United States Notable Corporate Governance Developments 2015 - - PowerPoint PPT Presentation

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

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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

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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

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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
• r 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

• pposed/recommended against

– 63% of shareholders voted to approve, due to high %

• f 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?

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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

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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

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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

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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

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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.

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