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.
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.
