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The gloves are off. Yesterday, ISS announced that it had filed this lawsuit against the SEC – which challenges the Commission-level guidance that was issued back in August. As Broc blogged earlier this week, CII had already sent a couple of comment letters to the SEC to complain about that guidance. This lawsuit also comes on the heels of the SEC announcing that it will hold an open Commission meeting next week to propose rule changes for proxy advisors.

These are the ISS allegations (also see this Cooley blog – and this Twitter thread from Wharton Prof David Zaring that speculates this case may be used as part of the bigger picture pushback on regulatory guidance that we’ve been seeing):

– The guidance exceeds the SEC’s statutory authority under Section 14(a) of The Securities Exchange Act of 1934 and is contrary to the plain language of the statute; the provision of proxy advice is not a proxy solicitation and cannot be regulated as such

– The guidance is procedurally improper because it is a substantive rule that the SEC failed to promulgate pursuant to the notice-and-comment procedures of the Administrative Procedure Act

– The guidance is arbitrary and capricious because, even though it marks a significant change in the regulatory regime applicable to proxy advice, the SEC has denied that it is changing its position at all. The agency has thus flouted the basic requirement of reasoned decision-making that it at least display awareness that it is changing its position

Director Survey: “Collegiality” & “ESG” Can Go Too Far

PWC is out with its annual survey of 700 directors. The main theme is that “collegiality” remains highly valued and important – but it can go too far if it keeps directors from speaking up or pursuing necessary refreshments. Here’s the key findings:

– 49% of directors (privately) say that one or more colleagues should be replaced (a record number)

– 43% of directors say it’s difficult to voice a dissenting view in the boardroom

– 72% of boards are conducting performance assessments (up from 49% in 2016) – but most focus on adding expertise or diversity, rather than counseling or not re-nominating underperforming incumbents

The survey also says that some directors are growing weary of diversity & ESG attention:

– After years of steadily climbing, the number of directors saying board diversity is “very important” fell by 10%

– 83% of directors say they don’t support state law diversity mandates – but around half say they support policies of including diverse candidates in recruitment slates

– 56% of directors say that investors devote to much attention to E&S issues (however, part of the frustration is that there’s still a lot of confusion among directors about what issues fall into this category)

– An increasing number of directors say that the board has a role in corporate culture (but still not as much as upper & middle management)

See this HBR article for a take on working with the “5 archetypes” of director approaches to ESG – the deniers, the hardheaded, the superficial, the complacent, and the true believers.

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– Liz Dunshee