In a sign that the height of shareholder engagement season is approaching, BlackRock Investment Stewardship has released its 2022 Engagement Priorities. The asset manager’s priorities are broadly the same as last year – which mapped to the UN Sustainable Development Goals – and signal a continued focus on board processes and accountability for long-term value creation.
The 10-page summary document identifies “Key Performance Indicators” for each of the main priorities. On top of the summary, BIS issued updated versions of its very detailed commentary on its engagement approach to:
1. Board Quality & Effectiveness – For companies with which BlackRock wishes to engage to understand the board’s role, it wants dialogue with a non-executive director. BlackRock assesses boards based on independence, tenure limits, time commitments, election cycles and diversity. BlackRock also wants companies to disclose their approach to ensuring meaningful board diversity and wants to see self-identified demographics on an aggregate basis, and understand how board composition aligns with the company’s strategy & business model.
2. Strategy, Purpose & Financial Resilience – BlackRock wants companies to set out how they’ve integrated business-relevant sustainability risks & opportunities. BIS encourages companies to disclose industry- or company-specific metrics to support their narrative on how they have considered key stakeholders’ interests in their business decision-making.
3. Incentives Aligned with Value Creation – BIS looks to companies to disclose incentives that are aligned with long-term value creation and sustained financial performance, underpinned by material and rigorous metrics that align with the company’s long-term strategic goals.
4. Climate Risk & Energy Transition – BlackRock encourages companies to discuss in their reporting how their business model is aligned to a scenario in which global warming is limited to well below 2°C, moving towards global net zero emissions by 2050. BIS encourages disclosures aligned with the four pillars of the TCFD—including scope 1 and 2 emissions, along with short-, medium-, and long-term science-based reduction targets, where available for the company’s sector. BlackRock won’t consider Scope 3 emissions disclosures & commitments “essential” for supporting directors.
5. Natural Capital – BlackRock wants info on how companies are managing material business risks & opportunities relating to natural resources such as air, water, land, minerals and forests.
6. Human Capital Management – BIS wants companies to provide info that shows how their approach to human capital management aligns with their stated strategy and business model, and to disclose actions they’re taking to support a diverse & engaged workforce.
7. Human Rights Impacts – BlackRock wants companies to discuss in their disclosures how the board oversees management’s approach to due diligence & remediation of adverse impacts to people arising from their business practices.
Each of these commentaries walks through BlackRock’s specific expectations and lists typical questions that they ask in engagement meetings. In total, the Investment Stewardship team published 53 pages of comprehensive guidance – on top of the 23-page voting guidelines and 20-page investment stewardship principles already issued. Hopefully that means that companies will be able to avoid any “gotchas” or surprises during engagements – and even more importantly, when it comes time to vote.
According to its updated “human capital management” commentary, BlackRock continues to believe that companies that have strong relationships with their workforce are more likely to deliver long-term shareholder value. Particularly in this labor market, robust HCM can be a competitive advantage – so companies need to explain how they set themselves apart. The commentary outlines several workforce-related topics that BIS is expecting to understand through disclosures & engagements – which may be mapped to the SASB materiality framework or other standards.
BlackRock isn’t alone. According to this WSJ article, other asset managers, as well as pension funds, are also continuing to clamor for more “human capital” info. In response to this investor appetite for specific data, the SEC is aspiring to propose amendments to the human capital disclosure requirements in Item 101 of Regulation S-K. Here’s a reminder of what a more prescriptive rule could include:
Commission staff have been working on a rule that would mandate additional disclosures around human capital since SEC Chairman Gary Gensler took office last April. The new requirements would likely be mandatory for public companies and could touch on turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety, he has said.
According to investors quoted in the article, most disclosure being provided in response to the principles-based 2020 rule isn’t getting them the info they want. In particular, the events of the past few years have heightened investor interest in turnover, health & safety, pay equity, and broader DEI progress – but only a small minority of companies publish specific metrics for those topics. Check out the memos in our “Human Capital Management” Practice Area for more analysis of disclosure trends under the current rule.
We’ve posted the transcript for our recent webcast for members, “Whistleblowers: Best Practices in a New Regime.” Cooley’s Zach Hafer, WilmerHale’s Susan Muck and Gibson Dunn’s Harris Mufson shared all sorts of practical tips for effective whistleblower programs, handling complaints, board matters and more.
With awards surpassing more than $1 billion under the SEC’s whistleblower program and more employees being willing to speak out, this is a topic that every company needs to know about. Here’s a nugget from Zach about handling complaints:
In the very early stages, a company should assess whether to involve outside counsel, even if just for a consultation. Obviously not every whistleblower situation calls for a full engagement of outside counsel to conduct an internal investigation, but you should assess it and consider consulting outside counsel in the first instance. Some of the factors that would be relevant to a decision like that would be: how high up did the allegations go, how isolated or far-reaching is the conduct, and how inappropriate is the conduct or the alleged conduct?
If the whistleblower is anonymous, my strong advice would be to not spend time trying to figure out who it is – you want to steer clear and stay within the lines of anti-retaliation and related laws. If the whistleblower is not anonymous, to the extent it’s practicable, I’d limit the number of people who know their identity. It can be a lot more distracting than helpful trying to identify the whistleblower, whereas if the whistleblower is anonymous, it would be difficult to retaliate or take any actions that could be construed as retaliatory. That’s one reason why, even if certain executives and counsel know the identity of the whistleblower, it’s best practices to shield that identity to the extent possible.
If you aren’t yet a member, email sales@ccrcorp.com to sign up today and get access to the full transcript.
Today I’m resharing a blog that Lawrence wrote on Monday for PracticalESG.com. Since then, several more companies have announced that they are suspending operations in Russia – including Boeing, Disney, Exxon and Ford. For more on these complicated issues, also see Matt Levine’s Bloomberg column yesterday about writing down Russian assets and whether weapons funding is now an ESG investment:
The human and global security costs of the Ukraine situation are hard to think about. Without a doubt, people and families living in the country are affected in ways words can’t adequately reflect. That words are inadequate may be good – because it shows the meaning of actions. Actions undertaken by companies in the next days can have meaningful lasting impacts.
Some companies (such as BP and Equinor) have already announced steps they are taking to reduce or eliminate business interests in Russia. The White House issued new sanctions on the largest Russian financial institutions and a number of “Russian elites.” The OECD announced it terminated discussions with Russia and is reviewing the country’s involvement in various aspects of the organization. Dave Lynn wrote last week that U.S. companies are starting to consider how to manage and disclose bans, sanctions and prohibitions that could impact them. Each new action taken by governmental and quasi-governmental organizations will have domino effects.
ESG as a corporate initiative faces an unprecedented and acute challenge. The magnitude and speed of Russia’s actions did not allow companies to conduct advance analysis and preparation, yet companies need to respond sooner rather than later. A few things I expect to see with regard to ESG activity for the foreseeable future include:
– Ending business relationships with Russian entities and divesting holdings of Russian businesses. Keep in mind that for a divestiture to be successful, that means a buyer is on the other end. Perhaps it is worth asking who would be a buyer of Russian interests in this moment? This Reuters article on BP points out that the company hasn’t made clear just “how it plans to extricate itself” from its Rosneft stake.
– Stepping up due diligence on business partners, who they deal with and where their business interests are.
– Sanctions issued by individual countries and the EU, along with industry and company responsible sourcing commitments, will likely disrupt certain supply chains as Dave mentioned. One precious metals industry pundit pointed to gold from Russian refineries in this context. Banks Credit Suisse and Societe Generale SA announced they are halting Russian commodity financing. Companies will need to identify and screen alternate suppliers.
– Increased direct humanitarian aid and more emphasis on planning to assist in future similar crises. For example, I’ve seen posts on LinkedIn from companies offering Ukrainians temporary jobs and living arrangements – even offering to pay transportation costs.
– Managing near term carbon reduction planning, especially for those involved in providing energy in Europe. Russian forces have reportedly destroyed a gas pipeline in Kharkiv and an oil terminal near Kyiv.
– Every country’s view of energy independence, or at least reducing reliance on imported fossil fuel, is now likely being reprioritized. That may or may not align with current sovereign and corporate plans for alternative energy development.
Lawrence’s book – “Killing Sustainability” – also gets into the practical aspects of defining ESG and making decisions in an evolving ESG framework. A brand new, updated edition of that resource is available in the “guidebooks” section of PracticalESG.com.
As Dave blogged last month, the SEC is seeking candidates to join the Investor Advisory Committee, which advises the Commission on a wide array of issues. In this 12-minute podcast, I talked with JW Verret about his experience on the IAC – including:
1. What the SEC’s Investor Advisory Committee does, and how he got involved
2. Specific initiatives that he’s looking forward to seeing the IAC tackle in the upcoming year
3. His open call for comment on digital asset regulation – based on the IAC’s recent hearing on crypto
4. How the SEC uses the input that the Investor Advisory Committee provides
5. Suggestions for those who are interested in being appointed to the IAC, in response to the SEC’s call for candidates
One of JW’s suggestions for anyone interested in getting involved with the IAC is to watch the Committee’s open meetings to get a sense of what they do. Those are available via live webcast – and the next one is next Thursday, March 10th. The agenda includes departing remarks from JW as well as Paul Mahoney, who are both rotating off the IAC. The Committee will also discuss cybersecurity and other matters.
For this podcast, we have also posted a short transcript, to give our members an extra way to absorb the info. (If you aren’t yet a member, sign up by emailing sales@ccrcorp.com or calling 800-737-1271.)
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 20-minute talk with Aon’s Laura Wanlass.
Laura shared her experience with creating & leading Aon’s Global Corporate Governance & ESG Advisory practice – and how an off-road navigation rally in the desert keeps her on track. If you want a nudge to pick up a hobby – or to just live vicariously through Laura – this episode is for you.
For even more about Laura, also check out this 2021 write-up on our Mentor Blog. Anyone who is interested in participating in our Mentor Blog interview series can email me with responses to these questions at any time. You can also encourage someone you know to participate, or even send me suggestions of people in the securities / corporate governance community who you’d like to learn more about. We would love to connect and elevate more members!
On Friday, the SEC announced a proposal that would increase public info of short sale data. Even though I’ve been mainlining news alerts for about 8 hours/day this past week, it has mostly been about war, sanctions, heroism & tragedy. So, this one slipped by me – especially because the SEC didn’t share its usual series of emails when it was issued (maybe our friends at the Commission were also focused on other things). Anyway, here’s the gist of it:
New Exchange Act Rule 13f-2 and the corresponding Form SHO would require certain institutional investment managers to report short sale related information to the Commission on a monthly basis. The Commission then would make aggregate data about large short positions, including daily short sale activity data, available to the public for each individual security.
The fact sheet explains that proposed Rule 13f-2 and the related proposed Form SHO are designed to fulfill the SEC’s Dodd-Frank mandate to make short sale data publicly available. It gives this additional detail on what would be required:
The proposed rule would require institutional money managers to file confidential Proposed Form SHO with the Commission via EDGAR, within 14 calendar days after the end of each calendar month, with regard to each equity security and all accounts over which the manager meets or exceeds either of the following thresholds:
● For any equity security of an issuer that is registered pursuant to Section 12 of the Exchange Act or for which the issuer is required to file reports pursuant to section 15(d) of the Exchange Act in which the manager meets or exceeds either (1) a gross short position in the equity security with a US dollar value of $10 million or more at the close of any settlement date during the calendar month, or (2) a monthly average gross short position as a percentage of shares outstanding in the equity security of 2.5 percent or more; or
● For any equity security of an issuer that is not a reporting company issuer as described above in which the manager meets or exceeds a gross short position in the equity security with a US dollar value of $500,000 or more at the close of any settlement date during the calendar month.
The information a manager would report includes:
● The name of the eligible security;
● End of month gross short position information;
● Daily trading activity that affects a manager’s reported gross short position for each settlement date during the calendar month reporting period.
The Commission would publish, based on information reported in Proposed Form SHO:
● The issuer’s name and other identifying information related to the issuer;
● The aggregated gross short position across all reporting managers in the reported security at the close of the last settlement date of the calendar month of the reporting period, as well as the corresponding dollar value of this reported gross short position;
● The percentage of the reported aggregate gross short position that is reported as being fully hedged, partially hedged, or not hedged; and
● For each reported settlement date during the calendar month reporting period, the “net” activity in the reported security, as aggregated across all reporting managers, within 14 business days of the calendar-month-end reporting deadline.
To supplement the short sale data, the release also proposes a new Rule 205 under Regulation SHO – which would require brokers to include new “buy to cover” marking on purchase orders if they have any short position in the same security at the time the order is entered. This amendment would expand on the markings currently required on the sales side for “long,” “short,” or “short-exempt” orders. The Commission also issued related proposed amendments to the consolidated audit trail under Rule 613 of the Exchange Act that would require CAT reporting firms to report the “buy to cover” info to CAT and to indicate where it’s asserting the “bona fide market making exception” under Regulation SHO. The idea with this fine-tuning to the order process is that it would help the Commission identify short squeezes and other abusive trading practices that may contribute to market volatility.
As this MarketWatch article explains, this proposal fits in nicely with SEC Chair Gary Gensler’s overall goal of market transparency. His supporting statement reinforces the goal of public visibility into short sale activity and the ongoing effort of the Commission to understand market volatility & stress – specifically, the role that short selling might play in market events. Commissioner Hester Peirce also issued a statement in support of the proposal. She’s interested in hearing from commenters whether these disclosure obligations are appropriate in light of the transparency objectives of Section 929X and the proposed rule and how they may affect trading strategies and market making activity in our markets.
The comment period runs until 30 days after the date the proposal is published in the Federal Register or April 26th – whichever is later.
Note, this is different than the rulemaking petition about short reports that John blogged about a few weeks ago. We’ll be posting memos about this proposal in our “Short Sales” Practice Area, where members can get all the info about what it means to companies.
Also on Friday, the Commission issued this 4-page release to reopen the comment period on proposed Exchange Act Rule 10c-1. That rule was proposed just before Thanksgiving last year. It wouldn’t directly impose obligations on issuers, but the info could be of interest. Here’s the original 184-page proposing release and the 2-page fact sheet. Here’s more detail:
Proposed Rule 10c-1 is designed to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association.
Although the original comment period just expired in early January, the Commission is formally re-opening it in light of the implications of proposed Rule 13f-2. The new comment period expires 30 days after the date the re-opening proposal is published in the Federal Register.