Monthly Archives: October 2021

October 29, 2021

Auditor Independence: Stay Vigilant

The SEC’s Acting Chief Accountant, Paul Munter, issued a statement earlier this week. I might be reading too much into it, but when public statements are issued out of the blue, I take it to mean that there’s some urgency and importance to the issue, and the SEC might be paying extra attention to it.

The purpose of this particular statement is to remind auditors, managers, and audit committees of the importance of auditor independence – and the need to continually monitor independence in light of business activities & relationships. Here’s an excerpt:

We continue to encourage audit committees to consider the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that potentially affect auditor independence. This is particularly relevant in the current environment as companies seek to access public markets through new and innovative transactions, and audit firms continue to expand business relationships and non-audit services.

Management, the audit committee and the independent auditor should proactively seek to inform themselves of any potential impact to auditor independence, in fact and appearance, as companies negotiate potential transactions with third parties. This requires all parties to potential transactions to understand the filings that could be required by such transactions, the existing auditors’ relationship with counterparties, and the potential impact of transactions and the auditor’s relationships with the counterparty on the existing auditor’s ability to continue to comply with the Commission’s auditor independence rule applicable to such filings. This proactive monitoring requires management, the audit committee, and the independent auditor to each consider the potential effects of the auditor’s existing business and service relationships with other companies on the auditor’s ability to remain independent of the issuer if a contemplated transaction is consummated.

For example, it is important to understand what business relationships exist, including non-audit service relationships, between the audit firm and other entities that will, or in the future could, require an audit, become the existing audit entity’s affiliates, or result in other companies that have significant influence over the entity. Given the importance of independence as it relates to the audit of financial statements, these relationships and services and their implications to auditor independence should be carefully considered when management is negotiating the timing and substance of a transaction with third parties.

The statement also urges an understanding of the general standard of independence in Rule 2-01 of Reg S-X. This Cooley blog provides even more context and lays out the bottom line for companies:

It is important for companies to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should certainly be a recurring menu item on the audit committee’s plate.

Liz Dunshee

October 29, 2021

More on “PCAOB’s Inspection Observations: What Audit Committees Should Know”

Earlier this week, I blogged about the PCAOB’s summary of 2020 inspection findings. A member emailed to ask whether the results of PCAOB audits are made public – because deficiencies in auditor performance could be very relevant to an audit committee’s decision to retain the auditor for the next year.

The PCAOB does indeed post inspection reports – as well as disciplinary actions. However, there’s a big lag between when inspections occur and when reports are issued. Audit committee chairs have told the PCAOB that they’re concerned about that, according to Appendix B of this Center for Audit Quality memo (pg. 14) – which also provides questions that audit committees can ask auditors about their inspections.

In his statement from earlier this week, SEC Acting Chief Accountant Paul Munter noted that the PCAOB inspection program is a key component of ensuring audit quality, and that audit committees should always be focused on audit quality. In my experience, the Big Four and some other large accounting firms always present to the audit committee about inspection findings – but you can’t count on all firms to do that. Especially OUS firms. A lot of mid-sized foreign private issuers that have a primary listing on the NYSE or Nasdaq aren’t a good fit for the Big Four, and one reason their audit quality can suffer is that their audit committees aren’t able to reliably get inspection info from smaller OUS audit firms in advance of engagement decisions.

If an audit committee is unable to access detailed inspection findings, the sample questions from the CAQ memo and the PCAOB’s summary of findings can be a starting point for digging for information.

Liz Dunshee

October 29, 2021

SEC’s John Nester to Retire

The SEC announced yesterday that John Nester, formerly the Director of the Office of Public Affairs, is retiring from the agency at the end of this month after nearly 25 years of SEC service. Since April, John has been helping the Office of the Chief Operating Officer prepare the SEC and its Staff for success in a post-pandemic environment. As Public Affairs Director from 2006 until April 2021, John helped modernized the SEC’s external and internal communications, which doubled the agency’s web traffic!

Earlier in his SEC career, John was a member of the SEC’s investor education office, where he conceived and helped organize a national financial literacy campaign backed by state securities regulators and nearly three dozen government agencies, public service organizations, industry associations, and educational groups. John received many awards throughout his SEC tenure, including the Distinguished Service Award, which is the Commission’s highest honor. We would like to congratulate John on his career and his contributions to the SEC’s mission.

Liz Dunshee

October 28, 2021

Board Composition: New Directors Are More Diverse, But Turnover Still Rare

This WSJ article recaps findings from the annual Spencer Stuart Board Index and The Conference Board’s annual Corporate Board Practices analysis. The big takeaway from both surveys is that large US companies are adding directors from underrepresented racial & ethnic backgrounds. Here’s an excerpt from Spencer Stuart’s findings:

The new class of S&P 500 directors is the most diverse ever. Directors from historically underrepresented groups — including women and Black/African American, Asian, Hispanic/Latino/a, American Indian/Alaska native or multiracial men — account for 72% of all new directors, compared with 59% last year. Nearly half — 47% — of the 456 new independent director class are from historically underrepresented racial and ethnic groups, and 43% are women, including 18% female Black/African American, Asian, Hispanic/Latina, American Indian/Alaska native or multiracial directors.

But as the WSJ article points out, people who identify as white and/or male are far from getting squeezed out:

With the new arrivals, a little over three-quarters of S&P 500 board members were white and 70% were men, according to Spencer Stuart.

The Conference Board’s findings show that the demographics of smaller companies’ boards are slower to change. Yet, companies of all sizes are adding more disclosure to their proxy statements about board composition, which makes it easier to track data. 59% of the S&P 500 now disclose demographics info (compared to 24% last year), and 27% of the Russell 3000 (compared to 8% last year).

There’s mixed data on director tenure:

– According to Spencer Stuart, the average tenure of S&P 500 directors is 7.7 years, which is a year less on average than in 2011.

– According to The Conference Board, the longest average sitting director tenure was recorded in the Russell 3000, at 34.1 years; in comparison, the longest average tenure found in the S&P 500 was 22.4. (Median tenure is much shorter and more aligned with Spencer Stuart’s findings.)

So, for anyone who wants to join a board or change director demographics, it appears that the lack of turnover is one of the biggest ongoing barriers. Spencer Stuart continues to advocate for board refreshment based on meaningful director evaluations as the way to get a variety of valuable backgrounds, experiences & skills – versus relying on a mandatory retirement age or tenure policy, or expanding the size of the board. This Russell Reynolds blog gives additional thoughts on how to improve the board refreshment process.

Similarly, The Conference Board recommends the boards prioritize diversity by taking these steps:

– Revisit director performance assessment processes to ensure they promote skill renewal and the injection of new ideas and perspectives. Directors should appreciate the importance of maintaining diversity of tenures across the board and commit to a healthy rate of refreshment.

– Develop a multi-year board succession plan where the need for strategic skills and expertise is evaluated through the lens of diversity and inclusion. The long-term plan should include developing relationships with diverse junior executives who may one day become attractive director candidates for boards of other companies. Rather than an episodic exercise, director succession should align with an ongoing board development program and be rigorously informed by an emphasis on diversity.

– Investigate best practices on the integration of DEI metrics into senior executives’ incentive plans. Recent studies illustrate how more and more companies, including large ones, have started to set executive targets meant to raise minority representation in managerial positions. Many companies that are still lagging in the promotion of diversity, equity, and inclusion have much to learn from peer experiences. Moreover, setting DEI objectives can help to develop a diverse pool of senior managers who could one day aspire to become board nominees. To support these endeavors, in July 2021, The Conference Board has introduced a new screening tool to its ESG Advantage Benchmarking Platform that allows access to granular information on the use of ESG-related metrics of performance across the Russell 3000 index.

– Consider adopting a Board Diversity Matrix disclosure model that complies with the guidelines recently published by the NASDAQ Listing Center. The information provided (whether in the proxy statement or the company’s corporate website) must be based on the self-identification of each member of the board of directors. For a US incorporated company, any director who chooses not to disclose a gender should be included under “Did Not Disclose Gender” and any director who chooses not to identify as any race or not to identify as LGBTQ+ should be included in the “Did Not Disclose Demographic Background” category. Following the first year of adoption of the matrix, to allow readers to appreciate the progress made, the guidelines establish that all companies must include in their disclosure the current year and immediately prior year diversity statistics.

– Some commentators have observed that the new California law, other similar new state laws, and the NASDAQ listing rule have missed the opportunity to extend the notion of board diversity to executives with disabilities. In a press release following the approval of the NASDAQ rule, in particular, Disability:IN (a global organization driving disability inclusion and equality in business) and the American Association of People with Disabilities (AAPD) expressed their deep disappointment with the SEC’s decision, which took place despite the vigorous lobbying campaigns by a wide group of stake-holders — including New York State Comptroller Thomas P. DiNapoli, the Leadership Council on Civil and Human Rights, the National LGBT Chamber of Commerce, the US Black Chamber and Women Impacting Public Policy.

Boards of directors committed to a more diverse and inclusive leadership development and board recruitment program can remedy this omission. They can learn from experiences such as the Valuable 500, a global disability network launched at the annual Davos gathering of business leaders hosted by the World Economic Forum in 2019: the organization recently announced having reached its target of 500 major companies that officially put disability inclusion on their boardroom agenda—including Microsoft, Unilever, Google, and Coca-Cola.

Liz Dunshee

October 28, 2021

ESG Oversight: Pros & Cons for Common Committee Assignments

This Clermont Partners blog points out that – although there’s a growing expectation among investors that boards will expressly oversee “ESG” risks & opportunities – some companies are facing gridlock & indecision about who gets the assignment.

The blog acknowledges that there’s no one way to approach this. It lays out pros & cons for assigning ESG oversight in full to one of the “regular” standing committees, creating a standalone ESG committee, or involving the full board. For example, here’s what it says about the “full board” approach – which involves dispersing the responsibility for parts of ESG oversight to various committees:

The Pros:

Full board oversight ensures that ESG management will receive a broad and diverse set of perspectives, experiences, and ideas. It also allows for the group to integrate ESG into all board committees in appropriate ways, rather than selecting just one committee to carry the load.

The Cons:

Especially for boards with upward of 10 members, there may simply be too many cooks in the kitchen. A variety of perspectives is helpful, until it begins to meaningfully slow down processes. Full board ownership also can lead to involvement and management that is too strategic and abstract and not rooted in measurable actions for the company.

Along similar lines, this NACD blog discusses how to create a “climate fluent” board. Panelists from a recent NACD summit urged companies to rely not just on one director who is an “expert” but to have a diverse board that’s willing to ask questions and learn. NACD says that “climate governance” means keeping sustainability front of mind during all decisions and is the most reliable way to set and achieve ESG goals.

Liz Dunshee

October 28, 2021

“Women Governance Trailblazers” Podcast: Latest Episode

I continue to team up with Courtney Kamlet of Vontier to interview women (and their supporters) in the corporate governance field about their career paths – and what they see on the horizon.

Our latest episode is a 19-minute interview with Rhonda Brauer about her path from the NYT’s corporate secretary department to running her own advisory firm, where she consults with both companies and investors. Rhonda shared about her experience working on ICCR’s “climate lobbying” campaign during the last proxy season – as well as her thoughts about how companies should approach evolving ESG issues.

Liz Dunshee

October 27, 2021

How BlackRock’s Client-Directed Voting Could Benefit Activists

A few short weeks ago, BlackRock announced a big change to how its institutional investor clients can vote. We’ve already written three follow-up blogs! We’ve covered:

What it could mean for companies

Why it may not be such a big deal

The impact on share lending

We’ll obviously be discussing this quite a bit in the months (and years?) to come. And now we can add a prediction from this Olshan memo – that institutional investors’ additional voting control could benefit activists. Here’s an excerpt:

We believe this could be a positive development for shareholder activists and potentially lead to a higher overall success rate in contested elections. In prior years, BlackRock has been particularly unsympathetic to activists in contested elections. According to Insightia, during the 2020/21 proxy season BlackRock supported at least one dissident nominee in only two of 14 election contests (including withdrawn and settled contests), or 14.3% of the time (down from 25% of the time in the 2019/20 season).

Allowing BlackRock’s institutional clients to depart from the firm’s historical tendency to vote in favor of management by giving these clients the ability to vote on their own could tilt voting results in favor of activists at shareholder meetings of companies where BlackRock is a significant shareholder. BlackRock also stated that it will explore extending these expanded voting choice capabilities to other clients in its ETF, index mutual funds and other products. This could give an even greater boost to the success rate of activists in election contests at companies where BlackRock is a shareholder.

Although the actual impact this initiative will have on voting results in contested elections is difficult to predict, it will likely influence strategic and capital deployment decisions both companies and activists will make when BlackRock is a shareholder. We envision companies and activists will widen their solicitation outreach to target not only the BlackRock Investment Stewardship team, but also individual institutional clients who could potentially take control of their proxy voting under the new voting framework. Proxy solicitation firms typically hired by both the company and activist in these campaigns will be tasked with ferreting out the identities of BlackRock clients as part of their solicitation efforts.

Liz Dunshee

October 27, 2021

Corporate Lawyers Analyze HBO’s “Succession”

I loved this Time interview with Sidley’s Holly Gregory and Kai Liekefett and Louis Pierro of Pierro, Connor & Strauss – discussing what is & isn’t accurate about Succession (they agree it’s pretty accurate overall). Yet another sign that corporate governance is becoming glamorous! Here’s an excerpt talking about something that everyone knows to be true but can’t say out loud when real clients are involved:

How do Kendall’s public allegations against his father impact Waystar’s proxy battle against Sandy and Stewy?

Liekefett: In the proxy fight world, we use a lot of terminology from political elections, and we are always concerned about the so-called ‘October Surprise.’ This is the ultimate October Surprise, and the nightmare of any defense attorney that something like this would happen shortly prior to the annual meeting. If that were to happen in my practice, we’d probably be dead in the water.

With that level of dysfunction — where the son of the CEO and chairman goes out and accuses his father of these kinds of wrongdoing — shareholders in 99 out of 100 situations would say, ‘O.K., enough said. I don’t even care who is right, father or son. The level of dysfunction here is so unbearable, that we need some adults in the boardroom. Anything is better than the status quo, we need some fresh faces here as directors.’ It would be the death knell of any proxy fight.

Liz Dunshee

October 27, 2021

Tomorrow’s Webcast: “Investment Stewardship – Understanding the ‘New Era’ of Expectations and Engagement”

Join us tomorrow for the webcast – “Investment Stewardship: Understanding the ‘New Era’ of Expectations and Engagement” – to hear T. Rowe Price’s Donna Anderson, Davis Polk’s Ning Chiu, BlackRock’s Michelle Edkins and Neuberger Berman’s Caitlin McSherry take stock of how “investment stewardship” has changed…and how it’s stayed the same. This program will help you understand how stewardship teams are operating these days – and what that means for your board, your engagements, and your voting outcomes.

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. If you need assistance, send us an email at – or call us at 800.737.1271.

Liz Dunshee

October 26, 2021

Executive Misconduct: 10-Step Crisis Response Plan

This Skadden memo (pg. 6) outlines 10 steps for boards to take right off the bat when responding to allegations of executive misconduct. It also identifies these 4 common mistakes to avoid:

− Delaying the start of an investigation, or failing to investigate additional or related reports.

− Failing to consider external optics, including potential conflicts, with respect to oversight of review and outside advisers.

− Inconsistent communications, external or internal, and delayed disclosures.

− Ignoring root causes and related remediation.

Don’t forget our checklist for members on “Board Oversight of Sexual Harassment Policies.

Liz Dunshee