It feels like four years ago that we narrowly avoided a government shutdown, but it’s actually only been four weeks – and it’s likely that our politicians will once again negotiate down to the wire when they revisit whether our government can continue operating past November 17th. Like most things in Washington, this isn’t just a “yes/no” decision. That means that when the SEC (eventually) gets funded, “Congress gonna Congress” when it comes to what exactly the Commission can do with the money.
We’ve bloggedrepeatedlyover the past many years about appropriation bills that would tack on a restriction to the SEC’s ability to issue rules on “political spending” (or in some cases, that would remove the roadblock to rulemaking on that topic). Here’s the typical provision:
None of the funds made available by this Act shall be used by the Securities and Exchange Commission to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.
So, here we are again. Even though no “political spending” disclosure rules are contemplated by the hard-driving Reg Flex Agenda that represents Chair Gensler’s priorities, the risk of regulation persists, and appropriations bills that address this topic are making their way through the House & Senate in the form of H.R. 4664 and S. 2309. In addition, two other bills that have been introduced in the House – H.R. 4472 and H.R. 4563 – aim to codify this restriction so that it’s not dependent on the annual appropriations dance. Here’s an excerpt from that last one:
(a) Findings. — Congress finds the following:
(1) From 2010 through 2013, the Internal Revenue Service targeted conservative organizations seeking tax-exempt status. The result of this targeting was obvious—to discourage conservative organizations and individuals associated with them from engaging in the 2012 presidential election after an incredibly successful 2010 midterm election.
(2) In response to this treatment, a large number of conservative organizations sued the Internal Revenue Service. In 2017, a settlement was reached and the Internal Revenue Service was required to issue an apology for its actions.
(3) Congress quickly recognized that the Internal Revenue Service was not the only government agency that could question or threaten the tax-exempt status of disfavored political groups. The Securities and Exchange Commission, an independent government agency, also enjoys some regulatory power in this area.
(4) Beginning in 2015, Congress has included in every appropriations bill that has funded the Securities and Exchange Commission, an appropriations rider prohibiting the agency from using any of the funds made available to “finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.” See Consolidated Appropriations Act, 2016, H.R. 2029, 114th Cong. § 1 (2015); Consolidated Appropriations Act, 2017, H.R. 244, 115th Cong. § 1 (2017); Consolidated Appropriations Act, 2018, H.R. 1625, 115th Cong. § 2 (2018); Consolidated Appropriations Act, 2019, H.J. Res. 31, 116th Cong. § 1 (2019); Consolidated Appropriations Act, 2020, H.R. 1158, 116th Cong. § 1 (2019); Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong. § 2 (2020); Consolidated Appropriations Act 2022, H.R. 2471, 117th Cong. § 2 (2022); Consolidated Appropriations Act 2023, H.R. 2617, 117th Cong. § 2 (2022).
(5) This prohibition is too important to be subject to yearly renewal. Instead, it must be enacted into permanent law so political organizations of both political parties can rest assured the Securities and Exchange Commission will not target them.
(b) Prohibition. – The Securities and Exchange Commission may not finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.
I’m not advocating for another disclosure rule, but I have always thought it was a stretch to compare the IRS settlement – which related to allegations that the agency was being extra strict in granting tax exempt status to conservative organizations – to the SEC’s consideration of a rule that would require companies to disclose the use of corporate resources for political activities. In any event, while our politicians have been arguing about it for the past decade, investors & companies have moved on with private ordering.
A new dimension of “political spending” scrutiny that has emerged in the last few years from shareholders and employees is “values alignment.” I blogged earlier this year on our “Proxy Season Blog” about how to respond to shareholder proposals on this topic.
In a sign that companies will continue to face these proposals in 2024, the Interfaith Center for Responsibility sent letters in late summer to the CEO members of the Business Roundtable that call for values alignment for political contributions, along with improved board oversight and public disclosure. Here’s an excerpt:
We believe that BRT companies would benefit from a thoughtful assessment of their political spending and lobbying. We recommend two resources to help guide company policy development and decision-making toward more responsible political engagement.
I. Erb Principles for Corporate Political Responsibility
The first key resource is the Erb Principles for Corporate Political Responsibility, released in March after a lengthy, deliberative stakeholder process by the Erb Institute of the University of Michigan. Developed as a complement to the BRT’s statement on the Purpose of the Corporation and the BRT’s actions to support the peaceful transfer of power in 2021, the Erb Principles propose a practical, non-partisan, and comprehensive definition of corporate political responsibility (CPR) as a first step in establishing CPR as a new norm that will reduce business risk, strengthen civic trust and foster collaborative problem-solving.
The Erb Principles do this by helping companies better align their political influences — including any political spending — with their values, purpose, commitments, and larger responsibilities to a healthy economy, civic institutions, and informed civic discourse. The Principles were designed to provide U.S. companies with a non-partisan, principled thought process for responsible engagement, without prescribing positions on specific issues.
Next week is Election Week. Maybe you have some important local items on your ballot this year, but in my neck of the woods, most people are already bracing themselves for the polarized U.S. Presidential election cycle that will soon be in full swing. That means that corporate “political spending” activities (which are broadly defined!) will continue to attract scrutiny. A recent scandal shows that misplaced contributions can create financial & reputational risks for companies.
In that vein, The Center for Political Accountability recently published this 10-page guide to corporate political spending. The guide suggests solutions to 5 common challenges that arise from contributions to political candidates, trade associations, and other third-party groups. This HLS blog summarizes the key elements:
– Recognize the heightened risks that a company faces from contributions to third-party groups, specifically 501(c)(4) organizations engaged in political spending, trade associations, super PACs and 527 committees. The company needs to know where its money ultimately ends up, what causes and candidates it advances and what risks it is assuming.
– Understand that public companies can no longer publicly claim to support some aspects of a candidate’s platform while disavowing others. The challenge facing a company is that when it supports a candidate, all of the candidate’s actions and positions will be associated with the company.
– Align the company’s political spending with its core values, policies and positions.
– Avoid siloed decision-making. Political spending should fairly reflect the views and interests of the company’s various stakeholders. Companies benefit from active and dynamic engagement among public affairs, government relations and other internal actors responsible for promoting the company’s values, policies and positions and those making political spending decisions.
– Direct corporate contributions to politicians who refrain from punitively targeting companies for their policy decisions, personnel practices, public statements, or other values important to the company’s success and integrity.
– Protect the democratic institutions and rule of law that companies depend upon to operate, compete, and thrive.
I expect that this year’s CPA-Zicklin Index, which rates companies annually on the transparency of their corporate political spending, will be published any day. Last year, the Index expanded to cover Russell 1000 companies.
Check out our “Political Contributions” Practice Area for more benchmarking & practical checklists. We also covered this topic at our recent “Proxy Disclosure Conference” – you can still get access to the video archives & transcripts by emailing sales@ccrcorp.com. The program is also eligible for on-demand CLE credit!
With all the new rules and their associated compliance & effective dates, it is getting difficult to keep track of what will need to change in your next Form 10-K. This memo from Bryan Cave Leighton Paisner is a helpful resource for doing that, with summaries for each of these new 10-K/proxy statement disclosures:
1. Annual cybersecurity disclosures
2. 10b5-1 plan quarterly disclosures
3. Clawback policy and disclosures
4. Share repurchase disclosures
The memo also runs through other “hot topics” that may warrant extra attention as you prepare your reports. And, it looks ahead to additional items that will be required in 2025! Also check out Meredith’s blog from earlier this week on our Proxy Season Blog about potential D&O questionnaire updates (visit our “D&O Questionnaire” Practice Area for our handbook, memos, and samples).
Earlier this week, I jokingly referenced the Commission’s “customary year-end enforcement spree” – a reliable addition to the government’s bottom line. On the final business day this year, the SEC raked in $218 million in fines!
New research in the Journal of Accounting & Economics looks at 20 years of data to figure out whether the “September Spike” is really a thing – and if so, whether it can be explained away by market or other factors. Here’s an excerpt about the case volume at the SEC’s FYE:
We find that the average number of cases (of any category) filed in September is almost double the average in other months, and that the median percentage of total annual cases filed in September is 16%. We refer to higher case volume in September relative to other months as the “September spike” and document variation in the size of this spike across time.
Our results are consistent with trends described in the financial press and examined by legal scholars. The Wall Street Journal, for example, reported an uptick in case volume in September 2013 (Eaglesham, 2013b), and subsequent legal research has shown similar upticks over longer sample periods (Velikonja, 2017; Choi, 2020). We extend the descriptive and graphical evidence in these articles by showing that the September spike is robust to controlling for various factors that may influence case volume, such as trailing securities class actions, SEC investigations, and other market factors.
The researchers found that the spike is larger when case totals are lagging the prior year, and smaller when the Chair is in their first year in office. It’s also larger when the SEC’s spending exceeds its budget authority and when the Enforcement Division has more resources. Does it matter? The authors suggest that in “high-spike” years, the resolutions of complex and possibly egregious cases are getting kicked down the road:
Regarding case selection, we create measures of case complexity and find that SEC staff prioritize less complex cases at fiscal year-end. Specifically, the standalone cases filed in September are significantly more likely to reference defendant cooperation and to only name companies as defendants, and are less likely to include a fraud allegation and to reference parallel criminal proceedings. For instance, September cases are approximately 11% less likely to include fraud allegations than cases filed in other months.
The annual year-end pressure might also give companies more leverage for settlements:
We find that defendants receive lower financial sanctions—both disgorgement and civil penalties—when they settle in September. On average, our results suggest the SEC discounts financial sanctions for cases filed as settled charges in September by approximately $132,000—an economically meaningful discount, given that the average financial sanction is $270,000. We also find an 11% lower likelihood of a large financial sanction in September.
As far as whether companies need to be on their best behavior in September, a graph on pg. 45 shows that the number of investigations remains steady year-round. Fiscal year end is just a good time to negotiate a settlement.
Speaking of disclosures to watch in your upcoming reports, we’ve posted the transcript for our recent “Corporate DEI Programs After Students for Fair Admissions v. Harvard” webcast featuring J.T. Ho, Partner at Orrick, Ngozi Okeh, DEI Editor of PracticalESG.com, and Travis Sumter, Labor & Employment Attorney at NextRoll. Our panelists offered their insights about how to navigate the increasingly complex surroundings in which corporate DEI programs operate.
The webcast covered:
– Overview of the Students for Fair Admissions v. Harvard Decision
– Legal Framework Governing Corporate DEI
– Potential Vulnerabilities of Corporate DEI Programs
– Mitigating DEI Legal Risks
– Dealing With Pro- and Anti-DEI Activism
This was a joint webcast with PracticalESG.com. If you are not a member of TheCorporateCounsel.net or PracticalESG.com, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Programming note: In observance of the federal holiday on Monday, we will not be publishing a blog. We will be back on Tuesday!
This HLS blog details recent CEO succession trends among the Russell 3000 and S&P 500 – with data & analysis from The Conference Board, Heidrick & Struggles, and ESGAUGE. Here’s one trend that jumped out:
The rate of inside promotions to the CEO position in the Russell 3000 increased from the prior years, reaching 73.5 percent of incoming CEOs in 2022—the highest since The Conference Board and ESGAUGE began tracking these statistics. In the S&P 500, the rate of inside promotions is projected at 84.6 percent for 2023, one of the highest ever recorded and higher than the historical average (78.8 percent since 2011). In 2022, Real Estate, Utilities, and Financial companies reported the highest rate of internal promotions to the EO role (93.3 percent, 91.7 percent, and 86 percent, respectively), while Communication Services companies had the highest percentage of outside CEO hires (64.3 percent).
What’s more, companies aren’t just promoting internal executives, they are awarding the golden ticket a few years sooner than has been the case historically:
While a critical source of CEO talent continues to be long-serving executives promoted from within, data suggests that after the pandemic, boards fast-tracked inside promotions to the chief executive post. As of the end of 2022, the average tenure-in-company of internally promoted CEOs was 12 years in the S&P 500 and 10 years in the Russell 3000, lower than the historical averages of 16 years and 11 years, respectively. The share of “seasoned executives”—or those with at least 20 years of company service—was also lower than the historical averages (17.3 percent in the S&P 500, compared to a 32.2 percent 5-year average; and 15.0 percent in the Russell 3000, down from a 17.8 percent historical average).
The blog points out that there’s significant variance across industries but says the data could suggest changing perceptions of leadership. Specifically, boards might be embracing new leadership traits around innovation & adaptability. Lastly, the more rapid ascent of executives makes leadership development even more important. The blog gives these final thoughts:
The decline of tenure-in-company and “seasoned executives” in a year where the overall rate of CEO succession increased may also suggest that companies accelerated their leadership development process to expand their pool of CEO candidates. To help mitigate human capital risks, the entire board should review, at least annually, the leadership development process within their companies and scrutinize internal succession candidate lists.
A fun project that often accompanies board meeting preparation is “benchmarking.” This used to mean combing through peer SEC filings to find information from other companies on whatever specific data point your boss or the board had inquired about. If you were lucky, secondary commentary would exist and give you a starting point. Good news! While peer disclosures & trend summaries absolutely remain valuable as sources for context and analysis, there are new tools these days to add to your toolbox.
Here’s a handy dashboard from The Conference Board, ESGAUGE, and Heidrick & Struggles that is updated weekly with info on CEO succession announcements in the Russell 3000 and S&P 500. I’ve also recently been using these dashboards to track trends on compensation, board practices, shareholder proposals, and ESG. You can filter by index, company size, and business sector – and browse data about:
1. Succession Rates – generally, across performance quartiles, across age groups, and share of forced successions
2. CEO Profile – various demographic categories and tenure
3. Departing CEOs – similar demographic categories, tenure, reasons for departure, and number of forced CEO departures (and why)
4. Incoming CEOs – demographics
5. Placement Types & Other Practices – inside appointments, non-executive directors appointed as CEOs, interim CEOs, practices for announcement & effectiveness dates, outside hires, and more
Here’s a topic of interest that John blogged about last week on DealLawyers.com (visit that site for seasoned perspectives and practical guidance on all things deal-related):
One of the issues under Delaware law that has generated some uncertainty over the years is the extent to which the DGCL permits a corporation to create a mechanism in which shares of the same class differ in their share-based voting power depending on who holds them. Vice Chancellor Laster’s recent decision in Colon v. Bumble, (Del. Ch.; 9/23), may go a long way toward resolving that uncertainty.
Delaware courts have permitted tenure voting arrangements, in which the voting rights of holders of the same class vary depending on how long they’ve held the shares, and other limitations, such as per capita regimes, that limit a stockholder’s voting rights based on the number of shares owned, but in Colon v. Bumble, Vice Chancellor Laster addressed a situation in which the voting rights of particular shares expressly depended on the identity of their owner.
In order to facilitate its IPO, Bumble installed an “Up-C” structure, which resulted in a hybrid entity in which public stockholders’ enjoyed voting & economic rights through ownership of Class A shares, while pre-IPO insiders enjoyed voting rights through ownership of Class B shares and economic rights through the ownership of their pre-IPO LLC units, each of which were convertible, when accompanied by a Class B share, into shares of Class A Common Stock.
Bumble’s charter provides that each share of Class A Common Stock is entitled to one vote, unless that share is held by one of the company’s “Principal Stockholders,” in which case it is entitled to ten votes. The charter defines the term Principal Stockholders to include the two insiders who were party to a pre-existing stockholders’ agreement with the company. It also authorized a class of Class B Common Stock, which was issued exclusively to the company’s Principal Stockholders. Each share of Class B stock is entitled to a number of votes equal to the number of Class A shares that the holder would receive if all of its units in were converted into Class B shares at the Exchange Rate and with a Principal Stockholder receiving ten votes per Class A share.
The plaintiffs contended that the disparate voting rights enjoyed by the Principal Stockholders under this structure were invalid under Delaware law because those rights depended on the identity of the stockholder. In response, Vice Chancellor Laster conducted a detailed and thoughtful analysis of both the relevant statutory provisions and case law, and concluded that the disparate voting rights were valid:
As required by Sections 102(a)(4) and 151(a), the charter sets out a formula that applies to all the shares in the class and that specifies how voting power is calculated. As authorized by Section 151(a), the formula makes the quantum of voting power that a share carries dependent on a fact ascertainable outside of the certificate of incorporation, namely the identity of the owner. The Class A formula is a simple one. If a Class A share is held by a Principal Stockholder, then it carries ten votes per share. If not, then a Class A share carries one vote per share.
The Class B formula is complex but reaches the same result. As long as a Class B share is held by a Principal Stockholder, then it carries ten votes per share for each Class A share that it could convert into. If the Class B share is not held by a Principal Stockholder, then then it carries one vote per share for each Class A share that it could convert into.
Under Providence, Williams, and Sagusa, having the level of voting power turn on the identity of the owner is permissible. To apply the formulas in Providence, Williams, and Sagusa, the corporation had to determine which stockholder owned the share. True, the processes also had to take into account another attribute. In Providence and Sagusa, it was how many other shares the owner held. In Williams, it was when the owner acquired the share. But the starting point in each mechanism was the identity of the owner. That is the same mechanism that the Challenged Provisions use.
From my perspective, this is a very impressive opinion, and one that any lawyer called upon to draft charter documents will want to keep in mind. Vice Chancellor Laster provides a comprehensive seminar on Delaware statutory law and judicial opinions addressing the special attributes and limitations with respect to shares that Delaware corporations may establish in their charter documents. Most impressively, he accomplishes this in an opinion that’s less than 35 pages long. That’s practically a text message by the Vice Chancellor’s standards.
Check out this blog from Keith Bishop for a discussion of how California law addresses the issue of disparate voting rights based on the identity of the stockholder.
Last week was fiscal year end for the federal government, including the SEC and other agencies. In the face of the shutdown threat, the Commission plowed forward with its customary year-end enforcement spree, making every effort to add to the government’s bottom line. The WSJ reported that they brought in $218 million in fines last Friday alone – 10% of the Commission’s annual budget!
Included in the pile of settlements announced during the last 10 days of the month were two (!) instances of the SEC taking issue with non-disclosure provisions in separation or employment agreements that, in the SEC’s view, discouraged potential whistleblowers from voluntary contacting the SEC about potential securities law violations, and thereby violated Rule 21F-17.
For those who may not remember, Rule 21F-17 became effective as part of the Dodd-Frank Act in August 2011. In the big picture, that’s not that long ago. So, maybe it’s not too surprising that these provisions continue to linger on in forms – especially because stray language can appear in various overlapping policies, agreements, and acknowledgement pages that are handled by different departments. In the SEC’s view, that’s not a good excuse.
Anyway, these two actions followed a similar announcement earlier in the month (so that’s 3 total just this past month, for anyone counting at home). That brings the running total of Rule 21F-17 enforcement actions to “nearly 20” since 2015, according to one of the recent orders. In these instances, both companies added language and/or sent communications to employees following the first wave of enforcement actions in 2015 to clarify that the provisions shouldn’t be construed to prevent whistleblower claims. But in the SEC’s view, that didn’t fully address the problem. Here’s why:
1. In this case, the SEC viewed the new language as prospective in nature, and not a cure for restrictions on disclosure from 2011 to 2015. The Commission noted that it wasn’t aware of any specific instances in which a former employee was prevented from communicating with the Commission Staff about potential securities law violations, or in which the company took action against a former employee based on the non-disclosure representation. The company cooperated with the SEC’s investigation, initiated a remediation program, and agreed to a $375k fine as part of the settlement.
2. In this case, the company continued to use an employment agreement without a whistleblower carveout for years after revising other policies, and after that, continued to use a release at the time of separation that reminded employees of confidentiality requirements (without a carveout). The Commission didn’t like that severance and deferred comp were conditioned on signing the release, and also said it was aware of one former employee who was initially discouraged from submitting a whistleblower complaint. The company cooperated with the SEC on remedial steps. They were fined $10 million!
Enforcement Director Gurbir Grewal shared this warning in the SEC’s announcement about the second case:
“Entities employing confidentiality, separation, employment and other related agreements should take careful notice of today’s enforcement action,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “The Commission takes seriously the enforcement of whistleblower protections and those drafting or using these types of agreements should take equally serious their obligations to ensure that they don’t impede whistleblowers from contacting the Commission.”
