Just in time for another round of polarizing mid-term elections, the Center for Political Accountability and the Zicklin Center for Governance & Business Ethics at the Wharton School have issued their annual “Index of Corporate Political Disclosure & Accountability.”
If there is one thing that has become clear over the past 11 years in which this Index has been published, it’s that companies that don’t carefully monitor “political spending” are playing with fire. And it’s important to note that – in addition to candidate donations – the term “political spending” includes contributions to trade associations, committees and lobbying organizations. In the wake of the Dobbs decision this summer, we wrote:
Carefully consider political and trade association contributions. Contributions to politicians, trade associations and other advocacy organizations are already receiving major scrutiny – and that’s only going to increase. Emily blogged recently that two lobbying-related shareholder proposals received majority support at recent meetings. Many trackers now exist that monitor the alignment of corporate political donations with stated values – with several companies already in the news for donations to anti-abortion politicians, and shareholder proponents also picking up the mantle with a new iteration of “values misalignment” shareholder proposals.
Gone are the days when a board could simply confirm that the company’s donations were striking a roughly even split between Republican and Democratic organizations. Now, management may need stricter directives to ensure that each donation aligns with overall values – and the board may need to dig deeper to ensure it’s informed of any potentially controversial activities.
When it comes to S&P 500 companies, this year’s Index finds:
– The number of S&P 500 companies with policies for general board oversight of political spending is 295, up 13.9 percent from 259 companies in 2020.
– Board committee review of direct political contributions and expenditures rose to 255 companies this year from 227 in 2020, an increase of 12.3 percent; board committee review of payments to trade associations and other tax-exempt groups rose to 228 this year from 199 in 2020, an increase of 14.6 percent.
– The number of companies that fully or partially disclosed their political spending in 2021 or that prohibited at least one type of spending is 370. This is over 75 percent of the S&P 500 companies evaluated. It is a record high since CPA and its shareholder partners launched their efforts.
– The number of companies that fully or partially disclosed their political payments to state or local candidates or committees, or that prohibited them, was 334, another record and well more than three-fifths of the S&P 500.
– The number of companies that disclosed some or all of their political spending was 293. The number of companies that prohibited direct donations to state and local candidates, political parties, and committees was 136.
For the first time this year, the Index also expanded to cover Russell 1000 companies (representing approximately 90% of the US market). It’s not a stretch to think that this move will lead to more scrutiny of spending by mid-sized and smaller companies – in the form of shareholder engagements & proposals, or questions from employees and customers. Right now, there’s a pretty big gap in transparency – and potentially, policies – between large & small companies. The Index finds:
– For all non-S&P 500 companies in the Russell 1000, the average score is 12.8 percent, on a scale of zero to 100. The overall Index score for all S&P 500 companies this year, for example, is 57.0 percent.
– There are 54 companies in the non-S&P 500 portion of the Russell 1000 with general board oversight of company political spending, compared with almost six times as many, 307 companies, in the full S&P 500 with the same oversight.
For “best practice” comparisons, take a look at the full Index – as well as the policies and disclosures of the six companies that scored a winning 100: AT&T, Becton Dickinson, Consolidated Edison, Edison International, HP Inc. and Visa. Also see the resources in our “Political Contributions” Practice Area.
According to the latest CPA-Zicklin Index, most large companies say their board oversees political spending – but few smaller companies are talking about it. PwC’s annual director survey seems to support that finding. Here’s one of the takeaways:
Only 39% of directors say their board has discussed the company’s stance on social issues in the past 12 months. Even fewer—30%—say they have discussed corporate political activity.
The survey gathered responses from 700+ directors. It has some other interesting findings as well. For example, 64% of male directors say that board diversity initiatives are driven by political correctness and that shareholders are too preoccupied with the topic. With the Supreme Court poised to overturn colleges’ ability to consider racial diversity in admissions, corporate boardrooms also seem to be growing skeptical of the near-term benefits of diversity, even while acknowledging that it brings unique perspectives to decision-making and prioritizing diversity in succession planning.
On the topic of ESG oversight, the survey notes a gap between small & large companies in board understanding of ESG data controls. Specifically, directors lack confidence in the board’s understanding of climate risk/strategy and carbon emissions, compared to human capital-type topics. And compared to a year ago, 9% fewer directors view ESG issues as impacting company financial performance. Again, the results vary based on demographics – with male directors being less likely to see ESG’s connection to strategy & performance.
Last week, ISS announced the results of its 2022 benchmark policy survey. ISS received responses to the survey from 205 investors – 29% more than last year – as well as 202 companies and corporate organizations.
The results will be used to formulate the proxy advisor’s voting policies, which will be released in draft form in November and finalized in December. Here are some key climate-related takeaways:
Board Accountability on Climate Risk: ISS asked what climate actions/non-actions from Climate Action 100+ “significant emitters” would constitute a “Material Governance Failure” that would call for an ISS recommendation against a director.
– A significant majority of both investor and non-investor categories of respondents expressed that they would consider there to be a material governance failure if a company that is considered to be a significant contributor to climate change is not providing adequate disclosure with regards to climate-related oversight, strategy, risks and targets according to a framework such the one developed by the Task Force on Climate-related Financial Disclosures (TCFD).
– Investor respondents generally agreed that the boards of companies that are large greenhouse gas (GHG) emitters are failing if they do not take steps to address emissions, but support for different actions that could be taken to address emissions varied. Besides a company failing to provide adequate disclosure according to a recognized framework, the three most common choices by investor respondents as demonstrating failures were targets-related, and were (i) a company not setting realistic medium-term targets (through 2035) for Scope 1 & 2 only (50% of investors), (ii) not declaring a net-zero by 2050 ambition (47% of investors), and (iii) not setting realistic medium-term targets (through 2035) for Scope 1, 2 & 3 if Scope 3 is relevant (45% of investors). A strong majority of investor respondents (69 percent) chose at least one of those “targets” responses, which was also the case for 43 percent of the non-investor respondents.
Management Say-on-Pay Proposals: When asked “What do you consider to be the top three priorities when determining if a company’s transition plan is adequate?”, the most popular responses among investor respondents were:
(i) whether the company has set adequately comprehensive and realistic medium-term targets for reducing operational and supply chain emissions (Scopes 1, 2 & 3) to net zero by 2050 (42 percent),
(ii) whether the company’s short- and medium-term capital expenditures align with long-term company strategy and the company has disclosed the technical and financial assumptions underpinning its strategic plans (41 percent),
(iii) and the extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards (38 percent).
The appropriateness of submitting management say-on-climate plans for shareholder approval was questioned by some investor respondents who believe these proposals improperly shift the responsibility for a company’s climate transition plan away from the board and management toward its shareholders.
Climate Risk as Critical Audit Matter: A substantial majority of investor respondents (75 percent) favored seeing commentary by auditors in the audit report on climate-related risks for significant emitters. A smaller majority (64 percent) of investor respondents supported climate-related risks being included by auditors in Critical Audit Matters / Key Audit Matters (CAMs).
– A majority of investor respondents (52 percent) would favor supporting a related shareholder proposal on this issue. Voting against the re-election of audit committee members and voting against the re-appointment of auditors got somewhat lower support (42 percent and 35 percent respectively).
– In comments, several respondents – including both those who favored and opposed the inclusion of climate risks – raised the question of whether auditors currently have the expertise to accurately gauge these risks. Others wrote that this issue is currently not a market norm but may develop quickly due to regulatory requirements that are being finalized in the U.S. and EU and as the International Sustainability Standards Board (ISSB) develops its sustainability standards. Non-investor respondents tended to not support seeing auditors comment on climate-related risk.
Financed Emissions: During the 2022 proxy season, a number of shareholder proposals were filed that asked companies to restrict their financing or underwriting for new oil and gas development in line with the assumptions in the International Energy Administration’s Net Zero 2050 Scenario, which prompted us to ask a question about expectations on climate-related disclosure and performance of financial institutions.
– Around half of investor respondents said that in 2023 large companies in the banking and insurance sectors should fully disclose their financed emissions (54 percent), have clear long-term and intermediary financed emissions reduction targets for high emitting sectors (51 percent), have a net-zero by 2050 ambition including financed portfolio emissions (49 percent), or should publicly commit to disclose financed emissions at some point in the future by joining a collaborative group such as the Partnership for Carbon Accounting Financials (PCAF) and/or the Glasgow Financial Alliance for Net Zero (GFANZ) (45 percent).
– Around 30 percent of investor respondents voiced support for these companies committing to cease financing for new fossil fuel projects.
Most survey respondents also predict that investors’ expectations for climate disclosure and performance will increase over time – with heightened focus on net-zero targets, comparable climate disclosures, greater Scope 3 disclosures and more interest in corporate investment in low-carbon products and strategies.
Today is our “19th Annual Executive Compensation Conference” – Wednesday & Thursday were our “2022 Proxy Disclosure Conference.” Both conferences are paired together and they’ll also be archived for attendees until next August. If you missed these conferences or our “1st Annual Practical ESG Conference” but want to purchase access to the archives, email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that. Here’s more info for people who are attending:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to Watch Archives: Members of TheCorporateCounsel.net or CompensationStandards.com who have registered for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
You can still register to view today’s event and get on-demand archive access to all of the Proxy Disclosure and Executive Compensation Conference from this week! Email sales@ccrcorp.com or call 1-800-737-1271, Option 1. Archives and transcripts will be available on-demand until July 31, 2023, to help you navigate challenging proxy season issues.
Investor activist Jim McRitchie recently filed a breach of fiduciary lawsuit against Meta in which he contends that in a system that emphasizes stockholder primacy, the directors’ fiduciary duties must consider the impact of the company’s actions on the diversified portfolios of its investors. As the complaint puts it, “if the decisions that maximize the Company’s long-term cash flows also imperil the rule of law or public health, the portfolios of its diversified stockholders are likely to be financially harmed by those decisions.” This excerpt from the complaint summarizes the theory of the case:
For a corporation whose impact is so widespread, the well-established doctrine of stockholder primacy cannot be rationally applied on behalf of investors without recognizing the impact of portfolio theory, which inextricably links common stock ownership to broad portfolio diversification. The economic benefits from—indeed the viability of—a system of corporate law rooted in maximizing financial value for stockholders would vanish if it forced directors to make decisions that increased corporate value but depressed portfolio values for most of its stockholders. But this is precisely how the Company has operated: Defendants have ignored the interests of all of its diversified stockholders, making decisions as if the costs that Meta imposes on such portfolios were not meaningful to stockholder
I can’t imagine that this argument is going to get any traction with the Delaware Chancery Court – and as UCLA’s Stephen Bainbridge has pointed out, it isn’t the first time someone has made this kind of argument. Bainbridge also notes the fundamental problems with the workability of such a standard:
I am dubious about whether managers have the training or expertise to manage a company in the interests of diversified investors at large. Suppose managers have come up with an idea for a new product. Do we really think they can–or should–evaluate whether selling the new product would injure competitors and thus be adverse to the interests of diversified investors?
My guess is that proponents of this fiduciary duty theory would likely respond that the BJR would continue to apply to the board’s ordinary course business decisions. As illustrated by Sarah Murphy’s comments in an interesting exchange with Doug Chia on LinkedIn, they appear to be making a more broadly focused argument:
The board’s job is to optimize value for the benefit of shareholders, but if most shareholders are diversified (as they are in public markets), then a value-maximization strategy that relies on externalizing costs that diversified portfolios internalize is clearly not “for the benefit” of those shareholders. As the plaintiff’s lawyer says, “Investment theory and the law governing investment fiduciaries is built around the importance of diversification, and we think it essential that the law governing corporate fiduciaries acknowledge that reality.”
For a more in-depth explication of this argument, check out Jim McRitchie’s blog. Anyway, “externalized costs” are those that are generated by a particular enterprise but carried by society as a whole, and to me, that makes corporate law the wrong mechanism to use in sorting them out. It seems to me that issues about how to handle the social costs associated with business are best addressed through the political and regulatory process, not through corporate law concepts of fiduciary duty.
Gunster’s Bob Lamm recently blogged about an issue that he’s reluctantly concluded needs to be on the board’s agenda – human trafficking. Here’s his reasoning:
There is a strong case to be made why businesses need to work on [human trafficking’s] elimination, but we need to make that case. One of the key components of that case should be apparent to us all; can you say “supply chain”? As boards increasingly take deep dives into how their companies address supply chain challenges, they should ask questions about the components of their supply chains: Where are goods coming from? Are they the products of forced labor? Child labor? If that doesn’t move a board, how about reputation? How would the company’s investors, employees, customers, and others react if they learned that its products are produced by women who are virtually enslaved, making far less than what we euphemistically call “subsistence wages”? How would that play out in the media?
Just how serious an issue human trafficking is was brought home to me when Cleveland hosted the 2016 Republican National Convention. A friend of mine was working for one of our economic development groups and attended a presentation that the FBI gave to downtown hotel operators about the potential human trafficking issues that surround any large destination event. The presentation was, in his words, “sobering.” Directors have a lot on their plates, but Bob makes a good case that this is another issue that like needs board-level attention.
Today is the second day of our “2022 Proxy Disclosure Conference” – tomorrow is our “19th Annual Executive Compensation Conference.” Here’s more info:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Proxy Disclosure/Exec Comp” tab to see the agendas for each day, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “2022 Proxy Disclosure Conference” and tomorrow’s “19th Annual Executive Compensation Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271, Option 1. If you have missed any of the Conference, archives and transcripts will be available on-demand afterwards!
In a recent Directors & Boards article, GW Law School prof. emeritus Lawrence Cunningham challenged the idea that there is a single set of corporate governance “best practices” that companies should follow. Anyone who has been in a board room during the past couple of decades has heard governance consultants repeatedly explain how the company needs to implement specific actions that may make zero sense for that particular business or else risk be viewed as a governance pariah. How did we get this way? Cunningham points the finger at the rise of what he refers to as the “generalists”:
A dominant reason is the expanding power of generalists offering only a macro-perspective. A generalist viewpoint is understandably held by all passive asset managers and proxy advisors, most policy makers and many empirical researchers who favor working with large general datasets. All have incentives to identify and promote universal practices for all boards.
In contrast, specialists take a micro-perspective on particular companies, including stock-picking shareholders, the directors who serve them, and analysts and researchers prepared to immerse themselves in the details of particular companies. Such cohorts would undoubtedly endorse universal practices that work, but they have an interest in resisting overgeneralized prescriptions.
In recent years, generalists have wielded far more power than specialists in corporate governance, and their worldview now dominates. As a result, gold standards and best practices are everywhere in governance, even if they are not good for particular companies. A catalog of good governance reigns, including refreshment imperatives, such as director age limits and term limits, and control-related rules, like majority voting in director elections and negative views of dual-class capital structures.
The article goes on to point out that the empirical studies purporting to identify governance best practices were based on astonishingly bad data, which, once corrected, calls into question many of the received truths about the link between “good governance” & investment returns.
This isn’t the first time that I’ve blogged about this topic, and I admit that articles like this are like catnip to me. That’s because I absolutely agree that a one-size fits all approach to corporate governance is one of the dumbest ideas that companies and investors have ever bought into, particularly since nobody really seems to have the vaguest idea about what “good governance” really is.
Michael Levin recently shared via Twitter an example of universal proxy cards used by participants in what’s apparently the first contested election to be conducted under the new rules. Here are the preliminary proxy materials filed by Apartment Investment and Management Company, and here are the materials filed by the dissident group. Michael’s tweet includes a link to his TAI newsletter discussing the filings, which provides some interesting insights into the contest & the filings themselves. Here’s an excerpt:
First, the proxy cards recommend how shareholders vote, in addition to properly distinguishing between the AIM and L&B nominees. The SEC rule was largely silent as to how the proxy card (not the proxy materials) should set forth specific voting instructions. We expect to see more companies and activists to test the boundaries of what the SEC will allow them to put on a proxy card.
Second, both of the AIM and L&B proxy statements include a curious statement. AIM’s appears in the Q&A section (p. 5), with a similar idea in the letter to shareholders:
If I want to vote for one or more of Land & Buildings’ nominees can I use the WHITE universal proxy card?
Yes, if you would like to elect some or all of Land & Buildings’ nominees, we strongly recommend you use the Company’s WHITE proxy card to do so.
L&B states (p. 17):
Any stockholder who wishes to vote for one of the Company’s nominees in addition to the Land & Buildings Nominees may do so on Land & Buildings’ BLUE universal proxy card. There is no need to use the Company’s white proxy card or voting instruction form, regardless of how you wish to vote.
[emphasis theirs in each excerpt]
Why would each acknowledge that shareholders might vote for the other’s nominees, and suggest they could do so using their own proxy card? We’d think they would do everything it could to discourage this. It appears each wants to receive as many proxy cards as it can. They can thus track which shareholders have already voted. If AIM receives proxy cards with votes for L&B nominees, and L&B for AIM nominees, then each can easily contact those shareholders, and attempt to persuade them to change their votes. Clever…
Today and tomorrow is our “2022 Proxy Disclosure Conference” – Friday is our “19th Annual Executive Compensation Conference.” Here are the agendas: 18 substantive panels over 3 days – including an interview with Renee Jones, the Director of the SEC’s Division of Corporation Finance. Here’s more info:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform. Once you log in to the Conference Platform, follow the “Proxy Disclosure/Exec Comp” tab to see the agendas for each day, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to View Archives & Transcripts: Members of TheCorporateCounsel.net or CompensationStandards.com who register for the Conferences will be able to access the conference archives on these sites using their existing login credentials beginning about a week after the event, and unedited transcripts will be available to these members on TheCorporateCounsel.net and CompensationStandards.com beginning about 2-3 weeks after the event. If you’ve registered for the conferences through CCRcorp but are not a member, we will send login information to access the conference footage and transcripts on TheCorporateCounsel.net or CompensationStandards.com.
If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP.
– How to Earn CLE Online: We are applying for up to 15 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these “CLE FAQs” carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts every 15-20 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “2022 Proxy Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271, Option 1. If you have missed any of the Conference, archives and transcripts will be available on-demand afterwards!