Monthly Archives: May 2021

May 14, 2021

Preparing for “Corporate Governance Gaming”

Looks like we can add “predictable proxy voting outcomes” to the list of things that Millennials are blamed for killing – along with doorbells, voicemail and the birth rate. Although the retail investor segment has exploded, there’s a chance it may not continue to deliver reliable support for management recommendations.

Recent changes to broker no-vote policies are partially responsible for this emerging issue – but it may also be due to the “eat the rich” mentality of recent stock market entrants. Last week’s “Investor Sentiment Study” from Broadridge & Engine Group found that over 60% of retail investors thought that companies they invest in should be taking active steps to improve E&S issues – and 46% of Millennial investors, the highest percentage of any generation, say they will vote their proxy this year. (For more details about retail voting trends & communications, see the Proxy Season Blog that Lynn ran for members earlier this week.)

This forthcoming article from LSU Law Prof. Christina Sautter and Monash (Australia) Law Prof. Sergio Gramitto Ricci explores whether this new generation of Millennial & Gen Z investors – who might come to stocks through online forums & gaming dynamics – will band together to pursue ESG voting initiatives. Here’s an excerpt:

If disintermediation and wireless investors reach a critical mass, wireless investors could cause a radical shift in the way corporations are run by exercising their aggregate power in shareholders’ meetings. If wireless investors are able to determine who sits on the board of directors and pick directors who have displayed an ESG record, the shift in the governance of corporations would be so deep-seated that the very purpose of the corporation would be impacted. After decades of debates on whether corporations should pursue any goals,but maximizing returns for share-holders, shareholders themselves would align the aim of a corporation with that of socially and environmentally conscious citizens. …

The wireless investors’ movement to make corporations serve people and the planet will also benefit from brokers no longer voting uninstructed shares. As brokers are transitioning out of voting uninstructed shares, unless shareholders express their votes, their shares will go unvoted. In fact, retail investors would not be able to rely on discretionary or proportionate voting by brokers. Discretionary voting involves brokers voting in line with board recommendations while with proportionate voting they vote uninstructed shares in proportion to how the broker was instructed by the other holders of those shares.351Hence, either they express their votes or they leave the corporation’s destiny in the hands of other unknown investors.

Furthermore, corporations risk failing to obtain quorums at shareholders’ meetings. In response, corporations might have to nurture their relations with retail investors and solicit them to vote, and retail investors would have an additional reason to internalize the frictional cost attached to inform themselves, possibly through online communication venues, and vote their shares. Compelled to stay informed and vote, other retail investors might vote with wireless investors and take part in the game-changing movement to make corporations serve people and the planet.

If this comes to pass, it could alleviate the voting apathy that others have recognized negatively impacts corporate governance, which companies have been trying to cure for many years through “swag bags” and donations. Prof. Sautter suggests that that gaming dynamics are a good thing because they’re making shareholder meetings more accessible – investors are even using gaming platforms like Twitch & Discord to communicate.

That said, a gaming approach to shareholder voting likely would terrify companies. The GameStop frenzy showed how difficult it is to control the “mob mentality” – and we wouldn’t be able to consult published voting policies to predict voting behaviors (although perhaps new advisory services would pop up). The Boadridge/Engine Group survey found that 43% of new market entrants are trading every week, so you can’t even predict whether they’re in your stock for the long haul! Similar to the “Clubhouse” trend that I wrote about a few weeks ago, this WSJ article says that some companies are getting ahead of the game by using social media channels to communicate with their retail holders.

Personally, my guess is that the retail revolution is still a ways off. I missed the Gen X cutoff by only a few days, so maybe I’m less idealistic – or less downtrodden? – than others in my assigned cohort. But I think institutional investors are going to do whatever they can to keep a lot of assets under their control. Profs. Ricci & Sautter suggest that big investors’ new emphasis on E&S could be one way to keep shareholders in their fold. This 2020 study – “Index Fund ESG Activism and the New Millennial Corporate Governance” – also makes that suggestion, and has been getting quite a bit of traction.

Cyber Disclosure: “Risk Ratings” Could Help Tell Your Story

Cyber issues continue to plague organizations big & small. Last week’s big pipeline shutdown due to a ransomwear attack on a privately held energy company emphasizes the need for boards to be paying attention. This Aon memo also suggests that cyber risk disclosures from public companies might get more detailed due to recent ISS QualityScore changes. The dilemma facing companies from a disclosure perspective is that, while investors need transparent disclosure to be able to assess risks, explaining technical shortcomings and incidents can also create a roadmap for the bad guys.

This 10-page report from NACD, Cyber Threat Alliance, IHS Markit, Security Scorecard and Diligent says that cyber-risk ratings could be the answer to that dilemma, because they’d convey information about threat levels without disclosing sensitive technical information. The report says that companies have been disclosing more info about board oversight of cyber risks and acknowledging vulnerabilities, but that recent events underscore the need for continued attention to this area. Here’s an excerpt:

In the wake of SolarWinds and the increased supply-chain security scrutiny in Washington DC, companies should be explaining to investors the specific risks they face from cybersecurity threats, including, among others, operational disruption, intellectual property theft, loss of sensitive client data, and fraud caused by business email compromises. Companies should also be explaining the categories of both technologies and processes they employ to mitigate those risks. Failure to do so is increasingly costly and is described by former SEC Commissioner Robert J. Jackson Jr. as “the most pressing issue in corporate governance today.”

In practice, businesses are slowly but unmistakably moving in the direction of increased transparency. This trend must continue for investors to begin deriving actionable value from cyber-risk disclosures. For example, certain companies are beginning to identify the specific technologies they are using in their program through their cyber-risk disclosures; others have started noting the materiality of their vendor risk exposure, to which regulators are paying particular attention in the aftermath of the 2020 SolarWinds attack. The next logical step is for these evolutions to converge.

Mark your calendars for our June 17th webcast – “Cyber, Data & Social: Getting in Front of Governance” – to hear VLP Law Group’s Melissa Krasnow, Lumen Worldwide Endeavors’ Lisa Beth Lentini Walker, Serna Social’s Sue Serna and Stroz Friedberg/Aon’s Heidi Wachs discuss unique governance challenges presented by cybersecurity, data privacy and social media and how it’s essential to proactively manage your risks, response plans and disclosure processes.

Transcript: “ESG Considerations in M&A”

We have posted the transcript for our recent webcast – “ESG Considerations in M&A.” This was a really excellent program and it’s worth perusing the remarks. Richard Massony of Hunton Andrews Kurth, Andrew Sherman of Seyfarth Shaw and Bela Zaslavsky of K&L Gates discussed:

1. Introduction to ESG Issues and Trends

2. ESG & Fiduciary Duties

3. ESG Opportunities in Transaction Financing

4. ESG Due Diligence and Risk Mitigation

5. Negotiating ESG-Related Deal Terms

6. Post-Closing Considerations

Liz Dunshee

May 13, 2021

How ISS Assesses Racial & Ethnic Diversity

We’re in the midst of the first proxy season in which ISS is flagging companies that have no apparent racially or ethnically diverse directors – next year, they’ll start making adverse voting recommendations. Because companies aren’t required by SEC rules to disclose diversity characteristics, ISS has been urging companies to either include the info in proxy statements or provide it directly to the proxy advisor.

Now, in its recently updated “Policies & Procedures” FAQs, the proxy advisor has also explained how it’ll go about making ethnicity assessments if companies don’t volunteer the info:

Where definitive information is not disclosed, ISS classifies directors — largely along standards put forth by the U.S. Office of Management and Budget’s Directive 15 — by carefully assessing race and ethnicity through a variety of publicly available information sources. These include company investor relations websites, LinkedIn profiles, press releases, leading news sites, as well as through identifying affiliations between individuals and relevant associations and organizations focused on race and/or ethnicity, such as the Latino Corporate Directors Association.

The FAQs also list the ethnic & racial categories that ISS uses in its database, how each category is defined, and what qualifies as “diverse” under the voting policies. And, they clarify that ISS will recommend against nominating chairs of insufficiently “diverse” boards – even if that director is themselves from an under-represented community – because the voting recommendation is intended to convey dissatisfaction with the person’s action taken in that role, rather than as a call for the person to step off the board.

ISS seems to be devoting a lot of resources to making sure its diversity voting policies will be accurately applied – presumably for the benefit of its investor clients who find this information valuable. And although this blog from Keith Bishop raises the question of whether a company could face a securities law claim if its directors insincerely self-identify as a member of an under-represented group – practically speaking, companies who want to get a favorable ISS recommendation for their director elections would probably want to make diversity info easy to find.

Bitcoin: Beaten Back By Strongly Worded Statements?

The ETF and Bitcoin trends got a little closer to converging earlier this week, when Cboe filed an application with the SEC to serve as an exchange for a Bitcoin ETF that Fidelity wants to launch. But the next day, the SEC’s Investment Management Division issued a Staff Statement about mutual funds & Bitcoin futures that also touches on ETFs.

The Statement says that, sure, there could be some mutual funds that can invest in Bitcoin futures in a way that works under the Investment Company Act – but the Staff is going to be closely monitoring a bunch of technical compliance issues. Add this to the list of things being scrutinized, along with accounting treatment for SPAC warrants and companies’ climate disclosures. The Statement says the Staff will be welcoming further input on ETF compliance efforts, specifically.

The Staff statement didn’t appear to make much of a splash, maybe because the Commission has been crypto-skeptical for several years, and Chair Gensler has signaled that he supports investor protections in this space. Commissioner Peirce also tweeted along with the IM Statement that she hopes the SEC will get comfortable with investors having access to crypto-based securities products, so perhaps crypto supporters took heart from that. Staff Statements are also always carefully crafted to emphasize that they aren’t rulemaking or Commission-level guidance, and there’s no indication (yet) of an enforcement sweep.

Last night, SNL star and Technoking Elon Musk made bigger waves with his own strongly worded statement. He tweeted that Tesla would suspend vehicle purchases using Bitcoin until that currency’s mining transitions to more sustainable energy. This WSJ article explains why Bitcoin uses more energy than newer cryptocurrencies. Elon says Tesla still owns its pile of Bitcoin, he continues to believe in crypto, and he’s also looking at alternatives that use less energy. Many people have been wondering whether ESG would overtake crypto hype at some point – we could be in for a horse race.

ESG Assurances: Watching the Watchers

As the SEC & investors seek reliable ESG data, it’s looking more likely that they could start to expect some third-party assurance of those disclosures. It’s also looking like audit firms will most likely be the ones to provide that service. Lynn blogged recently about the CAQ’s roadmap for auditor attestation of ESG metrics – and Lawrence shared more color on about how this could work. XBRL initiatives are also in the works.

But how can we know that the assurances are accurate? Dan Goelzer, current SASB member and former Acting Chair and founding member of the PCAOB (among other high-profile roles), is also calling for an expansion of the PCAOB’s powers to include oversight of ESG metrics. He outlines that concept in article that he recently authored for the CPA Journal. Here’s an excerpt:

Expand the PCAOB’s mission beyond financial statement auditing. The PCAOB’s authority is over public company “audits,” defined in SOX as examinations of financial statements. Traditional financial reporting, however, is becoming a smaller part of the information that companies disclose and that investors utilize. For example, investors increasingly use non-GAAP measures and key performance indicators, along with traditional financial reporting, in investment decision making. Moreover, investors have become more focused on the risks and opportunities presented by external, nonfinancial factors that can affect a company’s long-term success or failure. This type of information is often referred to as ESG — environmental, social, and governance

As investors increasingly demand non-GAAP measures and ESG reporting, auditors are being called upon to provide assurance over these types of information. Congress should expand the PCAOB’s authority to ensure that, as auditors’ assurance over nontraditional information becomes more common and more critical to capital allocation, the board will have the ability to set standards and inspect this aspect of auditors’ work. information. Virtually all large companies make ESG disclosures, and most do so in a sustainability report.

At the end of March, the PCAOB announced the formation of a new 18-person “Standards Advisory Group.” The charter doesn’t expressly say that the SAG will weigh in on ESG-related services, but the group’s purpose is to advise the Board on “key initiatives” – including auditing & attestation standards. The group will consist of 5 investor representatives, 4 audit professionals, and 3 seats each for audit committee members, academics and others with specialized knowledge.

Liz Dunshee

May 12, 2021

Board Diversity: A Nuanced Issue

A lot of discussions are happening right now about board diversity – including what that means, how to achieve it, and who it benefits. This 25-page Glass Lewis report (available for download) acknowledges that these are nuanced issues. Here’s an excerpt:

Whether increasing gender diversity in boardrooms poses a benefit or a detriment to companies is a complex question. Increasing the number and influence of women on boards must involve recruiting uniquely qualified directors who bring a breadth of experience and insight to the board table. Companies operate in myriad industries and locations and have unique strategies, challenges, and opportunities. Simply adding women to the board for diversity’s sake and without careful consideration of qualifications and experience is unlikely to automatically effect any positive corporate change. However, we view a companies’ placement of women on boards as being representative of companies’ consideration of broader, and harder to measure, diversity.

Glass Lewis believes that diversity, in general, is a positive force for driving corporate performance, as qualified and committed directors with different backgrounds, experiences, and knowledge will likely enhance corporate performance. We believe that gender is just one, albeit important, aspect of diversity and boards should ensure that their directors, regardless of gender, possess the skills, knowledge, and experience that will drive corporate performance and enhance and protect shareholder value.

More on “Board Diversity: Does Diversity Enhance Shareholder Value?”

John blogged last month about a paper from Harvard Law Prof. Jesse Fried that questioned the empirical support for Nasdaq’s board diversity listing proposal. University of MN Law Prof. and former chief White House ethics lawyer Richard Painter has written up a thorough rebuttal. Here’s an excerpt from his CLS summary:

Fried cites only one study showing a slightly negative impact on stock price from gender diversity on corporate boards. This study uses a data set two decades old that did not include the financial crisis of 2008. The same study found that women board members are more effective in monitoring management. The authors of the study attributed the slightly negative impact of board gender diversity on stock price to a number of factors, including most notably the fact that excessive monitoring of management by board members may decrease shareholder value.

Had the data set included stock price performance in 2008 and 2009, the aftermath of the financial crisis, it might have shown different results given that insufficient monitoring for exposure to financial risk was at least partially responsible for destroying so much shareholder value during that period It is also ironic that many academics have been pushing for more monitoring of management by corporate directors, including Harvard’s shareholder rights project which aggressively campaigned for annual election of directors, only to see at least some of them get cold feet about the board monitoring function when directors happen to be women.

The original piece also said there was a negative market reaction to California’s board diversity statute and attributed that to investor hesitation about the benefits of diversity. Professor Painter pointed out that the reaction actually may have been in response to the very controversial & significant fact that the law was a departure from the internal affairs doctrine. That aspect of the law could have concerned investors who don’t want to move toward a model in which states can regulate the corporate aspects of companies headquartered within their borders, even if incorporated elsewhere.

Professor Painter also emphasizes that the Nasdaq rule is a “comply or explain” rule, and aimed at companies that are lagging behind market averages. He says:

Nasdaq chose the more flexible “comply or explain” option carefully, knowing that while studies on the impact of boardroom diversity on firm performance are not uniform in their conclusions, boardroom diversity is important to some investors, particularly institutional investors, and that disclosure of this information to investors is important. Nasdaq, unlike the California legislature, is also very much focused on shareholder value. Finally, the Nasdaq rule could discourage California and other states from moving further in the direction of intruding upon the internal affairs of corporations headquartered within their borders but incorporated elsewhere.

Board Gender Diversity: What About Women of Color?

All of this back & forth aside, due to investor demands and legislation, the makeup of boards is gradually evolving. A new report from the California Partners Project updates earlier stats on board composition. While the report doesn’t delve in to all different aspects of diversity, it suggests that most of the gains right now are coming in the form of directors who are part of a single underrepresented group – e.g., white women – versus those whose identities intersect with multiple underrepresented communities – e.g., women of color. Here are some takeaways:

In the two years before California’s board gender diversity statute – SB 826 – was enacted, just 208 corporate board seats were newly filled by women. In the two years since, that number grew to 739. And in the first quarter of 2021, women filled 45% of public company board appointments in California, an indicator that women’s representation on boards is on the rise.

Although women now hold 26.5% of California’s public company board seats, only 6.6% of board seats are held by women of color, even though females of color comprise 32% of our state’s population. When it comes to Latinas, the disparity is truly shocking. Latinas make up more than 19% of California’s population and Latinos comprise over 37% of California’s workforce, yet Latinas hold only 1% of the seats on California’s public company boards.

Pages 20-24 of the report suggest strategies to further diversify boards – expand where you’re looking for candidates, expand your definition of “qualified,” take seriously the risks of homogeneous thinking, and prioritize different backgrounds over getting a “cultural fit.” See this Cooley blog for more info about the report and related topics.

Liz Dunshee

May 11, 2021

Meme Stocks: SEC Staff Report In The Works

Last week, the House Financial Services Committee heard testimony from new SEC Chair Gary Gensler about January’s market volatility. Here’s an excerpt from his prepared remarks (also see this 18-page CII Research report from last week):

As we work to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, I’d like to highlight seven factors that were at play in these volatile events:

1. Gamification and User Experience

2. Payment for Order Flow

3. Equity Market Structure

4. Short Selling and Market Transparency

5. Social Media

6. Market “Plumbing”: Clearance and Settlement

7. System-Wide Risks

We expect to publish a staff report assessing the market events over the summer. While I cannot comment on ongoing examination and enforcement matters, SEC staff is vigorously reviewing these events for any violations. I also have directed staff to consider whether expanded enforcement mechanisms are necessary.

Stonks’ Silver Lining: Same-Day Settlement?

In his remarks to the House Financial Services Committee, Chair Gensler said the two-day settlement cycle was partially to blame for the trading freeze-out that some investors experienced at the height of the “GameStonk” market frenzy. Here’s an excerpt about that:

The longer it takes for a trade to settle, the more risk our markets assume. The good news is, though it will take a lot of work by many parties, we now have the technology to further shorten the settlement cycles, not only to the settlement cycle we had a century ago, but even to same-day settlement (T-0 or “T-evening”).

I believe shortening the standard settlement cycle could reduce costs and risks in our markets. I’ve directed the SEC staff to put together a draft proposal for the Commission’s review on this topic.

Chair Gensler isn’t the first or only person to raise this possibility. CII’s Research & Education Fund suggested in a paper last week that slow settlement times were a potential contributor to the GameStop frenzy. And although it was only 4 years ago that the SEC said “hasta la vista” to T+3 settlement, former SEC Commissioner Michael Piwowar – who was an enthusiastic supporter of that 2017 rule change – also argued in a February WSJ op-ed that the 2-day settlement period is now past its prime.

DTCC then issued this 14-page whitepaper to identify steps necessary to move toward a T+1 settlement period – by 2023. DTCC says:

We believe the opportunity exists to accelerate the settlement cycle and optimize the process further, to T+1, T+1/2 or someday, even netted T+0, in which trades are netted and settled at the end of the same trading day.

DTCC goes on to say that real-time settlement is unlikely. It would put market makers in the very tricky position of having to see into the future and know what their net obligations will be at the end of each day, and have enough shares or dollars to meet those obligations. They’d basically have to change all of their processes and move to a transaction-by-transaction system. Last week, the Investment Company Institute (ICI), the Securities Industry and Financial Markets Association (SIFMA), and DTCC issued this follow-up FAQ to reiterate what needs to be done to accelerate the settlement cycle, and why T+0 isn’t feasible for all trades. But with Chair Gensler’s remarks, they could be taking a closer look at those obstacles.

In addition, DTC might be facing some competition. Paxos Trust Company announced that it’s already using blockchain technology to achieve same-day settlement for some equity trades. Paxos has also applied for full clearing-agency registration with the SEC and hopes to be approved sometime this year.

If and when a shorter settlement cycle arrives, it’ll have the most impact on broker-dealer obligations. The 2017 amendments didn’t change the settlement cycle for securities sold in most cash-only, firm commitment underwritten offerings – as explained in this Skadden memo at the time – and settlement on public offerings is still all over the place. While most deals are at T+3 or even T+4, some debt issuers want to push out settlement even further so that interest doesn’t start accruing.

Tomorrow’s Webcast: “Capital Markets 2021”

The capital markets have been a wild ride lately! Tune in tomorrow for our webcast: “Capital Markets 2021” – to hear Katherine Blair of Manatt, Phelps & Phillips, Sophia Hudson of Kirkland & Ellis and Jay Knight of Bass, Berry & Sims discuss what 2021 has in store for companies looking to access the capital markets, including discussion of financing alternatives. This webcast is available to members of as well as members of – you can tune in on either site!

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.

No registration is necessary – and there is no cost – for this webcast for our members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at – or call us at 800.737.1271.

Liz Dunshee

May 10, 2021

Climate Change: SEC Staff Scrutinizing Financial Disclosures

Over the years, the SEC’s Accounting leaders have used the Baruch College Financial Reporting Conference to message disclosure review initiatives, such as the non-GAAP review that happened in 2016. At last week’s conference, Corp Fin’s Chief Accountant Lindsay McCord warned that the Staff is scrutinizing how companies account for climate-related risks & impacts based on accounting rules. This blog from Cooley’s Cydney Posner has more details (also see this Accounting Today article):

According to McCord, as they conduct reviews of SEC filings, the staff will consider the impact of environmental matters in the application of current accounting standards, such as the standards for asset retirement, environmental obligations and loss contingencies. In that regard, at the same conference, Acting SEC Chief Accountant Paul Munter referred the audience to FASB guidance, issued in March, regarding the intersection of ESG and financial accounting standards, which addresses accounting as well as management disclosures.

The FASB guidance gives examples of how GAAP can intersect with ESG – e.g., going concern evaluations, risks & uncertainities disclosures, inventory issues, impairments, contingencies, and tax estimates. Page 48 of this slide deck from the conference walks through how the finance function fits in to ESG governance & controls – from data collection, to data controls, to reporting know-how. It notes that assurance over non-financial reporting is slowly increasing (see the internal controls resources in our “ESG” Practice Area).

In light of how these remarks build on February’s directive to the Corp Fin Staff to scrutinize climate change disclosures, it’s a good idea to loop in your financial reporting team on your climate disclosures. SEC Chair Gary Gensler also said last week before the House Financial Services Committee that the Commission would likely propose disclosure rules later this year.

Say-on-Pay: The Reckoning Continues

I’ve been blogging about this year’s unprecedented say-on-pay results on Here’s the latest entry, from last week:

Wow. This Semler Brossy memo recounts say-on-pay results through April 29th. Three takeaways jump out:

– The current failure rate (4.2%) is 2x higher than the failure rate at this time last year (2.1%); however, it is still early in the season and we will monitor whether the failure rate remains at an elevated level following annual meetings for the 12/31 FYE filers

– 13.6% of companies thus far have received an “Against” recommendation from ISS, which is nearly as high as any full-year “Against” rate observed since 2011

– The average vote results of 89.0% for the Russell 3000 and 87.1% for the S&P 500 thus far in 2021 are well below the average vote results at this time last year

At least three more failures rolled in since this memo was published. Here’s a WSJ article about two of them, and one company’s comp committee members also faced a “vote no” campaign for approving mid-stream changes to the CEO’s inducement grant. Diving into company-by-company results underscores what an unusual season this is, because there also have been several high-profile votes at which say-on-pay technically passed, but received less than 70% approval.

Coming in below the 70% level is dangerous because ISS will recommend against comp committee members next year if it doesn’t feel the board adequately responds to shareholders’ pay concerns. Moreover, a low say-on-pay vote can be “blood in the water” for activists.

If you haven’t held your meeting, keep up your engagements. Some companies are even filing additional soliciting material to encourage positive votes. We could be seeing a lot of changes to comp plans next year…

More on “Tweaks to NYSE’s Related Party Transaction Rule”: Are You Amending Your Policy?

Lynn blogged about recent amendments to the NYSE Listed Company Manual that would decouple NYSE pre-approval requirements for related party transactions from the $120,000 threshold in Item 404 of Regulation S-K. A few members have asked whether other NYSE-listed companies are amending their policies in light of this change. Please participate in this anonymous poll to help your fellow corporate secretaries decide what to do:

picture polls

Liz Dunshee

May 7, 2021

Consider Looking Outside 10-K for Detailed HCM Metrics

From a review of over 2000 Form 10-Ks following the effective date of the new human capital management (HCM) disclosure requirement, PwC released an updated memo to include findings from that review. At a high-level, PwC found 89% of the filings included both qualitative and quantitative metrics and disclosures commonly included discussion of COVID-19 and its impact on human capital (most of which were qualitative) and diversity, equity and inclusion (again much of which was qualitative).

When the SEC amended Item 101 of Reg S-K, it took a principles-based approach and didn’t mandate disclosure addressing specific human capital metrics. So, it wasn’t too surprising that PwC found when quantitative DEI metrics were disclosed, the disclosures primarily included the total number of employees and gender percentages.

With increased focus on employees, and as stakeholders look for HCM metrics, it can be helpful when you find a company that’s posted a stand-alone human capital management report, which often include much more detailed HCM disclosures. Over a year ago, I blogged on our “Proxy Season Blog” about Bank of America’s first human capital management report and just last week, Verizon released its first human capital management report. To each company’s credit, they include fairly extensive HCM disclosure in their 10-K but the HCM reports go further and include charts and visuals beyond what you’d commonly find in a 10-K.

Verizon’s report includes a deep dive with data about the makeup of its global workforce, and among other things, covers topics  like initiatives to attract and develop employees, pay equity, how it measures progress and actions it took in 2020 in response to COVID-19. Verizon’s deep dive into workforce data is one of the more detailed examples I’ve come across and it begins on page 35 – it includes gender and racial/ethnic diversity data globally and by business segment. Within each of those areas it shows the data across Verizon pay bands.

In terms of HCM disclosures included in SEC filings, a recent Stanford Closer Look article summarized its early look at HCM 10-K disclosures and it again points to why those looking for metrics might be better off looking elsewhere.

We find that while some companies are transparent in explaining the philosophy, design, and focus of their HCM, most disclosure is boilerplate. Companies infrequently provide quantitative metrics. One major focus of early HCM disclosure is to describe diversity efforts. Another is to highlight safety records. Few provide data to shed light on the strategic aspects of HCM: talent recruitment, development, retention, and incentive systems. As such, new HCM disclosure appears to contribute to the length but not the informativeness of 10-K disclosures.

Equilar has been tracking HCM disclosures in SEC filings and found the median character count has increased more than four times over the last year. Equilar’s most recent blog entry includes examples with varying levels of disclosure, some including data about age diversity by showing a breakdown of workforce across age brackets.

Internal Investigations: How-to Guide

Last year, John blogged about SEC press release announcing a $114 million whistleblower award. In that press release, the SEC said the individual repeatedly reported their concerns internally, and then, “despite personal and professional hardships,” the whistleblower alerted the SEC and provided ongoing assistance. When companies receive an internal alert of possible wrongdoing, if the company determines the situation warrants an internal investigation, lots of considerations factor into how to conduct the investigation. To help, King & Spalding issued a General Counsel’s Decision Tree for Internal Investigations.

Should an internal investigation arise, the decision tree provides a reference with recommended practices and reminds companies that it should be used in conjunction with their internal policies. Among other things, the memo addresses considerations relating to data preservation concerns, structure of the investigation team, fact gathering and memorializing investigation findings. One section of the memo that in-house members may find particularly helpful is a chart outlining various internal and external constituents and their interest in the investigation – it can serve as a starting point for a checklist of who needs to be informed when.

More on “Proxy Season Blog”

We continue to post new items on our blog – “Proxy Season Blog” – for members.  Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply entering their email address on the left side of that blog.  Here are some of the latest entries:

– Annual Meeting Season: Don’t Forget Our Checklists!

– Climate Change Governance: Director Opposition is Here

– Vanguard’s ’21 Voting Policies: More Color on “E&S”

– Say-on-Climate: Proxy Advisor Policies

– ISS Updates “Policies & Procedures” FAQs!

– Lynn Jokela

May 6, 2021

Board Cyber Risk Oversight: Revisit an “Everyone” or “Cyber-Expert” Approach Regularly

One skill that gets mentioned as an area of improvement for boards relates to IT or cyber expertise.  Perceived shortcomings in any board risk oversight responsibility can often come with consequences – in connection with losses from Greensill Capital and Archegos, the recent resignation of the risk committee chair of Credit Suisse is one example. A recent Bloomberg article discusses board oversight of cyber risk and notes some boards have been adding “cyber experts” while others say boards need cyber literacy.

In terms of approach for providing cyber risk oversight, each board will decide what’s appropriate given the company’s particular facts and circumstances. When it comes to board cyber literacy, boards frequently rely on management to help the board stay up to date about cyber risks, while the article said some boards are turning to cyber consultants for help. The article includes a reminder from the head of Accenture Security that cyber literacy is a two-way street and management’s role shouldn’t be overlooked:

Boosting cyber literacy isn’t just about directors learning the language of security but ensuring that chief information security officers can explain their work. ‘We have to ensure the CISO can communicate effectively at the board level, not in bits and bytes.’

A 2019 report from University of California, Berkeley and Booz Allen Hamilton based on interviews with directors about beliefs, practices and aspirations relating to cybersecurity oversight recognizes the tension around the need for board cyber expertise.  The report suggests boards re-assess decisions relating to cybersecurity oversight on a regular basis to take account of changes in internal and external risks.  At the time of the study, a majority of directors interviewed leaned toward distributed cyber expertise among board members. The report provides these considerations for boards that might be leaning toward an “everyone” or a “cyber-expert” approach:

Leans “Everyone”

– Ensure adequate training and education is defined, used, and kept up-to-date

– Engage external third-party expertise for specialized knowledge, and most importantly to prevent group-think traps

– Amplify accountability for cyber oversight in subset groups (likely committees)

Leans “Cyber-Expert”

– Seek out specific board members who offer deep specialized knowledge of cyber (e.g., crisis management, technology, and threat landscape)

– Prioritize full board discussion of cyber oversight over committee delegation

– Engage external subject-matter experts to test and enhance internal expertise

Dr. Jessica Wachter Named SEC Chief Economist and Director of DERA

Earlier this week, the SEC announced that Dr. Jessica Wachter has been appointed as the agency’s Chief Economist and Director of the Division of Economic and Risk Analysis (DERA).  Since 2003, Dr. Wachter has been a professor at the Wharton School and holds the Dr. Bruce I. Jacobs Chair of Quantitative Finance and is a Research Associate with the National Bureau of Economic Research.  Dr. Wachter is recognized as one of the leading academic researchers on financial markets. In this role, Dr. Wachter will lead DERA as it provides economic analysis to support decision-making at the SEC.

Audit Committee Resource: CAQ’s External Auditor Assessment Guide

For those looking for a resource to help audit committees evaluate the company’s external auditor, the Center for Audit Quality recently released an updated version of its external auditor assessment tool.  Audit committees of course meet regularly with the company’s external auditor and engage in informal assessment of the auditor throughout the year.  But, when it’s time for the audit committee to conduct a more formal annual assessment, CAQ’s assessment tool can be used as a guide.

For audit committee’s looking for input about factors to consider when assessing the auditor, the guide offers a good starting point. CAQ’s assessment tool includes sample questions to help the committee assess the external auditor and then also discuss as part of its annual evaluation of the auditor. Questions cover topics relating to, among other things, the engagement team skill and responsiveness, engagement team succession, workload, audit plan and risks, scope and cost considerations, audit quality, interaction with the external auditor and auditor independence, objectivity and professional skepticism.

When assessing the external auditor, CAQ suggests the audit committee also seek input from management. To help with this process, the assessment tool includes a sample rating form for members of management to complete. The rating form solicits feedback to a variety of factors relating to the external auditor’s quality of service provided, sufficiency of resources, communication, objectivity, etc.

– Lynn Jokela

May 5, 2021

With Time Slipping Away, Investor Advocates Urge Congress to Act on 14a-8 Amendments

Back at the end of March, Liz blogged about introduction of a resolution calling for repeal of last year’s Rule 14a-8 amendments under the Congressional Review Act (CRA). Although the resolution has been introduced, a Congressional webpage for the resolution shows the Senate Committee on Banking, Housing & Urban Affairs hasn’t taken any action on the bill since it was introduced.

The lack of action on the resolution may be partially what led about 200 investor advocates to reportedly write to every member of Congress urging support of the CRA resolution to nullify the shareholder proposal rule amendments. It’s unclear whether this investor campaign will have any impact and move the resolution forward.  Among those that want the amendments nullified there’s a sense of urgency because time is limited for the Senate to act without the threat of a filibuster.

The CRA’s “fast track” procedures for the Senate to act and approve the resolution nullifying the amendments can be complicated but the folks at the GW Regulatory Studies Center provided some insight to help explain:

There is a deadline as far as the Senate still having access to its “fast-track” authority (which makes the resolution filibuster proof). This is referred to as the Senate action period.

As of yesterday, there were about 10 Senate session days left until that deadline. The calculation is somewhat bothersome, but it’s essentially the 75th day of session in the Senate for this Congress. After this date, the Senate could theoretically still vote on it, but it would be subject to all of the usual delay tactics (the filibuster) and would be unlikely to get through.

10-K/A: Covid-19 Factors into 2020 Stats

A recent Audit Analytics blog reviews reasons behind companies filing amended Form 10-Ks last year.  When compared to 2019, 2020 saw an uptick in amended 10-Ks – up 34% and Audit Analytics attributes this increase to the impact of the Covid-19 pandemic on regulatory filings and annual meeting schedules. In fact, the pandemic factored into the frequency of the top 2 reasons for filing 10-K/As in 2020.

As it has been for the last 7 years, the most common reason for filing a 10-K/A was a need to include Part III information due to an inability of companies to get their definitive proxy materials on file within 120 days of the fiscal year end. In 2020, almost 9% of these filings specifically referenced Covid-19 as the reason for their delayed proxy filing or postponed annual meeting. The next most common reason for filing a 10-K/A was to include disclosure related to the 45-day filing extension first granted by the SEC back in March of last year in response to the pandemic.  Here are the top 5 reasons companies filed 10-K/As last year:

– Part III information – 48.2%

– Covid-19 extension – 8.9%

– Exhibits & signatures – 7.9%

– Auditor’s Report – 6.7%

– Subsidiary financial statements – 5.6%

Transcript: “The Top Compensation Consultants Speak”

We’ve posted the transcript for our recent webcast: “The Top Compensation Consultants Speak.” Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners shared their thoughts on:

– Key Issues & Considerations for Compensation Committees Now

– Human Capital Management Topics Compensation Committees are Discussing Now

– Setting Goals Under Uncertain Circumstances

– Balancing Internal Needs with External Pressures

– Using a ‘Resiliency Scorecard’ During COVID-19 & Beyond

– Early Proxy Season Feedback

– Lynn Jokela

May 4, 2021

Stock Gifts: Tighten the Reporting Period?

A forthcoming academic article in the Duke Law Journal asserts that well-timed gifts of stock by insiders continue to be widespread – a phenomenon John blogged about a few years ago. The data continues to suggest that this could result from a combination of gifting based on MNPI as well as backdating.

What’s the big deal? Well, although charitable organizations benefit greatly from insider stock gifts, the logic goes that when the donations are made just before disclosure that causes a drop in stock price, insiders personally benefit from “inflated” charitable tax deductions and reputational accolades while avoiding the loss in value. Similar to conventional insider trading, it creates an uneven playing field and undermines public trust in the market.

The study also suggests that large investors engage in this “insider giving.” It doesn’t provide a clear definition for this group – although the authors discuss controlling shareholders, venture capitalists and activist hedge funds. Here’s an excerpt:

We find that large shareholders’ gifts are suspiciously well timed. Stock prices rise abnormally about 6% during the one-year period before the gift date and they fall abnormally by about 4% during the one year after the gift date, meaning that large shareholders tend to find the perfect day on which to give.

These results are almost certainly not the result of luck. To the contrary, our research lets us identify information leakage as the most important cause of these results: executives seem to provide large shareholders with material non-public information, who then use it to time gifts.

The study’s authors believe that problematic “insider giving” thrives due to lax reporting & enforcement. To curb potential misdeeds, they say that the SEC should make gifts subject to the same 2-day reporting requirement that applies to purchases & sales. They suggest a couple of potential alternatives such as potential exceptions for “small” gifts or applying the 2-day reporting requirement to gifts made to charities controlled by the donor or that otherwise raise red flags and then a 5-day window for most other gifts.

This would definitely make things harder for those of us in compliance. An inadvertent miss of a short reporting window can be embarrassing and draw unwanted attention – right when you’re also working to make the filing. The authors also contend that stricter reporting requirements wouldn’t chill legitimate stock gifts, but insiders and charities might feel differently.

Our “Insider Trading Policies Handbook” urges caution when considering whether an insider can gift shares at a time when they possess MNPI. We recommend dealing expressly with that in your policy so that you don’t end up having to make difficult case-by-case decisions about whether gifts are permitted. If transactions are collapsed in a way that makes it look like an insider has benefited, at the very least the company could suffer negative publicity. And studies like this could draw even more attention to the issue.

10b5-1 Plan Primer – With Design Tips!

John blogged last week about Rule 10b5-1 plans – the House of Representatives passed proposed legislation calling for the SEC to study potential revisions to the rule. With calls for more transparency on 10b5-1 plans, a new WilmerHale memo (pg. 24) provides a primer on the technical requirements for 10b5-1 plans, then includes a couple of plan design suggestions for directors and officers who might consider entering into a plan:

– Keep selling formulas simple, this can help minimize the need for clarification or changes later that could constitute amendments

– Keep investor relations considerations in mind that could arise with frequent plan sales or from use of a plan that could result in a single large sale that’s triggered by the company hitting a significant milestone or from market volatility that’s unrelated to company news

The process for putting a 10b5-1 plan in place varies from company to company, including whether plans require review and approval, whether insiders are required to use 10b5-1 trading plans when conducting transactions involving company securities, length of cooling off periods, etc. The report includes survey data (co-sponsored by Deloitte Consulting and NASPP) about these and other 10b5-1 trading plan practices, here are some of the results:

  • 98% require plans to be reviewed (or reviewed and approved)
  • 10% require insiders to use plans
  • 79% require a cooling-off period between plan adoption and commencement of trading – the most common waiting period being 1 – 3 months (45%) followed by the next open window period/fiscal quarter (32%)

For more on Rule 10b5-1 Plans, check out our “Rule 10b5-1 Trading Plans Handbook” – it covers the basics of the rule and includes common Q&As that crop up every so often.  The handbook is available online for free to members of, you’ll find a list of all of our handbooks by clicking on “Handbooks” in the blue bar at the top of the home page.

Our May E-Minders is Posted

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

– Lynn Jokela

May 3, 2021

NYSE Wants to Shed Responsibility for Proxy Distribution Fee Schedule

Proxy distribution costs can be a pretty big line-item for corporate secretary departments (or sometimes treasury departments), and a recent rule proposal that could affect them has been flying under the radar. For anyone who hasn’t been tasked with fielding questions about invoices relating to proxy distribution, count your blessings. The invoices include a myriad of charges with the proxy distribution service provider including a key to help explain the fees, with some being fee maximums established by the NYSE.

Last December, in a rulemaking proposal submitted to the SEC, NYSE indicated that it wants out of the business of setting the proxy distribution fee schedule and instead wants FINRA to take on that responsibility.

The portion of proxy distribution fees established by the NYSE haven’t changed since 2013.  Still, questions about the invoices seem to arise nearly every year and among other things, distribution related costs like postage rates, mail class delivery, the number of packages, not to mention the weight of your annual meeting materials can change. Although the maximum fees established by the NYSE have remained stable, depending on what happens with the NYSE’s proposal, the fees established by NYSE could be on the verge of changing too.

As it turns out, FINRA doesn’t want the responsibility either.  The SEC has instituted proceedings to determine whether to approve or disapprove the NYSE proposal and for now responsibility still sits with the NYSE.  Various organizations have submitted comment letters on the proposed rulemaking, with some noting how this proposed change could impact issuers.  Here are a few notable letters:

The comment period on the proposed rulemaking closed last week, although for anyone wanting to weigh in on this hot potato, the SEC typically welcomes comments even late in the process.

Tweaks to NYSE Related Party Transaction Rule

A few weeks ago, I blogged about amendments the NYSE Listed Company Manual relating to shareholder approval requirements.  While that blog focused on amendments relating to equity issuances in private placement transactions, the amendments also tweaked NYSE Listed Company Manual Section 314.00, which requires related party transactions to be approved by an independent board committee. The tweaks to Section 314.00 are important to note before they completely slip under the radar.

Over the years, many have interpreted the NYSE Rule about related parties as being consistent with the disclosure requirement in Reg S-K Item 404. As amended, NYSE Section 314.00 clarifies that for purposes of this rule, the term “related party transaction” refers to transactions required to be disclosed pursuant to Item 404 – but without regard to the transaction value threshold of that provision. The amended rule also requires “prior” review of related party transactions to make sure they’re not inconsistent with interests of the company and its shareholders.

So does the removal of the $120,000 threshold from this rule mean that NYSE-listed companies need to have their audit committee (or whichever independent body of the board that reviews related party transactions) review and approve nearly all potential related party transaction regardless of dollar value? Maybe not. This Davis Polk memo explains how you might be able to get comfortable without it:

The revisions raise the question of whether the audit committee should review and approve even de minimis transactions involving directors, officers and other related parties. Because Item 404 specifies that the related party must have a “material interest” in the transaction—in addition to the transaction value threshold of $120,000—we believe companies may conclude that for many small transactions, there is no such material interest and so prior audit committee approval is not necessary. Depending on the relevant industry and a company’s ordinary business operations, companies may wish to review the types of transactions they regularly engage in with related parties in order to ensure continuing compliance with NYSE’s rules.

For companies that take a more conservative approach to pre-approval, it’s probably worth revisiting your related party transaction policy to consider whether to expand the list of pre-approved transactions. If some common arrangements are omitted only because of their low dollar amount, you would want to consider adding those.

Tomorrow’s Webcast: “The Leveraged ESOP as an Exit Alternative”

Tune in tomorrow for the webcast – “The Leveraged ESOP as an Exit Alternative” – to hear Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman and Steve Karzmer of Calfee, Halter & Griswold discuss benefits and structuring, financing and operational issues to take into account with leveraged ESOP transactions.

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.

No registration is necessary – and there is no cost – for this webcast for members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at – or call us at 800.737.1271.

– Lynn Jokela