Last week, the DOJ announced a new cyber-fraud initiative, and if your company is a government contractor, you’re on the front line. Here’s an excerpt from the DOJ’s announcement:
The Civil Cyber-Fraud Initiative will utilize the False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients. The False Claims Act is the government’s primary civil tool to redress false claims for federal funds and property involving government programs and operations. The act includes a unique whistleblower provision, which allows private parties to assist the government in identifying and pursing fraudulent conduct and to share in any recovery and protects whistleblowers who bring these violations and failures from retaliation.
The initiative will hold accountable entities or individuals that put U.S. information or systems at risk by knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, or knowingly violating obligations to monitor and report cybersecurity incidents and breaches.
The DOJ says that it will work closely with other federal agencies, subject matter experts and law enforcement partners throughout the government. This Miller & Chevalier memo on the Initiative notes that it follows on the heels of President Biden’s executive order on cybersecurity, and also discusses a number of recent cybersecurity cases where the government has used the formidable False Claims Act as the basis for its claims.
For me, the one unbending rule of corporate board and committee meetings has always been that the minutes should be the definitive record of the actions taken at them, so I have been dismayed to learn that some companies have opted to record video board meetings held during the pandemic. This Bryan Cave blog discusses the privilege, consent and privacy issues involved in recording board and other corporate meetings. This excerpt reviews the privilege issues that can arise when a company records its board meetings:
Recorded video conferences could be subject to discovery in the litigation context. Board discussions are not inherently privileged, and thus board members who become witnesses may, under some circumstances, be asked about what they discussed at a meeting. But a recording of the meeting is likely to provide a fuller account than participants’ memories or written minutes, and so may yield more powerful evidence. Further, to the extent all or part of a meeting is subject to the attorney-client privilege or other confidentiality provision, the existence of a recording that can be distributed raises the risk of waiver through sharing of the document with parties outside the scope of the privilege.
I don’t care how well-functioning your board is – I guarantee you that a plaintiff’s lawyer would consider an unedited recording of an entire board meeting to be an absolute gold mine. So, if you’re recording these meetings, expect those recordings to be included in a books & records request from a plaintiff’s lawyer on a fishing expedition for derivative claims.
On the heels of last week’s SEC proposal for enhanced proxy voting disclosure, yesterday BlackRock announced that it will give institutional index investors, such as pensions & endowments, the option to vote their own holdings – rather than having the asset manager cast votes on their behalf. This change will begin on January 1st and will apply to about 40% of BlackRock’s managed assets – a big expansion from the limited number of existing BlackRock clients who’ve been able to do this to-date.
BlackRock also said that this is just the beginning of a bigger initiative. Tulane Law prof Ann Lipton pointed out on Twitter that this could even be a step toward pass-through voting. Here are a couple of excerpts from the announcement:
Beginning in 2022, BlackRock is taking the first in a series of steps to expand the opportunity for clients to participate in proxy voting decisions where legally and operationally viable. To do this, BlackRock has been developing new technology and working with industry partners over the past several years to enable a significant expansion in proxy voting choices for more clients.
And:
BlackRock is committed to exploring all options to expand proxy voting choice to even more investors, including those invested in ETFs, index mutual funds and other products. This initiative will require the cooperation of additional partners across the investment and proxy voting ecosystem. In certain instances, it will also require regulatory and operational system change.
The asset manager says that it expects many clients will continue to want BlackRock Investment Stewardship to vote on their behalf, but it is making this option available because some clients want greater participation in proxy voting. Here are the ways that eligible investors will now be able to vote:
– Use their own proxy voting policies and transmit their votes using their own voting infrastructure.
– Choose from a menu of third-party proxy voting policies (e.g., sustainability policies, etc.) and have votes cast using BlackRock’s voting infrastructure.
– Vote directly on select resolutions or select companies using BlackRock’s voting infrastructure (This option is available only to clients in institutional separate accounts.)
– Continue to have BlackRock Investment Stewardship cast proxy votes using BlackRock’s voting policies and using its voting infrastructure.
– Liz Dunshee
Programming Note: Our office is closed on Monday, October 11th and we aren’t blogging that day. We’ll be back on Tuesday, October 12th.
BlackRock’s announcement says that its change to voting options is due to client demand. That would make sense, given the investment world’s growing interest in having their voice heard on ESG matters. The announcement may also ease the unease that some have expressed about the level of influence that can currently be exercised by a handful of behemoth asset managers.
In hindsight, though, some people who wished that BlackRock had less power over votes might end up regretting this “wish come true.” It is very early to predict exactly how this policy will play out in practice. But it seems that it may make it even more difficult for companies to track & predict votes during proxy season. Companies will now need to engage not just with BlackRock, but will also need to understand whether the index investor whose funds BlackRock manages will be following their own unique voting policy, following a specialty voting policy, continuing to use BlackRock Investment Stewardship, or casting unique votes only at particular companies or on particular resolutions. That’s a lot to figure out and track each year! Aon’s Karla Bos sent me this note:
Without attaching any judgment here, it certainly appears one logical result of extending more say in voting to institutional clients will be that it becomes more challenging for companies to know / reach / influence the voting shareholders and predict voting behavior across BlackRock-held shares. And that has broader implications given the explosion in ESG focus and voting support—although it is difficult for me to guess how that will manifest, e.g., will the voting institutions take a more or less stringent or consistent approach than BIS?
We also don’t know yet whether other big asset managers will follow BlackRock’s lead and offer something similar (Vanguard had already transitioned some of its voting power back in 2019). Even if they don’t, it’s possible that more investors who are interested in voting alternatives will migrate to BlackRock because of this “competitive advantage.” At any rate, on top of the changing number & nature of retail investors, changes to shareholder proposal rules, evolving ESG expectations, and the question mark on proxy advisor rules, 2022 is already shaping up to be a challenging proxy season. You might want to line up your proxy solicitor now, in case they get booked up.
Just in time for our “Proxy Disclosure & Executive Compensation Conferences” next week – where our agenda includes a panel covering “clawbacks” issues – the SEC issued this Sunshine Notice about an open meeting next Wednesday, October 13th. The purpose of the meeting is to consider whether to re-open the comment period for the clawback proposal that the Commission issued back in 2015, which would – at a very high level – direct the stock exchanges to require listed companies to implement policies to recover incentive-based pay in the event of an accounting restatement.
This doesn’t come as a huge surprise, because consideration of a re-proposal has been an item on the SEC’s “Reg Flex Agenda” for the past two years. Consistent with the priorities that he identified in that Agenda, SEC Chair Gary Gensler also has been remarking at recent conferences, such as the CII Fall Conference, that he wants to knock out remaining Dodd-Frank rulemaking in short order.
If & when clawback rules are finalized, that would satisfy the requirement in Section 954 of the Dodd-Frank Act. As I blogged a couple weeks ago for members of CompensationStandards.com, the SEC has proposed “say-on-pay” voting disclosure requirements that would take care of the rulemaking mandates under Section 951 of that Act. The list of outstanding Dodd-Frank rulemaking requirements rightfully continues to shrink.
This Stinson blog highlights things to think about for the upcoming proxy season. Here’s an excerpt discussing a few things to watch for in D&O questionnaires:
NYSE listed issuers who have detailed questions in their D&O questionnaires which reflect the current version of Item 404 of Regulation S-K should not need to update their D&O questionnaires. It may be worthwhile for NYSE listed issuers to double check their audit committee charters to make sure the charters reflect other changes made by the rule amendments.
As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition or “grandfather” rule. While likely few compensation arrangements are still grandfathered, this should be confirmed before eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members or references to §162(m) in compensation committee charters.
Nasdaq issuers may wish to begin modifying their D&O questionnaires to prepare for disclosures for the Board Diversity Matrix which is discussed below.
Other reminders from the blog include double-checking whether you’re due for a say-on-pay frequency vote, complying with the new MD&A rules (listen to our recent webcast), complying with modernized property disclosure if you’re a mining registrant, using Inline XBRL, and potentially using the SEC’s amended shareholder proposal thresholds to evaluate whether a proposal must be included in the company’s proxy statement (part of the transition rule is still in effect).
As we look ahead to the upcoming annual reporting season, don’t forget about new Item 9C of Form 10-K, which was added under the “Holding Foreign Companies Accountable Act.” The Stinson blog points out that the HFCAA will affect your Form 10-K even if you’re not directly impacted by the law:
The HFCA Act became law on December 18, 2020. Among other things the HFCA Act requires the SEC to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report where that registered public accounting firm has a branch or office that:
– Is located in a foreign jurisdiction; and
– The PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.
We do not expect the HFCAA to affect the issuers we work with. We do note however that the SEC interim amendments requires companies subject to the interim rules to make certain disclosures in new Item 9C to Form 10-K captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.” As such issuers should include the Item and caption in their Form 10-K and indicate the item is not applicable where appropriate.
We’ve blogged about the HFCAA a few times – including back in March, when the SEC adopted interim final rules, and in late summer, when SEC Chair Gary Gensler talked about additional disclosure requirements for China-based companies.
This Gibson Dunn blog reports that the PCAOB recently adopted a final rule to implement the Holding Foreign Companies Accountable Act and govern PCAOB determinations about oversight of registered public accounting firms outside of the US. The rule requires SEC approval before it goes into effect. In testimony before the House Committee on Financial Services earlier this week, SEC Chair Gary Gensler said that he hopes the Commission can collect public comments and finalize it before year-end.
The blog explains what the HFCAA and the PCAOB rule require. It also notes that if another bill that was passed by the Senate this summer gets signed into law, it would reduce the time period for delisting foreign companies under the HFCAA to two consecutive years, instead of three years. Here are the 3 main takeaways:
1. China and Hong Kong – The Two Jurisdictions Where Registrants Currently Run the Risk of Delisting.
2. The PCAOB Affirmed That Its Analysis Applies to Distinct Legal Entities, Not Networks.
3. Commission-Identified Issuers Are Subject to Reporting and Disclosure Requirements.
See the full blog for details – as well as the memos in our “Audit Documentation” Practice Area. The SEC also just approved a Nasdaq rule change to adopt additional listing criteria for companies in jurisdictions without PCAOB inspection.
IR Magazine & Broadridge recently published survey results from 315 investor relations professionals about their views on retail investors. Here are 5 key findings:
1. Nearly three in 10 companies have seen an increase in retail investment in the past 12 months. More than a quarter have seen an increase from three years ago.
2. While 55 percent of IROs are happy with their current level of retail investment, just over a quarter would like to see a higher proportion of shares held by retail investors. But nearly half of IROs in companies with more than 20 percent retail investment would like to see such retail investors hold fewer shares.
3. Press releases and IR websites are the most effective ways for IROs to communicate with retail investors. A strong ESG story can promote retail shareholder loyalty.
4. The adoption of virtual AGMs has resulted in greater retail investor attendance.
5. The biggest challenge retail investors bring is a perceived lack of knowledge, compared with institutional investors. Communications is the biggest challenge for small caps.
A recent Squarewell Partners report (download required) of the 100 largest US & European companies by market cap confirms that things are getting back to “normal” in some ways. For example, 75% of big companies have increased their dividend to be paid out of 2020 earnings, compared to 2019. That includes nearly all companies within the Health Care & Materials sectors (in the Energy, Financials & Utilities sectors, however, nearly a third of companies have decreased their dividends, and buybacks have not yet returned to pre-pandemic levels).
Yet, when it comes to proxy season, “normal” might be less company-friendly than the “Before Times.” Support for shareholder proposals is up and support for management proposals and director elections is down. Here are some of the key takeaways:
– Half of the companies that held their AGM between 1 January 2021 and 30 June 2021 received at least one ESG-related shareholder proposal. Most companies targeted were in the US.
– Governance-related proposals made up over half of all ESG-related shareholder proposals filed, followed by social- and environmental-related proposals. Overall, 14 proposals were approved by shareholders, with environmental-related shareholder proposals receiving the highest average support at 44%.
– 31 of the 88 companies that held their AGM during the period under review saw at least one agenda item receiving 20% or more opposition, namely to a pay-related and/or director election proposal. More than half of the most contested votes took place at US companies.
– 38 companies had at least one director with 10% or more opposition, with several of these directors being held accountable by investors for overseeing pay/governance failures as committee members. For example, the chair of Rio Tinto’s sustainability committee received only 74% support due to an ongoing ESG controversy.
– 27 companies saw at least 10% opposition to their say-on-pay/remuneration report proposals, with the most common reason for opposition being a misalignment between pay and performance. Eight companies received at least 10% opposition to their remuneration policy proposals.
– ISS and Glass Lewis had recommended against less than half of the proposals where significant investor opposition was registered on director elections and/or pay-related proposals, confirming a trend that investors are applying their own guidelines which are stricter than the policies adopted by the two leading proxy advisors.
The bright spot for companies is that, despite the high-profile Exxon outcome, only nine companies were the subject of traditional activist campaigns this past year. Also, this report just covers very large companies. Smaller companies may not be facing these same pressures on shareholder proposals, but they do have their own issues.