A to-do list for the fourth quarter – three key topics for public companies, plus action items

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Corporate Governance Alert


As summer winds down, we want to highlight three topics public companies need to keep in mind as they head into fall. The first relates to certain amendments adopted by the SEC that require hyperlinks to exhibits in exhibit indexes beginning September 1, 2017. The second relates to the annual global benchmark policy formulation process of Institutional Shareholder Services (ISS). Unlike in prior years, ISS is undertaking this process in two steps which require immediate attention. The third relates to certain rules adopted by the SEC in 2015, concerning CEO-to-median-employee pay ratio disclosure (the Pay Ratio Rule). Mandated by the Dodd-Frank Act, the Pay Ratio Rule requires a company with a fiscal year beginning on or after January 1, 2017 to report the ratio in its 2018 proxy statement. There are many nuances to the pay ratio disclosure rules. We recommend immediate planning and careful consideration of these rules in preparing and presenting CEO pay ratio disclosure for the 2018 proxy season.


Earlier this year, the SEC adopted certain amendments that require hyperlinks to exhibits in exhibit indexes beginning September 1, 2017. These amendments are expected to help investors and other users access exhibit information more efficiently while reducing search costs for investors.

Effective September 1, 2017, registrants must include a hyperlink to each exhibit in the exhibit index of a registration statement or report that is required to include exhibits pursuant to Item 601 of Regulation S-K. This rule applies to Forms S-1, S-3, S-4, S-8, and S-11 under the Securities Act of 1933, as amended, and Forms 8-K, 10-K, 10-Q, 10 and 10-D under the Securities Exchange Act of 1934, as amended. The final rules also apply to most filings by foreign private issuers, including Forms F-1, F-3, F-4, F-10, SF-1, SF-3 and 20-F. The exhibit hyperlinks requirement do not apply to filings made on Form 6-K or Form ABS-EE, any XBRL exhibits and certain other instances.

For registration statements, this applies to the initial registration statement and each subsequent pre-effective amendment. The new requirement does not apply to exhibits that are designated "to be filed by amendment." For periodic and current reports, registrants will be required to include an active hyperlink for each exhibit listed in the report (whether filed with the report or incorporated by reference) at the time the report is first filed. Some examples follow.

For previously filed exhibits, the parenthetical underscored text should be a clickable hyperlink:

3.2 Articles of Amendment dated April 27, 1995 (Filed as Exhibit 4 to Registration Statement No. 33-XXXX and incorporated by reference herein).  

For exhibits that are filed with the SEC filing, the SEC has explained that "in addition to links to a previously filed exhibit that it being incorporated by reference into the registration statement or report, links from a registration statement or report to an exhibit that is being filed at the same time" is permitted. For example, the underscored text should be a clickable hyperlink to the exhibit in the filing:

31.01 Certification of Principal Executive Officer Required by Rule 13a-14 (Filed herewith).  

Registrants may, but are not required to, refile electronically and provide hyperlinks to any documents that were previously filed only in paper, such as organizational documents. For example, see the following:

3.1 Restated Articles of Incorporation of ABC, Corp., as adopted on April 26, 1989 (Filed as Exhibit 3-A to Registration Statement No. 33-XXXX and incorporated by reference herein). Hyperlink is not required pursuant to Rule 105 of Regulation S-T.

The final rules include a new instruction which addresses correcting a nonfunctioning or mistaken hyperlink. The SEC has updated its EDGAR Filer Manual to describe the hyperlinking procedures. Here is the link to the manual; the relevant section is Section 5.4.2.

Action items

  • Review upcoming filings with the SEC, including the Form 10-Q and 10-K, with securities counsel to determine which exhibits will require a hyperlink.
  • Consider revising disclosure controls and procedures to take into account the new rules.
  • Companies that undertake their filings directly, rather than through a printer, should ensure that their software permits including the hyperlinks in the filings and to test their systems before making the next SEC filing.


In early August, ISS launched its 2018 Annual Policy Survey, as part of its annual global benchmark policy formulation process. The survey is targeted towards institutional investors, companies, corporate directors and other market constituents and invites input for ISS's consideration. Unlike prior years, there are two parts to the survey. One is a high-level survey covering certain topics (the Governance Principles Survey), which closes on August 31 at 5 pm ET. The other is a follow-on and more expansive portion of the survey (the Policy Application Survey) that allows parties to provide further input into certain topics. The second part of the survey will remain open until October 6, 2017, at 5 pm ET.

The Governance Principles Survey seeks feedback on a variety of topics:

  • One-share, one-vote principle. The survey notes a recent high-profile IPO in which a company sold shares without any voting rights. In light of that, as well as other proposed high-profile listings, stock markets are increasingly finding themselves in global competition for these listings and may opt to relax or eliminate certain rules designed to protect investors. The survey then solicits input regarding multi-class capital structures with unequal voting rights.
  • Gender diversity on boards. The survey indicates that while there has been increased focus on gender diversity in corporate boardrooms, the level of progress toward increasing the number of female board directors has varied. The survey then asks whether it is problematic if a board has no female directors and includes questions directed at actions that shareholders could take when a board lacks gender diversity and/or the company has not disclosed its policy on the issue.
  • Share issuances and buyback proposals. The survey states that the rules regarding shareholder approval of share issuances and buyback vary considerably in the US and many European markets and that the different approaches create challenges at companies listed in multiple markets. The survey indicates that ISS is currently reviewing its policies applicable to share issuances and buybacks at cross-market companies. The survey then asks which party would most properly make such decisions – the board, the shareholders or a combination of both.
  • Virtual/hybrid meetings. The survey observes that in the US and certain markets worldwide, companies are permitted to use electronic means of communication to hold shareholder meetings and that such meetings can take the form of either a hybrid or a virtual (all-electronic) meeting. The survey indicates that while there may be some benefits to meetings held by electronic means, abandoning physical meetings may negatively impact meaningful exchanges between management and shareholders. The survey then solicits input regarding means of communication for facilitating shareholder participation at general meetings (hybrid or virtual-only meetings).
  • Pay ratio between senior executives and employees. The survey states that, unless the Pay Ratio Rule is repealed, starting in 2018 US issuers will have to include the ratio of CEO pay to the pay of the median company employee (see section below in this alert). The survey then solicits input regarding the manner in which the data on pay ratios will be analyzed, including questions on how shareholders should use the disclosed data on pay ratio.

The Policy Application Survey is designed to elicit further information on issues such as responsible investment, takeover defenses and remuneration/compensation. For the US market, the survey relates primarily to compensation matters and seeks feedback on a variety of topics:

  • Outcomes-based compensation measure. The survey notes that many companies with performance-based compensation have included "realized pay" or "realizable pay" disclosures in their proxy statements and that ISS has presented a standardized measure of realizable pay for CEOs of S&P 1500 companies and used this measurement in its qualitative analysis of executive compensation programs. The survey states that ISS is considering changing its "quantitative pay-for-performance" methodology to take into account outcomes of performance-based programs using the realizable pay measure. The survey then solicits input regarding support for the use of such measures as part of the ISS quantitative pay-for-performance evaluation.
  • Non-employee director pay. The survey states that non-employee director compensation has come under increased scrutiny in the past few months and reminds the reader that under the existing ISS US Benchmark Voting Policy (ISS Voting Policy), a pattern of excessive director compensation may raise issues about the directors' independence. The survey solicits input into the factors ISS should consider in determining whether a non-employee director pay program presents governance concerns with respect to high pay magnitude and problematic pay structure.
  • Gender pay gap. The survey indicates that over the past two years, several shareholder proposals regarding gender pay equity have been filed and that these proposals request companies to report on policies and goals to reduce their gender pay gap. The survey solicits input into whether companies should be disclosing their gender pay gap information and in what circumstances this disclosure should be required.
  • Poison pills. The survey notes that under current ISS Voting Policy, ISS evaluates, on a case-by-case basis, instances where a company adopts a short-term poison pill without shareholder approval. The survey solicits input on whether ISS should continue to apply a case-by-case approach to such adoptions of short-term poison pills when voting on director elections.

Action items

  • Participating in these surveys is a key means of communicating concerns to ISS. This is not to say that ISS will limit changes to its 2018 voting policies solely to the topics addressed in these two surveys. As in the past, we expect ISS to publish the results of the two surveys shortly after the two deadlines pass and to solicit input for its 2018 voting policies later this year.
  • A copy of the ISS press release containing a link to the survey can be found here.


On August 5, 2015, the SEC adopted final rules concerning CEO-to-median-employee pay ratio disclosure (the Pay Ratio Rule). Mandated by the Dodd-Frank Act, the Pay Ratio Rule requires a company with a fiscal year beginning on or after January 1, 2017 to report the ratio in its 2018 proxy statement. The Pay Ratio Rule applies to all companies that are required to disclose executive compensation data under Regulation S-K's Item 402(c)(2)(x), an existing rule that governs executive compensation. The Pay Ratio Rule does not apply to emerging growth companies, smaller reporting companies or foreign private issuers.

Action items

As of date of this alert, it appears that CEO pay ratio disclosure will need to be included in proxy statements for the 2018 annual meeting of shareholders. Here are some key considerations:

  • Data collection of the supporting information for the computations may be onerous for some companies. It is therefore critical for issuers to already be in the process of collecting such supporting data. To the extent such data collection has not already begun, we strongly recommend that this process be started now.
  • Clear and concise CEO pay ratio disclosure will be critical to ensuring compliance and favorable review from institutional shareholders and proxy advisory firms. Disclosure should also consider how information may be perceived by public stakeholders, such as employees and employee organizations.
  • Foreign employees may be excluded from the computations under certain circumstances, but careful review of local law will be necessary to take advantage of these rules.
  • The computation of median employee compensation does not permit the use of full-time equivalent adjustments for part-time workers or annualized adjustments for temporary or seasonal workers. Also, while cost-of-living adjustments may be applied to the calculations, median employee compensation without the cost-of-living adjustments must also be disclosed.

There are many nuances to the pay ratio disclosure rules. We recommend immediate planning and careful consideration of these rules in preparing and presenting CEO pay ratio disclosure for the 2018 proxy season.

Find out more about these developments by contacting any of the authors.