Over on “The D&O Diary”, Kevin LaCroix recently flagged this Jones Day whitepaper on lessons US companies can learn from European climate change litigation. Kevin points out that litigation has been a component of climate change activists’ strategy in Europe for several years, and that they’ve targeted not just companies, but also “decision-makers in government and in business.” This excerpt from the whitepaper provides the key takeaways from this litigation:
For claimants, the objective is not only to win at trial: NGOs and activists are pursuing novel and inventive litigation strategies. Many of the routes to liability are far from straightforward and difficult to bring successfully. But success at trial often is not the point. Litigation is being used to attract publicity, obtain disclosure of documentation and information, and pressure businesses to change corporate behavior. And not just the behavior of the defendant, but the behavior of other businesses and decision-makers observing the risk of litigation and the direction of judicial travel.
Mind the gap between aspiration and execution: Any gap between a company’s aspirations and its actions creates litigation risk. It is not enough for an organization to make aspirational commitments, however well intentioned. In order to mitigate litigation risks, commitments should be backed up by action—whether that is a credible plan for achieving net-zero pledges, or proper oversight of a subsidiary’s activities to ensure group policies are being adhered to in practice—and adequate justification needs to be made available to the public in order to demonstrate the accuracy of the company’s communications and the seriousness of its plans.
The importance of robust, credible, and scientifically verifiable evidence: Companies making “green” claims about their products or services will need to ensure they can justify those claims by reference to robust, verifiable evidence based on recognized scientific methodologies. Statements that give only part of the story have been found to be misleading, so care needs to be taken to ensure that environmental claims reflect, for example, the full life cycle of a product, or the overall impact of an organization’s activities on the environment or climate (rather than just one of its business lines).
Supporting decision-makers: Evidencing board decision-making is good practice in any event, but directors and other decision-makers within a business will be particularly keen to ensure proper records are kept that they have complied with all relevant obligations when making decisions with potential environmental impact.
Diligence, diligence, diligence: When it comes to ESG and climate change, lines between corporate entities are increasingly blurred. Financial institutions find themselves having to rely on data disclosures provided by corporate issuers to meet their own ESG-related reporting requirements. Supply chain due diligence legislation codifies what was in any event a growing responsibility on parent companies to be alert to the activities not just of their subsidiaries but of those with whom they do business. Robust processes to diligence information and business practices and to audit compliance are essential.
European regulators and businesses have taken the lead on ESG regulation and in corporate commitments to addressing climate change. That’s created an environment where litigation surrounding those commitments has flourished. As the US catches up, activists and others may increasingly use litigation as a key component of their own strategies.
For some reason, I’ve got a real weakness for articles about best practices for keeping board minutes – which is kind of strange because of all the routine tasks I did as a corporate lawyer, this was the one I disliked most. Anyway, whatever bizarre neurosis may be the cause, I’m always very interested in pieces like this recent Skadden memo, which has plenty of good advice about board minutes.
Writing minutes is drudgery, but it’s important to get them right – and doing that often requires a lot of judgment calls. One area that requires judgment is how to handle legal advice provided to the board at a meeting. You want the minutes to reflect that the board sought and received legal advice at the meeting, but you also don’t want to do anything to inadvertently waive privilege in the event that you have to produce the minutes through a books and records request or otherwise. This excerpt from Skadden’s memo highlights a potential pitfall that may arise by the way a lawyer’s advice to the board is characterized in the minutes:
It is important to ensure that the fact that legal advice was given to the board is reflected in the minutes at least at a high level, but boards need to guard against waiving the attorney-client privilege. Although privileged information is typically redacted when minutes are produced to plaintiff stockholders, legal advice may at some point become an issue in litigation if the board asserts that it relied on that advice.
To protect privileged information from disclosure, minutes reflecting legal advice should be characterized as an outside attorney or in-house counsel “providing legal advice” about a matter as opposed to “advising the board” to take a certain action, because advice from a lawyer that is not legal in substance — say, advice on business strategy — potentially may not be protected by the privilege.
The memo’s point about the possibility that legal advice may at some point become an issue in litigation is an important one to keep in mind. That means that when thinking about privilege, you need to think about not only how to protect privilege in board minutes, but also how best to use the minutes to help manage a decision to waive privilege as part of a litigation strategy.
Why might a company do that? Well, one reason is that Delaware courts have made it clear that the advice directors receive from lawyers and other professionals is often central to determining the reasonableness of the board’s actions, and an unwillingness to share the substance of that advice can have significant negative consequences, including a prohibition on asserting the content of the legal advice that the board was provided in the defense of the plaintiffs’ claims. See, e.g., Chesapeake v. Shore (Del. 2/00).
In light of this position, some practitioners suggest referencing the fact that legal advice was given in the minutes, but also providing a summary of the advice in separate privileged minutes. Writing that summary presents challenges of its own, but in appropriate circumstances, that approach may both help avoid inadvertent production and enable the board to provided contemporaneous evidence of the advice provided by counsel if the company determines to waive the privilege.
ESG ratings have become an indispensable element of investing and greatly influence how companies manage and market themselves. A myriad of issues exist when relying on and using ESG ratings from a corporate perspective. Tune in to today’s PracticalESG.com webcast, “Improving Your ESG Score” at 10:00 am eastern – to hear from:
Tamara Close, Founder and Managing Partner, Close Group Consulting
Jeremy Davis, Executive Director, ESG & Climate Client Coverage, MSCI
Marie-Josée Privyk, Chief ESG Innovation Officer, Novisto
Huub Savelkouls, Founder and Owner, Scope3Plus Consulting
We’ll be discussing the fundamentals of ESG scores & ratings, exploring ways to improve corporate ratings and considering why you may not want to emphasize ESG ratings improvement at a management level.
If you’re not already a PracticalESG.com member, sign up today to get access to the on-demand replay and transcript from this program, along with access to practical checklists and more, to help you with your corporate ESG program and related disclosures and communications. Sign up on our membership portal or email sales@ccrcorp.com.
I know that Liz was incredibly grateful for the outpouring of good wishes that she received when she blogged about her career transition. You folks were wonderful – and she deserved every bit of the praise you gave her. I told her that if she felt like Sally Field at the Oscars after reading your emails, that’s because she should. I’ve definitely got some very big shoes to fill.
As I read through the messages that Liz shared with us, I got the impression that a lot of people thought that Liz wasn’t going to be around much anymore. That’s decidedly NOT the case. Liz will continue in the blogging rotation, she’ll help organize and moderate some webcasts, and she’ll also be involved in helping me with our Proxy Disclosure and Executive Compensation Conference. So, from our members’ perspective, I don’t think a lot is going to change in terms of Liz’s role here – and we’re as happy about that as you are.
Liz did seem particularly anxious to ensure that she was involved in planning for next year’s Conference, although for the life of me, I don’t know why. You may not know this because I’m not one to brag, but I was the mastermind behind the1997 Cleveland Securities Law Institute. As I’m sure you know, that epic event has been described as “The Woodstock of flyover state bar association sponsored securities law conferences held in markets too small to get anybody from the SEC to speak.” People still talk about the set of coasters emblazoned with the Cleveland Bar Association’s logo that we gave away as speaker’s gifts. Ah, glory days. . .
I’m also more than a little relieved that Liz will continue to be a part of the team, because frankly, the transition has been a little rocky. First, management shot down what I viewed as an entirely reasonable request to change the title of my new position from “Managing Editor” to “Emperor of the Editors.” Then, I proposed a couple of much needed reforms to improve the discipline and esprit de corps of the editorial team. Nothing major – just a daily 6:00 am Zoom meeting for calisthenics and a mandatory dress code for working from home. Regrettably, these reform proposals have not been well received.
Liz did caution me about not making drastic changes, but gee whiz, I didn’t consider any of this stuff to be drastic, and I admit that I was kind of bummed out by the reaction to my administration’s reforms. But then this morning I thought of something that I can do to celebrate my newly elevated station in life without needing management’s approval or buy-in from my editorial colleagues. When I was in college, one of my history profs shared an anecdote about Bavaria’s legendary “Mad King Ludwig.” Apparently, in one of his less lucid moments, Ludwig forgot that he was the king. When his advisors informed him that he was, his response was something like “I am King? Very well, then I shall have noodles for lunch.”
So now, if you’ll excuse me, I’ve got a package of ramen to boil.
According to a recent PCAOB Staff Report, public company auditors didn’t have a great year in 2021. The report says that, according to preliminary inspection data, the number of audits with deficiencies is expected to increase. Here’s an excerpt with some details:
We observed an increase in the percentage of engagements reviewed with at least one “comment form” (the initial communication to audit firms of observed deficiencies from our inspections, which generally result in Part I.A or Part I.B inspection observations). We expect approximately 33% of the audits we reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020.
In addition, we expect that approximately 40% of the audits we reviewed will have one or more deficiencies discussed in Part I.B of the individual firm’s inspection reports, up from 26% in 2020. Some audits have both Part I.A and Part I.B deficiencies, such that we expect that approximately 55% of the engagements we reviewed will have one or more Part I.A and/or Part I.B deficiencies, compared to 44% in 2020.
A lot of these problems aren’t minor foot-faults. If an issue makes its way into Part I.A. of an inspection report, it means that the PCAOB’s Staff concluded that the deficiencies were significant enough that the auditor, at the time it issued its report, did not have sufficient appropriate evidence to support its opinion on the company’s financials or ICFR. Deficiencies identified in Part 1.B. of the report are less significant and include the Staff’s observations concerning instances of noncompliance with PCAOB standards or rules that don’t relate directly to the sufficiency of the evidence supporting the auditor’s opinion.
The report provides specific data on audit areas where deficiencies were found as well as trend data concerning recurring deficiencies for 2019 through 2021. It also discusses common areas where deficiencies were found in 2021 inspections and highlights “good practices” that the Staff observed relating to ICFR, accounting estimates related to business combinations, critical audit matters, auditor independence, supervision of audits and engagement quality review.
In our recent podcast, Hunton Andrews Kurth’s Steve Haas discussed bylaw changes that companies should consider in response to the implementation of the universal proxy rules. One possible change he suggested was including language in the bylaws reserving the use of the white proxy card to the board.
White is the color that’s traditionally been used by management in proxy contests, and with all parties jockeying for leverage in the new environment, it certainly seemed plausible that dissidents might try to grab the white card to increase the likelihood that investors would return their version of the universal proxy card. Over the past couple of months, many companies, including heavyweights like Exxon Mobil and Alphabet, have staked their claim via a bylaw amendment. Here’s the relevant language from Alphabet’s bylaws:
2.12 PROXIES.
Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A stockholder may authorize another person or persons to act for him, her or it as proxy in the manner(s) provided under Section 212(c) of the DGCL or as otherwise provided under Delaware law. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL.
Any stockholder directly or indirectly soliciting proxies from other stockholders must use a proxy card color other than white, which shall be reserved for the exclusive use by the Board.
Anyway, it turns out that the concerns about dissidents beating companies to the punch and claiming the white card for their own that have prompted these amendments aren’t just hypothetical. On Twitter, Andrew Droste pointed out that activist hedge fund Blackwells Capital has launched a proxy contest at Global Net Lease – and grabbed the white card before the company did. So, if any of you have clients that considering the possibility of this kind of amendment, you might want to share Andrew’s tweet with them & suggest that there’s no time like the present.
Gibson Dunn’s Ron Mueller points out that Engine No. 1 snagged the white card in its battle with Exxon Mobil, and that’s what first put this issue on the radar screen for public companies (and likely prompted Exxon Mobil’s bylaw amendment).
We’re taking a few days off for the holiday and our blogs will return on Monday. In the past, we’ve left you with recipe tips and cookbook recommendations to improve your Turkey Day, but I’ve got to admit that I’ve been struggling a little to come up with something for this Thanksgiving.
My daughter and son-in-law are hosting this year, and I was thinking about what to do with today’s blog last night as I was going over the shopping list with her. When she pointed to a very large bag of potatoes that it appears I’ll be in charge of peeling tomorrow, I decided that this year, it might be nice to provide our readers with a little music to accompany their Thanksgiving Day food prep.
We’re still all reeling from Dave’s bombshell revelation about his lack of fondness for the Fab Four, so I’m trying to make this selection non-controversial. With that objective in mind, what better musical accompaniment to Thanksgiving Day celery chopping & potato mashing could there be than Thelonious Monk’s “Stuffy Turkey”?
Happy Thanksgiving from everyone here at TheCorporateCounsel.net – and as always, thanks for reading!
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.
