Costco Shareholders to Vote on Limits to Director Tenure
A shareholder proposal of activist John Chevedden aimed at limiting long-tenured directors will be up for vote at the annual meeting of Costco to be held in January 2015. The proposal asks the board to amend its bylaws to require at least 67 percent of the board of directors to have less than 15 years of tenure on the Costco board. According to the proposal, more than half of Costco's current directors would exceed this limit. Costco's board opposes the proposal, noting that imposing such mandatory limits would "arbitrarily deprive Costco of qualified, experienced and effective directors." The board's response also notes that current board nomination processes consider tenure and that experienced directors are good for Costco's long-term approach to creating shareholder value. ISS does not currently have a voting policy relating to director tenure. However, its QuickScore governance rating system looks at the proportion of non-executive directors with greater than nine years tenure and states that “[l]imiting director tenure allows new directors to the board to bring fresh perspectives. A tenure of more than nine years is considered to potentially compromise a director’s independence."
Insider Trading Convictions Overturned
In United States v. Newman, the U.S. Court of Appeals for the Second Circuit recently overturned the insider trading convictions of two former hedge fund managers. In doing so, the court set a new standard for the "personal benefit" element for tippee liability set in Dirks v. SEC. In particular, Newman held that “in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.” Previously, courts had used a low standard for showing the insider's personal benefit, allowing it to be inferred from circumstances such as mere friendship and not requiring the tippee's knowledge of the benefit.
U.S. House Takes on Disclosure Reform
Although the SEC previously launched its own "Disclosure Effectiveness" initiative under the JOBS Act, the U.S. House of Representatives recently passed the Disclosure Modernization and Simplification Act of 2014 aimed at similar reforms. The bill would require the SEC to revise Regulation S-K to “reduce the burden on emerging growth companies, accelerated filers, smaller reporting companies, and other smaller issuers, while still providing all material information to investors” and to eliminate duplicative, outdated or unnecessary provisions for all issuers. The bill would also permit public companies to include a summary page of all material information in Form 10-K. It is uncertain what action the Senate will take on the bill. In light of the ongoing attention to this issue, reporting companies should continue to evaluate their existing disclosure with an eye toward readability and usability for investors.
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