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regulation
Clearhouse
Comment Solicitation: Initial Listing Liquidity Measures
Publication Date: October 5, 2018

Click here to read our Comment Solicitation >>

Nasdaq is soliciting public comment on its initial listing criteria relating to the liquidity of equity securities. The comment solicitation is designed to elicit views on whether the rules should be changed and the impact of certain specific changes being considered on investor protection, the liquidity of listed securities and capital formation.

We encourage all interested parties to review the detailed description in our Comment Solicitation and provide comments before November 16, 2018.

Electronic responses are preferred and may be addressed to: comments@nasdaq.com.


 
spotlight
Clearhouse
Wynn Resorts: 7 Tactics to Cultivate a World-Class Employment Brand
Publication Date: October 4, 2018

It's been just eight months since Matt Maddox, CEO of Wynn Resorts (Nasdaq: WYNN), took the reins of the company following the abrupt departure of founder Steve Wynn following sexual misconduct allegations. During that short time, the company's board and leadership team have demonstrated they are serious about creating a workplace that fosters diversity and inclusion.

Perhaps the most public example of that commitment is the swift nomination and onboarding of three new women board members: Betsy Atkins, Dee Dee Myers and Wendy Webb. Nasdaq reached out to these newly-minted Wynn board members to learn more about the multi-faceted approach the company is taking to restore its employment brand and the trust of all its stakeholders, from shareholders to front-line employees.

They shared seven tactics Wynn has employed to emerge from the crisis stronger than ever—and with a world-class employment brand that maximizes its diverse talent pool.

1) Separate the CEO and Chairman roles.

When Steve Wynn stepped down, there was naturally concern that Wynn Resorts would have a difficult time separating the man from the brand—the very logo of the company is his signature. However, Matt Maddox, Wynn's new CEO, has spearheaded a smooth succession—in part because the board separated the roles of chairman and CEO when Steve Wynn stepped down.

The onboarding of a new CEO is a key opportunity for companies with a combined chairman/CEO role to consider separating that role. Wynn's board elected to split the roles, as they wanted to allow Matt to focus on leading the company through a potentially bumpy transition period. "Matt has taken this transition very seriously, devoting a lot of time in-person engaging with employees to listen to them and to share his vision for the company going forward," shared Betsy Atkins. "And when you look at the company's recent performance, Wynn hasn't missed a beat: The overall performance of the company has remained strong and the corporation continues to function smoothly."

2) Bring meaningful gender diversity to the board.

The Wynn Resorts leadership team committed to bringing a new perspective to company leadership and the board as the company turned its focus internally on gender diversity, inclusion, and sensitivity. The board recruited Betsy Atkins, Dee Dee Myers, and Wendy Webb through a very robust and transparent process, during which the entire board was fully engaged. Adding three new independent women directors placed the company among the top 40 of S&P 500 companies (by female board representation).

"There are mountains of evidence that show conclusively that diverse groups of decision-makers make better decisions. So diversifying the Wynn board quickly in the wake of Steve Wynn's departure was essential to navigating the crisis," said Dee Dee Myers. "Betsy, Wendy and I not only bring our unique perspectives and experiences to our roles, but we also bring new skills, and that has been helpful as the board develops and rolls out strategies to address a range of challenges, from improving workplace diversity and inclusion, to compliance, compensation and communications."

"Adding three new directors at once—let alone three new women directors—changes the dynamics in any boardroom," said Betsy Atkins. "However, we were warmly received, and the board's timing has allowed Dee Dee, Wendy, and me to be part of the launch of a whole new set of diversity and inclusion initiatives, both from an oversight as well as a participation standpoint. Wynn's board and leadership team are moving quickly to ensure the company and its employees come through this transition stronger than ever, and I'm thrilled to be a part of that work."

3) Recruit critical skillsets to the board.

With its new women board members, Wynn not only improved the board's gender profile, but added skillsets that will be instrumental in guiding the company going forward. Dee Dee Myers and Wendy Webb each have high PR profiles that can help to bolster Wynn's brand halo. They also bring critical crisis management, strategic communications and PR skillsets that the board can leverage to help Wynn communicate its new strategies and navigate the leadership transition smoothly.

Wynn Resorts is actually five businesses in one: entertainment, retail, hospitality, gaming, and dining, so there are myriad ways the company can leverage the talents and expertise of its new board members. Wendy spent 20 years as a senior executive at The Walt Disney Company, so she has an entertainment and direct-to-consumer perspective that is valuable on the Wynn Resorts board.

"I'm excited to bring to the Wynn Resorts board not only my experience in global travel & tourism learned over two decades at Disney, but also knowledge about the nuances associated with transitioning from a founder-led company to the next phase of professional management," said Wendy Webb. "Additionally, given my background in Investor Relations and Strategy, and through service on other public company boards, I recognize the importance of maintaining a sharp focus on creating value for shareholders. It is through this lens that I have approached my duties as a Wynn board member, while not losing sight of this company's culture and core values that make it a leading brand in the hospitality industry."

Dee Dee also brings considerable experience in public relations, messaging, transition management, and crisis management. She is currently executive vice president for worldwide corporate communications and public affairs at Warner Bros. Entertainment, so she is very familiar with the ripple effects of #MeToo issues.

Betsy Atkins' background as a veteran board member and a tech entrepreneur with experience with digital transformation, AI, branding, retail ecommerce and creating seamless omnichannel consumer experiences can be applied a number of ways to Wynn's business lines.

4) Benchmark the current culture.

The board and management team of Wynn are committed to having a workplace where every employee feels safe, supported, and has equal opportunities to develop his or her full potential. The first thing Matt and his leadership team did was benchmark the current culture.

Wynn conducted an employee-wide survey based on Fortune's "100 Best Companies to Work For" survey, adding questions related to diversity, working women, harassment, discrimination, and women's leadership opportunities to get a full baseline of how employees perceive the culture and working environment at Wynn Resorts. The leadership team has done a preliminary read-out of the results. Several focus groups have been created, each working on the departments that have the biggest impact on the employee base.

In addition, Wynn has engaged a compensation consultant to conduct a comprehensive pay equity study and a promotion equity study to review the rate of succession by gender and by ethnic groups. The company is also working with the Secretary of State of Nevada to participate in their gender equity workplace study.

"When I was approached about joining the board of Wynn Resorts, I quietly paid a visit to the Wynn Las Vegas property," said Betsy Atkins. "I wanted to get a read on its front-line employee base. Wynn is a premium hospitality company, delivering boutique luxury hotel service on a massive 4,000+ room scale—which means service employees are the core asset of the company's brand halo."

"At every level and every touch point at Wynn Las Vegas, I was consistently met with employees who were clearly happy to be working at Wynn and who truly cared about their customers. Whatever issues Wynn would face in the fallout of its founder stepping down, a demoralized and indifferent employee base wasn't one of them—a fact that reinforced my decision to join the company's board of directors."

5) Create a new division focused on leadership development.

Wynn has created a new division, the Culture and Community Department, which is specifically focused on leadership and development, diversity and inclusion, community relations, and gender equality. The entire 25,000 employee workforce of Wynn will feel the impact of the rollout of this division.

As part of this initiative, Wynn launched a Women's Leadership Council, and all four women directors (there was already one woman on the board, Patricia Mulroy) participated in the kickoff and will be involved going forward. The council will host town hall meetings, chats, and networking events to promote advancement of the female employee base.

Wynn is also expanding its already robust internal organizational development program to include leadership development curriculum that covers its broad employee base. There are classes that develop interns into first-time leaders, courses to develop supervisors and managers, courses for rising directors and senior VPs, and training for junior executives reporting to Wynn's C-suite.

6) Roll out a comprehensive compliance and education program.

Wynn Resorts has revisited and updated its internal employee "code of conduct" and associated training and taken that process a step further by adding specific diversity and inclusion courses. The content and complexity of the courses are tailored by the level of employee: directors and above take an eight-hour course, first-line managers or supervisors take a four-hour course, and line level employees in hospitality, restaurants or retail take a two-hour course.

The curriculum includes unconscious bias awareness, updated anti-sexual harassment and compliance training, and very comprehensive reporting training for management. An outside firm is implementing the program, which is supervised and owned at the senior level of Wynn's internal human resources and legal departments.

7) Rebuild trust with shareholders and foster support for long-term strategies.

As Wynn's leadership team began rolling out internal strategies to bolster trust with employees and consumers, the board participated directly in the most recent proxy outreach season. The goal was to update shareholders on how the company's leadership team is navigating the leadership transition and to generate support for the new long-term strategies the company is implementing to ensure the employee brand is strong.

Board members had face-to-face conversations with several big index funds, including Vanguard, State Street Global Advisors and BlackRock. Along with Wynn's general counsel and CFO, board members also had conversations by phone with institutional shareholder corporate governance and proxy voting groups.

***

Wynn Resorts (Nasdaq: WYNN) is a $16 billion developer and operator of premium resorts and casinos.

Betsy Atkins serves as President and Chief Executive Officer at Baja Corp, a venture capital firm. She is currently on the board of directors of Wynn Resorts, Schneider Electric, Cognizant, and a private company, Volvo Car Corporation, and served on the board of directors of The Nasdaq Stock Market LLC and as CEO and Board Chairman at Clear Standards.

Margaret J. "Dee Dee" Myers has been Executive Vice President, Worldwide Corporate Communications and Public Affairs for Warner Bros. Entertainment, a broad-based entertainment company and division of TimeWarner, Inc., since September 2014. She also serves on the board of the National Museum of American History. Myers served as White House Press Secretary under President Bill Clinton during his first term.

Winifred "Wendy" Webb has been Chief Executive Officer of Kestrel Corporate Advisors, an advisory services firm counseling corporate and non-profit organizations on strategic business issues, including growth initiatives, digital marketing, board governance and investor relations, since February 2013. Ms. Webb currently serves on the Boards of ABM Industries (since 2014) and 9 Spokes (since 2015). She also serves as Co-Chair of Women Corporate Directors, Los Angeles/Orange County Chapter.


 
public policy
Clearhouse
Business Development Companies Seek to Improve Retail Investor Access to Private Markets
Publication Date: September 24, 2018

The Securities and Exchange Commission's (SEC) Acquired Fund Fees and Expenses Rule (AFFE) has constrained investment and liquidity in business development companies (BDCs) and limited the ability of main street investors to invest in private companies. Here's how.

BDCs provide funding to middle market companies that are not yet large enough to access broad capital markets but require more capital for growth than banks can provide. The BDC corporate structure also offers retail or "main street" investors the opportunity to invest in private companies, through a vehicle that is more accessible than other forms of private investing that require investors to have a high net worth and a 10+ year commitment.

Late last month, SEC Chairman Jay Clayton told The Wall Street Journal that individual investors need more access to the private markets. In his speech in Nashville, he also said that companies located in the center of the U.S. (where there is less venture capital funding) need more access to capital. BDCs can help close both the investment opportunity gap and the capital gap. The industry, however, is hampered by an SEC disclosure requirement that appears to be misapplied.

We spoke with several members of the Small Business Investor Alliance (SBIA), an advocate for investors in small and medium sized businesses, to get a better understanding of the complexities of this issue and why a fix is long overdue.

BDCs are important to the economy.

BDCs were created by Congress in 1980 to fill the void left by traditional lenders that found themselves unable to lend to small and mid-sized businesses due to increased regulatory burdens. Currently BDCs have over $80 billion invested in small to medium sized businesses. BDCs must invest at least 70% of their assets in active small and mid-sized businesses based in the United States. They invest in a variety of industries and sectors across America including manufacturing, healthcare technology, aerospace, consumer products, food and beverage, energy, media, and IT. BDCs have various investment strategies, but typically make secured and unsecured loans between $10-$50 million to middle market companies. Many of these companies grow into household names: Cirque Du Soleil, Formula One, National Surgical Hospitals, and Brunswick Bowling are all companies that were financed at some point through BDC investments.

While the BDC universe is still relatively small as compared to that of closed-end funds, it plays a significant role in the economy: "BDCs facilitate capital formation into the middle market sector of the economy which is responsible for 1/3 of private sector jobs and produces more than $6 trillion in revenues annually," said Tonnie Wybensinger, Executive Director of the SBIA's BDC Council.

The AFFE Rule overstates the expenses of investing in BDCs.

The SEC passed the AFFE Rule in 2006 in an effort to help investors better understand the full spectrum of fees and expenses incurred by registered funds, in particular those that invest in other funds as part of their investment strategy. However, the application of the AFFE disclosure requirement overstates the expenses of mutual funds and other registered funds that invest in BDCs. BDCs hold a unique place in the registered funds' world acting as an operating company within a closed end fund structure. Adding the total expenses of the BDC into the expense ratio of a regulated fund effectively double counts the impact in a registered fund's expense ratio. A BDC's trading price already reflects its operating expense structure, which reduces the total return of the acquiring funds' investment in the BDC. Reflecting these expenses again under the AFFE rule results in double counting a BDC's expenses. The existing application of the AFFE rule disclosure to a BDC investment is therefore misleading and inaccurate.

It is this overstatement of the regulated fund's expense ratio and the misinformation it portrays that resulted in major index providers excluding BDCs in 2014 from index eligibility and contributed to a BDC industry-wide decline in institutional ownership and IPOs.

BDCs are important to main street investors.

BDCs offer retail investors the opportunity to participate in the growth phase of small and mid-sized private companies, a sector of the market that is increasingly capitalized outside of public markets. Historically, BDCs have provided good returns to investors compared to traditional fixed-income investments: "During the past three years, BDCs have returned on average approximately 9% per annum, according to the Wells Fargo BDC Index," shared Wybensinger. "For a fixed income-oriented product, that's a pretty good return for investors, whether they are retail or institutional."

The exclusion of BDCs from major indices triggered a material decline in BDC IPO activity and a significant decline in institutional ownership (which dropped from 42% at the end of 2013 to 29% by the end of 2017). Investment and liquidity in the BDC industry have been constrained as a result, and fewer BDC IPOs means fewer opportunities for retail investors to participate in the creation of new firms bringing additional capital to contribute to the growth phase of small and mid-sized businesses.

"The loss of institutional ownership impacts the quality of governance for the BDC industry, and by extension harms retail investors. Fewer institutional owners means lower voter turnout and limited professional oversight of BDC managers, for example through research analyst coverage," said Liz Greenwood, Corporate Secretary and Chief Compliance Officer of publicly traded BDC, BlackRock TCP Capital Corp. (Nasdaq: TCPC) and a member of SBIA's legal steering committee. "There's an inherent governance benefit to retail investors when an industry has more institutional investors."

"BDCs are effectively excluded from passive investment manager investment," shared Ian Simmonds, CFO of TPG Specialty Lending and Chair of SBIA's BDC Council. "BDC portfolio companies are executing long-term growth strategies, and institutional shareholders tend to be more fundamentally based in their analysis. Exempting BDCs from the AFFE Rule will bring more stability to the sector's ownership, more liquidity into BDC stocks, and more depth to the overall shareholder base—all of which benefits retail shareholders."

The SEC has the authority to remedy this situation.

As markets evolve and change, a modernization of the regulatory framework supporting them is at times warranted. In fact, in the latest draft of the 2019 House Appropriations Bill Report, issued earlier this summer, Congress indicated that it would like the SEC to revisit the AFFE Rule as it pertains to BDCs.

There is precedent for exempting corporate structures similar to BDCs from AFFE disclosure. REITs and closed-end funds are already exempted from AFFE disclosure. When the SEC passed the AFFE rule in 2006, the BDC industry was in its infancy and there was no organized representative industry body to advocate on its behalf for exemption.

"We believe that while the AFFE Rule itself is fundamentally sound, its disclosure requirements shouldn't apply to BDCs, just as they don't apply to REITs. Exempting BDCs from the AFFE Rule will steer additional capital to the middle market sector of the economy and increase investor access to private companies, catalyzing job creation and economic growth," said Wybensinger.

For more information, visit www.BDCsWorkforAmerica.org and read SBIA BDC Modernization Agenda >>

***

Liz Greenwood is Corporate Secretary and Chief Compliance Officer of BlackRock TCP Capital Corp. (Nasdaq: TCPC) and a Managing Director of BlackRock TCP Capital's advisor, Tennenbaum Capital Partners, LLC. She also serves on the Legal Steering Committee of the SBIA.

Ian Simmonds is the Chief Financial Officer of TPG Specialty Lending, Inc. and a Managing Director of TPG Sixth Street Partners. He also serves as Chair of the SBIA's BDC Council.

The Small Business Investor Alliance (SBIA) advocates for investors of the small and medium-sized businesses that are a critical source of job growth in the U.S. The SBIA is the largest voice for business development companies (BDCs) in Washington, D.C., representing lower middle market private equity funds and investors who provide vital capital to small and medium sized businesses nationwide. Tonnie Wybensinger serves as the Executive Director of the SBIA BDC Council.


 
leadership
Clearhouse
Bridging the Confidence Gap in the Leadership Pipeline
Publication Date: September 12, 2018

Nasdaq's Winning Women series seeks to share the insights of successful business women from inside the boardroom and C-suite.

In the second of our series on Winning Women, Caren Merrick, veteran director and entrepreneur, spoke with fellow veteran board member Candace "Candy" Duncan about the important role confidence plays in getting women to the next rung of the corporate ladder. As a former Managing Partner at KPMG who has gone on to serve on several high-profile public company boards, including FTD Companies, Inc. (Nasdaq: FTD), Discover Financial Services, and Teleflex Incorporated, she has unique insights on how to help build confidence in corporate America's pipeline of emerging female leaders.

During her conversation with Caren, Candy shared key insights gleaned from decades of experience as a corporate leader and mentor.

Gender parity is a business issue, not a "woman's issue." The statistics tell a very vivid story; consider for example the Credit Suisse report that revealed that the top 50% of companies with female CEOs experienced returns on equity that are on average 19% higher. Boards are becoming aware that they will have a more powerful team sitting around the table, and hopefully a more positive impact on the bottom line, as they bring more diversity to the boardroom. Technical skills and professional experience continue to be paramount, but boards also need global, regional, ethnic and gender-based perspectives to ensure companies stay relevant.

There is no lack of women qualified to lead, but I have noticed during my career that women sometimes lack the confidence to step up onto the next rung of their careers. "Confidence is the stuff that forms thoughts into action." That quote is from The Confidence Code, a book about self-assurance written by Katty Kay and Claire Shipman. It's been my experience that action begets confidence—and many women wait too long to seize opportunities that will help them grow professionally.

Those of us who have made it to the C-suite and the boardroom can have a real impact on the confidence factor. While this isn't exclusively a female issue, it is more prevalent in females than in males. Here are three ways we can help nurture a pipeline of women who are confident and action-oriented leaders.

#1   Encourage talented women in your company's pipeline to pursue challenging roles.

Women in the management pipeline need to be given opportunities to take risks, to make mistakes, to fail—which also gives them opportunities to gain confidence. I noticed a number of times during my career that when a male and female candidate were each asked to apply for a promotion that required multiple skillsets, the woman saw that opportunity very differently. She looked at the list of ten skillsets and said, "You know, I'm only really good at eight of these. Give me another six months, give me another year, I'll get the other two mastered." The male looked at the same list and said, "Great, I'm really good at four! No problem, I'll learn the other six on the job."

Oftentimes the female candidate who hesitates just needs a bit of a push. Obviously, someone thought she was ready, or she wouldn't be considered for the position. More than once during my own career at KPMG, I was asked to take on a role and my immediate response was, "I'm not sure I'm ready for that." I was lucky, because the individuals in those instances said, "Think about it, I'll call you back tomorrow." And in in the meantime, they called my immediate supervisor and said, "Get her straight. She needs to do this." Not everybody has that kind of support in their companies.

Managers should be aware of this "readiness=perfection" mindset and how it can make good candidates hesitate to take on challenging roles, so they are prepared to give them a nudge in the right direction.

#2   Sponsor and mentor high potential women.

Sponsors and mentors are important career catalysts for emerging leaders. I personally had different sponsors and mentors along the course of my career, and I've been a mentor and sponsor myself. These aren't necessarily lifelong relationships, as people need different kinds of coaching and sponsorship throughout their careers.

If you've never served as a mentor, consider it. These relationships are so beneficial to companies because they are a two-way street: My mentees have given me insights into team dynamics issues, industry specific knowledge and ways to use emerging technologies. When I was an audit partner, I'd often sit next to the most junior person in the audit room and tell them to teach me two things by the end of the day. It was amazing how my technology skills soared as they taught me shortcuts and ways to leverage new software platforms.

Sponsors and mentors serve different purposes. A sponsor is often a level or two higher than a mentor. A sponsor's role is to push female leaders to their next challenge. As a sponsor, you make pivotal comments when that woman is not in the room, sharing that she is ready for the next responsibility, the next opportunity. You know her well enough to say, "I think Candy would do a great job at this. She's already done A, B, and C, so D, E, F, and G will follow naturally." And you likely do some coaching and help her make connections to get ready for that next position.

A mentor, on the other hand, is closer on the management ladder to their mentees; likely they mentor direct reports or other professionals who work elsewhere in the company or industry at the same level as their direct reports. As a mentor, you talk your mentees through different issues as they grow and stretch into new responsibilities and challenges. You help them navigate those growth opportunities. You are probably one of the first to know when she makes mistake and one of the first to know when she does something really good. You have the ability to coach, guide and provide constant feedback on a real-time basis.

How did I find these people? Sometimes the relationships happened organically, sometimes they came to me for help and sometimes I was supervising individuals who I thought had the potential to go far. I felt responsible for helping them become even better than I was, because the company as a whole wins when we have a really strong team.

#3   Keep a mental list of female colleagues to recommend for board seats.

Women on boards are in an excellent position to help other women be recruited for board service. Women board members are often approached to join additional boards, at times by companies that may not be a good fit for any number of reasons: we may be over-boarded, or the timing isn't right, or there is too much overlap between multiple company board and committee meeting calendars. When these situations come up, it's important to be prepared to put someone else's name forward, someone who is ready for board service but perhaps not yet on the radar.

Twice I've been approached to join new boards at a time when I was already serving on three others. Both times I declined, but quickly made introductions to alternative female candidates who were very talented and had similar audit practice backgrounds and experiences to my own. Both women were ultimately voted onto those boards.

We all know women who are very similar to ourselves. Women executives have deep networks of female colleagues through the workplace, through professional associations, and through our involvement with women's leadership and advocacy groups like Catalyst, National Association of Corporate Directors, Paradigm for Parity, Committee of 200, and Women Corporate Directors. If you don't belong to one of these groups, look into joining one. Women at the top can—and should—facilitate the process of scoping for talent outside of the normal viewing lens and make introductions to the decision-makers who choose board members.

Now is such an exciting time to be a young professional woman in corporate America. Never before has the younger generation had so many skillsets and competencies that older executives and board members need to stay relevant. The emergence of new technologies within critical domains, such as cyber security, risk management and social media, has opened up unprecedented opportunities for talented young professionals (women included) to move up in the corporate ranks quickly, and move into the boardroom as well.

If I could give rising female professionals who aspire to the C-suite and the boardroom one key piece of advice, it would be this: Don't be afraid to speak up, your voice needs to be heard. If more and more women speak up, we are going to find ourselves in a very different place than we were 40 years ago.

Read the first of our Winning Women series featuring Janet Hill here >> 

***

Candace Duncan serves on the board of directors of Discover Financial Services, Teleflex Incorporated and FTD Companies (Nasdaq: FTD). Candy served on the KPMG LLP board of directors from 2009 to 2013, where she chaired the board's nominating committee and partnership and employer of choice committee. She retired from KPMG in November 2013 where she was Managing Partner of the Washington, DC Metropolitan Area since 2009. She is also a member of the National Association of Corporate Directors, International Women's Forum, C200, and Women Corporate Directors.

Caren Merrick is the CEO of Caren Merrick & Co. Previously, she was founder and CEO of Pocket Mentor, a mobile application and digital publishing company that provides leadership development and career advancement. Caren currently serves on the boards of The Gladstone Companies (Nasdaq: GAIN, GLAD, GOOD, LAND) and the Metropolitan Washington Airports Authority. She is also a co-founder and former Executive Vice President of webMethods, Inc., a business-to-business enterprise software solution, which went public on Nasdaq before being acquired.

 


 
outside insight
Clearhouse
SOX's Financial Expert Requirement 15 Years Later
Publication Date: September 4, 2018

Ann C. Mulé is the Associate Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

This article was first published in Directors & Boards magazine. Republished with permission.

Many companies are missing an audit committee disclosure opportunity.

In the 15 years since the Sarbanes-Oxley Act of 2002 (SOX) was passed, large institutional investors have been "finding their voice" and sharing their views of board expectations with regard to composition, accountability and transparency.

One of the most important aspects of the legislation was that it added additional requirements for the audit committee — the board's financial-oversight lynchpin — in an effort to strengthen it.

SOX required an annual disclosure of whether or not the board of directors had at least one audit committee financial expert (ACFE) on its audit committee, and if so, the expert's name and whether or not they were independent of management.

Part of the reasoning underlying this new disclosure requirement was that someone who possessed the skills and experience to be qualified as an ACFE, would ask more challenging questions and, as a result, more effective financial oversight would occur.

SOX was specific as to the skill sets the designated ACFE should possess, and also how the ACFE acquired these skill sets.

While there has largely been consensus that individuals who possess deep accounting, auditing, or corporate finance expertise have the skill sets to qualify, there has been disagreement and confusion over whether or not an individual is qualified to be designated as an ACFE if she or he held a supervisory role over someone with these skill sets. Investors may differ as to which particular ACFE skill sets they want to see on the audit committee. However, are companies missing an opportunity to make the ACFE disclosure more transparent and easy to understand for investors?

Our exclusive review of the 2017 proxy statements of the Fortune 100 companies found the disclosure determining why an ACFE qualified was largely lacking.

Here is what we found:

1.    It was a difficult and time consuming task to determine the reason why an audit committee member qualified as an ACFE because very few companies have voluntarily disclosed this information within the language of the actual ACFE designation disclosure. Five companies that did disclose the ACFE qualifications within the context of the actual ACFE designation were The Travelers Companies, Inc., Johnson & Johnson, Marathon Petroleum Corporation, Best Buy and Target Corporation. Their disclosures were transparent and easy to follow because all of the information was contained in one place in the proxy statement. Such disclosures enable an investor to easily ascertain the diversity of ACFE skill sets present (or lack thereof) among the ACFEs as a whole.

As an example, Travelers designation disclosure reads as follows: "The Board also has determined that Mr. Dasburg's experience with KPMG Peat Marwick from 1973 to 1980, his service as a KPMG Tax Partner from 1978 to 1980, his experience as Chief Financial Officer of Marriott Corporation, as Chief Executive Officer of Northwest Airlines, Burger King Corporation and ASTAR and his service on the audit committees of other public companies qualify him as an audit committee financial expert, and he has been so designated. In addition, the Board designated Mr. Kane as an audit committee financial expert after considering his extensive experience as an audit partner with Ernst & Young for 25 years."

2.    Some companies clearly disclosed the specific reasons why an ACFE was designated within their director biographies in the proxy statement. Twelve companies took this approach: McKesson Corporation, United Technologies Corporation, Tyson Foods, Inc., Publix Super Markets, Inc., General Dynamics Corporation, CVS Health Corporation, Lockheed Martin, The Home Depot, Inc., Anthem, Inc., Walgreen Boots Alliance, Inc. and AmeriSourceBergen Corporation. Marathon Petroleum Corporation explicitly disclosed the reasons why each ACFE qualified both in the designation and in the director biographies.

3.    In many companies, it was not easy to determine the reason why one or more of the designated ACFE's qualified either from the actual ACFE designation disclosure or from the director biographies. In this case, one had to spend time carefully reading the director biographies to try to determine what experience or skill sets might qualify the individual as an ACFE.

4.    To complicate things further, there were two companies that had only "Supervisory CEO ACFE's" as designated ACFE's on their audit committees. In other words, neither of these companies had a designated ACFE with deep accounting, auditing and/or corporate finance expertise on their audit committees (i.e., no "Preparer ACFE" "Auditor ACFE," or "Evaluator ACFE.") However, after spending the time to do a further analysis of the background and skill sets of the audit committee members who were not designated as ACFEs, it was determined that each company had a non-designated member(s) who possessed either deep accounting or corporate finance expertise on the committee.

5.    Regardless of one's position with regard to the merit/value of the "Supervisory CEO ACFE," another relevant question that investors should be asking is whether or not some companies may be incorrectly designating a CEO as an ACFE who does not technically meet the necessary "active supervision" requirement as per the SEC's adopting release. In some cases, it was impossible to determine if this was the case through reading the proxy disclosures.

6.    Numerous organizations track the absolute number of ACFE's on audit committees and the absolute number has trended upward over time. This implies that the financial expertise of the audit committee as a whole has been increasing, which is a good trend. However, in some cases, simply tracking the numbers may lead to an incomplete picture. For example, with regard to a specific company, if the absolute number of ACFE's has increased numerically but all of them are "Supervisory CEO ACFE's" (i.e., none of whom have deep accounting, auditing and/or corporate finance expertise), shouldn't this information be readily available to investors so that they can independently decide whether or not that particular audit committee is "fit for purpose" with respect to financial oversight? (Or, at least whether or not there is a need to perform a more detailed review to see what other financial oversight skill sets may or may not be present in the non-designated members?)

Since the audit committee is charged with critical financial oversight responsibilities, investors should be able to easily understand what financial oversight skill sets are possessed by the directors on the board committee as a whole. They should also, as an important first step, understand WHY the board determined that the audit committee member qualifies as an ACFE.

It is important to note that boards and companies are already doing the due diligence work internally to make the judgment call as to whether or not an audit committee member qualifies as an ACFE, and why. Why not clearly share this important information with investors as way to assist and engage with them?

***

Ann C. Mulé is the Associate Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware where she oversees and manages all of the professional, public service and academic outreach activities of the Center.


The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice.


 
boards
Clearhouse
Four Essential Elements for Optimizing Your Board's Meeting Agenda
Publication Date: August 13, 2018

As board portal tools streamline—or in some cases completely eliminate—administrative tasks on the board's meeting agenda, valuable meeting time is recaptured for the board to focus on core fiduciary duties. A well-structured meeting agenda leverages that additional time to maximize productivity in the boardroom.

In this post designed to help Chief Governance Officers build a better governance framework, Joan Conley, Nasdaq Senior Vice President and Corporate Secretary, shares the four essential elements of an effective board agenda.

Each company's optimal board agenda is dependent upon a variety of factors, including how often the board meets, how long the board meets, and how prepared board members typically are. At Nasdaq, we find that these variables can be transcended by making executive and chairman sessions standard protocol for each meeting. We also utilize an extended agenda for every board and committee meeting.

Board meeting agendas at Nasdaq are of course built within the company's secure board portal, where they are accessible to the board (and committee) chairs and archived as part of the corporate record. Nasdaq's playbook for creating an effective board agenda includes the following essential elements.

1. Executive sessions. Nasdaq board members have a standing invitation to hold executive sessions before and/or after the general board meeting. These brief sessions (typically 30 minutes or less) are attended by independent directors only, without the CEO or a corporate governance officer in attendance.

Executive sessions provide an opportunity for board members to discuss internal issues that may have cropped up since the previous meeting, or recent developments impacting corporations on a national or global level. If the consensus is that certain areas of concern or particular interest merit deeper discussion, the directors then share those with the CEO during the chairman session or general session.

2. Chairman sessions. These sessions may be longer than executive sessions, lasting up to 60 minutes. Chairman sessions at Nasdaq are attended by all directors (including the CEO) and by the Corporate Secretary.

During the chairman session, each committee chair reports on matters discussed and issues of importance to the committee. The CEO highlights key areas of focus for the board meeting, and then asks directors to candidly share any current concerns. The CEO is debriefed on topics of interest raised during the executive session so he or she can offer perspective on which items are relevant to the company and should be added to the general session agenda. Committee meeting reports, which are highly confidential, are an important component of the chairman session.

3. Regular session. This general board session includes the participants of the chairman sessions, as well as any executive staff or department heads called upon provide reports and/or updates. The board reviews the corporate strategy, receives updates on strategic initiatives, reviews quarterly or annual financials, and discusses new and emerging issues.

The goal of optimizing the board meeting agenda is to ensure directors receive all pertinent information required to carry out their fiduciary duties, that they have a voice in the decision-making process, and they make the highest and best use of meeting time. The order and length of each session within a board meeting agenda will differ from company to company and even meeting to meeting, depending upon the scheduling needs of the board and topics to discuss.

4. Extended agenda. An "extended agenda" is a highly effective tool that keeps board discussions focused and ensures directors are fully engaged.

The extended agenda is the basic meeting agenda with a script and attendance list embedded into it. This tool is used by the chair as he or she presides over meetings. The script outlines what should take place, the order of meeting sessions, and who should be there. It references specific page numbers of board materials and slide decks, and includes the standard template language required to process through the meeting agenda, including opening remarks, motions, action items, invitations for additional questions, and dismissal of staff between committee reports. The extended agenda is finalized during meeting prep sessions with the board chairman, the CEO, and each committee chairman.

The extended agenda facilitates better board meetings by allowing meeting chairs to participate in discussions without the distraction of keeping Roberts Rules of Order top of mind. Nasdaq's extended agenda is a tool our board chairs find so useful, they often carry it over to other corporate boards on which they serve. It has a tangible benefit to the chief governance officer as well, serving as a robust outline for drafting the board meeting minutes.

For more insights from Joan Conley, read:

Seven Tactics to Engineer Better Boardroom Dynamics >>

Onboarding New Directors: Beyond the Board Manual >>

***
Joan Conley is Senior Vice President and Corporate Secretary of Nasdaq and its global subsidiary organizations and, in that role, is responsible for the Nasdaq Corporate Governance Program and Nasdaq Ethics Program. She also serves as Managing Director of the Nasdaq Educational Foundation and is a Director of the Nasdaq Entrepreneurial Center Board.


 
audit
Clearhouse
Get a Handle on Critical Audit Matters
Publication Date: July 30, 2018

Cindy Fornelli is the Executive Director of the Center for Audit Quality.

Last year, following approval by the Securities and Exchange Commission, the Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard that significantly changes the auditor's report—with equally significant implications for investors, audit committees and others. The new standard is now moving through an implementation period.

The identification and communication of critical audit matters (CAMs) is the most significant change required by the new standard. If you feel like you don't fully have a handle on CAMs yet, you're not alone. Here are some FAQs to help.

What is a CAM?

The CAMs requirement adopted by the PCAOB is intended to make the auditor's report more informative and relevant to investors and other users of financial statements. According to the new standard, a CAM is "any matter arising from the audit of the financial statements 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.

How will auditors determine whether a matter is a CAM?

The determination of whether a matter is a CAM is principles based, and the new standard does not specify that any matter would always be a CAM. The new standard specifies that an auditor, in determining whether a matter involved especially challenging, subjective, or complex auditor judgment, should take into account, alone or in combination, certain nonexclusive factors (as specified in the new standard), such as the auditor's assessment of the risks of material misstatement, including significant risks.

What impact will CAMs have on the communication between the auditor and audit committee?

The source of CAMs are those matters communicated or required to be communicated to the audit committee. PCAOB auditing standards already require a wide range of topics to be discussed and communicated with the audit committee, which in most cases means most, and that it is likely that all of the matters that will be CAMs are already being discussed with the audit committee. However, not every topic that is discussed with the audit committee will rise to the level of a CAM. The PCAOB Board believes there should not be a chilling effect or reduced communications to the audit committee because the requirements for such communications are not changing.

Could a significant deficiency in internal control be a CAM?

The determination that there is a significant deficiency in internal control over financial reporting cannot be a CAM because such determination in and of itself is not related to an account or disclosure. However, a significant deficiency could be among the principal considerations that led the auditor to determine a matter is a CAM. For example, if a significant deficiency was among the principal considerations in determining that revenue recognition was a CAM, then the auditor could describe the relevant control-related issues over revenue recognition in the broader context of the CAM without using the term "significant deficiency."

Will CAMs only relate to the current audit period?

The PCAOB requires the communication of CAMs identified in the current audit period. While most companies' financial statements are presented on a comparative basis, requiring auditors to communicate CAMs for the current period, rather than for all periods presented, will provide relevant information about the most recent audit and is intended to reflect a cost-sensitive approach to auditor reporting. In addition, investors and other financial statement users will be able to look at prior years' filings to analyze CAMs over time; however, the standard permits the auditor to choose to include CAMs for prior periods.

Will the auditor be the original source of information about the company in the auditor's CAM communication?

The new standard includes a note explaining that the auditor is not expected to provide information about the company that has not been made publicly available by the company, unless such information is necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM or how the matter was addressed in the audit. The SEC has stated that they believe that situations where auditors would be required to provide information about the company that management has not already made public would be exceptions, arising only in limited circumstances, and not a pervasive occurrence.

What impact are CAMs expected to have on financial reporting?

Increased attention on CAMs could result in an incremental focus on aspects of management's related disclosures. This could result in discussion between and among management, the audit committee, and the auditor on how CAMs are described, and that may have an impact on management's consideration of the information to disclose in the financial statements related to that particular matter. Early dialogue among auditors, management, and the audit committee will be important.

These questions and much more are covered in a new publication from the Center for Audit Quality (CAQ), Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements. I invite you to read that report and to find more resources on auditor reporting at the CAQ website.

***

A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.


The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice.


 
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IN CASE YOU MISSED IT!
In the News
Webcast Transcript: Nasdaq Speaks – Latest Developments & Interpretations
Publication Date: October 8, 2018

On September 6, 2018, TheCorporateCounsel.net hosted Nasdaq Speaks: Latest Developments & Interpretations. John Zecca, Senior Vice President, General Counsel North America and Chief Regulatory Officer and other senior Nasdaq Regulation Staff discussed the latest that Nasdaq-listed companies need to know including recent initiatives, rule changes, resources and practice pointers. A transcript of the webcast is now available.

Read the transcript >>


SEC approves changes to Nasdaq Shareholder Approval Rules
Publication Date: September 26, 2018

The SEC approved changes to the Nasdaq shareholder approval rules effective September 26, 2018. The primary changes eliminate the requirement for shareholder approval of private placement transactions priced below book value but at or above market value; modify the measure of "market price" from the consolidated closing bid price to the lower of the Nasdaq Official Closing Price (NOCP) or the five-day average of the NOCP; and simplify the rule text. The SEC's approval order reiterates its view that "the development and enforcement of meaningful corporate governance listing standards for a national securities exchange is of substantial importance to financial markets and the investing public, especially given investor expectations regarding the nature of companies that have achieved an exchange listing for their securities." This rule amendment is the result of a multi-year effort, including two public comment solicitations by Nasdaq.

Read SEC Release >>


SEC Staff to Host Roundtable on the Proxy Process
Publication Date: September 25, 2018

Staff of the Securities and Exchange Commission will host a roundtable on November 15, 2018 to hear investor, issuer, and other market participant views about the proxy process and rules. The roundtable will focus on key aspects of the U.S. proxy system, including proxy voting mechanics and technology, the shareholder proposal process, and the role and regulation of proxy advisory firms. The roundtable, which will be webcast live on the SEC's website, will be held at the SEC's headquarters in Washington, DC, and will be open to the public. Views and comments may be submitted electronically or in paper in advance of or after the roundtable.

Read more >>

Submit electric comments here>> SEC Internet submission form or rule-comments@sec.gov.


Nasdaq and IR Magazine Webinar: "Navigating the Evolving ESG Landscape"
Publication Date: September 21, 2018

Nasdaq and IR Magazine will host a discussion on Thursday, October 11 at 11:00 a.m. ET on how the continued utilization of environmental, social, governance (ESG) is reshaping the investment landscape and impacting companies. The speakers, which include Foli Pontillo and Dan Romito with Nasdaq IR Intelligence, will discuss:
  • The key industry organizations and their roles in the ESG ecosystem
  • How ESG is integrated into the investment process
  • The role of the IR practitioner
  • How company ESG disclosures and transparency efforts are being leveraged by investors
Register here >>


SEC Withdraws No Action Letters Regarding Proxy Advisors
Publication Date: September 17, 2018

The Securities and Exchange Commission Division of Investment Management has withdrawn staff no action letters issued to Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004) concerning the ability of investment advisors to rely upon recommendations by proxy advisory firms in voting their clients' securities. The SEC further indicated that it would discuss the role of proxy advisory firms at an upcoming Roundtable on the Proxy Process. The Roundtable, which is expected to be in November 2018, will also provide the SEC staff an opportunity to engage with market participants on topics including the voting process and retail shareholder participation.

Read more >>

Read SEC Statement Announcing Roundtable >>

Read Nasdaq's petition to the SEC concerning Proxy Advisory Firms >>

Read Nasdaq's op ed about Proxy Advisory Firms >>


SEC Brings Charges in Short-and-Distort Scheme
Publication Date: September 14, 2018

The Securities and Exchange Commission has charged hedge fund adviser, Gregory Lemelson and his investment advisory firm, Lemelson Capital Management LLC, with illegally profiting from a scheme to drive down the price of Ligand Pharmaceuticals Inc., resulting in more than $1.3 million of gains. The SEC's complaint alleges that Lemelson used written reports, interviews, and social media to spread untrue claims. David Becker, an Assistant Director in the SEC's Division of Enforcement stated that, "while short-sellers are free to express their opinions about particular companies, they may not bolster those opinions with false statements, which is what we allege Lemelson did here."

Read more >>



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