Monthly Archives: February 2021

February 11, 2021

Podcast: Inside Track on Veeva Systems’ Conversion to a Public Benefit Corporation

A few weeks ago, I blogged about shareholders overwhelmingly voting to approve Veeva Systems recent conversion to public benefit corporation. For more on that story, Liz talks with Meaghan Nelson, Veeva Systems’ Associate General Counsel and Assistant Corporate Secretary in a new 19-minute podcast.

In this podcast, Meaghan discusses Veeva Systems’ journey to PBC conversion.  Conversation topics include:

1. How the possibility of a PBC conversion to be on the board’s agenda – and what advantages were identified

2. What type of shareholder outreach Veeva conducted before the special meeting – and what type of reaction it received from outside shareholders when it told them it was considering this as a possibility

3. What Veeva did under state corporate law to effect the conversion – and whether it’s planning many changes to its board committees and SEC disclosures to reflect the broader “stakeholder” focus

4. Whether PBC conversions will become a trend

5. Meaghan’s advice for in-house lawyers or outside counsel who might be advising clients on whether to convert to a PBC

The CEO of Veeva Systems posted this op-ed yesterday saying there’s a need for companies to evolve and he urges other CEOs and directors to take action by considering a PBC conversion.

Investor Tips for Enhancing ESG Reporting

EY recently issued a report outlining investor expectations for the 2021 proxy season based on conversations with more than 60 institutional investors representing $38 trillion in assets under management. One topic that’s sure to be top of mind for many investors this proxy season is portfolio company ESG reporting and the report provides tips for how companies can enhance ESG reporting.

When assessing a company’s ESG practices and performance, the report found investors place the most value on direct company engagement, which is reassuring since direct engagement can help ensure investors receive a fulsome picture of company ESG initiatives and progress. Third-party ratings aren’t as high on the list in terms of perceived value but 40% of investors still ranked them as a medium or high-value information source.  This excerpt describes how investors want companies to help ensure their disclosures are picked up by third-party data aggregators:

Some large asset managers rely on third-party data providers to aggregate and structure company disclosures in a way that is more scalable and efficient to their processes, allowing raw ESG data across thousands of companies to be uploaded into their internal platforms for assessment.  While investors generally acknowledged limitations of third-party data (e.g., gaps, data quality issues) they stressed their need to have data at scale. To make these processes successful, investors encouraged companies to take a more proactive role in confirming that their data is being picked up correctly by leading third-party providers.

The report says other ESG reporting enhancements investors would like to see align with one or more of the following: focus on what is material and the connection to strategy, align disclosures with external frameworks, disclose metrics, performance and goals, consider integrating material ESG disclosures alongside traditional frameworks and enhance data credibility through assurance.

PCAOB Conversations with Audit Committee Chairs: Year 2

Following the launch of an engagement program in 2019, the PCAOB recently issued a report summarizing information gathered from conversations with nearly 300 audit committee chairs. The conversations addressed several topics, with the report saying the overarching theme of conversations involved effects of the pandemic on the audit.  Other conversation topics included the auditor and communications with the audit committee, new auditing and accounting standards and emerging technologies.  With respect to emerging technologies, here’s an excerpt about what audit committees say works well:

– Discussing how use of technology will impact the audit team’s time and resource allocation

– As new technologies are implemented, discussing with management if/how the underlying controls will change and discussing with the auditors how they will evaluate and test any changes to the new controls

– Holding deep dive sessions on specific topics related to emerging technologies, new technology tools used in the audit and cybersecurity

– Discussing whether third-party software or data processing is used in the company’s financial reporting processes and if so, how risks and controls are considered and addressed

Audit committee chairs also identified several areas for improvement including guidance around auditing of certain controls for third-party vendors. So, as much as discussion of use of third-party software is among the emerging tech items identified as working well, it can be a challenging topic and one that auditors and audit committees each grapple with amid heightened attention on risk oversight responsibilities.

– Lynn Jokela

February 10, 2021

Board Technology Committees: SolarWinds & Infodemic Reignite the Conversation

Last summer, Liz blogged about one take on what a “stakeholder” board could look like. She noted how some view re-examining the board’s structure as an opportunity to more closely align the board with strategy & culture.  As much as stakeholder interests are in the spotlight, so is the concept of business transformation – which, among other things, often relates to advancements in digital and AI technologies.

Not only that, but stakeholders will be holding companies accountable for failures to safeguard data and systems. The SolarWinds hack from late last year shows that vulnerabilities are constantly being found and exploited – and we’re facing a pretty dystopian future if those weaknesses aren’t addressed.

We’ve blogged several times over the years about the appeal of board technology committees and the need for a digitally savvy board. But recent events are reigniting that conversation. Just today, Liz blogged on the Proxy Season Blog that ISS ESG will now be rating boards on information security risk management & oversight as part of QualityScore. A couple of recent articles offer views on board oversight related to data integrity and digital and AI technologies – and serve as a reminder that the need for board technology expertise isn’t likely to diminish:

In a HBR article, Brad Keywell, founder and CEO of Uptake Technologies, makes an argument for creation of a board-level “data integrity committee.”  Keywell asserts that data integrity is foundational and that operational data is a company’s most undervalued and risk-embedded asset.  Observing that data integrity lacks a specific guardian in most corporate governance structures, Keywell says companies that want to stay ahead of the curve should have a board committee take the lead.

In another article, Karen Silverman, CEO and founder of The Cantellus Group, says boards need a plan for AI oversight in context of the company’s mission and risk management. Silverman suggests boards be proactive to ensure they have a plan for AI oversight so they can leverage the benefits of AI while also considering the legal, regulatory, brand/reputational and business continuity risks it presents.

With directors already stretched thin, boards may be reluctant to form yet another committee. But leading IT research and advisory firm, Gartner, predicts 40% of boards will have a dedicated cybersecurity committee by 2025. Some companies have already moved in this direction – here’s a recent Accenture blog citing several examples of companies with a dedicated board level technology or cybersecurity committee. The blog opines that a dedicated committee is useful because it allows the board to focus on digital or cybersecurity risk – as well as the upsides & downsides of advanced technologies. This sends a strong signal to not only stakeholders, but also hackers.

For boards thinking about structure and expertise needs, check out our “Board Composition” and “Board Succession” Practice Areas and for memos about cybersecurity and the board’s oversight role, see our “Cybersecurity” Practice Area.

Resource for Board Composition Data

For those who work frequently with boards, you’ve probably been asked to pull together comparative board composition data.  Among other things, questions about board tenure, mandatory retirement, average age and board size are not uncommon.  To help answer those questions in a pinch, Spencer Stuart has an interactive comparison chart that provides key data for each S&P 500 sector.  You’ll also find more resources in our “Board Composition” Practice Area that can help when you’re on the receiving end of an unexpected call from one of your board members.

Tomorrow’s Webcast: “Audit Committees in Action: The Latest Developments”

Tune in tomorrow for our webcast – “Audit Committees in Action: The Latest Developments” – to hear Consuelo Hitchcock of Deloitte, Josh Jones of EY and Mike Scanlon of Gibson Dunn discuss evolving audit committee oversight responsibilities, updates to the auditor independence rules, the impact of Covid-19 to oversight of internal controls, internal audit risk assessments and external audit assurance for ESG data.

– Lynn Jokela

February 9, 2021

Market Mania: Corp Fin Issues Sample Comment Letter

Yesterday, Corp Fin issued a sample comment letter for companies conducting securities offerings during times of extreme price volatility. The Staff cautioned that the risks associated with price volatility are particularly acute when companies are seeking to raise capital during times of stock run-ups, high short interest or reported short squeezes, or atypical retail investor interest – i.e., the type of “market mania” that we saw a couple weeks ago with GameStop, and last summer with Hertz.

The letter highlights issues for companies to consider when preparing disclosure documents – including automatically effective registration statements and pro-supps that wouldn’t typically be subject to Staff review. In particular, the Staff wants companies to consider disclosing on the prospectus cover page:

– A description of recent stock price volatility in the company’s stock and any known risks of investing in the stock under the circumstances

– Comparative stock price information prior to recent volatility and any recent change (or lack thereof) in the company’s financial condition or results of operation that are consistent with the recent stock price change

– Any recent change in the company’s financial condition or results of operations, such as earnings, revenues or other measure of company value that is consistent with the recent change in your stock price – if no such change to financial condition or results of operations exists, disclose that fact

Corp Fin also suggests companies provide information about potential risk factors addressing the recent extreme volatility in a company’s stock price, effects of a potential “short squeeze,” the potential impact of the offering on a company’s stock price and investors and the potential dilutive impact of future offerings on investors purchasing shares in the current offering. The sample letter includes information each of these potential risk factors should include.

For use of proceeds, the sample letter also suggests that companies disclose the possibility that they may not be successful in raising the maximum offering amount and the priorities for proceeds received.

Corp Fin cautions that the sample comment letter doesn’t provide an exhaustive list of issues companies should consider. Companies experiencing extreme price volatility are encouraged to contact their Corp Fin industry office with questions about proposed disclosure. Kudos to Corp Fin for issuing this guidance so that advisors of companies that might get caught up in a fast-moving #stonk craze can prepare in advance.

SEC Acting Chair Lee Announces Executive Staff Roster

Last week, John blogged with big news about the recent SEC appointment of Satyam Khanna as Senior Policy Advisor for Climate and ESG and John Coates as Acting Director of Corp Fin.  Along with those appointments, the SEC released a roster of executive staff for Acting SEC Chair Allison Herren Lee. It’s a fair lengthy list of between 15-20 appointments, check it out to see who’s all involved with SEC activities.

Last Friday, the SEC continued with its string of appointments and issued an announcement that Kelly Gibson has been named Acting Deputy Director of the Enforcement Division.  Kelly has been serving as the Director of the Philadelphia Regional Office since February 2020 and has served in the Philadelphia Regional Office for the past 13 years.  Congratulations Kelly!

Insight into Perspectives of Acting Corp Fin Director

Along with the SEC appointment of Satyam Khanna, many practicing in securities law took note of the appointment of John Coates as Acting Director of Corp Fin. In addition to serving on faculty at Harvard Law School, Coates is a member of the SEC’s Investor Advisory Committee and also Chair of the Investor as Owner Subcommittee. To help shed light about Coates’s perspective on issues, this Cooley blog provides highlights about a few Committee recommendations he’s authored. The blog is worth a read, particularly for those interested several hot-button issues involving shareholder proposals and proxy advisors, and proxy plumbing.

– Lynn Jokela

February 8, 2021

Succession Planning: Reassuring Investors with Disclosure

CEO succession has been near the top of business news cycles lately – last week’s news about Jeff Bezos stepping down as Amazon’s CEO certainly played a part. One key board responsibility relates to CEO succession planning. Investors expect boards to have a plan and when the need arises – to appoint a new CEO in due course. As boards need to deal with views of multiple stakeholders, one dilemma is what board should say to investors and a SquareWell Partners report says it found only 20% of companies that have appointed a new CEO since January 2019 provided comprehensive disclosure of their succession planning process.

Some companies aren’t in a position like Amazon – where the company’s announcement named Andy Jassy as incoming CEO. Jassy reportedly previously described himself as Bezos’ shadow – and the announcement also said Bezos will transition to executive chairman. To underscore the importance of CEO succession planning, the SquareWell report cites research that found companies that are unprepared to appoint a successor in a timely manner lose on average $1.8 billion in shareholder value. The report notes, when it comes to succession planning, it’s understandable that companies may want to hold their cards close to the vest, but investors want reassurance that boards are ready to act. Here’s an excerpt about succession planning disclosure that can help reassure investors:

There might be a misunderstanding that investors expect to learn the names of potential successors or to micromanage the choice of the next leader while what they actually want is to see evidence that the board is fulfilling its fiduciary duty and is ready to ensure a smooth transition for all scenarios.

Companies taking succession planning seriously should allow different executives to gain experience in engaging with investors. Investor focus should be on the frequency of the review of the succession plans and asking boards how they ensure that the pipeline of potential candidates and the successor profile are always aligned with the evolution of the company’s strategy. Investors could also question the company’s leadership development programs to understand how the leaders of tomorrow are being groomed. The quality of the board’s answers to these questions should reveal how prepared the board really is to face the next CEO transition.

For a look at trends in Russell 3000 and S&P 500 succession practices, Heidrick & Struggles and The Conference Board recently issued their “2020 CEO Succession Practices” report. The report discusses trends, the Covid-19 impact on succession planning and predicts that if company performance continues to be unsteady, it’s likely more boards will face the need to navigate a leadership change sooner than they might have anticipated.  And for more practical insights about CEO succession planning, check out the transcript from our webcast “CEO Succession Planning in the Crisis Era” – there you’ll find tips about disclosure issues and steps boards and advisors can take now!

Form 10-K Considerations & Reminders

With calendar year Form 10-K filings coming along, a recent Gibson Dunn memo walks through substantive and technical considerations to keep in mind when preparing 2020 Form 10-Ks. The memo covers recent amendments to Reg S-K, disclosure considerations in light of Covid-19, amendments to MD&A & financial disclosure rules and other considerations in light of recent and upcoming changes at the SEC. The memo includes a fairly extensive discussion of the new human capital disclosures and among other things, reminds companies to be mindful of what they’ve said about composition of their workforce in their CEO pay ratio disclosures. Here are a few other considerations, check out the complete 25-page memo for more:

KPIs: The SEC’s Interpretive Release issued in January 2020 was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company’s performance, including non-financial and financial metrics. The memo reminds companies that if changes are made to the method by which they calculate or present the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period’s presentation to help ensure the comparison is not misleading.

Covid-19 Impact on Risk Factors: It is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company’s business, (ii) risks impacting the company’s suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.

Disclosure Controls and Procedures: In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company’s disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company’s approach to addressing them.

Transcript: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season”

We’ve posted the transcript for our recent webcast: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season” – it covered these topics:

– Proxy Season Review Highlights

– Policy Guideline Updates

– Board Diversity

– ESG Reporting

– Compensation

For those diving in to drafting a company’s proxy statement, check it out for insight into what Glass Lewis and the firm’s investor clients will want to see in this year’s disclosures.

– Lynn Jokela

February 5, 2021

Section 13(d) Reform: On the SEC’s Agenda?

A recent Olshan blog discussing what activists might expect from a Gary Gensler led SEC raised the possibility that Section 13(d) reform just might find its way on to the SEC’s agenda. This excerpt explains these efforts might garner bipartisan support:

At the CFTC, Mr. Gensler demonstrated an ability to balance progressive political pressures with competing industry interests. Should he take a similarly pragmatic approach if confirmed to lead the SEC, one of the areas where a coalition can be brokered between different interest groups is reform of Section 13(d) of the Exchange Act. Adopted in 1968 as part of the Williams Act, Section 13(d) instituted a rigorous beneficial ownership disclosure regime that requires stockholders to promptly notify issuers if they accumulate significant stock positions.

Ever since, corporations and their advisors have agitated for increasingly stringent investor reporting obligations. Likewise, progressives skeptical of hedge funds and activism in general have also trained their sights on parts of Section 13(d). As a testament to the appeal of this sentiment to both the business community and progressives, legislation (the “Brokaw Act”) was introduced in the Senate in 2017 to intensify oversight of activist hedge funds through Section 13(d) reform by Senator Tammy Baldwin (D-WI) and former Senator David Perdue (R-GA), each a member of the peripheral wing of their respective party.

The blog suggests that in addition to potentially shortening the reporting window, the SEC’s efforts could include expanding the definition of “beneficial ownership” to include derivative instruments that are not subject to settlement in the underlying security.

Rule 10b5-1 Plans: Glass Lewis Offers Up “Best Practices”

Rule 10b5-1 plans are one of the “great divides” between those of us who are lawyers for public companies and literally everyone else who follows public company issues.  Most of us are borderline paranoid about crossing the t’s & dotting the i’s to make sure these plans provide the protection they’re supposed to provide (we even have an 87-page handbook devoted to that!). Most of them think these plans are a total scam – and point to the windfalls reaped by execs at Pfizer & Moderna for trades under 10b5-1 plans that seemed particularly well-timed to coincide with positive Covid-19 vaccine news.

That divide is one reason why I was kind of surprised by a recent Glass Lewis blog offering up some thoughts on “best practices” for 10b5-1 plans. These include typical suggestions like “cooling off” periods & public disclosure – but as this excerpt notes, the ultimate goal of these and other best practices is to provide transparency about the plan and its implications:

Other forms of best practice include avoiding the use of multiple, overlapping plans, avoiding short-term plans (most plans are six months to two years) and avoiding making changes to existing plans. All of these best practices help simplify the flow of publicly available information and present a clear way for insider trading rules to be followed. They help to avoid situations where executives are put into the spotlight, as was the case for Pfizer and Moderna – and ensure that when things do go public, the market has the information it needs to put things in context.

Now, since the blog’s title is “Operation Warp Pay,” I expected this discussion of best practices to be followed by a smackdown of the trading by the execs of these pharma companies.  Surprisingly, that wasn’t the case.  While the media reaction to Pfizer & Moderna’s 10b5-1 trading plans suggest that more could have been done on the transparency front, Glass Lewis concludes that the trades were essentially benign examples of lawful transactions under Rule 10b5-1.

Market Mania: History Doesn’t Repeat Itself, But It Often Rhymes

Have you ever heard of the Piggly Wiggly short squeeze? This article tells the story of the last time individual investors & Wall Street went toe-to-toe over a stock. It happened nearly a century ago, but it shows that Mark Twain was right when he said that “history doesn’t repeat itself, but it often rhymes.” (In case FT puts this behind their pay wall, this Of Dollars & Data blog also recounts the tale).

Also, check out Bruce Brumberg’s interview with former SEC enforcement lawyer John Reed Stark for a discussion of some of the legal issues involved in last week’s shenanigans.

John Jenkins

February 4, 2021

PPP Loans: Appealing Denials of Forgiveness

According to an SBA press release, the agency has forgiven over $100 billion in PPP loans as of January 12, 2021, and has approved forgiveness for nearly 85% of the applications that it has received. That’s great, but what should you do if your client is in the other 15%?  This Dorsey & Whitney memo says that a borrower’s only recourse is the SBA appeals process, and this excerpt says that it should expect an uphill battle:

The only appeal process allowed by law is set out in the SBA regulations found at 13 CFR § 134.1204, et seq. The decision on the appeal will be made by an administrative law judge (ALJ) who will review the petition filed by the borrower, the response of the SBA, and the “record,” that is the documentation submitted by the borrower and the SBA. However, in order to obtain a reversal of the denial of loan forgiveness, the borrower must convince the ALJ that “the SBA loan review decision was based on clear error of fact or law.” 13 CFR § 134.1212.

That is very difficult to prove because courts have ruled that “clear error of fact or law” means that “although there is evidence to support [the decision], the [administrative law judge] . . . is left with the definite and firm conviction that a mistake has been committed.” Concrete Pipe & Prods. of California, Inc. v. Constr. Laborers Pension Tr. for S. California, 508 U.S. 602, 622, 113 S. Ct. 2264, 124 L. Ed. 2d 539 (1993); see also, PGBA, LLC v. United States, 389 F.3d 1219, 1224 (Fed. Cir. 2004). All of that means that thorough preparation and diligent prosecution of the appeal is absolutely necessary.

The memo reviews the appeals process, including deadlines and the matters that must be addressed in an appeal petition. The most important part of the process to keep in mind is that deadlines are very tight – an appeal must be perfected within 30 days of the SBA’s final decision on forgiveness, and it is applied rigidly. That means that even if a company expects that its forgiveness application will be approved, it needs to prepare to move quickly in case it receives an unpleasant surprise.

PPP Loans: Unforgiven? You May Be Eligible for a Tax Credit

If your client is not successful in obtaining loan forgiveness from the SBA, all is not lost! The IRS says that it may be eligible for a consolation prize in the form of a tax credit:

Under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). The eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.

If you received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and your request for forgiveness was denied, you can claim the ERC related to those qualified wages on your 4th quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return.

This recent  “Accounting Today” article provides additional details on the tax credit, which is limited to the 4th quarter of 2020.

PPP Loans: Fraudulent? Now You’re REALLY Unforgiven

The DOJ recently announced its first civil fraud settlement associated with a PPP loan. The case involved a company called Slidebelts & its CEO Brigham Taylor, and centered on allegations that the company falsely represented that wasn’t bankrupt on PPP loan applications. Here’s an excerpt from this Troutman Pepper memo that describes the terms of the settlement:

The settlement agreement states that Slidebelts and Taylor are liable to the United States for nearly $4.2 million in damages and penalties for violating the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act. Because of the compromised financial condition of Slidebelts and Taylor, DOJ agreed to accept a settlement amount of $100,000 in exchange for releasing Slidebelts and Taylor from liability for these civil claims. The settlement agreement did not, however, release Slidebelts and Taylor from any liability under the Internal Revenue Code, criminal liability, or any other administrative liability or enforcement right not specifically released in the agreement.

The memo points out that DOJ can seek maximum penalties of approximately $2 million per violation under FIRREA and $23,000 per violation, plus triple damages, under the FCA. What’s more, both incentivize whistleblower actions. That means that borrowers need to monitor compliance closely and ensure that their internal reporting system addresses potential violations of PPP loan requirements.

John Jenkins

February 3, 2021

Human Capital Management Disclosure: Early Returns From 10-K Filings

Whenever a new disclosure requirement becomes effective, one of the first things people ask is – “what are other companies doing to comply with it?”  This Willis Towers Watson memo provides some insight into that by reviewing the content of early 10-K filings containing human capital management disclosure.  The memo’s analysis breaks down the disclosures into two categories – descriptions of human capital resources & initiatives and disclosure of data reflecting human capital metrics. Here’s an excerpt on what companies are saying about their resources & initiatives:

Most companies included the descriptions “employee development and training” and “diversity initiatives and strategies.” This is not surprising given the societal focus on these issues during 2020. A cursory review of larger companies in our sample indicates these disclosures were leveraged from existing public statements, such as proxies and environmental, social and governance (ESG) reports.

Among the companies disclosing diversity initiatives and strategies as descriptions, two thirds enhanced their disclosure with representation metrics. Only a handful of companies disclosed concrete gender and racial diversity goals (e.g., increase the representation of both women and ethnically diverse talent by at least one percentage point year over year). We expect that more companies will continue to enhance their internal reporting processes and develop and publicize actual goals in these areas; therefore, an uptick in their prevalence as metrics disclosed in future filings is likely.

Almost every disclosure also included at least one human capital metric. Workforce profiles were the most common of these, with the total number of employees disclosed being most prevalent metric. Information about the total number of employees appeared in 94% of filings. That isn’t surprising, since that kind of disclosure was previously required in 10-K filings.

What is a little surprising is that this was the only metric to appear in a majority of the 10-K filings reviewed. Gender representation and diversity & inclusion were the next most popular metrics, and appeared in 44% and 38% of filings, respectively. Other metrics discussed in some filings included union representation, training, and employee turnover or retention rates.

Human Capital Management Disclosure: What Do Investors Want?

As companies work through how to comply with the SEC’s new “principles based” human capital disclosure requirement, they also may want to consider this recent FEI article, which says that investors are looking for companies to address three things:

As we approach the Q4 2020 earnings cycle and 2021 proxy season, investors will be focused on three specific aspects of HCM: 1) employee health and safety amid the precipitous increase in COVID-19 cases; 2) diversity and inclusion given a spate of decrees, proposals and actions by the State of California, ISS, NASDAQ, Business Roundtable and OneTen; and 3) training and development amid the acceleration of Industry 4.0, IoT, digital, and automation.

The article recommends specific actions that companies should take in preparing to satisfy their new disclosure obligations. These include ensuring that a board committee (typically the Comp Committee or a dedicated ESG Committee, if one exists) oversees human capital management, evaluating its processes & systems for monitoring and updating publicly disclosed human capital metrics, and assessing whether those metrics are still the most relevant for managing the business and changing or updating them as needed.

Audit Committees: Financial Reporting Disclosure & Control Tips 

Just in time for everybody’s upcoming round of audit committee meetings, here’s a Weil memo with 21 tips for audit committees drawn from recent SEC rule changes, guidance, enforcement cases and Staff comment letters. Now, you might be tempted to write off a memo promising “tips” as likely to be pretty facile, but that would be a big mistake with this one – it’s a 21-page deep dive that’s definitely worth spending some time with on your own & sharing with your audit committee.

John Jenkins

February 2, 2021

Market Mania: Starlings, Shorts & Stonks

During the initial lockdown last spring, my wife & I became enamored with bird watching.  We hung several different feeders in our back yard and spent a lot of time on our porch watching all sorts of cool birds. Yes, we party hard here in the Cleveland suburbs!

Anyway, we’ve attracted a real menagerie. We’ve kept the feeding going during the winter & have seen some new arrivals, all of which were more than welcome – that is, until the European starlings showed up.  I’ve quickly learned to hate these guys. They travel in large flocks, poop everywhere and bully all the other birds off the feeders.  We’re trying to get rid of them, but it looks like it’s going to take some effort.

Nobody invited the starlings to the party, and now they’re why the other birds can’t have nice things.  Their presence at our bird feeders made me think of last week’s stock market shenanigans involving GameStop, AMC and a handful of other “stonks.” My annoyance at this situation is similar to my annoyance with the starlings in my back yard. After all, nobody invited people who treat the stock market like a casino to the party, and they’re a big reason why a lot of companies & stakeholders can’t have nice things.

The only thing is, like a lot of other people, I’m not exactly sure who the starlings are in this scenario. Are they the “Eat the Rich” crowd from Reddit – or are they the billion dollar hedge funds that publicly paraded their short positions & ended up being taken down by the Internet’s sans-culottes? Maybe the starlings are the trading apps, the clunky way Wall Street clears trades, or even Donald Trump supporters? Perhaps the answer is “all of the above.”

It’s going to take me a while to sort this out in my own head. Based on the recent joint statement that the SEC commissioners issued on the situation, it looks like it’s going to take the agency some time as well. This whole thing is far from simple – check out this NYT article to get a sense of the challenges that the SEC faces here. So for now, I guess all we can do is just sit back & enjoy the memes and the free chicken tenders.

SEC Makes Some Interesting Appointments

The SEC announced yesterday that HLS professor John Coates has been appointed to serve as Acting Director of Corp Fin.  It’s an interesting appointment – the head of Corp Fin has traditionally been a practitioner, while Coates is a long-time academic. Of course, he’s also a former Wachtell M&A lawyer, so it’s not like he doesn’t know his way around a deal.

The SEC also announced the appointment of Satyam Khanna as Senior Policy Advisor for Climate and ESG. Khanna  previously served as counsel to former commissioner Robert Jackson. In his new role, Khanna will “advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.” His appointment is another signal that ESG issues and rulemaking projects are likely to feature prominently on the SEC’s agenda.

Transcript: “Streamlined MD&A and Financial Disclosures – Early Considerations”

We have posted the transcript for the recent webcast – “Streamlined MD&A and Financial Disclosures: Early Considerations.”

John Jenkins

February 1, 2021

ESG: Corporate Heavy Hitters Sign On to Stakeholder Metrics

Last week, the World Economic Forum announced that 61 companies signed-on the organization’s “Stakeholder Capitalism Metrics,” a set of ESG metrics and disclosures that measure long-term enterprise value creation for corporate stakeholders. The metrics are intended to serve as “a set of universal, comparable disclosures focused on people, planet, prosperity and governance that companies can report on, regardless of industry or region.” This excerpt from the WEF’s announcement provides more details:

The Stakeholder Capitalism Metrics, drawn from existing voluntary standards, offer a core set of 21 universal, comparable disclosures focused on people, planet, prosperity and principles of governance that are considered most critical for business, society and the planet, and that companies can report on regardless of industry or region. They strengthen the ability of companies and investors to benchmark progress on sustainability matters, thereby improving decision-making and enhancing transparency and accountability regarding the shared and sustainable value companies create.

The Stakeholder Capitalism Metrics document is 97 pages long, and contains plenty of the kind of pious, self-congratulatory corporate gobbledygook you’d expect to find in something like this. However, the core metrics are summarized in a three page chart beginning on page 8 of the document – and a review of that chart should give you a pretty good handle on them.

Companies that have signed on to the core metrics include Dow, Unilever, Nestlé, Bank of America, Credit Suisse, Sony & all of the Big 4 accounting firms (which helped develop the metrics). The signatories have committed to reflect the core metrics in their corporate reporting and to publicly support the effort to develop uniform ESG metrics.

We’ve previously blogged about the growing demand among investors and other constituencies for standardized sustainability disclosures, and this announcement represents a milestone in that process. Now, we’ll have to see what these disclosures look like and whether the WEF’s metrics continue to gain traction.

Tomorrow’s Webcast: “Shareholder Proponents Speak: 14a-8 Fallout & Other Initiatives”

Tune in tomorrow for the webcast – “Shareholder Proponents Speak: 14a-8 Fallout & Other Initiatives” – to hear As You Sow’s Andy Behar, Trillium Asset Management’s Jonas Kron,’s Jim McRitchie, and the NYC Comptroller’s Yumi Narita discuss what changes they expect in light of the recent changes to Rule 14a-8 and other initiatives on the horizon.

Our February E-Minders is Posted

We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!

John Jenkins