In its annual global benchmark policy survey, ISS also sought input on whether board diversity info is still important to investors. As I blogged earlier this year, ISS halted application of its voting policy on that topic – but at least for this year, its research reports still have data on board diversity factors.
– 29% of investors selected “We remain focused on the importance of board, executive and workforce diversity, including diversity targets where applicable, and expect that most U.S. companies will disclose their approach to the diversity demographics of their boards as well as other DEI matters.”
– 24% of investors selected “Corporate DEI-related practices have evolved in the U.S., and disclosure on how companies assess risks or opportunities associated with DEI, whether they are scaling back or maintaining corporate DEI programs, is generally helpful for shareholders.”
– 2% of investors said “Irrespective of complexity, shareholder proposals on DEI topics are an unnecessary distraction for companies.”
– 34% of non-investors said “We no longer (or never did) consider numerical board or executive diversity targets but expect that U.S. company boards will continue to have a mix of professional and personal characteristics that is comparable to market norms and to each company’s business needs.“
For companies, this is an area where the balance of risk continues to evolve – so it will be important to have ongoing conversations about practices and disclosures, especially as proxy season approaches. Don’t forget to include perspectives from other experts and affected stakeholders in these conversations. For the legal side, that may include colleagues who specialize in employment law, government contracting, and potentially M&A and white collar defense (depending on the company’s circumstances). People outside of legal will also have views…
In addition to AI oversight and board diversity, the results from ISS’s annual global benchmark policy survey included several bread & butter governance topics. For these topics, investor respondents tended to show that they have views about “best practices” – while many companies (non-investors) want flexibility. No surprise there!
Here’s more detail on a few of the governance-related survey topics:
– Multi-Class Capital Structures – ISS asked whether “non-common” shares with more than one vote per share (other than in cases where these shares vote on an “as-converted” basis) should generally be considered the same way as common shares that have more than one vote per share.
– 71% of investors said “Yes.”
– 62% of non-investors said “No.”
As a reminder, ISS’s current benchmark policy is to recommend against directors individually, committee members, or the entire board, if the company has a capital structure with “unequal voting rights” – in the absence of sunset provisions or de minimis super-voting power.
– Independent Board Chairs – ISS noted that “independent chair” proposals seldom receive majority support (the current voting policy generally recommends a vote “for” these proposals and lists factors that the proxy advisor considers). In the survey:
– 43% of investors said an independent chair is best and that shareholder proposals calling for an independent chair are understandable.
– 38% of investors said that having an independent chair is a good practice, and companies should explain why they’re an exception to the rule.
– 51% of non-investors said a board should generally have the flexibility to determine its leadership structure.
– Director Overboarding – ISS noted that it last asked about overboarding in 2019, and some investors have changed their policies since then. Where local market best practice codes and/or regulations provide upper limits for board mandates, ISS policies globally already reflect these limits, but ISS asked about preferences when regulations aren’t in play. Here’s what they found about maximum limits:
– 26% of investors and 19% of non-investors said that 5 total board seats is appropriate.
– 25% of investors and 22% of non-investors said that 4 total board seats is appropriate.
– 9% of investors and 38% of non-investors said there should be no general limit; the board should consider its own circumstances and act accordingly.
– For CEOs, 55% of investors and 34% of non-investors believe 1 external board seat is an appropriate limit, and 39% of non-investors believe no general limit should be applied. The survey also got into other details, like whether board chair positions and connected companies should be treated differently.
The survey also covered views on shareholder proposals, shareholder written consent, say-on-pay responsiveness, director pay, executive incentive awards, and other matters. Meredith will cover the compensation-related items tomorrow on The Advisors’ Blog on CompensationStandards.com!
Earlier this year, the SEC published a concept release to explore changing the eligibility criteria for Foreign Private Issuers. This Mayer Brown memo summarizes themes from comments submitted to-date:
• A very large number of letters argued that the SEC should narrowly tailor any changes to the specific problems it intends to solve, since broad based changes may have unintended and unwanted consequences. More specifically, some letters request narrowly tailored disclosure changes focusing only on issuers that have failed to provide robust disclosure necessary to ensure the protection of U.S. investors (i.e., making “targeted, incremental changes to existing disclosure requirements applicable to FPIs accessing the U.S. markets through registered offerings or as reporting issuers”).
• Other letters favored limited, specifically tailored changes to the FPI definition for other reasons, arguing that any changes should be made in a manner that considers the impact of the definition on other terms and rules under the federal securities laws, including Regulation S and Exchange Act Rule 12g3-2(b).
• Similarly, a number of commenters stated that the SEC should be wary of potential changes that are duplicative of or contrary to existing home requirements to which FPIs adhere, and understand that the additional burden and cost of navigating the two regimes could be significant, such that some issuers may choose to exit the U.S. markets.
• Many letters argued in favor of continued reporting in IFRS, either for FPIs or for all issuers. In the alternative, if foreign issuers that lose FPI status must report in U.S. GAAP, the SEC should provide guidance and a suitable transition period (several commenters suggested a minimum of two or three years). Concern about switching from IFRS to U.S. GAAP was the most commonly repeated idea across all letters.
• Some letters advocated requiring meaningful non-U.S. trading (e.g., ≤90% of global trading in the U.S.), potentially with de-minimis exclusions for bona fide dual-listings, and providing a safe harbor for issuers listed on a designated “major foreign exchange” or in jurisdictions assessed as robust. Interestingly, a number of other letters took the opposite approach, arguing that significant non-U.S. trading is not required or helpful in demonstrating meaningful regulation of a foreign issuer.
• A few letters asked the SEC to consider carve-outs or refined eligibility criteria that preserve
FPI status for companies with genuine foreign governance and infrastructure, regardless of shareholder geography or incorporation jurisdiction.
• A number of letters advocated for a requirement that a FPI be (i) incorporated or headquartered in a jurisdiction that the SEC has determined to have a robust regulatory and disclosure oversight framework and (ii) be subject to such securities regulations and oversight without modification or exemption. Other letters suggested that the SEC should avoid any approach requiring jurisdiction-specific judgments because developing the relevant assessment criteria would be a large undertaking and require constant monitoring, straining SEC resources, and would lead to unpredictability for non-U.S. companies that are reliant upon a given jurisdiction or exchange continuing to meet the SEC’s criteria to maintain their FPI status.
• At least one letter argued that meeting a required jurisdictional threshold alone is not sufficient, and the SEC should consider not just where a company is incorporated and headquartered but should also look holistically at where the company is from, including where its directors, officers and employees reside, where its assets are held, where it earns revenue, and the citizenship and residency of any controlling beneficial owners.
• A handful of other letters argued that, in the alternative to requiring that FPIs be subject to
certain named robust regulatory jurisdictions, the SEC should identify jurisdictions of incorporation that do not have securities regulations and oversight sufficient to protect U.S. investors. Companies from these jurisdictions could be subject to the same reporting obligations and rules as domestic issuers.
• A number of letters argued that the SEC should keep the current multijurisdictional disclosure system with Canada, or MJDS, unchanged, and explore mutual recognition pilots (e.g., EU, UK, Australia) where regulatory objectives demonstrably align.
The memo says there have been about 70 responses submitted so far – mostly from law firms, FPIs and industry groups. The SEC’s Investor Advisory Committee also discussed this topic at a meeting last week. In his remarks at the meeting, SEC Chair Paul Atkins noted:
Now, to be clear, the SEC welcomes foreign companies that seek to access the U.S. capital markets. I must emphasize that the concept release is not a signal that the SEC intends to disincentivize such firms from listing on U.S. exchanges. Rather, our goal is to better understand the impact on U.S. investors and the U.S. market resulting from significant changes to the population of foreign companies listed in the United States over the last two decades.
The Center for Audit Quality recently shared these notes from a June meeting with Staff from the Division of Corporation Finance and Office of the Chief Accountant. Among other things, the Staff weighed in on transition reporting and segment reporting, as well as pro forma requirements following a reverse merger or de-SPAC transaction. Here’s an excerpt on that piece:
In de-SPAC transactions or where a public shell company acquires a private operating company, a registrant is required to provide pro forma financial information reflecting the accounting for the acquisition in a proxy or registration statement (e.g., a Form S-4). After effectiveness of the registration statement, certain subsequent filings (such as a Super 8-K reporting the transaction or subsequent registration statements) may require the registrant to update its and the target’s financial statements to remain compliant with the applicable age of financial statement requirements in Regulation S-X.
The Committee asked the staff whether the pro forma financial information reflecting the acquisition should be updated for the most recently reported periods in the Super 8-K or subsequent registration statements even if the registrant believes the update would not be material. The staff clarified that if the registrant’s financial statements were required to be updated, the pro forma financial information must also be updated. The update is required regardless of any materiality assessment.
The Committee further inquired whether pro forma financial information presented for transactions other than the one described by the Committee (i.e., transaction specified in Rule 11-01 of Regulation S-X) must be updated when the financial statements used to prepare the pro forma financial statements are required to be updated. The staff confirmed that if the financial statements used to prepare pro forma financial information are required to be updated, the pro forma financial information must also be updated. The update is required regardless of any materiality assessment.
Here’s something that Meredith blogged last week on DealLawyers.com:
Sidley recently analyzed all late-stage director contests at Russell 3000 companies in the last eight years — which includes five years pre-UPC and three years post — to understand the impact of the SEC’s universal proxy rule on contested elections. As these excerpts from their report show, the assumption that UPC would make it easier for activists to win seats didn’t exactly come to fruition as expected. The impact has been more nuanced.
The “floor” on activists’ electoral success has risen. At least one activist nominee was elected in 48% of UPC elections, up from 39%. Half of these successes have been limited to a single seat, an increase from 10% to 24% of total elections.
The “ceiling” on activist success has collapsed. Shareholders have supported at least half of the dissident slate in only 24% of UPC elections, down from 39%.
The average number of activist candidates elected under the UPC is down 22% (1.1 to 0.9 seats), and the average when a dissident wins at least one seat is down 37% (from 2.9 to 1.8 seats).
Management success has ticked down while remaining typical. “Clean sweeps” (full-slate elections) by management continue to be a majority of contested elections under the UPC (52%, down from 61%).
Activists are more often withdrawing their slates after ISS and Glass Lewis back management (13% of late-stage proxy contests under the UPC withdrew after proxy advisor recommendations, up from 9%)
Activists are more often withdrawing their slates after ISS and Glass Lewis back management (13% of late-stage proxy contests under the UPC withdrew after proxy advisor recommendations, up from 9%)
Activist clean sweeps have effectively vanished, falling from 29% of pre-UPC contested elections to none aside from the proxy contests at Masimo.
The memo says the “net effect” of these data points is that “activist victories have increased in frequency but compressed toward single-seat outcomes.” This memo and others analyzing UPC are posted in our “Proxy Fights” Practice Area on DealLawyers.com. If you aren’t already a member of that site, it is full of good info about Delaware case law, deal trends, and more. To get access, you can sign up online, email info@ccrcorp.com, or call 800.737.1271.
Yesterday, Corp Fin released a batch of updates to the Financial Reporting Manual. I am very happy that the Staff keeps this resource current! As a young associate attempting to understand securities law, I remember feeling like I’d stumbled upon a hidden treasure when I first encountered the FRM in its current form almost 20 years ago (although I must confess that I still did not use it quite as much as TheCorporateCounsel.net, which of course covered the current Manual’s debut in a blog).
The latest updates follow a batch released in July and address a variety of items. The revisions that are likely of most interest to this crowd are the ones made for:
– The May 20, 2020 amendments to the S-X Acquisition Rules (S-X 3-05, S-X 3-14, S-X 8-04, and S-X 8-06) from SEC Release No. 33-10786, “Amendments to Financial Disclosures about Acquired and Disposed Businesses,” which were effective January 1, 2021. The updated Sections are 1140.8, 2200.2, 2200.5, 2340 2345, 2360, 5210, 6120.11, 6220.7, 6340.2, 6410.8, 6410.10, 10220.5, and 12250.
– Exchange Act Reporting Requirements for Transition Period – Section 1360.2
– Acquired or To-Be-Acquired Business is Not a Foreign Business But Would Be an FPI – Section 2935.22.
– FPIs Voluntarily Filing on Domestic Forms – Section 6120.6.
– FPI Disclosures of Changes in Accountants & Disagreements – Section 6830.
As a reminder, the Staff includes a disclaimer on the FRM landing page, which states in part:
Because of its informal nature, the Manual does not necessarily contain a discussion of all material considerations necessary to reach an accounting or disclosure conclusion. Such conclusions about a particular transaction are very fact dependent and require careful analysis of the transaction and of the relevant authoritative accounting literature and Commission requirements. The information in this Manual is non-authoritative. If it conflicts with authoritative or source material, the authoritative or source material governs. The information presented also may not reflect the views of other Divisions and Offices at the Commission. The guidance is not a rule, regulation or statement of the Commission and the Commission has neither approved nor disapproved this information.
Reuters had reported that SEC Chair Paul Atkins was pushing for a delay, due to feedback from audit firms. Here’s more detail about the postponement, from the PCAOB’s announcement:
The Public Company Accounting Oversight Board (PCAOB) announced today that it is postponing for one year, to December 15, 2026, the effective date for QC 1000, A Firm’s System of Quality Control, and other new and amended PCAOB standards, rules, and forms adopted by the Board on May 13, 2024. The Board’s action also postpones the related rescission date of certain rules and standards that are currently in force.
In adopting QC 1000, the Board expressed the view that a 2025 effective date struck an appropriate balance between the benefits to investors of having QC 1000 take effect as soon as practicable and the need to allow sufficient time for registered public accounting firms to design and implement robust QC 1000-compliant quality control systems. Today’s decision by the Board to postpone the effective date takes into account information from various sources that some firms have encountered implementation challenges that, as a practical matter, may be insurmountable within the previously established timeframe. The Board believes that an additional year is sufficient time for firms that have encountered implementation challenges to overcome those challenges.
The Board has not made or proposed any changes to the text of the new and amended standards, rules, or forms from the text adopted by the Board. Nor is there any change to the Board’s previous statement that registered firms are permitted to elect to comply with the requirements of QC 1000 before the effective date (except as to reporting to the PCAOB on the evaluation of the quality control system).
It is too bad Dave wasn’t up on the blog this week, because I think he is our team’s biggest Swiftie. Even though I don’t know how he feels about the Chiefs, I imagine he has been busy celebrating this week’s engagement news.
As if the lady hasn’t already done enough for the economy, the Big News also gave a nice bump to a few stocks – and (as I saw “Overheard on Wall Street” joke on X) – could have given companies with not-so-great news a good opportunity for cover. Personally, the thing I most enjoyed was Uncle Jesse & Olaf finding the perfect way to celebrate together.
If you haven’t seen their video yet – and even if you don’t much care for “TNT”! – please let the antics of John Stamos and Josh Gad carry you into this holiday weekend with a smile on your face. We’ll be back with our blogs on Tuesday.
The SEC’s Office of the Inspector General recently audited the work carried out by Corp Fin’s Disclosure Review Program in the 2023 and 2024 fiscal years. Yesterday, it issued a 22-page report with the results of the audit. Here are the 3 main recommendations:
• Update policies and internal guidance to (a) require that staff document the reasons and relevant risk factors for conducting elective annual report reviews, (b) provide clear direction for scoping annual report reviews, and (c) require that staff document scoping decisions.
• Coordinate with the SEC’s Office of the General Counsel to finalize Sarbanes-Oxley Act of 2002 section 408 guidance, including a description of all six factors to be considered and an interpretation of the minimum review period mandate.
• Consider developing a plan that prioritizes DRP goals and requirements in the event of significant staffing decreases and/or significant workload increases.
The DRP is a big task for Corp Fin, and it’s staffed with nearly 300 employees. In order to comply with the Sarbanes-Oxley Act requirement to review filings on a “regular and systemic basis,” the DRP annually selects for review a portion of the 7,400 annual reports that are filed by public companies – as well as selected transactional filings. The intent is that each company will cycle through a review at least once every 3 years.
The report says that the purpose of the Inspector General’s audit was to assess whether the DRP uses a risk-based process to concentrate resources on critical disclosures, and whether it is meeting its statutory requirements. The OIG says its recommended improvements are important for several reasons:
• Staff turnover may lead to a loss of institutional knowledge
• Potential new rules for crypto assets and other issues may create issues warranting the DRP’s attention
• The current regulatory environment may increase new issuer transactional filings
The Inspector General also encouraged the DRP management to leverage automation and technology where feasible and advisable – with a separate report on the SEC’s information technology systems. The report is full of good info about how the DRP was organized and staffed during the audit period, recent comment letter trends, and more.
We also give an overview of how Corp Fin’s Disclosure Review Program works – and how to respond to the comments that you might receive when it’s your company’s turn for review – in our “SEC Comment Letter Process Handbook.” If you do not have access to our Handbooks, Checklists, and all of the other practical guidance that is available here on TheCorporateCounsel.net, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
I recently shared trends on The Proxy Season Blog about disclosing the board’s approach to AI oversight. Specifically, I noted that during the 2025 proxy season, more companies said that they had assigned oversight to a committee (typically the audit committee).
A related question is whether board composition is changing to reflect the impact of AI opportunities and risks. We talkeda lot about the similar topic of “cyber experts” back when everyone started to realize that incidents could affect companies across a wide variety of industries, and interest from investors and Congress in oversight & expertise eventually contributed to the SEC adopting the cyber disclosure rules in 2023 (which built on Commission-level guidance from 2018).
2. Replacing retiring directors due to mandatory retirement or tenure policies, and
3. applying the results of board and director evaluations.
Interestingly, though, the “human dynamic” seems to remain just as important. When the Chairs were asked why they felt certain directors had overstayed their welcome, they said:
– Too long of a tenure (57%),
– Cultural mismatch (26%), and
– Being too busy outside the boardroom (22%).
Notably, “cultural mismatch” nearly doubled year over year from 14% to 26%, indicating greater issues around interpersonal dynamics and cultural alignment rather than technical qualifications. This is the first year that tenure was listed as a reason for replacement.
So, culture still matters. And remember that AI in the boardroom may come in the form of tools rather than individual experts. I also blogged last year that lengthy director tenures could be catnip to some activists – and shared trends in mandatory retirement policies.
