As a corporate secretary or other governance professional, you may face occasions when you have cause to challenge default reactions or views associated with keeping a lid on certain matters. As governance evolves and expectations are increasingly elevated, governance professionals need to be attentive to the assumptions you and your board may make about continuing to treat certain matters as being under lock and key. That may well remain appropriate in some instances; in others, such an approach could represent a disservice to the organization and its stakeholders.
Increasingly, governance professionals need to assess the merits and ramifications of affording higher degrees of disclosure than in the past. This may involve re-examining your own assumptions or reservations about how much transparency should be afforded a given issue. Consider, for example, changes to the scope of information you make publicly available on your board’s website. How does today’s content compare with what would have been published there a decade ago?
Ideally, you and your board won’t struggle with uncertainty when it comes to shareholder meetings and disclosure requirements. In the U.S., stock market regulations have impacted corporations for almost a century. Congress’s 2002 passage of the Sarbanes-Oxley Act (SOX) reflected the need for reforms to prevent accounting fraud and restore investors’ confidence through the improvement of financial disclosure practices. There was an expectation that corporate responsibility to shareholders would be embedded in best practices, and yet the financial crisis of 2008 deepened shareholders’ mistrust of more than a few institutions.
Shareholder Disclosure Requirements
This is among the reasons that board disclosure and accountability have become increasingly critical aspects of good governance. It’s only reasonable for shareholders to expect that an organization’s board will be committed to effective oversight, turning to metrics and more to monitor and assess performance. Investors expect that strong performance should be rewarded, and they have every right to anticipate that boards should also act appropriately in the case of poor performance or misconduct.
Executive compensation is of particular interest to shareholders. Investors want to see disclosure of a company’s executive compensation plan and severance packages – which is just one more reason board committees need to pay attention to executive agreements and contracts. Increasingly, investors want to see that executive compensation is tied to performance. Shareholders can support equity-based compensation, bonuses and other incentives when they’re warranted by strong performance. They take less kindly, though, to severance packages that can be seen as rewarding failed performance or early departures.
While their votes are neither legislated nor binding, U.S. shareholders are afforded a vote on whether their “say on pay” votes are to be held annually or less frequently, at a rate of once every two or three years. In Canada, TSX-listed issuers are required to disclose to all security holders their annual burn rate for each of the issuer’s three most recently completed fiscal periods – and to do so for each relevant Plan. This requirement applies to financial years concluding on or after October 31, 2017.
Like the word “disclosure,” the word “transparency” has become part of a good governance professional’s lexicon. In his November 2017 remarks to the Practising Law Institute (PLI) 49th Annual Institute on Securities Regulation in NYC, Securities and Exchange Commission (SEC) Chairman Jay Clayton opened his remarks by observing that “transparency facilitates effective governance.” He reflected, “Looking back at enforcement actions, a common theme emerges – where opacity exists, bad behavior tends to follow … The SEC may not yet have policy or rule-making answers in these areas, but we are on the lookout for ways to fight the type of opacity that can create an environment conducive to misconduct.”
Rules for Corporate Accountability and Transparency
In the absence of rules, the SEC has issued reports providing guidance on corporate accountability and transparency. It has also been focusing on investor education designed to support informed investment choices and voting decisions. While a good board will want to hone its accountability, as well as its approach to transparency and disclosure on the basis of principles, shareholder activism is also impacting disclosure and other governance practices. Shareholders want companies to disclose more than an overview of a company’s business; they (and the SEC) want to see financial and operating data, as well as biographies of the company’s senior management, directors and nominees.
In Canada, the Canadian Securities Administrators’ (CSA’s) National Policy 51-201 articulates the expectation that companies shall comply with requirements established by the exchanges on which they’re listed. NP 51-201 also stipulates that companies must immediately disclose any material change in the business. The Toronto Stock Exchange (TSX) has published a number of documents, as follows, that can inform disclosure practices for governance professionals:
- TSX Company Manual – amendments to Section 473 specifically list information that TSX-listed issuers must publish on their websites
- TSX Continuous Disclosure Documents – access to a number of disclosure resources, three of which are listed below
- TSX Statement on Timely Disclosure – rules and guidelines
- TSX Electronic Communications Disclosure Guidelines – applicable to website, email and other communications channels
- TSX Guide to Security Based Compensation Arrangements – including a disclosure checklist
Even if your organization isn’t a publicly traded company, you would do well to assess your board’s website disclosure practices in the context of the standards required of TSX-listed issuers. Your checklist could include posting current versions of the board’s majority voting and advance notice policies, as well as position descriptions for the board Chair and lead director, along with the board mandate and all board committee charters (or terms of reference/TOR). These are in addition to the “articles of incorporation, amalgamation, continuation or any other constating or establishing documents of the issuer and its by-laws” that TSX-listed issuers are required to post.
Role of the Disclosure Committee
On both sides of the border, corporations establish disclosure committees that are charged with overseeing the corporation’s disclosure practices. Composed of the corporation’s officers and directors, the disclosure committee will support the board and the corporation in meeting disclosure expectations. Quarterly and annual financial reports, earnings and release filings, and proxy statements represent key elements of disclosure, and the disclosure committee is responsible for the timely and accurate completion of these reports.
While the committee will typically have at least one member who is well versed in terms of financial reporting and the law, such committees’ charters or TORs may also provide the committee with the authority to retain external legal, accounting, financial and other expertise as required. In some organizations, it may be a body, such as an independent Audit or Audit and Conduct Committee, that holds these responsibilities, one composed of directors who are not employees or affiliates of the corporation. The committee is responsible for promptly informing the board of potential disclosure issues should they arise.
In the U.S., the disclosure committee will be charged with reviewing the corporation’s internal controls and procedures associated with disclosures to the SEC. It will monitor, assess and document the corporation’s disclosure procedures and controls, and it is also responsible for reviewing all reports and materials pertaining to disclosure statements. This includes communications to shareholders, earnings guidance and financial projection statements, forms, material transactions, proxy and registration statements, and more.
When you consider the scope of information to be documented, monitored and reported, your board and its committees can benefit from enterprise governance management (EGM), the application of technical tools and resources to address governance needs. Diligent Corporation’s board portal system provides a secure repository for remote access to all the requisite reports and meetings, and integrates seamlessly with Diligent Messenger, a secure digital communications tool.
It is in a corporation’s best interests to provide shareholder disclosures and to establish a culture of transparency that helps make it an attractive choice for increasingly well-informed investors.
If you’re reading this post even though you’re a governance professional working with a board that’s not publicly traded, smart you. While specific legislation, rules and guidelines associated with shareholder disclosure apply to publicly traded companies, your board can also benefit from attention to such standards associated with transparency and disclosure.