Boston Traffic Report

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Everyone knows Boston traffic is gridlocked and public transportation does not perform.  Current ambitious State plans to fund public transportation, by an $18Billion bond offering, presently are pending in the Legislature.  According to an expert panel convened by the National Association of Corporate Directors-New England and the Business Roundtable held February 11 at the Boston Harvard Club, that $18Billion is a drop in the bucket.

Compared to other cities, Boston (which needs a lot of help as a very old and congested city) is a piker.  Seattle has a $54Billion transportation program and Los Angeles has a program in excess of $100Billion.  Further, it seems that the $18Billion is designed merely to make things operable, and not to address an expansion of transportation options.  That will take a lot more money.

The panel noted that businesses are moving out of Boston and Cambridge into surrounding suburbs, and as far west as Worcester.  The problem is that many in the high tech millennial population want to be in Boston or in Cambridge.  But housing is so expensive that housing becomes part of the problem.

What can directors do?  In terms of fixing geographic location and commuting policy for employees, management should be asked to listen to employees in detail: what their needs are.  Many current surveys, which ask a few simplistic questions such as “how do you typically get to work,” are not useful.  You need to know when people travel and what their problems are, specifically and then statistically. Sometimes subsidies for mass transit are not the answer.

A board can also ask management to become politically active, putting pressure on government and the Legislature to address the problems presented.

The presenting panel included the President of Zip Car, the Vice President for Public Policy for Verizon in New England, the President of the Massachusetts Biotechnology Council and the Marketing Director for JLL New England (serving business real estate clients).  If this panel thinks it may get worse before it gets better, we all are in for trouble.

Director Review of Risk

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Lots of advisers at this time of year circulate publications relative to the upcoming proxy season, and the obligations of boards of directors.  This is the year of “rethinking risk.”

Boards are advised to “assess risk” in the following areas:  does the board have expertise to evaluate the full range of risks?; does the board treat corporate culture as an enterprise asset which must be assessed for risk?; does management integrate risk into its strategy (this really ought to be an implicit no-brainer)?; is the board assessing the risk of not being either a leader or an “agile follower” with respect to the digital revolution and the expanding role of AI?; given the labor market, is the board deeply enough involved in assessing workforce risk?

There also is renewed interest in a series of Delaware litigations described as “Caremark cases.”  Almost twenty-five years ago, the Court of Chancery established a standard, requiring that directors be not only loyal and non-corrupt, but also that they had an obligation to conduct “oversight.”  Thereafter many cases were brought alleging directors were neglectful, and that injury to the corporation was actionable against them. 

Making a “Caremark case” was a very tough hill to climb, but recent litigation (involving claims against Blue Bell Creamery’s directors in connection with product contamination) did find a lack of oversight that created director liability.

Although analysis suggests that the Court considered this particular case a slam dunk (the company manufactures food and it is not a far step to say that directors ought to be aware of the risk of contamination), the Court noted not one specific failure but, rather, the categorical lack of board oversight of food safety.

Boards should not only identify risks, but also must allow specific identifiable time on board agendas in risk review.

Corporate Political Contributions

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Ever since the Supreme Court established the rights of corporations to exercise “political” speech (Citizens United), debates have raged concerning ground rules for corporate political action.

Sometimes the general public “votes with its purse” with respect to popular or unpopular political positions taken by companies, or by their executives (note particularly but not only the case of Chick‑fil‑A).

How do public corporations, with high profiles in terms of exposure to the securities market and to the consuming public, approach spending by the corporation?  Are political contribution decisions the bailiwick of management, or does the board have a strategic role? 

As noted in NACD Directorship magazine’s current issue, a poll of 399 public companies disclosed remarkable governance involvement: 276 such companies had a dedicated political spending webpage; 189 had board committee review of political spending policy; 201 had direct committee review of specific contributions.  Well over half also reported “general board oversight.”

Further, over 84% of S&P 500 companies make some disclosure concerning election-related corporate expenditures, and almost 60% post a detailed policy statement.  Conversely, only about 40% describe which political entities to which they may or may not contribute. 

Proxy advisory firm ISS reported a large number of shareholder proxy proposals relating to corporate political contributions (and lobbying), and is pushing for formal SEC regulation of disclosure.  Notably, almost all proposals regarding political contributions have to date failed of shareholder passage.

Whether you are publicly held or privately held, if you have a public profile (perhaps through the offering of products and services), how should a board of directors approach political contributions?

Best thinking:  boards should be actively involved; boards should adopt a corporate strategy for political contributions, based upon a business case (what is the economic benefit sought to be gained); boards must consider risks attendant to political expression.  Do political contributions line up with company statements of mission or values; is there preclearance of content and expense; what is your control for compliance with law, including the Federal Lobbying Disclosure Act.

In this highly politicized time, political expenditures can be volatile.  Interesting that of the S&P 500, only 141 companies categorically prohibit contributions to State candidates, political parties and committees.  This statistic alone suggests an open playing field for companies to support political action; and, an open invitation to foot‑fault by proceeding without due care.

Coronavirus Scams?

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Occasionally we are reminded that securities law scams are not only illegal, but also often prey on the worst instincts of their victims.

Yesterday, the SEC announced a formal warning to the investing public not to be tricked into offerings by companies claiming vaccines, cures or other strategies for the containment of coronavirus. 

One might not think, of all the potentially horrible fallouts of an aggressive world disease, that we would also find people attempting to illegally profit from the hysteria.  That the SEC, so quickly, should feel constrained to issue such a warning release is both startling and depressing.

Harvard Prof Sues NYTimes

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Yesterday, Professor Lawrence Lessig joined the parade of famous people who have sued the New York Times, over the years, for an almost inexhaustible list of alleged defamations.  This particular lawsuit is interesting in two different ways.

First, the defamation is characterized as being based upon “clickbait.”  This is the practice that, in today’s world, people click through news posted on media and all they look at is limited to the electronic headline.  Putting aside the substance of the underlying claim, the practical effect of finding liability here will put pressure on the way in which media sets headlines both electronically and, likely, in traditional type formats. 

Anyone who has attempted to write a headline that fits into the allotted space knows that it is not always possible to capture the nuance of the situation in five or eight words; sometimes, you actually have to read what follows.

The second aspect of the case is substantive:  the claim is that, notwithstanding Lessig’s efforts to set the record straight, the Times missed the point that in fact Lessig was not endorsing the actions of MIT in accepting donations from Jeffrey Epstein (a wealthy and convicted sex offender who killed himself while in prison facing sex trafficking charges).  It may be that Lessig’s efforts will be complicated by the fact that he seemingly, and admittedly, changed his view of the propriety of MIT’s actions, over time. 

Not surprisingly, the Times promises a vigorous defense, particularly since Lessig’s prior complaint to the Times was carefully reviewed by “senior editors” and rejected.  Stay tuned.

Proxy Season: Hot Topics

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The usual question put to C suite executives and directors, in an effort to jumpstart a panel or an interview, is:  “What keeps you up at night?”  That list for the upcoming proxy season seems to include the following:  management of personnel (which includes compensation, diversity, and culture); “ESG” which is the current buzz word for “environment, sustainability and governance,” with an emphasis on climate change; actions by the SEC concerning shareholder proposals and reining in proxy advisory companies; implications of the much-discussed Business Roundtable statement suggesting that corporations owe duties to employees and broader society, and not just to shareholders. 

An expert panel convened on January 14 by the New England Chapter of the National Association of Corporate Directors provided interesting perspectives; that panel included representatives of firms which advise directors, a representative of Glass Lewis (a proxy advisory firm), and an investment manager.  Interestingly, the panel did not seem to include any actual directors affected by these topics.

One noted development is the transformation of the compensation committee, which used to be concerned almost exclusively with fixing the pay of the CEO.  Now that committee is being repurposed, emphasizing employees below the CEO level, human resource policies concerning harassment, diversity, pay parity, succession below the CEO level, and how to approach the “five generations” now in the workforce.  These committees have been renamed by at least 20% of the surveyed public companies, and 40% of such committees already have been repurposed in the above manner.

Finally, the SEC has proposed two rules (comment period in each ends February 4):  the first would tighten access to inclusion of shareholder proposals in proxy statements (no surprise: opposed by investors); and, a controversial regulation of proxy advisors, requiring conflicts disclosure and affording companies the opportunity to review and comment on advisory reports prior to their release.

When the mandatory say-on-pay votes for shareholders in public companies was launched by the SEC pursuant to Congressional mandate, I considered this development unimportant.  After all, the votes are advisory only and are not nuanced:  your shareholders vote in favor of or opposed to your executive compensation, period.  Seems that I underestimated the use to which that vote would be put by proxy advisors; the Glass Lewis representative on the panel, noting that the average approval rate is approximately 96%, said that it inquires of companies where investor approval of compensation is less than 80% (a percentage which you might think would be deemed robust).

Insider Trading Re-booted

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The Second Circuit on Monday made insider trading a lot more risky by permitting the government to assert a criminal complaint against a tipper without showing that the tipper received personal benefit by reason of providing the tip.

Over the past couple of decades, the courts had grafted a requirement to show some benefit to the tipper in order to create liability when relying on the ’34 Act, setting off a series of confusing cases wherein the effort to define the requisite benefit became increasingly esoteric– receipt of money was easy, but what about gifts, or situations where benefits were inherent in close personal relationships.

The Second Circuit permitted a conviction to stand without even addressing the question of personal benefit by utilizing a different statute, Section 1348 of Title 18, which addresses securities fraud in general. See US v Blaszczak.

Note that neither the ’34 Act nor the text of Title 18 mentions the words “tipper” or “tipee” or “tipping.” There is a House bill that would address tipping directly, although it is too early to tell if anything will pass Congress and whether any such Act would adopt or reject the “benefits” requirement.

Homeopathic Drug Regulation

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Somewhat below the radar screen, in late October the FDA has changed the ground rules concerning manufacture and distribution of homeopathic drugs.

Refusing to endorse the then-status quo policy by issuing an official regulation, the FDA stated that the current policy does not reflect the “current thinking” of the Agency as it is inconsistent with the Agency’s “risk-based approach to enforcement generally.”  This “new” approach apparently requires premarket approval from the FDA.  The current Agency thinking appears to be that homeopathic drugs continue to have certain related health issues.  The FDA also warned that consumers opting for homeopathic products were likely bypassing “medical products that have been scientifically proven to be safe and effective.”

This is a complex area.  The FDA is receiving comments on its current position until January 23, 2020.  Those interested in further detail will need a deep dive; one good place to start is reading the Federal Register FDA announcements during the last week of this past October.

Proxy Access

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Earlier this month, the SEC proposed amendments affecting the process by which shareholder proposals are evaluated for inclusion in public company proxy statements.

In the proposed amendments, the SEC has maintained the $2,000 minimum ownership requirement, but shareholders seeking a place in the proxy process must have held those shares for at least a three year period so as to demonstrate a long-term investment in the company.  Further, the requirements for affirmative shareholder votes for re-submission of defeated shareholder proposals have been increased in a sliding scale of between 5% and 25% prior support before resubmission is permitted.

Comments to the SEC can be made until in early January.  The import of these changes appears related to an attempt to bar shareholder proposals propounded by small shareholders who take a stock position just for the purpose of exerting policy pressure on the issuer, divorced from any true interest in the shareholder’s economic stake.

Trends in Executive Comp

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It is boom time, particularly in the tech sector, and CEO compensation is climbing.  Comp consultants are in their heyday.  Twenty-five years ago, comp consultants were hired by management; today they are hired by boards of directors to figure out what to pay the C-suite.

At last Tuesday morning’s breakfast meeting of National Association of Corporate Directors/New England, an expert panel discussed the factors that enter into fixing CEO comp.  Needless to say, there were no pat answers.  However, certain themes emerged.

First, what are you aiming for?  What does the company need?  Is it all about the price of the stock?  To what degree does ESG enter into the equation?

Second, you are after all dealing with people.  Before getting embroiled in the metrics, what about the personality, and the goals and passions, of the CEO?

The experts guiding the discussion wanted to focus on current compensation (base salary and target bonus) and then long-term incentives, and whether those incentives should be tied to performance or longevity.  The answer, not surprisingly, is that each category needs to be filled to some degree.  There was also an expression of fear with respect to explaining to proxy advisors what the public company board was doing.  There was an undercurrent that if you did your job you could explain it to ISS, and a counter undercurrent that sometimes ISS didn’t listen.

One significant consideration:  it is very expensive to hire a new CEO, someone who is making a lateral move is likely to be seeking a step-up in salary.  There is a balance to be struck between paying for the performance you are getting and paying more for an unknown level of performance.