November 5, 2020

More on “Board Diversity: Goldman Says No More ‘Boys Club’ IPOs”

Last year, Goldman Sachs’ CEO David Solomon announced that the bank wouldn’t be taking any company public unless the company met diversity quotas – one diverse director in 2020, two in 2021. In this LinkedIn post, DJ D-Sol notes that they’ve taken 54 companies public since the policy went into effect – and they’ve started a new initiative to get first-timers on boards.

Goldman Sachs isn’t alone in these initiatives – the NYSE is also involved with getting diverse directors connected with companies who are seeking new directors. This recent report from the NYSE & Diligent says that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon. However, 45% lacked a specific timeframe for meeting diversity goals. Check out the full survey for info on board refreshment practices and other diversity efforts.

Critical Audit Matters: PCAOB Says CAMs Made Ripples, Not Waves

Last week, the PCAOB issued this analysis of the impact of the “critical audit matter” disclosure requirement, which has already been in effect for large accelerated filers and will take effect for other companies at the end of this year. This Cooley blog summarizes some of the high expectations and worries that people had when the requirement was adopted. But so far, other than auditors putting in some long hours (or maybe because of auditors putting in long hours), it seems like CAMs are making more of a ripple than a wave. Here are some of the key PCAOB findings:

• 2,420 audit reports contained CAMs – averaging 1.7 per report (7 was the highest). The most common CAMs reported related to revenue recognition (604), goodwill (462), other intangible assets (385) and business combinations (355).

• Audit firms made significant investments to support initial implementation of CAM requirements – but so far, they don’t appear to be passing those costs on to companies.

• Audit committee chairs and company preparers participating in the interview process indicated that the CAM implementation process was a “generally smooth experience” for companies, largely as a result of the significant upfront preparation by auditors. In particular, those interviewed considered the “dry runs” conducted by auditors to be useful.

• 41% of engagement partners who participated in the survey felt that the CAM requirement enhanced audit committee communications – less than 2% felt they constrained communications.

• Investor awareness of CAMs communicated in the auditor’s report is still developing, but some investors are reading CAMs and find the information beneficial. Only 31% of surveyed investors had seen a CAM “in the wild.”

• Only 2% of engagement partners reported issuer changes to internal control over financial reporting because of CAMs.

• The staff has not found evidence of significant unintended consequences from auditors’ implementation of CAM requirements for audits of large accelerated filers in the initial year.

The PCAOB analysis was accompanied by two whitepapers: one covering stakeholder outreach on CAM implementation and the other providing an econometric analysis of CAM requirements. Riveting stuff. The PCAOB plans to issue another report in 2022 and a comprehensive post-implementation review in 2024.

COVID-19: Heightening Investors’ Focus on Social Issues?

Social issues are attracting greater attention from asset managers this year, compared to the “Before Times” – but governance remains the most important issue. That’s according to a recent survey of 65 asset managers by ISS ESG, asking how the pandemic has impacted their consideration of ESG factors in investment decision-making and stewardship or engagement activities. The press release lists these key findings (see our “ESG” Practice Area for a bevy of surveys and memos):

– 62.5 percent of respondents report that social issues attract more of their attention now than before the COVID-19 pandemic.

– Governance remains the most important ESG factor in the investment analysis and stewardship activities of 86 percent of respondents.

– Respondents report the primary drivers of growth in their ESG engagements include client and stakeholder demand, racial inequality and diversity, and regulatory changes.

– 44.1 percent of respondents expect future ESG ratings to place a greater weight on workplace safety, treatment of employees, diversity and inclusion, as well as supply chain labor dynamics.

– 37.5 percent of respondents have either already added or intend to add new staff to manage ESG-related issues.

Liz Dunshee