If, as the IR Magazine/Broadridge survey suggests, people are worried about retail shareholders lacking the knowledge they need to make informed votes, and if people are also worried about index investors being conflicted due to their “universal ownership,” why not… find a way to give more power to your long-term shareholders whose portfolios are more concentrated in your company’s stock? This academic paper from GW Law prof Lawrence Cunningham proposes that important votes be subject to an additional condition: that they be approved by a majority of shares owned by “quality shareholders.”
The “MoQ” model would be “an additional separate vote of those with the longest holding periods and highest concentration.” Here’s more detail from the paper:
MoQ conditions should hold at least some appeal for all constituents—directors, shareholders judges and scholars. By adding a MoQ clause, a board would signal the corporate importance of long-term focused shareholders. Directors have long deployed many tools available to sculpt their shareholder base, from corporate communications to dividend policy. The MoQ adds a powerful new tool to the toolbox. The MoQs strategic and tactical appeal will vary with context, concerning the vote topic, board composition, shareholder makeup, and corporate financial condition.
Some shareholders might balk at first, indexers to guard their influence and transients to protect arbitrage options. But both cohorts still vote in the usual shareholder approvals, retaining power. And if the work of quality shareholders on the MoQ adds value, as fact patterns such as the Dell case suggest it likely would, all other shareholders benefit too. Individuals, still owning at least one-third of all public equity, and lately exerting considerable power, should also welcome the proposal.
On Thursday, the SEC posted notice & immediate effectiveness of an NYSE proposal to make Juneteenth National Independence Day an Exchange holiday. As Lynn blogged earlier this year, the exchanges were left to make their own determinations of operating status when Juneteenth was declared a Federal holiday. It was very short notice for them to do anything for the 2021 observance, but this WSJ article explains that SIFMA made a recommendation back in July that the exchanges would close on the holiday beginning in 2022.
Under this change to NYSE Rule 7.2, the Exchange will be closed on June 19th of each year going forward. If the holiday falls on a Saturday, the Exchange will be closed the preceding Friday – and if it falls on a Sunday, the Exchange will be closed the succeeding Monday. This rule change brings the number of NYSE market holidays to ten.
The rule is immediately effective – but may be temporarily suspended within 60 days if the Commission decides that it needs to take that action for the protection of investors or the public interest, and it would then institute proceedings to determine whether the proposal should be approved or disapproved. The rule doesn’t apply to other exchanges – they’ll have to propose their own amendments.
Juneteenth commemorates the day in 1865 when enslaved Black people in Galveston, Texas were finally informed they were free. It had been recognized by most states as a holiday before being declared a Federal holiday in June of this year. Check out this PracticalESG.com blog for ideas on how your company can observe the occasion next year.
To the jubilation of proxy statement drafters and voting tabulators everywhere, late last week, the SEC gave notice of an NYSE proposal to amend the definition of “votes cast” for items that require shareholder approval under NYSE Rule 312.07 (e.g., equity compensation plans, certain stock issuances). This White & Case memo explains (also see this Cooley blog):
The NYSE’s proposal would amend Section 312.07 of the NYSE Listed Company Manual to provide that a company must calculate “votes cast” on a proposal subject to that section “in accordance with its own governing documents and any applicable state law.”
Effectively, this means that the NYSE would change its current policy of requiring companies to count abstentions as votes “against” a proposal subject to NYSE rules – even when applicable state law would consider abstentions to have no effect on the outcome of the vote. The Exchange has observed that its current policy has historically caused confusion among listed companies, and the Exchange believes that this rule change will avoid any complications among issuers and shareholders when different voting standards are applied under the NYSE rule, a company’s governing documents, and/or applicable state laws. The rule change will also result in NYSE being consistent with Nasdaq in their treatment of abstentions.
The memo cautions that even if this rule change is approved, you’ll still have to carefully review disclosure about voting standards and ensure votes are properly tabulated in light of numerous standards under state law and companies’ governing documents.
There’s a 21-day comment period for the proposal, and the SEC will either approve or disapprove of the rule change within 45 days of publication in the Federal Register.
California Superior Court Judge Maureen Duffy-Lewis issued her ruling on September 28th on the parties’ respective motions for summary judgment in Crest v. Padilla (Cal. Super. Ct. Case No. 19STCV27561). In this case, the plaintiffs are seeking a judgment declaring that any and all expenditures of taxpayer funds to enforce and carry out the provisions of California’s female director quota law (SB 826) are illegal. SB 826 is codified at Sections 301.3 and 2115.5 of the California Corporations Code.
The basis for the plaintiffs’ claim is Art. I, Section 31 of the California Constitution which forbids the state from discriminating against, or granting preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.
Judge Duffy-Lewis denied both motions on the grounds that there are triable issues of material facts. While the fundamental question presented by the case appears to be legal, the ruling notes that each side provided with their moving papers “substantial amounts of extrinsic evidence” and that each side disputed facts presented by the other.
As this Cooley blog reports, Crest v. Padilla was the first complaint filed against California’s board gender diversity law, back in 2019. It’s framed as a “taxpayer suit.” There are several pending challenges to SB 826, as well as AB 979, which is the California statute that requires representation on boards from underrepresented communities.
On Friday, ISS announced the results of its 2021 benchmark policy survey. 159 investors responded – as well as 246 companies, directors, advisors and other company-related folks. Here are some of the highlights (see my blog on CompensationStandards.com for details about ESG metrics and other exec comp-related findings):
1. Racial Equity Audits: The survey evidences a philosophical split on these proposals. Almost half of investors chose “most companies would benefit” and almost half chose “it depends on company-specific factors.” About a tenth of investor respondents chose that most companies would not benefit from an independent racial equity audit. That percentage was higher for non-investor respondents. The case-by-case analysis approach was by far the most popular answer for non-investor respondents. Investors & companies said that involvement in controversies was a factor that could merit a recommendation in favor of a racial equity audit proposal.
2. Virtual-Only Meetings: When asked which practices would be considered problematic related to a company’s virtual-only meeting, the top three most concerning practices according to investor respondents were management unreasonably curating questions, the inability to ask live questions at the meeting, and question and answer opportunities not provided. Each of these practices were considered problematic by at least 90 percent of investors. The majority of investor respondents indicated that problematic practices related to virtual meetings could warrant votes against directors.
3. Pre-2015 Poor Governance Provisions: As time goes by, there’s less of a reason to distinguish between companies that went public prior to 2015 and were allowed to continue “poor governance provisions” – such as multi-class shares, supermajority voting requirements, and classified boards – and those that have gone public since then. A high percentage of investor respondents supported ISS revisiting this policy and considering issuing adverse director recommendations at any company that maintains these poor governance provisions. A little over half of non-investors answered the same way.
4. Recurring Adverse Director Recommendations: ISS’ current policy is to recommend against director nominees every year while certain poor governance provisions – such as supermajority vote requirements – are maintained. In some cases, the company has sought shareholder approval to eliminate supermajority vote requirements, but the proposal has failed (because it is hard to get the supermajority support). On this question, the most popular answer indicated by investors was for ISS to continue to recommend against directors every year there is not a management proposal on the ballot to reduce the supermajority vote requirement.
The most popular answer choice among non-investors was that a single try by the company to get shareholder support for a provision to remove the supermajority standard is enough. The second most popular choice among investor respondents was that if a company has tried and failed for several years to eliminate the supermajority vote requirement, ISS should stop recommending against directors. When asked how many years the company should offer the proposal, three years was the most popular answer choice.
5. SPACs & Proposals with Conditional Poor Governance Provisions: Current ISS policy is to evaluate SPAC transactions (business combination with a target company) on a case-by-case basis, with one of the main drivers being the market price relative to the redemption value. However, due to the mechanics of SPACs and considering SPAC investor voting practices over recent years, ISS is considering changing its policy to generally favor supporting the transaction. Responses on the survey showed that most institutional investors did not own SPACs. Among those who did, the response was split, but a preference not to change ISS’s policy received a slightly higher response.
ISS noted that it was seeing instances where shareholders were asked to approve a new governing charter with poor governance or structural features as a condition for a transaction to close. The proxy statements will commonly state that these closing conditions may be “waived” by the parties to the transaction if they are not approved by shareholders, but there is the risk that waiving the provisions would jeopardize the transaction. When asked what the best course of action was in this case, a strong majority of both investors and non-investors responded that ISS’s current policy was the right way forward: to support the transaction but make note of disapproval with any poor governance provisions.
Don’t miss our “Navigating ISS & Glass Lewis” panel coming up next Thursday, October 14th, at our virtual “Proxy Disclosure & Executive Compensation Conferences” – which runs October 13th – 15th. We’ll be discussing policy expectations, engagement do’s & don’ts, and more. You can still register – and anyone who has a paid subscription to any one of our sites gets a discount! Check out the agenda – 18 panels over 3 days.
As I blogged a few months ago on our Proxy Season Blog, this year ISS also conducted a separate policy survey about climate-related matters. The proxy advisor announced the results of that survey on Friday as well. 164 investors responded, along with 152 companies, advisors and affiliates. Here are the takeaways:
1. Climate-Related Board Accountability: A significant majority of all categories of respondents expect a company that is considered to be a strong contributor to climate change to be providing clear and detailed disclosure, such as according to the Task Force on Climate-related Financial Disclosures. A smaller majority of investor respondents support all of the criteria listed except “medium-term Scope 1 & 2 targets” and “starting to show a declining trend in absolute GHG emissions.”
Other than detailed disclosure, the other criteria that were popular among investors were demonstrating improvement in disclosure and performance, declaring a long-term ambition to be in line with Paris Agreement goals, disclosing a strategy and capital expenditure program in line with Paris goals, and showing that its corporate and trade association lobbying activities are in line with Paris goals.
The comments by investors were strongly supportive of companies’ setting goals in line with the more stringent 1.5 degrees of warming limit than the “well below 2 degrees” target that was in the Paris Agreement as it was adopted in 2016. Corporate responders also were strongly supportive of disclosure and demonstrating improvement, although support drops precipitously for ambition and targets in line with Paris goals.
2. Easier Expectations for Some Companies: Regarding the question about whether companies not deemed to be strongly contributing to climate change should be held to similar standards as those that do, one-third of investor respondents and a majority of non-profit respondents preferred to see minimum expectations the same regardless of company contribution to climate change, but the most common response by investors and corporate responders was that there should be some level of expectations but that they should be lower.
3. Say-on-Climate – Management Proposals: As ISS looks to further develop its framework for analyzing climate transition plans presented by companies, the dealbreakers indicated by investor respondents were similar to the responses about board climate accountability. The top five dealbreakers for investor respondents were a lack of the following: detailed disclosures (such as according to the TCFD framework), a long-term ambition to be aligned with Paris-type goals, a strategy and capital expenditure program, reporting on lobbying aligned with Paris goals, and a trend of improvement on climate-related disclosures and performance.
4. Climate Transition Plans – Vote Targeting: The highest numbers of both investors and non-investors who responded answered that, when a climate transition plan is on the ballot, they considered that the plan is the primary place to vote to express sentiment about the adequacy of climate risk mitigation but that escalation to votes against directors may be warranted in future years if there is multi-year dissatisfaction.
5. Say-on-Climate – Shareholder Proposals: Responses to the question about when Say-on-Climate shareholder proposals requesting a regular advisory vote on a company’s climate transition plan would warrant shareholder support, the answers reflected a split in sentiment. The answer with the highest support from investors was “Always: even if the board is managing climate risk effectively, a shareholder vote tests the efficacy of the company’s approach and promotes positive dialogue between the company and its shareholders.”
However, just a little below that for investors but the most frequent response from corporate respondents was that it should be case-specific and would be warranted only when the company’s climate transition plan or reporting fell short. Fourteen percent of investor respondents answered such a proposal never warranted support and preferred voting directly against directors if the company was not adequately managing climate risk. Just over thirty percent of corporate respondents answered that a shareholder Say on Climate was never warranted because it was a matter for the company to decide.
This was a global survey – 18% of the responding investors were US-based. As I’ve blogged, US-based investors seem less gung-ho about shareholder say-on-climate proposals, due to a concern that these proposals will insulate directors and slow down change. Geography may be driving some of the split on that question, but the survey doesn’t delve into that level of detail.
The survey also includes responses that affect ISS’s specialty climate voting policy. There appears to be consensus that high-impact companies should be subject to more stringent evaluations. Most respondents favored the policy assessing a company’s alignment with net zero goals.
We’ve been watching with intrigue the steps that the SEC is taking to put an end to “fake SEC filings” and make the filing process more reliable. My latest blog on this saga was earlier this year, when the Commission amended Reg S-T. Now, the SEC has also announced that it’s considering a big EDGAR upgrade that could change how filers access the system and manage people who file on their behalf. Here are a few details (see the SEC’s info page for more):
1. Requirement to obtain individual account credentials and use of Login.gov: If the SEC implements the potential technical changes to EDGAR filer access and account management processes, each individual who seeks to file on EDGAR would need unique account credentials from a third-party service provider to log in to EDGAR filing websites.
2. Filer Admins & Users: Each filer would designate at least one filer administrator, an individual authorized by the filer to manage individual users.Individuals authorized to make submissions on behalf of the filer would be known as the filer’s users.
3. Transition: If the potential technical changes to EDGAR filer access and account management processes are implemented, all current EDGAR filers would be required to transition their accounts to the new processes.
If you have opinions, you can provide those via the SEC’s request for comment. You can also sign up to test the beta version of “EDGAR Next” starting next Tuesday, October 12th.
I am a big believer in the saying “if it ain’t broke, don’t fix it.” I am not entirely sure where this saying comes from (and trying to figure that out sent me down a bit of a rabbit hole), but suffice it to say, there are plenty of things that we deal with as securities and governance professionals that are best left alone because they work just fine. I think disclosure committees often fall neatly into this category, because there have been relatively few developments which have necessitated significant changes to the disclosure committee’s responsibilities over the years, and disclosure committee charters are usually flexible enough to allow the committee to adapt to changes in rules and practices over time.
All of that said, I do think that a disclosure committee tune-up may be advisable right now. As this Morrison & Foerster alert notes, this year the SEC has ramped up its actions against companies for ineffective disclosure controls and procedures with respect to cybersecurity incidents, with the agency now focusing on how companies ensure that cybersecurity incidents are identified and communicated to management so that appropriate disclosure decisions can be made on a timely basis. Further, a push for more voluntary environmental and social disclosures, as well as the prospect of mandatory SEC disclosure in the coming months, has focused attention on the disclosure controls and procedures that companies have in place for those disclosures. As Corp Fin’s recent sample letter on climate change disclosures has demonstrated, the Staff is looking closely at how disclosures about climate change included in CSR and sustainability reports relates to the disclosures that the company includes in its SEC filings. Here are my suggestions for areas that the disclosure committee should consider:
Does the disclosure committee have the right mandate? Disclosure committees were established when disclosure controls and procedures requirements were adopted as part of the SOX certification rulemaking, but in the almost 20 years since that time, we have certainly observed some “mission creep” for the disclosure committee. As a result, it is advisable to review the disclosure committee charter to see if it accurately describes the scope of the committee’s responsibilities and its role in the disclosure process, including the committee’s role in analyzing and assessing whether disclosure is required under SEC or other requirements.
Are the right people in the room? Given the SEC’s focus on cybersecurity disclosure controls and procedures, does the disclosure committee include a representative from the company’s information technology function, or does someone from that function report to the committee on a regular basis? Further, does the disclosure committee have an appropriate level of involvement in the company’s ESG disclosure efforts, and are there representatives on the committee who can assist with understanding what is being disclosed in SEC reports and in other communications and how that disclosure is developed?
Is the disclosure committee in a silo? Is the disclosure committee properly positioned within the organization, and does it have the appropriate authority to have access to the raw data that it needs to make informed recommendations for disclosure decisions on a timely basis? In some cases, the disclosure committee may be too tilted toward the company’s financial reporting function, which can cause it to lose sight of, and not have appropriate access to information about, broader disclosure topics such as cybersecurity and ESG.
Does the disclosure committee have the right framework in place for assessing materiality? One of the most important roles that the disclosure committee serves is assisting management with making informed decisions about the materiality of information. As we all know, materiality is not a static concept, so it is advisable for the disclosure committee to take steps to articulate the framework that is used for analyzing and determining whether information is material, and tweak that framework as necessary given changes at the company, new SEC rules and evolving investor expectations.
Does the disclosure committee have an active role in the design and evaluation of disclosure controls and procedures? The members of the disclosure committee are usually best situated to determine if the company’s disclosure controls and procedures are operating effectively, and have the best perspective on what improvements may be necessary or when changes are necessary due to new SEC requirements. As a result, the disclosure committee should have clearly articulated responsibilities with respect to disclosure controls and procedures, and a mechanism should be in place for recommending regular adjustments and following up on their implementation.
One topic that disclosure committees are particularly focused on these days is the prospect for SEC disclosure requirements concerning climate change risks, which the SEC has identified as a top regulatory priority. Back in July, SEC Chair Gary Gensler indicated in a speech on the U.N. Principles for Responsible Investment “Climate and Global Financial Markets” webinar that he had asked for climate disclosure recommendations from the staff for consideration by the Commission by the end of the year.
It has now been reported that, during a recent interview at the Council of Institutional Investors Fall conference, Gensler indicated that climate rule proposals may not be considered by the Commission until late this year or early next year, and that human capital disclosure rules would follow in a very active period between now and next spring.
What we can expect from the SEC on these and other rulemaking initiatives (and when) will be topics that we will discuss in detail at our upcoming conferences, which are now less than two weeks away! Be sure to register today!