As Dave noted last week, one thing that many of us are grateful for this holiday season is that we can take a big – and possibly permanent – pause from working to comply with the SEC’s climate disclosure rule that was adopted last spring. However, as Dave also pointed out, CSRD compliance will still require effort from many companies. On that front, Ropes & Gray recently updated its “transposition tracker” – which shows which EU member states have implemented CSRD requirements in their national laws.
A recent Teneo memo predicts that CSRD may even affect companies that aren’t subject to that disclosure regime, if institutional investors push for comparable disclosure across their portfolios. This consequence is included in the memo as one of the 10 most likely scenarios that could impact corporate environmental & social initiatives as the balance of power shifts in Washington. Here are 4 more possibilities that Teneo shares for 2025 & beyond:
– Greater scrutiny of company DEI programs. While the 2023 Supreme Court’s Students for Fair Admissions rulings focused on higher education, conservative campaigns to end corporate DEI programs have landed on company doorsteps this year. As a result, many companies have conducted legal reviews of their DEI programs and communications. New challenges to DEI initiatives are expected under the next administration, including the reinstatement of an executive order against “divisive topics” in DEI training for contractors and possible action from the Department of Labor to change federal policies. In addition to the risk of another shift in the legal landscape, the Trump administration is expected to appoint vocal critics of DEI, such as Elon Musk, Vivek Ramaswamy and Stephen Miller, to federal positions. Companies should prepare for the campaign against DEI to become more public and challenging as advocates, including employee groups, nonprofits and investors, press companies to stand firm with prior commitments.
– Revisited attacks on proxy advisory firms and ESG shareholder proposals. The SEC may resume its prior initiatives to rein in the perceived power of proxy advisory firms like ISS and Glass Lewis. Rules requiring proxy advisors to eliminate corporate advisory services and/or allow companies to review their reports ahead of official publication may also be revisited. ESG raters could also be affected by these initiatives. Other regulation that could limit the number of ESG shareholder proposals will likely be considered, such as higher minimum share ownership requirements for proponents and expanded grounds for companies to exclude ESG proposals. If shareholder powers become more limited, companies should expect proponents to adjust tactics, such as launching more “vote-no” campaigns against directors and/or Say on Pay votes, as well as single-issue proxy contests.
– Increasing importance of shareholder engagement. Investors will be eager to understand how these fundamental shifts will impact ESG and DEI programs within their portfolio companies. U.S. investors may have a very different perspective than European investors. With off-season shareholder engagement underway, companies should not deviate from the values expressed in their sustainability reports, as these statements are on-record, signed by the CEO and leadership of the company. As the new administration’s policies play out, companies can respond to changes by communicating them in proxies, ESG reports, websites, earnings calls and social channels.
– Fewer ESG mentions on earnings calls. Over the past year, companies have increasingly reevaluated their ESG communications strategies, especially during earnings calls. Under a Trump administration, there is expected to be less emphasis on sustainability and DEI-related policies. As regulatory pressures around ESG issues arise, companies may prioritize other financial and operational topics. The polarization of ESG may lead many companies to avoid further public discussion on contentious topics to steer clear of potential backlash. Going forward, earnings calls are expected to feature less ESG-related content, as they primarily focus on short-term performance and have limited time to address issues beyond financial metrics.
This memo is part of a series that Teneo has been running, which you may want to check out if you’re involved with your corporate sustainability disclosures:
Remember to visit PracticalESG.com for a deeper dive into how to implement initiatives and disclose ESG performance. We’re also continuing to post relevant resources in our “Sustainability” Practice Area on this site.
For years, we’ve maintained a blog roll on the left side of this page – which you can use as a resource to check out corporate governance & securities updates from practitioners and others in our community. Given the number of informative podcasts that folks have launched over the past few years, we’ve now added a similar list on our “podcasts” page!
One of the newer series that I’ve been enjoying is the “Shareholder Primacy” podcast with activist investor & advisor Michael Levin and Tulane Law Prof Ann Lipton. Of course, you can also access the archives of our podcasts on that page… dating all the way back to 2003! (Broc was an OG on the podcasting front!) And don’t miss Meredith’s “Pay & Proxy Podcast” over on CompensationStandards.com.
Yesterday, the President-elect announced more picks for leadership roles in the incoming administration, including the one we’ve all been waiting for: SEC Chair.
The nominee – Paul Atkins – is already familiar to many practitioners. He served as an SEC Commissioner from 2002 – 2008 (and during that time, current SEC Commissioners Hester Peirce and Mark Uyeda served as his Counsel). He held several other roles at the agency prior to that, including as Chief of Staff to then-Chair Richard Breeden and later as Counsel to SEC Chair Arthur Levitt. Since then, Mr. Atkins founded and has been running a prominent consulting firm, Patomak Global Partners, among other activities.
The confirmation process should give us more insight into the priorities of an Atkins SEC. For now, it’s a safe bet that at least some of those priorities will differ from what we’ve experienced during Chair Gensler’s tenure. In fact, the WSJ Editorial Board nicknamed him the “Anti-Gensler” in an op-ed yesterday, with lots of optimism that he’ll curb enforcement efforts, improve our capital markets, and work to lower costs for public companies & investors.
In this roundup of Atkins’ past commentary, Cooley’s Cydney Posner points out that he has also criticized the shareholder proposal process, saying the SEC had “eviscerated the exclusions,” as well as the notion of “decision-useful” (vs. “material”) information for investors, the trend of expanding risk factors, and many other requirements that have created compliance challenges for companies. This Politico article offers a few more predictions (also see reporting from the WSJ and Bloomberg):
As chair, Atkins would likely weigh unwinding parts of Gensler’s agenda and crafting bespoke rules for the crypto market — something Trump himself vowed to do on the campaign trail. While speaking at a Federalist Society event in April, Atkins called the lack of regulatory clarity around crypto a “fundamental underlying issue” that the SEC needs to address.
He also said that a change in administration would likely also mean a move to undo some of the rules enacted under Gensler. But Atkins added that he hoped the SEC would “get beyond that,” too.
We don’t know exactly when the agency’s new chair will be confirmed. This nomination is at least a month ahead of schedule compared to the last couple of go-rounds, when nominations were announced in January, but whether that will affect the Senate’s timeline is still an open question. Back in 2020 when Chair Gensler was nominated, the process went like this: nomination announced in late January, Senate Banking Committee met to approve the nomination in early March and full Senate confirmation came along in mid-April. As previously announced, Chair Gensler is leaving the SEC on January 20th.
Dave blogged last week about the SEC’s surprising FY24 Enforcement results. The SEC’s lengthy press release is organized by topic and is worth a read for whichever category (or categories) of Enforcement priorities might be most likely to affect your company.
This report from Cornerstone Research and the NYU Pollack Center for Law & Business also spotlights some interesting trends. As noted in their press release, some key Enforcement sweeps contributed to the results:
The SEC’s FY 2024 enforcement priorities were evident in the 38 actions that were part of five sweeps. Most prominent was the sweep of recordkeeping failures stemming from companies’ use of off-channel communications (22 actions). This led to an increase in actions with Broker Dealer allegations, with such actions jumping to 29% of all FY 2024 actions compared with 19% during the previous fiscal year. The SEC also brought seven actions for violations of the whistleblower protection rule in FY 2024, up from three in FY 2023.
Here are some other key takeaways from the report:
– While the average monetary settlement was higher than in FY 2023, the median monetary settlement was lower at $3.2 million in FY 2024 compared to $4.0 million in FY 2023.
– The percentage of public company and subsidiary defendants for which the SEC noted cooperation was at its highest level (75%) since FY 2019 (77%) and the second highest in SEED. The average from FY 2015 through FY 2023 was 64%.
– The SEC imposed $784 million in civil penalties in administrative proceedings in FY 2024, accounting for 54% of total monetary settlements. The $784 million was higher than the FY 2023 total of $694 million in civil penalties imposed.
– In FY 2024, the percentage of total monetary settlements from disgorgement and prejudgment interest in civil actions was 15%, the highest percentage since FY 2020.
– Public company and subsidiary defendants with admissions of guilt under the current Gensler administration totaled 66, more than double the number under Chair White (29) and more than seven times those under Chair Clayton (9).
Even though SEC Enforcement Director Gurbir Grewal left the SEC in early October, shortly after the agency’s fiscal year end, we are continuing to see activity. Cooley’s Cydney Posner has covered a few newer Enforcement actions that were announced in recent weeks. The allegations related to:
We’ve posted the transcript for our recent webcast – “SEC Enforcement: Priorities & Trends.” Our panelists – Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel Urquhart & Sullivan’s Kurt Wolfe – provided their lessons learned from recent enforcement activities and insights into what the new year might hold. Topics addressed included:
– SEC Enforcement Activities in 2024 and Priorities for 2025
– Implications of Jarkesy for SEC’s Enforcement Program
– Monetary and Non-Monetary Penalties
– Accounting and Disclosure Actions
– Actions Targeting “Internal Controls”
– Self-Reporting and Cooperation Credit
– Coordination with DOJ Investigations
Members of this site can access the transcript of this program. If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Yesterday, with a little less than one month to go before the compliance date for the Corporate Transparency Act, a federal district court in Texas has issued a preliminary injunction that blocks the Department of Treasury from enforcing the reporting requirements under that statute. The court also stayed the compliance deadline. (Hat tip to my Fredrikson colleagues for alerting me! Here’s our memo.)
This holding – Texas Top Cop Shop v. Garland (E.D. Tex.; 12/24) – follows an Alabama decision from earlier this year that also found the CTA unconstitutional. In the Alabama case, FinCEN followed up with a notice that clarified the court’s order applied only to the specific plaintiffs in that litigation. Here, though, the court was very clear that its order applies to all entities – on a nationwide basis. Here’s an excerpt from the opinion:
Having determined that Plaintiffs have carried their burden, the Court GRANTS Plaintiff’s Motion for a Preliminary Injunction. Therefore, the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the APA. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.
The court found that the statute is likely unconstitutional as outside of Congress’s power, and that the final rule implementing the CTA is likely unconstitutional for the same reason. With these CTA cases, all that time studying the commerce clause in law school has finally become relevant to what we do!
The U.S. Chamber of Commerce applauded the ruling. Here’s an excerpt from their release:
The preliminary relief will remain in effect until the conclusion of legal proceedings, at which point the court may enter a permanent injunction. In the meantime, the government will likely appeal the preliminary injunction.
Unless and until an appellate court overrules or narrows the injunction, no businesses are obligated to comply with the reporting requirements.
This Bloomberg article says that the DOJ hasn’t indicated yet whether it will appeal this holding. In the Alabama case from earlier this year, the DOJ appealed to the 11th Circuit. We’ll stay tuned for any updates or guidance from FinCEN, as well.
Recently, A&O Shearman announced the release of its Annual Corporate Governance & Executive Compensation Survey – its first as a combined firm. The survey covers trends in shareholder proposals, Delaware case law, executive compensation, and more. One article – on pg. 45 – provides a governance framework for generative AI that is particularly helpful. Here are a few high points:
– The need for and shape of corporate governance is driven by a number of features (and consequences) of generative AI. Broadly, these can be categorized into a few key factors: legal and regulatory risk, market dynamics and people. The article then delves into each of these.
– Companies fundamentally want to do 3 things: deploy AI quickly and effectively, deploy AI safely with demonstrated risk management to key stakeholders, and maintain effective corporate governance without expending significant cost and time. A solid governance framework can help with achieving these objectives.
– While some may consider a complete overhaul of corporate governance frameworks, we do not believe that a lengthy and expensive overhaul is necessary. Instead, organizations can leverage existing policies and governance processes. A central AI governance structure acts as the central hub of a wheel with existing policies acting as the spokes. We structure this central framework as a 3-part hierarchy: Responsible/Ethical AI Principles, Policy on Use and Use Case Deployment Policy. The article takes a close look at each part of this framework.
Download the survey for more tips on using a centralized governance structure to apply existing policies to AI issues.
In this 24-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Lily Yan Hughes, who is Chair of DirectWomen and Assistant Dean at Syracuse University College of Law. We discussed:
1. Lily’s career path, including her leadership of legal teams at Arrow Electronics, Public Storage and Ingram Micro, and her current roles with DirectWomen and NAPABA.
2. DirectWomen’s mission to increase the representation of women lawyers on corporate boards, and the criteria and steps for being involved.
3. The importance of adapting to different subject areas and demands.
Significant geopolitical issue that companies need to be monitoring right now, and how to help boards and businesses navigate them.
4. What law schools and industry organizations can do to prepare lawyers to advise on business risks and opportunities.
5. What Lily thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
Here’s a scary stat from a Bain CFO survey that I shared last week on the Proxy Season Blog:
There are now about 1,000 activist campaigns per year, and 25% of CFOs expect their company to be a target in the next 2 years.
This Skadden memo says that lengthy director tenures are an increasingly important factor in activists’ decisions to target a company – and they aren’t doing companies any favors when a contested election goes to a vote, either. Here are the key takeaways:
– Proxy advisory firms and institutional investors increasingly view tenures over nine years as too long, questioning the independence of directors who have served longer than that.
– Board refreshment is a frequent demand of activists, so companies may find themselves vulnerable to activist campaigns if they have very long-serving directors.
– As boards review their own composition for skills and other attributes, they should explain to investors the value that long-serving directors bring to the board.
– While few U.S. companies have formal tenure limits, age limits are more common but less favored by proxy advisory firms.
The memo says that 67% of activist campaigns since 2021 have targeted companies with three or more directors who have served 10 years or more, according to Evercore’s Third Quarter 2024 Quarterly Review. As that last point above alludes to, recent survey results indicate that mandatory retirement is still a widely used tool for board refreshment – but companies are also amping up their evaluation practices.
The National Association of Manufacturers has filed its brief to appeal a February decision from the D.C. Federal District Court that would vacate the SEC’s 2020 rule to regulate proxy advisors. The rule was premised on the notion that proxy advisor services are a “solicitation” under Rule 14a-1 – and are exempt from information & filing requirements only if they comply with certain conditions, including giving companies an opportunity to review & respond to voting recommendations.
This blog from Cooley’s Cydney Posner reports details from NAM’s brief. Here’s an excerpt:
NAM professed that, in its statutory analysis, the district court made “three fatal errors.” First, NAM claimed, the district court failed to take into account “Congress’s express delegation of authority to the SEC to define statutory terms like ‘solicit.’” Citing Loper Bright (see this PubCo post), NAM contended, “when Congress expressly gives an agency definitional authority, the court must ‘independently identify and respect such delegations of authority, police the outer statutory boundaries of those delegations, and ensure that agencies exercise their discretion consistent with the APA.’”
In adopting its definition of “solicit”—a definition that “falls within the word’s acknowledged range of meanings”—the SEC was acting pursuant to Congress’s delegation, NAM asserted. As a result, NAM argued, the district court “should have ‘respect[ed]’ Congress’s explicit delegation, not overridden it in favor of a narrower interpretation.” This case, NAM argued, “presents a question of statutory construction: whether the SEC’s definitional amendment regarding ‘solicit‘ is consistent with the Exchange Act. That is the Court’s domain, not the SEC’s.”
Second, NAM looked to the “ordinary tools of statutory interpretation” to find a broad meaning for the term “solicit”: according to NAM, this broad scope is supported by contemporaneous authorities, the structure of Section 14(a), the “historical circumstances and remedial purpose of the Exchange Act,” and the “near-century worth of enforcement.”
Third, NAM contended that “the district court rewrote the statute by concluding that the SEC may only regulate proxy solicitors who have an interest in the underlying corporate ballot measure. The Exchange Act contains no such requirement.” Nothing about the term “solicit,” NAM argued, necessarily implies that the solicitor has an underlying interest in the matter submitted for a vote. “If a person asks a shareholder for their proxy—soliciting it in the most literal sense—and then votes based on a coinflip, that person would surely be subject to SEC regulation, despite lacking an interest in the measure’s outcome.
The district court’s conclusion to the contrary yields disastrous and absurd results. The Court should reverse.”
It’s not clear where we’ll go from here with this case and with proxy advisor regulation in general. The 2020 rule was adopted when Jay Clayton chaired the SEC – it was welcomed by companies and resulted from years of advocacy. Unsurprisingly, ISS promptly challenged the rule (and guidance that had preceded it), but the litigation has inched along and been confusing to follow, in part because the SEC partially repealed the rules in 2022. The rollback generated its own wave of lawsuits in the 5th Circuit – with the most recent decision on that front being that the SEC’s 2022 repeal was arbitrary & capricious and the 2020 rule should stay in place. So, that 5th Circuit decision was somewhat at odds with the one that NAM is challenging here, from the D.C. District Court.
Cydney notes that for this case, ISS’s brief is due in mid-January. The SEC had been aligned with NAM in this litigation, but it dropped out of the appeal last spring. This Bloomberg Law article says that the U.S. Chamber of Commerce has filed an amicus brief in support of NAM’s positions.
