Securities Mosaic® Blogwatch
December 13, 2017
Are CEOs a Dime a Dozen or Worth Their Weight in Gold?
by Nicholas Donatiello, David Larcker and Brian Tayan

In recent years, there has been considerable criticism of the amount of money that CEOs earn to run the largest U.S. companies. Governance researchers have expended considerable resources examining executive compensation in an effort to determine whether pay levels are set fairly. The results of these studies are generally mixed.

An important and related question, however, is rarely asked: Just how scarce is CEO talent? How many people are very well qualified to run a large, publicly traded company? These questions have important implications for CEO pay levels, performance measurement, succession planning, and internal talent development.

CEO Talent Pool

Recently, Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University conducted a survey of directors currently serving on the boards of the largest 250 U.S. companies by revenue (Fortune 250) to better understand their perspective on the size and quality of the labor market for CEO talent.1

The perspectives of corporate directors are critical for understanding the depth and quality of the CEO labor market because directors are highly knowledgeable about the number, quality, and performance of top talent in their industry, and through their regular succession planning discussions should have identified specific individuals or candidate pools to turn to in a transition.

The survey finds that directors overwhelmingly believe that the CEO job is very difficult and that only a handful of executives are qualified to run companies in their industry. Almost all directors (98 percent) describe the CEO job at their company as extremely or very challenging. Practically none (2 percent) believe it is moderately, slightly, or not at all challenging.

When asked to estimate how many executives are capable of stepping into the CEO role at their company and performing at least as well as their current CEO, directors estimate that fewer than four executives have the requisite skills (see Figure 1).

Figure 1

"Roughly how many people, including those both inside and outside your company, are capable of stepping into the CEO role at your company today and doing at least as well as your current CEO?

Their assessment of a small labor market is not confined to their own company and extends to other companies in their industry. When asked how many executives could step into the CEO role of their biggest competitor and perform at least as well as that company’s CEO, directors estimate that only six executives would be qualified (see Figure 2).

Figure 2

"How many people, including those both inside and outside their company, are capable of stepping into the CEO role at your biggest competitor and doing at least as well as their current CEO?"

They also believe that only nine executives would have the skills needed to turn around a company struggling in their industry (see Figure 3).

Figure 3

"If a large company in your industry were in need of a turnaround, how many people have the skills required to succeed as its CEO?"

These are surprisingly low numbers, and have important implications for corporate governance:

  • Efficiency of the labor market for CEO talent: Given the scarcity of outstanding CEO talent among large corporations, it is unlikely that the labor market for CEOs functions efficiently. That is, the matching process for linking qualified talent with suitable job opportunities likely does not occur as economically as it does for other job types. With an inefficient labor market, management might face less pressure to perform and distortions can arise in the balance of power between the CEO and the board, and in compensation.
  • Compensation: A tight labor market for CEO talent might help to explain high compensation levels, particularly among the largest U.S. companies. If only a limited number of executives are qualified to run these companies—and if outstanding CEO talent is critical for their success—then it is reasonable to expect that boards will offer large sums of money to attract their top candidate or retain their current CEO. The cost of losing him or her to a competitor would be too high.
  • Performance Evaluation: Directors’ view that capable CEO candidates are extremely scarce is likely to color their assessment of their CEO’s performance, as any evaluation that implies that the CEO should be replaced requires the board to take on the risk associated with finding a replacement. This risk aversion may encourage boards to tolerate both performance and behavior that would be not be acceptable if they perceived the existence of a large pool of highly qualified candidates.
  • Succession planning: If directors believe that executives require special and rare attributes that are difficult to identify (including the right set of functional, industry, and managerial experience combined with leadership qualities and cultural fit), identifying these candidates prospectively becomes even more important and reinforces the need for rigorous succession planning.
  • Talent development and retention: Internal executives continue to be the most promising source of candidates for most companies when it comes to future succession. Given the board’s familiarity with them, the visibility of their track record, and their tested cultural fit, it is more economic for most companies to invest in—and retain—their best internal talent.


  1. For complete survey results, see Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University, "CEO Talent: America’s Scarcest Resource? 2017 CEO Talent Survey," (2017), available at:

This post comes to us from Nicholas Donatiello, David Larcker and Brian Tayan. Donatiello is a lecturer in corporate governance at Stanford Graduate School of Business. Larcker is the James Irvin Miller Professor of Accounting and Senior Faculty at the Rock Center for Corporate Governance at Stanford University. Tayan is a researcher at the center. The post is based on their recent article, "CEO Talent: A Dime a Dozen, or Worth Its Weight in Gold?," available here.

December 13, 2017
Gibson Dunn Discusses Proxy Policy Updates and Action Items for 2018 Annual Meeting
by Ronald Mueller, Elizabeth Ising, Lori Zyskowski, Gillian McPhee and Lauren Assaf

The two most influential proxy advisory firms—Institutional Shareholder Services ("ISS") and Glass, Lewis & Co. ("Glass Lewis")—recently released their updated proxy voting guidelines for 2018. The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments. An executive summary of the ISS 2018 policy updates is available here and a more detailed chart showing additional updates to its voting policies and providing explanations for the updates is available here. The 2018 Glass Lewis Guidelines are available here.

ISS 2018 Proxy Voting Policy Updates

On November 16, 2017, ISS updated its proxy voting guidelines for shareholder meetings held on or after February 1, 2018. These updates impact ISS policies for the United States, Canada, the United Kingdom, Ireland, Europe, the Nordics Region, Japan, China, Hong Kong, and Singapore. This client alert reviews the major U.S. policy updates in ISS’s 2018 proxy voting guidelines, which are used by ISS in making voting recommendations on director elections and company and shareholder proposals at U.S. companies.

ISS plans to issue a complete set of updated policies on its website in December 2017. ISS also indicated that it plans to issue updated Frequently Asked Questions ("FAQs") on certain of its policies in December, and it has already issued a set of Preliminary FAQs on the U.S. Compensation Policies, which are available here. In January 2018, ISS will evaluate new U.S. shareholder proposals that are anticipated for 2018 and update its voting guidelines as necessary.

  1. Director Elections
Non-Employee Director Pay

ISS has adopted a new policy on "excessive" non-employee director pay, although the policy will not impact voting recommendations for 2018. Under the policy, ISS will recommend votes "against" board or committee members responsible for approving or setting non-employee director compensation when there is a recurring pattern (which ISS defines as two or more consecutive years) of "excessive" pay without a compelling rationale or other mitigating factors to justify the compensation. While ISS does not define what constitutes "excessive" pay, it notes that it has identified "cases of extreme outliers relative to peers and the broader market."

For 2018, ISS will continue to rely on its current policy to guide its vote recommendations. Under this policy, patterns of excessive compensation may call into question directors’ independence and result in ISS including cautionary language in its proxy analysis. After 2018, negative voting recommendations would be triggered only after ISS identifies a pattern of excessive pay in consecutive years.

Pledging Company Stock

In prior years, ISS has addressed pledging of company stock through its "governance failures" policy. Under this policy, ISS issued negative voting recommendations for members of the committee charged with risk oversight based on "significant" pledging of company stock. For 2018, ISS has implemented an explicit policy on problematic pledging that reflects its current approach to this issue. Under this policy, ISS recommends votes "against" the members of the committee responsible for overseeing pledge-related risks, or the full board, where a "significant" level of executive or director pledging raises concerns. In making its voting recommendations, ISS will consider the following factors:

  • the existence of an anti-pledging policy that prohibits future pledging activity and is disclosed in the proxy statement;
  • the magnitude of pledged shares in the aggregate in terms of total common shares outstanding, market value, and trading volume;
  • disclosure of the progress, or lack thereof, in reducing the magnitude of aggregate pledged shares over time;
  • proxy statement disclosure that the shares subject to stock ownership and holding requirements do not include pledged company stock; and
  • any other factors that are relevant.
Board Diversity

ISS applies four fundamental principles when determining its votes for director nominees: accountability, responsiveness, composition, and independence. ISS expanded its "composition" principle to include a specific statement about the benefits of boardroom diversity, which states that "[b]oards should be sufficiently diverse to ensure consideration of a wide range of perspectives." In addition, ISS stated that it will not consider a lack of gender diversity in making voting recommendations, but it will highlight in its voting analysis if a board has no female directors.

Poison Pills

ISS significantly updated its policy for poison pills in an effort both to simplify the policy and reinforce its views that shareholders should timely approve poison pills. Under the updated policy, ISS will recommend votes "against" all board nominees, every year, at a company that has a "long-term" poison pill (a pill with a term greater than one year) that was not approved by shareholders. This policy reflects several changes. First, commitments to put a newly-adopted long-term poison pill to a vote at the following year’s annual meeting will no longer be considered a mitigating factor that would exempt directors from negative voting recommendations. Second, the frequency of adverse recommendations will increase. Under its current policy, at companies with annual director elections, ISS only recommends "against" all board nominees every three years, while ISS will now recommend votes "against" all board nominees every year. Third, companies with 10-year poison pills that were grandfathered into the current policy will no longer be grandfathered and will receive adverse voting recommendations. According to ISS, this will impact about 90 companies. With grandfathering gone, ISS has also removed its provisions for pills with deadhand and slowhand provisions since the few remaining deadhand/slowhand pills are not shareholder-approved and would be covered by the updated policy.

ISS is maintaining its current policy for short-term poison pills (pills with a term of one year or less). ISS will assess these on a case-by-case basis and focus its review on the company’s rationale for adopting the poison pill (instead of its governance and track record), as well as other relevant factors such as a commitment to put any renewal to a vote.

ISS’s current policy on renewals and extensions of existing pills remains unchanged. These will not receive case-by-case analysis, but rather, will result in adverse voting recommendations for all directors.

  1. Shareholder Proposals
Gender Pay Gap

ISS adopted a new policy focused on shareholder proposals that target the gender pay gap by requesting reports from companies on either (i) their pay data, by gender, or (ii) their policies and goals aimed at reducing existing pay gaps (if any). ISS did not previously have a policy on this issue, and the new policy is intended to provide more clarity about ISS’s approach, given the expectation that the number of shareholder proposals on this subject will grow. The new policy reflects a case-by-case approach to these proposals and will consider the following four factors:

  • current company policies and disclosures regarding diversity and inclusion policies and practices;
  • the company’s compensation philosophy and its use of "fair and equitable compensation practices";
  • any recent controversies, litigation or regulatory actions in which the company was involved related to gender pay gap issues; and
  • any lag between the company and its peers with regard to reporting on gender pay gap policies or initiatives.
Climate Change Risk

ISS has also updated its policy on shareholder proposals relating to climate change risk, in light of recommendations from The Task Force on Climate-Related Financial Disclosures ("TCFD") that were finalized in 2017. Under its current policy, ISS generally supports shareholder proposals asking that a company disclose information on the risks it faces related to climate change, and the policy provides examples of those risks. According to ISS, the updated voting policy "better aligns" with the TCFD recommendations, which seek transparency around the roles of the board and management in assessing and managing climate-related risks and opportunities. In this regard, the updated policy applies not only to shareholder proposals seeking disclosure about "financial, physical, or regulatory risks" that a company faces related to climate change, but also proposals addressing "how the company identifies, measures, and manages such risks."

  1. Executive Compensation
Pay-for-Performance Analysis

Beginning in 2018, ISS will incorporate the Relative Financial Performance Assessment into its quantitative pay-for-performance analysis. This metric compares a company’s rankings to a peer group with respect to Chief Executive Officer ("CEO") compensation, and financial performance in three or four metrics, each as measured over three years. The Preliminary FAQs on the U.S. Compensation Policies identify the metrics that ISS plans to use for each industry and how the metrics are weighted. ISS intends to provide further specifics on the updated quantitative analysis in a white paper, but has indicated that the Relative Financial Performance Assessment would operate as a secondary quantitative screen that could move a company from "medium" to "low" concern or from "low" to "medium" concern. The 2018 updates also clarify that the multiple of the CEO’s total pay relative to the peer group median is measured over the most recent fiscal year, which is consistent with ISS’s current policy.

Board Responsiveness to Advisory Votes on Executive Compensation

When a company receives support below 70% of votes cast on its last say-on-pay proposal, ISS will continue to make voting recommendations on a case-by-case basis the following year both for the say-on-pay proposal and the election of compensation committee members. One of the elements that ISS currently considers is the board’s response to investor concerns, including disclosure of engagement efforts with major institutional investors on the reasons for their low support of the proposal. For 2018, ISS has expanded the factors it will consider in assessing whether the board’s response to investor concerns was sufficiently robust. In particular, ISS will consider disclosures about the timing and frequency of engagements with shareholders, and whether independent directors participated. In this regard, the voting policy updates explicitly state that "[i]ndependent director participation is preferred." ISS will also consider disclosure about specific concerns voiced by shareholders that voted against the say-on-pay proposal, as a way of assessing whether subsequent changes made by the company were in fact responsive to those concerns. Finally, in addition to considering whether the company made any changes in response to shareholder concerns, ISS will also consider the nature of those changes and whether they were meaningful.

  1. Other Changes

The voting policies also include the following updates:

  1. Director independence criteria: ISS is changing its terminology on director classifications—from "inside" to "executive" and from "affiliated outside" to "non-independent non-executive." In addition, directors who were previously considered "inside" directors due to ownership of more than 50% of a company’s stock will be moved to the "non-independent non-executive" category. According to ISS, this change is purely to standardize terminology across markets and will not impact voting recommendations.
  2. Attendance for newly appointed directors: ISS is exempting new directors who have served for only part of the year from its attendance policy, under which it generally recommends votes "against" directors who attend less than 75% of meetings unless the proxy statement includes "an acceptable reason" for the absences. Under the current policy, new directors are assessed case-by-case and disclosure about schedule conflicts is viewed as an acceptable reason for poor attendance because the meeting schedule would have been set before the director joined the board. Under the updated policy, ISS will exempt new directors from the attendance policy, rather than expecting disclosure about scheduling conflicts.
  3. Restrictions on shareholders’ ability to amend the bylaws: Under its current policies, ISS recommends votes "against" members of the nominating/governance committee if a company’s charter places "undue" restrictions on shareholders’ right to amend the company’s bylaws. These restrictions include prohibitions on the submission of binding shareholder proposals or ownership requirements in excess of those imposed by Rule 14a-8. ISS has expanded this policy to address situations where a company’s bylaws (or the charter) include these types of restrictions.

Glass Lewis 2018 Proxy Voting Policy Updates

On November 22, 2017, Glass Lewis released its updated proxy voting policy guidelines for 2018 in the United States and Canada and for shareholder proposals. This client alert reviews the major updates to the U.S. guidelines, which provide a detailed overview of the key policies Glass Lewis applies when making voting recommendations on proposals at U.S. companies and on shareholder proposals. The key changes in the 2018 guidelines are summarized below.

  1. Board Diversity

Glass Lewis has added a new section to its voting guidelines on how it considers gender diversity on boards of directors. Glass Lewis affirmed that, as in prior years, it will continue to review board composition closely, and it may note as a concern instances where it believes the board lacks diversity, including those boards that have no female directors. For 2018, Glass Lewis will not make voting recommendations solely on the basis of a board’s diversity, although this will be one of several factors Glass Lewis considers when evaluating a company’s oversight structure. This will change in 2019, however, when Glass Lewis will begin recommending votes "against" the nominating/governance committee chair at companies with no female directors. In those instances, Glass Lewis may also recommend votes "against" other nominating/governance committee members as well, depending on factors such as the company’s size, industry, and governance profile.

The voting guidelines also state that Glass Lewis will "carefully review a company’s disclosure of its diversity considerations" in making voting recommendations. Glass Lewis may not recommend votes "against" directors when the board has provided a "sufficient rationale" for the absence of any female board members or there is disclosure of a plan to address the board’s lack of diversity.

  1. Dual-Class Share Structures

Glass Lewis has also added a new section to its voting guidelines on how it will consider dual-class share structures—different classes of stock that may differ in voting or economic rights—in analyzing various aspects of a company’s governance. In this section, Glass Lewis explicitly states that dual-class voting structures "are typically not in the best interests of common shareholders" and that "[a]llowing one vote per share generally operates as a safeguard for common shareholders by ensuring that those who hold a significant minority of shares are able to weigh in on issues set forth by the board."

Consistent with these principles, Glass Lewis "generally considers a dual-class share structure to reflect negatively on a company’s overall corporate governance." It will typically recommend that shareholders vote in favor of recapitalization proposals to eliminate dual-class share structures and "against" proposals to adopt a new class of common stock.

For companies that have done an IPO or spin-off in the past year, Glass Lewis has not changed its overall approach, which is that it generally refrains from making voting recommendations based on a company’s governance practices for the first year the company is public. However, Glass Lewis evaluates newly public companies to determine whether the rights of shareholders are being "severely restricted indefinitely" based on a list of factors and may recommend votes "against" directors where it determines this is the case. The 2018 voting policy updates add the presence of a dual-class share structure to this list of factors.

The discussion on dual-class share structures also addresses how Glass Lewis will assess board responsiveness to a significant shareholder vote (discussed in the next section).

  1. Board Responsiveness to Significant Shareholder Votes

Under Glass Lewis’s current policy on board responsiveness, Glass Lewis evaluates the board’s response on a case-by-case basis in situations where 25% or more of a company’s shareholders vote contrary to the company’s recommendation on any proposal, including the election of director nominees, company proposals and shareholder proposals. For 2018, Glass Lewis is reducing this threshold to 20%, because it believes a 20% threshold is significant enough to warrant consideration of board responsiveness, especially when a proposal addresses compensation or director elections. Accordingly, when 20% or more of the votes cast (excluding abstentions and broker non-votes) on a proposal (including the election of directors) are contrary to management’s recommendation, Glass Lewis will evaluate whether or not the board responded appropriately following the vote. As under the current policy, the 20% threshold alone will not automatically generate a negative voting recommendation from Glass Lewis on director nominees or future proposals. However, it may be a contributing factor to Glass Lewis’s recommendation to oppose the board’s voting recommendation.

For companies with dual-class share structures, Glass Lewis will review with care the approval or disapproval levels of shareholders that are unaffiliated with the company’s controlling shareholders when making a determination as to whether board responsiveness is warranted. Boards are expected to exhibit an "appropriate" level of responsiveness to voting results where a majority of unaffiliated shareholders either supported a shareholder proposal or opposed a company proposal.

  1. Virtual Shareholder Meetings

Recognizing that the number of companies adopting virtual-only meetings is "small but growing," Glass Lewis has adopted a new policy on virtual meetings. Glass Lewis considers virtual meeting technology "a useful complement" to in-person shareholder meetings because of its ability to expand the participation of shareholders that cannot attend those meetings in-person (resulting in a "hybrid meeting"). At the same time, Glass Lewis states that virtual-only meetings could curb shareholders’ ability to have meaningful discussions with company management.

In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company has chosen to hold a virtual-only meeting. Instead, when analyzing the governance profiles of companies that hold virtual-only meetings, Glass Lewis will look for "robust" proxy statement disclosure that makes clear that shareholders will have the same ability to participate in the virtual-only meeting that they would have at an in-person meeting. This policy will change in 2019. Beginning in 2019, Glass Lewis will generally recommend votes "against" the members of the nominating/governance committee where the company intends to have a virtual-only shareholder meeting and fails to provide the disclosure described above.

  1. Overboarded Directors

Glass Lewis did not change its director overboarding policy for 2018, but did clarify how the policy will apply to directors who are serving in executive roles but are not CEOs. Under Glass Lewis’s policy, it generally recommends a vote "against" (i) any director that serves as a public company executive officer while also serving on more than two total public company boards and (ii) any other director serving on more than five total public company boards.

In determining whether to issue a negative voting recommendation, Glass Lewis considers whether service in excess of these limits may impact a director’s ability to devote sufficient time to board duties based on a number of factors, such as the size and location of the other companies where the director serves on the board and the director’s board duties at those companies. For directors who are executives—but not CEOs—of public companies, the 2018 policy updates clarify that Glass Lewis will evaluate the specific duties and responsibilities of the executive’s role.

  1. CEO Pay Ratio

Beginning in 2018, Glass Lewis’s Proxy Paper reports will include a company’s CEO pay ratio as an additional data point. However, Glass Lewis notes in its 2018 voting policies that although the pay ratio can provide investors with more insight when assessing the pay practices at a company, pay ratio will not be a determinative factor in Glass Lewis’s voting recommendations at this time.

  1. Pay for Performance

Glass Lewis’s pay-for-performance model, which ranks companies using a grade system of "A," "B," "C," "D," and "F," did not change this year and will continue to be used to guide Glass Lewis’s evaluation of the effectiveness of compensation committees. Where a company has a pattern of failing Glass Lewis’s pay-for-performance analysis, Glass Lewis will generally recommend a vote "against" that company’s compensation committee members. The voting policy updates for 2018 provide clarification on the grading system by adding more detail on each of the grades. Specifically:

  • The letter "C" "does not indicate a significant lapse," but instead "identifies companies where the pay and performance percentile rankings relative to peers are generally aligned." This suggests that a company does not overpay or underpay relative to its comparator group.
  • The grades "A" and "B" are also given to companies that align pay with performance, but indicate lower compensation levels relative to the market and to company performance. A "B" grade stems from slightly higher performance levels in comparison to market peers while executives earn relatively less than peers. An "A" grade shows that a company is paying significantly less than peers while outperforming the comparator group.
  • A grade of "D" or "F" reflects high pay and low performance relative to the comparator group, with a "D" reflecting a disconnect between pay and performance and an "F," a significant disconnect. An "F" indicates that executives receive significantly higher compensation than peers while underperforming the market.
  1. Shareholder Proposals
Climate Change

Glass Lewis has expanded its policy on shareholder proposals relating to climate change. Glass Lewis will generally recommend "for" shareholder proposals seeking disclosure of information about climate change scenario analyses and other climate change-related considerations at companies in certain extractive or "energy-intensive" industries that have increased exposure to climate change-related risks. Glass Lewis generally supports the disclosure recommendations of The Task Force on Climate-Related Financial Disclosure ("TCFD"), but will conduct a case-by-case review of proposals requesting that companies report in accordance with these recommendations. When evaluating proposals asking for increased disclosure, Glass Lewis will evaluate:

  • the industry in which a company operates;
  • the company’s current level of disclosure;
  • the oversight afforded to issues related to climate change;
  • the disclosure and oversight afforded to climate change-related issues at peer companies; and
  • whether other companies in the company’s market or industry have provided disclosure that is aligned with the TCFD’s recommendations.
"Fix It" Proxy Access Shareholder Proposals

Glass Lewis has expanded its voting policy on proxy access shareholder proposals to address "fix it" proposals. Shareholders have submitted "fix it" proposals to companies that already have proxy access in an effort to change specific terms of existing proxy access bylaws, such as the number of shareholders that can aggregate their shares to submit a proxy access nominee.

Glass Lewis will evaluate these proposals on a case-by-case basis and will review a company’s existing bylaws in order to determine whether they "unnecessarily restrict" shareholders’ ability to use proxy access. In cases where companies have adopted proxy access bylaws that "reasonably conform with broad market practice," Glass Lewis will generally oppose "fix it" proposals. Where a company has "unnecessarily restrictive" provisions, Glass Lewis "may consider support for well-crafted ‘fix it’ proposals that directly address areas of the company’s bylaws that [Glass Lewis] believe[s] warrant shareholder concern."

Dual-Class Share Structures

Glass Lewis has codified its position on shareholder proposals asking companies to eliminate their dual-class share structures and will generally recommend that shareholders vote "for" these proposals.

Actions Public Companies Should Take Now

  • Evaluate your company’s practices in light of the revised ISS and Glass Lewis proxy voting guidelines: Companies should consider whether their policies and practices, or proposals expected to be submitted to a shareholder vote in 2018, are impacted by any of the changes to the ISS and Glass Lewis proxy voting policies. For example, companies should consider whether their non-employee director compensation has been previously deemed "excessive" by ISS and what mitigating factors or support can be provided to explain higher-than-average compensation in the 2018 proxy statement.
  • Consider enhancing your proxy disclosures on matters including board diversity and shareholder engagement: Companies should consider whether there is additional information they can provide in the proxy statement to emphasize the diversity of the board, particularly with respect to gender and ethnicity. Boards that have more work to do on diversity should be aware that this is likely to be a continued area of focus, not just for ISS and Glass Lewis but for institutional investors as well. Regardless of the level of support a company received for its say-on-pay proposal, companies should evaluate their disclosures about shareholder engagement and consider whether they can say more about their engagements on executive compensation and on other matters.
  • Enroll in the Glass Lewis 2018 Issuer Data Report program: Glass Lewis has not yet opened enrollment for its 2018 Issuer Data Report ("IDR") program. Companies that have previously enrolled will be automatically notified when the 2018 enrollment period begins, but companies that have not enrolled may sign up for notifications regarding the open enrollment period here. The IDR program enables public companies to access (for free) a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to public company annual meetings. Glass Lewis does not provide drafts of its voting recommendations report to issuers it reviews, so the IDR is the only way for companies to confirm the accuracy of the data before Glass Lewis’s voting recommendations are distributed to its clients. Moreover, unlike ISS, Glass Lewis does not provide each company with complimentary access to the final voting recommendations for the company’s annual meeting. IDRs feature key data points used in Glass Lewis’s corporate governance analysis, such as information on directors, auditors and their fees, summary compensation data and equity plans, among others. The IDR is not a preview of the final Glass Lewis analysis as no voting recommendations are included. Each participating public company receives its IDR approximately three weeks prior to its annual meeting and generally has 48 hours to review the IDR for accuracy and provide corrections, including supporting public documents, to Glass Lewis. Participation is limited to a specified number of companies, and enrollment is on a first-come, first-served basis. To learn more about the IDR program and sign up to receive a copy of the 2018 IDR for your company, go to issuer_data_report.

This post comes to us from Gibson, Dunn & Crutcher LLP. It is based on the firm’s client alert, "Proxy Advisory Firms: Policy Updates and Action Items for 2018 Annual Meeting," dated December 4, 2017, and available here.

December 13, 2017
Reexamining Staggered Boards and Shareholder Value
by Alma Cohen, Charles Wang
Editor's Note: Alma Cohen is Professor of Empirical Practice, and Research Director of the Laboratory for Corporate Governance, at Harvard Law School; Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration at Harvard Business School. This post is based on their recent article, Reexamining Staggered Boards and Shareholder Value, recently published in the Journal of Financial Economics. Related program research includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles Wang.

The Journal of Financial Economics has recently published our article, Reexamining Staggered Boards and Shareholder Value, which seeks to contribute to understanding how staggered boards affect shareholder value.

In an article published in the Journal of Financial Economics in 2013, How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment (CW2013), we provided evidence that market participants perceive staggered boards to be, on average, value-reducing. In a subsequent article, Do Staggered Boards Harm Shareholders?, Amihud and Stoyanov (2016) (AS2016) contest our findings, arguing that excluding some observations or amending certain specifications renders our results statistically insignificant (though they largely retain their sign). In our new article, we address the concerns raised by AS2016.  We show that the evidence is overall consistent with the main conclusion of CW2013: market participants view staggered boards as value-reducing on average.

CW2013 examined two rulings by the Delaware courts, which affected the antitakeover force of staggered boards, in the case of Air Products & Chemicals Inc. v. Airgas, Inc. We found that the rulings were accompanied by abnormal stock returns that are statistically significant and consistent with the view that staggered boards are value-decreasing. After replicating the CW2013 results, AS2016 reports that excluding some observations from our sample yields results that largely have the same sign as in CW2013 but are not statistically significant. When an event study is not based on a large sample, the statistical significance of its results is often sensitive to the removal of a small number of observations. However, our new article shows that, in the case of the Airgas rulings, a wide range of additional tests yields results that are significant and reinforce the CW2013 conclusions.

The analysis of our new article proceeds as follows. We begin by describing the results of CW2013 and the analysis of AS2016. Given the robustness concerns raised by AS2016, we also discuss two alternative definitions of treated companies (the set of companies affected by the rulings) to improve robustness. We do so by expanding the set of treated companies to include companies that are affected less strongly by the rulings. We show that these alternative specifications yield results that are consistent with those produced when using CW2013’s definition of treated companies.

We next focus on AS2016’s central claim that the results of CW2013 become statistically insignificant when excluding a handful of very small companies and, thus, cannot inform the assessment of how staggered boards affect value in normal-size companies. We first show that, when imposing the same sample filters recommended by AS2016, the results are statistically significant using the two alternative definitions of treated companies. We then demonstrate that, using each of the three definitions of treated companies (the one used by AS2016 and the two alternative definitions), the results of CW2013 are robust to excluding all companies with market capitalization below $500 million or $1 billion, instead of excluding the handful of small companies suggested by AS2016. These findings are inconsistent with the claim that the CW2013 results are driven by small companies and that they do not hold when such companies are excluded.

Turning to examine the source of the non-significance results presented in AS2016, we show that they are not due to a differential size effect. Instead, these results are due to the happenstance that some of the companies excluded by AS2016 have large returns that go in one direction; that is, the sample restrictions of AS2016 happen to remove extreme observations asymmetrically, from one side of the return distribution. After excluding large returns symmetrically from both sides of the distribution, we obtain an array of results (across various alternative specifications and samples excluding small companies) that are consistent with the results and conclusions of CW2013.

We then examine the AS2016 claim that the results of CW2013 are unduly driven by a few particular observations with extreme returns. We first show that when excluding the observations suggested by AS2016, our results still retain their significance using the two alternative definitions of treated companies. Furthermore, when excluding extreme returns in a symmetric fashion, we obtain results that are statistically significant and consistent with the findings of CW2013 under each of the three definitions of treated firms (the one used by AS2016 and the two alternative definitions).

Finally, we consider the sensitivity of the CW2013 results to our use of industry fixed effects based on six-digit Global Industry Classification Standard (GICS-6). AS2016 suggests using four-digit GICS (GICS-4), as opposed to GICS-6, and argues that doing so renders our results not statistically significant. We show that the results retain their significance even when using GICS-4 fixed effects under each of the three definitions of treated companies. Furthermore, under each of these three definitions, the results retain their significance when no industry fixed effects are used, as is commonly done in event studies.

We conclude that the wide array of results from our reexamination of the data are consistent with the view that staggered boards are, on average, viewed by market participants as value-reducing. Our results thus reinforce the conclusions of CW2013.

Our article is available for download here.

December 13, 2017
SEC Appoints New Chairman and Board Members to PCAOB
by U.S. Securities and Exchange Commission
Editor's Note: The following post is based on an press release from the U.S. Securities and Exchange Commission announcing the appointment of a new Chairman and Board Members to the Public Company Accounting Oversight Board (PCAOB).

The Securities and Exchange Commission [December 12, 2017] announced the appointment of William D. Duhnke III as Chairman and J. Robert Brown, Kathleen M. Hamm, James G. Kaiser, and Duane M. DesParte as Board members of the Public Company Accounting Oversight Board (PCAOB).

The Sarbanes-Oxley Act of 2002 established the PCAOB to oversee the audits of public companies and broker-dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB accomplishes these goals through registering public accounting firms, setting auditing standards, conducting inspections, and pursuing disciplinary actions. The PCAOB is subject to oversight by the SEC.

“Bill, Jay, Kathleen, Jim, and Duane bring substantial experience to the Board and a shared commitment to serve in the interests of our Main Street investors,” said SEC Chairman Jay Clayton. “Their individual and collective talents position the PCAOB to execute its mission effectively in our local, national, and international markets.”

SEC Chief Accountant Wes Bricker said, “We look forward to working with these new Board members in connection with furthering the PCAOB’s central mission. The new Board members are well-qualified to lead the PCAOB as it carries out its critical role in promoting investor protection and strengthening audit quality.”

Chairman Clayton added, “I would like to thank Jim Doty for his excellent leadership in serving as Chairman of the Board. I also would like to thank Steve Harris, Lew Ferguson and Jeanette Franzel for their dedicated service as members of the Board. They have achieved a great deal on behalf of our investors and the public, including, most recently, the adoption of a new auditor’s reporting model which should provide investors with meaningful additional insight into auditor-audit committee communications.”

New PCAOB Members

William D. Duhnke III, Chairman is currently the Staff Director and General Counsel to the U.S. Senate Committee on Rules and Administration. He previously served as Staff Director and General Counsel to the U.S. Senate Committee on Banking, Housing and Urban Affairs and the Committee on Appropriations. Prior to joining the Senate staff, Mr. Duhnke served in the U.S. Navy and the Commission on the Assignment of Women in the Armed Forces. He received a J.D. from Catholic University and a B.A. from the University of Wisconsin.

J. Robert Brown is currently a professor of law at the University of Denver, where he is Director of the Corporate and Commercial Law program and is the Lawrence W. Treece Professor of Corporate Governance. Prior to beginning his teaching career 25 years ago, he served on the staff of the SEC and worked in private practice. He has a Ph.D. and M.A. from Georgetown University, a J.D. from the University of Maryland, and a B.A. from the College of William and Mary.

Kathleen M. Hamm is currently the Global Leader of Securities and Fintech Solutions and Senior Strategic Advisor on Cyber Solutions at Promontory Financial Group. She previously worked at the U.S. Department of the Treasury, the American Stock Exchange, and the SEC. She received a LL.M from Georgetown University, a J.D. from Duke University, and a B.S. from the State University of New York at Buffalo.

James G. Kaiser is currently a partner and the Global Assurance Methodology & Transformation Leader at PricewaterhouseCoopers (PwC), where he leads the firm’s efforts to drive innovation in auditing and has responsibility for the firm’s adherence to international auditing standards. He has been with PwC for 38 years and has held numerous leadership roles with the firm. He received a MBA from the University of Pennsylvania and a B.S. from St. Joseph’s University.

Duane M. DesParte will soon retire as Senior Vice President and Corporate Controller of Exelon Corporation, where he has been employed for the past 14 years. He previously was an audit partner at Deloitte & Touche and, prior to that, Arthur Andersen. He received his B.S. in Accountancy from the University of Illinois at Urbana-Champaign—College of Business.

December 13, 2017
Statement on Cryptocurrencies and Initial Coin Offerings
by Jay Clayton, U.S. Securities and Exchange Commission
Editor's Note: Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, “this time is different.”

The cryptocurrency and ICO markets have grown rapidly. These markets are local, national and international and include an ever-broadening range of products and participants. They also present investors and other market participants with many questions, some new and some old (but in a new form), including, to list just a few:

  • Is the product legal? Is it subject to regulation, including rules designed to protect investors? Does the product comply with those rules?
  • Is the offering legal? Are those offering the product licensed to do so?
  • Are the trading markets fair? Can prices on those markets be manipulated? Can I sell when I want to?
  • Are there substantial risks of theft or loss, including from hacking?

The answers to these and other important questions often require an in-depth analysis, and the answers will differ depending on many factors. This statement provides my general views on the cryptocurrency and ICO markets [1] and is directed principally to two groups:

  • “Main Street” investors, and
  • Market professionals—including, for example, broker-dealers, investment advisers, exchanges, lawyers and accountants—whose actions impact Main Street investors.
Considerations for Main Street Investors

A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.

Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.[2] If any person today tells you otherwise, be especially wary.

We have issued investor alerts, bulletins and statements on initial coin offerings and cryptocurrency-related investments, including with respect to the marketing of certain offerings and investments by celebrities and others.[3] Please take a moment to read them. If you choose to invest in these products, please ask questions and demand clear answers. A list of sample questions that may be helpful is attached.

As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.

Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.

To learn more about these markets and their regulation, please read the “Additional Discussion of Cryptocurrencies, ICOs and Securities Regulation” section below.

Considerations for Market Professionals

I believe that initial coin offerings—whether they represent offerings of securities or not—can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require. A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed.[4] Said another way, replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance.

I urge market professionals, including securities lawyers, accountants and consultants, to read closely the investigative report we released earlier this year (the “21(a) Report”)[5] and review our subsequent enforcement actions.[6] In the 21(a) Report, the Commission applied longstanding securities law principles to demonstrate that a particular token constituted an investment contract and therefore was a security under our federal securities laws. Specifically, we concluded that the token offering represented an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.

Following the issuance of the 21(a) Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security. Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law. On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities. I urge you to be guided by the principal motivation for our registration, offering process and disclosure requirements: investor protection and, in particular, the protection of our Main Street investors.

I also caution market participants against promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions. Selling securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of “scalping,” “pump and dump” and other manipulations and frauds. Similarly, I also caution those who operate systems and platforms that effect or facilitate transactions in these products that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.

On cryptocurrencies, I want to emphasize two points. First, while there are cryptocurrencies that do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security. Before launching a cryptocurrency or a product with its value tied to one or more cryptocurrencies, its promoters must either (1) be able to demonstrate that the currency or product is not a security or (2) comply with applicable registration and other requirements under our securities laws. Second, brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies on margin, or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations.[7] As I have stated previously, these market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.

Additional Discussion of Cryptocurrencies, ICOs and Securities Regulation

Cryptocurrencies. Speaking broadly, cryptocurrencies purport to be items of inherent value (similar, for instance, to cash or gold) that are designed to enable purchases, sales and other financial transactions. They are intended to provide many of the same functions as long-established currencies such as the U.S. dollar, euro or Japanese yen but do not have the backing of a government or other body. Although the design and maintenance of cryptocurrencies differ, proponents of cryptocurrencies highlight various potential benefits and features of them, including (1) the ability to make transfers without an intermediary and without geographic limitation, (2) finality of settlement, (3) lower transaction costs compared to other forms of payment and (4) the ability to publicly verify transactions. Other often-touted features of cryptocurrencies include personal anonymity and the absence of government regulation or oversight. Critics of cryptocurrencies note that these features may facilitate illicit trading and financial transactions, and that some of the purported beneficial features may not prove to be available in practice.

It has been asserted that cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC’s jurisdiction. Whether that assertion proves correct with respect to any digital asset that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset. In any event, it is clear that, just as the SEC has a sharp focus on how U.S. dollar, euro and Japanese yen transactions affect our securities markets, we have the same interests and responsibilities with respect to cryptocurrencies. This extends, for example, to securities firms and other market participants that allow payments to be made in cryptocurrencies, set up structures to invest in or hold cryptocurrencies, or extend credit to customers to purchase or hold cryptocurrencies.

Initial Coin Offerings. Coinciding with the substantial growth in cryptocurrencies, companies and individuals increasingly have been using initial coin offerings to raise capital for their businesses and projects. Typically these offerings involve the opportunity for individual investors to exchange currency such as U.S. dollars or cryptocurrencies in return for a digital asset labeled as a coin or token.

These offerings can take many different forms, and the rights and interests a coin is purported to provide the holder can vary widely. A key question for all ICO market participants: “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders. In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come. It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value—with the ability to lock in those increases by reselling the tokens on a secondary market—or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.

By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.

I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.


We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.

I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so. When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years. I also encourage market participants and their advisers to engage with the SEC staff to aid in their analysis under the securities laws. Staff providing assistance on these matters remain available at .

Sample Questions for Investors Considering a Cryptocurrency or ICO Investment Opportunity[8]
  • Who exactly am I contracting with?
    • Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product? Do they have a clear written business plan that I understand?
    • Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product? Have they been paid to promote the product?
    • Where is the enterprise located?
  • Where is my money going and what will be it be used for? Is my money going to be used to “cash out” others?
  • What specific rights come with my investment?
  • Are there financial statements? If so, are they audited, and by whom?
  • Is there trading data? If so, is there some way to verify it?
  • How, when, and at what cost can I sell my investment? For example, do I have a right to give the token or coin back to the company or to receive a refund? Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
  • If a digital wallet is involved, what happens if I lose the key? Will I still have access to my investment?
  • If a blockchain is used, is the blockchain open and public? Has the code been published, and has there been an independent cybersecurity audit?
  • Has the offering been structured to comply with the securities laws and, if not, what implications will that have for the stability of the enterprise and the value of my investment?
  • What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects? Who will be responsible for refunding my investment if something goes wrong?
  • If I do have legal rights, can I effectively enforce them and will there be adequate funds to compensate me if my rights are violated?

1This statement is my own and does not reflect the views of any other Commissioner or the Commission. This statement is not, and should not be taken as, a definitive discussion of applicable law, all the relevant risks with respect to these products, or a statement of my position on any particular product. Additionally, this statement is not a comment on any particular submission, in the form of a proposed rule change or otherwise, pending before the Commission. (go back)

2The CFTC has designated bitcoin as a commodity. Fraud and manipulation involving bitcoin traded in interstate commerce are appropriately within the purview of the CFTC, as is the regulation of commodity futures tied directly to bitcoin. That said, products linked to the value of underlying digital assets, including bitcoin and other cryptocurrencies, may be structured as securities products subject to registration under the Securities Act of 1933 or the Investment Company Act of 1940. (go back)

3Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others (Nov. 1, 2017), available at; Investor Alert: Public Companies Making ICO-Related Claims (Aug. 28, 2017), available at; Investor Bulletin: Initial Coin Offerings (July 25, 2017), available at; Investor Alert: Bitcoin and Other Virtual Currency-Related Investments (May 7, 2014), available at; Investor Alert: Ponzi Schemes Using Virtual Currencies (July 23, 2013), available at back)

4It is possible to conduct an ICO without triggering the SEC’s registration requirements. For example, just as with a Regulation D exempt offering to raise capital for the manufacturing of a physical product, an initial coin offering that is a security can be structured so that it qualifies for an applicable exemption from the registration requirements.(go back)

5Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (July 25, 2017), available at back)

6Press Release, Company Halts ICO After SEC Raises Registration Concerns (Dec. 11, 2017), available at; Press Release, SEC Emergency Action Halts ICO Scam (Dec. 4, 2017), available at; Press Release, SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds (Sept. 29, 2017), available at (go back)

7I am particularly concerned about market participants who extend to customers credit in U.S. dollars—a relatively stable asset—to enable the purchase of cryptocurrencies, which, in recent experience, have proven to be a more volatile asset.(go back)

8This is not intended to represent an exhaustive list. Please also see the SEC investor bulletins, alerts and statements referenced in note 3 of this statement.(go back)

December 13, 2017
SEC Charges Firm, CEO and CFO In Corporate Perks Action
by Tom Gorman

The Commission charged a firm and its former CEO and CFO in actions centered on the improper payment of expenses facilitated by inadequate internal corporate controls. In the Matter of Provectus Biopharmaceuticals, Inc., Adm. Proc. File No. 3-18306 (Dec. 12, 2017).

Provectus is a development stage biotechnology firm whose shares are listed on the NYSE MKT. H. Craig Dees is a co-founder of the firm and previously served as CEO. Peter Culpepper previously served as the firm’s CFO. Over a five year period beginning in 2011 the company paid Mr. Dees about $3.2 million for what purported to be business travel and expenses. The majority of the funds were used for unauthorized personal travel and expenses. Much of the money was obtained in the form of cash advances. Provectus allowed Mr. Dees to obtain the travel advances based on requests in vague emails which lacked details justifying the amounts.

In 2011 and 2012 Mr. Dees submitted expense reports for the majority of the advances he received. Those reports often lacked documentation and were deficient. For example, he failed to apply about half of the advances he received. Rather, Mr. Dees sought reimbursement for the full amount. At times the questionable nature of the receipts that were furnished was apparent on their face. For his 2013 and 2014 expense advances, Mr. Dees failed to submit any expense reports. After concerns about the lack of reports were expressed internally, Mr. Dees submitted receipts for some 2015 expenses.

Mr. Dees’ travel advance requests and expense reports were submitted to CFO Culpepper for processing. They were paid by wire transfer. Under company policy only the CFO "determined the need" for the wire transfer. While the requests were channeled through two other executives at the firm, company policy did not require that they assess the sufficiency of the underlying documentation. For at least 2011 and 2012 the reimbursement expense reports of Mr. Dees were not sent to the firm’s provider of bookkeeping services.

Over a two year period beginning in 2013 Provectus paid Mr. Culpepper $199,194 in personal benefits and perquisites through travel advances and reimbursements. The personal benefits were not authorized. For example, from 2013 to 2015 the company paid Mr. Culpepper foreign currency cash advances. About $103,649 of those cash advances were for his personal benefit.

Mr. Culpepper’s travel advance requests and expense reports were paid by check. The firm’s policy required that two executives approve checks and that a review be made for proper backup. The policy was not enforced.

The firm’s inadequate internal controls facilitated these practices. For example, the internal accounting controls did not require that cash advances be substantiated. For returns, the controls did not define "support" or require the submission of third party support. Other controls were not followed.

From 2012 to 2015 the company did not disclose as compensation the personal benefits and perquisites Mr. Dees received from 2011 through 2014. Those benefits were material components of his compensation, exceeding his annual salary by substantial amounts. The Order alleges violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a).

In resolving the matter the company agreed to certain undertakings, including the retention of a consultant. The Commission also considered the firm’s cooperation which included making available the results of its internal investigation which facilitated the work of the staff.

To resolve the proceedings the company consented to the entry of a cease and desist order based on the Sections cited in the Order. See also SEC v. Dees, Civil Action No. 3:17-cv-00532 (E.D. Tenn. Filed Dec. 12, 2017)(charging Mr. Dees with violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5); the case is in litigation); In the Matter of Peter R. Culpepper, CPA, Adm. Proc. File No. 3-18308 (Dec. 12, 2017)(action against the former CFO in which he consented to the entry of a cease and desist order based on Securities Act Sections 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a), and agreed to the entry of an order denying him the privilege of appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after three years; he also agreed to comply with an undertaking to pay the firm disgorgement and interest of $152,378 and was ordered to pay disgorgement of $140,115 and prejudgment interest which is deemed satisfied by the payment of the undertaking to the company).

December 13, 2017
The PCAOB's Brand New Slate
by Broc Romanek

Yesterday, the SEC announced the appointment of Bill Duhnke as Chair and Jay Brown, Kathleen Hamm, Jim Kaiser and Duane DesParte as Board members of the PCAOB. This is the first time since the PCAOB was initially formed 15 years ago that an entire slate of Board Members was tapped at once. Pretty wild. Here’s SEC Chair Clayton’s statement.

"Financials Staleness Calculator"

A nice companion for our "Disclosure Deadlines Handbook" is this "financials staleness calculator" from Latham & Watkins and KPMG. This tool advances any date that falls on a weekend or holiday to the next business day; accommodates any fiscal year end; and can make the calculation outside of the current year…

Perk Enforcement Case: CEO’s "Personal Piggy Bank"

Yesterday, the SEC announced an enforcement action against Provectus for insufficient controls surrounding the reporting & disclosure of travel and entertainment expenses submitted by its executives. The former CEO swindled millions using fake or non-existent documentation – the former CFO’s take was closer to $200k.

Here’s an excerpt from the SEC’s press release:

The SEC separately charged Dees in federal district court in Knoxville, Tennessee, alleging that, while Dees was Provectus’ CEO, he treated the company "as his personal piggy bank." According to the complaint, Dees submitted hundreds of falsified records to Provectus to obtain $3.2 million in cash advances and reimbursements for business travel he never took. Instead, he concealed the perks and used cash advances to pay for personal expenses such as cosmetic surgery for female friends, restaurant tips, and personal travel.

We’ve added this case to our list of perk enforcement actions in our "Perks" Practice Area on…

Broc Romanek

December 12, 2017
Coming soon: Get the Securities Mosaic Daily News through Newsdesk
by Chris Hitt

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December 12, 2017
The Best Defense Is a Good Offense: FCPA Corporate Enforcement Policy Cements Importance of Compliance Programs
by Lily Becker and Michael Wood

The Department’s revised FCPA Corporate Enforcement Policy—which will be incorporated into the United States Attorneys’ Manual—builds on and makes permanent the Department’s 2016 FCPA Pilot Program. While much of the commentary on the revised policy has focused on the potential benefits of voluntary self-disclosure and cooperation after an issue arises, the policy also provides updated guidance to all companies on the hallmarks of an effective compliance and ethics program – an important and practical takeaway for compliance officers, in-house counsel, boards and executives.

DOJ’s Revised FCPA Corporate Enforcement Policy Formalizes the 2016 FCPA Pilot Program

The Pilot Program set out to evaluate if the Department could motivate companies to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in controls and compliance programs. One of the key components of the Pilot Program was the potential for substantial mitigation—including declination of prosecution in certain cases and, where warranted, a credit of up to a 50 percent reduction below the low end of the applicable U.S. Sentencing Guidelines’ fine range for companies that voluntarily self-disclose misconduct and cooperate and remediate to the Department’s satisfaction. Deputy Attorney General Rod Rosenstein expressed his satisfaction with the program’s results, which he heralded as a step forward in fighting corporate crime. He also noted that during the pilot period, the DOJ saw 30 voluntary disclosures to the FCPA Unit—compared to 18 during the previous 18‑month period.

In announcing the new formalized Policy, Deputy Attorney General Rosenstein emphasized that the Department will continue to strongly encourage voluntary disclosures and set forth what he considers to be the revised Policy’s three key features:

  • First, when a company satisfies the standards of voluntary self-disclosure, full cooperation, and timely and appropriate remediation, there will be a presumption that the Department will resolve the company’s case through a declination;
  • Second, if a company voluntarily discloses wrongdoing and satisfies all other requirements, but aggravating circumstances compel an enforcement action, the Department will recommend a 50 percent reduction off the low end of the Sentencing Guidelines’ fine range; and
  • Third, the Policy sets forth that the Department will evaluate a company compliance program, which will vary depending on the size and resources of a business.

Rosenstein conveyed the importance of these features both to those in the Department as well as to those who may find themselves in the Department’s crosshairs. Yet the key question for the vast majority of companies not currently facing the question of how to address an actual potential FCPA violation is how to put themselves in a position to maximize the potential benefits of the revised policy—and in so doing, prevent themselves from reaching that point.

What Does the Revised Policy Mean for Corporate Compliance Programs?

When read in tandem with existing guidance, and the DOJ’s recent Compliance Guidance in particular, the Revised Policy provides powerful clues to understanding what the government expects in a robust and comprehensive anti-corruption compliance program—which, if appropriately implemented, can put a company in the best position to take maximum advantage of the now-permanent Pilot Program.

In many ways, the new Policy reiterates the traits of an effective compliance and ethics program that the Department and SEC have discussed before, such as fostering a culture of compliance, dedicating sufficient resources to compliance activities and ensuring that experienced compliance personnel have appropriate access to management and to the board. There are some new nuances embedded in the Policy, however. For example, the board of directors should have compliance expertise available to it, and the compliance function should have authority and independence. In addition, the stature and compensation of personnel involved in compliance is relevant to the effectiveness of the program. Because of the limited case law interpreting the Foreign Corrupt Practices Act, companies have long looked to the SEC and DOJ’s Resource Guide to the U.S. Foreign Corrupt Practices Act, industry and NGO guidance such as the Good Practice Guidance on Internal Controls, Ethics, and Compliance, and in the Anti-Corruption Ethics and Compliance Handbook for Business, and more recently, to DOJ Deferred Prosecution Agreements (discussed here) and the Department of Justice’s February 2017 Compliance Guidance (discussed here) for compliance program best practices.

In crafting and maintaining a strong and effective compliance program that can deter and detect potential misconduct, compliance officers, in-house counsel, boards, and corporate executives should use the DOJ’s recent Compliance Guidance as a checklist of questions for every aspect of a new program or in evaluating the efficacy of an existing program. For example, the following questions are among those that a company should ask itself:

  • What are the root causes of misconduct in each of a company’s areas of business and the systemic issues that may exacerbate that risk?
  • How has the company addressed prior misconduct, and have policies and procedures been adjusted, where necessary, to prevent the same or similar misconduct? Has the company taken appropriate remediation?
  • Does the company’s senior leadership promote ethical conduct at the top through their words and actions?
  • Is the company’s governance structure such that it can properly provide oversight of compliance and control functions?
  • Is adequate training provided at all levels?
  • Do compliance and control personnel have the appropriate experience and qualifications for their roles and responsibilities?
  • Are policies and procedures designed and implemented with the company’s specific industry, business practices, and geographic region in mind?

Programs designed with these and other questions in mind will no doubt place a company in the best possible position to have the information and tools needed to take advantage of the revised policy by securing a declination or Guidelines Range reduction through voluntary self-disclosure, full cooperation, and timely and appropriate remediation.

In our experience, designing and implementing an effective, risk-based program takes careful planning with input from a variety of stakeholders through an iterative process that constantly reevaluates and revises itself. While the Revised Policy may appear to be geared toward those already facing tough questions with respect to a potential violation—it may prove to be the most valuable for those creating and evaluating compliance programs.

View today's posts

12/13/2017 posts

CLS Blue Sky Blog: Are CEOs a Dime a Dozen or Worth Their Weight in Gold?
CLS Blue Sky Blog: Gibson Dunn Discusses Proxy Policy Updates and Action Items for 2018 Annual Meeting
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Reexamining Staggered Boards and Shareholder Value
The Harvard Law School Forum on Corporate Governance and Financial Regulation: SEC Appoints New Chairman and Board Members to PCAOB
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Statement on Cryptocurrencies and Initial Coin Offerings
SEC Actions Blog: SEC Charges Firm, CEO and CFO In Corporate Perks Action Blog: The PCAOB's Brand New Slate
Blogmosaic: Coming soon: Get the Securities Mosaic Daily News through Newsdesk
Securities Litigation, Investigations and Enforcement: The Best Defense Is a Good Offense: FCPA Corporate Enforcement Policy Cements Importance of Compliance Programs

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