We have posted the transcript for our webcast “The Latest: Your Upcoming Proxy Disclosures.” Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells LLP and Section16.net, Ron Mueller of Gibson Dunn & Crutcher LLP and yours truly discussed the latest guidance on how to improve your executive and director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult issues on oversight, engagement and disclosure of executive and director pay.

On the topic of the SEC’s potential agenda for executive compensation disclosure and related matters, Mark Borges noted:

While it’s still too early to tell whether the incoming SEC Chair has these or any other compensation disclosure requirements on his immediate agenda, of the three, I think the one most at risk is pay ratio. Even there, I wouldn’t quantify that as high risk. As Dave said, each of those rules was Congressionally mandated, so it’s unlikely that the SEC, of its own initiative, would try to get rid of them or substantially change them. But for pay ratio, people may be performing a cost-benefit analysis and asking whether or not that information is really helpful.

When it was adopted, the SEC believed that this information would provide shareholders with a company-specific metric that would assist them in evaluating executive compensation practices, but seven years later, now that the initial sticker shock has worn off, it’s not clear that the disclosure is serving its intended purpose. For the most part, I think many companies view it as a compliance exercise that requires a fair amount of work once every three years. As far as I can tell, to date, ISS and Glass Lewis, while they provide the pay ratio information as a data point in their reports, don’t really consider it in making their voting recommendations.

Given the reaction to this disclosure in the legal community and in the corporate community, I could envision an effort developing to rescind the disclosure, as I said, on a cost-benefit basis. It’s a lot of work, it costs a lot of money when you have to identify a new median employee, and nobody seems to be using the disclosure, at least at this stage, to evaluate financial and compensation information in any way differently than they could before it was required.

I’m less concerned about the other two rules, pay versus performance and the clawback rule. I don’t think there’s going to be much of an effort at this stage to revisit those rules, at least in 2025. Even though pay-for-performance is a lot of work, and it’s still a bit unclear how investors can best use this information, given that we’re coming up upon the proxy season where, for the first time, companies will be required to reflect a full five years’ worth of information, which was always the rule’s intent, I think it’s going to take a couple more years for the investor community to thoroughly assess this disclosure and determine its usefulness. While this is something to keep an eye on, I don’t think it’s one of the things that’s at the top of the list that needs to be or will be considered for change.

As for the clawback rule, we’re just beginning to see the scope and implications of the compensation recovery process this year, at least with a couple dozen companies, and we’re starting to learn how investors are going to react to the information that’s now available to them. I think it’s going to take a little bit longer, maybe a couple of years there as well, to get a real sense of what stakeholders think about this rule and whether they think that there are things that could be changed. Also, I think the optics of rescinding the rule would be a public relations nightmare. And I doubt that we’re going to see Congress direct the SEC to undo the rule. Yet I could still see some tinkering with the mechanics, depending upon what we learn over the next couple of years when we get into some more complex situations and more companies clawback compensation.

In other areas, DEI is an important one that continues to be a subject of debate. I think the controversy over DEI and disclosure is almost certain to continue. Therefore, it’s too speculative to say what might happen in the disclosure area at this stage. Notwithstanding the publicity of high-profile companies reevaluating their DEI initiatives, there are still a lot of companies that are continuing to integrate these principles in their businesses. I don’t think it’s going to affect disclosure right away, absent some sweeping legislative, judicial or regulatory development.

I also think companies are going to continue to incorporate DEI metrics into their incentive compensation programs with, as we’ve seen in the past, a continuing emphasis on their short-term incentive plans. We’re likely to see a continuing evolution in how companies design and utilize these metrics for now, but the litigation targeting DEI programs is a key factor shaping what happens going forward, particularly this year and next. It remains to be seen how this is going to play out.

In terms of human capital management, as you probably know from the Reg-Flex Agenda, the SEC pushed back the completion of that project until October of 2025. While it’s still there, it wouldn’t surprise me to see that project further stalled or actually set aside.

One that might come back, though, that we haven’t thought about for a while, is the SEC’s proposal from 2020 to revise Rule 701 and Form S-8 regarding equity awards granted to platform workers. As you may recall, back when that proposal was first published, the SEC was considering allowing companies to more easily grant equity awards pursuant to a Form S-8, or in the case of a private company, pursuant to Rule 701, to workers who were providing bona fide services through a company’s technology-based marketplace platform or system. Given the developing relationship between the new administration and the tech community, I could see this proposal being reactivated or renewed.

Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.

– Dave Lynn

In yesterday’s blog. I highlighted the Trump Administration’s imposition of tariffs on Canada, Mexico and China, only to learn later in the day that the tariffs had been suspended for Canada and Mexico for a period of thirty days to facilitate negotiations. The 10% tariff on goods from China was not suspended, and as this Reuters article notes, China announced that it would impose tariffs of 15% on imports of U.S. coal and liquefied natural gas, and 10% on crude oil, farm equipment and some automobiles, beginning on February 10.

It is only fitting that, in this year in which we mark the 50th anniversary of the premier of Saturday Night Live, I have made two Emily Litella references within a span of three months. For the uninitiated, Emily Litella was a Saturday Night Live character played by the iconic Gilda Radner. The bit with Emily Litella was always the same, in that she would get spun up responding to a fictional editorial, and then the news anchor would point out the error underlying her response, and she would say “Nevermind!” It seems weird that this passed for comedy in the 1970s, but that was the magic of those first few seasons of Saturday Night Live. I was only eight years old when SNL premiered, but for some reason my parents would let me stay up late and watch the program and it certainly left a lasting impression on me!

The question inevitably arises now as to whether impacted public companies should take a different approach to their disclosures now that the immediate crisis of the tariffs on products from Mexico and Canada has been averted. In my opinion, it is still appropriate to analyze the potential impact of the tariffs and include appropriate risk factors and MD&A disclosure in upcoming filings, because there can be no assurance that the dispute will be resolved within the 30-day negotiating period. Further, the imposition of the tariffs is emblematic of a larger international trade policy of the Trump Administration that will clearly utilize trade wars to achieve policy objectives. So while I may say “nevermind!” with respect to the immediate threat, the longer term risks should still be accounted for in upcoming disclosures.

– Dave Lynn

A recent report published by SAR, a data analytics company focused on the securities litigation risk of U.S. public companies, notes that the market capitalization losses related to high-risk adverse corporate events studied by SAR amount to approximately $10 trillion, an increase of $1.1 trillion relative to the two-year period ending September 2024. The announcement of the report includes a quote from SAR’s CEO noting:

The frequency and severity of adverse corporate events are the dominant drivers that foment securities litigation risks for directors and officers of U.S. public companies. As of the fourth quarter, issuers now face an increase of about $1 trillion in market capitalization losses linked to high-risk adverse corporate events that materially impacted stock price during the preceding two years. The securities plaintiffs’ bar will take advantage of increasing complexity around risk factor disclosures after the Supreme Court punted on the high-severity securities class action against Meta last quarter. As a result, the securities litigation risks for issuers will be greater in 2025.

SAR quantifies the securities litigation risk footprint of public companies by analyzing the economic impact of adverse corporate events, together with the change in market capitalization of constituent companies within each of the eleven industry sectors. The firm calculates a “SAR Risk Score,” which is a proprietary score assigned to each company listed on the NYSE or Nasdaq based on the frequency and severity of high-risk adverse corporate events during a two-year period. The SAR Risk Score is calculated by dividing the market capitalization losses observed on high-risk adverse corporate events by the issuer’s market capitalization on the preceding trading day.

In the study, SAR notes that the sector with the highest median SAR Risk Score is Health Care with a median score of 29.11%, followed by Information Technology and Consumer Discretionary with 25.44% and 24.21%, respectively.

– Dave Lynn

I just wrapped up a week in Coronado, California where I served as Vice Chair of the 52nd Annual Northwestern Law Securities Regulation Institute, and it was great to get a chance to connect with people and talk securities law in a much warmer climate. Now that I made it through that big event, it is time to turn my attention to the next big event, our 2025 Proxy Disclosure and 22nd Annual Executive Compensation Conferences!

Registration is now open for our 2025 Conferences, which will be taking place October 21-22 in Las Vegas, Nevada. Join us for engaging sessions full of essential and practical guidance, direct from the experts. Register now to lock in our early bird rate and save your seat!

– Dave Lynn

In case you missed it, over the weekend President Trump issued three executive orders directing the United States to impose new tariffs on imports from Canada, Mexico, and China. These tariffs will take effect tomorrow. A White House Fact Sheet notes that the tariffs were imposed under the authority of the International Emergency Economic Powers Act to address “[t]he extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl,” which constitutes a national emergency. No US president has ever used the International Emergency Economic Powers Act to impose tariffs.

As this White & Case alert notes, the tariffs impose an additional 25% ad valorem rate of duty on imports from Canada and Mexico and 10% on imports from China. The tariffs will apply to all imports except Canadian energy resources exports, which will be subject to a 10% tariff. The alert states:

The tariffs apply to products that are entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. Eastern Standard Time on February 4, 2025. Goods already in transit to the United States before to 12:01 a.m. on February 1, 2025 (the day Trump issued the executive orders) are exempt from the tariffs. The executive orders also suspend access to the Section 321 customs de minimis entry process, subjecting shipments below US$800 (which are often e-commerce retail shipments) to the tariffs.

The tariffs will remain in effect indefinitely, until the president decides to remove them. Further tariff increases – by the United States and the target countries – are possible over the next few weeks. The orders state that the president may raise the tariffs further if Canada, Mexico, and China retaliate. All three countries have signaled their intention to retaliate.

As this WSJ article indicates, Canadian Prime Minister Justin Trudeau announced retaliatory 25% tariffs on more than $105 billion of U.S. goods. An announcement regarding retaliatory tariffs is expected from Mexico today.

I highlighted back in October that public companies were contemplating potential risks arising from a change in the Presidential administration, including the potential risks arising from the imposition of tariffs on U.S. trading partners. In the months since then, disclosures have been getting more specific as the outcome of the election became known and the scope of the policy actions came into more focus. Now, as the largest calendar year-end companies are getting ready to file their annual reports on Form 10-K, an analysis must be undertaken to determine how significant tariffs with large US trading partners could impact their business and the economy. Some key considerations include:

– Whether the new US tariffs or new tariffs to be imposed by the other countries will be collected on the company’s goods or goods that are utilized in production of the company’s goods.

– How the tariffs will impact the price that is charged for the company’s goods.

– How the tariffs will impact the cost of goods utilized in producing the company’s goods.

– Whether the imposition of tariffs may impact the availability of goods, including goods in the company’s supply chain.

– Whether the imposition of tariffs will impact the demand for goods that are subject to the tariffs.

– Whether the imposition of tariffs will cause inflationary pressures in the economy and will otherwise have negative economic impacts that could in turn impact the demand for a company’s goods and services.

– Whether mitigation strategies could increase costs that a company may not be able to recover.

Companies should consider these and other relevant risks and uncertainties in the context of preparing their Risk Factors, Business and Management’s Discussion and Analysis sections of their upcoming annual reports on Form 10-K and quarterly reports on Form 10-Q. Some companies are also considering whether the impact of tariffs is so significant that they must provide more current disclosure concerning the situation in a Form 8-K or press release.

As further proof that “what is old is new again,” we covered trending trade war disclosures in this blog way back in 2018.

– Dave Lynn

On Friday, Vanguard published its updated Proxy Voting Policy for U.S. Portfolio Companies for Vanguard-advised funds. The policy was effective on February 1, 2025 and is applicable to 2025 annual meetings.

Consistent with changes we have seen with the proxy voting policies of other investors, Vanguard appears to have revisited its approach to environmental and social shareholder proposals, eliminating guidance regarding specific types of proposals in favor of the following more general statement of the funds’ approach:

It is not the funds’ role as passive investors to dictate company strategy or interfere with a company’s day-to-day management. That said, we believe that a company’s fulsome disclosure of material risks to its long-term shareholder returns is beneficial to the public markets to inform the company’s valuation. Clear, comparable, consistent, and accurate disclosure enables shareholders to understand the strength of a board’s risk oversight. Because sustainability disclosure is an evolving and complex topic, a fund’s analysis of related proposals aims to strike a balance in avoiding prescriptiveness and providing a long term perspective. As such, the funds are more likely to support proposals seeking disclosure of such risks and/or the company’s policies and practices to manage them over time. Finally, shareholders typically do not have sufficient information about specific business strategies to propose specific targets or environmental or social policies for a company, which is a responsibility that resides with management and the board.

As a result, a fund may support a shareholder proposal that:

– Addresses a shortcoming in the company’s current disclosure relative to market norms or to widely accepted investor-oriented frameworks endorsed or referenced by Vanguard’s Investment Stewardship program (e.g., the International Sustainability Standards Board (ISSB));

– Reflects an industry-specific, materiality-driven approach; and

– Is not overly prescriptive, such as by dictating company strategy or day-to-day operations, time frame, cost, or other matters.

Yet another hot topic this year is how investors will be addressing the topic of board composition, and for 2025 Vanguard notes the following approach:

The funds look for boards to be fit for purpose by reflecting sufficient breadth of skills, experience, perspective, and personal characteristics (such as age, gender, and/or race/ethnicity) resulting in cognitive diversity that enables effective, independent oversight on behalf of all shareholders. The funds believe that the appropriate mix of skills, experience, perspectives, and personal characteristics is unique to each board and should reflect expertise related to the company’s strategy and material risks from a variety of vantage points.

To this end, the funds seek fulsome disclosure of a board’s process for building, assessing, and maintaining an effective board well-suited to supporting the company’s strategy, long-term performance, and shareholder returns. This disclosure should include the range of skills, background, and experience that each board member provides and their alignment with the company’s strategy (typically presented as a skills matrix); additionally, the funds look for such disclosure to provide an understanding of the directors’ personal characteristics to enable shareholders to understand the breadth of a board’s composition. The funds also look for disclosure regarding the board’s process for evaluating the composition and effectiveness of their board on a regular basis, the identification of gaps and opportunities to be addressed through board refreshment and evolution, and a robust nomination (and renomination) process to ensure the right mix of skills, experience, perspective, and personal characteristics in the future.

The funds look for a board’s composition to comply with requirements set by relevant market-specific governance frameworks (e.g., listing standards, governance codes, laws, regulations, etc.) and to be consistent with market norms in the markets in which the company is listed. To the extent that a board’s composition is inconsistent with such requirements or differs from prevailing market norms, the funds look for the board’s rationale for such differences (and any anticipated actions) to be explained in the company’s public disclosures.
A fund may vote against the nomination/governance committee chair if, based on research and/or engagement, a company’s board composition and/or related disclosure is inconsistent with relevant market-specific governance frameworks or market norms.

Now we await the updated proxy voting policy of State Street Global Advisors, which usually is not published until March.

– Dave Lynn

I am thrilled to be participating in a new podcast series with Liz on the very important topic of mentorship. In the “Mentorship Matters with Dave & Liz” podcast, Liz and I share our perspectives on mentorship and career development, which we hope can help those looking for guidance on their own career path, as well as those who are looking for ideas on how to support people who are newer to the field.

In the second episode of the series, we address:

1. What led us to become securities lawyers.

2. Our career paths and where we are today.

3. Traits of successful securities lawyers.

4. How to create opportunities that align with your skills.

This podcast is available to members of TheCorporateCounsel.net. Be on the lookout for future episodes and be sure to check out The Mentor Blog here on TheCorporateCounsel.net.