal to “fix” Form 13F – the form on which large investment managers report their equity holdings of public companies.  While it’s nice that the SEC has turned its attention to a form that has long been in need of updating, the proposal seems to me to be unacceptable in at least two major respects.
Continue Reading 13F proposal — the SEC can (and should) do better