FASB recently announced that it has proposed an Accounting Standards Update for interim disclosure requirements (Topic 270), which would add to GAAP a requirement to disclose when a “significant transaction or event has occurred since the prior year-end that has had a material effect on an entity.” That disclosure previously was required by Regulation S-X Rule 10-01 – but was axed as part of the SEC’s “disclosure simplification” back in 2018. Although this wasn’t one of the specific items that the SEC had asked FASB to consider incorporating into GAAP, it is part of FASB’s ongoing disclosure framework project.

This “Jim Hamilton” blog highlights key points about the 113-page proposal. Here are a few excerpts:

Assessing materiality. In addition to reintroducing the disclosure requirement for significant events with a material effect on a company, FASB proposed to eliminate the phrase “at minimum” and add language to Topic 270 to encourage entities to exercise discretion when considering interim reporting disclosures. FASB also proposed to clarify that assessing materiality is appropriate for entities when evaluating disclosure requirements, and that assessing which disclosures to provide at interim periods involves considering information provided at the previous annual period.

Other amendments. FASB’s proposals include an update that would require that an entity refer a reader of interim financial statements and notes to the previous annual financial statements when providing condensed financial statements or limited notes. The proposed amendments would require, if applicable, that the reporting entity explain that the interim results may not be indicative of the annual results or that adjustments have been made to the period to provide a more relevant depiction of the entity’s results.

With regard to providing comparative disclosures, the proposed amendments would clarify when comparative disclosures are required. The amendments also would remove phrases such as “for each period presented” and instead refer to making comparative disclosures when comparative statements are presented.

Stakeholder feedback. FASB requested that comments be provided by the end of January 2022.

– Liz Dunshee

In another sign that proxy season will be here before we know it, Glass Lewis announced this week that it has released its 2022 Proxy Voting Policy Guidelines. These Guidelines address how the proxy advisor approaches matters that affect votes on director elections, auditor ratification, executive pay, and governance structures.

As always, the first few pages of the Guidelines summarize the policy changes. Here are the main ones:

Board Gender Diversity: The policies remind boards that beginning in 2022, Glass Lewis will generally recommend voting against the chair of the nominating committee of a board with fewer than two gender diverse directors, or the entire nominating committee of a board with no gender diverse directors, at companies within the Russell 3000 index.

Beginning with shareholder meetings held after January 1, 2023, Glass Lewis will transition from a fixed numerical approach to a percentage-based approach and will generally recommend voting against the nominating committee chair of a board that is not at least 30 percent gender diverse at companies within the Russell 3000 index.

The policies clarify that when making these voting recommendations, Glass Lewis will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors of companies when boards have provided a sufficient rationale or plan to address the lack of diversity on the board.

It has also replaced references in the guidelines to female directors with “gender diverse directors,” defined as women and directors that identify with a gender other than male or female.

Interplay With Other Diversity Regulations: The policies address evolving state laws and stock exchange requirements on gender diversity and underrepresented community diversity. Glass Lewis will recommend in accordance with mandated board composition requirements of applicable laws and regulations when they come into effect.

For annual meetings of applicable Nasdaq-listed companies that are held after August 8, 2022, Glass Lewis will recommend voting against the chair of the governance committee when the required board diversity disclosure has not been provided.

Glass Lewis will generally refrain from recommending against directors when applicable state laws do not mandate board composition requirements, are non-binding, or solely impose disclosure or reporting requirements in filings made with each respective state annually.

Disclosure of Director Diversity & Skills: Beginning in 2022, for companies in the S&P 500 index with particularly poor disclosure (i.e., those failing to provide any disclosure in each of the tracked categories), Glass Lewis may recommend voting against the chair of the nominating and/or governance committee. Beginning in 2023, when companies in the S&P 500 index have not provided any disclosure of individual or aggregate racial/ethnic minority demographic information, Glass Lewis will generally recommend voting against the chair of the governance committee.

E&S Risk Oversight: Beginning in 2022, Glass Lewis will note as a concern when boards of companies in the Russell 1000 index do not provide clear disclosure concerning the board-level oversight afforded to environmental and/or social issues. For shareholder meetings held after January 1, 2022, it will generally recommend voting against the governance committee chair of a company in the S&P 500 index who fails to provide explicit disclosure concerning the board’s role in overseeing these issues.

While Glass Lewis believes that it is important that these issues are overseen at the board level and that shareholders are afforded meaningful disclosure of these oversight responsibilities, it believes that companies should determine the best structure for this oversight. In Glass Lewis’s view, this oversight can be effectively conducted by specific directors, the entire board, a separate committee, or combined with the responsibilities of a key committee.

Role of a Committee Chair: Glass Lewis has revised its approach to the role of a committee chair in cases where there is a designated committee chair and the recommendation is to vote against the committee chair, but the chair is not up for election because the board is staggered. Beginning in 2022, in cases where the committee chair is not up for election due to a staggered board, and where Glass Lewis has identified multiple concerns, it will generally recommend voting against other members of the committee who are up for election, on a case-by-case basis.

Multi-Class Share Structures: Beginning in 2022, Glass Lewis will recommend voting against the chair of the governance committee at companies with a multi-class share structure and unequal voting rights when the company does not provide for a reasonable sunset of the multi-class share structure (generally seven years or less).

Governance Following a SPAC Combination: In cases where Glass Lewis determines that the company has adopted overly restrictive governing documents, where, preceding the company becoming publicly traded, the board adopts a multi-class share structure where voting rights are not aligned with economic interest, or an anti-takeover provision, such as a poison pill or classified board, it will generally recommend voting against all members of the board who served at the time of the company becoming publicly traded if the board hasn’t obtained or committed to get shareholder approval or provide for a reasonable sunset provision.

Director Commitments of SPAC Executives: Given the nature of executive roles at SPACs and the limited business operations of SPACs, when a directors’ only executive role is at a SPAC, we will generally apply our higher limit for company directorships. As a result, we generally recommend that shareholders vote against a director who serves in an executive role only at a SPAC while serving on more than five public company boards.

Waiver of Age & Tenure Policies: Beginning in 2022, in cases where the board has waived its term/age limits for two or more consecutive years, Glass Lewis will generally recommend shareholders vote against the nominating and or governance committee chair, unless a compelling rationale is provided for why the board is proposing to waive this rule, such as consummation of a corporate transaction.

Glass Lewis also clarified policies on its ESG approach (noting it looks at issues through the lens of a long-term shareholder), its case-by-case evaluation of shareholder proposals, preferred stock increases, exclusive forum provisions, post-IPO governance, director independence, related party transactions, and E&S metrics in executive pay and other executive pay-related issues (see Emily’s blog on CompensationStandards.com).

We’ll be posting memos in our “Proxy Advisors” Practice Area.

– Liz Dunshee

In addition to updating its voting guidelines for director elections and other more standard proxy statement proposals, Glass Lewis also updated its separate Policy Guidelines on ESG Initiatives, which now stands at 40 pages. These Guidelines identify factors Glass Lewis considers when making its case-by-case recommendations on shareholder proposals and related initiatives. Here’s a summary of this year’s changes:

Environmental and Social Risk Oversight: Glass Lewis clarified the factors it considers when evaluating companies’ board-level oversight of ESG-related matters. It also clarified its approach to holding directors accountable for ESG-related risks.

Say on Climate: Glass Lewis clarified its approach to management proposals asking shareholders to approve climate transition plans as well as shareholder proposals asking companies to adopt such a vote. Glass Lewis maintains concerns relating to the Say on Climate vote on the basis of shareholders approving a company’s business strategy, particularly given that sufficient information to fully evaluate the plan is often not available to shareholders. Accordingly, Glass Lewis will generally oppose shareholder proposals requesting that companies adopt a Say on Climate vote.

However, when companies have adopted such a vote, and are asking shareholders to weigh in on their climate-related strategies, Glass Lewis will evaluate companies’ climate transition plans on a case-by-case basis. In its evaluation, it will consider companies’ disclosure of the board’s role in setting company strategy in the context of the Say on Climate vote as well as disclosure on how the board intends to interpret the vote results and its engagement with shareholders on the issue. In addition, Glass Lewis will evaluate each climate transition plan in the context of each companies’ unique operations and risk profile.

Updates: Glass Lewis removed guidelines referencing the MacBride Principles, Genetically Modified Organisms, and Sustainable Forestry, as there have not been shareholder proposals on these topics in a number of years. Should proposals on these topics begin to be submitted to shareholder votes in the future, it will likely reincorporate its views on these proposals into future versions of these guidelines.

Written Consent: Glass Lewis codified its approach to shareholder proposals requesting that companies lower the threshold required to initiate written consent. When evaluating these proposals, it will generally recommend in favor of lowering the ownership threshold when the company has no special meeting provision, or only allows shareholders owning more than 15% of its shares the ability to call a special meeting. It will generally oppose lowering the ownership threshold necessary to initiate written consent if the company in question has a 15% or lower special meeting threshold.

– Liz Dunshee

The holiday season is barrelling towards us and many of us are daring to envision gatherings outside our own homes. But when it comes to the stock market’s New Year celebration, this year’s calendar gives no rest for the weary.

Even though Friday, December 31st is a federal holiday – meaning the SEC & Edgar are closed – the stock market is open for a full trading day that day. So, there’s extra time for something to go sideways, or at the very least for some insiders to squeeze in last minute trades (if they lack MNPI and/or are relying on a valid Rule 10b5-1 trading plan!). The market and the SEC are also open for business on Monday, January 3rd. The NYSE calendar explains that no New Year holiday will be observed by the Exchange this year because of Rule 7.2, which says in part:

When a holiday observed by the Exchange falls on a Saturday, the Exchange will not be open for business on the preceding Friday and when any holiday observed by the Exchange falls on a Sunday, the Exchange will not be open for business on the succeeding Monday, unless unusual business conditions exist, such as the ending of a monthly or yearly accounting period.

This Bloomberg article says the non-holiday is going to surprise some folks, because this is the first time in 11 years that Rule 7.2 has snatched away a day off. Here’s more detail:

While the exchange published its holiday schedule a long time ago, complete with a “—*” footnote under the New Year’s Day 2022 column, some market participants are only now realizing they’re getting stiffed on the holiday. Adding salt to the wounds, bond traders get to start their New Year’s Eve parties a little earlier: Sifma is calling for a 2 p.m. market close that day.

– Liz Dunshee

A coalition of UK-based investors representing $4.5 trillion recently announced – just ahead of the COP26 summit – that it had sent letters to PwC, Deloitte, KPMG and EY that escalate a years-long engagement about reflecting climate change risks in financial statements. Each letter starts off like this:

Many of us wrote in January 2019 seeking assurance that [audit firm] was integrating material climate risks into its audits wherever relevant. Specifically, we asked that [you] alert shareholders where company accounts were not considering the financial implications of either the current decarbonisation pathway, or the global transition onto a 1.5C pathway . We are writing again now as an even larger group of investors following analysis of carbon-intensive companies’ financial statements published by Carbon Tracker, which details the broad failure of both directors and auditors to act on our expectations. We would like to understand what you plan to do to address these weaknesses in [audit firm’s] audit process.

The body of the letter contains details about the particular firm’s audits, and then it goes on to threaten action at upcoming annual meetings:

We began our engagement with you almost three years ago. We cannot afford to wait another three years for [audit firm] to act. From next voting season, you should increasingly expect to see investors vote against [audit firm’s] reappointment as auditor where you fail to meet the expectations we have clearly set out in our previous correspondence, the November 2020 IIGCC paper and underlined again here.

It remains to be seen whether this shaming endeavor will spur the Big 4 to take any actions that they aren’t already taking, and whether this is a bellwether for US expectations. As Lawrence blogged earlier this year, PwC announced that it’s investing $12 billion and planning a 100,000 increase in headcount relating to ESG work. The whole industry is gearing up for what they clearly expect to be in-demand work.

With those wheels already in motion, this threat really just underscores that in the future, the Big 4 may be competing with each other on ESG expertise (or more accurately, their ability to market their ESG expertise). It’s pretty unlikely that all of the big firms will suffer a string of low votes that send huge companies to move their work to smaller firms, and that’s probably not exactly the outcome that the investors want either. But as Lawrence has written, tracking ESG progress and accurately validating ESG data will also require more than a focus on financial audits. A few places are recognizing that – here’s one that’s hiring.

– Liz Dunshee

Results from a new Deloitte survey of 350 global audit committee members suggest that audit committees may not feel prepared to oversee the data collection and other changes that enhanced climate change disclosures and strategies may require. The survey also shows that at this point, there’s quite a bit of variation in the climate change responsibilities that audit committees are taking on. Some committee members feel that they lack a clear mandate to do what may be expected externally.

Here are some key stats (also see this Cooley blog):

– 62% of audit committee respondents in the Americas believe that climate change has no material impact on the organization

– When it comes to climate related matters, audit committees in the Americas are most likely to have oversight responsibility for risk management (63%), the front half of disclosure in the annual report, such as narrative climate risk and TCFD info (52%), the impact of climate risks & opportunities in financials, including in relation to judgments & estimates (54%), external audit’s work in climate-change related financial statement risks (53%) and assurance of climate-related info and disclosure (42%)

– 54% of audit committee respondents in the Americas said they don’t have the information, capabilities, or mandate to fulfill climate regulatory responsibilities or climate reduction targets

– The main internal challenges in overseeing climate change was the lack of clear strategy in relation to climate for the organization (65%), followed by poor quality of data (46%)

– Although 8% of audit committees in the Americas discuss climate change at every meeting, nearly 60% of global respondents said that their audit committees do not discuss climate change at all or as a fixed agenda item.

– 52% said that some or all of their audit committee members are “climate literate” – 48% said their committees were not “climate literate” or relied on just one committee member – nearly 90% seem to want more education versus different board members

– 18% of global respondents said that their climate impact assessment is reflected in the financial statements

– 42% of global respondents said that their organization’s climate response is not as swift and robust as they would like – 58% were satisfied

– Liz Dunshee

EY is out with their 10th annual survey of audit committee disclosures – finding that committees are continuing to share more info about their role and work. The survey primarily looks at 2021 proxy statements from Fortune 100 companies. It also includes stats about auditor ratification support and audit committee composition at a bigger group of companies. The areas with the most year-over-year change relate to audit quality & the committee’s oversight role for non-financial risks. Here are some of the key takeaways:

– This year, 71% of reviewed companies disclosed factors used in the audit committee’s assessment of the external auditor qualifications and work quality, up from 64% last year. Only 15% of these companies made that disclosure in 2012.

– Nearly 92% of reviewed companies disclosed that the audit committee considers non-audit fees and services when assessing auditor independence vs. just 16% in 2012.

– Nearly 70% of reviewed companies stated that they consider the impact of changing auditors when assessing whether to retain the current external auditor, and 79% disclose the tenure of the current auditor. That’s up from just 3% and 23%, respectively, in 2012.

EY also found that 76% of the reviewed companies included additional disclosures around risks beyond financial reporting that were being overseen by the audit committee. Some of these top risks being overseen by audit committees include cybersecurity, data privacy, enterprise risk management and ESG. Here’s more detail on that piece:

– Nearly 70% of reviewed companies disclosed that the audit committee oversees cybersecurity matters.

– Notably, 10% of reviewed companies discussed the audit committee’s role in ESG matters, up from 6% last year. These matters include oversight of climate change risks as they relate to financial and operational risk exposures and other environmental, health and safety-related matters.

On “Critical Audit Matters,” EY found that 16 out of 72 companies discussed the audit committee’s review and discussion of CAMs with the external auditors. Only one company noted the number of CAMs identified.

As you prepare your disclosures for 2022, remember that our 49-page “Audit Committee Disclosure” Handbook can help you efficiently resolve questions that arise. It covers the regulatory requirements for audit committees as well as real-world disclosure trends.

– Liz Dunshee

Here are results from our recent survey on COVID-related adjustments to insider trading policies:

1. Who owns/administers your company’s insider trading policy (e.g., sets window open/close dates, determines employees subject to window periods, provides pre-clearance for transactions, etc.)?

– Corporate secretary department – 77%
– Ethics & compliance office or similar function – 11%
– Corporate stock plan department – 1%
– Combination of 1 or more of the above – 11%

2. Has your company made changes to the policy as a result of Covid-19?

– Yes, it covers more employees – 2%
– Yes, we’ve instituted an event-specific closed window period – 10%
– No – 88%

3. Has your company issued more frequent communication about the policy during the Covid-19 pandemic?

– Yes – 22%
– No – 78%

4. If you’ve issued more frequent communication about the policy, how frequent?

– Once – 67%
– Twice so far – 28%
– More often – 5%

5. If you haven’t issued more frequent communication, are you planning to do so and if so when?

– No – 69%
– Yes, within the next month – 2%
– Haven’t decided yet, will depend upon ongoing developments – 29%

As a reminder, we’ve previously posted the transcript from our webcast for members, “Insider Trading Policies & Rule 10b5-1 Plans.” We’re keeping an eye out on further SEC developments with insider trading policies – stay tuned!

Please also take a moment to participate anonymously in these surveys:

– “Quick Survey on Board Meeting Health Protocols”

– “Quick Survey on Board Committees – Risk and Cybersecurity”

– Liz Dunshee

Here’s something John recently wrote on our free DealLawyers.com blog:

The question of the legality of a dividend or repurchase under Delaware law is one that often arises in leveraged recaps and other transactions involving large distributions to shareholders. The answer usually depends on whether the company has sufficient “surplus” within the meaning of Section 154 of the DGCL. The Delaware Supreme Court has held that what matters in the surplus calculation is the present value of the company’s assets & liabilities, not what’s reflected on the balance sheet. Since that’s the case, valuations are often used to determine the amount of available surplus.

While that’s a pretty common practice, there’s not a lot of Delaware case law on how the board’s valuation decisions will be assessed. That’s kind of disconcerting, particularly since directors face the prospect of personal liability for unlawful dividends or stock repurchases. Fortunately, the Chancery Court’s recent decision in In re The Chemours Company Derivative Litigation, (Del. Ch.; 11/21), provides some guidance to boards engaging in this process. Here’s an excerpt from this Faegre Drinker memo on the decision:

In this case, the board approved both dividends and stock repurchases at a time when the company also faced legacy contingent environmental liabilities that conceivably could render Chemours insolvent.

The court deferred to the board’s determination that there was sufficient surplus to permit these transactions, even though the board looked beyond GAAP-metrics to evaluate its contingent liabilities. The court held that it “will defer to the Board’s surplus calculation ‘so long as [the directors] evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud.” This standard is consistent with the court’s prior guidance that the DGCL “does not require any particular method of calculating surplus, but simply prescribes factors,” total assets and total liabilities, “that any such calculation must include.”

As for reliance on experts, the court held that, under the DGCL, utilization of and good faith reliance on experts “fully protects” directors from personal liability arising from their surplus calculation. In reaching this conclusion, the court rejected the argument that the directors were required to second-guess the GAAP-based reserves calculated by the experts — an analysis that permitted the board to significantly reduce the size of these liabilities on Chemours’ balance sheet.

The memo goes on to provide some thoughts on the key takeaways from the decision, including the need for the board to carefully compile and review accurate data on assets & liabilities, and to retain an expert in any situation where the calculation of surplus may be an issue.

– Liz Dunshee

We continue to share daily posts about career issues and board matters on our “Mentor Blog” – which is available to TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Time to Refresh Your Compliance Training
– C-Suite Executives Want More Effective & More Diverse Directors
– Supply Chains: How to Manage Cyber Risk
– PCAOB 2020 Inspection Reports for the Big 4+ Are Out!
– Books & Records Demands: A Primer for Boards

– Liz Dunshee