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Frequently Asked Questions
  An Early Look at US 2018 Proxy Season Trends
Identification Number 1532
An Early Look at US 2018 Proxy Season Trends
Publication Date: May 18, 2018

With proxy season in full swing, Institutional Shareholder Services has identified some early trends. Their research indicates that: virtual-only meetings are on the rise; more proxy disclosures feature discussions regarding company culture, board refreshment, and diversity; and majority support for director elections remains consistent with prior years. Social issues, including lobbying and political contribution disclosures, take the lead in terms of the number of proposals filed by shareholders.

Publication Date*: 5/18/2018 Mailto Link Identification Number: 1532
Frequently Asked Questions
  SEC Wants Boards' Views on Contested Shareholder Proposals
Identification Number 1526
SEC Wants Boards' Views on Contested Shareholder Proposals
Publication Date: May 16, 2018

This Wall Street Journal Article explains that while the SEC usually allows companies to exclude shareholder proposals that relate to the company's ordinary business, there is room for argument on whether issues go beyond day-to-day business into significant policy areas—such as the environment. In these circumstances, it appears from recent decisions that the Securities and Exchange Commission is eager to see that the Board of Directors has considered the issue. In that regard, the SEC had indicated in guidance that a company's board is in a better position than the agency to determine the relevance to a company's business operations of any policy issue raised in a proposal.

Publication Date*: 5/16/2018 Mailto Link Identification Number: 1526
Frequently Asked Questions
  Janet Hill Shares Leadership Lessons from 20 Years in the Boardroom
Identification Number 1524
Janet Hill Shares Leadership Lessons from 20 Years in the Boardroom
Publication Date: May 10, 2018

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

In the first of our series on Winning Women, Caren Merrick, Nasdaq company director and entrepreneur, spoke with fellow veteran board member and expert on corporate diversity and inclusion Janet Hill. During the interview, Janet shared key insights gleaned from more than two decades of board service on high-profile public company and foundation boards, such as The Carlyle Group (Nasdaq: CG), Esquire Financial Holdings, Inc. (Nasdaq: ESQ), The Wendy's Company (Nasdaq: WEN), and the Kennedy Center for the Performing Arts.

Admit what you don't know.

Dave Thomas, the CEO of Wendy's, was successful in growing his company because he recognized early on what he didn't know. Dave was something of a mentor for me, from the time I joined the Wendy's board in 1993 until his passing in 2002. He started the company with one restaurant and by the time I joined the Wendy's board he had 2,000. Today, Wendy's has nearly 8,000 stores. I'll never forget him mentioning, in a rather offhand way, that when he went from one store to two stores he knew he needed help to manage his business. I admired that; I see it as a show of strength when someone admits they need help or don't know something. Dave was a great leader who surrounded himself with smart people who could help manage the aspects of the business he didn't know.

Boards need to diversify by adding youth and talent deeper into the C-suite.

Technology is evolving geometrically, at warp speed. And every company in the country is concerned about cybersecurity.

You can't have a boardroom full of 60 and 70-year old men and expect they will be as technologically proficient as someone who is 35 or 40. The obvious answer is to bring younger members onto boards, although corporate America has resisted this idea.

Anybody in their 20's or younger was born with a digital gene. Hand a brand-new iPhone to a 10-year-old (like my husband did with our granddaughter) and watch her set it up in minutes and then train the adults around her how to use it.

Of course, we can't put 10-year-olds on the board. But a 35-year-old is on the cusp of the digital age and many have enough significant work experience to be an asset on a board. I don't see this as an experiment: younger members would not just be there to provide a digital edge for the board. Like everyone else, they would be expected to serve on the audit committee, the comp committee, and to have a good understanding of operations.

Another prejudice that hampers boardroom composition is stacking the board with current or former CEOs. Boards have to think beyond the CEOs and COOs in the C-Suite and consider female executives who are in other positions in the C-Suite. For example, bringing on a chief information officer or a senior vice president of information technology, or chief marketing officer. They're not the CEO, but frankly they know more about IT and other topics than the CEO of their company.

Engage men to develop a solution to gender imbalance.

There aren't enough men engaged in the process of bringing women on boards, and I don't believe we should let them off the hook. But we can do a better job of leveraging their existing networks, instead of asking them to work outside of them when recruiting women and minorities.

Male executives traditionally use informal settings to search for new board members: their friends, their country clubs, their golf games, their bankers, their tennis partners. One of the reasons that many white men ultimately suggest white male candidates is because the networks they are reaching out to haven't suggested women or minorities. But that doesn't mean those networks don't know diverse candidates. Men just need to change the question they are asking when they tap their networks.

In my work consulting with companies to improve their diversity and inclusion, I would suggest to CEOs and boards that they go back to their sources and say, "You gave me the best board member when you suggested John Doe. Now, I want you to suggest to me a minority or a woman because you did such a bang-up job on that last referral." And usually, when they went back to their golf buddy or banker or former colleague with that request, they got a good recommendation for a woman or minority.

"Three women on the board" is not a magic threshold for inclusive boardroom dynamics.

I know that Harvard Business Review published study on gender imbalance in the boardroom that concluded there was a clear shift in dynamics when boards have three or more women, but I do not agree with them in this case. I have served on 12 corporate boards; on many of them I was the only woman. On the Board of Dean Foods, I'm one of two women, although I've been on that board since 1999 and during that period there were some years in which I was the only woman. I'm one of two women on the Carlyle Board. I served on the Board of Tambrands when it had 12 board members and six of us were women.

The number of women on the board has never made a difference in how I'm treated—whether I'm the only woman, or one of two, or one of three or more. I've never felt isolated or that my voice was not heard. I don't think a critical mass of three is a magic sweet spot.

And for the record, being "listened to" does not mean that every time I say something in the boardroom, the company follows my direction. Every collaborative and collegial board is going to have disagreements. In fact, the board is advantaged by having different opinions and different approaches on how to achieve success for the company.

That said, I do believe boards need far more women. There are enough women in the pipeline ready and able to serve.

Front line employees are a valuable resource for board members.

Board members should have (or make) the opportunity to meet employees who are on the front lines of customer service. When I served on the board of Sprint, we had a number of call centers around the country. People working in call centers had the first line of contact with our customers. I made a point to visit Sprint call centers wherever I was traveling and meet those folks.

I would usually ask them two questions. One icebreaker question: "What is your favorite football team?" I was a Cowboy fan, so I could tease them about their team if it wasn't the Cowboys. The other question was "What are the most common questions you get from customers?" I found a lot of useful information to take back to the Sprint board by talking to front line employees who had direct contact with Sprint customers.

New board members should ask questions: the answers can be illuminating to the entire board.

Board members can add value from day one, even if they don't yet know all the nuances of the business or the industry, just by asking questions to educate themselves.

I learned this when I joined the board of a tech operation back in 1999 and I was thrown into the audit committee, although I'm not a typical audit committee member. I felt lost at the end of the first audit committee meeting, so I asked the CFO to annotate the financials to help me better understand what kind of accounting principles were used to put together the balance sheet.

With the exception of cash, almost every item on the balance sheet turned out to be an estimate based on certain principles of accounting. When the CFO presented that annotated balance sheet at the second audit committee meeting, the other committee members were shocked to see certain items on the balance sheet were estimates and not a firm fact figure. These were experienced financial professionals; many were former CFOs and one member was the CEO of his own company.

Ultimately, we spent a great deal of time in my second audit committee meeting going over that balance sheet. It turned out to be extremely illustrative for the entire audit committee. And this happened because I was not afraid to say (in front of the rest of the board), "I need an annotated balance sheet in order to better understand how you prepare the materials for this meeting".

Extend the benefit of the doubt to people you don't know.

When I left a very segregated New Orleans in 1965 to attend college at Wellesley I had never met anyone white until I walked on the campus. When I called home expressing doubt that Wellesley was the right place for me, my mother gave me very important and prescient advice: "Extend the benefit of the doubt to people you don't know." Her advice changed my life (I stayed at Wellesley) and as it turns out the advice endures. It certainly can be used in the context of on boarding new directors in the boardroom, especially if an all-male, all-white board is welcoming their first minority or female director. Both sides should extend the benefit of the doubt.

In terms of recruiting new members, we can give the benefit of the doubt by not using the word "qualified" as a qualifier when vetting women and minority candidates. Let's stop saying "We could use a few qualified women on this board." I personally never use this word. No one ever says, "We could use a few qualified white males." There's an assumption that if the candidate is a white male he's qualified.

As chair of the governance committee on the Dean Foods board, it's an insult to me to suggest that I would damage the company by bringing an unqualified person, including an unqualified white male, onto the board. Every time I say women, it goes without saying I mean women who are qualified.


Janet Hill has served as Principal at Hill Family Advisors since 2008, where she oversees her family's assets and investments. She is currently a director of The Carlyle Group (Nasdaq: CG), Dean Foods, Inc., Echo360, Inc., Esquire Financial Holdings, Inc. (Nasdaq: ESQ) , and Green4U Technologies, Inc. Ms. Hill previously served on the boards of Houghton Mifflin Company; Sprint Nextel Corporation; Tambrands, Inc.; and The Wendy's Company, Inc. (Nasdaq: WEN). She also serves on the Board of Trustees at Duke University, the John F. Kennedy Center for the Performing Arts, the Knight Commission on Intercollegiate Athletics, and the Wolf Trap Foundation.

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

Publication Date*: 5/10/2018 Mailto Link Identification Number: 1524
Frequently Asked Questions
  Digitization Inside and Out of the Boardroom
Identification Number 1522
Digitization Inside and Out of the Boardroom
Publication Date: May 2, 2018

Advancements in technology have changed the way company leadership and directors communicate and share information to stakeholders. Stacie Swanstrom, Executive Vice President and Head of Board & Leadership Solutions at Nasdaq, explains that, through digitization, "directors are turning away from printed documents in favor of digital information that is easy to share and accessible on mobile platforms, like board portals." This article addresses the opportunities that digitization can provide for companies as well as investors.

Publication Date*: 5/2/2018 Mailto Link Identification Number: 1522
Frequently Asked Questions
  The Conflicted Role of Proxy Advisors
Identification Number 1523
The Conflicted Role of Proxy Advisors
Publication Date: May 2, 2018

The American Council for Capital Formation recently published a report which found that proxy advisory firms are operating with limited oversight and are moving toward an increasingly activist stance on issues relating to the environment, as well as social and political issues. The report, titled "The Conflicted Role of Proxy Advisors," examines the impact such proxy firms have on major policies at most publicly traded companies. The report also examines the biases and conflicts of these influential proxy advisory firms.

Read the report here >>
Publication Date*: 5/2/2018 Mailto Link Identification Number: 1523
Frequently Asked Questions
  Hearing on "Oversight of the SEC's Division of Corporation Finance"
Identification Number 1520
Hearing on "Oversight of the SEC's Division of Corporation Finance"
Publication Date: April 30, 2018

On April 26, 2018, the Capital Markets, Securities, and Investment Subcommittee of the House Financial Services Committee held a hearing entitled "Oversight of the SEC's Division of Corporation Finance." During the Hearing, William Hinman, Director of the Division, described the Divisions efforts to make the public company model become more attractive and his current priorities, which include initiatives to facilitate capital formation and provide investment opportunities. Director Hinman, stated that the Division will examine its processes to determine where it "can make enhancements while maintaining important investor protections" and continue "to work on a full rulemaking agenda, with a focus on reforms to make our disclosure regime more effective."

Read Director Hinman's testimony >>

Watch the Hearing >>
Publication Date*: 4/30/2018 Mailto Link Identification Number: 1520
Frequently Asked Questions
  Recommendations to Expand the IPO On Ramp
Identification Number 1518
Recommendations to Expand the IPO On Ramp
Publication Date: April 27, 2018

A broad coalition of industry participants, including, Nasdaq, the U.S. Chamber Center for Capital Markets, the National Venture Capital Association, and SIFMA, has published a report providing recommendations for reform to help more companies go and stay public. The topics covered in this report include:
  • Enhancements to the JOBS Act
  • Recommendations to encourage more research of smaller public companies
  • Improvements to certain corporate governance, disclosure and other regulatory requirements
  • Recommendations related to financial reporting, and
  • Recommendations regarding equity market structure
Read the report here >>
Publication Date*: 4/27/2018 Mailto Link Identification Number: 1518
Frequently Asked Questions
  Nasdaq Submits Application to suspend UTP trading for certain securities
Identification Number 1519
Nasdaq Submits Application to suspend UTP trading for certain securities
Publication Date: April 27, 2018

On April 25, 2018 Nasdaq submitted an application to the U.S. Securities and Exchange Commission seeking to suspend the unlisted trading privileges ("UTP") of certain Nasdaq-listed operating companies, which are thinly traded. Nasdaq believes that suspension of UTP for these securities will result in an improved market structure and more efficient trading environment for these securities, while reducing market complexity.

Learn more about Nasdaq's application>>

Read Nasdaq's application to the SEC here >>
Publication Date*: 4/27/2018 Mailto Link Identification Number: 1519
Frequently Asked Questions
  PCAOB Seeks Public Input on its Strategic Plan
Identification Number 1515
PCAOB Seeks Public Input on its Strategic Plan
Publication Date: April 23, 2018

Following the recent appointment of five new Board members, the Public Company Accounting Oversight Board is taking a fresh look at the organization and its future direction in fulfilling its mission. In that regard, the PCAOB is seeking input into its 2018-2022 strategic planning through a public survey. The brief survey asks for participants' perspectives on the PCAOB's vision, priorities, and opportunities in fulfilling its mission. Survey responses are requested by May 15, 2018.


Take the survey here >>
Publication Date*: 4/23/2018 Mailto Link Identification Number: 1515
Frequently Asked Questions
  Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 2
Identification Number 1513
Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 2
Publication Date: April 19, 2018

How can boards diversify to manage change? Is the CEO Pay Ratio rule going to be effective? When should the CEO and Chairman of the Board roles be separate?

During a wide-ranging and informative interview, veteran board member and venture capitalist Betsy Atkins and Bloomberg Radio host and former SEC Chairman Arthur Levitt discuss these important topics, and more. We divided their interview into three separate articles and posted Part 1 last month. Part 2 is presented below.

Arthur Levitt: What is the best case for diversity in the boardroom and what should diversity really mean? It's not just about gender, right?

Betsy Atkins: Correct, it's about cognitive diversity: how people think differently and problem solve differently. Diversity should be the diversity of backgrounds in the board room, diversity of domain experts in the company's industry, and diversity of functional experts such as financial experts for audit committee, digital experts, and geographic diversity. It should not simply be gender. I'm not a believer in affirmative action. Hire the best people who bring you diverse thought, as that brings the best business judgment for the shareholders.

AL: You write about how companies should "manage" diversity. What do you mean by that?

BA: What I mean by managing diversity is to really look into your board composition and think about how to forward hire the optimal set of differentiated and complementary perspectives required for effective oversight. The board should be an asset that the CEO and management can leverage to help stress test future plans as well as perform broad oversight for current plans. Just as management refreshes their leadership team frequently, the board should be refreshed to meet the challenges and opportunities the company will face during the next five to seven years, given the velocity of change.

AL: BlackRock recently updated its proxy voting guidelines, adding a stipulation that it expects companies to have at least two women directors on their boards. When it comes to more women on boards, are you in favor of quotas or targets?

BA: I don't like the idea of quotas. I'm certainly supportive of embracing aspirational targets, but it has to be based on qualified people—the board shouldn't lower the quality bar to achieve a quota. Fortunately, there are plenty of qualified women and minorities out there.

AL: Why is the U.S. so far behind in either quotas or targets for getting more women on boards?

BA: While the U.S. is behind, they have made incremental progress. The 2017 Spencer Stuart U.S. Board Index reported that the percentage of women serving on S&P 500 boards in 2017 increased to 22% of all directors from 17% in 2012, and that 80% of boards now include two or more women, which represents a significant increase over 61% in 2012. The U.K. has been more aggressive, and has set a target of 33% for the number of FTSE 350 board seats held by women by the year 2020.

AL: Will companies find women for their boards if they don't specifically go looking, with some kind of pressure to diversify?

BA: I expect big changes this year, because the large index funds are now pushing gender diversity, which is going to be a huge accelerant. If boards are serious about diversity, they need to mandate that for every board seat they are going to fill at least one-third to half of the candidates on the board search panel are female. But again, diversity should be broader than gender diversity.

AL: What do you think of NYC Comptroller Scott Stringer's Boardroom Accountability Project?

BA: It's hard to establish a quantitative matrix that truly identifies diversity of thought. The concept is sound, but what boards should really be looking for is diversity of experience, so the board has multiple business models to call on from their past to solve current and future business challenges. For example, if you spent your entire 35-year career in one company, you would only have that company's model of how to approach and solve problems, only that company's "cycle time" and sense of urgency in problem solving, which is probably too slow today. The goal should be to build a high performing board that is able to access the contemporary director's business judgement ability.

The matrix is a reasonable starting point for the conversation, but ultimately the matrix is a quantitative concept and the board makes a judgement that is more qualitative than quantitative.

AL: This will be the first year that the ratio of a CEO's total compensation as compared to that of a median employee must be disclosed. What do you think of this rule?

BA: This rule will prove to be more of a media event than a driver of change. It's going to be confusing and create noise without driving valuable and actionable insight. CEO pay thresholds are completely different industry to industry: there will be a profound difference in pay ratios between a company that has the bulk of its workforce in India and that of a company with an all-American workforce that is far more highly paid. Even when comparing a company with its own peer set, again, it's a challenge to find the right peers outside of a company's direct competitors.

AL: Do you think consultants are helpful to boards in setting CEO compensation?

BA: I think compensation consultants are helpful in gathering factual data.

AL: How would you advise companies to structure CEO pay to encourage long term growth?

BA: Practical reality is that companies have to pay their CEOs relatively competitively in comparison to direct competitor peers. The long-term growth part of compensation should be based on a small number of very specific quantifiable metrics such as market share, new product introduction, and geographic expansion. The metrics are long-term and measurable, versus the typical short-term annual metrics of revenue, profit and total shareholder return.

AL: Where are you on the question of whether it is ever a good idea for the CEO to also serve as Chairman of the Board?

BA: I think it's very specific to each company. Although a majority of companies still combine the two roles, it currently stands at just over the 50% mark and that statistic is falling. In a situation where a company has a first-time or new CEO, it is a better governance practice to separate the Chairman from the CEO. When the CEO has been serving for a long time, or is successful, recognized and acclaimed, it can be viewed as a major issue by an incumbent CEO if he or she doesn't get the chairmanship when the sitting Chairman exits the board.

Every board should have a strong independent lead director, with a mechanism in the by-laws for annual review enabling rotation. All boards should have a method for orderly chairman replacement to be prepared when the need arises.

AL: You believe the most important role of the board is to choose the CEO. What do you look for in a CEO?

BA: The key thing to look for in a CEO is to match the company's CEO profile to the stage of the company. For example, if your business model is perfect, and all you need to do is a little bit more revenue, a little more profit a little faster, it would point you toward an internal candidate who can continue to implement the current strategy. If your company is going to face big transformation and change in its competitive landscape, you may want to look outside for a candidate with a transformational growth skillset and experience.

AL: What is your best advice for a new CEO faced with a new board?

BA: You need to create a rhythm of being in touch with each board member at least once a quarter. You would be well served to engage the committee chairs in working with you to create an annual board calendar of important topics that the board wants to review annually. Start every board meeting with a state of the union and clearly identify one or two topics you want the boards input and engagement on each meeting. They came to contribute and participate, and you'll lose control of the meeting if you don't point them to where you want their input.

Be sure to get a thorough debriefing on every executive session and memorialize back to the board any topics for future follow up.

For more information, read Betsy Atkins Talks to Arthur Levitt about the Current State of Boards: Part 1


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

Arthur Levitt is currently the host of Bloomberg Radio's "A Closer Look with Arthur Levitt" and serves on the board of directors at Bloomberg LP. Levitt was the 25th Chairman of the U.S. Securities and Exchange Commission, and in 1999, became the Commission's longest-serving Chairman until his resignation in 2001. He also serves as a senior advisor to Goldman Sachs & Co. and an advisory board member of the Knight Capital Group.

The views and opinions expressed herein are the views and opinions of the contributors 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.

Publication Date*: 4/19/2018 Mailto Link Identification Number: 1513
Frequently Asked Questions
  Society for Corporate Governance Complimentary Directors' Cut Newsletter
Identification Number 1514
Society for Corporate Governance Complimentary Directors' Cut Newsletter
Publication Date: April 19, 2018

The Society for Corporate Governance is now offering complimentary access to its Society Alert - Directors' Cut® newsletter. This quarterly online newsletter is a compilation of governance-related news from the preceding quarter's weekly Society Alerts, with a view toward a director and C-suite audience. Each issue covers a range of relevant developments and guidance in areas such as audit/financial reporting, board composition/refreshment, board and key committee oversight, and shareholder engagement/activism - as well as institutional investor developments & perspectives.

Read the Society Alert - Directors' Cut for 2018 Q1 >>

Subscribe to the newsletter here >>
Publication Date*: 4/19/2018 Mailto Link Identification Number: 1514
Frequently Asked Questions
  Webcast -- Blockchain: What it is & implications for investors
Identification Number 1512
Webcast -- Blockchain: What it is & implications for investors
Publication Date: April 11, 2018

On April 12, 2018, Invesco QQQ ETF, Microsoft and Nasdaq will participate in a live webcast where they will discuss what blockchain is from a practitioner's point of view, how broad blockchain's application can be, trends within blockchain and what may lie ahead. Speakers include Yorke E. Rhodes III, co-founder of Microsoft's blockchain initiative, Fredrik Voss, Nasdaq's Vice President of Blockchain Innovation, and John Q.Frank, Invesco's QQQ Equity Product Strategist.

Read more and register here >>
Publication Date*: 4/11/2018 Mailto Link Identification Number: 1512
Frequently Asked Questions
  Non-GAAP Measures: Questions and Insights
Identification Number 1511
Non-GAAP Measures: Questions and Insights
Publication Date: April 9, 2018

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

The use of financial measures that do not conform to US Generally Accepted Accounting Principles (GAAP) has long been the subject of debate—even controversy. While it has ebbed and flowed over the years, this discussion is unlikely to disappear.

Consistent with its mission to convene and collaborate with stakeholders to advance the discussion of critical issues, the CAQ held a series of 2017 roundtable discussions regarding the presentation and use of non-GAAP measures—and the opportunities to enhance trust and confidence in this information. Each roundtable was attended by approximately 20 to 25 individuals including audit committee members, management, investors, securities lawyers, and public company auditors. Because the presentation and use of non-GAAP measures can vary from industry to industry, each roundtable focused on a specific industry: pharmaceutical, real estate, and technology.

These events each began with a set of key questions, on which participants provided no shortage of insights. We have published a full report, Non-GAAP Measures: A Roadmap for Audit Committees, on the roundtables' findings, as well as a companion video that provides additional context and real-life examples of how audit committees are thinking about non-GAAP measures.

Here, we provide some high-level key themes.

Why is GAAP so important?

No discussion of non-GAAP measures can take place without a discussion of GAAP itself. At the roundtables, participants made clear that they view the GAAP information as the "bedrock" or "starting point" for the financial information that companies present. GAAP, they said, provides a useful baseline that offers comparability from one company to the next.

If GAAP is the bedrock, why do companies present non-GAAP measures?

Participants were asked to share their views on what drives the presentation and use of non-GAAP measures. Several common themes emerged from the discussion.

  • Demand from investment analysts: Participants shared that requests from investment analysts are often a primary reason company management chooses to present a non-GAAP measure. Investment analysts find that non-GAAP measures help them better understand the company's underlying business performance or forecast the company's long-term value in their proprietary models.
  • Desire to tell the company's story: Participants also acknowledged, however, that company management does not present non-GAAP measures solely for investment analysts. Rather, non-GAAP measures can be a tool to help tell a company's story and provide users of the information with insight into how management evaluates company performance internally. In some cases, non-GAAP measures are also an input into how the company compensates employees for company performance.

What are top challenges related to non-GAAP measures?

Participants acknowledged that non-GAAP measures present challenges to certain stakeholders in the financial reporting supply chain.

  • Investors are challenged by the lack of consistency in the calculation of non-GAAP measures from one company to the next. Such irregularity makes it difficult for non-GAAP measures to be compared across companies—even within the same industry. It also can be a challenge for end-users to know whether the performance reported by the press is a GAAP measure or a non-GAAP measure.
  • Management representatives indicated that they spend a significant amount of time (1) discussing what information to include in or exclude from non-GAAP measures they present, and (2) making sure the information is presented fairly and disclosed transparently.
    Audit committees noted that their challenges related to non-GAAP measures tend to be an extension of management's challenges. Audit committees want to understand the reason the company is presenting the measure, and the roles and responsibilities of those involved with the information, including company personnel (e.g., finance and internal audit) and the external auditor. Further, they want to know how the company's non-GAAP measures compare with the information presented by peer companies.

To address challenges, should non-GAAP measures be standardized?

Not necessarily. Representatives from management at all of the roundtables indicated that standardization may limit their ability to tell their companies' story.

The real estate industry makes use of a supplemental standardized non-GAAP measure: funds from operations (FFO). The FFO measure, which was defined by Nareit, is in widespread use and is recognized by the Securities and Exchange Commission. That said, in addition to reporting Nareit defined FFO, companies report various forms of FFO (e.g., adjusted FFO, normalized FFO, company FFO). So even within one industry that has agreed on a standardized non-GAAP measure, there are still variations on how it is reported.

Why is dialogue so important around non-GAAP measures?

Participants emphasized the significant judgment involved in determining how to treat a one-time transaction or event in non-GAAP measures, and they agreed that company management and audit committees strive to execute good judgment when making these decisions. To that end, many companies have enhanced the rigor of their presentation and disclosure of these metrics.

There was consensus among participants that audit committees can promote rigor related to non-GAAP measures by having a dialogue with company management as well as internal and external auditors. Among other things, this dialogue can help the audit committee to set clear expectations regarding the roles and responsibilities—relative to non-GAAP measures—of each member of the financial reporting supply chain.

What is the external auditor's non-GAAP role?

In a nutshell, the external auditor's opinions on the company's financial statements and, when required, the effectiveness of the company's internal control over financial reporting (ICFR) do not cover non-GAAP measures. Professional auditing standards indicate that the auditor should read non-GAAP measures presented in documents containing the financial statements (such as annual and quarterly reports) and consider whether non-GAAP measures or the manner of their presentation is materially inconsistent with information appearing in the financial statements or a material misstatement of fact.

Though external auditors do not audit non-GAAP measures as part of the financial statement or ICFR audits, audit committees and management may consider leveraging the external auditors as a resource when evaluating non-GAAP measures.

How can the audit committee enhance its non-GAAP role?

At the roundtables, there was wide recognition of the benefits of increased audit committee oversight and involvement with non-GAAP measures. The CAQ's full roundtable report offers audit committees insights on the way forward. It is available free of charge at the CAQ website.


Also from the CAQ see Preparing for the Leases Accounting Standard: A Tool for Audit Committees. This tool is designed to help audit committees exercise their oversight responsibilities as companies implement the new lease accounting standard, which will begin to take effect in January 2019.


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

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

Publication Date*: 4/9/2018 Mailto Link Identification Number: 1511
Frequently Asked Questions
  2018 Proxy Season Preview
Identification Number 1510
2018 Proxy Season Preview
Publication Date: April 6, 2018

Highlights of the upcoming proxy season, including governance and compensation issues, are discussed in this 2018 proxy review by Shirley Westcott, Senior Vice President at Alliance Advisors LLC. Westcott expects the upcoming proxy season to reflect shifting investor priorities with social and environmental issues at the forefront of engagement discussions and shareholder resolutions. The article identifies two issues from 2017—board diversity and change risk— that are likely to gain more traction in 2018. The article also describes new and revived proposals that are expected for the 2018 annual meetings, updates from proxy advisory firms, and trends that will help plan for 2019.

Publication Date*: 4/6/2018 Mailto Link Identification Number: 1510
Frequently Asked Questions
  Revitalize Biotech with these 5 Policy Initiatives
Identification Number 1509
Revitalize Biotech with these 5 Policy Initiatives
Publication Date: April 3, 2018

In this post, Charles Crain of the Biotechnology Innovation Organization (BIO) highlights five legislative and regulatory reforms that he believes would address some of the principal challenges facing biotech companies that go public. Notably, several of these proposals are modest revisions to existing SEC rules and federal legislation, including the JOBS Act. These proposed reforms are consistent with Nasdaq's comprehensive blueprint for stronger, more robust public markets: The Promise of Market Reform: Reigniting America's Economic Engine.

1. Bring transparency to short seller positions

Biotech companies, many in the pre-revenue phase, are easy targets for short sellers. That's primarily due to a lack of liquidity in their stocks and blinded FDA clinical studies that make it easy to circulate false information in the market to drive down stock prices. This includes a new spurious breed of short sellers who initiate patent challenges for the sole purpose of driving the stock price down to make money. This disturbing behavior is highly damaging to industries that are based on intellectual property—like biotech.

BIO has been working with Nasdaq to advocate for increased transparency around short selling positions, which would help inform the market and prevent biotech companies from being taken advantage of by investors who don't have the best interest of long-term investors (and patients of these potentially life-saving drugs and therapies) at heart.

2. Establish SEC oversight of proxy advisory firms

Proxy advisory firms have developed an outsized market influence over biotech companies, relative to their theoretical mission. These firms claim they're only providing recommendations to investors, but what they're actually doing is inserting their own judgment over investors, company management, and corporate boards in terms of how companies should be run.

In an industry like biotech, which has a unique business model that isn't directly comparable to other industries, these one-size-fits-all recommendations can be misleading to investors and damaging to the companies themselves.

BIO and Nasdaq both support the Corporate Governance Reform and Transparency Act, a bi-partisan bill that has already passed the House of Representatives. This bill provides for SEC oversight of proxy advisory firms, and BIO believes it will help reduce conflicts of interest and allow investors to make informed proxy voting decisions.

3. Allow pre-revenue small businesses to maintain SOX 404(b) exemption for 10 years

External auditing of a company's internal controls, as required by SOX 404(b), is expensive for small businesses, potentially costing upwards of $500,000 annually. That money could otherwise be spent on life-saving R&D, and given the simple business model and straightforward corporate structure of small biotech firms, the benefits don't justify the costs. These companies typically have 30 or 40 employees, almost all of whom are scientists, so there's not much complicated financial maneuvering going on; clinical trial results and scientific data are more material concerns.

The JOBS Act was tremendously helpful to the biotech industry; more than 250 emerging biotech companies relied on provisions in the law to help them go public. This compares to just 55 biotech IPOs in the five years before passage of the JOBS Act. The positive impact of this legislation was due in part to the five-year exemption from the SOX 404(b) external auditing requirements granted to emerging growth companies. However, it can take upwards of 15 years to develop a biotech drug, not five, so the cost burden of external auditing is still going to hit some companies in their pre-revenue phase.

BIO has endorsed the Fostering Innovation Act, a bi-partisan legislative solution to reduce the cost of auditing internal controls. The Fostering Innovation Act extends the five-year exemption to 10 years for certain pre-revenue companies. Given that it's a very targeted piece of legislation (only the smallest of companies are still pre-revenue at year six), we have been able to get strong congressional momentum behind this solution, which has already passed the House.

4. Expand the SEC's definition of "non-accelerated filer"

The SEC's non-accelerated filer definition, which scales compliance requirements for small businesses (including a SOX 404(b) exemption), is presently limited to companies with a public float below $75 million. In BIO's view, that limit is too low: a 20 or 30-person biotech may be valued as high as $150-$200 million. That doesn't mean such a company actually has $200 million sitting in their bank account to be spending on Section 404(b); it means their investors are optimistic about the company's potential to fight devastating diseases one day in the future.

BIO is working with the SEC, as well as allies like Nasdaq, to expand the definition of a non-accelerated filer to allow companies with a public float below $250 million to qualify, and to add a revenue component that exempts pre-revenue companies from SOX 404(b) compliance. This will allow pre-revenue companies to focus investor funds on R&D, instead of external auditing that doesn't provide additional value to investors.

Based on the SEC's initial analysis, there are 782 additional public companies that would be added to the universe of non-accelerated filers if the public float limit was raised from $75 million to $250 million. Assuming each of these companies spent on average of $500,000 per year in external auditing, expanding the definition would divert nearly $400 million from compliance to R&D and business development. On the flip side, investor exposure is minimal. If the SEC makes this small, technical change to the definition, only 0.03% of the total float in the market would be exempted from SOX 404(b) compliance via the non-accelerated filer exemption.

5. Implement tax code reforms that incentivize investment in pre-revenue innovators

While 90% of BIO's membership is in the pre-revenue phase, the remainder are revenue-generating companies that have long been hamstrung by high corporate tax rates in the U.S. BIO member companies were therefore very pleased that Congress was able to lower the corporate rate, move to a territorial system, and maintain the R&D credit in the Tax Cuts and Jobs Act. The reduction in the corporate rate will allow those companies more capital to invest in R&D in the United States, and create opportunities to pursue partnerships and mergers with smaller biotech businesses (which is often how smaller biotech companies fund the next stage in their research).

More could be done, however. There are tax policy levers that Congress can pull on the pre-revenue side to incentivize innovation for these small businesses and pre-revenue companies, including investor-side incentives and rules to help companies better utilize net operating losses (NOLs) and/or R&D credits, neither of which pre-revenue companies can use because they don't have a tax liability to offset. For example, BIO supports allowing a small R&D company's NOLs to be carried forward after a financing round or M&A event, rather than being limited by Section 382 of the tax code. We also want to make sure the qualified small business stock rules in Section 1202 work as effectively as possible to attract investors to growing biotechs via the Section's 100% capital gains exclusion.

For more information, read Nasdaq Talks to Congressman Sean Duffy and Vitae Pharmaceuticals' CEO Jeff Hatfield about Proxy Advisor Legislation and Short Selling Transparency >>


Charles Crain is the Director of Tax & Financial Services Policy at the Biotechnology Innovation Organization (BIO). Charles's portfolio includes capital markets, securities, accounting, and tax policies that impact BIO's member companies, including the JOBS Act, legislation to enhance capital markets access for emerging companies, market structure reform, decimalization and tick size, and small company auditing standards. Charles serves as BIO's representative to the Equity Capital Formation Task Force and the SEC Government-Business Forum on Small Business Capital Formation.

BIO is the world's largest trade association representing biotechnology companies, academic institutions, state biotechnology centers and related organizations across the United States and in more than 30 other nations. BIO represents more than 1,100 biotechnology companies, academic institutions, state biotechnology centers, and related organizations.

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.

Publication Date*: 4/3/2018 Mailto Link Identification Number: 1509
Frequently Asked Questions
  DTCC Calls for Cross Industry Cooperation in Case of Cyber Attack
Identification Number 1508
DTCC Calls for Cross Industry Cooperation in Case of Cyber Attack
Publication Date: March 28, 2018

The Depository Trust & Clearing Corporation (DTCC) recently published a white paper that makes several recommendations to strengthen financial sector resiliency from cyber-risks, including increased coordination across the industry, the development and implementation of standards to facilitate effective response and recovery and adherence to regulatory principles. Andrew Gray, Chief Risk Officer at DTCC, stated, "An attack on one or more institutions or critical infrastructures could have a contagion effect across the financial system, especially as interconnectedness continues to grow. As a result, it is critically important that firms incorporate additional redundancies to ensure that the failure of any single institution can be contained and mitigated. To successfully achieve this, we must collectively prioritize resilience and recovery efforts across market participants, infrastructure providers, technology vendors and regulators."


Read the DTCC white paper here >>
Publication Date*: 3/28/2018 Mailto Link Identification Number: 1508
Frequently Asked Questions
  Discussion on Dodd-Frank
Identification Number 1507
Discussion on Dodd-Frank
Publication Date: March 27, 2018

In a recent Facebook Live video, Nasdaq's John Zecca, Sr. Vice President of MarketWatch, and Alan Hahn, Partner, Davis & Gilbert, discuss the evolution of the Dodd-Frank Act, providing pointers to help prepare for the CEO pay ratio disclosure and describing guidance offered to companies from the SEC. They also discuss pending legislation to repeal provisions of Dodd-Frank.

View on Facebook Live >>
Publication Date*: 3/26/2018 Mailto Link Identification Number: 1507
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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