Monthly Archives: March 2021

March 17, 2021

Shaq SPAC Under Attack? SEC Cautions On Celebrity SPACs

In news that I’m delighted to say has nothing whatsoever to do with ESG, the SEC recently issued an Investor Alert about celebrity involvement with SPACs. Here’s the gist of it:

The SEC’s Office of Investor Education and Advocacy (OIEA) cautions investors not to make investment decisions related to SPACs based solely on celebrity involvement.

Celebrities, from movie stars to professional athletes, can be found on TV, radio, and social media endorsing a wide variety of products and services. Sometimes they are even involved in investment opportunities such as special purpose acquisition companies, or SPACs, as sponsors or investors. Those celebrities may even be well-known professional investors.

However, celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors. Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.

I know that most of you likely had the same reaction to this that I did – How can the SEC issue something like this during this very difficult time for A Rod & J Lo?

America may not be #1 in a lot of stuff anymore, but I’ll match our celebrities against anybody in the world. During the past couple of weeks alone, Meghan & Oprah caused the British monarchy more heartburn than George Washington or Mahatma Gandhi ever did, Geraldo entertained the Buckeye State by almost simultaneously announcing that he was, and that he was not, considering a run for the Senate, and Kanye reportedly offered to buy Rye, New York for $100 million & rename it “Ye,” which is totally sane and very cool. Meanwhile, the biggest professional investor celebrity SPACer, Bill Ackman, has been busy trying to both cultivate & stay one step ahead of the “Stonks” crowd on Reddit.

I guarantee that an investment in a SPAC sponsored by any of these folks will provide much greater entertainment value than an investment in other SPACs. I also bet that when the dust settles, public investors in celebri-SPACs  & public investors in more mainstream SPACs will achieve just about the same really crappy return on their investments. So, to paraphrase the great American patriot Patrick Henry, I say, “I know not what course others may take, but as for me, give me Shaq SPAC or give me death!”

Financial Reporting: Big Year for Goodwill Impairment

If your company took a big goodwill impairment charge last year, it probably won’t come as a big surprise to learn that you weren’t alone. According to this Duff & Phelps report, goodwill impairments in 2020 were at their highest level since the financial crisis:

At the time of writing, the disclosed top 10 GWI events for 2020 reached a combined $54 bn, far surpassing the top 10 in 2019. Although full 2020 calendar year-end results for U.S. public companies will not be known for some time, early reporting points to overall GWI already exceeding $120 bn in 2020. For perspective, in 2008, at the height of the global financial crisis, U.S. companies recorded a total GWI of $188 bn, according to our prior studies.

According to the report, the energy sector took the biggest hit – approximately 34% of energy companies with goodwill on their books recorded an impairment charge. Duff & Phelps says that if 2020’s impairment charges don’t top financial crisis levels, we can thank the Federal Reserve & federal government for repeatedly firing their cash bazookas.

Sold! Glass Lewis Moves From Activist to Private Equity Ownership

Yesterday, Glass Lewis announced that it had been sold to the Toronto-based private equity firm Peloton Capital Management & its Chairman, Stephen Smith.  Here’s the press release. As most of you know, Glass Lewis’s previous majority owner was an activist investor, the Ontario Teachers Pension Plan. Now that it’s in the hands of private equity, you’ll have to decide for yourselves whether there’s been a disturbance in the Force.

John Jenkins

March 16, 2021

ESG: Acting SEC Chair Solicits Public Comment on Climate Change Disclosure

Well, it looks like this blog has to continue with its “All ESG, All the Time” format for at least another day. The latest event that’s preventing me from taking my preferred approach & blogging about literally any other topic is yesterday’s announcement from Acting SEC Chair Allison Herren Lee that the agency is soliciting public comment on climate change disclosure.

The announcement identifies 15 specific climate disclosure-related questions on which the SEC would like public input. These range from the fairly mundane (What are the advantages & disadvantages of rules that incorporate or draw on existing frameworks?) to the downright hair-raising (How should the SEC’s rules address climate change disclosure by private companies?).

The final question notes that the Staff is evaluating a range of ESG disclosure issues & asks if climate-related requirements should be one component of a broader ESG disclosure framework. That’s a good segue into the speech that Acting Chair Lee also gave yesterday at the Center for American Progress, in which she outlined her views on the SEC’s climate change & ESG agenda. In case you haven’t already figured it out, this excerpt indicates that the SEC is going to be a very different place than it has been over the past several years:

Human capital, human rights, climate change – these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. We see that unmistakably in shifts in capital toward ESG investing, we see it in investor demands for disclosure on these issues, we see it increasingly reflected on corporate proxy ballots, and we see it in corporate recognition that consumers and investors alike are watching corporate responses to these issues more closely than ever.

That’s why climate and ESG are front and center for the SEC. We understand these issues are key to investors – and therefore key to our core mission.

While climate change & ESG may be front and center, Acting Chair Lee indicated that they aren’t the only items on the agenda. Others include potentially undoing last year’s changes to the shareholder proposal process, revisiting the SEC’s guidance on proxy voting by investment advisors and finalizing a universal proxy rule.

Non-GAAP: Companies Aren’t Pushing the “EBITDAC” Envelope

Throughout the pandemic, we’ve been keeping an eye on how companies have been reporting the financial impact of Covid-19. Early on, some companies were disclosing non-GAAP adjusted EBITDA that reflected pandemic-related expenses, such as PPE and other safety-related expenses and high comp for on-site employees.

This adjusted EBITDA presentation was derisively called “EBITDAC”  by its critics. Last fall, the WSJ questioned how long companies could continue to characterize additional expenses like these as one-time charges justifying an “adjusted EBITDA” presentation. According to this CFO Dive article, it looks like companies are backing away from this approach in their Q4 disclosures:

Few companies are reporting adjustments to earnings before interest, taxes, depreciation and amortization (EBITDA) to account for COVID-19-related costs at this late stage of the pandemic. Some analysts say that’s not a bad thing. Adjustments to EBITDA, a non-GAAP performance measure, are intended to account for one-time events. The idea is to show that, but for these unique circumstances, the company’s sustained performance would show a different result.

In the first few quarters after the pandemic’s start, some companies were reporting adjusted EBITDA to account for purchases of personal protective equipment (PPE), higher pay to on-site employees and operational restructuring. Uber, for example, increased its adjusted EBITDA by $19 million in March to account for assistance payments to its drivers. Iron Mountain, an information management and storage company, included almost $10 million in expenses for PPE, plexiglass shields and facility cleaning in its second quarter financial results.

The article cites a Bass Berry blog which said that only 16% of large, public companies made COVID-related adjustments at the end of 2020. The blog says that most of the companies that presented adjusted EBITDA dumped the charges into a single “Covid-19 related charges” line item, but that 37% provided more granular detail on the nature of the charges.

“Technoking” & “Master of Coin”? Elon Strikes Again

Not too long ago, Tesla went through three General Counsels in a single year. My guess is that you need look no further than the Item 8.01 Form 8-K that Tesla filed yesterday if you want to know why the company finds it so hard to hang on to senior lawyers. Yesterday’s filing announced the following:

Effective as of March 15, 2021, the titles of Elon Musk and Zach Kirkhorn have changed to Technoking of Tesla and Master of Coin, respectively. Elon and Zach will also maintain their respective positions as Chief Executive Officer and Chief Financial Officer.

Ha Ha! Oh, that Elon – what a jokester! I’m not sure the Tesla board is laughing though, particularly since they were just sued again in Delaware for allegedly allowing Elon to continue to engage in “erratic” tweets that the plaintiffs contend violate the terms of the company’s settlement with the SEC.

One wit wondered via tweet if the 8-K filing also disclosed that the GC’s title had been changed to “He Who Sits In The Revolving Door Of Saying ‘No’ And Creating Forms?”

John Jenkins

March 15, 2021

ESG: Corp Fin’s Coates Calls for Global Reporting Framework

I was really hoping to lead with something other than an ESG-related topic this morning, but thanks to Acting Corp Fin Director John Coates, that’s not going to happen. Coates issued a statement on Thursday setting forth his views on ESG disclosure, and he had a lot to say. He addressed some of the key considerations in developing an ESG disclosure system, the costs of non-disclosure of ESG information, and, in this excerpt, called for the development of global disclosure standards:

On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets. In this regard, the work of the IFRS Foundation to establish a sustainability standards board appears promising.

This Davis Polk blog on the statement provides some additional color on the efforts to establish the sustainability standards board to which John Coates referred:

The IFRS is an international non-profit organization that has been steadily working on creating global sustainability reporting standards. By the end of September 2021, IFRS plans to release its definitive proposal, complete with a roadmap and timeline, on whether it will create a sustainable standards board to sit beside the International Accounting Standards Board, IFRS’s accounting standard-setting body.

In February 2021, the International Organization of Securities Commissions, or IOSCO, issued a public statement in support of IFRS’s work. IOSCO’s members include 34 international securities regulators, including the SEC and the CFTC, and the securities regulators of Brazil, China, France, Hong Kong, Spain and the UK, among others.

IOSCO said that it “sees an urgent need for globally consistent, comparable, and reliable sustainability disclosure standards and announces its priorities and vision for a Sustainability Standards Board under the IFRS Foundation.” However, despite the apparent consensus, the blog notes one particular challenge that needs to be confronted – getting all parties to agree upon a definition of “materiality” in the ESG context.

SEC Enforcement: Commissioner Crenshaw Throws a Grenade

Last week, Commissioner Caroline Crenshaw gave a speech at the CII’s spring meeting.  She didn’t make much news – well, I mean unless you consider throwing a grenade at 15 years of SEC enforcement policy to be news. Over on Radical Compliance, Matt Kelly seemed to think this was kind of a big deal:

Compliance officers, clear your schedule and retreat to your reading nook! We have an important speech to consider on the future of enforcement at the Securities and Exchange Commission. Commissioner Caroline Crenshaw, a Democratic appointee who joined the SEC only seven months ago, spoke Tuesday at the spring meeting of the Council of Institutional Investors — and took a wrecking ball to longstanding assumptions about how large the penalties should be in cases of corporate misconduct.

Specifically, Crenshaw faulted an SEC enforcement policy in place since 2006 that says the agency should be careful not to impose a penalty that might unduly burden shareholders of the company in question. The logic behind that policy has been that a company’s current shareholders at the time of resolution might not have benefitted from the misconduct that happened earlier; and that those current shareholders would suffer because paying the penalty leaves that much less money for the company to put to good use.

Crenshaw’s response: what does any of that have to do with the need to, ya know, punish misconduct?

Commissioner Crenshaw said that in lieu of focusing on “amorphous concepts” like corporate benefits and shareholder harm, the SEC should set penalties based on the actual misconduct and the extent of cooperation with the Division of Enforcement staff. Higher penalties should be imposed for violations that cause more harm, and for those that are more difficult to detect. Stay tuned. . .

Tomorrow’s Webcast: “The Top Compensation Consultants Speak”

Tune in tomorrow for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners discuss what compensation committees should be learning about – and considering – evolving views of pay-for-performance, expanding roles for compensation committees, goal-setting and adjustments, and an early look & predictions for the 2021 proxy season.

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

Members of 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.

Transcript: “Private Offerings – Navigating the New Regime”

We have posted the transcript for the recent webcast “Private Offerings – Navigating the New Regime.”

John Jenkins

March 12, 2021

Diversity, Equity & Inclusion: Investors Want Data – and Companies Might Be Forced to Provide It

This article about the “Morningstar Minority Empowerment Index” caught my eye. The Index taps into investor appetite for DEI data by selecting US stocks based on an NAACP scorecard & Sustainalytics data.

As is usually the case with these types of issues, investors aren’t just excluding “under-performing” companies from their portfolios – they’re also agitating for change. As I blogged earlier this week on the Proxy Season Blog, proponents have submitted more than 60 “diversity & racial justice” proposals this season. Over 20 companies have received proposals asking for a D&I report – and at least 6 companies have received a proposal asking them to conduct a “civil rights” or “racial equity” audit (including Amazon, Citi, BlackRock & State Street).

Corp Fin recently rejected J&J’s no-action request to exclude a Trillium proposal that requests a civil rights audit. The Staff didn’t agree that J&J’s publication of a D&I report was “substantial implementation” of the proposal, that it dealt with matters related to the company’s “ordinary business,” or that the proposal was “materially false & misleading.” This WSJ article speculates that the Staff might agree with fewer no-action requests this year.

Here’s the text of the resolution that appears in the company’s proxy statement:

Resolved, shareholders request the company conduct and publish a third-party audit (within a reasonable time, at a reasonable cost, and excluding confidential/proprietary information) to review its corporate policies, practices, products, and services, above and beyond legal and regulatory matters; to assess the racial impact of the company’s policies, practices, products and services; and to provide recommendations for improving the company’s racial impact.

If J&J ends up publishing an audit, it won’t be the first company to do so. Starbucks has published two assessments, and Facebook published a civil rights audit last summer.

As You Sow’s New “Scorecards”: Racial Justice & Workplace Equity

As You Sow is out with a pair of new scorecards for the S&P 500 (and they’ve filed a bunch of related shareholder proposals):

Racial Justice – scoring companies based on their “racial justice statements,” corporate policies and practices across 22 data points

Workplace Equity – assessing the quality of companies’ DEI disclosures

To gather data, they are looking at websites (including reporting/disclosure and career pages), social media accounts, and sustainability reports. The results of the findings are available as an overall composite list of the “top 10” & “bottom 10” – and also can be sorted by sector, HQ state, region, market cap, and number of employees. Here’s some of the key “Workplace Equity” findings:

– The largest companies by market cap, and the largest employers by headcount, are most likely to release meaningful workplace diversity and inclusion data.

– Almost half (46%) of the 100 largest companies by market cap in the S&P 500 release their consolidated EEO-1 forms, a good first step for sharing workplace composition. Within the 100 largest employers in the S&P 500, more than 1 in 4 do so. Of the companies that fall within both categories 30 of 53 (57%) release this form.

– More than 1 in 4 of the largest 100 companies release their recruitment rates of female employees. Almost 1 in 5 release their retention rates of female employees, and 1 in 10 release their recruitment rate of female employees.

– Disclosure rates of recruitment, retention, and promotion data by race and ethnicity is still catching up to gender data, likely a reflection of the #metoo movement gaining traction in 2017, while the protests in the aftermath of George Floyd murder began in late May, 2020, less than a year ago.

– Across sectors, a few companies have shown early leadership in publishing recruitment, retention, and promotion data by race and ethnicity. These companies include: Allstate, Apple, BlackRock, Norfolk Southern Corp and Oracle Corp which release their recruitment rates; Alphabet, Edison International, Intel, PVH Corp and Twitter, which release retention rates; and Consolidated Edison, Goldman Sachs, Progressive, Twitter and Walmart which release promotion rates.

– 16% of the S&P500 release at least one recruitment statistic related to race or ethnicity. Within the 100 largest companies by market cap, 23% do so. Within the 100 largest employers, 23% do so.

– 15% of the S&P 500 have released a quantifiable goal related to their workplace diversity, equity and inclusion goals. Within the 100 largest companies by market cap, 22% do so. Within the 100 largest employers, 22% do so. Of the companies that fall within both categories 13 of 53 (25%) release this form.

As You Sow is also continuing to release its scorecards on Waste & Opportunity – measuring 50 large companies in the beverage, quick-service restaurant, consumer packaged goods and retail sectors – and Pesticides in the Pantry – scoring 14 food manufacturers on transparency & risk in food supply chains – as well as its mainstay, the “100 Most Overpaid CEOs.”

California Board Diversity Statute: Less Than Half of Companies Report Compliance

At our “Women’s 100” session last week, there was some great back & forth about whether California-headquartered companies are relocating due to that state’s board diversity legislation. The gender diversity law, SB 826, required listed companies with principal executive offices located in California (no matter where they are incorporated) to include at least one woman on their board of directors by the end of 2019. That minimum increases to two by December 31, 2021, for companies that have five or fewer directors – and to three women directors, for companies that have six or more directors. The newer law, AB 979, which requires adding directors from other underrepresented groups, will first come into play at the end of this year.

According to the “Women on Boards” report that was released last week by the California Secretary of State, 22 listed companies moved their headquarters out of the state last year – and 6 moved into the state (the report doesn’t analyze whether the moves are in reaction to the legislation or for other, unrelated reasons). The report included a couple of other surprising data points as well:

– Out of the 647 companies subject to the rule, 318 filed the state’s required disclosure statement – and 311 of those statements showed that there’s at least one woman on the board

– 288 companies voluntarily filed the state’s disclosure statement

The Golden State publishes this annual review in order to monitor compliance with its board diversity laws – next year, there will also be a review of underrepresented communities on boards. But for now, the exercise seems to show that a lot of companies are ignoring the reporting requirement, which would appear to result in fines under the statute.

The report lists every company identified as being required to comply with the rule, the date they filed the disclosure statement (it’s blank for those that skipped the filing), and whether or not they reported having at least 1 female director in 2020. It doesn’t include company size as a data point, but a quick skim indicates that the larger & more familiar companies seem to be complying, and the smaller companies…not. There are exceptions on both ends of that spectrum.

The last thing to note is that this report isn’t all that useful if you’re looking to get a sense of the current composition of California boards, because it pulls data from backward-looking Form 10-Ks and California disclosure statements that were mostly filed during the early part of 2020 calendar year. But it paints a pretty telling picture of whether companies believe that filing the disclosure statement is worth their while.

Liz Dunshee

March 11, 2021

ESG: DOL Won’t Enforce ERISA Plans’ Investment & Voting Limitations

In what investors are saying is a big win, the DOL announced yesterday that it won’t enforce its pair of recent rules that limited consideration of ESG factors in retirement plans’ voting & investment decisions. The details of the non-enforcement stance are explained in a 1-page policy statement. Here are the key takeaways:

The Department has heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers, and investment advisers, who have asked whether these two final rules properly reflect the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries. Stakeholders have also questioned whether those rulemakings were rushed unnecessarily and failed to adequately consider and address the substantial evidence submitted by public commenters on the use of environmental, social, and governance (ESG) considerations in improving investment value and long-term investment returns for retirement investors.

The Department has also heard from stakeholders that the rules, and investor confusion about the rules, have already had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules can be read to explicitly allow. Accordingly, the Department intends to revisit the rules.

Until it publishes further guidance, the Department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights. This enforcement statement does not preclude the Department from enforcing any statutory requirement under ERISA, including the statutory duties of prudence and loyalty in section 404 of ERISA. The Department will update its website at as more information becomes available.

CalSTRS Says “Activist Stewardship” Is Here

It’s shaping up to be an active proxy season. As this Wachtell Lipton memo explains, ESG & TSR activists are teaming up. In the throes of Engine No. 1’s dissident campaign – and facing pressure from hedge fund D.E. Shaw – ExxonMobil last week appointed two new directors to its board.

The new directors, Michael Angleakis of Atairos and Jeff Ubben of the “activist E&S fund” Inclusive Capital Partners, weren’t part of Engine No. 1’s dissident slate. so while D.E. Shaw welcomed the appointments, Engine No. 1 said they weren’t enough – and that campaign continues.

In this recent HLS blog, two influential leaders at CalSTRS – the country’s second largest pension fund, with approximately $275 billion in assets – suggest that this is just the beginning of a bigger “activist stewardship” trend. Here’s why:

1. Divestment of individual companies isn’t an attractive option for “universal owners” whose portfolios essentially reflect a representative slice of the economy – they need to manage systemic risks, as I blogged yesterday

2. These investors are growing frustrated with ineffective engagements at some companies

3. Activist techniques – such as replacing directors – can effect the types of changes that investors believe will improve the value of their overall portfolio

The blog points to Engine No. 1’s campaign, which CalSTRS supports, as a “pilot” for future activist stewardship. It lays out a game plan and says that CalSTRS’ goal is to create activist stewardship capabilities “at scale” in order to protect future investment returns. That means board composition – and disclosure about director skills – will continue to grow in importance.

Net-Zero Planning: Investors Want More Than “Offsets”

Yesterday, the UK’s “Institutional Investors Group on Climate Change” – representing 35 trillion Euro in assets under management – published this “Net-Zero Investment Framework 1.0.” The most surprising nugget in the 30-page document is that the use of carbon market offsets in achieving net-zero goals is specifically discouraged. While a lot of people in the sustainability space believe that offsets are mostly smoke & mirrors, the investor position stands in stark contrast to the “market-based solution” that the BRT and many companies have been embracing as a way to meet their recently announced corporate greenhouse gas reduction goals.

This Politico article also emphasizes that quality offsets are in short supply. The article says that today’s market isn’t big enough for a single major corporate pledge. As I blogged earlier this year, the Taskforce on Scaling Voluntary Carbon Markets found that the market would need to grow by at least 15-fold by 2030, enough to absorb 23 gigatons of GHGs per year, to be able to support the pledges that companies are making.

Liz Dunshee

March 10, 2021

Confidential Treatment: Corp Fin Clarifies Guidance for Expiring Orders

Yesterday, Corp Fin revised “Disclosure Guidance Topic No. 7” to be more specific about how to handle expiring orders. When this piece of the guidance was first added last September, it tied the analysis for the different alternatives to orders issued “less than 3 years ago” or “more than 3 years ago.” Now, Corp Fin has helpfully put a stake in the ground at October 15, 2017. So the alternatives upon expiration are are:

1. If the contract is still material, refile it in complete, unredacted form

2. Extend the confidential period – using the short-form application for orders initially issued after October 15, 2017, or filing a new and complete application for orders initially issued on or before October 15, 2017

3. Transition to the “redacted exhibit rules” in Reg S-K Item 601(b)(10), if the contract continues to be material and the initial confidential treatment order was issued on or before October 15, 2017

Corp Fin also reiterated that if a confidential treatment order was granted on or before October 15, 2017, you don’t need to wait for the order to expire to transition to compliance with the redacted exhibit rules. You can just start doing that in a new filing or by amending a previously filed document.

Mandatory Climate Disclosure: California Bill Sets Ambitious Tone

California has been a bellwether for board diversity & consumer privacy movements. Now, it could be setting the tone for mandatory climate disclosures. California Senate Bill 260 – which was introduced in late January and will be taken up by committees this month – would apply to publicly traded domestic and foreign corporations with annual revenues in excess of $1 billion that do business in California, and would require:

– Public disclosure of their greenhouse gas emissions, categorized as scope 1, 2, and 3 emissions, from the prior calendar year – beginning in January 2024

– Setting & disclosing “science-based emissions targets” based on the covered entity’s emissions that have been reported to the state board, which would be consistent with the Paris Agreement goal of limiting global warming to no more than 1.5 degrees Celsius – beginning in 2025

– Public disclosures to be independently verified by a third-party auditor, approved by the state board, with expertise in greenhouse gas emissions accounting

This Akin Gump blog explains why this bill would be a big deal if it passes:

While many large companies already issue climate disclosures on a voluntary basis, SB 260 would no longer give them—or their more reluctant peers—a choice. Importantly, the bill’s required scope 2 and 3 emissions reporting would force companies to disclose, for the first time, the indirect emissions that result from their purchase and use of electricity as well as their supply chains, business travel, procurement efforts, water use and wastes.

Covered entities also would have to engage certified third-party auditors to verify their disclosures and emissions targets, another noteworthy first that should lead to a greater degree of standardization over time in climate reporting. Given the bill’s capacious reach and the minimum contacts with California required to trigger its applicability, most large companies in virtually every sector would soon face climate disclosure requirements.

As the blog explains, the bill faces a long road before it could become law. But even if it doesn’t end up passing, the dialogue that comes out of this process could influence company practices and investor preferences – and maybe even other disclosure regimes.

Value Vs. Values: False Dichotomy?

When pressed on “social policy” positions, the talking point for index funds and long-term investors seems to be that they’re simply taking positions that promote long-term financial value for the company. This recent study points out that it’s not so much the financial value of each individual company that they’re trying to maximize – it’s the financial value of their overall portfolio. And because that overall financial value increases when society prospers, investors have strong incentives to promote “ESG” issues, which reduce systemic risk and lead to diversified gains. Here’s an excerpt:

The analysis also shows why it is generally unwise for such funds to pursue stewardship that consists of firm-specific performance-focused engagement: Gains (if any) will be substantially “idiosyncratic,” precisely the kind of risks that diversification minimizes. Instead asset managers should seek to mitigate systematic risk, which most notably would include climate change risk, financial stability risk, and social stability risk. This portfolio approach follows the already-established pattern of assets managers’ pursuit of corporate governance measures that may increase returns across the portfolio if even not maximizing for particular firms.

Systematic Stewardship does not raise the concerns of the “common ownership” critique, because the channel by which systematic risk reduction improves risk-adjusted portfolio returns is to avoid harm across the entire economy that would damage the interests of employees and consumers as well as shareholders.

These theories probably don’t mean much for boards as a whole – who will still need to focus on their specific shareholders, and the business judgment rule will protect most decisions. But when it comes to individual directors, the paper makes the case that rejecting “weak directors” is one company-by-company action investors can take that has portfolio-wide effects. That seems to be consistent with some of the investor policies that have been published lately, and means the focus on board composition & skills isn’t going away anytime soon.

Liz Dunshee

March 9, 2021

Early Bird Registration! Our “Proxy Disclosure & Executive Compensation Conferences”

We’ve just posted the registration information for our “Proxy Disclosure” & “Executive Compensation Conferences” – which will be held virtually October 13th – 15th. We’re excited to offer a format that can be either “live & interactive” or “on-demand” (your choice! or do both!) – to deliver candid & practical guidance, direct from the experts.

These Conferences will help you tackle ESG & executive pay issues that will be essential to your proxy disclosures and engagements. Check out the agendas – 17 panels over three days.

Early Bird Rates – Act Now! As a special “thank you” for early registration, we’re offering an “early bird” rate for a limited time to both members & non-members of our sites. In addition, anyone who subscribes to one of our sites will get a special “member discount” when they register for these Conferences (both of the Conferences are bundled together with a single price). Register online or by mail/e-mail today to get the best price and make sure that you’ll have access to all of the latest guidance.

ICOs: Investment Advisers Face Scrutiny

This Reuters article says that in his confirmation hearings last week, SEC Chair nominee Gary Gensler signaled openness to additional crypto regulations if his nomination is approved. Overall, the remarks seem pretty non-committal. But in the meantime, the SEC’s Examinations Division has issued a risk alert to explain its continued focus on digital assets – in particular, the Staff will be taking a closer look at the practices of investment advisers to make sure that digital assets are properly classified as “securities” when necessary, and at the disclosures those firms are making about the risks of crypto purchases.

The risk alert also casts a spotlight on transfer agents using distributed ledger technologies and says the Examinations Division will review whether those services comply with Exchange Act Rules 17Ad-1 to 17Ad-7. See this Mayer Brown memo for more details & practice implications.

“Machine Readable” SEC Filings: What Does It Mean?

I blogged recently about how the year-end report from the SEC’s Investor Advocate urged the Commission to adopt rules that would make companies’ SEC filings machine-readable. This paper points out that corporate disclosure has already been reshaped by machine processors, since those types of downloads have been steadily increasing over the past 15-20 years – and looks at how companies are adjusting their SEC disclosures when they know that machines are doing the reading.

“Machine readability” means that it’s easy for machines to separate and extract tables and numbers from text, it’s easy to identify tabular info because of clear headings, column separators and row separators, the filing contains all the needed info (without relying on external exhibits) and the characters are mostly standard ASCII. See page 31 for examples of high and low machine readability, pulled from actual reports. The researchers say that we humans are starting to make adjustments in our behavior to cater to our robot friends:

Our findings indicate that increasing AI readership motivates firms to prepare filings that are more friendly to machine parsing and processing, highlighting the growing roles of AI in the financial markets and their potential impact on corporate decisions. Firms manage sentiment and tone perception that is catered to AI readers by differentially avoiding words that are perceived as negative by algorithms, as compared to those by human readers.

Such a feedback effect can lead to unexpected outcomes, such as manipulation and collusion (Calvano, Calzolari, Denicolo, and Pastorello, 2019). The technology advancement calls for more studies to understand the impact of and induced behavior by AI in financial economics.

Liz Dunshee

March 8, 2021

SEC Brings Reg FD Enforcement Action!

On Friday afternoon, the SEC announced that it had filed this complaint against AT&T and three of its IR execs for violations of Regulation Fair Disclosure. This is the first Reg FD enforcement action that we’ve seen in a couple of years – the Enforcement Division does indeed seem to be “powering up” and wasting no time in bringing litigation.

The charges show that the SEC views talking down analyst estimates as a problem under Reg FD. One of the most surprising points in the SEC’s announcement is that the IR execs allegedly disclosed info that the company’s internal policies specifically said could be “material.” Here’s an excerpt (also see this Stinson blog):

According to the SEC’s complaint, AT&T learned in March 2016 that a steeper-than-expected decline in its first quarter smartphone sales would cause AT&T’s revenue to fall short of analysts’ estimates for the quarter. The complaint alleges that to avoid falling short of the consensus revenue estimate for the third consecutive quarter, AT&T Investor Relations executives Christopher Womack, Michael Black, and Kent Evans made private, one-on-one phone calls to analysts at approximately 20 separate firms.

On these calls, the AT&T executives allegedly disclosed AT&T’s internal smartphone sales data and the impact of that data on internal revenue metrics, despite the fact that internal documents specifically informed Investor Relations personnel that AT&T’s revenue and sales of smartphones were types of information generally considered “material” to AT&T investors, and therefore prohibited from selective disclosure under Regulation FD. The complaint further alleges that as a result of what they were told on these calls, the analysts substantially reduced their revenue forecasts, leading to the overall consensus revenue estimate falling to just below the level that AT&T ultimately reported to the public on April 26, 2016.

While we don’t know yet whether this claim will end up being settled and what type of penalties (if any) AT&T will face (at this point, the SEC’s allegations are unproven), the fact that the company is charged in the complaint is a reminder that simply having a policy in place isn’t enough to avoid litigation. Check out our 135-page “Reg FD” Handbook if you need to jump-start your compliance efforts.

EDGAR Gets a Makeover!

Wow. The EDGAR filings page has been completely remade (here’s Apple’s page as an example). Our members are giving it mixed reviews so far, but that might be because it takes time to get accustomed to a new interface.

In addition to being able to revert to “classic version” via a button at the top right (h/t Lowenstein Sandler’s Daniel Porco), you can still use “form descriptions” to search for filings – click the “view filings” box in the top left box, and then use the “search table” box just like on the old page.

The updated version also has a new field to be able to search text in filed documents, which will be helpful. Perhaps the “company information” box at the top of the page will eventually be populated with more key info that’s pulled in from filings…

Tomorrow’s Webcast: “Conduct of the Annual Meeting”

Tune in tomorrow for our “Conduct of the Annual Meeting” webcast – to hear 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 discuss expected “virtual meeting” trends for the 2021 proxy season, annual meeting logistics, rules of conduct, handling shareholder questions, and voting & tabulation issues.

Bonus: If you attend the live version of this 60-minute program, CLE credit will be available! 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 5, 2021

Enforcement Division Creates Climate & ESG Task Force

That was quick!  Following last week’s SEC announcement that Corp Fin will be scrutinizing climate-related disclosures, yesterday the SEC issued an announcement about creation of an Enforcement Division Task Force focused on climate and ESG.  Acting Deputy Director of Enforcement Kelly Gibson will lead the task force, which will include 22 members. Here’s an excerpt from the SEC’s press release:

Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct.  The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.

The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.

Besides noting that the task force will work closely with other SEC Divisions and offices, the announcement says the task force will pursue tips and referrals on ESG-related issues and includes a link to the agency’s TCR webpage for submitting tips, referrals and whistleblower complaints.

With the earlier announcement directing Corp Fin to scrutinize climate-related disclosures and now with the creation of an Enforcement Division climate and ESG task force, the SEC’s sending a message that it intends to focus and dedicate resources to review of climate and ESG disclosures. Yesterday’s announcement also follows Wednesday’s announcement of priorities for the Examinations Division for climate risks relating to brokers and investment advisors, as it seems like they’re going to scrutinize ESG investments.  The announcement about Examinations Division priorities includes mention that they’ll review investment advisors and investment company proxy voting policies and procedures and votes to assess whether they align with the strategies.

In an apparent effort to add context to these recent announcements, Commissioners Hester Peirce and Elad Roisman issued a statement saying time will tell what these recent announcements really mean because right now it’s not yet clear. Commissioners Roisman and Peirce note that the Enforcement Division will continue to identify, investigate, and bring actions against those who violate SEC laws and rules but such actions would not be based on any new standard.

In response to these recent announcements, some may want to step-up their efforts around climate-related disclosures. As a resource to help those reviewing and preparing climate-related disclosures, check out the “Internal Controls” memos in our “ESG” Practice Area.

ESG Reporting: Roadmap for Attestation Services

A few weeks ago, I blogged about how investors want to see companies enhance ESG reporting. One enhancement investors want to see is improved data credibility through assurance. Now with the Enforcement Division’s new task force potentially preparing to sift through company ESG disclosures, more companies may be thinking about possible actions to assure themselves and investors of ESG data quality. Recently, the Center for Audit Quality and AICPA issued a memo providing a roadmap for audit practitioners about their role in assisting companies with ESG data assurance efforts, which might offer some help.

Although the report is aimed at audit practitioners, it outlines information to help companies understand what might be involved with a review or examination level attestation from an independent accounting firm. The report includes representative samples from 2 US companies that included an attestation report in their SEC filings. Here’s an excerpt describing several topics to consider prior to engaging a firm to provide ESG attestation services:

Important decision attributes include, but are not limited to, (a) what information will fall within the scope of the attestation engagement (the subject matter); (b) what reporting criteria will the subject matter be measured against (e.g., GRI, SASB, company developed); (c) what level of attestation service will be provided (examination engagement, review engagement); and (d) how will the ESG information and attestation report be disclosed and used?

In determining whether to seek an examination level engagement or a review level engagement, the report suggests where and how the ESG information will be disclosed plays a part in the decision.  Management may determine a review level of engagement is sufficient when the information will be disclosed on a company website rather than disclosed in a SEC filing. The nature of intended users and the significance of the ESG information to them will also affect the level of attestation service for a particular company – when ESG disclosures are being used for investment decision making, the report says an examination level engagement may be more appropriate.

For more about the need for assurance services, last week, the International Federation of Accountants and the International Integrated Reporting Council announced an initiative to help determine how to best deliver integrated report assurance. The organizations plan to roll the initiative out in phases and the first installment announced last week sets out what integrated reporting assurance involves, the difference between limited and reasonable assurance and what is required of auditors and organizations to strive for reasonable integrated reporting assurance.

Transcript: “Audit Committees in Action: The Latest Developments”

We’ve posted the transcript for our recent webcast: “Audit Committees in Action: The Latest Developments” – it covered these topics:

– Evolving Audit Committee Oversight Responsibilities

– Considerations on Financial Reporting in the COVID-19 Environment

– COVID-19 Impact to Oversight of Internal Controls

– CAM Considerations for Audit Committees in Year 2

– Updates to Auditor Independence Requirements

– External Audit Assurance for ESG Data

– Lynn Jokela

March 4, 2021

Climate Disclosures: Comment Letter Focus Areas Following SEC’s 2010 Guidance

Last week, John blogged about Acting SEC Chair Allison Herren Lee’s statement directing Corp Fin to scrutinize climate change disclosures. Many companies had already been focused on their climate-related disclosures given the increased focus coming from investors and other stakeholders. But, with Corp Fin now directed to look closer, a recent Audit Analytics blog looked back what happened with SEC comment letters following release of the Commission’s 2010 guidance.

Corp Fin could scrutinize more than they did a decade ago, after all company initiatives and disclosures relating to climate risk have changed in that time. Still looking back at comment letters is one way to help gauge potential focus areas. Here’s what Audit Analytics had to say about comment letters issued back around the time of the 2010 SEC guidance:

The most common area of focus for climate change comment letters was the risk factors section. This was followed by the business overview section, reserves reporting, and the liquidity section of the MD&A. And top five concluded with the accounting for contingencies. This was to be expected as these were the areas focused on in the 2010 guidance.

In terms of industries most likely to receive comment letters, the findings weren’t surprising – the Mining and Extraction sectors, including oil and gas companies, topped the list. They were followed by Power Generation and Manufacturers, respectively, with Insurance being the only other notable industry.

Looking at things today, Audit Analytics predicts we’ll see many of the same industries bear the brunt of potential SEC comment letters. But, the firm also says companies in industries that were largely spared the last time around will likely see more scrutiny this time. For those sharpening pencils for possible updates in their upcoming Q1 reports, check out our “Climate Change” Practice Area for the latest memos and other resources.

Do Social Boycotts Influence Board Turnover?

According to an academic study, researchers say social boycotts can lead to increased board turnover at targeted companies. The study’s abstract provides an overview explaining that researchers studied how personal social values affect directors’ willingness to serve on boards. The researchers found when director ideologies are aligned with those of activists targeting a company on which they serve, a director is more prone to leaving.

The findings aren’t that surprising as one would hope directors and companies are somewhat aligned with their values. In terms of what this could mean, the researchers note social values may become an even more central part of future director recruitment as millennials and younger generations tend to place more emphasis on social impact. This excerpt from the Academy of Management Insights (subscription required) summarizes the study’s findings:

– Boycotted firms experienced a 7% increase in board director turnover

– Boards faced a greater likelihood of director turnover among directors who shared ideologies with boycotters (liberal directors were more likely to leave after liberal boycotts, and vice versa)

– Directors became more loyal to firms that were targeted by movements from the opposing ideology. Conservatives, compared to liberals, were especially prone to loyalty when their firms faced challenges from liberal activists

– The link between shared social values and director exits was stronger after boycotts that caused stock prices to drop

Audit Committee Oversight: 10 Topics for Leveraging Internal Audit

Now that March is here, many audit committees might be reflecting on their workload over the last couple of months as, among other things, they wrapped up tasks related to year-end reporting. To help understand company-wide risks and mitigation activities, many audit committees lean on internal audit to provide insight into whether company risk mitigation efforts are effective. 2020 brought increased attention to risks that previously weren’t always top of mind.  Besides focusing on financial controls and operational audits, a PwC memo says some internal audit departments have expanded their work to areas beyond the traditional internal audit world.

The memo outlines 10 areas for audit committees to consider leveraging internal audit, with examples of internal audit focus areas for each.  To help ensure audit committees are providing effective oversight, here are a few topical areas that audit committees might consider tapping internal audit for help:

Organizational culture, values and compliance: effectiveness of the compliance program considering new guidance from the DOJ and with a deeper focus on the state of the risk and compliance culture, key reporting indicators of company culture, assessment of culture as part of routine internal audits, review of the organization’s process and controls related to diversity and inclusion metrics and reporting

Health and safety: sufficiency of return to the workplace plans, including the process undertaken to create and vet the policy as well as compliance with any applicable regulations, assessment of health and safety protocols, process for monitoring and reporting of ethics and compliance hotline activity related to health and safety

Brand management: management’s processes for monitoring and responding to content on social media and its impact on reputation, the organizations policies around employee use of social media

Human capital and talent management: mechanisms to monitor and obtain feedback on programs focused on employee satisfaction and well-being, processes to measure workforce productivity, the company’s recruitment and retention programs

– Lynn Jokela