Q1 2016: FOCUS ON THE REGULATORS – IS MORE ENFORCEMENT ON
The big governance news this quarter primarily comes from the SEC, which appears to be forecasting future enforcement actions in several areas critical to corporate governance. In this issue of Quarterly Governance Review, we take a concise look at some of these areas, and we offer you action items to consider as you review your business strategies.
Welcome to Spring.
NON-GAAP MEASURES – EXPECTING AN SEC CRACKDOWN
During the past few months, members of the SEC staff have been foreshadowing a renewed focus on enforcement of reporting of financial metrics, and the use of “non-GAAP” financial measures by companies in the capital raising process, in quarterly earnings releases and on analyst calls. This renewed focus is leading to new policy statements on the regulatory front, and we expect it to lead to new enforcement actions, which could also impact risk in civil litigation.
The regulatory regime governing the use of non-GAAP financial measures has not changed much since the SEC adopted Regulation G and Item 10(e) of Regulation S-K in 2003. But over the course of the past six months, the SEC staff has repeatedly voiced its concern that the increased use of non-GAAP measures may be confusing to investors and analysts.
Find out more and see our action items.
GENDER PAY GAP – A NEW FRONTIER?
Stockholder proposals regarding gender pay equality have been proposed at several large companies during this year’s proxy season, particularly among technology companies.
Companies should be aware that these types of proposals are gaining more traction, and interest from the media, and plan accordingly.
NEED SOME “SPECIFICITY” IN YOUR PROXY CARD?
The SEC’s Division of Corporation Finance has issued a new interpretation related to the form of proxy requirements. The interpretation relates to the specificity with which an issuer must describe a Rule 14a-8 shareholder proposal on its proxy card.
The SEC staff noted that the proxy card should clearly identify and describe the specific action on which shareholders are being asked to vote.
Find out more and see the SEC’s thoughts on “bad” vs. “good” descriptions.
FASB MODIFIES ACCOUNTING RULES FOR STOCK-BASED
The Financial Accounting Standards Board has made updates to share-based accounting policies in its Accounting Standards Update (ASU) 2016-09. The amendments impact the accounting of excess tax benefits, certain minimum statutory withholding requirements, elections with regard to the accounting of forfeitures, and certain other share-based accounting rules.
The ASU simplifies employee share-based accounting for both public and private organizations.
See our alert.
SEC CONTINUES TO FOCUS ON INTERNAL CONTROL FAILURES
The SEC has settled charges against Texas-based oil company Magnum Hunter Resources Corporation (MHR) and several individuals. The SEC allegations related to deficient evaluation of MHR’s internal controls over financial reporting as well as failures to maintain internal control over financial reporting.
As noted by the Director for the SEC’s Fort Worth regional office, this proceeding “emphasizes that all those involved in ICFR assessments – companies, management, external auditors and consultants – must take their responsibilities seriously and rigorously assess controls, including those over financial reporting.”
The message from the SEC staff based on this proceeding and other recent speeches is clear: it is important to evaluate the severity of a control deficiency to determine whether it is a material weakness.
Find out more.
THE SILICON VALLEY INITIATIVE – UNICORNS IN
SEC’S LINE OF SIGHT: ACTION ITEMS
SEC Chair Mary Jo White and a delegation of officials from the SEC traveled to Silicon Valley in early spring to deliver a shot across the bow to technology and healthcare businesses, entrepreneurs, investors and their advisers.
In a speech delivered at the Stanford Law School’s Rock Center on Corporate Governance on March 31, SEC Chair White announced the SEC’s Silicon Valley Initiative, warning that “unicorns” with sky-high valuations merit special scrutiny and noting her concern that such companies maintain internal controls and investor protections appropriate for their promised projected growth.
Find out more.
David P. Lewis
Sarah E. Ritter
Rachel B. Cowen
James V. Telfer