Monthly Archives: November 2022

November 22, 2022

ESG: Materiality Isn’t Just About the Bottom Line – or Maybe Even About the Bottom Line

When it comes to ESG disclosure, it’s become apparent that a lot of folks at the SEC don’t seem to approach the materiality concept in the traditional way. A recent speech by a senior Division of Enforcement official emphasized that point.  Here’s an excerpt from a CFO Dive article on her remarks:

The Securities Exchange Commission (SEC) will look beyond the figures that underlie net income when determining whether a company is in compliance with the agency’s proposed climate risk disclosure rule, an SEC enforcement official said Tuesday. “If the company has really put a lot of emphasis in its marketing around, for example, what it’s doing in the climate space, those are ways that I think it can become material even if you don’t necessarily see that translate to the bottom line,” according to Carolyn Welshhans, associate director of the SEC’s Enforcement Division.

“Something can be material to a company — for example specific to that company’s business or its operations — not just as financial statements,” Welshhans said at Securities Enforcement Forum 2022 after noting that her comments did not necessarily reflect the view of the agency. “It’s not just quantitative — it’s not just ‘does something impact the bottom line.’”

The idea that financial materiality involves both quantitative and qualitative considerations is something that the Staff has made clear since at least the time that SAB 99 was issued. But I think there needs to be some connection to a statement’s impact on a reasonable investor, and I’m not sure that the example of ESG-related puffery around a marketing campaign makes that connection. That kind of position risks unmooring materiality entirely from financial considerations, which I think will ultimately undermine the SEC’s credibility as a financial regulator.

On the other hand, who cares what I think?  This is where we are, and companies need to act accordingly when it comes to ESG disclosure. I think the article’s quote from Kelly Gibson of Morgan Lewis, who previously led the SEC’s Climate & ESG Task Force, sums up the way companies should approach ESG-related statements in the current environment:

“If you’re making a statement about ESG [environmental, social and governance performance], the SEC is going to consider it to be material. . . I know that’s a blanket generalization, but at least from what I’m seeing that’s not a point to argue with the SEC.”

John Jenkins

November 22, 2022

Board Diversity: Welcoming New Board Members

Liz recently blogged about how the director onboarding process is evolving. This article from Nasdaq’s Center for Board Excellence focuses on a discrete aspect of the onboarding process – welcoming diverse directors to the board. One of the realities about adding new directors with different backgrounds and life experiences is that their addition will alter the board’s group dynamics.

That’s a feature of a more diverse board, not a bug, but the article points out that it creates challenges that need to be addressed in order to ensure the board works well together while welcoming new members with different experiences and expertise. This excerpt discusses ways to teach the culture of the boardroom to new directors:

One suggested action is to appoint existing directors to act as a mentor for new directors—a practice already in place at Zoom. According to Janet Napolitano, Former Secretary of Homeland Security and Board Member of Zoom, the company also “arranged a comprehensive series of meetings with different leaders throughout the company to help me understand the company’s organization and various functions.” She found that a lengthy session on how financial information was presented to the board was most useful.

Joanna Coles, Board Member of Sonos, Snap, The Original Bark Company, and Density, explained that for established boards, it may be useful for new directors to talk to other board members and the executive leadership team, while for new boards, it may be useful to understand the skills and strengths of the other board members and where one can be useful. Moreover, for boards with newly appointed members from underrepresented communities, Joanna Coles advised that they onboard two candidates together. She shared, “This is very effective and takes the attention from the diversity, giving them support with each other to ensure they aren’t talked over.”

Other topics covered by the article include how to build consensus among board members on the purpose of board diversity initiatives, how to create space for new perspectives on the board, and how to develop a pipeline of diverse board talent.

John Jenkins

November 22, 2022

Universal Proxy: Non-Traditional Contestants on the Way?

Some commenters on the newly implemented universal proxy rules have predicted that the ability to use a single proxy card and the potential to run a proxy contest a lot more cheaply than in the past may attract non-traditional players to enter the fray. This recent blog from Jim McRitchie announcing a forum on using the UPC process to advance board nominees focusing on ESG issues suggests that prediction may soon come to pass – and Jim appears to have a target in mind:

Amazon is an example. If it can be done at an affordable price at Amazon, we can run candidates at many other companies. Engine No. 1’s campaign at Exxon Mobil made history. Yet, they ran industry experts, not directors aimed at converting XOM to a CSR company. I would run a candidate(s) at Amazon concerned with worker rights… as well as other ESG concerns. At the very least, we should start looking for potential candidates.

Jim goes on to say that “We need to move beyond filing 20+ proposals at Amazon and other companies facing a plethora of issues. We need board candidates who share our concerns and to anticipate, rather than just react to issues as they arise. Otherwise, we will continue fighting the symptoms of undemocratic corporate governance.” Stay tuned. This is likely to be a very interesting proxy season.

John Jenkins

November 21, 2022

Officer Exculpation: Glass Lewis Weighs In

Ever since Delaware amended its corporate statute to permit charter amendments exculpating certain officers from damages liability for certain duty of care breaches, companies and their advisors have been anxious to see how ISS & Glass Lewis would react. Glass Lewis became the first firm to definitively address this issue when it issued its 2023 Policy Guidelines last week. Is Glass Lewis on board? Not really:

Under Section 102(b)(7), a corporation must affirmatively elect to include an exculpation provision in its certificate of incorporation. We will closely evaluate proposals to adopt officer exculpation provisions on a case-by-case basis. We will generally recommend voting against such proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling rationale for the adoption is provided by the board, and the provisions are reasonable.

I guess that’s not a definitive no, but I wouldn’t get your hopes up if I were you.

John Jenkins

November 21, 2022

Officer Exculpation: What About ISS?

Okay, so we know where Glass Lewis stands on officer exculpation – what about ISS?  This guest blog from Orrick’s J.T. Ho and Bobby Bee says that ISS seems to be more open to the concept:

ISS recently released proposed changes to its benchmark voting policies for the 2023 proxy season. Among the 17 proposed policy changes announced was an indication ISS will recommend “FOR” proposals to add officer exculpation provisions in a Delaware company’s charter. Such a charter amendment (an “officer exculpation charter amendment”) would be adopted to implement the August 2022 change in Section 102(b)(7) of the Delaware General Corporate Law permitting corporations to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care. For officers of Delaware corporations, adopting such a charter amendment can bring some parity with existing protection for directors.

While ISS is not expected to release its final U.S. Proxy Voting Guidelines for the 2023 proxy season until mid-December, it has already made a few “FOR” recommendations in line with these proposed policy changes. In making such recommendations, ISS identified the below factors as generally supporting adoption of an officer exculpation charter amendment:

– an expectation the protection afforded by the amendment will become commonplace for officers, and failure to provide could put a company at a disadvantage in recruiting or retaining executives;

– the amendment balances shareholders’ interest in accountability and their interest in attracting and retaining quality agents to work on their behalf; and

– the amendment does not appear to negatively impact shareholder rights and conforms to state law.

ISS will also consider company specific factors such as:

– whether a company is involved in the kind of litigation impacted by the proposed amendment at the time of the proposal; and

– whether a company was otherwise considered a “bad actor” with respect to corporate governance.

As of mid-November, there have been at least ten officer exculpation charter amendment proposals announced, with six already acted upon. Of those six, four were overwhelmingly approved by shareholders, while two failed. However, both failures were due to an inability to gain sufficient voting participation. Actual votes cast were overwhelmingly “FOR” adopting the amendment, just not enough votes were cast to cross the majority, or supermajority, participation mark required for approving a charter amendment.

While the above results are generally a good sign of things to come, Delaware companies considering an officer exculpation charter amendment proposal for the 2023 proxy season should take note of the company specific factors being considered by ISS, and consider the need for a proxy solicitor to ensure any majority or supermajority participation thresholds are met in connection with such a vote.

John Jenkins

November 21, 2022

Board Minutes: Best Practices Before, During & After the Meeting

There have been enough articles, blogs & memos written about best practices in keeping board minutes to fill an entire Practice Area here on, but that doesn’t mean there isn’t room for more. In that regard, this recent series of blogs by Perkins Coie’s Erin Gordon covering best practices before, during and after a board or committee meeting is a worthy addition.  This excerpt comes from her second blog, which addresses minute practices during the meeting itself:

Use a clear and concise drafting style that generically reflects the topics addressed and acted upon, and the extent of discussion undertaken. Include defined terms as necessary; minutes should be able to stand on their own.

For more significant decisions or discussions, more detail may be appropriate, but minutes should never be akin to a transcript of the conversation. For executive sessions, even if extended in time, only a high-level overview of the topics for discussion is typically appropriate. If any resolutions are adopted during executive session, use the recitals included in the resolutions to reflect any important considerations or information relied on.

John Jenkins

November 18, 2022

Farewell to Scott Spector

It is with great sadness that I acknowledge today the passing of Scott Spector, who died last week from injuries he sustained in a biking accident. Scott was a very important part of our community for many years, participating in so many of our programs and contributing to our publications for the benefit of our members. Scott was truly a legend in the area of executive compensation and employee benefits law, having practiced for many years at Fenwick, where he was partner emeritus.

As this Fenwick tribute notes, Scott was not only an extraordinary lawyer, but also a great friend and mentor:

Scott created a legacy at Fenwick through his practice, but his greatest impact is felt through his friendship, charisma, and adventurous spirit.

Scott was an exceptional lawyer and devoted friend. He embodied the very essence of Fenwick, always putting people first and serving as a loyal and supportive colleague and mentor. He was magnetic and funny, had an infectious laugh, and was a fearless adventurer who lived life with passion and without regrets.

Scott will be remembered for his selfless leadership and capacity for friendship. His aptitude for making connections influenced every relationship around him. The care and attention he poured into his relationships made everyone he touched feel singularly special. Almost every day, he would rally colleagues to go to lunch, helping forge connections that moved beyond collegial pleasantries and into genuine compassion and support. He enriched the lives and relationships of everyone, simply by knowing him.

Scott was that unique sort of person that I always learned something new from whenever I spoke with him. He was always generous with his time, and was the master of explaining complex issues and “seeing around corners” whenever a new issue emerged. I always enjoyed talking with Scott about cars and his exciting travel schedule. Scott was a great friend to so many in our community, and I know that we will feel his loss deeply.

Our condolences go out to Scott’s wife Holly and their children Stephanie and Melanie, as well as to all of Scott’s many friends and colleagues.

– Dave Lynn

November 18, 2022

Fresh Regulatory Scrutiny in Connection with IPOs

This week, advisories were issued by NYSE Regulation, Nasdaq and FINRA in response to recent instances of unusual price movements following certain IPOs on U.S. exchanges. The focus appears to be on unusually high price spikes immediately following the pricing of IPOs, mostly with respect to small-cap companies with operations outside of the United States.

The advisories focus on the process for vetting companies seeking to list on an exchange, the role of gatekeepers such as underwriters in the IPO process, the potential for market manipulation and the use of nominee accounts in a “ramp-and-dump” scheme, as well as something disturbingly called “pig butchering,” which is the use of seemingly misdirected text messages to lure victims into a relationship that is then used to defraud that person.

The activities described in these advisories from the SROs sound to me like a blast from the past – the tried and true fraudulent boiler room activities that happened with penny stocks back in the 1980s and 1990s. It never ceases to amaze me how these kinds of things come around again and again – it is like we never learn!

– Dave Lynn

November 18, 2022

I Can’t “Let it Be:” The Beatles

A recent speech by SEC Chair Gary Gensler on the Treasury market grabbed my attention because it was titled “The Beatles and the Treasury Market.” Apparently, one of Chair Gensler’s former colleagues at the Treasury Department would wear a different Beatles tie to work every day, and that inspired the SEC Chair to pepper his recent speech to the U.S. Treasury Market Conference with various references to Beatles songs. His recollection about the colleague with the Beatles tie collection reminded me of the very interesting fashion choices that my government colleagues would make at the SEC back in those days long ago when people actually went to work wearing work clothing.

For some reason, Chair Gensler’s speech has prompted me to make a shocking admission in this blog: I am not a big fan of the Beatles. As someone who has spoken about classic rock on this site and at our conferences over many years, I thought that it is finally time to set the record straight that I am not a Beatles fan. This is not to say that I hate the Beatles, because I certainly enjoy hearing their songs from time to time, and I would never imply that the Beatles were not a singularly extraordinary force in the history of rock and roll – it is just that they really do not do anything for me. I hope that Beatles fans out there will forgive me and understand that this is just a statement of my own personal preference – I know that “We Can Work it Out.”

– Dave Lynn

November 17, 2022

SEC Enforcement Actions Against Public Companies: A New Study

Following up on the SEC’s report on fiscal 2022 enforcement activity that I blogged about yesterday, the NYU Pollack Center for Law & Business and Cornerstone Research published a report examining the SEC’s enforcement actions against public companies and subsidiaries during fiscal year 2022.

The report notes that the SEC filed 68 enforcement actions against public companies and subsidiaries in the fiscal 2022, with aggregate monetary reaching $2.8 billion. The 68 enforcement actions in fiscal 2022 represented a 28% increase over fiscal 2021. Issuer Reporting and Disclosure continued to be the most common allegation type in fiscal 2022, accounting for 38% of actions.

The press release announcing the new report noted the following highlights:

– Despite ongoing challenges to the constitutionality of the SEC’s use of administrative law judges, the SEC continued to bring most of its actions (88%) as administrative proceedings in FY 2022.
– Five actions were litigated actions, more than the average of three over the prior five fiscal years and consistent with Chair Gensler’s statement that more cases will be litigated as the SEC increasingly holds wrongdoers accountable.
– The SEC filed four actions against public companies and subsidiaries related to environmental, social, and governance issues.
– In FY 2022, 18% of total monetary settlements came from disgorgement and prejudgment interest, the lowest percentage in SEED. The remaining 82% came from civil and other penalties.
– Only 1% of public company and subsidiary defendants settled without cooperation noted and without a monetary component, the lowest percentage in any fiscal year in SEED.

– Dave Lynn