May 28, 2020

SEC Chairman Clayton’s ESG Comments

Last week when SEC Chairman Jay Clayton spoke before the SEC Investor Advisory Committee meeting, he concluded his remarks by noting his views on disclosure of ESG matters – saying that lumping “E”, “S” and “G” disclosure matters together reduces the usefulness of the disclosures.  Yesterday, Chairman Clayton re-emphasized his view in remarks before a meeting of the SEC’s Asset Management Advisory Committee.  Here’s an excerpt from Chairman Clayton’s remarks yesterday:

I believe I have made it clear that, while I believe that in many cases one or more “E” issues, “S” issues, or “G” issues are material to an investment decision, I have not seen circumstances where combining an analysis of E, S and G together, across a broad range of companies, for example with a “rating” or “score,” particularly a single rating or score, would facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise.

Along with everyone else that has compiled data and responses for surveys used in ESG ratings, it seems safe to say that Chairman Clayton isn’t a fan of the proliferation of ESG ratings either.

The Commission has a tall order now that the SEC Investor Advisory Committee approved its recommendation suggesting the Commission get moving on ESG disclosure.  Part of the Investor Advisory Committee’s recommendation is that the Commission conduct outreach about ESG reporting requirements to investors, companies and others.  The Commission is clearly conducting outreach by gathering information from the Investor Advisory Committee and Asset Management Advisory Committee – although at this point, it’s hard to tell where the Commission’s effort on ESG disclosure goes from here – or for that matter, whether it will go any further.

Proxy Advisor Regulation – Is a Speed Bump the Answer?

Proxy advisors and others are voicing displeasure at the notion of a “speed bump” when it comes to proxy advisor reports.  Even though the comment period for the SEC’s proposed proxy advisor regulations closed back in February, concerned voices haven’t quieted.  The latest concern relates to the “speed bump” that Commissioner Elad Roisman spoke about back in March at CII’s spring conference.

During his remarks, Commissioner Roisman mentioned one idea that would allow contemporaneous review – companies would receive and review a proxy advisor’s report at the same time the proxy advisor sent the report to its clients.  While a company reviewed a proxy advisor’s report, as a way to manage “automatic voting,” Commissioner Roisman suggested a “speed bump” – basically a time period during which the proxy advisor would disable any automatic voting submission features.

While some see contemporaneous review and a speed bump as an improvement compared to how things stand today, the constituents that don’t are jumping on the “voice of concern bandwagon.”

First, a CFA Institute blog says they want the SEC to propose new rules so details of contemporaneous review and the speed bump can be better understood.  Without reopening a revised proposal for comments, the blog says the SEC risks shutting out stakeholders from providing comments.

A recent Pension & Investments article, titled “Truce sorely wanted on proxy proposal championed by SEC” (subscription required), quotes Glass Lewis’s SVP & GC, Nichol Garzon-Mitchell, as saying the proxy advisor still has concerns about some of the alternatives the SEC may be considering and that details of a new proposed approach should be vetted through public comment.  The article also quotes representatives of the Investment Advisor Association and the Council of Institutional Investors as saying that the idea of contemporaneous review and a speed bump is promising but more information is needed and basically the SEC should re-propose the rule to sort out potential concerns and issues.

ISS declined to comment for that article, but separately a recent opinion piece from ISS’s head of Governance Research & Voting,  Lorraine Kelly, also voices displeasure about the “speed bump” solution.  The opinion piece echoes the IIA and CII concerns and suggests because the alternative proposal is so different from the original rule proposal it should require the rulemaking process to go back to start over.  The opinion piece concludes by suggesting the SEC shelve the proposed rules.

Give the Commission credit, it’s no easy task to try to change or improve the process around proxy advisor reports and they’ve stepped up to try and address it.  The proposed rules are controversial and no matter what is done, somebody’s probably not going to like it.  At the same time, companies have been frustrated for years with the existing process for proxy advisor reports so some change would likely be welcome news.

Post-Mortem Assessment of Virtual Financial Close

Working remote continues for many and a recent Deloitte memo takes a look back at what, for most, was the first virtual financial close to help smooth the effort the next time around.  Many companies had to adjust financial close processes on the fly and the memo says this may have raised questions about internal controls and it lists questions to help guide an assessment of potential weaknesses.

Knowing that the recent virtual financial close likely won’t be the last, if companies haven’t already done so, the memo serves as a reminder that now might be a good time to conduct a post-mortem of the most recent quarter-close experience.  For a post-mortem assessment, the memo provides questions covering accounting and reporting impacts, impacts on the timeline, close and task management, governance and compliance, resourcing, technology, and remote working.  Here’s an excerpt of questions about accounting and reporting impacts:

What were the technical accounting or disclosure impacts of the current pandemic—and how might they change in future periods?

Which elements of the financial statements needed increased focus?

Was there adequate time allowed for management reviews at all levels?

Where does management have limited transparency into the results and underlying drivers?

Were there any new focus areas for the external audit this period, or places where auditors spent additional time?

– Lynn Jokela