United States Notable Corporate Governance Developments 2015 Katherine K. Combs President, Corporate Secretaries International Association Former Chair and Interim Chief Executive Officer Society of Corporate Secretaries & Governance Professionals (USA)
Outline of Comments • Sarbanes Oxley - 10 year Costs vs. Benefits • Dodd-Frank Impact • CEO/ Chair Split – No Consensus in US • Say on Pay 2015 Results • Proxy Access 2015 • ISS 2015 Policy Survey Results • NACD 2015 Director Survey Results • SEC Disclosure Effectiveness Initiative 2
Sarbanes-Oxley after 10 Years • Harvard analysis of 120 multi-disciplinary research findings 1. Current measurement methods are inadequate – benefits are indirect and hard to measure 2. Act and rules have survived intact despite continued complaints – except lower stds and more flexibility for smaller cos. 3. Research doesn’t support fears of less risk taking, lower R&D, fewer IPOs (except some that went private who were small, less liquid and fraud-prone anyway) 3
Sarbanes Oxley After 10 Years • Required Internal Controls Audit (Section 404) – Despite high initial cost, evidence shows benefits in more reliable disclosure and better internal processes. Testing has become more cost- effective over time. • Did SOX make 2008 financial crisis more or less likely? Don’t know • Lessons learned – Build flexibility into future regulatory regimes – Hard to measure regulations’ cost/benefits systematically 4
Dodd Frank Impact After 4 years • Overwhelmed regulatory system – Broad terms left gaps for regulators to interpret and fill • Stifled finance industry – JPMorgan hired 10,000 compliance officers, laid off 5,000 others – compliance trumps profit seeking – New agency deciding who is “too big to fail” • Impaired economic growth – GDP recovery from recession slowest on record; 11% below averaage • No changes to government housing policies and agencies that caused most of problem – By 2008, 58% of US mortgages were subprime (32 milion loans). Of these, 76% were on books of govt agencies (Fannie and Freddie), working under federal policy to make housing more affordable for low income and minorities. – Private firms were responsible for less than 25% of the problem 5
CEO/Chair Split – Civil War Among Investors • Only 14 of S&P 500 require splitting; only 38 have separate CEO and Chair • Studies don’t show that splitting will increase value or improve oversight (despite conventional wisdom) • Bank of America board changed bylaw that required splitting and appointed CEO to also be Chair (w/o sh approval) – Calpers, Calsters, ISS and Glass Lewis vocally opposed/recommended against – 63% of shareholders voted to approve, due to high % of mutual fund investors (increasingly skeptical of corp. gov. “revolution”. 6
Say on Pay Results (2011-2015) Russell 300 Companies with 5-year SOP Results • 91% passed (greater than 50%) all 5 years • . 1% failed all 5 years • 77% got more than 90% favorable vote in 2015 • ISS recommended against approval in 12% of the votes • Shareholder support was 32% lower when ISS recommended against • Larger cos are improving SOP results, smaller cos are flat or worse – Can larger cos afford more shareholder engagement? – Or is SOP driving meaningful changes in pay? 7
Proxy Access – 2015 Results • 113 proposals for access to issuers proxy to nominate candidates in 2015: – 2/3 of companies adopted 3% SH requirement, before or after vote – 10 companies agreed to implement next year even though vote failed • Success depends on investor profile – Vanguard prefers 5% SH req; Fidelity against any • Debate has now shifted from whether to how – Trend towards 3% SH requirement, 3 year holding – SH Aggregate limit - Not more than 20 shareholders; but related funds counted as one – No more than 20% of nominees, or at least 2 – Avoiding “creeping control” – restrict sequential nominees 8
Proxy Access Current Thinking • Who is likely to use? – Not hedge fund activists • Can’t meet 3 year holding requirement, prefer own card and to keep threat in pocket – Public Pension Funds and Unhappy LT Investors most likely to use • Want greater shareholder representation on board • But not until a significant crisis precipitates • Threat of access is causing issuers to implement before being forced to do so 9
ISS 2015 Policy Survey Results (109 institutions, 257 issuers, 20 advisers, consultants) • Overboarding – CEOs: ISS limits CEOs to 2 other boards • 48% of investors prefer to limit CEOs to one other board; • 20% of Issuers support limit of one; 37% two limit – Non-Exec Directors : ISS limit is 6 boards • 34% of investors prefer to limit to 4 boards • 19% of issuers prefer 4 board limit; 41% no limit 10
2015-16 NACD Director Survey Results • Diversity – Females increasing – 79% have at least one – Racial, ethnic minorities – unchanged at 52% • Director turnover increasing – 72% added one, vs 64% last year • Shareholder engagement – 44% said a director met with institutional investors last year • Director Materials – Directors want more effective, risk focused materials, and more on cybersecurity, IT risk and tech strategy 11
SEC’s Disclosure Effectiveness Initiative US Society’s Comments – Eliminate disclosure of obsolete information – Eliminate duplicate disclosures – SEC and FASB should coordinate to avoid overlap – Use technology to assist • “Company profile” for basic info, with tabs for each topic – update annually • Recent performance and future plans for periodic reports – Eliminate “glossy” annual report, unless issuer desires for marketing purposes – Institute formal sunset reviews for significant disclosure requirements – Eliminate sustainability disclosures – put in separate, non-financial reports 12
Sources Slides 3-4 : Hanna, Julia, “The Costs and Benefits of Sarbanes -Oxley, HBS Working Knowledge, March 10, 20145 Slide 5 : Wallison, Peter J., “Four Years of Dodd - Frank Damage”, Wall Street Journal July 20, 2014; See also Markovitch , Steven J, “The Dodd - Frank Act” CFR Backgrounders, updated December 10, 2013. Slide 6 : Solomon, Steven David, “A Lack of Consensus on Corporate Governance”, New York Times, Sept. 30, 2015 Slide 7: Semler Brossy , “2015 Say on Pay Results”, September 28, 2015. http//semlerbrossey.com/sayonpay Slides 8-9: Skadden Arps, “Proxy Access: Latest Developments – Key Takeaways”, synopsis of September 17, 2015 webinar. Slide 10: ISS, “2015 -2016 ISS Global Policy Survey Summary of Results, September 28, 2015. The report also contains global and country-specific results, where applicable . Slide 11 : National Association of Corporate Directors, “ Highlights: 2015-2016 NACD Public Company Governance Survey”, September, 2015 Slide 12: Society of Corporate Secretaries and Governance Professionals, Comments on Disclosure Effectiveness for ‘34 Act Reports, available at governanceprofessionals.org . 13
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