Monthly Archives: March 2021

March 31, 2021

ESG: SEC Rulemaking Could Draw “First Amendment” Challenge

That was fast. Only a couple of weeks ago, Acting SEC Chair Allison Herren Lee gave a speech and issued a corresponding request for public comment on 15 aspects of climate change disclosure. Hunton Andrews Kurth’s Scott Kimpel alerted us that West Virginia’s Attorney General promptly responded with this letter to threaten a First Amendment lawsuit if the SEC adopts rules that require ESG disclosure.

The letter says the “strict scrutiny” framework applies to speech “compelled” by the government – and concludes that the SEC disclosure rules wouldn’t pass muster. The AG rests that conclusion on the theory that ESG info isn’t financially material and is merely meeting investor “demand.” Here’s an excerpt:

Strict scrutiny is the highest First Amendment standard and imposes three requirements. First, the regulation must advance a compelling government interest; second, it must be directly and substantially related to advancing that end; third, it must use the least restrictive means. See United States v. Playboy Entertainment Group, Inc., 529 U.S. 803, 813 (2000). This is a high bar for the government, and it is the “rare case[]” in which a regulation “withstands strict scrutiny.” Williams-Yulee v. Florida Bar, 575 U.S. 433, 444 (2015).

In Reed v. Town of Gilbert, the Court held that strict scrutiny applies to the type of content ­based speech regulation at issue here. 576 U.S. 155, 159 (2015). According to Justice Breyer, the holding in Reed “inevitably involve[s]” the “governmental regulation of securities.” Id. at 177. In NIFLA v. Becerra, the Court again applied strict scrutiny in a case dealing directly with compelled speech. 138 S. Ct. 2361, 2365-66 (2018). And most recently in an opinion by Justice Kavanaugh, the Court reaffirmed the same standard. Barr v. Am. Ass ‘n of Political Consultants, Inc., 140 S. Ct. 2335, 2346 (2020) ( citing Reed for its holding that “content-based laws are subject to strict scrutiny”). Concurring in part and dissenting in part in that case, Justice Breyer again remarked that this affects “the regulation of securities sales” because, “the regulatory spheres in which the Securities and Exchange Commission … operate[s]” is “defined by content.” Barr at 2360.

First Amendment strict scrutiny is an unmistakable roadblock for your proposal because merely meeting a “demand” for company statements is not a compelling government interest. And while protecting investors from fraud and deceptive practices in the issuance and trading of public securities will likely be held to be a compelling government interest, it is highly unlikely courts will find requiring statements of the kind you propose to directly and substantially serve that end. Moreover, the Commission would be hard-pressed to demonstrate that mandating companies to issue statements regarding environmental, social, and governance matters which are not material to future financial performance constitutes the least-restrictive means for investors to obtain such information. Private competition for customers and investors already leads companies to issue statements on a wide variety of matters of public interest without government compulsion.

It would be preferable for you and the Commission to recognize now that the First Amendment stands in the way of the plans you outlined. If not, these issues will be raised during rulemakings that proceed down this path.

It’s not too surprising to see a threat like this, given the fact that everything these days has become so politically charged. And remember, a First Amendment challenge was successful against the conflict minerals rule.

However, it’s bold to make a preemptive threat on behalf of the citizens of West Virginia before we can even assess whether proposed rules are appropriately tailored. Especially when we hear from companies that they want more certainty for information demands – and investors (including retail investors) are saying they want protection & accuracy when investing in ESG funds & indexes.

What’s clear is that both supporters and detractors will be gearing up for legal battles if rules materialize, and the Constitutional interpretation will land with the courts. That means we’ll probably be dealing with ambiguities in the “ESG disclosure” realm for quite a while.

“Responsible” Investors: Better to Engage Than Divest?

We’ve blogged several times about investor divestment initiatives – and pressure on big asset managers to eliminate fossil fuel companies from their portfolios. That’s a pretty blunt tool to use to effect social change – and recent research says it might not be as effective as engagement. Here’s an excerpt:

This paper is an attempt to analyze the welfare implications of two traditional strategies aimed at shaping corporate outcomes: exit and voice. To make the problem tractable we have made a number of simplifying assumptions: identical firms with zero marginal cost up to a capacity constraint, a linear demand curve, constant absolute risk aversion, normal distribution, etc. We have also studied the three principal socially responsible strategies, divestment, boycotting and engagement, separately, without considering how they might interact with each other.

Subject to these limitations, we find that in a competitive world exit is less effective than voice in pushing firms to act in a socially responsible manner. Our conclusion is consistent with Kruger et al.’s (2020) survey of institutional investors, which finds that such investors consider engagement, rather than divestment, to be the better approach for addressing an externality such as climate risk. Furthermore, we show that individual incentives to join an exit strategy are not necessarily aligned with the social incentive, while they are when investors are allowed to express their voice.

We have derived these results under the best possible scenario for the exit strategies: investors and consumers who can announce their strategies to the world and commit to them. If we relax these assumptions, exit becomes even less effective.

The authors go on to note that company-by-company engagement is also a better alternative than regulatory efforts – because it’s more flexible, cost-effective and “less prone to capture than political voice.” The authors note, however, that the US proxy system tends to limit shareholders’ ability to influence corporate policy and makes engagement less effective – and of course, engagement isn’t very effective at controlled and privately held companies.

Transcript: “Conduct of the Annual Meeting”

If you’re preparing for your shareholder meeting right now, make sure to check out the transcript from our recent webcast: “Conduct of the Annual Meeting.” Crown Castle’s Masha Blankenship, AIG’s Rose Marie Glazer, Rocket Companies’ Tina V. John, American Election Services’ Christel Pauli and Oracle’s Kimberly Woolley gave practice pointers on meeting format & logistics, voting tabulations, “rules of conduct” and other helpful topics.

Liz Dunshee

March 30, 2021

Congressional Review Act Invoked Against 14a-8 Amendments!

When the Rule 14a-8 amendments were approved in high-drama fashion last fall, they were the first revisions to the submission thresholds in over 20 years, and the first revisions to the resubmission threshold since 1954. Some viewed them as a “capstone” to former SEC Chair Jay Clayton’s tenure. Now it’s become more likely that could all be undone.

Late last week, Senator Sherrod Brown (D-OH) introduced a resolution calling for reversal of last year’s Rule 14a-8 amendments under the Congressional Review Act. As I blogged in January, that’s a complicated and rarely used law that allows Congress to overturn rules that have been recently finalized by federal agencies. This Medium post from Morningstar’s Global Head of Sustainable Investing Research explains how a rescission could happen – and what the impact would be:

The CRA allows Congress to pass a joint resolution disapproving of an agency’s final rule, which requires only a simple majority of both chambers to pass, along with the president’s signature. Congress must invoke the CRA within 60 days of a finalized rule. For rules that go final within 60 legislative days of the end of one Congress, the new Congress gets a new 60-day period to invoke the CRA.

Once the joint resolution is signed, the shareholder rule will not only be rescinded, the SEC will be prohibited from reissuing the same or a substantially similar regulation in the future, unless authorized by Congress to do so.

That means the SEC will revert back to the status quo ante, which required only that a shareholder needed to hold $2,000 worth of company’s stock for 12 months in order to propose a resolution. To be eligible for resubmission, a resolution must receive 3% of the vote the first time it appears on a ballot, 6% the second time, and 10% thereafter.

It would be very unusual to overturn an SEC rule using the Congressional Review Act. The only time that’s ever happened was when the 2016 “resource extraction rule” was killed the following year. This FAQ says that only a total of 17 rules have ever been overturned, 16 of which were “Obama-era” rules overturned by the Trump administration.

That said, plenty of people have been speculating that the shareholder proposal amendments would be vulnerable to this type of reversal, due to the fact that they were adopted via a 3-2 vote and the expected priorities of the incoming SEC Chair. That speculation intensified after Interim SEC Chair Allison Herren Lee gave a speech two weeks ago saying that reversal was on the table. Here’s an excerpt:

I have asked the staff to develop proposals for revising Commission or staff guidance on the no-action process, and potentially revising Rule 14a-8 itself. The goal is to bring greater clarity to the no-action relief process, increase the number of proposals on the ballot that are well-designed for shareholder deliberation and votes, and reduce the number that are not.

This could involve reversing last year’s mistaken decision to bar proponents from working together and restricting their ability to act through experienced agents. It could also involve reaffirming that proposals cannot be excluded if they concern socially significant issues, such as climate change, just because they may include components that could otherwise be viewed as “ordinary business.”

Many companies welcomed the modernization of Rule 14a-8, and a reversal now could be like snatching a gift back from a kid on Christmas. On the other hand, investors have been vocal in their criticism. The shareholder proponent speakers in our January webcast argued that the amendments could cause companies to suffer unintended consequences, as investors’ outlet for expressing dissatisfaction would shift from submitting precatory shareholder proposals to voting “against” directors or even conducting “vote no” campaigns or proxy contests. But, companies would probably prefer to assess that risk on a case-by-case basis and include proposals in their proxy statements at their discretion.

This Reuters article reports that the National Association of Manufacturers and the US Chamber have spoken out against the effort to overturn the amendments. The resolution has been referred to the Senate Committee on Banking, Housing & Urban Affairs – they haven’t scheduled a date for next steps – and it’s hard to predict with certainty whether the all Senate Democrats would approve the resolution, which is what it would need to pass (along with almost all Dems in the House). Nothing going on here will affect this year’s annual meetings, since the Rule 14a-8 amendments aren’t scheduled to go into effect until next year.

SPACs: Enforcement Actions Coming Soon?

SPAC deals have raised nearly $90 billion so far this year in the US alone! It’s making some folks nervous. The SEC’s Office of Investor Education & Advocacy warned people a few weeks ago that they might want to think twice before throwing money onto the pile. Yes, even if the SPAC is run by A-Rod – and even if it’s a Shaq de-SPAC doing what a traditional IPO couldn’t accomplish for WeWork (if, this time around, all goes according to plan, the coworking space company also will raise $800 million through a PIPE as part of the deal).

Last week, Reuters reported that the SPAC boom also might be attracting attention from the SEC’s Enforcement Division. Underwriters who’ve been involved in these deals have received letters asking about deal fees, volumes, compliance, reporting and internal controls. To be clear, there’s no formal investigation demand at this point. But, the SEC’s interest in this information shows that it’s continuing to closely monitor these IPOs – so you should make sure there are strong compliance procedures in place. The article gives some guesses about what the Commission could be watching:

The SEC has also scrutinized some companies that went public via SPAC deals, including electric vehicle-makers Lordstown Motors Corp, Nikola Corp and Clover Health Investments, the companies have disclosed.

Investors have sued eight companies that combined with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits allege the SPACs and their sponsors, who reap huge pay-days once a SPAC combines with its target, hid weaknesses ahead of the transactions.

The SEC may be worried about the depth of due diligence SPACs perform before acquiring assets, and whether huge payouts are fully disclosed to investors, said a third source.

Another potential concern is the heightened risk of insider trading between when a SPAC goes public and when it announces its acquisition target, the second source added.

Whistleblowers: Record-Setting Year…And It’s Only March!

The SEC announced yet another whistleblower award yesterday. While the award itself was rather modest – a cool $500k – what caught my eye was that the Commission has now made 40 individual awards this year, surpassing last year’s record of 39. And it’s only March!

The SEC highlighted in its announcement & the related order that the whistleblower had first reported alleged securities violation internally to their employer, which prompted an internal investigation. The whistleblower was eligible for the SEC award because they also reported the info the SEC within 120 days of the internal report. Lynn blogged earlier this month about how the Commission has been applying recent amendments to its whistleblower program to recent awards…

Liz Dunshee

March 29, 2021

SEC Chair: When Is the Senate Voting on Gary Gensler?

Although the absence of a Senate-confirmed Chair hasn’t stopped the existing Commissioners from articulating disclosure & enforcement priorities these past few months, rulemaking will likely accelerate once the new Chair is confirmed and all of the leadership positions get finalized. The Senate was previously scheduled to vote on Gary Gensler’s confirmation last week, but that didn’t happen. The legislative calendar now says that the session is scheduled for Tuesday, April 12th – but it’s possible it will get bumped back again.

In 2017, former Chair Jay Clayton was confirmed in early May. He appointed Bill Hinman as the Director of Corp Fin about a week later.

ESG: Not Just For Public Companies

Earlier this year, BlackRock’s Larry Fink made a point of saying that large private companies and public debt issuers need to embrace the Task Force on Climate-related Financial Disclosures. John also blogged a couple of weeks ago that private company climate change disclosure is one of the points for which Acting SEC Chair Allison Herren Lee is soliciting comments.

This announcement from ISS ESG that it’s launching a scorecard for private companies is more evidence that it isn’t just public shareholders who want this info. Here’s how ISS expects the data to be used:

Use cases for ESG Scorecards include the assessment of ESG risk exposure of investee companies during due diligence processes for private equity portfolios, the evaluation of ESG risk during credit risk assessment, and to facilitate engagement with private companies regarding sustainability.

Tomorrow’s Webcast: “Shareholders Speak – How This Year’s Expectations Are Different”

There is always some uncertainty during proxy season, but this year it is more pronounced. Tune in tomorrow for our webcast, “Shareholders Speak: How This Year’s Expectations Are Different” – to hear Rob Main of Sustainable Governance Partners, Yumi Narita of the Office of the NYC Comptroller, Ryan Nowicki of State Street Global Advisors and Danielle Sugarman of BlackRock explain how this year’s in-season engagements and voting expectations might be different from prior years.

Bonus: If you attend the live version of this 60-minute program, CLE credit will be available in most states! You just need to submit your state and license number and complete the prompts during the program.

Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at – or call us at 800.737.1271.

Liz Dunshee

March 26, 2021

Political Spending: Congress Might Remove Roadblock to SEC Action

John blogged last December about a provision in the Consolidated Appropriations Act, 2021 restricting the SEC from finalizing a rule requiring company political spending disclosures. So as much as it could be a while before the SEC could take action relating to company political spending, Congress has shown interest in allowing it to happen.

First, H.R. 1, the For the People Act has not only been introduced in the House, but it also passed. The bill would require additional disclosure of campaign-related fundraising and spending. The Shareholder Protection Act of 2021, which has been introduced in the Senate, takes things a bit further.

The Senate bill, would among other things, require political spending disclosure and prohibit company political spending unless it has been approved by shareholders. Cydney Posner, in this Cooley blog, runs through some of the bill’s other requirements, which include penalties for officers or directors who authorize any political contribution expenditures without shareholder approval.

Members of the Commission have also expressed interest in the topic. Although a lot of commentary about SEC interest in ESG disclosures centers on climate risk, another topic Acting Chair Lee addressed in a speech last week was political spending disclosure. In her speech, Acting Chair Lee said political spending disclosure deserves attention and that it’s “inextricably linked to ESG issues.”

As a potential sign the Commission wants to take action in this area, some may have read commentary that Gary Gensler, the nominee for SEC Chair, and Commissioner Caroline Crenshaw each voiced interest too. Back in early March at his Senate confirmation hearing to serve as SEC Chair, Gary Gensler expressed support for the SEC to consider company political spending disclosures. Commissioner Crenshaw recently expressed her thoughts on company political spending disclosures in a HLS Corporate Governance post co-authored with HBS Professor Michael Porter. In that post, Commissioner Crenshaw urges business leaders to call on Congress and the SEC to provide investors with political spending disclosures.

After the events of January 6, interest in company political spending has certainly intensified. One sign that this increased interest has had an impact can be found in company announcements about pausing political contribution activity. More recently, Popular Information reported that at least two companies have paused or suspended contributions in response to voter suppression bills introduced in Arizona. Although far from certain (see commentary in yesterday’s NYT Dealbook column about Senator Pat Toomey’s letter to Acting Chair Lee), it’s possible company pauses on political contributions will lead to some Congressional action. As Cydney observes in her blog, if the Senate bill is signed into law, political spending and more will be on the SEC’s plate.

Auditors & ESG Data Assurance: High-Level Summary for Audit Committees

With ESG reporting the topic du jour, ESG data assurance continues garnering attention. Besides issuing a roadmap for attestation services, the Center for Audit Quality issued another memo, this one directed at audit committees to help them understand the role of auditors in connection with company-prepared ESG information.

For companies reporting ESG information, the memo outlines high-level information to help audit committees understand what’s involved with third-party assurance services by answering questions about reasons a company might engage an auditor to provide third-party assurance, ESG information within the scope of an attestation engagement, levels of attestation services and ESG information readiness assessments.  The memo summarizes factors that differentiate auditor third-party assurance services from those provided by other service providers, such as engineering or consulting firms, and notes other service providers may or may not be required to adhere to an independence framework.  It also includes this Q&A about auditor independence:

Can a public company use the same independent accounting firm for its financial statement audit and attestation over its ESG information?

Yes, performing a review or examination engagement of a public company’s ESG information is considered a permissible service for the independent accounting firm performing the financial statement audit, subject to pre-approval from the audit committee.  The performance of review or examination attestation services by an independent accounting firm requires that firm to meet certain independence requirements.

Free ESG Scores: S&P Global Joins In

Last month, I blogged about how Refinitiv has started making its ESG rating information, including sub-theme scores, publicly available. At that time, I wondered whether other firms would start doing the same, and now we know at least one firm is following Refinitiv’s path. Not too long ago, S&P Global joined in by making S&P Global ESG scores publicly available. S&P Global’s announcement says the firm has ESG scores on 9200 companies.

S&P Global says it’s committed to providing more transparent and comparable insights on ESG performance. The firm also recently announced the addition of 400 new data points that it uses to inform company ESG scores.

The newly released data points encompass information across companies’ environmental, social and governance performance, including environmental reporting disclosures, biodiversity commitments, direct and indirect CO2 and greenhouse emissions, waste/hazardous disposal, energy consumption, water usage, social disclosures across safety, human rights and codes of ethics, and policies across anti-crime, corruption & bribery, board governance, executive compensation and supply chain management, among others.

– Lynn Jokela

March 25, 2021

China-Based Companies: SEC Adopts HFCA & Seeks Comments on Implementation

Last December, John blogged when “The Holding Foreign Companies Accountable Act” (HFCA) was signed into law. The law amends the Sarbanes-Oxley Act to prohibit listing on US exchanges of foreign companies for which the PCAOB has been unable to inspect audit work papers and is primarily aimed Chinese companies listed in the US. Yesterday, this SEC press release announced the adoption of interim final amendments relating to the HFCA’s submission and disclosure requirements.

Under the HFCA, “Commission-Identified Issuers” will need to submit certain disclosures to the Commission establishing that they’re not owned or controlled by a governmental entity in that foreign jurisdiction. These amendments implement a process for this disclosure requirement. Even with adoption of the amendments, there’s more work for the Commission before issuers are required to comply with them:

The Commission is requesting public comment regarding implementation of the HFCA submission and disclosure requirements, as well as the appropriate mechanics for determining Commission-Identified Issuers. A registrant will not be required to comply with the amendments until the Commission has identified it as having a non-inspection year under a process to be subsequently established by the Commission with appropriate notice. Once identified, a registrant will be required to comply with the amendments in its annual report for each fiscal year in which it is identified. The Commission plans to separately address implementation of the trading prohibitions in Section 2 of the HFCA Act in a future notice and comment process.

Ever Changing CCPA: Additional Changes Approved

Throughout the last year, we’ve blogged about changes to the California Consumer Privacy Act. Last week, California’s Office of Administrative Law approved a new set of changes to the CCPA. The changes are intended to provide clarity to consumers about how they can opt out of the sale of their personal information. Among other things, the modifications prohibit businesses from creating confusion for consumers to opt out of the sale of their personal information by clicking through multiple screens or using confusing language such as double negatives.

To help everyone stay on top of all of the various changes to the CCPA, check out our “Cybersecurity” Practices Area – this Gibson Dunn memo provides a quick summary of the most recent modifications.

March-April Issue: Deal Lawyers Newsletter

The March-April Issue of the Deal Lawyers  newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:

– Troubling Signs From Recent M&A Case Law: Forgetful Gatekeepers, Targeted Executives, and Poor Record Building

– COVID-19 Deal Terminations: Assessing Specific Performance Provisions

– A Canadian Perspective: The 2021 US and Canadian M&A Landscape

Remember that you can also subscribe to our newsletters electronically – an option that many people are taking advantage of in the “remote work” environment. Also – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we make all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

– Lynn Jokela

March 24, 2021

UK Audit Reform: Proposal Aims to Reduce Influence of Big 4 Audit Firms

A few weeks ago, I blogged about the Center for Audit Quality and AICPA’s roadmap to help auditors provide ESG data assurance services to companies. So, while Big 4 audit firms potentially ramp up ESG data assurance service offerings, over the UK there was big news last week when the government proposed to breakup the dominance of the Big 4. The proposal comes in response to large company collapses, such as Carillion and Thomas Cook, and aims to restore confidence in businesses.

This BBC story says there’s a 16-week consultation period to consider the proposal, which would require large companies to engage smaller audit firms to conduct part of their annual audits.  Among other things, audit firms would be required to make their audits more rigorous, and they could be capped in terms of the number of FTSE 350 companies each firm could audit. The latest proposal follows last year’s attempt by the FRC, the UK audit regulator, to shakeup the accounting industry by separating audit functions from other operations, which this FT article says the accounting firms supported.

Still not all are optimistic the latest proposal will result in meaningful change. For one observation on past attempts, along with commentary on this most recent proposal, check out Francine McKenna’s take in her entry on The Dig titled “UK audit reform proposals: Full of sound and fury but likely to amount to nothing.”

Audit Committee Guide & Quick Poll: Disclosure Committee Meeting Attendance

If you’re looking for an updated audit committee resource, check out the recently released KPMG Audit Committee Guide.  It’s 61 pages and among other things, provides information about the committee’s role in overseeing financial reporting, external and internal auditors and risk. In the section about disclosure controls and procedures, one item I found interesting was that it said some audit committee chairs occasionally attend disclosure committee meetings to see how the committee operates and to support its initiatives.  For unscientific benchmarking about this practice, participate in our anonymous poll:

survey services

Sustainability Commitments: Energy-Producing States Preparing to Hit Back

Back in January when Liz blogged about Larry Fink’s letter to CEOs, she noted that in the BlackRock’s companion letter to clients, the asset manager said it would be implementing a “heightened-scrutiny model” in active portfolios, including potential divestments. Since then, we’ve read reports of financial services firms making commitments about achieving net-zero GHG emissions from financing activities. Earlier this week, Robeco released survey results that said investor divestment from carbon-intensive assets will rise sharply in the next five years. Although stakeholders are happy to see these actions, oil-rich states are preparing to deliver a new set of headaches for companies and investors.

A blog entry from Pew says that lawmakers in Alaska, North Dakota and Texas are introducing legislation that would force states to stop investing in companies that use sustainable strategies to make financial decisions and to sever ties with asset managers, banks and insurers that are doing the same. This excerpt from a Texas Tribune article explains proposed legislation in that state:

If passed, the legislation would require state entities — including state pension funds and Texas’ massive K-12 school endowment — to divest from companies that refuse to invest in or do business with fossil fuel-based energy.

The early version of the bill directs the state comptroller to create a list of companies and funds that ‘boycott’ fossil fuel companies and allows the attorney general to take enforcement action against state funds that do not divest from the companies on the list.

If the state fund determines that divesting would cause it to lose value or deviate from its benchmark, it could provide that information in a written report to the comptroller, the Legislature, and the Texas attorney general to request an exemption.

– Lynn Jokela

March 23, 2021

BlackRock Pushes Companies on Human Rights Risks

Yesterday, I blogged about BlackRock’s 2021 engagement priorities.  Betsy Popken, JT Ho and Carolyn Frantz of Orrick kindly provided this guest post with more about BlackRock’s stewardship focus addressing human rights:

BlackRock, the world’s largest asset manager, which has been a vocal leader in climate change, sustainability and other ESG issues, has now turned its attention to human rights.  BlackRock is now pushing companies to “implement processes to identify, manage, and prevent adverse human rights impacts that are material to their business” and “provide robust disclosures on these practices,” according to a recent Investment Stewardship Commentary.  Moreover, BlackRock believes effective oversight of human rights issues also involves the board: “[T]he responsibility for managing human rights issues…lies with boards and management of companies and the governments that regulate them” (emphasis added).

BlackRock notes that a company that fails to effectively manage potential or actual adverse human rights issues can not only harm the people directly affected, but also expose companies to significant legal, regulatory, operational, and reputational risks from business partners, customers, and communities. Further, it believes that human rights risks may call into question “a company’s social license to operate” in a certain location and benefit from the labor, raw material, or regulatory structures in place.

BlackRock provides a few examples of the sorts of human rights issues it expects companies to use their “best efforts” to address:

– Poor working conditions, substandard wages, and use of forced labor or child labor by a company or its suppliers;

– Community harm or displacement, particularly using contested land or infringing on indigenous rights;

– A hostile or discriminatory workplace; and

– Failure to manage content or applicable privacy laws, standards, or expectations.

Of particular note for companies are BlackRock’s inclusions of privacy and workplace discrimination in the category of human rights. And these are only examples – each company needs to consider human rights particular to its industry, business, and geographical footprint. A broad group of company representatives therefore need to be aware of these expectations, including persons working within the supply chain, human resources and privacy and information security groups.

To meet BlackRock’s expectations, a company should be prepared to show that it “prioritizes human rights across its value chain – its products and services, operations, and suppliers” through its policies and processes, and that it “adheres to applicable voluntary or mandatory disclosure frameworks” such as the United Nations Guiding Principles on Business and Human Rights, which require companies to develop a human rights policy and due diligence and remediation processes, among other things.

Companies should also ensure that “the board oversees human rights,” including “related policies and processes.” In what is becoming trend with institutional investors, who are seeking more effective board oversight of ESG, BlackRock wants companies to disclose whether this oversight occurs at the full board level or is performed by a specific committee, and the “type and frequency of information reviewed.” BlackRock has indicated that it may vote against directors if it believes that the company is not adequately addressing or disclosing material human rights risks. In light of this, companies should consider whether their committee charters need to be changed to specifically allocate oversight of these risks, and how to enhance their proxy statement disclosures and/or other public facing disclosures (e.g. CSR, Sustainability, and Human Rights reports) in a meaningful way.

The bottom line for in-house counsel of companies where BlackRock invests:  It may be time for a comprehensive review of your human rights issues, policies, and governance. Each company should have an understanding of which human rights issues are most salient to its business, which could include, among other things, human rights related to operations, supply chain and sourcing, products and services, employees, and customers or users.  You should ensure you have up-to-date policies addressing them (e.g., a human rights policy, anti-human trafficking and modern slavery policy, conflict minerals statement, supplier code of conduct, anti-harassment policy, privacy policy).  And then you should evaluate whether you have defined processes to monitor, address, and remediate any potential negative impacts from violations of these policies.

Some companies may also benefit from adopting specific goals related to human rights, and actively measuring progress against such goals. Finally, you should make sure your board-level governance of these issues is clearly addressed in the relevant governance documents and that the nature of board or committee oversight can be appropriately and effectively disclosed. Even companies in which BlackRock does not invest today may benefit from following these recommendations – as BlackRock’s announcement will likely spur other institutional investors to seek a better understanding of how companies manage human rights risks.

SEC Launches New “ESG” Page!

The SEC’s website improvements continue. The latest change is Monday’s launch of this new page to bring together all of the latest Commission actions and info on ESG. It reflects the integrated, intra-agency approach to this topic – and the SEC says that it will be updated with more responses to investor demand on this topic. Clearly all things ESG are moving right along at the agency. In a further nod to ESG prominence, the page will be accessible right through the SEC’s homepage.

Transcript: “Your CD&A – A Deep Dive on Pandemic Disclosures”

We’ve posted the transcript for our recent webcast: “Your CD&A – A Deep Dive on Pandemic Disclosures.” Mike Kesner of Pay Governance, Hugo Dubovoy, Jr. of W.W. Grainger and Cam Hoang of Dorsey shared their thoughts on:

– Trends & Investor Expectations for COVID-Related Pay Decisions

– Adjustments to CD&A Format in Light of Pandemic

– Investor & Proxy Advisor Policies for Disclosure

– Framework of Key Factors for Exercising Discretion

– Linking Your CD&A to Your Broader ESG and Human Capital Initiatives

– Ensuring Consistency Between Your CD&A and Minutes

– Lynn Jokela

March 22, 2021

Shareholder Engagement Season: BlackRock’s 2021 Engagement Priorities

Spring is in the air and many in-house members are busy preparing for shareholder engagement meetings. To help companies prepare, last week BlackRock issued its 2021 engagement priorities along with a slew of memos relating to stewardship engagements. The stewardship engagement memos address BlackRock’s engagement on board diversity, human capital management, climate risk, natural capital, long-term strategy, executive incentives and human rights.

BlackRock’s 2021 engagement priorities map each priority to UN Sustainable Development Goals – and include key performance indicators for each engagement priority. It’s not a surprise that one of the asset manager’s engagement priorities relates to how companies are dealing with climate-related risks. As emphasized in Larry Fink’s January letter to CEOs, the “climate risk” KPIs include expectations for companies to explain how they are aligned with achieving net-zero GHG emissions by 2050. The “natural capital” KPI builds on that theme, and encourages companies to disclose how their business practices are consistent with sustainable use and management of natural capital.  It also calls on companies with material dependencies or impacts on natural habitats to publish “no-deforestation” policies and strategies on biodiversity.

One takeaway from BlackRock’s 2021 engagement priorities is that it appears the asset manager may vote “for” more shareholder proposals focused on sustainability. Here’s an excerpt:

In 2021, we see voting on shareholder proposals playing an increasingly important role in our stewardship efforts, particularly on sustainability issues. As a long-term investor, BIS has historically engaged to explain our views on an issue and given management ample time to address it. However, given the need for urgent action on many business relevant sustainability issues, we will be more likely to support a shareholder proposal without waiting to assess the effectiveness of engagement. Accordingly, where we agree with the intent of a shareholder proposal addressing a material business risk, and if we determine that management could do better in managing and disclosing that risk, we will support the proposal. We may also support a proposal if management is on track, but we believe that voting in favor might accelerate their progress.

State Street Releases 2021 Proxy Voting & Engagement Guidelines

Keeping step with BlackRock, last week State Street released its 2021 proxy voting & engagement guidelines.  With State Street’s update, I was happy to see the asset manager also released a summary of material changes. We’ve blogged on our “Proxy Season Blog” about some of these changes or updates before – such as State Street’s policy to vote “against” nominating committee chairs at S&P 500 companies that don’t disclose gender and racial/ethnic board diversity information and integration of the asset manager’s R-Factor score into voting. State Street is reiterating that beginning in 2022, it will vote “against” certain directors at S&P 500 companies and other indices that are underperformers on their R-Factor score, where they haven’t shown positive momentum in the previous two years.

Other changes relating to racial and ethnic diversity disclosures include, starting in 2022, State Street will vote “against” comp committee chairs at S&P 500 companies that don’t disclose workforce EEO-1 data and “against” nominating committee chairs at S&P 500 and FTSE 100 companies that don’t have at least one director from an underrepresented group.

This excerpt from State Street’s summary highlights two changes to executive pay proposals:

Ongoing high level of dissent against a company’s compensation proposals may indicate that the company is not receptive to investor concerns. If the level of dissent against a company’s remuneration report and/or remuneration policy is consistently high, and we have determined that a vote against a pay-related proposal is warranted in the third consecutive year, we will vote against the Chair of the Compensation Committee.

For problematic pay practices, State Street may vote “against” the re-election of members of the Compensation Committee if the asset manager has serious concerns about pay practices and/or if the company has not been responsive to shareholder pressure to review its approach.

Check out State Street’s complete 2021 voting policies – they’ve issued Global Voting and Engagement Principles, North American Proxy Voting and Engagement Guidelines and Global Proxy Voting and Engagement Guidelines for E&S Issues.  State Street also released an updated engagement protocol document – this provides guidelines for engaging with the asset manager along with information about how to request an engagement meeting with State Street and how to request a company’s R-Factor score.

Circle March 30th for Our Upcoming Webcast: “Shareholders Speak: How This Year’s Expectations Are Different”

To learn more about this year’s institutional investor engagement priorities and voting expectations, mark your calendars for March 30th to tune in for our webcast – “Shareholders Speak: How This Year’s Expectations Are Different” – you’ll hear from Rob Main, Managing Partner & COO of Sustainable Governance Partners, Yumi Narita, Executive Director of Corporate Governance of the Office of NYC Comptroller, Ryan Nowicki, Assistant VP Asset Stewardship of State Street Global Advisors and Danielle Sugarman, Director Investment Stewardship of BlackRock.

Members of are able to attend this webcast at no charge.  If you’re not a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at – or call us at 800.737.1271.

We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

– Lynn Jokela

March 19, 2021

Corporate Governance: Back to the Drawing Board?

What if everything we’ve taken for granted about good corporate governance is wrong? According to a recent study, that just may be the case. As one of the authors, UVA Law School’s Cathy Hwang, discusses in this article, the study revisited a 2003 study that introduced the influential “Governance Index” or “G-index,” which measures how much governance rules protect shareholders.

That 2003 study has been cited nearly 10,000 times, and many other governance indices are based on the G-index it created. That study used the G-index to support its finding that stronger shareholder rights are correlated with higher value, profits & firm growth. There’s just one teensy-weensy problem with the G-index – it’s replete with errors. In fact, the authors found an astonishing 80% error rate in the G-index! What’s more, they concluded that “correcting these errors substantially weakens one of the most well-known results in law and finance, which associates good governance with higher investment returns.”

Ain’t that a kick in the head? The good news is that the authors decided to build their own dataset, called “Cleaning Corporate Governance,” that includes the 25 years of corporate charters from S&P 1500 companies that have been indexed across numerous governance metrics. This dataset will be free and open access, and hopefully will provide a better set of data for examining how governance affects shareholder value.

The governance industrial complex may find this news disconcerting, but those cynics (like me) who maintain that ideas about what constitutes “good governance” have a lot more to do with ideology than empirical data likely find it rather amusing.

Non-GAAP: Alternatives To EBITDAC

Earlier this week, I blogged about how relatively few companies are presenting adjusted EBITDA numbers that attempt to back-out expenses associated with Covid-19.  That raises the question – how are companies getting the impact of the pandemic across to investors? This excerpt from a recent Lincoln International article says that companies appear to be adopting one of three alternative approaches:

Annualizing Earnings. For some, business during Q4 2020 returned to more normal conditions than in April to June when COVID-19 was at its height. As such, for businesses disrupted by COVID-19 in the spring, annualized earnings either in the form of Last Quarter Annualized (LQA) or annualizing post June performance may be a more accurate measure of business performance than metrics from 2020.

2021 EBITDA. CFOs are more comfortable assessing 2021 EBITDA because they have better visibility into the full year’s budget, including contracted revenues and full implementation of cost-cutting measures, and as a result would prefer to focus on 2021 performance and underweight 2020 results.

The Swap Out. Another twist to LTM EBITDA is to replace the months most impacted by COVID-19 with the earnings results of those same months from 2019. Swapping out those months with 2019 performance is an easy way to reflect actual levels that were once earned.

The article says that it is critical that the particular metric chosen is as defensible as possible – and that companies should evaluate KPIs to ensure the metric they select is one that market participants would actually rely upon.

Securities Litigation: 2020 Class Action Settlements

Cornerstone Research recently released its annual report on securities class action settlements. Over on The D&O Diary, Kevin LaCroix provides an in-depth review of the report. Here’s an excerpt summarizing the numbers:

According to the report, there were 77 securities class action settlements in 2020, compared to 74 in 2019. (The settlement date). The 77 settlements in 2020 was also slightly above the 2010-2019 average number of settlements of 72.

The total value of settlements in 2020 was $4.2 billion, which is double the 2019 total settlement amount of $2.0 billion. The increase in total settlements in 2020 was largely the result of the significant number of mega settlements in 2020. (At the end of this post, I have identified the largest of these mega-settlements.) If the 2020 settlements over $1 billion are excluded, the total settlement dollars actually declined 4% in 2020 compared to 2019

As a result of the number of very large settlements in 2020, the average securities settlement in 2020 doubled to $54.5 million from $27.8 million in 2019. Though the average settlement increased in 2020 relative to 2019, the 2020 average was below the 1996-2020 average of $58.1.

There are all sorts of other interesting tidbits in Kevin’s blog, including the fact that D&O insurance covered 90% of the settlement amounts in 1933 Act claims, and that the average case took 3.3 years to resolve. Unfortunately, Cornerstone believes that relatively high settlement amounts are likely here to stay, given the significantly increased volume of class action filings in recent years.

John Jenkins

March 18, 2021

ESG: Are Wall Street’s Sustainable Investments “Duping” the Public?

Well, it was fun while it lasted. We now return to our regularly scheduled series of ESG-related lead blogs. Yesterday, the SEC released the agenda for tomorrow’s meeting of its Asset Management Advisory Committee. Topping that agenda is a discussion of the ESG subcommittee’s recommendations on improving “the data and disclosure used for ESG investing, in order to create better transparency for investors, and better verifiability of investment products’ ESG strategies and practices.”

The subcommittee’s recommendations address both issuer disclosure and ESG-themed investment products. On the issuer side, the subcommittee calls on the SEC to adopt a standardized framework for disclosing material ESG risks – a process that the subcommittee acknowledged would be “lengthy and complex.” On the investment products side, the recommendations start with asking “How can we avoid ‘greenwashing,’ that is, investment products bearing the name ESG but not actually engaging in meaningful ESG investment?”

That focus on greenwashing is timely, because the AMAC meeting will be held just a few days after the publication of a scathing opinion piece by Tariq Fancy, BlackRock’s former head of sustainable investments, on how ESG investment products are “duping” the public. This excerpt gives you a sense for the tone of the piece:

The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.

As the former chief investment officer of Sustainable Investing at BlackRock, the largest asset manager in the world with $8.7 trillion in assets, I led the charge to incorporate environmental, social and governance (ESG) into our global investments. In fact, our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.

I’m not sure what to make of the fact that this appeared in – of all places – “USA Today.” That’s a publication I’m more accustomed to turning to for high school football rankings than for financial analysis & opinion, although I guess that’s beside the point. Anyway, if you read the whole thing, you come away with a feeling that the SEC’s new enforcement task force is going to find a target-rich environment when it comes to ESG themed mutual funds & ETFs.

Crowdfunding: Corp Fin Issues Guidance on EDGAR Filing of Form C

The SEC’s private offering simplification rule amendments became effective earlier this week, and as a follow-up to that, Corp Fin issued guidance yesterday on EDGAR filings of Form C for Regulation Crowdfunding offerings. The first part of the guidance addresses the fact that the form hasn’t caught up to the rule changes yet, and provides advice to companies that are taking advantage of the new $5 million size limit on how to fill out a form that only contemplates a $1.07 million maximum offering size.

The second part of the guidance contains 4 Q&As addressing how issuers taking advantage of their new ability to use a special purpose vehicle as a conduit in a Regulation Crowdfunding should complete & file Form C. The first Q&A addresses each party’s filing obligations:

Is a crowdfunding vehicle required to file its own Form C, separate from the Form C filed by the crowdfunding issuer?

Response: No. Under Regulation Crowdfunding Rule 203(a)(1), the crowdfunding issuer and crowdfunding vehicle are required to jointly file one Form C, providing all of the required Form C disclosure with respect to the offer and sale of the crowdfunding issuer’s securities to the crowdfunding vehicle and the offer and sale of the crowdfunding vehicle’s securities to investors.

However, if the crowdfunding issuer is offering securities both through a crowdfunding vehicle and directly to investors, Rule 203(a)(1) requires the crowdfunding issuer to file two Forms C: its own Form C covering the securities offered directly to investors, and a second Form C jointly with the crowdfunding vehicle for the securities offered through such vehicle.

Other Q&As address matters such as CIK numbers & access codes, how to furnish the XBRL information for the crowdfunding vehicle, and how the crowdfunding vehicle should comply with signature requirements.

Public Offerings: Financial Statement Requirements for US & Foreign Issuers

Latham recently published its annual memo on the financial statement requirements for public offerings. As usual, there’s a version for U.S. issuers and a separate version for non-U.S. issuers. These are always a good resource, but with the changes to acquired company financial information requirements that the SEC adopted last year, you may find them particularly useful this year.

John Jenkins