Update on the current board issues: October 2015

Issues in brief

Obama to nominate two women to SEC

President Obama announced October 20 he intends to nominate two women to serve as SEC commissioners.

The President plans to nominate Lisa M. Fairfax, a George Washington University Law School professor, and Hester Maria Peirce, a senior research fellow at George Mason University and former senior counsel for the Minority Staff of the US Senate Committee on Banking, Housing, and Urban Affairs. 

Fairfax was chosen to replace Democrat Luis Aguilar for a five-year term and Peirce was named to finish Republican Daniel Gallagher’s term, which was to expire in June 2016. Aguilar has agreed to stay on the commission until his replacement takes over. Gallagher stepped down on October 2.

After President Obama officially nominates Fairfax and Peirce, they are still subject to Senate confirmation. If the two are confirmed, the SEC would have four women and one man. In the commission’s history, there have only been 11 female commissioners.

Fairfax, who had been an associate at Ropes & Gray LLP, is co-Chair of the DirectWomen Board Institute and served on the Corporate Laws Committee of the Business Law Section of the American Bar Association. 

Peirce, who was an associate at Wilmer, Cutler & Pickering (now WilmerHale), served the SEC as a staff attorney in the Division of Investment Management and counsel to Commissioner Paul Atkins.

ISS investor survey: Proxy access, overboarding will be big issues in the 2016 proxy season

Nearly all investors responding to the proxy advisor Institutional Shareholder Services’ (ISS) annual Global Voting Policy Survey said they endorse the three-year, 3% proxy access rule. And nearly half favor a limit of two board seats for active CEOs.

In addition to supporting the proxy access thresholds for shareholders owning at least 3% of a company’s stock for at least three years to nominate a limited number of directors to the board on the company’s proxy, 90% of survey respondents favored a negative vote recommendation for proposals with thresholds of higher than three years and more than 5% ownership.

Investors are very concerned about directors who sit on too many boards. For directors who are active CEOs, 48% of investors indicated that two board seats (a CEO’s “home board” plus one outside board) is an appropriate limit. While 32% favored a limit of three board seats, 12% preferred no limit on board seats. Among company respondents, 37% supported a limit of three board seats for an active CEO, 20% favored two board seats, and 35% didn’t think a board seat limit was necessary. 

This year’s survey, which was conducted in the late summer, included questions about director independence and a “cooling off” period (a waiting period for a director to become independent after having a relationship with the company), and equity compensation for non-executive directors.

ISS will release its 2016 voting policies on November 18, to be effective beginning February 1, 2016. 

Court ruling affirms need for reasonable cybersecurity protection

On August 23, the US Court of Appeals for the Third Circuit ruled that the Federal Trade Commission has the right to take enforcement actions against companies it believes have inadequate cybersecurity practices. 

The court ruled in the Federal Trade Commission vs. Wyndham Worldwide Corp. case after Wyndham filed a motion to dismiss the lawsuit on the basis that the FTC didn’t have the authority to regulate cybersecurity matters. Both a federal District Court in Arizona, where the lawsuit was filed, and the Third Circuit Court denied the motion to dismiss.

In the case, the FTC alleged that the company and its subsidiaries engaged in unfair practices by failing to provide security measures to protect consumer data it had collected. The case stems from an incident when hackers broke into the company’s computer systems in 2008 and 2009.

“[The] Third Circuit Court of Appeals decision reaffirms the FTC’s authority to hold companies accountable for failing to safeguard consumer data,” FTC Chair Edith Ramirez said. “It is not only appropriate, but critical, that the FTC has the ability to take action on behalf of consumers when companies fail to take reasonable steps to secure sensitive consumer information.”

Comment letters: SEC’s proposed clawback policy rules

The SEC received more than 60 responses to its proposed rule regarding an executive compensation clawback policy. A majority of the comment letters submitted were either against the proposal altogether or suggested significant changes. The arguments ranged from the rules being too punitive (compared to the current Sarbanes-Oxley clawback rules) to the fact that many companies already have clawback policies in place.

Meanwhile, a handful of investor-based organizations wrote in support of the rules, citing concerns about the bonuses awarded to bankers during the 2008-2009 financial crisis.

The proposed rules would require national securities exchanges and associations to establish listing standards requiring companies to adopt and disclose policies that would allow issuers to recover incentive-based compensation that was awarded based on financial results that were restated due to the issuer’s material noncompliance with financial reporting requirements. 

The Sarbanes-Oxley Act provides for the clawback of incentive compensation from only the CEO and CFO and only in instances of misconduct. If finalized, the rules will likely impact the content of clawback policies and could affect how the compensation committee oversees such policies.

PwC submitted a comment letter on select provisions of the the clawback policy proposal, agreeing with the definition of “accounting restatement” and asking for clarification regarding the accounting period in which compensation to be recovered should be recorded.  

The National Association of Corporate Directors (NACD) and the Council of Institutional Investors (CII) were also among those submitting comments on the SEC’s proposal.

The NACD expressed concern about the proposal, stating: “NACD believes that this proposed rule, as drafted, could negatively impact company productivity and value, especially among smaller companies. Furthermore, NACD believes that the proposed rule, like any rule that increases disclosure and compliance burdens unnecessarily, puts an inordinate burden on smaller companies, which cannot always afford the kind of compliance costs entailed by new rules.”

The CII, on the other hand, supported the application of the rule to all issuers, including smaller reporting companies. Their views echoed their sentiments from a 2008 letter to Congress, which called for stronger clawback provisions, which said “[a]t a minimum, senior executives should be required to return unearned bonus and incentive payments that were awarded due to fraudulent activity or incorrectly stated financial results.’”