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.”
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.
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.
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.
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.
There have been enough articles, blogs & memos written about best practices in keeping board minutes to fill an entire Practice Area here on TheCorporateCounsel.net, 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.
Rule 15c2-11 governs when dealers are permitted to publish quotations for securities. In September 2020, the SEC amended the rule to prohibit them from publishing quotes when current information about the issuer isn’t publicly available. In 2021, the Staff clarified its position that Rule 15c2-11 applies to fixed income as well as equity securities but provided limited-time relief for fixed income securities that were offered pursuant to Rule 144A. This Ropes & Gray memo says that this relief will expire on January 3, 2023, and that means market practice for private Rule 144A issuers will need to change:
While Rule 144A only requires issuers to make financial information available upon request to holders or prospective purchasers of their securities, beginning on January 4th dealers will no longer be able to publish quotations for debt securities in quotation mediums unless financial statements for and certain other information about the issuer are publicly available (for example, on the issuer’s website). Accordingly, issuers may be required to agree to publish financial statements outside of password-protected datarooms currently available only to bondholders and prospective purchasers so that dealers can continue to facilitate a liquid 144A market.
The memo says that various trade groups are lobbying the SEC and Congress to rescind this requirement, but unless action is taken prior to January 3rd, the market will have to deal with this new reality – which may result in a lot more attention being paid to reporting covenants in Rule 144A deals.
Just a few years ago, the audit market for SPACs was dominated by two non-Big 4 firms, Withum & Marcum (see my 3rd blog here). Boy, have things changed. This Bloomberg Tax article says the Big 4 now rule the roost:
When SPACs became Wall Street’s favorite way to take companies public, the Big Four accounting firms steered clear, leaving audit work to smaller outfits churning out hundreds of fast, cheap audits of the blank-check vehicles.
For those freshly minted public companies that emerged from the boom, it’s been a different story. The largest firms — Deloitte & Touche LLP, PricewaterhouseCoopers LLP, KPMG LLP, Ernst & Young LLP and their affiliates— audit almost two-thirds of the approximately 330 companies that went public through special purpose acquisition companies since 2020 and are still trading today, according to Bloomberg data. EY and its affiliates lead the Big Four in the de-SPAC client market, with 65 companies that went public via SPAC on its roster.
The article explains why the Big 4 have jumped into the fray, but here’s my TL;DR version. Anyway, while the auditors found the streets paved with SPAC gold for a couple of years, the article notes that they now find themselves with a lot of problematic clients on their hands.
In light of the findings laid out in the Bloomberg Tax article, I thought this Audit Analytics blog on the 3rd Quarter IPO market was kind of interesting. In addition, to cataloguing the overall grim IPO environment, the blog says that many of the deals that did get done didn’t involve Big 4 auditors:
Auditor Market Share – All IPOs. Twenty different firms audited the 39 companies that completed IPOs during Q3 2022. Friedman led with seven IPO clients. BF Borgers and Marcum followed with four clients each. Friedman and Marcum merged as of September 1, 2022.
Auditor Market Share – Excluding SPACs. When excluding SPACs, there were 20 firms that audited 31 companies. Friedman led with five clients. BF Borgers, Deloitte, Ziv Haft, and Grassi & Co were the only other firms with multiple IPO clients.
If it’s any consolation to the Big 4, the only unicorn to go public during the quarter, Corebridge Financial, was audited by PwC.
Yesterday, the SEC announced the adoption of amendments to Form N-PX that are intended to enhance the transparency of proxy voting by mutual funds, ETFs and other registered funds. At the same time, the SEC also fulfilled one of Dodd Frank’s regulatory mandates by adopting rules requiring investment managers to disclose on Form N-PX how they voted on “say-on-pay” proposals. Here’s the 169-page adopting release and here’s the two-page fact sheet. This excerpt from the SEC’s press release summarizes the changes:
To enhance proxy vote reporting, the amendments will require funds and managers to categorize each matter by type and, where a form of proxy or “proxy card” subject to the Commission’s proxy rules is available, tie the description and order of voting matters to the issuer’s form of proxy to help investors identify votes of interest and compare voting records. The changes also prescribe how funds and managers must organize their reports and require them to use a structured data language to make the filings easier to analyze.
Funds and managers will also be required to disclose the number of shares that were voted or instructed to be voted, as well as the number of shares loaned and not recalled and thus not voted. This latter requirement is designed to provide shareholders with context to understand how securities lending activities could affect a fund’s or manager’s proxy voting practices.
The new rules are effective for votes occurring on or after July 1, 2023 and will be reflected in filings beginning in 2024. They were adopted by the now customary 3-2 vote along partisan lines, and I think it’s gotten to the point where when you read one of our blogs about rule adoptions you should just assume that was the vote unless we tell you otherwise.
