Here we go again, this time from a new report on board refreshment policies from The Conference Board, ESGAUGE, and other collaborators:
As US corporations seek to increase diversity of backgrounds, skills, and professional experience on their boards, they face a central hurdle: limited board turnover that creates few openings for new directors. Indeed, the percentage of newly elected directors in the S&P 500 has remained flat over the past several years.
Broc griped about the stalemate on board diversity as far back as 2017, and The Conference Board’s recommendations to overcome the impasse are pretty much unchanged from when I blogged about the lack of director turnover and its impact on board composition over a year ago. In that regard, consistency is a good thing – it now just requires execution. Here’s what the current-year analysis says:
Companies have a variety of board refreshment tools at their disposal to increase diversity of backgrounds, skills, and professional experience on their boards. The tools that focus on triggering discussions of turnover or reinforcing a culture of board refreshment may be particularly valuable.
These include overboarding policies, policies requiring directors to submit their resignation upon a change in their primary professional occupation, guidelines on average board tenure, individual director evaluations as part of the annual board self-evaluation process, and informal discussions that set an expectation that directors do not need to serve until they are required to leave, but rather should consider whether their contributions are still relevant to the needs of the company. Unlike policies that mandate turnover, such as term limits and retirement policies, these more flexible tools can lead to a more thoughtful process in proactively aligning board composition with the company’s strategic needs.
An encouraging finding from this report is that there has been an uptick in individual director evaluations & use of independent facilitators:
Almost all companies disclose conducting some form of annual board evaluation (which, for NYSE companies, is mandated by listing standards) — and the combination of full board, committee, and individual director evaluations is growing in popularity. As of July 2022, 99 percent of S&P 500 and 97 percent of Russell 3000 companies disclosed carrying out board evaluations. In the S&P 500, conducting full board, committee, and individual director evaluations has become the most common practice (52 percent of companies reported this combination as of 2022 compared to 37 percent in 2018). Indeed, in the S&P 500, the practice of conducting only board and committee evaluations has declined from 58 percent in 2018 to 46 percent as of 2022. Although the Russell 3000 has seen a similar pattern, with a rise in full board, committee, and individual evaluations (from 18 percent in 2018 to 34 percent as of July 2022), 60 percent of Russell 3000 companies continue to conduct only full board and committee evaluations.
Companies are increasingly disclosing their use of an independent facilitator for board evaluations — and larger companies are more likely to disclose hiring an independent facilitator than their smaller counterparts. As of July 2022, 29 percent of S&P 500 companies and 15 percent of Russell 3000 firms disclosed hiring an independent facilitator for board evaluations versus 14 percent of S&P 500 and 6 percent of Russell 3000 companies in 2018. In 2022, 42 percent of the largest companies, with annual revenues of $50 billion and over, disclosed their use of an independent facilitator, but only 5 percent of the smallest companies with annual revenues of under $100 million did so.
Overboarding remains one of the primary reasons for votes against directors, as Emily noted earlier this year on our “Proxy Season Blog.” While State Street and Vanguard allow for some flexibility in applying their overboarding policies, this Financial Times article says that BlackRock’s recent votes show that it has been less forgiving, at least at Big Tech.
The article identifies directors at Salesforce, Twitter, Alphabet, and Amazon whose re-elections were opposed by BlackRock due to “overcommitment” – which for non-executives, BlackRock defines as serving on more than 4 public company boards. The article says that Alphabet changed its overboarding policy this year due in part to BlackRock pressure.
In the voting summary that BlackRock released in July, the asset manager said that it voted against 182 directors in the Americas because of overboarding concerns – which is less than the number of directors who got the “thumbs down” for independence, board diversity or misaligned compensation decisions, but still within its “top 4” reasons for not supporting director elections.
Make sure to visit the “Overboarding” resources in our “Board Composition” Practice Area to keep up with all of the policies you need to know – and protect your directors. If you’re not already a member with access to this useful resource, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Yesterday, the SEC’s Acting Chief Accountant, Paul Munter, issued a statement to say that the SEC & PCAOB are skeptical of alternative audit engagement structures that companies might attempt to use as a workaround to HFCAA compliance. The statement follows the tentative deal that the PCAOB has reached with China-based regulators regarding inspections – and the apparently growing practice of some China-based firms to switch to US-based lead audit firms in an effort to avoid delistings. Here’s the bottom line:
Issuers and accounting firms looking to avoid the uncertainty about whether they will be in compliance with HFCAA may be tempted to engage in an efficient breach of other applicable legal and audit requirements. Such issuers and accounting firms should be forewarned that doing so may well result in investigations and enforcement actions by the PCAOB, the Commission, or both, and that the attendant liabilities may attach not only to the accounting firms and their associated persons, but also to issuers, their audit committees, and officers and directors. Any attempt by issuers or accounting firms to engage in such an efficient breach and avoid the consequences of HFCAA in contravention of other legal and audit requirements should therefore be avoided.
Reuters reported yesterday that Digital World Acquisition Corp., the SPAC that’s attempting to merge with Donald Trump’s social media venture, has so far failed to get the approval from 65% of shareholders that’s necessary to extend the deadline to complete the deal.
Management is once again postponing the vote tally, this time until Thursday – and if that doesn’t pan out, the sponsors will sink in more of their own funds in order to extend the life of the SPAC by three months. The deal has been on hold while the SEC and others investigate how it came about – here’s more detail from the article:
Digital World has disclosed that the SEC, the Financial Industry Regulatory Authority and federal prosecutors have been investigating the deal with TMTG, though the exact scope of the probes is unclear.
The information sought by regulators includes Digital World documents on due diligence of potential targets other than TMTG, relationships between Digital World and other entities, meetings of Digital World’s board, policies and procedures relating to trading, and the identities of certain investors, Digital World has said.
Per the playbook, the media company blames political bias for the regulatory scrutiny of this transaction. But what that statement misses is that the SEC and others are searching for ways to kill SPAC deals regardless of who’s involved. In a separate enforcement action announced yesterday, the Commission charged a New-York based investment adviser with failing to disclose conflicts of interest relating to SPAC sponsor compensation and failing to timely file a Schedule 13D. The investment adviser agreed to a censure and a $1.5 million penalty to settle the charges.
If you haven’t already received a comment letter, be aware that Corp Fin is taking a close look at disclosure of board leadership structures and risk oversight functions. These comments are going to many companies – it’s not apparent that this initiative is focusing on companies in particular industries or with particular governance structures. What’s the Staff looking for? Here’s one of the comments:
Please expand your discussion of the reasons you believe that your leadership structure is appropriate, addressing your specific characteristics or circumstances. In your discussion, please also address the circumstances under which you would consider having the Chair and CEO roles filled by a single individual, when shareholders would be notified of any such change, and whether you will seek prior input from shareholders.
Other comments suggest that the Staff is seeking detailed disclosure about how the board administers the risk oversight function and the role of the independent chair or lead independent director.
So far, it sounds like all of the comments request that changes be made in future filings, versus amending earlier disclosures. It is striking how far beyond any specific disclosure line items these comments seek to go, but at the same time the requested disclosures seem innocuous enough that some companies may just agree to the disclosures to make it go away.
If you’re working on a response to this or any other Staff comments, make sure to consult our “SEC Comment Letter Process” Handbook – which includes fresh, practical insights from Sidley’s Sonia Barros and Sara von Althann on how to best navigate that process. If you’re not already a member with access to this useful resource, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Back in 2011, the SEC found itself on the losing end of litigation over its “proxy access” rulemaking, after the US Chamber of Commerce challenged the Commission’s economic analysis. In its July lawsuit against the SEC that takes issue with the rollback of 2020 proxy advisor rules, the Chamber is once again leveraging this argument.
Critiques of the SEC’s cost-benefit figures aren’t new, but they have become particularly acute in light of the current rulemaking agenda. This WSJ article says that it is a major theme in recent comments to the SEC’s proposal to enhance ESG disclosure by investment companies.
Compliance costs are also top-of-mind for companies facing down the SEC’s climate disclosure proposal. Among other impacts, this 27-page Gibson Dunn memo dives into what public company oil & gas companies are telling the SEC about their expected regulatory burden if and when that proposal is adopted. Here’s an excerpt:
The Commission estimates that annual direct costs to comply with the proposed rules (including both internal and external resources) would range from $490,000 (smaller reporting companies) to $640,000 (non-smaller reporting companies) in the first year and $420,000 to $530,000 in subsequent years.
52% of public company letters and 43% of industry association letters raised concerns about the actual (and economic) cost of the Proposed Rules. Many believe the SEC underestimated the implementation costs, and a handful of companies provided quantitative estimates as to actual cost.
Sample Comments:
• “We are . . . concerned about the cost, complexity and practicability of complying with parts of the Proposal (in particular, the proposed amendments to Regulation S-X) that will be borne by registrants of all sizes, and which we believe, will significantly exceed the estimates set forth in the Proposal. Our company expects implementation costs in the $100-500 million range, and annual costs for on-going compliance in the $10-25 million range — costs that will ultimately be borne by investors and the public markets.”
• “This additional reporting [on GHG emissions] will come at a high costs: EPA estimated if it lowered its own de minimis reporting thresholds from 25,000 to 1,000 metric tons of CO2e per year it would cost an additional $266 million (in 2006 dollars). . . . EPA updated the reporting requirements for petroleum and natural gas systems in 2010. In doing so, EPA estimated that the incremental cost to reduce the bright line threshold from 25,000 to 1,000 would cost an additional $54.43 million (2006 dollars). . . . Based on EPA’s figures, the Proposed Rule could mean an additional cost to [the company] of $7,000,000 or more in 2006 dollars just to track and report Scope 1 emissions from additional facilities. These figures also suggest that the Commission has not fully accounted for the cost of this rule.”
• “[The company] estimates the cost of voluntarily reporting Scope 3 GHG emissions to be more than $1 million. . . . This does not include accounting personnel to incorporate Scope 3 emissions reporting into our Form 10-K or any commercial efforts needed to amend contracts or attempt to gather and verify Scope 3 emissions data across our value change to the extent it can be identified. Furthermore, [the company] estimates implementing the amendments to Regulation S-X would also be in the millions of dollars.”
• “[A small cap public company] estimate[s] that the total annual cost of satisfying the disclosure requirements set forth in the Proposal would be approximately $500,000 to $800,000, which would be significant for a company of our size.”
• “We believe the Commission’s cost estimates are significantly understated for large accelerated filers. . . . Currently, [the company’s] climate-related disclosures activities in line with TCFD recommendations require time and several million dollars in costs for data and information collection, IT system solutions, services provided and other related tools, techniques, and expertise. This does not include the significant additional time and cost of assurance of our performance data and disclosures.”
• “[W]e believe the SEC has significantly underestimated the costs of compliance, which we believe would be many multiples of the projected $640,000 per year initially and would likely increase over time.”
• “The cost of registrants trying to report in alignment with just certain aspects of TCFD for their first time on a voluntarily basis can be around $500,000. This does not account for the level of rigor, financial line items, attestation, and liability costs associated with complying with this Proposed Rule. The actual cost for complete alignment to TCFD could be up to $1,000,000 per registrant over several years. This does not include the annual cost associated with preparing for and conducting attestation.”
• “[B]y only considering the costs of compliance to the public companies that are required to file, SEC misses completely the costs to companies that supply SEC filers, the largest being the induced requirement to gather and report their GHG emissions to the filing company as a condition of their supply relationship. . . . [B]ecause filing companies will have to undertake the herculean task of estimating their Scope 3 emissions, they will have no other choice but to require their suppliers to provide their GHGs, even if those suppliers have no regulatory requirement otherwise to report to SEC or EPA.”
While these comments don’t seem to be moving SEC Chair Gary Gensler to give up on these proposals, they could influence parts of the final rules. The risk of not heeding these concerns could be that industry groups pounce on the economic analyses in court – like the Chamber is already doing – and the rules get vacated post-adoption.
The comments on the SEC’s pair of proposals for ESG investment funds are showing that these rules could increase pressure for portfolio companies, which is something that Lawrence said to watch for when he blogged about the proposals earlier this year. Here’s an excerpt from BlackRock’s recent comment letter to the SEC on the proposal to enhance disclosure about investment companies & advisers’ ESG practices:
Final rules on corporate GHG disclosures should be implemented before requiring fund level disclosures. Climate risk is financial risk and as a fiduciary to our clients, we have taken a number of steps to address climate-related financial risk, including by providing greater transparency. However, climate metrics continue facing methodological and data challenges. Corporate level disclosure requirements should precede requirements for fund level disclosures to provide market participants with climate-related information, including greenhouse gas (“GHG”) metrics.
We also respectfully disagree with the SEC’s proposal for funds to resort to “best efforts” when disclosure of GHG emissions is not available. Locating and estimating information that is not required to be publicly available is an undue burden and likely to lead to disclosure across funds that is not comparable or consistent across funds, negating the purpose of the SEC’s proposed amendments.
Moreover, in the absence of mandatory GHG emissions reporting across the public and private markets, the proposed rule would force funds to step into what we believe is an inappropriate role of policing their portfolio investments through negotiating for and monitoring data needed for their own disclosures. Further, as we noted in our response to The Enhancement and Standardization of Climate-Related Disclosures for Investors, we respectfully request that the SEC consider its approach with respect to Scope 3 emissions which is distinct from Scope 1 and 2, given the higher degree of estimation and methodological complexity in the former.
The proposals for investment advisers also contemplate requiring more disclosure about ESG voting & engagement strategies. Here’s an excerpt from the SEC release:
We also are proposing amendments to fund annual reports to require a fund for which proxy voting or other engagement with issuers is a significant means of implementing its strategy to disclose information regarding how it voted proxies relating to portfolio securities on particular ESG-related voting matters and information regarding its ESG engagement meetings
BlackRock has recommendations for that part of the proposal as well:
Recognize that engagement and proxy voting are standard parts of asset management. Engagement and proxy voting are a standard part of asset management, for both active and index products, and are not definitive characteristics of an ESG-Focused Fund, or even definitive characteristics of ESG integration. Engagement is a mechanism for investors to seek clarity and provide feedback to companies on governance topics; particularly for index funds, it is not done to exert power over a company’s management team’s decision-making or engineer specific outcomes.
It is crucial to note that stewardship engagement and proxy voting are at their core about encouraging transparency and enabling investment managers to hold company leadership to account where board directors or executive management seem not to have acted in long-term shareholders’ interests. As the bedrock of engagement is governance, which is the “G” of “ESG”, all engagement has an ESG component and indeed nearly 90% of our engagements in 2021 covered a governance topic.
When “E and “S” topics are raised in engagement meetings, the intent is to seek greater transparency for our investors on those issues to make informed investment decisions not to dictate a specific outcome to company management. Additionally, the detailed nature of the disclosure required on both engagement and proxy voting is unnecessary, potentially misleading and, particularly in relation to voting, duplicative of already existing disclosure in Form N-PX and the fund’s annual shareholder report.
BlackRock’s comment letter also warns that parts of the SEC’s proposal could actually worsen “greenwashing” and investor confusion. Like many of the SEC’s recent “ESG”-related rulemaking initiatives, the two proposals aimed at investment companies & investment advisers are drawing a lot of suggestions for improvement.
It’s been several years since I saved Thanksgiving, so as we prepare for summer’s official sendoff, I thought it was high time for me to once again share my culinary insights in order to help you enjoy a better Labor Day cookout. Today’s topic is the quintessential American late summer food – corn on the cob – and how you can make it even more delicious.
Corn on the cob has long been a staple of many Labor Day cookouts. There are a couple of reasons for this. First, when many of us older folks were kids, fresh corn was only available during the late summer, so you needed to eat it while you could. Second, even though corn’s available all summer now – which by the way is a sure sign that Western Civilization is advancing, not decaying – most of the local varieties are at their absolute best around the end of August.
I bet many of you folks cook corn on the cob the way your mom did. You peel the corn, make a half-hearted effort to remove the silks, and then plunge it into a big pot of boiling water, cover it and let it boil away for 15-20 minutes. If your mom was a real gourmet, she probably even poured some milk into the pot to help sweeten the corn. People still do that today, but thanks to the kind of sophisticated biotech wizardry that even the folks who came up with Captain America’s Super-Soldier Serum would envy, the corn that’s available today is usually sweeter than a Snicker’s bar.
This traditional recipe produces a very satisfactory – if a bit soggy – ear of corn. But many of us have discovered that there’s a better way. If you want an ear of corn that is easier to prepare and has a delectable combination of smokiness and sweetness, then the grill is your answer. Here’s how you do it.
– First, peel the outer layers of the husk off of the corn. Some people think you need to go down to just the last layer or two, but you don’t and you shouldn’t. You want some of that husk left on to protect the corn from the heat. One of the best things about this recipe is that there’s no need to clean out the silks. Some of the online recipes tell you to remove them because they’ll supposedly burn, but I’ve never had that happen & they’ll come off easier than you can imagine once the corn’s done.
– Next, fire up your grill. I’ve done this on both a gas and a charcoal grill and it works well on either. Personally, I’m a Big Green Egg guy so I like charcoal. You need a pretty hot grill – 400 – 450 degrees or so.
– While the grill’s heating up, dump your ears of corn into a pot of cold water and let them soak until you need them. This is important. You want them good and wet.
– Once the grill’s heated, arrange the ears around the outside of the grill if you’re using charcoal. If you’re using gas, turn off the flame on one side and put the corn on that cool side. You can use this indirect method with a charcoal grill too if you’re more comfortable with it.
– Cook the ears for 12-15 minutes a side, depending on your grill. Keep the grill cover closed. You can periodically turn them if you want, but I usually just let them cook and flip them to the other side after the 12 minutes are up. Don’t be scared if some of the husks get burnt. Think of them as your heat shield.
– Once they’re done, cover them with foil until you’re ready to eat. When you are, just grab an ear and pull the husk off. You’ll need to give it a twist at the bottom in order to get it off. Just grab the silks and they’ll come right off like they never do when you boil them.
At this point, your ears of corn are the ultimate butter delivery vehicle just as God intended them to be. Don’t worry if some portion of your ear of corn looks burnt – trust me, you’ll find that to be the best tasting part. I also promise you that once you grill your corn, you’ll never go back to boiling it again. Have a safe and happy holiday! Our blogs will be back on Tuesday.
As the law firm memos on the Inflation Reduction Act’s 1% excise tax on stock repurchases continue to roll in, we’re learning that there are a lot of unknowns about how it will apply to specific situations. For example, there are a number of uncertainties associated with its application to accelerated share repurchase (ASR) programs.
In an ASR program, a company typically enters into a “forward” contract with a broker-dealer and makes an upfront payment to the dealer. The dealer in turn borrows the company’s shares in the market and delivers them to the company (the shares typically have a value of between 70-85% of the company’s upfront payment). The dealer then buys shares in the open market to repay the borrowed shares during an agreed upon time period. At the end of that period, the company will either receive additional shares or return some of the shares (or cash) to the dealer.
ASR programs are a pretty complicated way to repurchase shares, and this excerpt from a Wilson Sonsini memo says that determining how the excise tax applies to ASR programs isn’t a layup either:
The form of the ASR is that a repurchase occurs on the prepayment date to the extent of the 70-85 percent delivered at the time, which would be subject to an excise tax if it occurs on or after January 1, 2023. This treatment is consistent with the fact that the delivered shares are canceled upon delivery and are generally not considered issued and outstanding (e.g., they are removed for purposes of calculating earnings per share). A second repurchase would occur on the termination date if the dealer delivers additional shares. If, on the other hand, the company delivers additional shares to the dealer, this would be an additional issuance. If the termination date is in the same taxable year as the prepayment date, the adjustment / netting rules described above should apply to reduce the excise tax on the initial repurchase.
However, if the termination date is in a different taxable year, the additional issuance would not offset the initial repurchase, although it could perhaps net against other repurchases in the year of the termination date. It is not clear how a delivery of cash by the company would be treated for purposes of the excise tax. Alternatively, it is possible that the excise tax would not apply until the number of shares that is repurchased is fixed, i.e., upon settlement on the termination date. In that case, an ASR that terminated on or after January 1, 2023, would be subject to the excise tax in its entirety based on the amount of stock finally repurchased, even if the ASR was executed prior to January 1, 2023 (unless regulations issued by the Secretary of the Treasury provide a grandfathering exception).
If it makes you feel better, the M&A folks are dealing with a whole bunch of interpretive issues as well, and I blogged about some of those last week over on DealLawyers.com.
SecuritiesDocket.com recently flagged a Capitol Account article about a new public interest law firm called the “Investor Choice Advocates Network.” ICAN was formed by former SEC enforcement lawyers & first caught the public’s eye when it persuaded Elon Musk & Mark Cuban to join in an amicus brief seeking SCOTUS review of the SEC’s “neither admit nor deny” settlement policy. This excerpt from the article summarizes ICAN’s purpose:
Despite the innocuous name, they plan to use the group to shine a spotlight on what they see as SEC overreach – partly by weighing in on important appellate cases, but also by offering free legal services to defendants caught up in investigations. A number of those probes could be in the cryptocurrency area where the SEC has been busy.
ICAN is the brainchild of Nick Morgan, a partner at Paul Hastings in Los Angeles. The idea was spurred, he says, by watching numerous people being railroaded into settling cases with the SEC rather than taking them to court where they had a decent shot at winning. For those of limited financial means, and no company or insurance firm picking up the tab, there’s really no choice, he says.
The Division of Enforcement has a job to do, but I think it’s hard to argue that there’s not a need for quality pro bono representation to help level the playing field in enforcement actions targeting individuals and businesses with limited resources. The article compared ICAN’s teaming up with Musk & Cuban on the SCOTUS brief to “the teaming up of the Penguin, Riddler, Catwoman and the Joker – with a mission of going after the regulator.” Given ICAN’s purpose, comparing this team of SEC enforcement alums to legendary comic book characters seems to be right on the money – but I have a very different set of those characters in mind.