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 two latest episodes provide real-world insights on board diversity and board excellence:
Say-on-Climate Management Proposals: ISS is codifying the framework developed over the last year for analyzing management-offered climate transition plans put up for shareholder approval, incorporating feedback received during this year’s policy development process including from the Climate Survey. For transparency, page 4 of the policy lists the main criteria that will be considered when analyzing these plans (a non-exhaustive list).
Say-on-Climate Shareholder Proposals: “Say-on Climate” shareholder proposals emerged late in 2020 and increased in 2021, generally asking companies to publish a climate action plan and to put it to a regular shareholder vote. This policy establishes a case-by-case approach toward such proposals and provides a framework of analysis that will allow for consistency of assessment across markets. (See page 5 of the policy for factors that ISS will consider.)
Board Accountability on Climate: In response to the 2021 Climate Policy survey, high percentages of investor respondents supported establishing minimum criteria for companies considered to be strongly contributing to climate change. Therefore, ISS is for 2022 focusing on the 167 companies currently identified as the Climate Action 100+ Focus Group, and will recommend against incumbent directors – usually the appropriate committee chair in the first year – in cases where the company does not have both minimum criteria of disclosure such as according to the Task Force on Climate-related Financial Disclosures (TCFD) and quantitative GHG emission reduction targets covering at least a significant portion of the company’s direct emissions. (Page 12 of the policy lists the “minimum criteria” and more details.)
Board Gender Diversity: ISS adopted a U.S. board gender diversity policy in 2019, which went into effect in February 2020, for companies in the Russell 3000 or S&P 1500 indices. Based on institutional investor feedback in 2021, after a one-year transition period, the current U.S. board gender diversity policy will be extended to all companies covered under U.S. policy, taking effect beginning in 2023.
Board Racial & Ethnic Diversity: ISS’s previously adopted policy on board racial & ethnic diversity will go into effect this year. That means that for companies in the Russell 3000 or S&P 1500 indices, ISS will generally recommend a vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Unequal Voting Rights: Due to the strong support expressed through the survey results and roundtable discussions, ISS will remove the safe harbor for older companies with unequal voting rights. After a one-year grace period, starting in 2023, ISS will generally recommend against relevant directors at all companies with unequal voting rights, irrespective of when they first became public companies.
Shareholder Proposals on Racial Equity and/or Civil Rights Audits: ISS will take a case-by-case approach on shareholder proposals asking companies to conduct an independent racial equity and/or civil rights audit. Page 23 of the policy provides criteria for assessing whether such an audit would likely be beneficial to shareholders. Factors include whether the company has developed a process or framework for addressing inequalities internally, whether the company has engaged with stakeholders and made racial justice efforts, and whether the company has been the subject of recent controversy.
ISS also updated its policy on proposals authorizing additional common or preferred stock and on its burn rate calculations for equity plans. In addition, the proxy advisor updated its FAQs about compensation policies and the COVID-19 pandemic. We’ll be posting memos about the policy changes in our “Proxy Advisors” Practice Area.
Yesterday, the SEC Staff issued a statement that reminds companies of their disclosure obligations around the imminent LIBOR transition. This Stinson blog provides a summary:
The publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities will cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023. The statement discusses the generally preferred alternative rate – the Secured Overnight Financing Rate (“SOFR”).
The statement said the SEC staff encourages companies to provide qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past December 31, 2021 or June 30, 2023, as applicable, to provide context for the status of the company’s transition efforts and the related risks. For example, companies with material risk related to outstanding debt with inadequate LIBOR fallback provisions should consider disclosing how much debt will be outstanding after the relevant cessation date and the steps the company is taking address the situation, such as renegotiating contracts or refinancing the obligations. To the extent that a company has or is taking steps to identify and assess LIBOR exposure and mitigate material risks or potential impacts of the transition, the company should consider providing investors insight into what the company has done, what steps remain, and the timeline for further efforts.
According to the SEC, companies generally include disclosures about the LIBOR transition as part of risk factors, recent developments, MD&A and/or quantitative and qualitative disclosures about market risk. To the extent a company provides this disclosure in response to more than one disclosure requirement within a filing, the SEC encourages companies to consider providing a cross-reference or otherwise summarizing or tying the information together so an investor has a complete and clear view of the company’s plan for the discontinuation of LIBOR, the status of the company’s efforts, and the related risks and impacts. The SEC staff expects disclosures to evolve over time as companies provide updates to reflect transition efforts and the broader market and regulatory landscape.
A little over a year ago, the US Supreme Court reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions, in Liu v. SEC. However, the Court set some parameters on that authority: the disgorgement award can’t exceed the wrongdoer’s net profits and that the money must be returned to the victims. Now, the SEC appears to have established a way to comply with these parameters. This Troutman Pepper memo summarizes a recent holding from the 5th Circuit, which is the first federal appellate court to evaluate a disgorgement remedy post-Liu. Here’s an excerpt:
The order did not impose joint-and-several liability, but instead assessed each defendant’s gain and disgorgement amount. The SEC also identified victims and created a process to return disgorged funds to them. Under the district court’s supervision, any funds recovered will go to the SEC, acting as a de facto trustee. The SEC will disburse those funds to victims, but only after district court approval. The Fifth Circuit found that the process outlined by the SEC satisfied the standards articulated in Liu.
The Blackburn decision provides a roadmap for how the SEC may pursue disgorgement and comply with the new limitations. When the SEC seeks disgorgement in future matters, it will likely abide by a similar process and identify specific victims to whom disgorgement funds will be disbursed.
Yesterday, the SEC’s Acting Chief Accountant, Paul Munter, issued this statement to recap the 2021 activities of the Office of the Chief Accountant – and preview what could be coming. It’s not unusual for the head of the OCA to make a statement like this near year-end (here’s last year’s). This year’s version caught my eye because it’s a reminder of the many complexities that have cropped up during 2021 – like a BuzzFeed “Best of ’21” list, but for accounting. For example:
1.SPAC accounting – speaking of BuzzFeed and de-SPACs…the OCA has received a large number of consultations on accounting issues for IPO companies this year, including those going public via a SPAC. The statement reiterates the importance of ensuring that appropriate personnel and processes are in place to produce financial statements in accordance with U.S. GAAP applicable to public business entities, which would include the reversal of any previously-elected Private Company Council accounting alternatives available to private companies and, depending on the issuer’s status, earlier effective dates for most standards.
2.Revenue Recognition – Similar to observations the OCA has shared in the past, revenue consultations are numerous and often relate to the identification of the company’s performance obligations, including the principal versus agent analysis, identification of the company’s customer(s), and accounting for consideration payable to a customer.
3.Crypto – While the OCA welcomes constructive dialogue on whether accounting standards could be revised to better reflect the underlying economics of digital asset transactions or business models, this statement reminds stakeholders that there is an existing accounting framework that is robust and provides a basis to account for and report these assets and related transactions. Application of the existing accounting guidance often requires judgment and depends on the issuer’s specific facts and circumstances. The statement also emphasizes the FASB’s and IASB’s work to consider feedback from their respective agenda consultation processes will be important in this area.
4.Auditor Independence – This statement reiterates Munter’s October comments about the importance of auditor independence. It notes that the number of auditor independence consultations has increased. In applying the principles-based standard of Rule 2-01 of Regulation S-X, OCA staff has consistently provided the view that it would be a high hurdle to reach a conclusion that the accountant could be viewed as objective and impartial under the general standard when an auditor has provided services in any of the periods included in the filing that are contrary to one of the Rule’s four guiding principles.
5.PCAOB Oversight – The statement touches on the Commission’s authority to oversee the PCAOB, including by appointing board members, and notes that the OCA advises the Commission on its responsibilities. Last month, the SEC announced appointments of new PCAOB members (some Republican members of the House Financial Services Committee and the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets recently requested an inquiry into the removal of Bill Duhnke earlier this year, but the statement doesn’t dive into that drama).
6.OCA Role in Rulemaking – The OCA has been involved with the SEC’s rulemaking effort on climate risk disclosure. That includes involvement with international financial reporting standards, which have been a big topic of discussion when it comes to standardization of ESG disclosures. OCA has also been involved with rulemaking about risks of investments in companies with China-based operations, and the impact of different types of restatements on executive compensation clawbacks.
Paul Munter’s statement is also worth checking out because it gives tips for accounting standard setters, companies, auditors and audit committees. These are areas that the Office of the Chief Accountant (and the Commission) are focused on, so you should be too. Here are a few nuggets:
1.Estimates & Assumptions – Munter says that he cannot overstate the importance of preparers making well-reasoned and supported judgments that are grounded in their particular facts, relevant rules, and accounting principles and that consider the usefulness and transparency of the resulting information provided to investors. Companies should also ensure that significant judgments and estimates are disclosed in the financial statements in a clear and transparent manner that is understandable and useful to investors.
2.Internal Controls – Companies must continually assess and evaluate whether their ICFR environment is effective. In light of significant changes to many companies’ operations, for example, changes to their financial reporting processes in a remote work environment, the OCA reminds preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).
3.Audit Committee Responsibilities – Audit committees are getting more involved with ESG, cybersecurity, tax risks, and more. It is important that audit committees assess whether the scope of their responsibilities is appropriate, achievable, and aligned with the experience of its members, and importantly, not lose sight of their core responsibility — oversight of financial reporting, including ICFR, engagement of the independent auditor, and oversight of the external audit process. Munter says that he cannot overstate the importance of independent and diverse thinking brought by independent directors in fulfilling this responsibility.
4.Audit Quality – Audit committees must consider the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that could affect auditor independence. In addition to evaluating independence of the auditor, it is foundational to high quality audits that audit committees give careful consideration to audit quality, and not merely focus on price, when appointing and retaining auditors.
The WSJ recently reported that for the third year in a row, more money has been raised through IPOs on Nasdaq than on the NYSE – in part because of SPACs, but also partly because of a perception that Nasdaq is more focused on ESG criteria. According to the article, companies that emphasize ESG in their prospectus seem more inclined to want to reflect that in their exchange choice as well.
That focus on ESG is also one of the reasons that dual listings on the Long-Term Stock Exchange could become attractive – particularly now that a couple of issuers have blazed the trail for listings. Join us tomorrow for the webcast – “Understanding LTSE Listings” – when LTSE Services’ Martin Alvarez and Jane Storero, Asana’s Katie Colendich and Eleanor Lacey, and Twilio’s Mariam Sattar share practical tips about the listing process and what it means to be traded on the LTSE.
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 by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Investors representing over $2 trillion in assets under management are urging ISS to take a stricter stance on climate progress in its upcoming policy updates, according to this LinkedIn write-up from Majority Action’s co-founder. Zevin Asset Management, Boston Common Asset Management, ICCR and the Nathan Cummings Foundation were among the signatories.
As Dave blogged last month, ISS has proposed policy updates that would recommend against the re-election of directors that aren’t meeting expectations around climate-related disclosures or that haven’t set quantitative GHG reduction targets. The investors are saying that those policy guidelines – if adopted – would give too much leeway for under-performance and that they are more focused on the quality of disclosure than on assessing decarbonization activities. Here are the changes that the investors want ISS to incorporate into its benchmark voting guidelines for the 2022 proxy season:
1. Expand and disclose the analysis on company climate performance to assess whether a company’s current and future business plans, capital allocation, and political activity are aligned with a 1.5°C scenario and/or science-based sectoral decarbonization plans (e.g., IEA Net-Zero Roadmaps, Science-Based Targets Initiative).
2. Incorporate company climate performance into vote recommendations, including:
– Recommend votes against directors for failure to adequately manage or mitigate ESG risks, including failure to align business plans, capital allocation, and policy influence (political spending and direct/indirect lobbying activities) with a 1.5°C scenario. Clarify that when information is unavailable to make that determination, ISS will recommend votes against directors.
– Recommend votes in favor of shareholder proposals that call for the reduction of greenhouse gas emissions, disclosure of lobbying and political activity, and/or reports on greenhouse gas emissions, instead of taking a case-by-case approach to proposals, unless the company has demonstrated meaningful alignment of its business activities with a 1.5°C scenario.
3. When recommending votes be cast against management’s recommendations for climate-related reasons, incorporate into the rationales for climate-related votes whether the company’s business strategy and operations align with a 1.5°C scenario.
Last year, ISS published its updated proxy voting guidelines in mid-November, so it’s likely that the 2022 updates will be coming soon. Mark your calendars now for our January 13th webcast with Marc Goldstein, Head of US Research at ISS, along with Davis Polk’s Ning Chiu and Gunster’s Bob Lamm. We’ll be discussing the 2022 policy updates – as well as what to prepare for when it comes for director elections, shareholder proposals, say-on-pay and sleeper issues. CLE credit is also available!
Last week, the SEC posted notice & immediate effectiveness of a Nasdaq proposal to increase annual listing fees. The new fee schedule takes effect January 1st.
For the Nasdaq Global Select & Global Markets, the all-inclusive annual fee for most equity securities will increase by $1-4k/year. For the Nasdaq Capital Market, the increase ranges from $1.5-4k/year. While the increases are modest, every dollar counts for budgeting!
Last week, an industry working group of 800+ brokerage firms, custodians, and clearinghouses released this 43-page report to recommend a transition to a “T+1” settlement cycle for market transactions. The Securities Industry & Financial Markets Association, working with the Investment Company Institute, The Depository Trusty & Clearing Corporation and Deloitte, led the working group.
Although the SEC’s Investor Advisory Committee had recommended a one business day settlement cycle way back in 2015, when the SEC adopted 2017 rules on the topic, it just moved incrementally from a T+3 requirement to T+2. But earlier this year, investors, SEC Chair Gary Gensler and DTCC blamed slow settlement times as one factor in the meme stock frenzy. The push for a shorter cycle now seems to be gaining more momentum. Here are a few of the new report’s recommendations and conclusions:
Corporate Actions:
• Coordinate with regulators and exchanges to align the ex-date with the record date for regular-way corporate actions
• Adopt SWIFT messaging, or other automated means, across the corporate actions lifecycle to increase efficient communication by industry participants related to corporate action events
• Industry to evaluate whether the cover/protect period should be eliminated
Equity & Debt Offerings
• Retain the exception in Rule 15c6-1(c) but shorten the applicable period to T+2
• Retain the exception in Rule 15c6-1(d) to allow debt and other offerings to have the ability to opt for extended settlement
Regulatory Impacts
• Continue to engage the regulatory community to ensure that rules and regulations that identify regular way settlement as greater than T+1 be changed, including the SEC’s capstone rule 15c6-1(a) of the Securities Exchange Act of 1934 and the associated rules derived from it, to create regulator certainty for market participants
Same-Day Settlement
• As the industry analyzed the migration to T+1 settlement, the IWG also considered the impacts and benefits of moving to T+0 settlement. The ISC and IWG concluded, by consensus, that T+0 is not achievable in the short term given the current state of the settlement ecosystem.
I blogged back in May that if T+1 is adopted, it would have the most impact on broker-dealer obligations. Particularly in debt transactions, issuers sometimes prefer longer settlement periods so that interest doesn’t start accruing. These recommendations suggest that the exception for extended settlement would continue to exist. The report walks through detailed considerations for how a shorter settlement cycle could affect equity and debt offerings, beginning on page 31.