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proxy season
Clearhouse
5 Ways Governance Teams Can Step Up Their Proxy Season Game for 2019
Publication Date: February 14, 2019 

To help governance professionals understand and address the evolving concerns of shareholders, Martyn Chapman, head of strategy for Nasdaq Governance Solutions, together with Dan Romito and Ben Maiden from Corporate Secretary, recently hosted a webinar.  Among other things, our hosts shared these five ideas to help governance professionals step up their proxy season game for 2019:

1) Hold virtual or hybrid annual meetings.

 Virtual and hybrid annual general meetings (AGMs) are becoming increasingly popular, particularly in the U.S. where shareholders are often dispersed over a very large geographic area.  If your company hasn’t yet implemented virtual attendance at AGMs, it isn’t too soon to begin planning for next year. Following are some key considerations when preparing to transition to virtual annual meetings:

  • Engage a vendor that provides robust and reliable technology.  There are already many providers in this space, and a number of them partner with registrars and transfer agents. 
  • Investigate legal and regulatory requirements.  Whether an annual meeting is virtual or hybrid, meeting requirements still apply, including those that govern notice, decorum, attendance, material display, and voting, among others.   The company’s articles of incorporation and/or bylaws may need to be amended to provide for virtual annual general meetings.   Among other things, amendments should cover any failure in technology, even if it affects only one or a few shareholders.  For example, the chair may not be able to put forward a resolution to shareholders to adjourn a meeting if there is a severe technical problem during a fully virtual meeting, so the articles should provide the chair the ability under these circumstances to adjourn the meeting without a resolution.
  • Consult with major stakeholders.  Most companies will want to consult with their key shareholders to be sure they are comfortable with virtual general meetings.  Some shareholders may react adversely if there is a long-standing tradition of well attended physical meetings.  Putting forward a resolution to ratify amendments to the articles of incorporation to hold virtual AGMs is a good opportunity to discover shareholder appetite for a virtual or hybrid meeting format.  Other stakeholders to consider are service providers, registrars and transfer agents, and any vendors who would be providing technology.

2) Control your company’s ESG narrative to neutralize potential shareholder proposals.

 Environmental, Social and Governance (ESG) issues are here to stay.  Morrow Sodali’s 2018 Institutional Investor Survey states this unequivocally: “ESG issues are either fully integrated or progressing towards full integration with investment decision-making.” That survey listed the following ESG topics as top concerns of institutional investors:

  • Board skills and experience.  Investors are focused not just on the reputation of a board member but the skills that individual brings to the table.  If a board lacks a critical skill such as cyber security experience, investors will likely become concerned. 
  • Climate risk disclosure.  This issue is industry and sector dependent because some industries have a bigger impact on climate than others.  But investors are not just concerned about a company’s impact on the climate—they also want to know that companies are assessing the impact of climate change on the long-term sustainability of their core businesses and taking steps to prepare for that risk. 
  • Executive compensation.  Investors are wary of what they perceive as excess compensation or excess severance.  For context on what index funds view as “excess,” BlackRock outlined their perspective on executive pay in their 2018 stewardship guidelines.

Companies are increasingly finding that better engagement on ESG issues leads to shareholder proposals being dropped—or not filed in the first place.  Best in class engagement is proactive engagement, because by the time institutional shareholders reach out to you with an issue, they often already have made up their minds. 

3) Explain your company’s human capital management strategy.

Human capital management (HCM) has become an investment issue.  Massive amounts of data can now be accessed and analyzed across a multitude of companies, which has allowed investors to unearth correlations between human resource initiatives and investment outcomes.  Investors are keeping a closer eye on labor markets.  In BlackRock’s 2018 stewardship guidelines, they reported “In light of evolving market trends like shortages of skilled labor, uneven wage growth, and technology that is transforming the labor market, many companies and investors consider robust HCM a competitive advantage.” 

Companies need to articulate how they’ve established themselves as an employer of choice for the workers they depend upon. The company’s approach to HCM, including employee development, diversity, a commitment to equal employment opportunities, health and safety, supply chain, labor relations, and labor standards, is viewed as a factor in the continuity—and ultimately the success—of the business. 

BlackRock is a good litmus test on investor attitudes towards HCM, and they are encouraging companies to go a step beyond providing commentary and begin to bring transparency to HCM data and practices.  Investors know that companies possess data on their workforce to help investors distinguish companies that are managing HCM matters more strongly than those who are not. 

4) Help investors understand how data is protected and utilized.

2018 was a year chock full of stories in the media about data breaches and data sensitivity issues, stories that adversely impacted a wide variety of companies.  Society in general—and investors in particular—were caught off guard by the manner in how data is protected and utilized.  Yet a vast majority of companies still don’t disclose (to the degree that investors would prefer) what they actually do with their data and how that data is protected. 

Given the trajectory of big data, investors generally understand that data will continue to be utilized in new ways, but they want more disclosure and transparency (especially from a risk management perspective) around how that data will be protected and utilized, both now and in the foreseeable future.

5) Create a cyber risk management dashboard and give the board access to the CISO.

Cyber risk management covers a broader spectrum than data protection, and while investors do not expect all board members to possess deep cyber security expertise, they do want assurance that the board has incorporated cyber security oversight into the risk management process.  Corporate secretaries and other governance professionals can support the board in this effort by ensuring the board has some form of dashboard or metrics that provide a regular overview of the strategic implementation of the company’s cyber risk program.

Because cyber risk is so technical in nature and changing so rapidly, another best practice is to ensure that the board has access to the CISO (chief information security officer).  The corporate secretary can play a key role in helping to bring together board members and those responsible in the organization for the implementation of cyber risk management. For example, it can be very useful to buddy up particular board members with the CISO, especially board members who are on committees tasked with cyber security and/or risk management oversight.  Some companies schedule private management meetings between board committee chairs and the CISO to get a better grasp of the issues. 

Listen to the full webinar: Looking Ahead: How GRC Teams Can Prep for 2019>>

***

Martyn Chapman serves as Head of Strategy for Nasdaq Governance Solutions, supporting product development and commercial strategies for Nasdaq’s flagship governance offering, Nasdaq Boardvantage. He has over 15 years of governance industry experience serving boards of FTSE100 and Fortune 500 companies with a focus on innovating corporate governance practices through technology.

 Daniel Romito is Global Head of Investor Analytics at Nasdaq where he oversees Nasdaq’s Strategic Capital Intelligence team, Insight360 Analytics Platform, and ESG index consulting and manages a global roster of advisory clients. His advisory work focuses on consulting management teams across the globe on optimizing capital allocation strategies, mitigating risk within their shareholder base and identifying opportunistic investors.

 Ben Maiden is editor of Corporate Secretary, a digital and print platform providing a forum where governance experts and service providers can share their experience, insights and best practice recommendations on a wide range of critical governance issues. 


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shutdown
Clearhouse
Impact of Government Shutdown and Recommencement of Operations
Publication Date: January 29, 2019

DIVISION OF CORPORATION FINANCE ANNOUNCEMENT REGARDING RECOMMENCEMENT OF OPERATIONS

With the end of the government shutdown, the Securities and Exchange Commission has returned to normal operations. The Division of Corporation Finance has published an announcement stating that it generally will address matters in the order in which they were received; however, expedited assistance can be requested by contacting CFEmergency@sec.gov. Consistent with Corp Fin’s statement during the shutdown, some registrants omitted or removed delaying amendments from their registration statements and Corp Fin will consider requests to accelerate the effective date of those registration statements if they are amended to include a delaying amendment prior to the end of the 20 day period and acceleration is appropriate. Corp Fin also stated it would treat no-action requests concerning shareholder proposals in the order they were received, but asked that notice of any timing constraints or changes in circumstances (such as if a company no longer needs a response) be sent to shareholderproposals@sec.gov.
  
Read more from Corp Fin >>

See, also, Statement by Chairman Clayton >>

Impact of Government Shutdown

No changes to Original text: During the government shutdown, the SEC is operating with a limited number of staff members. This impacts the ordinary process for companies seeking to list on Nasdaq, including companies first seeking to go public, and may impact companies already listed. Nasdaq has received a number of questions about various capital raising activities and has published a series of FAQs addressing certain scenarios during the shutdown. We will update this information periodically as events unfold.

Read the FAQs >>

 
boardroom
Clearhouse
Try These 5 Ideas to Foster Better Dynamics in Your Boardroom
Publication Date: January 23, 2019

Boardroom dynamics can make or break the effectiveness of a board. This could be why more than 600 governance professionals signed up for a recent webinar co-hosted by Martyn Chapman, head of strategy for Nasdaq Governance Solutions, and David Shaw, editor and publishing director for Directors & Boards magazine. While the webinar focused on the Seven Tactics to Engineer Better Boardroom Dynamics per a recent Governance Clearinghouse post, our hosts also brought new insights to executing these tactics, sharing these five new ideas that governance professionals can use to re-energize and refresh the dynamics in their own companies' boardrooms.

1) Design and implement a "reboarding" strategy.

An emerging practice, one the governance community may be hearing more about, is "reboarding." Reboarding is a process of re-energizing and refreshing the board without changing any of the existing players. 

Reboarding is useful for directors who have been on a board for a very long time, or for an organization that has changed its business or operational paradigm significantly during the tenure of the existing board. For example, if a corporate board has pivoted its focus to more technology-based business operations, such as expanding from traditional retail stores to online selling, it will need to change its approach. The re-boarding process can help a tenured board better understand how the business operates in its new domain, as well the new risks (such as cyber risk) that the company faces.  Re-boarding could become a useful element of continuing professional development for a board.

Whether onboarding a new director or reboarding tenured ones, it’s important to look at the particular passions, expertise and backgrounds of board members.  The program should be individually tailored to ensure each member has access to the right information and makes the right connections with appropriate members of management.

2) Encourage communication between board members and management outside of the boardroom.

Ideally, board members "keep their noses in but their fingers out" of running the business.  Boards walk a fine line between immersing themselves in company business and encroaching on the role of management, so any engagement between board members and management should be carefully supervised.  A strong Corporate Secretary has the institutional knowledge and cultural fluency to be the key person in the organization to facilitate communications between board members and management that take place outside of board meetings.

The appropriate level of engagement between the board and company management is defined by a company's corporate culture and should be shared with board members during the onboarding process. 

3) Bring the business to life with site visits.

Site visits are an excellent means of engaging board members and sparking knowledge sharing between board members and management.  Companies can host board meetings at sites that are of significant operational value to them, such as factories, storefronts, or mines.  New projects are also exciting to visit, such as a tunnel being built or a new research facility. These trips bring to life a better understanding of the business and foster a board that is more in touch with the company and its operations. 

4) Actively manage tension to minimize the likelihood that tensions escalate into conflicts.

Challenge and debate are key to a board’s effective oversight of management, stimulating new ideas and leading to robust decision-making.  When managed properly, tension and conflict form an integral part of boardroom dynamics.

There is a distinction between healthy tension and unhealthy conflict, and it is important to embrace the difference between the two. Tension, from a board perspective, is a disagreement which is uncomfortable but can be addressed by healthy debate.  Conflict arises when that tension becomes aggressive and escalates to unresolvable levels. 

There are three issues that tend to lead to tension and conflict in the boardroom:

  • people and personality matters (i.e., retention, recruitment, compensation);
  • historical disputes (issues and concerns that weren’t resolved, decisions where certain directors were not fully on board, transactions rife with conflict); and
  • decision making (fundamental disagreements over strategy or particular actions proposed by the board).

It is important to identify how tension and conflict present themselves in the boardroom. Healthy tension can present as discomfort when discussing difficult topics, during open exchanges of information, and when directors are engaged in robust debate.  Red flags that signify a conflict may be brewing are:

  • passive-aggressive behaviors, such as board members who do not engage in a discussion or are overly polite or detached when responding to difficult questions;
  • repeating a point;
  • overly interrogative or heavy-handed questioning;
  • pushing debate offline or out of the boardroom; and
  • physical actions such as slapping on tables, banging glasses or leaving the room.

Tension generally tips into conflict when discussions become emotionally charged.  There are strategies that the board chair, Corporate Secretary or CEO can take to manage tension and minimize the likelihood of tensions escalating into conflicts:

  • Explicitly acknowledge and address concerns during the board meetings.  Concerns that are ignored or not fully addressed can plant seeds for conflict later.
  • Hold face-to-face conversations between the chairman and the conflicted parties (either one-on-one or in a group). These conversations work best when the board chair targets individual members with specific issues ahead of board meetings in informal settings outside the boardroom. 
  • Remind board members of the higher purpose of what they are working toward, who they are working for, who they are representing.  The board chair plays a key role in that as well.
  • Sit opposing board members next to each other during board meetings.

5) Add an "extra" member to each board committee.

An emerging practice among company boards is to assign at least one more member to each committee than is required by listing rules. This provides a margin of compliance if a member is suddenly no longer available to serve, and also allows boards to more easily rotate one of the committee members each year.  Rotating committee memberships keeps viewpoints fresh, exposes board members to new aspects of company’s business and creates new working relationships between and among board members. 

Listen to the full webinar: 7 Steps to Better Boardroom Dynamics>>

Read the companion article: Seven Tactics to Engineer Better Boardroom Dynamics>>

***

Martyn Chapman serves as Head of Strategy for Nasdaq Governance Solutions, supporting product development and commercial strategies for Nasdaq’s flagship governance offering, Nasdaq Boardvantage. He has over 15 years of governance industry experience serving boards of FTSE100 and Fortune 500 companies with a focus on innovating corporate governance practices through technology.

David Shaw is editor and publishing director of Directors & Boards, a quarterly print and digital journal dedicated to the topics of leadership and corporate governance.

 
governance
Clearhouse
Good Governance: A 2019 To-Do List for Your Company's Board
Publication Date: January 16, 2019

Each year, corporate governance changes with the times and the priorities of investors. This year's governance checklist shares updates on three issues from last year, along with a number of new challenges. In this post, veteran director Betsy Atkins encourages companies (and their boards) to kick off 2019 by focusing on the following seven priorities.



Clearhouse
1. Keep an Eye on the Regulatory Landscape

Each year seems to bring a new watershed governance issue. 2017 was the year of the activist, with an unprecedented volume of activism and proxy actions not just across the U.S. but globally as well. 2018 was the year of #MeToo, a movement that led to the boards of numerous iconic companies scrambling to defend their corporate brands and investigate CEOs accused of sexual harassment.

I expect 2019 to be the year that regulation impacts a variety of businesses. I’m not just referring to high-profile issues, such as the data use and protection regulations being debated for internet goliaths. Sitting on the Wynn Resorts board has taught me that navigating the gaming commission and regulatory compliance is worse than trying to get top secret clearance. Almost every industry has a regulator they are dealing with, and companies that do business globally must navigate a complex regulatory landscape.

For example, a new law passed recently in India goes into effect in February and will limit online sales through Amazon and Wal-Mart. Both companies have bet billions of dollars on the upside of the online retail market in India. Combined, they represent 83% of the Indian online retail market through affiliate relationships, but that new regulation is going to cap online sales through affiliates at 25% via any one online marketplace.

Boards need a window into how upcoming legislation may impact company operations, so they can plan how to help influence and shape it. As regulatory compliance becomes more complex, it should become an annual best practice for board members to ask management to share the 1, 3, and 5-year regulatory agenda. A proactive approach is far better than winding up on the back foot when new legislation is passed.

Nasdaq does an excellent job keeping an eye on the regulatory landscape and participates actively in the debates that shape legislation that will impact its listed companies. The U.S. Securities and Exchange Commission (SEC) employs committees and roundtables to energize public policy discussions affecting public companies, including a recent roundtable on Proxy Access that covered issues about technology and proxy plumbing as well as the rules surrounding proxy advisors and how shareholders can introduce proposals. Another issue of interest that the SEC is looking to advance in 2019 includes a review of the quarterly reporting process for U.S. public companies.

Read More: It's Time to Fix the Proxy Process >>

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2. Review Your Board's Composition

Diversity of board composition is now a front and center topic.

Gender diversity is a must, as companies that fail to proactively address it are going to be under increased scrutiny. Starting in 2020, ISS will note “NO” on re-election of nominating and governance committee chairs if their company does not have at least one woman on their board. Many gender diversity advocacy groups are now aiming towards a near-term target of 30% of public company board members being female. If companies fail to make progress on this issue, there could be more legislation like the new board diversity law that passed in California and the mandatory women on boards bill recently introduced in New Jersey.

Diversity should also be more broadly defined as cognitive diversity, which is the diversity of thought achieved in a group with diversity of ethnicity, age, and demographical geography as well as gender. Experience as a CEO or top corporate executive is no longer a must-have credential for board service. Only 35% of the new S&P 500 directors are active or retired CEOs and other C-suite leaders, down from nearly half (47%) a decade ago. Look for new resources for board members in order to improve the diversity of thought on the board.

Another 2019 must is a digital director on the board. There can be little doubt in today's business environment that adding board members with broad experience in technology (including software, services, cloud, analytics and artificial intelligence) will bring critical insights into the boardroom. There is not a business listed on Nasdaq that cannot apply technology to generate efficiencies in some way, whether to reduce the costs of supply-chain management or take friction out of the customer journey or revolutionize the industry’s business model. Look at the birth of sharing economies like Airbnb and gig-enabled businesses like Uber, Lyft, and Thumbtack.

The velocity of change and disruption has shrunk the average lifespan of companies; pretty much half disappear within a decade. The biggest risk to companies today is that they don't stay contemporary which makes cognitive diversity critical to maintaining a vibrant and sustainable business model for shareholders.

Read More: 2018 U.S. Spencer Stuart Board Index Highlights >>

Read More: ISS 2019 Proxy Voting Guidelines >>

Read More: The Digital Boardroom: Industrial Boards Are Looking for More Tech-Savvy Directors >>

Read More: Five Ways to Raise Your Board's Digital IQ >>

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3. Embrace Environmental, Social and Governance (ESG) Issues

A robust ESG program can open up access to large pools of capital, build a stronger brand, and promote sustainable, long-term growth. 2019 is the year boards have to proactively embrace ESG if their companies haven’t already.

ESG investments are estimated at over $20 trillion in assets under management—representing one of every four dollars under management. These tend to be stickier pools of capital that help promote sustainable, long-term growth. And, as the competition for talent increases and companies seek to be attractive to the millennial workers who already make up a third of the workforce, companies need to articulate a higher purpose. ESG is an excellent framework for explaining your company’s values and mission and purpose.

The low hanging fruit on the ESG tree is creating a baseline to bring visibility to the sustainable business practices the company has already adopted. Most companies are doing many good things in the ESG realm, but they're not measuring them or articulating them to investors. These might include environmental and sustainability reports; social employee initiatives around inclusion, gender diversity, anti-harassment, or anti-predatory practices; or better governance practices in general.

Companies also need to begin the operationalization of measuring ESG initiatives, and there are resources like MSCI and Sustainalytics to help companies identify which ESG criteria make sense for their industry.

Board members should ask their management teams to come forward with a plan to articulate the company's ESG position during 2019. If a holistic ESG program is too big to tackle in the near term, challenge management teams should come forward with a baseline and develop an ESG program to implement and publicize in 2020.

Read More: Strong ESG Practices Can Benefit Companies and Investors: Here's How >>

Read More: ESG Investing and Your Company: Is Your Board Ready? >>

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4. Proactively Engage Major Shareholders

There has been a sea change with regards to in-person shareholder engagement during the past several years. It used to be that CEOs held an analyst call once a quarter and followed up afterwards with a few major funds that were big shareholders. Now, index funds are disproportionately dominating the shareholder base, and they are creating in-house governance groups to monitor governance practices and issues within their portfolio companies. In a trend that began quietly but is picking up pace, index funds are requesting visibility from the board, including the chairman, lead independent director or compensation committee chair (it varies depending on the issues that the fund is sensitive to).

Boards should proactively ask their companies' governance teams if major shareholders want access to board members, and if so they need to determine which board members will engage in direct outreach (under management guidance of course), target the major shareholders they will visit, and determine what issues should be discussed.

Companies with large hedge fund ownership should proactively seek to engage these shareholders as well—don't wait for them to come to you, especially if an issue is brewing. Hedge fund activity by means of shareholders proposals continues to decline, but only because they have refined their tactics to stir public debate on their portfolio companies' business strategy and agitate for change without making a single SEC filing.

Read More: Corporate Governance Teams, Investor Relations, and the Changing Governance Landscape >>

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5. Quantify and Assess Tech-Readiness of the Company

Every company is a technology company in some way, and all boards should be continuously researching macro trends in technological innovation and digital enablement. These trends include robotic process automation, data analytics, artificial intelligence (AI), and machine learning. Disruptive technologies have the power to transform your business - delighting consumers, bringing efficiencies to supply chains, and lowering costs.

Hand-in-hand with keeping up with technology trends is ensuring the company is ready and able to adopt those new technologies. The ability to apply innovative technologies to the business is so significant to a company's viability that it should be of equal or greater concern to the board than cyber security. Boards need to consider developing a framework or template to assess the technology enablement of a company holistically: Are the company's software development and R&D teams continually updating their skills? Does the company's website convert sales leads? Does the company have omni-channel sales capabilities? Are ERP systems integrated? Is data analytics being deployed in decision making? Are there areas where machine learning and AI could save time and money?

Boards must routinely assess if the companies they are leading are laggards or frontrunners in technology enablement; if not, they risk becoming blindsided by technology like Blockbuster was by the streaming of video content.

Read More: 5 Ways Companies are Transforming Their Businesses with Machine Learning >>

Clearhouse
6. Develop a Social Media Crisis Management Plan

2018 taught us that we live in a real-time social media world, where a crisis is playing out in the public domain before the company has a chance to deal with it. Hours are the new days when it comes to social media crisis management. This has been true for a few years for business-to-consumer companies, but business-to-business companies are going to face this new reality too.

To make the most of those first precious hours after a crisis occurs, update the company's crisis management plan to be social media centric, with the top ten social media disasters or risks already thought through and on-the-shelf responses prepared.

The company should engage an outside social media consultant as a crisis partner. The firm should specialize in social media communication—not just offer social media as part of a larger traditional PR firm. Social media firms have a whole different network of getting the message out there and understand that crisis management requires a whole different approach.

Starbucks (Nasdaq: SBUX) is a great example of how to handle a social media crisis. When there was an allegation of racial bias leveled at Starbucks front-line staff, the whole company shut down and immediately retrained all of their employees. Starbucks' response to this crisis ultimately enhanced their company brand.

Read More: Managing Brand Risk in an Age of Social Media >>

Read More: Build Your Social Media Crisis Management Plan in 10 Steps >>

Clearhouse
7. Review Retirement Policies for C-Level Executives and Board Members

The model of corporate board service as a part-time gig for retired CEOs who are coaching with corporate playbooks from the ྌs and ྖs doesn't work anymore. The rate of change has accelerated so dramatically that a board slate of contemporary perspectives and experiences has gone beyond a competitive advantage to become a necessity of survival.

That doesn't mean companies should rush to stack their boards with millennials. Experienced executives bring wisdom and big picture perspective that is acquired through decades of experience. Contemporary perspectives are not age dependent, but rather engaged dependent. Boards need seasoned former executives who have remained deeply engaged in the business world and are dedicated life-long learners.

That said, it's important to strike the right balance between experience and ensuring the board has new and evolving skill sets critical to navigating the exponential rate of change. Mandatory retirement ages for board members, tied to board refreshment planning, are an effective way for a company to onboard the evolving skill sets and modern perspectives it will need in the boardroom in the next 3-5 years. Just be sure those policies allow for special exceptions, so exceptional talent and wisdom isn't lost due to an arbitrary age limit.

Companies should also review their executive retirement age policies before it becomes an issue and an exception must be made to keep valuable C-level executives as it did at Merck.

Read More: Board Refreshment: Finding the Right Balance >>

Read More: CEOs & Mandatory Retirement Age >>

***

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 Cognizant Technology Solutions Corporation (Nasdaq: CTSH), Wynn Resorts (Nasdaq: WYNN), Schneider Electric, and a private company, Volvo Car Corporation. She previously served on the board of directors of The Nasdaq Stock Market LLC and as CEO and Board Chairman at Clear Standards.

 
regulation
Clearhouse
Enhancing Transparency in Regulation
Publication Date: January 10, 2019

At Nasdaq, we believe transparency is fundamental to investor protection and fair regulation, ensuring that investors are protected and listed companies understand our rules, can structure compliant transactions and are never surprised. To this end, in 2012, Nasdaq created the Listing Center's Reference Library, which today houses more than 450 frequently asked questions about listing matters, 100 anonymized versions of appellate listing decisions and 350 written Staff interpretations of the Listing Rules. To reinforce the critical role transparency plays in our regulatory program, we are publishing, together with the Nasdaq Listing and Hearing Review Council, our second annual Transparency Report.

This report describes the facts and circumstances that prompted Nasdaq Regulation Staff and Listing Hearing Panels to exercise discretionary authority under our Listing Rules with respect to a company's listing. It also describes the factors we considered in requesting that listed companies make significant changes to certain share issuances and in shortening compliance time frames otherwise available to listed companies under our rules. In all of these cases, we removed information that might identify the companies involved.

We believe that sharing this information helps companies better understand how Nasdaq applies its listing rules, which helps companies and their advisors better comply with those rules. As always, we welcome your comments, which can be emailed to us at staffinterpretations@nasdaq.com.

View the 2017 Transparency Report Here >>

View the 2016 Transparency Report Here >>


 
leadership
Clearhouse
7 Hallmarks of a Company That Champions Women in Leadership
Publication Date: January 2, 2019 

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

For this latest installment of our series on Winning Women, Caren Merrick, veteran director and entrepreneur, interviewed Mary Davis Holt, an expert in developing women leaders and transforming corporate culture. Mary is a senior consultant at Flynn Heath Holt Leadership, a consulting firm with the stated goal of "moving women leaders forward faster." She offers practical advice on how companies can effectively shift culture to support women leaders and build a diverse leadership pipeline.

Culture trumps everything. When corporate culture doesn't match a company's shiny public face, internal initiatives such as building a gender-diverse management pipeline are likely to fail. In my work, I've observed that companies "walking the talk" of gender parity share the following characteristics:

1) The company has taken the time to audit its own culture.

Culture is elusive, made up of behaviors and beliefs that are felt beneath the surface, rather than seen. So, the first step to retooling a corporate culture is to define what it is currently.

Culture can be audited through surveys, focus groups, or one-on-one interviews, although I'm not a fan of surveys. It's difficult for HR to be objective when analyzing culture, and employees are hesitant to be too candid with internal surveys. Even when the surveys are outsourced, they lack the editorial give-and-take of focus groups and interviews, which is where truly meaningful insights bubble up.

I find the best results come when a company brings in a leadership development consulting group to interview employees first-hand about what it's like to be a woman in that organization. Interviewers delve into issues with lots of probing questions: What are the hurdles in your way? Why are women leaving? How are your benefits? Is there flexibility in the work arrangements? These interviews can be conducted in a focus group setting or one-on-one. It's important to seek input from men as well as women, and to interview a broad range of employees from mid-level up through to the top.

Along with employee perspectives, the company should gather some hard data with regards to employment of women at the company. How many women are being hired? How long do they stay in entry level roles? At what levels in the organizational hierarchy do the numbers of women begin to drop off?

Culture-shaping consultants can help distill the information from interviews and internal employment data into a "culture report card". Depending on their level of expertise, consultants can also help to develop and implement strategies to address any issues that were uncovered.

2) Senior leadership champions diversity and inclusion.

The most powerful lever of cultural change is a CEO who is walking the talk. A company can hire the most successful culture-shaping consultants in the world, but if the CEO and senior leadership team aren't articulating why change needs to happen and taking visible action to make it happen, the culture will not change.

CEOs who are actively engaged in making a difference for women in the workplace typically have some kind of personal experience that got them excited about the issue. Some are pressured by institutional investors, some have daughters entering the workplace and coming up against some tough barriers, some are sponsoring a senior woman but she's not advancing and they want to dig into it and understand why.

Whatever the motivator, when a CEO commits to making the company's culture more supportive of women, everybody else in the company sits up straight and says, "If he's doing it, I'd better do it too." One of my CEO clients told his C-suite team (consisting of 10 men), "Each of you is going to pick a senior woman you want to sponsor. I'm going to ask you every quarter to report how it's going and what progress she's made, and I want to hear what you are doing to support her." The CEO further directed that each sponsored woman should attend a senior leadership team meeting to get a sense of what goes on. That company, as a result, has one of the most successful leadership development programs we have ever facilitated.

3) The company holds itself accountable to creating a supportive culture.

Companies that are serious about supporting female employees use insights from their culture audits to establish measurable, incremental goals—and they hold management accountable to achieving them. Maybe the company wants to increase retention of women by five points, or grow the number of women in senior management by a certain time frame. Whatever the goals, they need to be publicly stated (at least internally if not externally) so employees see that management is committed to making it happen.

4) Hiring and advancement practices within the company promote parity.

Companies with supportive cultures hire and promote in an equitable way, with a level of parity for men and women. Companies need to do an honest assessment of hiring and advancement practices to ensure both genders are treated the same during those processes.

This is harder than it sounds, because unconscious biases get in the way. For example, a recent report by McKinsey reminds us that men are often promoted based on their potential for performance while women are promoted based on their actual results. Either yardstick is fine, but the company needs to pick one, so the same criteria is applied to all employees.

5) Unconscious bias is proactively routed out.

Unconscious bias is not intentional or overt but rather a very low-key hidden driver of behaviors that can operate against success and leave women with a very narrow leadership path to walk.

Here are some examples of behaviors that indicate unconscious bias:
  • Assuming high potential women with children and two-career households aren't relocatable for promotions.
  • Tolerating foul language and inappropriate storytelling in workplace settings.
  • Setting double standards for desirable leadership traits (i.e. confident and assertive women are seen as being overly aggressive and bossy while that same behavior is acceptable in the men).
Companies that take steps to address unconscious bias experience greater success in creating supportive cultures. When trying to rout unconscious bias from company culture, some organizations will put the whole organization through unconscious bias training, and some will conduct an analysis to find out where the pockets are.

Neither approach is easy to execute effectively. Discerning the unconscious biases of a population of employees can be really difficult. And oftentimes unconscious bias training fails because it's approached in a manner that becomes a turnoff to people who are taking the training, so they stop listening and nothing happens. It's critical to design the training curriculum so that it's relevant, actionable and reflective of the company's unique culture.

Unconscious bias is so tricky to identify and remediate that I often recommend companies deal with more tangible issues during the first stages of a culture shift and tackle unconscious bias later in the process.

6) The work environment is flexible.

The women I coach through my firm are much happier—and more productive—when they have some workplace flexibility, whether it's flex time, work from home, reduced hours, or paternity and maternity leave. It's not just women—men need it too.

Allowing flexibility and trusting that the company will continue to generate good productivity and strong results from employees is critical to a supportive culture. Millennials are going to demand it, so while a company may be able to avoid it right now, it won't for much longer.

7) Leadership development includes a formal sponsorship program.

Harvard Business Review published an article that reported women are over-mentored and under-sponsored. I've personally observed that to be true, to the point that I don't believe women can make it to the top of their organizations without sponsorship. Internal leadership development programs should include formalized sponsorship.

A productive sponsorship program goes beyond throwing two people together and saying, "Go have a sponsorship relationship." Upper management should not leave the matching process to happen organically, because in most cases it won't. Sponsors need to be assigned women, and they need to be supported with tools and training. Both parties need coaching to maximize the relationship. Routine check-ins with leadership coaches or upper management can help to ensure accountability. These conversations are highly customized and in-person: How's it going? What's the problem? What's an issue? What do you need? Companies should track the progress of the women being sponsored to gauge the effectiveness of the program.

One of my clients, Heidrick & Struggles (Nasdaq: HSII), has committed to retooling its corporate culture, and has adopted many of the practices I described above with great success. They're looking at their numbers and developing metrics to report progress, they've established a diversity committee, they have appointed a diversity officer. Their CEO is totally on board. And we've helped them create a leadership development program with a strong sponsorship thread. The company is matching senior leaders with high potential women, and we're giving them the training and support to make these relationships productive.

Seven months into the program, the positive effect on both the women and their sponsors and on the corporate culture has been incredible. I've seen real tangible results there in a very short time: the company has two women on the board, there are new women on the leadership team, and women are running offices and practices throughout the organization.

Read our most recent Winning Women installment featuring Candy Duncan here>>

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

***

Mary Davis Holt is a Senior Consultant at Flynn Heath Holt Leadership (FHHL), providing executive coaching on business, women, and leadership. Prior to joining FHHL, Mary held executive positions at Time Warner, Inc. with oversight that ranged from finance to IT, marketing, human resources, manufacturing, and distribution. She served as Senior Executive Vice President and Chief Operating Officer of Time Life, Inc. and as President of Time Life Books.

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). 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.

 
q&a
Clearhouse
Corporate Governance Teams, Investor Relations, and the Changing Governance Landscape
Publication Date: December 13, 2018

Meagan Tenety, Senior Advisory Analyst, Nasdaq IR Intelligence, recently sat down with Joan Conley, SVP and Corporate Secretary of Nasdaq, as she discussed her role, Investor Relations and the changing governance landscape. She outlined trends, best practices and tools for engagement for CFOs, Corporate Secretaries and IR teams.

How has institutional interest in ESG, and in particular, governance changed over time?

Conley: Governance used to be a check-the-box category. Over time it has become one of the most influential tools that institutional investors and activists use to evaluate the strength of the Board and an organization's leadership. The ESG conversations at the likes of Vanguard and BlackRock, and Warren Buffet's letters to stockholders show that investors are increasingly concerned with governance and the environmental and social issues surrounding companies. The environmental and social side of the conversation is evolving but governance issues are clearly defined and measurable and have become a focus area for institutional investors and activists alike.

Focusing specifically on governance, what data and information do the corporate governance teams use to make decisions?

Conley: Corporate Governance teams use varying sources of data:

1. Your IR team, CFO and/or Corporate Secretary/Governance Team

2. Engagement with institutional investor governance teams

3. Harvard Law School Forum on Corporate Governance

4. Thought leaders in the governance field

5. ISS

6. Glass-Lewis

There are limited data sets for corporate governance teams. The good news is that their sources are public so you can do the investigation yourself. More importantly, your team should be getting in front of the governance teams at the largest institutions to tell your story and continually engage these professionals.

What do you communicate publically to engage corporate governance teams and proxy voters?

Conley: Publically outline your proxy guidelines over time:

• This is what you said with regards to corporate governance

• This is what we heard from investors

• This is what we did

Listen to the feedback you are getting from institutional investors both through your meetings and through their proxy votes. It is equally as important to listen to your retail investors. Analyze your stockholder meeting votes looking for year-over-year changes. Document and follow up with engagement conversation and listening tours on an annual basis to discuss your progress given their feedback. Dialogue and listening is key here!

What are the key topics that governance teams are interested in?

Conley: Corporate Governance teams use varying sources of data:

1. Board

• Composition

• Skills

• Board Refreshment

• Board Evaluation

Board Composition needs to encompass gender and ethnic diversity and unique skill sets that align with the strategy and needs of your organization to achieve your strategic plan. It is not just checking boxes but, rather, having a truly dynamic, strategic and skilled board that will help guide your organization. In order to properly communicate with governance teams, IROs and CFOs need to understand where your board is today, communicate this to governance teams, and work with leadership to design a plan to reach your board composition goals.

It is important to note that board composition is not stagnant and needs to constantly be refreshed and updated as your company strategy evolves and grows. The evolution can be strategy changes, pivots or refreshes or reaching new market cap thresholds. Stockholders, stakeholders, institutional governance investor teams and retail stockholders want to know that your board is changing and growing to meet the strategic needs of your company.

2. Leadership

• Executive Compensation

• CEO Salary Ratio

• Goals for Executive Compensation

The governance teams really care about the metrics and milestones associated with executive compensation. Get to know the governance teams so that you can make sure your executive compensation structure is not leaving you exposed.

3. Environmental and Social

The field is growing with organizations assessing your company's ESG policies. We have yet to see a leader emerge in terms of measurable and actionable guidelines on environmental and social issues like ISS and Glass Lewis provide for governance. I look to the thought leadership in Europe to guide me on forward-thinking environmental and social issues. Nasdaq Nordics ESG Reporting Guide

What is your overall strategy in terms of engagement?

Conley: Regardless of the size of your team there are simple ways to engage in activities you are already doing for your shareholder clients. Be proactive. Identify and engage with these teams as soon as possible, come prepared for the meeting and listen carefully.

1. Be Proactive: Connect with proxy teams to bring them up to speed of progress on governance issues

2. Listen, document and follow through

3. Develop a quarterly engagement plan

Can you outline for us some actionable ways a CFO, IRO or Corporate Secretary can start to engage corporate governance teams?

Conley:

• Invite the governance team/proxy voters into meetings with portfolio managers

• Send most recent earnings reports ahead of scheduled calls and invite governance teams of top institutions to your quarterly earnings calls

• Invite governance teams to your investor days

• Let governance teams know when you are in town

• If there is a key issue that is made public, let the governance teams know immediately

• Conduct a GAP analysis of the largest institutions for their proxy voting guidelines and create an action plan

• Assess the content of all of the ESG questionnaires/your institutional investor preferences and then come to an agreement within your company on the key metrics

Lastly, any final advice when engaging governance teams?

Conley: Always keep in mind that:

• They don't want to only be brought in when there is an issue

• They know which companies engage with them and which do not

• They want a relationship leading into proxy voting season

A two-way dialogue is the preference for all governance teams. They want to know that they have the latest and most up-to-date information and are being heard when they raise concerns.

Overall, your team should be proactive as possible. Add governance teams to your travel and communications schedules and begin the dialogue. Through these relationships, you will lessen your exposure to governance risk and strengthen your organization's knowledge and best practices on governance issues.

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.


 
outside insight
Clearhouse
Innovation Competitions are a Unique Way for Companies to Foster Innovation and Diversity: Here's How
Publication Date: November 29, 2018

Jennifer Byrne is the co-founder and CEO of Quesnay Inc, an innovation consulting services firm that helps traditional firms and brands accelerate innovation by working with startups.

Legacy industries like insurance and banking continue to face the threat of disruption by new technologies and solutions. Many corporations are looking for proactive ways to catalyze innovation such as partnering with startups and influencing new ideas from within.

A survey by Accenture reports that over 85% of incumbent businesses from China, India, and the U.S. believe that collaborating with their smaller rivals will give them access to game-changing technologies that can help them thrive in technology-driven markets. The majority of companies surveyed view access to new technologies as the biggest opportunity of engaging with small high-tech firms in innovation initiatives. However, many companies don't know how to go about collaborating with startups and small tech companies—or don't go about it in the right ways.

A new way to approach collaborative innovation

That's where programs like innovation competitions come in. With the ability to be customized to any corporation's need, innovation competitions are essentially a form of business development that focuses on the creation and celebration of the best new ideas or solutions, crowdsourced from top innovators. Competitions typically run over the course of several months, during which companies are able to identify startups that can provide a different outlook on their industry and assess opportunities for long-term partnerships with them.

A corporation's objectives help determine the competition topic, question, and timeline. Once these factors are decided, recruitment for qualified startups takes place through numerous channels and industry experts judge the best solutions for the stated challenge. As an innovation consultancy, Quesnay Inc. has been running innovation competitions for over five years, helping clients to achieve their goals by introducing them to high-quality startups offering innovative solutions beyond their own industries, geographies, and demographics. Clients are encouraged to create relationships with these startups and often go on to have strong, mutually beneficial partnerships long after the competition ends.

The link between diversity and innovation

Whatever approach a company takes to collaborative innovation, there is one key element that should not be overlooked–the positive correlation between innovation and diversity.

A recent study by BCG shows that in both developing and mature economies, companies with an above-average diversity profile generated 45% of their total revenue from innovation versus just 26% for companies with below-average leadership diversity. In addition, organizations with diverse leadership reported better overall financial performance.

The research is clear, yet a lack of diversity persists in industries that are striving for innovation. A report by Mercer shows that when it comes to gender diversity in the financial services industry, as career level rises female representation severely declines. It shows the comparison of female to male employees at the manager level is 37% to 63%, at the senior manager level it 26% to 74%, and at the executive level, 15% to 85%.

Many corporations have created employee special interests groups and focused on diversity in their recruiting efforts to solve the problem, but they are also looking for new and actionable ways to move the needle. 

An innovative way to foster diversity

Here's how some organizations worked with Quesnay to structure innovation competitions to generate new ideas to help their business while fostering diversity.

Verizon Powerful Answers Award

When Verizon Communications Inc. (Nasdaq: VZ) was looking for new ways to expand into emerging areas of technology, they asked Quesnay to help design a program that allowed them to find and support innovative entrepreneurs. The result was the Verizon Powerful Answers Award, which provided more than $12 million in cash prizes to support the growth and development of new mobile-centric social enterprises around the world.  The award also opened up new integration and engagement pathways for startups across the Verizon organization, leading to multiple corporate venture investments, product partnerships and commercial relationships.

An example of this is Verizon's investment in Swiftmile, the leading provider of scalable turnkey eBike and eScooter transit systems, to support its growing internet of things (IoT) initiative. The relationship started with Swiftmile using Verizon's IoT-enabled Share Solutions platform as part of its electronic bike transit share system and continues today.

National Association of Broadcasters Pilot Innovation Challenge

The National Association of Broadcasters (NAB) chose to start their PILOT Innovation Challenge at the ideation stage. The competition awarded cash prizes for original ideas and innovative solutions to help broadcasters and media organizations better serve their local communities and audiences.

One of the winners was nēdl, an app that lets users search live radio as easily as they search the web and also start their own live broadcasts.  In addition to its $20,000 prize, nēdl received funding from Backstage Capital and Matter.vc, launched on Alexa, and was featured in the App Store. 

The NAB has continued to support the development of other winning teams through funding, mentorship, and introductions to key industry leaders with much success.

Quesnay's newest competition series, Female Founders in Tech (FFiT), works to not only support diversity of thought like the NAB PILOT and Verizon competitions discussed above, but places a special emphasis on gender diversity. Recent reports indicate that only 3% of venture capital dollars went to female founders.  Quesnay launched the FFiT to address the gap among women leaders in numerous industries with specific competitions for insurtech, fintech, and mediatech. This program recognizes and supports women-led startups and awards them with money, mentorship, education, and—perhaps most importantly—partnership opportunities with the companies sponsoring the program.

The 2017 FFiT winner, Goalsetter, is a goal-based savings and gifting platform. Goalsetter received investment from a competition sponsor, went on to raise $600,000, was selected to join Morgan Stanley's Multicultural Innovation Lab and was named a winner of JP Morgan Chase's Financial Solutions Lab competition.

The FFiT program is a powerful way for participating companies to increase staff engagement and actively promote an innovative culture, while also demonstrating their commitment to diversity and inclusion. Employees can directly impact women entrepreneurs through mentorship and coaching. In addition, workers at all levels can participate in evaluating the startup applicants and attending the pitch event.

The latest competition, Female Founders in FinTech presented by Wells Fargo, just launched on November 12 and is seeking innovative fintechs to change the game for financial services incumbents. The program's other sponsors and partners, Fidelity Investments, Shearman & Sterling LLP, and Royal Bank of Canada are supporting the program by providing mentorship and experts to evaluate the companies.  PayPal Holdings, Inc. (Nasdaq: PYPL) is also a strategic partner for FFiT's competition.   Louise Pentland, PayPal's Chief Business Affairs and Legal Officer, had this to say:

"Much like PayPal's mission to democratize financial services and create greater opportunities for consumers and merchants to participate – and in fact, thrive – in the global economy, Female Founders in Tech is designed to democratize access to capital, giving female entrepreneurs access to much needed resources. We are proud to serve as a strategic partner for FFiT's competition and look forward to hosting the final pitch event." 

To learn more about the current Female Founders in FinTech competition, visit www.quesnays.com/ffit2018fintech.

***

Whether corporations are looking to support women in tech from a diversity perspective, invest in strong, cutting-edge startups, or just get a better view on what startups are doing in their industry, an innovation competition is a compelling way to bring together and promote factors that can easily impact a corporation's future business success.

***

Quesnay is an innovation consulting services firm that helps traditional firms and brands accelerate innovation by working with startups. Quesnay achieves this by running innovation competitions and acceleration programs, as well as providing strategic partnership consulting services. Prior sponsors and clients include AARP, American Family Insurance, Condé Nast, CSAA Insurance Group, Farmers Insurance Group, Hearst Corporation, John Hancock, Liberty Mutual Group, MassMutual, National Association of Broadcasters, Prudential, QBE Insurance Group, RGAX Inc., Sterling National Bank, TD Bank, Thomson Reuters, and Verizon. For more information, follow us at @QuesnayInc or visit www.quesnays.com.

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.

 
public policy
Clearhouse
It's Time to Fix the Proxy Process
Publication Date: November 22, 2018

On November 15, 2018, John Zecca, Senior Vice President, General Counsel North America, and Chief Regulatory Officer of Nasdaq Regulation for U.S. Markets, participated in the SEC's Proxy Process Roundtable. Prior to his appearance at the roundtable, Mr. Zecca submitted a comment letter to the SEC advocating key changes to the proxy rules on behalf of public companies and retail investors.  Highlights are provided below. 

Nasdaq operates 19 regulated entities in the United States and Canada, including the Nasdaq Stock Market, which is home to over 3,000 public companies and exchange traded products.  Nasdaq is also a listed company and is subject to the same regulations as other public companies, including the proxy rules.

A common theme we hear as we talk to our listed companies (and our own experience confirms this) is that the proxy process is costly, inefficient, unduly complicated, and requires a disproportionate share of management's attention.  Specifically:

  • Companies routinely cite the proxy process as one of a series of complaints, which, in the aggregate, discourages them from joining the public markets.
  • Despite its cost and complexity, the current system results in a disproportionately few number of retail investors voting their shares. 
  • The current outdated proxy process also limits a company's ability to communicate with shareholders—especially younger retail shareholders—in the digital way that they prefer to communicate.

In my letter to the SEC dated November 15, 2018, we urge the Commission to address the cost and difficulties for companies to communicate with shareholders; reform the rules related to shareholder proposals; and require transparency about the methodologies and conflicts of proxy advisory firms, as well as a mechanism for companies to address errors by the firms. Excerpts from this letter, which address each of these issues, are provided below.

Proxy Voting Mechanics and Technology

The primary purpose of all aspects of the SEC's proxy rules should be to facilitate communications between companies and their shareholders.  In this digital age, it is notable how incredibly complex and expensive it is for companies to communicate with their shareholders, especially their retail shareholders. 

Problems fall into three broad categories:

  • Lack of transparency as to beneficial ownership.  Companies consistently report that there is over-voting and under-voting in their proxy elections, in part as a result of double-voting in connection with security lending.  Shareholders express frustration that they have no way to verify that their votes have been counted. 
  • The proxy process makes it impossible for companies and shareholders to communicate in the way retail shareholders expect to communicate today.  Because of the complexities of the proxy system, and particularly the distinction between objecting beneficial owners (OBOs) and non-objecting beneficial owners (NOBO), companies often don't know the identities of their retail shareholders, making it impossible to contact them directly.  Even when companies do know shareholders' identities, for proxy-related matters they must contact them through expensive intermediaries. 
  • Companies are frustrated they are charged fees that they cannot negotiate. Issuers receive large, obscure annual bills from intermediaries that they did not select, for delivering proxy materials.  In addition, while notice and access has improved the proxy system considerably, companies still pay a large amount in printing fees each year because intermediaries report that large numbers of stockholders have requested full set delivery of proxy materials. Issuers have little ability to contest, or even deconstruct, the annual bills they receive.  Companies would like to reach out to those stockholders to encourage them to use technology to receive materials, but again, the proxy system makes it difficult to identify and contact them.  Even where they can use electronic delivery the cost to do so remains high.

As a technology company, Nasdaq knows there is a better approach—and Nasdaq's eVoting initiative has shown that it is possible.  We have conducted proof of concept tests in Estonia and South Africa that use a cryptographically secure transaction private ledger to address many of the current challenges of the proxy process, including the lack of transparency and traceability in the voting process. In the Estonian market, we were able to use the national identity numbers issued to each resident to help establish each digital identity in this market where investors directly hold their securities. Users in South Africa, which has a central securities depositary (similar to the US), access eVoting via a web enabled front end; the system records the data on the blockchain. The system can also accommodate the transmission of voting-related materials and, of course, the audit trail and immediate vote tally functionality is available through permissioned reports that provide different levels of information to issuers and shareholders and, if needed, auditors and even regulators.

We are hopeful that technology will one day enhance many aspects of the proxy process, but in the meantime the SEC should consider the following actions:

  • Revise rules to permit direct communication between companies and their shareholders. 
  • Consider assigning the cost of the OBO designation to those shareholders whose status force those costs.
  • Give issuers a say in selecting intermediary providers and ensure transparency to companies about the fees they pay, giving them the ability to ensure that those fees are correct.  
  • Enhance the integrity of the shareholder vote by improving transparency and the mechanisms to reconcile long and short positions, thereby better limiting voting, and the cost of proxy solicitations, to only those persons entitled to vote.

Shareholder Proposals

Another cost that public companies face is related to the shareholder proposal process.  Many companies spend thousands of dollars and countless hours of management time addressing proposals from proponents who own minimal amounts of their shares. 

Nasdaq proposes the following amendments to Rule 14a-8:

  • Increase the minimum ownership percentage to ensure that shareholders have a meaningful investment in the company before they are given access to the proxy. 
  • Delete the meaningless $2,000-dollar threshold and instead require that a proposing shareholder hold a material investment in that issuer.
  • Increase the holding period to a longer period, such as three years, which would help ensure that management and boards spend their scarce time focused on shareholder proposals that come from shareholders who are aligned with other shareholders in the long-term success of the company. 
  • Increase the resubmission thresholds, so companies aren't burdened year after year with proposals that the majority of their shareholders don't support. 

In addition, shareholder activists are increasingly using Notices of Exempt Solicitation on Form PX14A6G to advocate for certain proposals and policy issues without subjecting their materials to review by the company or the SEC.  As a result, communications about a shareholder proposal that would otherwise be excluded from a Company's proxy statement in accordance with Rule 14a-8 can nonetheless be presented to shareholders on a Form PX14A6G, which can be filed at any time prior to or after an annual meeting.   

Nasdaq proposes that the SEC revise the "cover" in Rule 14a-103 to clearly identify the filing party, similar to Schedules 13D and 13G, and require the filing party to disclose the number of shares held and any interest in the proposal or policy issues it is advocating for. The SEC should also consider restricting the time period in which a voluntary Notice may be filed.

Proxy Advisory Firms

Given the number of public companies, the large number of proposals placed on each company's proxy, and the limited time to consider these proposals, institutional shareholders have come to rely on proxy advisory firms.  While this service is valuable in theory, in practice the industry is a largely unregulated black box, rife with opacity, lack of accountability and conflicts of interest.  Specifically:

  • Proxy advisory firms are not required to fully or completely explain their criteria or provide companies a means to question analysis or even correct factual errors.

  • Proxy advisory firms are not required to disclose whether they have a financial relationship or ownership stake in the companies on which they report.

  • When shareholders rely on the voting recommendations of the proxy advisory firms, it further distances companies from their shareholders.

While the SEC took preliminary steps to address these concerns several years ago by issuing Staff Legal Bulletin 20 , and again earlier this year when it withdrew two no-action letters concerning the ability of investment advisors to rely upon recommendations by proxy advisory firms in voting their clients' securities, additional guidance is needed about the impact of this withdrawal and the important underlying concerns that other market participants have with proxy advisory firms. 

Proxy advisors must also have a line of communication with the companies they analyze and clear transparency around their ownership of, or short interest in, covered companies.  The stories we hear from public companies further bear this out.  In one case, in two successive years, a proxy advisory firm based its recommendations on an erroneous and incomplete understanding of the relevant facts.  In each instance, the company was told that it could avoid such issues by subscribing to (and paying for) the proxy advisory firm's corporate services.  

Each of the above issues are central to the willingness of companies to join the public markets and to retail investors' ability to interact with the companies whose shares they own.  Nasdaq urges the SEC to address the cost and difficulties of communicating with shareholders; update the rules related to shareholder proposals; and require transparency about the methodologies and conflicts of proxy advisory firms, as well as a mechanism for companies to address errors by the firms. 

Please note that the SEC encourages public companies to submit comments related to these topics.  Comments can be submitted here

* * * * *

For more information, read:

Letter from John Zecca, Chief Regulatory Officer of Nasdaq, to the SEC >>

Chairman Jay Clayton's Statement at the SEC Staff Roundtable on the Proxy Process >>

Commissioner Kara Stein's Opening Remarks at the 2018 SEC Staff Roundtable on the Proxy Process >>

Roundtable on the Proxy Process, November 15, 2018: Transcript >>


 
technology
Clearhouse
5 Ways Companies are Transforming Their Businesses with Machine Learning
Publication Date: November 5, 2018

At the intersection of machine learning and natural language processing sits Amenity Analytics, a relative newcomer to the text analytics industry. Amenity's founders see the information gushing from today's knowledge economy as a massive, untapped resource of important data for companies across a spectrum of industries.

The brainchild of a former portfolio manager and a machine learning academic, Amenity Analytics has automated the process of sifting through complex documents and narrative content to find and visualize meaningful data sets. For businesses that rely heavily upon the consumption and analysis of complex documents and texts, natural language processing (NLP) tools can save man-hours on a massive scale and deliver powerful insights to decision makers.

We spoke with Nate Storch, co-founder and CEO of Amenity Analytics, about how companies can stop drowning in information and start surfing it instead.

NLP is the branch of computer science that turns complex, unstructured data—specifically text written in human language—into structured datasets that can then be processed, visualized and analyzed.

I was an investment portfolio manager in my previous career, a job that required constant scanning of SEC filings, earnings call transcripts, broker research and news for nuggets of information relevant to our investments. Amenity Analytics was born out of finding a solution to information overload, which was one of my biggest problems in financial analysis.

I first learned about natural language processing when I was researching an investment and met my future business partner, Professor Ronen Feldman. Prof. Feldman is an early pioneer in NLP who coined the phrase "text mining" back in the ྖs.

I saw immediately that NLP technologies could be a game-changer for me in investment analysis, not only bringing enormous time efficiencies to scanning complex financial documents but also creating data sets that could be visualized and analyzed to uncover trends and outliers. I saw potential applications of NLP to many other industries as well, and that's why Prof. Feldman and I founded Amenity Analytics.

We created a platform that gives people the ability to take a document and apply artificial intelligence to mimic the perspective of an expert. Forensic accountant, top financial analyst, an expert in ESG—all of those models are there, and countless others can be created. Amenity's NLP platform can quickly highlight, extract, and visualize data so users can spot patterns and outliers or establish causality—correlating stock prices with suspicious behavior, for example.

When you think about it, it's ridiculous that humans are still consuming text in much the same way we did 100 years ago. At Amenity, we are challenging our clients to reassess a process very core to their operations: reading complex financial documents. Here are five case studies that illustrate the innovative ways our clients are applying Amenity's NLP tools to solve problems, answer questions, and revolutionize the way they consume information.

1. Analyze quarterly earnings conference call transcripts to uncover deception or looming issues.

One of the spaces we're most focused on is my old industry—investment services. Amenity's platform is designed to address the needs of financial analysts and portfolio managers on a fundamental level, in a way that is going to be highly disruptive for the industry.

We are working with some of the world's largest and most sophisticated hedge funds. Our platform empowers their discretionary investors—the people doing true fundamental analysis—by providing additional insights and datasets into what's going on at their targeted companies.

For example, Amenity's software can process earnings conference call transcripts to flag companies that may be in trouble—before simmering issues impact earnings results. We've embedded the language analysis techniques used by CIA interrogators into our platform to capture and highlight clusters of language that might indicate uncertainty, doubt or even dishonesty, such as clichés and detour statements. A sudden spike in this type of language used by a CEO during a company's earnings call is often a reliable indicator that something is amiss.

Our platform can also process documents through a niche investment lens. For example, we built processing models from the perspective of an Environmental, Social and Governance (ESG) expert. If an analyst wants to quickly find pertinent ESG information related to a potential investment in a certain document, in the news, or in a 10-K or in an earnings call transcript, they can enter our platform and use an ESG model to highlight their documents from the ESG perspective.

2. Make better underwriting decisions, faster.

Starr Insurance Companies has customized Amenity's platform to assist in underwriting Directors and Officers (D&O) Insurance. Underwriters are often tasked with coming to a decision very quickly around whether they want to underwrite a company's D&O risk or not. And in order to make that decision, they have to process and understand information that's included in a stack of documents that can be a foot high.

Starr Insurance turned to us for help, first off, to create a model that analyzes those documents from the perspective of their top underwriters, those who consistently have the best feel for the data points that indicate whether a company is an acceptable risk or an unacceptable risk. We've been able to define and codify those data points, so the model can lead the underwriter directly to the relevant text in those documents that reveals that critical information.

So now, when one of their underwriters sits down to start analyzing a company, he has a checklist and nearly all the information that he is responsible for knowing is right there in front of him, already highlighted. Not only is he more efficient, but he's also more accountable because the information that he's responsible for knowing has now been defined and is very much measurable.

As the company continues to acquire and track relevant information, Starr's underwriters can add it to their predictive models to identify where and how those data points correlate to risk or to opportunity. As machine learning improves underwriting models, it drives smarter decision-making. For example, an underwriter could review the historical record of various types of litigation to identify how they correlate to claims and problematic situations. Underwriters can score this data so they can identify specific risks for the models to flag so it can extract related commentary.

Another insurance client recently tasked us with tracking diseases and epidemics. The company was trying to understand the path that an epidemic was taking by analyzing how people were talking about it—first in the news, second in social media and finally within the academic and scientific communities. We created a tracking model that brought together all three views to help the insurer separate true emerging epidemics from controlled diseases that were merely getting overblown in the news media or going viral in social media.

3. Track sentiment on political and economic issues.

Amenity was recently approached by a large investment bank to monitor news and conversations related to trade wars and flag changes in the tone of policy makers. For this project, we conducted a dynamic analysis of social media conversations and news statements regarding trade and tariff issues that were being made by major players in political and economic arenas, including Donald Trump, Steve Mnuchin, Robert Lighthizer and Wilbur Ross.

The trick in monitoring social media—as well as monitoring increasingly fragmented traditional media outlets and blogs—is cutting through noise to find data that is truly relevant to the specific topic. We identified and scored trade-related terms in key regions of the world, looking at equity, currencies, credit, and commodities. We were able to pull from unlimited sources and social media, cut the noise and false positives, and flag statements that were indicative of shifts in rhetoric or perspective.

4. Establish causality of market moves.

NLP is a useful tool for teasing out underlying factors of sudden movements in price or volume of trades in commodities, stocks, or currencies. Amenity was recently challenged by a client to sift through over 5 million news articles to discern what made the dollar move during a specific range of days. We were able to program our models and deliver an answer to our client in less than a week, via a dashboard of visualized data which enabled them to pinpoint the cause of each move.

We've created a similar dynamic analytic system for another client, centered around monitoring conversations related to cryptocurrencies. It processes discussions on cryptocoins to flag what is moving markets in each of them. We input Twitter's raw API, blogs and chatrooms that discuss cryptocurrency, and scraped various news sources such as Dow Jones and Reuters. We created a taxonomy of weighted topics to score meaningful data, so the system can pinpoint news and conversations that are directly connected to changes in coin prices as well as to buy and sell recommendations.

5. Prioritize documents for review.

In fact, Nasdaq partnered with Amenity to harness NLP technology for its regulatory compliance program. Today, Nasdaq's analysts spend about 60% of their workday reviewing the more than 48,000 SEC filings submitted by Nasdaq companies each year. While their compliance program effectively evaluates securities for compliance with quantitative requirements (e.g., equity), it has limited ability to facilitate the qualitative elements of an analyst's review (e.g., equity offerings, investigations). Nasdaq believes that our technology can improve efficiency and save time by helping them prioritize the filings that require manual review without compromising the integrity of the market.

***

One of the easiest ways for public companies to experiment with this technology is to use it to systematically analyze the earnings call transcripts of their competitors. Boards and executive leaders can use NLP technology to see at a glance what's going on in their industries with an incredible level of depth and granularity. They can monitor what all the companies in their space are saying about the competitive environment—not just in their specific industry, but up and down the supply chain as well.

Amenity has recently launched a new cloud-based software solution called Viewer, which enables any interested party to simply log on through Amenity's website and rapidly process earnings call transcripts and uncover real-time, actionable insights that can only be gleaned by analyzing massive numbers of complex documents at scale. Soon we will be adding SEC Filings, news, and research to Viewer.


***

Nathaniel "Nate" Storch is the Co-Founder and CEO of Amenity Analytics, a New York and Israel based provider of NLP analytical solutions and software. Nate is an experienced financial industry executive with nearly two decades as an investor and business builder. Before co-founding Amenity Analytics, he served as Managing Partner of Pilgrim Hill Capital, where he provided equity-related capital and strategic advice to small and mid-cap companies. Previously, Nathaniel served as Partner and Senior Portfolio Manager at Swieca Holdings/Talpion Fund Management, Partner and Head of Equities at One East Partners, and Head of Merger Arbitrage Research & Event-Driven Healthcare at Highbridge Capital Management.


 
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In the News
SEC Actions Regarding Mandatory Arbitration Bylaw Provisions
Publication Date: February 20, 2019

On February 11, 2019, the SEC’s Division of Corporation Finance responded to a no action request for a company seeking to exclude from its proxy statement a shareholder proposal, which would have required the company to arbitrate all claims brought by investors under federal securities laws and would have precluded investors from bringing such claims as a class. Relying upon a submission from the Attorney General of New Jersey, which stated that the proposal would violate state law, the SEC Staff concluded that it would not recommend enforcement action should the company decide to exclude the proposal on the grounds that it would violate state law. Chairman Clayton issued a statement supporting the Staff’s decision, but also noting that the SEC Staff did not address the legality of mandatory shareholder arbitration in the context of federal securities laws, and emphasizing that any SEC policy decision on the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws should be made by the Commission.

View the No-Action Letter here >>

View Chairman Clayton’s statement here >>


Nasdaq Comments on PCAOB Strategic Plan
Publication Date: February 08, 2019

In August 2018 the PCAOB released a draft of its five-year strategic plan and sought public comment on the plan. On February 7, 2019, Nasdaq issued a comment letter commending the PCAOB for the initial steps in the Strategic Plan towards improving the quality of audit services and urged action to meaningfully reduce the hurdles of compliance as a public company where that can be done without harming investor protection or while enhancing investor protection.

View Nasdaq's comment letter here >>



Congress to Consider Requiring Disclosure of Board and Executive Officer Diversity Data
Publication Date: February 07, 2019

Congressman Gregory Meeks, Chair of the Consumer Protection and Financial Institutions Subcommittee of the U.S. House Committee on Financial Services, has introduced the Improving Corporate Governance Through Diversity Act of 2019, which would require public companies to annually disclose the gender, race, ethnicity and veteran status of their board members, board nominees and senior executive officers. The bill also would require public companies to disclose whether their board or a board committee has adopted a policy to promote diversity. A companion bill was also introduced in the Senate by Senator Bob Menendez, who sits on the Senate’s Banking Committee.

Read Press Release >>



BlackRock's Larry Fink Delivers Annual Message to CEOs
Publication Date: January 28, 2019

Each year, Larry Fink, CEO of BlackRock, delivers an annual message to executives.  In this year’s letter he calls on executives to be “leaders in a divided world” and stated that “stakeholders are pushing companies to wade into sensitive social and political issues — especially as they see governments failing to do so effectively.” The letter also reiterates last year’s plea for executives to focus on purpose and emphasized the "inextricable" link between purpose & profits. When it comes to preparing for this year's engagements, BlackRock's annual letter identifies these four priorities:
  • Governance - including the company's approach to board diversity;
  • Corporate strategy and capital allocation;
  • Compensation that promotes long-termism;
  • Environmental risks and opportunities; and human capital management.

Read Larry Finks’ 2019 Annual Letter >>



Nasdaq Participates in the 2019 World Economic Forum in Davos
Publication Date: January 23, 2019

Thousands of business, political and cultural leaders from all over the world will return to Davos, Switzerland the week of January 22 to discuss the latest global issues.  Representatives from Nasdaq include Adena Friedman, Chief Executive Officer;  Nelson Griggs, Executive Vice President, Corporate Services & President;  Edward Knight, Executive Vice President and Global Chief Legal and Policy Officer; and Adam Kostyál, Senior Vice President of Listing Services, Europe.  The main theme of this year's World Economic Forum is "Globalization 4.0: Shaping a New Architecture in the Age of the Fourth Industrial Revolution."  Nasdaq will co-host four events involving a range of topics, including public policy and gender equality. 

Read More >>



Securities and Exchange Commission operating on limited basis due to federal shutdown
Publication Date: January 4, 2019

The SEC is currently operating in accordance with the agency's plan for operating during a federal government shutdown. Until further notice, the agency will have a very limited number of staff members available, although staff is available to respond to emergency situations involving market integrity and investor protection, including law enforcement. EDGAR will continue to operate and accept periodic reports, registration statements, offering statements and other filings, but staff will not be able to declare registration statements effective nor qualify Form 1-A offering statements. Additional information is available from the Division of Corporation Finance and the Division of Investment Management.

Read More on the SEC Website >>



SEC Seeks Public Comment on Earnings Releases and Quarterly Reports
Publication Date: December 21, 2018

The Securities and Exchange Commission is accepting public views on the quarterly reporting process for U.S. public companies. The comment solicitation is designed to elicit views on how the burdens of quarterly reporting can be reduced while maintaining or enhancing investor protection. The SEC is also interested in hearing from public companies and market participants on whether the current quarterly reporting regime encourages short-termism. Nasdaq has advocated for reforming the quarterly reporting process in our Blueprint to Revitalize Capital Markets.

Read More in the SEC Fact Sheet>>



New SEC Rules Require Companies to Disclose Hedging Policies
Publication Date: December 21, 2018

The Securities and Exchange Commission adopted final rules requiring public companies to disclose whether directors or employees are permitted or disallowed to enter into hedging transactions designed to offset any decrease in the company's stock performance. Companies (other than foreign private issuers) will be required to disclose such policies (or the absence of such policies) in any proxy statement or information statement for the election of directors during fiscal years beginning on or after July 1, 2019, or July 1, 2020 for emerging growth companies and smaller reporting companies.

Read More in the SEC Fact Sheet >>




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