As we see more Form 10-Ks with new Item 101 human capital resource disclosures, it’s becoming clear that companies are taking this opportunity to tell their “diversity & inclusion” story. This WSJ article from Monday says that about one-third of S&P 500 companies are including at least some information on diversity in their annual report. A recent Semler Brossy report found some companies are also including HCM disclosure in their proxy statements – which makes sense as companies tell their stories about board oversight of human capital and related initiatives. Semler Brossy’s report says that of the proxy statement HCM disclosures reviewed, diversity & inclusion was the most frequent topic covered.
Companies want to do the right thing and tell all they’re doing on the D&I front, and stakeholders want to see this. At the same time, disclosures need to be accurate. They’ll not only be scrutinized by investors and other stakeholders, but also could attract unwanted attention from plaintiffs’ attorneys – as explained in this recent Keith Bishop blog.
Over the last year, we’ve blogged about several board diversity lawsuits that have cropped up. These lawsuits seem to have quieted down, perhaps as a result of California’s law mandating certain board diversity requirements for companies based in the state and Nasdaq’s proposed listing standard relating to board diversity disclosures. But, this D&O Diary blog provides a discussion of a more recent board diversity lawsuit – this one involving Micron Technology. We don’t know whether these lawsuits will continue or whether they’ll be successful, but they certainly are an unwelcome development for the companies involved.
As noted in the D&O Diary blog, the most recent lawsuit differs from prior board diversity lawsuits in that it involves a company based in Idaho – not California – and it was brought by a law firm not involved with the prior lawsuits. As much as companies carefully consider disclosures during what is usually an iterative drafting process, this most recent lawsuit serves as another reminder to consider disclosures relating to diversity and inclusion from all angles, including from the potential perspective of plaintiff firms.
Legislative Push for Board & Executive Diversity Disclosures
Last week, a bill that would require public companies to disclose the gender, race, ethnicity and veteran status of directors, board nominees and senior executive officers was reintroduced in the House and Senate. The bill, called “Improving Corporate Governance Through Diversity Act of 2021” was simultaneously introduced by Congressman Gregory Meeks in the House and Senator Bob Menendez in the Senate.
First introduced in 2017, the bill passed the House in 2019 but then stalled in the Senate. It’s too early to gauge whether the bill will pass but with Democrats in control of both chambers, there’s a chance it could – although it’d likely be a challenge – see John’s blog from last week about Senators urging the SEC to reject Nasdaq’s board diversity listing standard proposal. Various organizations support the proposed legislation, including the US Chamber of Commerce. In addition to requiring board and executive diversity disclosures, this press release describes other provisions:
– Empowers SEC’s Office of Minority and Women Inclusion (OMWI) to publish triennially best practices, in consultation with an advisory council of investors and issuers, for compliance with these enhanced disclosure rules.
– Mandates OMWI to create an advisory council consistent with the Federal Advisory Committee Act requiring formal reporting, public openness and accessibility, and various oversight procedures.
– Allows OMWI to solicit public comment on its best practices publication consistent with the formal rulemaking process under the Administrative Procedures Act.
Board Diversity Matters: There’s More!
With board diversity, there’s a lot more going on besides the introduction of federal legislation and concern about potential plaintiff firms, it’s almost a bit of an extravaganza. Today, I blogged on our “Proxy Season Blog” about the NY State Comptroller’s recent press release outlining its proxy voting guidelines addressing board diversity matters – the Comptroller has expanded its voting position at S&P 500 companies and in certain cases, anticipates increased votes “against” directors.
Also, in response to comments and criticism launched by members of the Senate Banking Committee that John blogged about last week, Nasdaq amended its proposed listing standard relating to board diversity disclosures. This Bryan Cave blog summarizes the changes – and there are several. First, one change relates to companies that have five or fewer directors – these companies would only need to include one diverse director rather than two. In another change, Nasdaq has proposed a one-year grace period for companies with a vacancy on the board that would put the company under Nasdaq’s recommended diversity objective. At this point, the SEC still has to approve Nasdaq’s proposal so stay tuned.
Also, Reuters reported that during a virtual forum last week Acting SEC Chair Allison Herren Lee said the SEC should consider revisiting disclosure requirements and strengthening guidance on board diversity in an effort to address a lack of board diversity. This Cooley blog questions whether enhanced diversity disclosure will follow Acting Chair Lee’s recent directive to Corp Fin to enhance its focus on climate-related disclosures. It’s hard to say where all of this will lead but in the near term anyway stakeholder focus on board diversity ranks right up there with focus on climate.
Back in September, Liz blogged about the SEC’s adoption of amendments to the SEC’s whistleblower awards program, which had been in the works for a while. With a new SEC, whistleblower awards continue rolling along. Last week the SEC issued two press releases relating to awards that high-lighted certain aspects of the amendments.
First, this SEC press release announced an award of more than $9 million. What’s unique about this award is that the SEC’s press release says it marks the first SEC whistleblower award based on a non-prosecution agreement or deferred prosecution agreement since the amendments to the SEC’s whistleblower program became effective last December. Some may recall the amendments to the SEC whistleblower rules included a change allowing awards based on deferred prosecution agreements and non-prosecution agreements entered into by the DOJ. The SEC’s press release doesn’t say how much the whistleblower received from the original award, but another $9 million coming from the related DOJ action is a nice payday. Here’s an excerpt:
The whistleblower provided significant information about an ongoing fraud to the SEC that enabled a large amount of money to be returned to investors harmed by the fraud. The SEC in turn provided that information to the DOJ. The whistleblower also provided significant assistance by traveling at the whistleblower’s own expense to be interviewed by DOJ.
Also last week, the SEC announced two additional whistleblower awards totaling more than $1.7 million. Although the award amounts were smaller for these awards, the SEC highlighted in its press release that the whistleblowers provided Forms TCR to the Commission within 30 days of their first learning of the Form TCR filing requirement under the agency’s new whistleblower rules. Not sure we’ve seen the agency draw attention to Form TCR previously, here’s an excerpt about that:
‘As these awards show, deserving whistleblowers may receive an award if they comply with the Form TCR filing requirements within 30 days of first obtaining actual or constructive notice of the filing requirement or 30 days from the date the whistleblower hires a lawyer to represent them in connection with the whistleblower’s previous submission of information to the Commission, whichever occurs first, and they otherwise meet the eligibility requirements,’ said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. ‘These whistleblowers earned their awards by providing high quality information that supported a pair of successful Commission enforcement actions.’
Compliance Programs Stay on Front Burner, Virginia Passes Privacy Legislation
Over the last year, as California’s Consumer Privacy Act became effective, we blogged about some of the late changes and here’s John’s blog about passage of the California Privacy Rights and Enforcement Act of 2020. Although various states have proposed privacy laws, Virginia is the first state this year to adopt new privacy legislation. Virginia’s Consumer Data Protection Act is awaiting the governor’s signature and presuming it’s signed, it is slated to take effect in January 2023. This Morgan Lewis memo outlines considerations for businesses, here are a few takeaways:
First, unlike the CCPA’s limited private right of action for security breaches, Virginia’s legislation does not provide for a private right of action. Instead, the attorney general will have the exclusive right to enforce the law.
Second, Virginia’s legislation would impose stricter requirements than the CPRA as to how businesses obtain consent from consumers before processing sensitive data. While the CPRA accounts for sensitive personal information and permits consumers to submit opt-out requests specific to this sensitive personal information, the Virginia legislature borrowed the stricter standard in the GDPR and requires a business to obtain affirmative consent before any sensitive data may be collected and processed.
Third, covered businesses that only process consumer requests to opt out of the sale of personal data will need to expand their opt-out compliance programs. If passed, the Virginia legislation goes further than just granting Virginians the right to opt out of the sale of their personal data and broadens that opt-out right to the use of personal data for targeted advertising and profiling purposes.
Companies that have already taken measures to comply with the CCPA, CPRA and GDPR likely have a head start to ensure compliance with Virginia’s legislation. But, the differences with Virginia’s legislation probably mean it’d be a good idea to add compliance program review back to the to-do list. For a comparison between Virginia’s legislation and the CCPA, this GreenbergTraurig blog has a chart showing how certain aspects of Virginia’s legislation are broader than the CCPA.
Our March E-Minders is Posted
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Each year, we blog about Larry Fink’s annual letter to CEOs. With BlackRock being among the largest shareholders for many companies, the letters are read with interest to help understand BlackRock’s key focus areas for the upcoming shareholder meeting season. A recent academic study examined whether “broad-based public engagement”, such as Larry Fink’s annual letter, is effective at influencing company behavior and it found that it is.
The study examined several questions, including among others, whether companies adjust disclosures following the release of Larry Fink’s annual letter and if so, whether BlackRock values the disclosures. For each of these questions, the researchers said yes, companies adjust their disclosures and BlackRock values them.
The researchers studied disclosures from 2016 – 2019 of 3,550 companies and observed a change in portfolio firms’ 8-K disclosures around the letter release date, suggesting that companies are responding to Fink’s call for more disclosure about topics of interest. Specifically, we find that portfolio firms’ disclosures during the post-letter period reflect an increase in language similar to that included in the letter, controlling for a variety of firm and disclosure characteristics. Moreover, our results indicate that the observed change in disclosure around the BlackRock letters is a response to BlackRock’s broad-based public engagement letters, rather than to a general demand for information from other important stakeholders (e.g., Vanguard and State Street) or to BlackRock’s private engagement.
Further, BlackRock appears to value these additional disclosures, as evidenced by less opposition to management recommendations in votes during subsequent annual shareholder meetings. This result extended to the subset of proposals related to environmental and social issues.
This Institutional Investor article discusses the research and in it the authors appear to advocate for investor public engagement. Hard to say whether we’ll see more of this from other investors but the authors say their research suggests public engagement is an effective way for investors to communicate broadly with portfolio companies beyond more costly individual interactions.
Welcome Back! Clayton Returns to Sullivan & Cromwell, Avakian to WilmerHale
In the time since former SEC Chair Jay Clayton departed the agency, some have wondered whether he would return to private practice. Some may recall last summer when the DOJ issued an announcement that the President intended to nominate Jay to become the US Attorney for the SDNY – that nomination didn’t really go anywhere as he stayed at the SEC until the holiday season. A couple of weeks ago, Sullivan & Cromwell announced that Jay is returning to the firm’s New York office as Senior Policy Advisor and of counsel. The announcement also says that he’s been appointed as Lead Independent Director of Apollo Global Management.
Separately, last week WilmerHale announced that Stephanie Avakian, former Co-Director of the SEC’s Enforcement Division, is returning to the firm later in the year as Chair of its Securities and Financial Services Department and as a member of the firm’s Management Committee. Stephanie had been a partner at the firm prior to joining the SEC back in 2014.
January-February Issue of “The Corporate Executive”
The January-February issue of The Corporate Executivehas been sent to the printer (try a no-risk trial). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– The Impact of COVID-19: Our Model CD&A Disclosure
– Recent Case Tests Attorney-Client Privilege for Law Firm Assisted Internal Assessments
– Deferred Compensation Plan Funded by a Rabbi Trust but Participants are Shut Out by Company and 409A
– Officer and Director Indemnification Provisions May Need Review