Reaching new heights: looking back, moving forward
The Society for Corporate Governance (formerly the Society of Corporate Secretaries and Governance Professionals) celebrated its 70th anniversary at its summer conference on June 22-24 with a new name that reflects the broader reach and responsibilities of its membership. Taking in the sprawling, variegated landscape of the Broadmoor resort in Colorado Springs, attendees were reminded of the expansion and evolution the society has undergone through the decades as it has tried to respond to changes in the governance arena.
Helena Morrissey, CEO of UK-based Newton Investment Management, set the tone in an opening address that drove home the importance of corporate secretaries and other governance professionals being more responsive to investors, which are increasingly pushing for changes in board composition, business strategy and risk management.
Morrissey also founded the 30% Club in 2010, which has helped boost female membership on the boards of the 100 largest UK companies to more than 26 percent in 2015 from 12 percent in 2009. ‘How do we change the priority of different issues that are discussed on boards by having women involved?’ she asked, reflecting on whether a larger female presence on boards could have a positive impact on sustainability policy such as that regarding climate change. Looking at the challenge of adding women to boards by industry, for example, she noted that energy companies’ boards tend to have the lowest percentage of women directors.
A panel on SEC developments discussed interpretations of rules regarding the use of non-Gaap financial measures, which the SEC’s corporation finance division issued in May in response to the predominance of these measures in financial filings over the last 10 years. Currently, 88 percent of S&P 500 companies use non-Gaap financials and 80 percent of the adjustments [to reported Gaap numbers] are upward or favorable, said a partner at an international law firm that represents major companies worldwide. The interpretations clarify what the SEC regards as misleading in such disclosures.
The new interpretations require that companies present Gaap numbers with equal prominence as non-Gaap numbers in all earnings releases and proxy filings, and that Gaap numbers be cited first in financial filings and news releases. The law partner urged companies to get their CFO, IR committee and audit committee educated on these changes.
In response to a question during the Q&A session about proposed legislation that would require a cost/benefit analysis by the SEC of all rule-making under consideration, a former SEC commissioner said the legislation probably wouldn’t slow rule-making but would change retrospective reviews of past rule-making.
A separate but related panel focused on executive pay disclosure rules mandated by the Dodd-Frank Act covered not only implications of the SEC’s tougher non-Gaap rule interpretations but also how to best prepare for compliance with the Pay Ratio Rule, clawback considerations and other compensation topics.
A compensation consultant said the corporation finance division’s guidance will ‘cause many companies to rethink their presentation of the big financial highlights at the beginning of their discussions of the reasons for compensation plan decisions in their CD&As. [They] will also cause a rethink of using non-Gaap measures that really aren’t tied to a compensation target.’
During discussion of the controversial Pay Ratio Rule slated to take effect in early 2018, the principal at an investment firm advised companies to start thinking about this from a process perspective. Virtually all of the preparatory work is about identifying a company’s median employee, which requires each company to decide which employees to include in that calculation. ‘If you can eliminate foreign employees under the de minimis exception, that automatically puts you in the 60 percent area of completion,’ he said.
‘Until you identify where your employees are and where their data is kept, you can’t begin to look at exceptions and exemptions to see whether they apply to you,’ the compensation consultant said. ‘You want to do this before you’re under pressure to do so and be able to do dry runs to see how it works out.’ He believes the SEC will try to put out a release addressing the most prevalent technical and mechanical questions that have arisen.
In discussing clawbacks of executive bonuses, one panelist noted that some of the voluntary company policies are limiting the instances where clawbacks should be required to where executive misconduct has been found, while Dodd-Frank justifies clawbacks for a broader range of behavior. Similarly, unlike Dodd-Frank, most corporate policies give the compensation committee discretion to approve or decline a recommended clawback.
A panel called ‘Proxy access – now what?’ offered a comprehensive and frank discussion between investment managers and issuers about some of the practical questions that have been raised regarding meeting threshold requirements that determine investors’ eligibility to nominate alternate directors. These include whether a family of funds should be counted as a single investor or individually when aggregating a group of no more than 20 investors to meet the 3 percent of shares minimum.
The ability for securities on loan to count toward the 3 percent ownership threshold during the three-year ownership period is another concern cited by an investment manager. He expressed apprehension about overly broad indemnification language, saying the more focused indemnifications are, the better.
A representative from a state comptroller’s office said he and his colleagues would like to see their portfolio companies articulate what their value proposition is over the long term and how the composition of their boards reflects that. ‘The more that companies do that, the more it will lead to a discussion of where there are skill gaps,’ he said. ‘To the extent the board is unresponsive to that discussion with shareholders, we think it will provide an opportunity for an access candidate running for election to the board.’
Best practice communications
One of the last panels explored best practices for forging smooth relationships between the corporate secretary and general counsel working together on a company’s governance matters. One panelist gave some examples of what good communication between corporate secretaries and general counsel can look like, such as trying to be rigorous about copying each other on emails. ‘It’s not instinctive, so it took a little bit of work to get used to,’ she said. ‘My understanding of what I’d bother my boss with was pretty high-level stuff, so I had to recalibrate and dial it down, as did my colleague.’
She and the general counsel also instituted a pre-meeting in advance of each board meeting to go through all the legal issues that might come up and brief the general counsel on all the business content that would be shared at the board meeting.
In response to a question about how to handle directors who want to attend committee meetings they aren’t members of, the former deputy general counsel at a major financial firm said she ‘intentionally scheduled [committee] meetings to overlap, to avoid having directors with free time to attend a committee meeting they weren’t [supposed to be] in.’ Seeing that the M&A committee was the most popular meeting for non-members to crash made her realize that some directors likely felt they weren’t getting as much information as they needed about various transactions that were being discussed. That spurred her to change the way the corporate secretary’s office shared transaction information.