BoardroomDirect: Issues in brief

Update on the current board issues: June 2015

Issues in brief


SEC to consider clawback policy rule July 1

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The SEC will vote July 1 on proposed rules under the Dodd-Frank Act that would require national securities exchanges to prohibit the listing of companies that have not developed and implemented a compensation clawback policy.

The SEC’s proposed rules would require the disclosure of policies that would claw back incentive-based compensation that is based on financial information filed by the company in the event there is a material accounting restatement. This proposed rule would go further than the Sarbanes-Oxley Act, which calls for clawbacks regarding executives who have committed fraud.

The SEC’s latest regulatory agenda update also shows that it may be April 2016 before it takes the next step in finalizing the Dodd-Frank CEO/median pay ratio disclosure rule.

Regarding the pay ratio disclosure rules, which were proposed in November 2013, the SEC’s Division of Economic and Risk Analysis recently posted an analysis that considers the potential effects of excluding different employees from the pay ratio calculation. Such categories include employees who work in foreign countries, or are part-time, seasonal or temporary, according to an SEC press release.

The analysis shows that the reported pay ratio of companies may be impacted differently depending on (a) whether the excluded employees are paid above or below the median distribution of overall employee compensation, and (b) the percentage of employees a company is able to exclude. The analysis is open to public comment until July 6.


Delaware legislation prohibits fee-shifting bylaws

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Under a new law, Delaware-based companies would not be allowed to have bylaws that require a shareholder plaintiff to pay a company’s legal fees if the plaintiff is unsuccessful in a legal action against the company. The law is effective August 1.

The Delaware legislature approved the bill, which bans the so-called fee-shifting bylaws. The bill, which was proposed by the Delaware State Bar Association’s Corporation Law Council, was originally written last June. It followed a Delaware Supreme Court decision that upheld the ATP Tour’s use of such a bylaw in a case against Deutscher Tennis Bund and Qatar Tennis Federation. The original bill was withdrawn following opposition from the US Chamber of Commerce, but was reintroduced earlier this year, when it was passed by the Delaware General Assembly in May and the Delaware Senate earlier this month. Governor Jack Markell signed the bill on June 24.

A second important aspect of the bill is its “codification of Delaware case law allowing a Delaware stock corporation to adopt forum-selection bylaws requiring that internal corporate claims be brought either exclusively in the Delaware courts or in courts of one or more states, so long as the Delaware courts are included as an available forum,” according to a client memo from Sullivan & Cromwell.


Proxy access proposals: Nearly two-thirds have passed so far

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With proxy access, shareholders who meet certain criteria can include a slate of directors to challenge sitting directors on the company’s proxy rather than filing their own. This year, proxy access has been front and center.

Proxy access proposals have garnered the most support of any shareholder proposals in the 2015 regular proxy season to date. Seventy-five of the 107 proxy access proposals came from the New York City Pension Funds, led by City Comptroller Scott M.

Stringer. Illinois State Board of Investment and The Philadelphia Public Employees Retirement System joined Stringer in that campaign.

The latest edition of ProxyPulse, a joint publication of PwC’s Center for Board Governance and Broadridge Financial Solutions, reports that 64% of the more than 40 proposals voted on between January 1 and May 15, 2015 received more than 50% support.

As of June 1, Institutional Shareholder Services (ISS) data on the Russell 3000 Index shows that 49 of 83 shareholder proposals voted had won majority support, with an average tally of 55%. In 2014, only six of 17 shareholder proposals voted won majority support, with an average 34% for votes.

As of June 10, 22 of 31 proxy access shareholder proposals that came to a vote received more than 50%, with one getting as much as 92% of the vote, according to Manhattan Institute’s, which follows the Fortune 250. Of the 22 proposals that passed, 18 were filed by the New York City Pension Funds. Only three of the 21 pension fund proposals filed with Fortune 250 companies did not receive majority support.

According to FactSet, the proxy access shareholder proposals that include thresholds for making a proposal of 3% ownership stake for at least three years (the original Dodd-Frank Act proxy access rule thresholds that were adopted by the New York City Pension Funds and others) accounts for 63% of all shareholder proxy access proposals this year.


Two former SEC chairs lead group calling for political spending disclosure

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As the 2016 US presidential election cycle is gearing up, a bipartisan group of two former SEC chairs and a former commissioner recently urged the Commission to move forward with corporate political spending rulemaking.

In a May 27 letter to SEC Chair Mary Jo White, former Chairs William Donaldson and Arthur Levitt and former Commissioner Bevis Longstreth referenced a 2011 petition filed by the Committee on Disclosure of Corporate Political Spending. That petition urged the Commission to propose and adopt a rule that requires public companies to disclose corporate political spending.

“Despite the Supreme Court’s decision in Citizens United in 2010, allowing corporations greater freedom to spend shareholder money to influence politics, there have still been no new rules or procedures established to ensure that shareholders – those who actually own the wealth of corporations – are informed of decisions on spending their money on politics,” according to the letter.

“This lack of regulation is in direct conflict with one of the essential building blocks supporting the opinion in the [Citizens United] case. Its author, Mr. Justice Anthony Kennedy, justified permitting corporate political activities in large part on the expectation that shareholders and citizens would be informed of what those activities entailed,” the letter states.

According to Proxy Monitor, 47 companies faced shareholder proposals on political spending this year. As of late May, the average such proposal won 22 percent support.


CII executive director resigns; interim named

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The Council of Institutional Investors (CII) long-time Executive Director Ann Yerger is leaving the organization July 3 for a similar position with a Big 4 accounting firm.

Amy Borrus, CII’s deputy director, will fill in as interim executive director until a replacement is found, according to CII Chair Michael McCauley, the senior corporate governance officer for the State Board Administration of Florida.

“Under Ann’s guidance, CII built a stellar reputation for leadership, integrity, innovation and consensus-building in support of effective corporate governance and strong shareholder rights,” McCauley said. “The members and board will miss her greatly.”

In coming weeks, the CII Board of Directors will develop a formal search process for a new executive director, according to a CII press release. Yerger joined CII in 1996 as director of its research service. She was appointed executive director in 2005.