The Wall Street Journal editorial board is highlighting today a new report from the Committee to Unleash Prosperity, which indicates a sharp drop-off in institutional investor support for ESG proposals in 2023 as compared to 2022. The Committee to Unleash Prosperity, in case you were wondering, was co-founded by conservative writer Stephen Moore, economist Arthur Laffer, financial news commentator Larry Kudlow and publisher and politician Steve Forbes. The stated mission of the Committee to Unleash Prosperity is “to educate policy makers and the public about government policies that have been proven, in practice, to maximize economic growth and equitable prosperity in America and around the world.”
The WSJ editorial board notes that the report indicates some significant retrenchment on the part of large funds with respect to ESG proposals:
The news this year is that some of the funds are backtracking. The latest report finds that support for ESG resolutions dropped 25% in 2023 from 2022, including a 30% drop among the 25 most active fund families. Progressive shareholders—often with only a few shares—are putting forward more proposals than ever, trying to pressure executives into adopting their causes as corporate policy. But non-ESG-branded funds aren’t backing them like they were a year ago.
The WSJ piece attributes the change in part to a reluctance on the part of some funds to follow ISS and Glass Lewis recommendations on ESG proposals, stating:
One cause of the shift is asset managers’ growing reluctance to follow the direction of the proxy-adviser duopoly, Institutional Shareholder Services (ISS) and Glass Lewis. The firms claim about 97% of the market for guidance on shareholder votes, and they back ESG at an overwhelming rate. Both earned lower grades than most of the funds they advise—a D for Glass Lewis and an F for ISS. Until last year most fund managers seemed to accept the duopoly’s recommendations as gospel.
Today more fund executives are second-guessing the proxy advisers’ guidance. “It is increasingly clear that proxy advisers have undue influence,” wrote JP Morgan CEO Jamie Dimon in his April letter to shareholders. His firm’s asset-management arm was among the dozens that rejected more ESG proposals last year, and he suggested that managers ought to do more of their own research on how to vote.
The WSJ editorial board concludes that “[t]he funds rejecting ESG are embracing their responsibility to investors. All asset managers have a fiduciary duty to maximize returns, and that includes their approach to proxy voting.”
On a side note, I studied economics as an undergraduate and had plans to go on to get a PhD and become an economist, but bailed on that plan when I opened up the “subject test” part of the GRE exam. I am pretty sure the first question in the test had something to do with the Laffer Curve, which was developed by Arthur Laffer to depict the theoretical relationship between rates of taxation and the resulting levels of the government’s tax revenue. Reading that question made me decide then and there that I had absolutely no interest in being an economist, so I turned the test in unfinished and left the building. So, for that career twist that saved me from a life of debating how many angels can dance on the head of a pin, I am indebted to Arthur Laffer!
SEC Chief Accountant Paul Munter released one of his insightful statements yesterday on the topic of fostering a healthy “tone at the top” at audit firms, and I think his guidance is applicable to other professional service organizations as well. Munter notes:
To be an effective public watchdog, audit-firm leadership must set the right tone at the top by always placing the public-interest obligations of our profession ahead of business interests and profits. Doing so is essential for educating and instilling in our young accountants the critical importance of acting ethically, with integrity and fidelity to the public trust in all our professional activities. These are core tenets of the accounting profession.
Munter highlights how tone at the top is particularly important in audit firms, noting:
For example, setting a proper tone at the top is critical in supporting auditors’ ability to exercise professional skepticism—having an attitude that includes a questioning mind and a critical assessment of audit evidence at all times. We understand that skepticism can prolong an audit by requiring auditors to obtain additional audit evidence and perform additional, but necessary, procedures to have sufficient appropriate audit evidence in support of the audit opinion. Such time pressures “can create an environment in which audit quality might be compromised if engagement team members, at any level, perceive that their individual performance is measured primarily by meeting time deadlines and budget estimates.” So in order for a less-experienced accountant on an engagement team to be empowered to exercise such skepticism, they need the unwavering support of engagement team and firm leadership, who should shield members of the engagement team from client pressure and resist the desire to wrap up an engagement quickly so that they can move on to the next book of business.
Tone at the top is also critical for having an effective quality control system. Leaders who understand and are dedicated to their role in protecting the interests of investors through adherence to professional ethics, values, and attitudes—and instilling those priorities in their employees—are the foundation of a strong quality control system.
So when firm leadership fails to set a strong tone at the top¬—for example, by sweeping mistakes and bad behavior under the rug, treating violations of law as isolated incidents or the “cost of doing business,” not holding wrongdoers throughout the firm and across service lines accountable, or changing their firm structures in ways that could pose future independence challenges for the firm with respect to its audit engagements—they risk eroding the firm’s culture, professional skepticism, quality control systems, and public responsibility as gatekeepers of our capital markets.
Munter’s statement goes on to recommend how to instill a healthy “tone at the top” into the organization, including taking appropriate actions rather than merely relying on a code of ethics, setting an appropriate example, integrating ethics and character into the firm’s hiring, retention, and promotion criteria, making professional integrity and an integral part of the promotion and compensation process, promoting candor and transparency and avoiding conflicts in the firm’s business structure (e.g., selling a portion of the firm to a third party).
If you are interested in the SEC Chief Accountant’s important role in shaping accounting and audit policy over the course of the SEC’s history, check out this exhibit that I curated for the SEC Historical Society.
Today on CompensationStandards.com at 2:00 pm Eastern, join us for the webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Jan Koors of Pearl Meyer discuss the latest considerations for compensation committees. The panel will be covering the following topics:
– Year 2 of Pay vs. Performance
– Incentive Plans – Setting Goals and Considering Adjustments
– Trends in Strategic and Operational Metrics
– Clawback Policies – What HR Teams and Compensation Committees Are Focusing on Now
– Human Capital Management – Recent Considerations and Disclosure Trends
– Director Compensation Today
Members of CompensationStandards.com are able to attend this critical webcast at no charge. If you’re not yet a member of CompensationStandards.com, subscribe now. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE, which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
On Monday, the PCAOB adopted two new standards. First, the PCAOB adopted a new audit quality control standard, replacing the existing AICPA standard that pre-dated the creation of the PCAOB. The new standard requires all PCAOB registered firms to identify their specific risks and design a quality control system that includes policies and procedures to address those risks. The PCAOB’s announcement notes the following key provisions of the new audit quality standard:
– The new standard strikes a balance between a risk-based approach to QC (which should drive firms to proactively identify and manage the specific risks associated with their practice) and a set of mandates (which should assure that the QC system is designed, implemented, and operated with an appropriate level of rigor).
– All PCAOB-registered firms would be required to design a QC system that complies with the new standard. Firms that perform audits of public companies or SEC-registered brokers and dealers would be required to implement and operate the QC system they design, monitor the system, and take remedial actions where policies and procedures are not operating effectively – creating a continuous feedback loop for improvement.
– Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC, which would be certified by key firm personnel to reinforce individual accountability.
– Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system, referred to as an External QC Function (EQCF), composed of one or more persons who can exercise independent judgment related to the firm’s QC system. In response to comments, the new standard clarifies that the EQCF’s responsibilities should include, at a minimum, evaluating the significant judgments made and the related conclusions reached by the firm when evaluating and reporting on the effectiveness of its QC system.
The new audit quality standard will apply to all PCAOB-registered firms. Subject to approval by the SEC, the new standard and related amendments will take effect on December 15, 2025.
The PCAOB also adoptedAS 1000, General Responsibilities of the Auditor in Conducting an Audit, along with related amendments to other PCAOB standards. The PCAOB’s announcement of the new standard notes: “AS 1000 enhances and consolidates a group of standards that were adopted on an interim basis by the PCAOB in April 2003 and that address the general principles and responsibilities of the auditor, such as due professional care, professional skepticism, competence, and professional judgment.” This new standard will apply to all audits conducted under PCAOB standards. Subject to approval by the SEC, the new standard and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2024. For certain firms, the amendment relating to the documentation completion date will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.
The committee advises and consults with the Commission on rules, regulations, and policies as they relate to:
– Capital raising by emerging, privately held small businesses and publicly traded companies with less than $250 million in public market capitalization;
– Trading in the securities of emerging companies and smaller public companies; and
– Public reporting and corporate governance requirements of emerging companies and smaller public companies.
Interested persons should email a letter of interest to smallbusiness@sec.gov with information about their relevant experience. The deadline for submissions is June 14, 2024. The SEC’s announcement lists the particular experience that would be relevant to service on the Small Business Capital Formation Advisory Committee.
Our early bird in-person Single Attendee Price is $1,750, which is discounted from the regular $2,195 rate. If you can’t make it in person, we also offer a virtual option, and we offer discounted rate options for groups of virtual attendees.
You can register now by visiting our online store or by calling us at 800-737-1271.
Don’t miss PracticalESG.com’s free virtual event – “Developments in EU Policy and ESG Disclosure Assurance.” You can register here for this 3-hour program, which will kick-off at 12:00 pm eastern today, May 14th. This virtual event features three panels of experts who will provide insights into the intricate policy landscape shaping EU regulations, strategies for ensuring compliance, and what to expect in ESG/climate report assurance and how to prepare for it.
These events are free to all – you don’t have to be a member of PracticalESG.com to attend. But if you’re attending events like these, you need the resources that PracticalESG.com provides. Become a member today by clicking here, emailing sales@ccrcorp.com or by calling (800) 737-1271.
If you are looking for other reasons to become a member of PracticalESG.com, I note from Zach Barlow’s post on the PracticalESG.com blog that the site’s newest feature is now live – a Glossary of the ever-growing collection of acronyms, terms and abbreviations that make up the ESG, climate, sustainability and DEI landscape. This is an essential resources for everyone who works in areas that touch on these topics. You can become a member of PracticalESG.com today by clicking here, emailing sales@ccrcorp.com or by calling (800) 737-1271.
I have to admit, after having spent almost three decades now either regulating or advising on the preparation of issuer disclosure, I sometimes wonder, is it really serving any purpose? For example, it always troubles me that when I receive a prospectus or proxy statement in the mail, I never actually have time to review it, because I am too busy helping issuers with their prospectuses and proxy statements! Well, my self-doubt was assuaged last week in a speech by Chair Gensler before the 11th Annual Conference on Financial Market Regulation, where he extolled, among other things, the benefits of issuer disclosure on the financial markets. After describing the Commission’s efforts toward making issuer disclosure easily accessible to the public through the EDGAR system, Chair Gensler concluded:
Adam Smith’s nearly 250-year-old notion—that the whole economy benefits when the price of information is lowered, or information is free—is as relevant today as it has ever been. The SEC, as mandated by Congress, has an important role to promote data as a public good.
I’m proud to work with all of my colleagues at the SEC, including those of you from DERA, to ensure for the public good of data.
With Chair Gensler’s encouragement, I can now go about my day promoting data as a public good!
We are now just a little over two weeks away from the new T+1 settlement timeframe, which will be implemented over the Memorial Day holiday weekend across securities markets in the U.S. What seemed like a distant to-do list item the last time I blogged about the move to T+1 is now very much a reality. Here are few last-minute considerations for you as we hurtle toward this more rapid settlement cycle:
1. If you have a contemplated capital markets transaction over the course of the next few weeks, it will be important to adjust the timeline for when you will conduct diligence calls, obtain signed documents and make filings with the SEC. For example, deal teams will need to prepare for a much quicker timetable for filing a prospectus or prospectus supplement in a T+1 settlement cycle, even though SEC rules permit filing on the second or fourth day after first use of a prospectus or prospectus supplement.
2. If you have a selling securityholder transaction that will settle after the T+1 settlement cycle goes into effect, keep in mind all of the documents and actions that will be required in anticipation of settlement, including such things as medallion guarantees, delivery of “wet ink” signatures and “know your customer” or “customer due diligence” documentation and delivery of delegending and local counsel opinions. Now is the time to plan for these matters given the impending compressed settlement timeframe.
3. For issuers with active “at-the-market” or “ATM” offerings, note that, after the Memorial Day weekend, ATM sales will settle on a T+1 basis, so now is a good time to modify your procedures and timelines around ATM sales to accommodate the faster settlement cycle.
4. Beginning on May 29, 2024, the ex-dividend and ex-rights dates for dividend payments and rights distributions will be the same date as the record date for the relevant dividend or distribution. During the transition, ex-dividend dates will be as follows: (i) if the Record Date is May 24, the Ex-Dividend Date will be May 23; (ii) if the Record Date is May 28, the Ex-Dividend Date is May 24; and (iii) if the Record Date is May 29, the Ex-Dividend Date is May 29.
5. If you are contemplating a global securities offerings, note that markets outside North America will remain on their current settlement cycle, potentially resulting in conflicting timelines for documentation and funds flow. These issues may be particularly acute when dealing with markets in Asia due to time zone issues.
With just two weeks to go, now is the time to act! This is one of those times when pulling out the last deal’s timeline and documents just won’t cut it, you will need to dig deep to anticipate all of the potential consequences of a faster settlement, while managing your client’s expectations.