USA: adoption of IFRS - roadmap to be published

The SEC has announced that it will shortly publish for consultation a proposed roadmap for the adoption of International Financial Reporting Standards (IFRS) by US issuers beginning in 2014. The SEC notes in its press release:

Currently, U.S. issuers use U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission. The increasing integration of the world's capital markets, which has resulted in two-thirds of U.S. investors owning securities issued by foreign companies that report their financial information using IFRS, has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide".

To watch a statement by SEC Chairman Cox, outlining the above, click here (for QuickTime) or here (for Windows Media Player). The roadmap has not yet been published on the SEC website but further information is available in this report in the Wall Street Journal. 

Note:

[a] A useful map, indicating those countries where IFRSs have been adopted, is available on the IASB website here. 

USA: board oversight of environmental issues

The Wall Street Journal has reported, in an article titled "Environmentalism Sprouts Up On Corporate Boards", that "About 25% of Fortune 500 companies now have a board committee overseeing the environment, compared with fewer than 10% five years ago". 

USA: California: directors' duties and corporate social responsibility

Section 309 of the California Corporations Code provides that a director must act in good faith, in the manner in which he/she believes to be in the best interests of the corporation and its shareholders. A proposal to amend Section 309 is currently before the California State Legislature. Assembly Bill 2944 , introduced by Assemblyman Mark Leno, will provide that in acting in the best interests of the corporation, the director may consider:

(1) The long-term and the short-term interests of the corporation and its shareholders.

(2) The effects that the corporation’s actions may have in the short term or in the long term upon any of the following: 

• The prospects for potential growth, development, productivity, and profitability of the corporation.
  
• The economy of the state and the nation.
  
• The corporation’s employees, suppliers, customers, and creditors.
  
• Community and societal considerations.
  
• The environment. 
  

The draft Bill makes clear that the introduction of the above provision will not impose on the director any legal or equitable duties, obligations of liabilities, or create any right or cause of action against the director. According to Assemblyman Leno, the Bill "would promote socially responsible corporate conduct by authorizing boards of directors to consider the interest of the full community, the environment and employees, along with the interest of shareholders, when making official decisions on behalf of the corporation".  There has, quite predictably, been opposition. For example, the Corporations Committee of the Business Law Section of the State Bar of California has argued that the Bill would undermine director accountability to shareholders without effectively promoting interests of non-shareholder stakeholders.

Notes:

[1] Progress of the Bill can be monitored here and for an overview of the legislative process in California, click here. 

[2] Bill 2944 does not go as far as the UK Companies Act (2006) which, in Section 172, requires the director to act:

in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term, (b) the interests of the company's employees, (c) the need to foster the company's business relationships with suppliers, customers and others, (d) the impact of the company's operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company".

USA: improving financial reporting for investors

The SEC's Advisory Committee on Improvements to Financial Reporting has published its final report. The report makes recommendations within the following five areas:

• Increasing the usefulness of information in SEC filings
  
• Enhancing the accounting standards-setting process
  
• Improving the substantive design of new standards
  
• Delineating authoritative interpretive guidance
  
• Clarifying guidance on financial restatements and accounting judgments
  

For further information, including a video commentary provided by SEC Chairman Cox and Advisory Committee Chairman Pozen, click here.

USA: financial regulation reform

The Wall Street Reform and Consumer Protection Act (also known as the Dodd-Frank Act after Senator Dodd and Congressman Frank and not, as posted earlier, the Restoring American Financial Stability Act) was yesterday signed by the President: see here.

The Act will bring about the most significant financial regulatory reform since the 1930s and also includes corporate governance measures. For example, Section 951 provides for a shareholder vote on compensation disclosure and Section 952 sets out requirements for compensation committee independence. For a more comprehensive summary of the Act see here and here.

USA: the SEC and corporate governance

The chairman of the Securities and Exchange Commission, Mary L. Schapiro, delivered a speech earlier this month at the National Conference of the Society of Corporate Secretaries and Governance Professionals: see here. One part of her speech concentrated on effective corporate governance and in this regard the chairman observed:

... we believe investors' interests are served when they can participate productively in the governance of the companies they own. Let me be clear: the SEC's job is not to define for the market what constitutes 'good' or 'bad' governance, in a one-size-fits-all approach. Rather, the Commission's job is to ensure that our rules support effective communication and accountability among the triad of governance participants: shareholders, as the owners of the company; directors, whom the owners elect to oversee management; and executives, who manage the company day-to-day.

But meaningful communication means the spectrum of viewpoints is represented, and all of the company's owners have access to the information they need to persuade, or to be persuaded. Investors should have detailed information about directors' and nominees' qualifications; about compensation consultants' fees and conflicts; and about the relationship between a company's overall compensation policies and its risk profile. Rules requiring greater disclosure resulted—with some exceptions—in filings that were significantly more informative this year. They gave investors not only greater insight into the qualifications of board candidates, but a better understanding of how candidates' skills and experience suit the needs of their companies".

USA: Restoring American Financial Stability Act of 2010

The most significant financial regulatory changes for 80 years have moved closer. The Bill that will become the Restoring American Financial Stability Act of 2010 has passed its final hurdle in Senate, gaining a majority of votes cast. The Bill now awaits signing into law by the President.

Correction (21 July 2010): the Act will, in fact, be known as the Wall Street Reform and Consumer Protection Act.

USA: the proxy voting system - SEC invites public comment

The Securities and Exchange Commission has published a paper inviting comment on the US proxy system: see here (pdf). The paper raises three broad questions:

• Should steps be taken to enhance the accuracy, transparency, and efficiency of the voting process?
• Should the SEC's rules be revised to improve shareholder communications and encourage greater shareholder participation?
• Is voting power aligned with economic interest and do the current disclosure requirements provide investors with sufficient information about this issue?

Further background information, including a short factsheet about the proxy system, is available here.

USA: Sarbanes-Oxley - PCAOB member removal provisions unconstitutional according to Supreme Court

The Supreme Court ruled earlier this week in Free Enterprise Fund et al v Public Company Accounting Oversight Board et al: see here (pdf). A majority of the court held that provisions in the Sarbanes-Oxley Act regarding the removal from office of Public Company Accounting Oversight Board members were unconstitutional and should be severed from the Act.

The Act provided that the Board members were removable by the Securities and Exchange Commission only for good cause; the effect of the court's decision is that they are now removable at will. Chief Justice Roberts, delivering the (majority) opinion of the court, stated:

Neither the President, nor anyone directly responsible to him, nor even an officer whose conduct he may review only for good cause, has full control over the Board. The President is stripped of the power our precedents have preserved, and his ability to execute the laws — by holding his subordinates accountable for their conduct — is impaired. That arrangement is contrary to Article II’s [of the Constitution] vesting of the executive power in the President".

USA: Supreme Court opinions on 'honest services' - Skilling and Black

The Supreme Court gave its opinions yesterday in Skilling v United States and Black v United States: see, respectively, here (pdf) and here (pdf). These are important opinions concerning honest services fraud (as defined in the US Code by Section 1346 of Title 18, Part I, Chapter 63), under which Skilling, Enron's former chief executive, had been found guilty for conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health for his own profit.

The Supreme Court held that Section 1346 was limited to bribes and kickbacks. A wider interpretation, the Court found, would raise constitutional vagueness concerns. As such, the Court found that Skilling did not violate Section 1346 (but it did not overturn his convictions). To quote from the opinion's headnote:

Skilling did not violate §1346, as the Court interprets the statute. The Government charged Skilling with conspiring to defraud Enron’s shareholders by misrepresenting the company’s fiscal health to his own profit, but the Government never alleged that he solicited or accepted side payments from a third party in exchange for making these misrepresentations. Because the indictment alleged three objects of the conspiracy — honest-services wire fraud, money-or-property wire fraud, and securities fraud — Skilling’s conviction is flawed. See Yates v. United States, 354 U. S. 298. This determination, however, does not necessarily require reversal of the conspiracy conviction, for errors of the Yates variety are subject to harmless error analysis. The Court leaves the parties’ dispute about whether the error here was harmless for resolution on remand, along with the question whether reversal of Skilling’s other convictions".

For further background information see Prof. Bainbridge's excellent summary here and the comments of Prof Ribstein here.

USA: NASDAQ's corporate governance standards

Last year the NASDAQ Listing and Hearing Review Council undertook a review of its corporate governance listing standards. The Council identified a number of emerging governance practices that it believed could assist boards and sought views on whether these or other governance practices should be designated as best practices and subject to 'comply or explain'.

In a report published earlier this month - available here (pdf) - the Council announced its decision not to recommend that NASDAQ change its corporate governance standards. The Council reached its decision following comments received and in the light of forthcoming legislative changes. A report was published because the Council wished to make public the issues it discussed and to provide guidance for boards. The Council concluded in its report:

Regulatory changes implemented throughout the course of the past decade by the SEC, Congress, NASDAQ and the other national securities exchanges are continuing to lead to significant changes in corporate governance in the United States. Following every reform, new events occur that reopen the debate on corporate governance practices. While we are not recommending that NASDAQ change its governance listing standards or designate best practices at this time, we urge all boards to engage in periodic review of board functions, procedures, and responsibilities. We also urge NASDAQ-listed and other companies to follow closely the current debates about governance issues".

USA: Guidance on Sound Incentive Compensation Policies

The Federal Reserve and several other agencies have adopted final guidance on incentive compensation policies in banking organisations: see here (pdf).

USA: Delaware - Supreme Court opinion in CA Inc v AFSCME

The Delaware Supreme Court has given its opinion in CA Inc. v AFSCME Employees Pension Plan (No. 329, 2008). The opinion has been keenly anticipated because of the issues it raises about the management of companies and the role of the directors and shareholders.  AFSCME, a stockholder in CA Inc. ("the company"), submitted a bylaw for inclusion in the company's proxy materials for its 2008 annual stockholder meeting. The bylaw, if accepted, would require the board of directors to reimburse a stockholder (or group of stockholders) the reasonable expenses incurred in nominating one or more candidates in a contested election of the board of directors. 

The company's board decided to exclude the proposed bylaw from the proxy materials. The SEC was informed and a request was made for a "no action" letter (one indicating that enforcement action would not be taken against the company for its exclusion of the proposed bylaw). The company argued that the proposed bylaw was not a proper subject for a stockholder action and if implemented would breach Delaware General Corporation Law (DGCL). The AFSCME obtained legal advice taking the opposition position. The SEC decided to ask the Delaware Supreme Court for its opinion - the first time it has done so under new clarification rules in the Delaware Constitution (Article IV, §11(8), about which see here) - and posed two questions.

The first question was whether the AFSCME proposal was a proper subject for action by shareholders under Delaware law. The court held that it was and observed:

The shareholders of a Delaware corporation have the right “to participate in selecting the contestants” for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election. The Bylaw would accomplish that by committing the corporation to reimburse the election expenses of shareholders whose candidates are successfully elected. That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action".

The second question for the court was whether the AFSCME Proposal, if adopted, would cause the company to violate any Delaware law to which it was subject. The court held that it would. In reaching this decision, the court considered the proposed bylaw in the abstract and stated that it had to consider:

... any possible circumstance under which a board of directors might be required to act. Under at least one such hypothetical, the board of directors would breach their fiduciary duties if they complied with the Bylaw. Accordingly, we conclude that the Bylaw, as drafted, would violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders".

Unsurprisingly commentators have been quick to describe the decision as a further example of the director-centric nature of Delaware law but the court's opinion is rather more nuanced than this description suggests.  For further discussion see:

Harvard Corporate Governance blog | Wall Street Journal article | Professor Bainbridge's blog | Risk & Governance Blog | Delaware Corporate and Commercial Litigation Blog (with links to other blog posts) | 

USA: 'say on pay' votes lost at KeyCorp and Occidental Petroleum

Two more American companies, in addition to Motorola, have lost 'say on pay' votes this year: KeyCorp and Occidental Petroleum. See the results here and here.

USA: credit rating agencies - SEC report

Some more on credit rating agencies, following the developments noted in the previous post. The USA's Securities and Exchange Commission has published a "Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating Agencies". In the associated press release the SEC noted:

The SEC staff's examinations found that rating agencies struggled significantly with the increase in the number and complexity of subprime residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) deals since 2002. The examinations uncovered that none of the rating agencies examined had specific written comprehensive procedures for rating RMBS and CDOs. Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately"

For further information see:
SEC Report | SEC press release | SEC proposals: June 11 and July 1 |

USA: IFRS and US GAAP convergence

Following the publication of a joint statement (here, pdf) by the IASB and FASB in connection with their standards convergence work, the chairmain of the Securities and Exchange Commission, Mary Shiparo, has announced (see here):

I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff's analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff's analyses. Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers".

USA: the predictive qualities of corporate governance ratings

Recent research published by academics at Stanford University's Rock Center for Corporate Governance has considered the predictive ability of corporate governance ratings. The authors report:

"The providers of the ratings make strong claims regarding the ratings’ value in predicting future bad outcomes (such as accounting restatements or shareholder suits) and firm performance. These ratings, often provided by proxy advisors, are also used in formulating recommendations that can be influential in shareholder voting. We provide the first independent assessment of four prominent commercial corporate governance ratings. Prior evidence on individual ratings has generally been backward-looking, raising the distinct possibility that the ratings reflect past firm performance but are unable to predict  accounting restatements, litigation, and future performance. We examine the ability of ratings produced by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library to predict future performance. With the possible exception of ratings by Audit Integrity, we find that most ratings have either limited or no success in predicting firm performance or other outcomes of interest to shareholders".

For further information see:
Research article | Abstract | Rock Center home page |

USA: SEC launches 21st century disclosure initiative

The US Securities and Exchange Commission has launched a review of the way in which it collects and discloses information about regulated entities.  The SEC's Chairman, Christopher Cox, stated:

On the 75th anniversary of the SEC, with so much new technology available to improve the quality of information for investors as well as the way investors acquire it, we're initiating a broad, introspective look at our business model. What hasn't changed in 75 years is the importance of full disclosure — sunlight remains the best disinfectant for problems in our capital markets. We'll be examining how to improve the way disclosure works, including tapping the full potential of today's technology and integrating it seamlessly into our regulatory approach. That could mean fewer confusing forms, and more useful information at investors' fingertips in a form they can really use"

For further information, click here. 

NB: The UK's Financial Services Authority embarked on a similar enquiry last month with the publication of a discussion paper titled Transparency as a Regulatory Tool. The purpose of the discussion paper was to start a debate about the way in which transparency can best be used to meet the FSA's regulatory objectives. For further information, click here.

USA: 'say on pay' vote at the Motorola general meeting

Motorola Inc., incorporated in Delaware, held its annual stockholder meeting earlier this month. The voting results are available here. Stockholders were given a non-binding vote on the company's remuneration policy. Although more votes were cast in support of the policy (887,793,923) than against (855,021,547) it was defeated when the number of abstentions (201,440,789) were taken into account. This would appear to be the first time that an American company has lost a 'say on pay' vote (although there is currently no legal or regulatory obligation to provide such a vote).

The abstentions were included in determining whether the resolution was passed because the company's bylaws (Section 4, page 5; available here, pdf) provided that "the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, except as otherwise required by Delaware law, the Certificate of Incorporation, or these Bylaws".

In the absence of such a provision a default rule is provided by Section 216(2) of the Delaware General Corporations Law as follows: "[in] all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders". For judicial discussion of Section 216, see Licht v. Storage Technology Corp., et al. (C.A. No. 524-N, 2005): here (pdf).

USA: the Restoring American Financial Stability Act of 2010

Major reform of financial regulation, including some corporate governance reforms, is now imminent following a vote in Senate to end debate of the Restoring American Financial Stability Act of (2010). For newspaper reports see here (Wall Street Journal) and here (New York Times). President Obama welcomed the vote in Senate: read his speech here or watch it below.