Monthly Archives: August 2019

Remarks before the 38th Government-Business Forum on Small Business Capital Formation

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the 38th Government-Business Forum on Small Business Capital Formation, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Martha [Miller]. It is wonderful to be here in Omaha. Thank you to all the participants in today’s program. Dean [Anthony] Hendrickson, thank you for welcoming us to Creighton University’s Heider College of Business. It is a beautiful facility that reflects the thriving economic region in which it sits.

I remember my first trip to Nebraska about twenty years ago. I was driving through the state and was just stunned by its Great Plains beauty. Since then, Nebraska has always been one of my favorite states, although I have not had many opportunities to visit. I am therefore happy to be back to talk about capital formation in the Silicon Prairie.

Reading Martha’s introduction to today’s forum deepened my affinity for Nebraska because I learned that the Reuben sandwich—my favorite—has its origins here. I understand, however, that there is a competing origin story that says the Reuben was invented in New York City. [1] The dueling sandwich origin narrative is a fitting theme for a discussion of capital formation. There will always be competition for capital, and too often New York claims capital that could have been put to good use right here in Omaha.


What the Capital One Hack Means for Boards of Directors

John Reed Stark is President at John Reed Stark Consulting LLC. This post is based on his memorandum.

Another day, another data breach. This time at Capital One, the fifth largest credit card issuer in the United States.

Specifically, on July 29, 2019, FBI agents arrested Paige A. Thompson on suspicion of downloading nearly 30 GB of 100 million Capital One Financial Corp credit applications from a rented cloud data server. The FBI says Capital One learned about the theft from a July 17, 2019, email stating that some of its leaked data was being stored for public view on the software development platform Github. That Github account was for a user named “Netcrave,” which includes the resume and name of Paige A. Thompson. According to the FBI, Thompson also used a public Meetup group under the alias “erratic,” where she invited others to join a Slack channel named “Netcrave Communications.”

KrebsOnSecurity actually entered the open Netcrave Slack channel on July 30, 2019, and reviewed a June 27, 2019 commentary Thompson, which listed various databases she found by hacking into improperly secured Amazon cloud accounts, suggesting that Thompson may also have exfiltrated tens of gigabytes of data belonging to other major corporations.


Audit Committee Disclosure in Proxy Statements—2019 Proxy Review

Leeann Arthur is a senior manager, Krista Parsons is a managing director, and Robert Lamm is an independent senior advisor, all at the Center for Board Effectiveness, Deloitte LLP. This post is based on their Deloitte memorandum.

In recent years, the role of the audit committee—and, in particular, its oversight of the independent auditor—has been subject to increased scrutiny from regulators, investors, and other stakeholders. The independent auditor is critical to maintaining confidence in the reliability of financial information and, ultimately, in the proper functioning of the capital markets. Increasingly, investors also look to the independent auditor to provide insights that support sound, well-informed financial decisions. With changes to the auditor’s reporting model that went into effect this year, and the imminent requirement to identify critical audit matters (CAMs), transparency around the audit committee’s interactions with the independent auditor is even more essential.

Now in its fifth year, Deloitte’s observations and analysis of trends in audit committee disclosures in the proxy statements of S&P 100 [1] companies reflect moderate increases in disclosure in certain areas of frequent focus by regulators and investors.

In 2019, certain disclosures relating to the independent auditor increased. A greater percentage of S&P 100 companies disclosed that the audit committee evaluates the independent auditor, the reasons why the committee decided to reappoint the independent auditor, and the tenure of the independent auditor. More audit committees also disclosed that they discussed the scope and plan for the audit with the independent auditor. While some other voluntary disclosures appear to have plateaued, these modest increases may have been in preparation for the new and upcoming regulatory requirements previously discussed.


Recent Application of Caremark: Oversight Liability

Jason J. Mendro and Andrew S. Tulumello are partners and Jason H. Hilborn is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Hilborn, Mr. Mendro, Mr. Tulumello, Elizabeth A. IsingGillian McPhee and Ronald O. Mueller. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision applying the famous Caremark doctrine, the Delaware Supreme Court confirmed several important legal principles that we expect will play a central role in the future of derivative litigation and that serve as important reminders for boards of directors in performing their oversight responsibilities. In particular, the Delaware Supreme Court held that a claim for breach of the duty of loyalty is stated where the allegations plead that “a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation.”

Although the case addressed extreme facts that will have no application to most mature corporations, the plaintiffs’ bar can be expected to attempt to weaponize the decision. With all the benefits that hindsight provides, derivative plaintiffs will more frequently contend that a board lacked procedures to monitor “central compliance risks” that were “essential and mission critical.” The Supreme Court’s decision reinforces that directors need to implement controls that enable them to monitor the most serious sources of risk, and may even caution in favor of a special discussion each year around critical risks.


Weekly Roundup: August 9–15, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 9–15, 2019.

5 Steps for Tying Executive Compensation to Sustainability

Finalized Volcker Rule Amendments

Managing Legal Risks from ESG Disclosures

Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review

Female Board Power and Delaware Law

Modernization of Regulation S-K

Inventor CEOs

Non-Employee Director Pay Practices

SEC Enforcement in Financial Reporting and Disclosure: 2019 Mid-Year Update

More than Money: Venture Capitalists on Board

A New Milestone for Board Gender Diversity

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

As reported by the WSJ, a new milestone has finally been reached for board gender diversity: there are no longer any companies in the S&P 500 with all-male boards!

Reaching just that one milestone has not exactly been expeditious. According to the WSJ, one in eight S&P 500 boards was all male in 2012. In 2019, women hold 27% of all S&P 500 board seats, up from 17% in 2012—certainly an improvement, but still far from anyone’s idea of gender parity. Progress seems to be even slower among companies in the Russell 3000 where, the WSJ reports, as of the first quarter of 2019, 376 companies still had all-male boards (19.3% women overall), reflecting a decrease from 457 in the fourth quarter of 2018 (18.5% women).

According to an ISS publication on U.S. Board Diversity Trends in 2019, 45% of new board positions among the Russell 3000 were filled by women in 2019, up from 34% in 2018, and a substantial improvement compared to only 12% in 2008. Moreover, in contrast to “previous years, when the percentage of new female directors was higher at large-capitalization companies, the high rate of new female directors—at almost parity—is consistent across all market segments.” This shift may reflect, in part, various initiatives by large asset managers, such as BlackRock and State Street, seeking to impose, through their votes, their own mandates for more board gender diversity. (See this PubCo post and this PubCo post.) ISS also attributes some of the change to California’s new board gender diversity mandate, affecting almost 700 companies. (See this PubCo post and this PubCo post.) The WSJ reports that, of “the 94 public companies in California with all-male boards when the law passed in late 2018, about 60% have added at least one woman to their boards since….”


More than Money: Venture Capitalists on Board

Natee Amornsiripanitch is a Ph.D. Student at Yale University; Paul A. Gompers is the Eugene Holman Professor of Business Administration at Harvard Business School; and Yuhai Xuan is Dean’s Professor of Finance at The Paul Merage School of Business at the University of California, Irvine. This post is based on their recent article, forthcoming in the Journal of Law, Economics, and Organization. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups (discussed on the Forum here) and Do Founders Control Start-Up Firms that Go Public? (discussed on the Forum here), both by Jesse Fried and Brian Broughman.

There exists a large literature on boards of public companies. However, research on boards of private companies is limited because of data limitations. To fill this gap in the literature, we employ a large data set of private venture capital-backed companies in the United States and abroad to explore the structure and functions of these boards.

In our article, we begin by documenting key features of board structure. We find that venture capital-backed boards of directors are small and are mostly composed of venture capitalists and independent outsiders. The median number of board members is five. As financing rounds progress, board size increases. As board size grows, the number of venture capitalists and independent outsider board members increases, while the number of insider board members remains small.


SEC Enforcement in Financial Reporting and Disclosure: 2019 Mid-Year Update

David WoodcockShamoil T. Shipchandler, and Joan E. McKown are partners at Jones Day. This post is based on a Jones Day memorandum by Mr. Woodcock, Mr. Shipchandler, Ms. McKown, Henry Klehm III, and Jules Cantor.

In May 2019, the SEC completed its second full year under the stewardship of Chairman Jay Clayton. Unlike the “broken windows” philosophy of Chair Mary Jo White that left little room for interpretation, Chairman Clayton has steadfastly adhered to his focus on “Main Street investors,” which has proven to be a concept that is straightforward in its delivery but difficult to predict in its application. As we have discussed in our previous White Papers, the ideological orientation of the Commission as a whole has been a challenge to ascertain based on several factors, including limitations on its ability to collect disgorgement, constitutional challenges to its administrative procedures, the federal government’s repeated budgetary issues, and the explosive growth of digital asset-based offerings, to name a few.

More specifically, when we try to understand where the Enforcement Division is heading, we examine the nature of cases that it has filed, the remedies that it has obtained and forgone, and the public statements of its Commissioners and Senior Officers, among other factors. But during Chairman Clayton’s tenure, these internally driven factors have been significantly affected, and in many ways overtaken, by outside factors that have never been present before or that have become more pronounced than ever before. For example:


Non-Employee Director Pay Practices

Bill Reilly is managing director at Pearl Meyer & Partners, LLC. This post is based on his Pearl Meyer memorandum.

Pearl Meyer’s “On Point: Non-Employee Director Pay Practices” survey provides real-time insights on the latest trends in non-employee director (NED) compensation practices and potential responses to increased external scrutiny. This online survey was conducted in March and April of 2019, with participation from 204 companies, including 143 publicly traded, 52 private for-profit, and nine not-for-profit (NFP) organizations.

This survey addresses a variety of topics, such as time commitments and supplemental pay, NED pay-setting process and compensation philosophy, equity grant practices, and public company responses to enhanced external scrutiny on director compensation. These survey findings will provide valuable insights to companies as they evaluate potential NED program changes going forward.


Inventor CEOs

Emdad Islam is an Assistant Professor at the Department of Banking and Finance at Monash University and Jason Zein is Associate Professor at UNSW Business School. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

The academic literature has established that individual CEOs possess an idiosyncratic “style” which can be detected in their corporate decision making. One important, yet unexplored aspect of CEOs’ personal background that can influence their style, is the extent to which they possess hands-on innovation experience as inventors. In our recent article, we examine whether this dimension of a CEO’s personal background impacts upon a firm’s innovation activities.

A possible channel through which individuals acquire and refine specialized skills is through hands-on experience. In our study, we conjecture that  CEOs’ inventor experience may endow them with valuable innovation-related insights that translate into a superior ability to evaluate, select and execute innovation-intensive investment projects for the firms they lead.


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