On Friday, the SEC voted to approve Nasdaq’s board diversity listing standard. Here’s a copy of the SEC’s 82-page approval order. As usual, the SEC was divided, with Commissioner Peirce dissenting and Commissioner Roisman dissenting in part. SEC Chair Gary Gensler issued a brief statement in which he said that Nasdaq’s diversity disclosure rules “are consistent with the requirements of the Exchange Act,” and that they “reflect calls from investors for greater transparency about the people who lead public companies.”
If that sounds a little defensive, that’s probably because dissenting statements from Commissioners Peirce & Roisman contend that Nasdaq hasn’t satisfied its burden of showing that the rule is consistent with applicable Exchange Act requirements. Furthermore, as this excerpt from Hester Peirce’s lengthy dissenting statement points out, she questions the relevancy of the disclosure called for by the new standard to investors:
[T]his reasoning either begs the very question that needs to be asked—whether the information is relevant to investors in a way that matters under the Exchange Act—or suggests that an exchange may impose any obligation on issuers for which “commenters representing a broad array of investors” are clamoring. To the extent that it is begging the question, it fails under the D.C. Circuit’s decision in Susquehanna International Group LLC v. SEC, in which the Court held that the Commission’s “unquestioning reliance” on a self-regulatory organization’s analysis in approving a rule filing violated both the Exchange Act and the Administrative Procedure Act.
The Commission is obliged to critically assess the “self-serving views of the regulated entit[y],” and it cannot evade this obligation by assuming that the Proposal imposes disclosures and other obligations that are meaningful to investors (and “commenters representing” them) in a way that is relevant under the Exchange Act.
Commissioner Peirce raises a number of other legal issues in her statement (which reads like a brief), but her comments on the relevancy of information on board diversity to investors may be a preview of coming attractions. My guess is that we’ll likely hear similar arguments from dissenters when it comes to climate change & other ESG-related rule proposals that are likely to come down the pike over the next few years.
Commissioner Roisman issued a statement explaining why he supported the provisions of Nasdaq’s listing standard that would offer support to companies looking to add diversity to their boards, but dissented from the standard’s disclosure requirements for listed companies. Commissioners Crenshaw and Lee issued a brief joint statement in support of the approval order.
Be sure to check out this Goodwin memo on the new rules. We’ll be posting this and other memos in our “Nasdaq Guidance” Practice Area.
Shortly after the SEC issued its approval order, Nasdaq posted updated guidance on how the new listing standard’s disclosure requirements will work and the timeline for its implementation. This excerpt discusses the transition period for compliance with the new standard, which is generally based on a company’s listing tier:
– Nasdaq Global Select Market and Nasdaq Global Market companies will have, or explain why they do not have, one diverse director by the later of two years of the SEC’s approval date (August 7, 2023), and two diverse directors within four years (August 6, 2025), or the date the company files its proxy or information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s annual shareholder meeting in that year.
– Nasdaq Capital Market companies will have, or explain why they do not have, one diverse director by the later of two years from the SEC’s approval date (August 7, 2023), and two diverse directors within five years (August 6, 2026), or the date the company files its proxy or information statement (or, if the company does not file a proxy, in its Form 10-K or 20-F) for the company’s annual shareholder meeting in that year.
Companies with five or fewer directors represent an exception to the tier-based transition period. Regardless of their listing tier, these companies will be required to have at least one diverse director or explain why they don’t by the later of August 7, 2023 or the date the company files its proxy statement for the company’s annual shareholder meeting in that year. For companies that don’t solicit proxies, the compliance date will be the date of filing their 10-K or 20-F for that year.
UCLA’s Stephen Bainbridge recently blogged that, in his view, the 11 pending or adopted state board diversity statutes don’t pass constitutional muster. He points out that “9 of the 11 statutes apply not just to companies incorporated in the adopting state but also to companies headquartered in the state.” New York and Ohio’s legislation goes even further, with New York’s law applying to all companies authorized to do business in the state, and Ohio’s pending legislation extending to all companies “doing business” in the state.
Bainbridge says provisions in these statutes that purport to apply to companies not incorporated in the state in question run afoul of the internal affairs doctrine, which as he discussed in an earlier blog, he views as a constitutional requirement.
The theory behind the proxy advisory industry is that it helps its clients fulfill their fiduciary duties by allowing them to vote their shares in accordance with what their informed preferences would have been if they did their own research. A recent study suggests that this isn’t how it works in practice. Here’s an excerpt from the abstract:
Our main finding, for the period 2004-2017, is that proxy advice did not result in funds voting as if they were informed – more often than not it pushed them in the opposite direction – and this distorting effect was particularly noticeable for ISS. The finding is robust to several strategies designed to control for endogeneity of acquiring information and seeking proxy advice, including fixed effects and instrumental variables.
We also show that advice distorted votes toward policies favored by socially responsible investment (SRI) funds, and provide suggestive evidence consistent with the idea that proxy advisors slanted their recommendations toward the preferences of SRI funds because of pressure from activists.
The study started by looking at how informed funds (those that accessed proxy materials on EDGAR) voted, and compared that to how the funds that relied on proxy advisors voted across a range of 9 common governance-related proposals (these included board declassification, independent chair, majority vote, political contributions and proxy access proposals). With the exception of declassification proposals, the study found that those funds that relied on proxy advisors voted more frequently in favor of these proposals than did their informed counterparts. The study found that ISS’s advice moved its customers in the “wrong” direction on 7 out of the 9 proposals. Glass Lewis fared better, with its advice moving customers in the same direction as informed funds on 6 out of the 9 proposals.
So, this study suggests that proxy advisor voting recommendations are slanted because of activist pressure, which results in their non-SRI clients often voting in ways that are contrary to what their informed preferences would have been. If that holds up, it’s not a good look for the proxy advisors or the fiduciaries that hire them.
Here’s another study that’s sure to honk off the governance-industrial complex. Critics of some of the corporate governance reforms put in place over the past two decades like to suggest that the increased “navel gazing” required of corporate boards in the name of good governance makes public companies less innovative. According to a recent study, they may be on to something. Here’s the abstract:
In this study, we investigate the effect of corporate governance reforms on corporate innovation by constructing a comprehensive firm-level panel dataset across 58 countries from 2000 to 2015. We find that both the quantity and quality of innovation decrease after the initiation of the reforms. Affected firms also conduct less innovation that explores new knowledge versus that exploits existing knowledge.
The effect is more pronounced for firms operating in more competitive industries or with higher operational uncertainty. The results suggest that corporate governance reforms may induce managerial myopia and mitigate long-term investment in risky innovation.
Maybe this explains why we get a billion new smart phone apps every year but I’m still waiting for my jetpack.
Earlier this week, I blogged about the phenomenon of “remote-first” public companies that purportedly don’t have principal executive offices. Keith Bishop recently blogged that the location of a company’s principal executive offices can have some important real world implications – including determining whether the company is subject to California’s board gender diversity statute. Here’s an excerpt:
California’s new board gender quota law places great weight on the location of a corporation’s principal executive offices. The law applies to a publicly held foreign corporation when its principal executive offices, according to its Form 10-K, are located in California. Cal. Corp. Code § 301.3(a). The law also applies to a publicly held domestic corporations, but it is not clear whether it applies only when their principal executive offices are located in California.
Keith notes that the SEC doesn’t define the term “principal executive offices” for purposes of 10-K filings and provides some examples – in addition to our homeless issuers – of companies have taken a somewhat “flexible” approach to where their principal executive offices are located.
Most of us look at climate change disclosure obligations in the context of what the SEC now requires or what the agency will require in the future. This Winston & Strawn blog provides a reminder that other disclosure obligations may exist – and that alleged violations of them are being aggressively pursued by state AGs. The blog discusses litigation brought by Massachusetts against ExxonMobil alleging that it deceived consumers about the impact of climate change on its business. In addition, this excerpt lists some other pending actions by state AGs targeting climate-related disclosures:
– Connecticut. Attorney General William Tong sued Exxon under the Connecticut Unfair Trade Practices Act. This suit alleges: “ExxonMobil knew that continuing to burn fossil fuels would have a significant impact on the environment, public health and our economy,” yet ExxonMobil did not disclose that to the public.
– Delaware. Attorney General Kathleen Jennings filed a lawsuit against BP America Inc. and many other companies. The state asserts common law claims and a claim under Delaware’s Consumer Fraud Act. It alleges the defendants’ failures to disclose “their products’ known dangers—and simultaneous promotion of their unrestrained use—drove consumption, and thus greenhouse gas pollution, and thus the climate crisis.”
– District of Columbia. Attorney General Karl Racine filed a lawsuit against BP plc, Chevron, Royal Dutch Shell, and others. The suit similarly alleges these entities failed to disclose to consumers the role their products play in causing climate change.
– Minnesota. Attorney General Keith Ellison filed a complaint against ExxonMobil, the American Petroleum Institute, Koch Industries, and Exxon and Koch subsidiaries. It similarly accuses the defendants of insufficient disclosure and acts associated with climate change.
The blog also says that while most of the actions so far have targeted the oil & gas industry, state AGs are on record as having said that most U.S. companies have not adequately considered or disclosed climate-related financial risk. The blog says that they are eyeing tech companies and those in the agriculture sector as possible litigation targets.
While SPACs have been a hot property in the capital markets, it turns out that they’ve been a sure thing for short sellers too, or at least that’s what this excerpt from a recent Institutional Investor article says:
Even as the broader stock market hit a record in the first half of 2021, with the S&P 500 index gaining 15%, short sellers found what has seemed to be a surefire place to make money: special-purpose acquisition companies. Since SPACs began to soar last year, activist short sellers have set their sights on 22 of them. The vast majority of those — 16 — were the subject of short reports this year, according to Breakout Point, a Germany-based research firm and data provider.
The short sellers have an impressive record: One week after they unveiled their SPAC targets, the stocks fell 14.2% on average, Breakout Point said. And they kept falling. After one month, they were down 24.7% on average. Moreover, “SPACs are better performing” than other short targets over the past year and a half, Breakout Point’s Ivan Cosovic told Institutional Investor. Since 2020, the stocks of SPAC shorts have declined 17.5% on average year to date, while the average decline of all new activist shorts was 13.5%.
One notable exception to this string of short-seller wins: SPAC pioneer Virgin Galactic. The article says that the stock’s up 44% since a short report was issued on it in early June. I guess the lesson is that you shouldn’t bet against billionaires who want to be astronauts.
According to this excerpt from EY’s Global IPO Trends Report, despite the slowdown in SPAC IPOs due to the recent regulatory unpleasantness, there are plenty more deals to come:
– While SPAC formation frenzy has slowed from record levels, the lull caused by the SEC guidance is behind us and deals are being announced daily. SPAC activity is expected to remain steady over the next couple of months, picking up speed in Q3 2021 and toward the end of the year.
– There are nearly 300 SPACs on file that have not yet priced; indicating there are SPACs that are rushing to find suitable targets. High-quality target companies could have stronger bargaining power that will enable them to secure more favorable terms.
– With more scrutiny from the SEC, along with improved aftermarket performance, we can expect more quality SPAC deals being announced and executed, which is good news for investors.
More quality SPAC deals may be good news for investors, but I bet short sellers are still licking their chops at the prospect of the SPAC assembly line cranking up again.
BlackRock just issued its 2021 Stewardship Report and it’s an eye-opener, particularly when it comes to the giant asset manager’s support of shareholder proposals during the 2020-2021 proxy year. Here are some of the highlights:
– BlackRock supported 35% of shareholder proposals, compared to 17% the previous year. On ESG-related topics, BlackRock supported 64% of Environmental proposals, 35% of Social proposals, and 32% of Governance proposals. It cast at least one vote against management’s recommendations in 42% of this year’s meetings, compared to 39% last year.
– BlackRock voted against 10% of incumbent directors this year, up from 8.5% last year. Corporate governance concerns — including lack of board independence, insufficient diversity, and executive compensation — prompted most of the votes against directors’ elections, and other director-related proposals, globally. In the Americas, lack of board gender diversity was the most common reason for rejecting a director, accounting for 61% of negative votes. BlackRock withheld votes from 255 directors based on climate-related concerns.
– BlackRock voted against 5% of Say on Pay proposals in the Americas compared to 4% last year, and voted against 16% globally compared to 12% last year. BlackRock voted against 20 S&P 500 Say on Pay proposals, and 12 of these proposals failed to receive majority support.
The report covers BlackRock’s stewardship activities focusing on proxy voting for the period from July 1, 2020 to June 30, 2021. It also provides specific engagement case studies and addresses how BlackRock’s voting aligned with its engagement priorities – which include board quality and effectiveness, aligning incentives with value creation, climate and natural capital, strategy, purpose and financial resilience, and company impacts on people.
