The DOJ’s Latest Compliance Program Warning

U.S Deputy Attorney General Rod Rosenstein recently announced the Department of Justice’s revised FCPA Corporate Enforcement Policy. The revised Policy is based on the DOJ’s FCPA Pilot Program (in place since April 2016), which provided mitigation credit for voluntary reporting of wrongdoing and specified levels of cooperation and remediation in connection with the resulting investigation. Much has been made about the new Policy provisions that create the presumption of a DOJ enforcement declination and specify percentage reductions from the U.S. Federal Sentencing Guidelines in the event that a company self-discloses, cooperates and/or remediates in accordance with specified Policy requirements. Certainly, these provisions significantly further the shift toward encouraging company cooperation, as well as continue the focus on holding individuals accountable, and deserve careful attention. It was, however, Deputy Attorney General Rosenstein’s third “policy enhancement” that most caught my eye. That provision provides detail about how the DOJ evaluates compliance programs, specifying what he calls “hallmarks of an effective compliance program.” The Policy first states that the criteria for an effective compliance and ethics program may vary based on the size and resources of the organization, which seems fair enough. It then provides a list of criteria (quoted below), which it says will be periodically updated: The company’s culture of compliance, including awareness among employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated; The resources the company has dedicated to compliance; The quality and experience of the personnel involved in compliance, such that they can understand and identify the transactions and activities that pose a potential risk; The authority and independence of the compliance...

Activist Versus Institutional Investors, and the Role of Sustainability

Sustainability concepts are now widely accepted as legitimate, mainstream considerations for boards of directors and corporate management. (See, for example, this Doug’s Note.) As a result, many companies now routinely consider the long-term impact on their entire universe of stakeholders of various environmental, social and governance (ESG) issues. Conversely, most boards of directors and C-suites no longer solely consider maximizing short-term shareholder profits in their decision-making. A balanced corporate mindset now factors in long-term considerations (see this Doug’s Note) and the interests of employees, business partners, communities and society as a whole. The emergence of sustainability may also be blurring the traditional distinction between “activist” and “institutional” investors. At the risk of over-generalizing, activist investors have historically been associated with maximizing short-term shareholder profits through a variety of often harsh corporate maneuvers. Institutional investors, on the other hand, have often been seen as taking a longer view, which resulted in general support of management accompanied by behind-the-scenes efforts to influence corporate strategy. Those two camps may now be moving toward the middle of that spectrum, driven in significant part not only by the dramatic rise in popularity of sustainability as a corporate principle, but also the increased desire among institutional investors to engage with management on such issues. After a few years of resistance, companies have embraced the concept of regular, substantive shareholder engagement, resulting in lines of communication that are more open than ever, which allows traditionally passive institutional investors more ability to routinely influence management priorities and strategic decisions. Activist investors, on the other hand, now seem more interested in influencing governance policies, as well as management...

The New Auditor Reporting Standards

Late last month, the SEC approved the new auditing standards adopted by the PCAOB back in June, which substantially modify the content of the auditor’s report. They also raise various concerns that public companies and the SEC will need to closely monitor going forward. Critical audit matters disclosure. By far the biggest and most controversial change to the old standards is the requirement that the auditors include in a separate section of their report “critical audit matters” applicable to the current period covered by the report. CAMs are defined as: “any matter … that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment.” The auditor must identify the CAM, describe the principal considerations that led the auditor to determine it was a CAM, describe how the CAM was addressed in the audit, and reference the accounts or disclosures related to the CAM. In the unlikely event that a report contains no CAMs, it must affirmatively so state. Though the determination of a CAM is supposed to be principles-based, the new rules provide a nonexclusive list of factors for the auditor to consider in its determination. Even so, the standards emphasize that disclosure must be tailored to the particular company and audit, meaning that it should not be boilerplate. Emerging growth companies and employee stock purchase plans, savings plans and similar plans are excluded from the CAM disclosure requirements. Additional changes. The modified auditor’s report also must: State the year the auditor began serving as...

Evolution of the General Counsel—A TerraLex Report

TerraLex recently published The General Counsel Excellence Report 2017, which tracks the continuing evolution of the role of corporate general counsel to encompass important nontraditional areas of focus and responsibilities. TerraLex, a referral network of more than 150 law firms (including Parker Poe) in more than 100 countries, sponsored similar surveys in 2013 and 2015. The 31-page report makes for interesting reading. For example, it notes that even the GC’s title is changing, with 45 percent of respondents describing their role as “General Counsel” (slightly down from 2015) while more than 20 percent use titles like “Head of Legal,” “Group Head of Legal,” “Head of Legal & Regulatory Affairs” or even “General Counsel, Director of M&A, Strategy and Risk.” The report states that “[i]t is clear … that the exact role of the general counsel is becoming an increasingly difficult one to define.” Also interesting is the general counsel’s perception of his or her role within the company. According to the report: “General counsel thought it most important that they were a stakeholder in business decisions rather than just managing the legal department – just over 60 percent gave this answer the most important or next most important score compared with 45 percent who voted for managing the legal department. Being the conscience of the business was also a popular answer and this idea of the legal officer as moral guardian of the corporate entity is a theme which runs through the survey and the interviews. “ This leads to the report’s observations regarding the issues that general counsel find most concerning. Not surprisingly, “regulation and compliance” remains the...

The NYC Comptroller and Pension Funds Boardroom Accountability Project 2.0

Board composition is increasingly at the forefront of governance activists’ focus and initiatives. A recent, high-profile example of this comes from New York City Comptroller Scott M. Stringer and the New York City Pension Funds via their Boardroom Accountability Project 2.0. This initiative builds on their 2014 initiative and, according to their press release, is intended to “ratchet up the pressure on some of the biggest companies in the world to make their boards more diverse, independent, and climate-competent, so that they are in a position to deliver better long-term returns for investors.” The campaign directly targets the boards of 151 U.S. companies, calling on them to “disclose the race and gender of their directors, along with board members’ skills, in a standardized ‘matrix’ format and to enter into a dialogue regarding their board’s ‘refreshment’ process.” They believe this will push boards to be more diverse and independent. The targeted companies include “139 that enacted proxy access after receiving a proposal from the New York City Pension Funds, and 12 at which the pension funds’ proposal received majority shareowner support in 2017, but have yet to enact the reform.” Comptroller Stringer and the Funds blame the “persistent lack of diversity on corporate boards” on a nomination and election process “that is effectively controlled by the existing board — and as a result, more akin to a coronation.” They cite PwC’s 2016 Annual Corporate Directors Survey as reporting that 87% of directors rely on board member recommendations to recruit new directors, while only 18% consider investor recommendations. Fundamentally, they believe that shareowners “need to know the race and gender of...

Pay Ratio Disclosures are an Employee-Relations Opportunity … Really

Most companies are now devoting substantial resources and effort to ensuring compliance with the SEC’s new rules requiring disclosure of the ratio of the CEO’s and median employee’s respective annual total compensation. Because the disclosure is required for fiscal years beginning on or after January 1, 2017, calendar-year-end companies must include it in their upcoming proxy statements. As the number crunching and parsing of new SEC disclosure guidance (see Doug’s Notes here and here) begins to take shape, these companies will soon get a sense of the magnitude of their ratio and, therefore, of any concerns it may raise. Discussions are also taking place regarding the extent to which companies can, or should, provide supplemental proxy disclosure that adds explanatory context to the mandated ratio disclosures. In the course of all of that analysis, it would be a shame to overlook “silver-lining” opportunities to engaging in proactive, positive dialogue with the company’s various stakeholders. And the most important constituency at most companies is the employees. Pay ratio disclosures may be disconcerting to employees for a variety of reasons. Most obviously, while the CEO’s total compensation has long been public information, its stark numerical contrast to median employee compensation could be expected to generate negative emotional responses from some members of the workforce. Less obvious, but perhaps as disconcerting, may be the realization by half of your employees that they are compensated below the median. This realization could be further exacerbated by negative comparisons to peer company compensation medians and ratios, which will likewise now be public. Failure to proactively address these issues could result in a disgruntled subset of...