Congrats to the SEC for taking home third place in the “Best Places to Work” survey for midsized federal agencies. Despite being extra busy with rulemaking, this scoring page says that the Staff is giving pretty high marks to engagement & satisfaction. It also shares detail on demographics.
This ranking reinforces what I’ve heard from every person I know who has spent time on the SEC Staff: it is a terrific place to work, full of smart and dedicated people. Lately, there’s been a hiring spree – so if you’re considering a career move, keep the SEC in mind!
A new Fenwick memo shows that many of Silicon Valley’s largest tech companies are making strides on ESG disclosures, even as providing the info remains voluntary at this point in time. Here are the key takeaways:
– The number of SV 150 companies disclosing ESG information and the comprehensiveness of such disclosures increased in 2022.
– Although ESG reporting has not been mandated, most companies have opted to provide some level of disclosure in response to stakeholder demands and in anticipation of likely mandated disclosures by the SEC.
– Areas most frequently disclosed include: environmental issues, human capital resources, diversity, supply chains, customers and products, community impact and governance.
– 76% of SV 150 companies disclosed bord or committee oversight of ESG. In particular, 85% of the companies providing such disclosure stated that the nominating and corporate governance committee (or its equivalent) had primary responsibility for ESG oversight (with other committees overseeing particular aspects of ESG, at many companies).
– The quality of ESG disclosure varied by size of company, with the larger SV 150 companies generally providing more comprehensive disclosure, including quantitative metrics.
– Technology and life sciences companies contemplating whether to voluntarily disclose ESG information or expand their disclosure should consider these trends and the types of information disclosed, to better assess their preparedness for ESG disclosure and meeting the demands of investors and other stakeholders.
These findings also build on data from earlier this year that said that nearly all S&P 500 companies now detail ESG-related issues in their Form 10-K risk factors.
Keep in mind that although many of us have been suffering from a case of “ESG fatigue” that feels like it’s been lingering for years, we are still at the front end of this. Reporting standards – at the SEC and elsewhere – will continue to evolve. Fenwick notes that approximately half of the SV 150 companies reported using a third-party standard or framework to guide their disclosure. Here’s more detail on which standards currently are getting the most traction:
The most prominent frameworks and standards included Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosure (TCFD) and the United Nations Sustainable Development Goals (UNSDG).
SV 150 companies cited SASB most often as the standard to which they adhered, with 91% of the companies disclosing standards citing SASB compared to 87% in 2021. GRI was the second-most popular standard, with 63% of reporting companies favoring it. Finally, approximately 43% of companies that reported to a standard or framework (22% of all SV 150 companies) indicated that they used the TCFD framework.
The “cost-benefit” analysis for federal regulatory reviews may be getting a makeover. Last week, the White House Office of Management & Budget announced two developments:
1. Executive Order on Modernizing Regulatory Review – which raises the threshold that defines “significant regulatory action” requiring additional steps for review, from $100 million to $200 million in annual effects, and makes other changes to how the review process is conducted.
2. Proposed changes to “Circular A-4” – which hasn’t been updated since it was first issued in 2003 and addresses how the government calculates costs & benefits.
These updates have the potential to impact securities disclosure rulemaking, particularly as we stare down significant changes that companies believe will vastly increase their SEC compliance costs. I blogged earlier this year that the “estimated compliance burden” under the Paperwork Reduction Act is an important part of the SEC comment process for proposed rulemaking, even though it often doesn’t generate a lot of responses from public commenters.
Circular A-4 touches on the Papwerwork Reduction Act – and bigger-picture, covers how to assess a regulation – including its impact on public health & safety, economic impact and non-monetized and non-quantified effects – when conducting a cost-benefit analysis. The White House Council of Economic Advisers summarized the context and a few of the changes – here’s an excerpt:
In the 20 years since Circular A-4 was issued, economic conditions and best practices for benefit-cost analysis have evolved, and updating the Circular will make it easier to promote regulations that most enhance wellbeing.
For example, the proposed update expands discussion of critical regulatory needs, addressing market power, behavioral biases, distributional fairness, civil rights, and more. Currently, Circular A-4 focuses on a limited set of market failures as potential reasons to regulate.
The benefits & costs of regs don’t always fall on the same groups & even when they do, research shows that a given gain or loss has larger impact on lower-income people than on higher-income people. Currently, Circular A-4 doesn’t discuss distributional effects in much detail. The proposed revision substantially expands guidance on assessing distributional effects. It helps empower agencies to use income-weighted estimates in their analyses by providing them with a weighting methodology if they choose to do so.
There’s a 60-day public comment period and review process for the proposed changes, with specific questions set forth in this preamble. If adopted, the impact of this update on rulemaking also will depend on how federal agencies – like the SEC – implement it. However, it does signal a potential shift towards a more holistic approach to cost-benefit analyses, which could have implications for future securities disclosure regulations.
I continue to team up with the experienced and delightful Courtney Kamlet – who spent time in Corp Fin and has been guiding boards in-house for nearly two decades – to interview women who are “movers & shakers” in the corporate governance field. These episodes not only give insight into the many ways to build a successful corporate governance career, they also equip you with a variety of perspectives on current corporate governance issues – so that you can tackle your work-day challenges with the benefit of our guests’ experience. Check out our latest episodes!
– 20-minute conversation with Betsy Atkins – Betsy is a 3-time CEO and serial entrepreneur. She’s served on 38 boards (currently Wynn Resorts, Gopuff and Google Cloud), and been involved with 17 IPOS! We were lucky enough to talk with Betsy in the immediate wake of the SVB receivership last month. We discussed “lessons learned” from recent financial and geopolitical crises, how boards can oversee emerging risks, and what advisors should do – and not do – to add value in the boardroom.
– 30-minute conversation with Kris Veaco – Kris founded the corporate governance advising firm Veaco Group in 2006 after a lengthy corporate secretary career. She shared insights into effective board & director evaluations and recommendations on how boards today can be as effective as possible in a demanding environment.
– 19-minute conversation with Laura Zizzo – Laura co-founded Manifest Climate – a risk-planning tool that provides climate-related insights, analytics and recommendations – after beginning her career as an environmental lawyer. Laura shared her take on how companies can get their arms around climate data and risks, what most excites her about the future of corporate governance, and advice on how to allocate your time and talents when you are getting pulled in many different directions.
You can find all of our “Women Governance Trailblazers” episodes on our WGT podcast page – as well as with all of the informative podcast series posted in the “Podcast Archives” on TheCorporateCounsel.net.
Heads up! State Street Global Advisors has issued its “Proxy Voting & Engagement Guidelines” for 2023 – and they include what may be an unwelcome “Easter egg” for Russell 3000 companies. Thanks to Aon’s Karla Bos for calling this to our attention and highlighting key changes in the US & Canada Guidelines:
• Directors and Boards – Added: In our analysis of boards, we consider whether board members have adequate skills to provide effective oversight of corporate strategy, operations, and risks, including environmental and social issues. Boards should also have a regular evaluation process in place to assess the effectiveness of the board and the skills of board members to address issues, such as emerging risks, changes to corporate strategy, and diversification of operations and geographic footprint.
• Board Gender Diversity – We expect boards of all listed companies to have at least one female board member and the boards of Russell 3000 companies to be composed of at least 30 percent women directors [emphasis added]. If a company does not meet the applicable expectation, State Street Global Advisors may vote against the Chair of the board’s nominating committee or the board leader in the absence of a nominating committee. Additionally, if a company does not meet the applicable expectation for three consecutive years, State Street Global Advisors may vote against all incumbent members of the nominating committee or those persons deemed responsible for the nomination process.
Added: We may waive this voting guideline if a company engages with State Street Global Advisors and provides a specific, timebound plan for either reaching the 30-percent threshold (Russell 3000) or for adding a woman director (non-Russell 3000).
• Board Racial/Ethnic Diversity – We believe effective board oversight of a company’s long-term business strategy necessitates a diversity of perspectives, especially in terms of gender, race and ethnicity. If a company in the Russell 1000 [emphasis added – formerly S&P 500] does not disclose, at minimum, the gender, racial and ethnic composition of its board, we may vote against the Chair of the nominating committee. We may withhold support from the Chair of the nominating committee also when a company in the S&P 500 does not have at least one director from an underrepresented racial/ethnic community on its board [emphasis added].
• Virtual/Hybrid Shareholder Meetings – New policy describing support for proposals that maintain specific best practices.
• Advisory Vote On Executive Compensation – No change
• Employee Equity Award Plans – No change
• Risk Management – New policy: We believe that risk management is a key function of the board, which is responsible for setting the overall risk appetite of a company and for providing oversight on the risk management process established by senior executives at a company. We allow boards to have discretion regarding the ways in which they provide oversight in this area. However, we expect companies to disclose how the board provides oversight on its risk management system and risk identification. Boards should also review existing and emerging risks that evolve in tandem with the changing political and economic landscape or as companies diversify or expand their operations into new areas.
As responsible stewards, we believe in the importance of effective risk management and oversight of issues that are material to a company. To effectively assess the risk of our clients’ portfolios and the broader market, we expect our portfolio companies to manage risks and opportunities that are material and industry-specific and that have a demonstrated link to long-term value creation, and to provide high-quality disclosure of this process to shareholders.
Consistent with this perspective, we may seek to engage with our portfolio companies to better understand how their boards are overseeing risks and opportunities the company has deemed to be material to its business or operations. If we believe a company has failed to implement and communicate effective oversight of these risks, we may consider voting against the directors responsible.
Karla noted that if you’re working with small or mid-sized clients, you may want to highlight SSGA’s board gender diversity threshold of 30%. The 2022 CEO letter had stated the 30% threshold would apply in 2023 to “companies in major indices in the US, Canada, UK, Europe, and Australia.” Many had expected that to mean S&P 500 for the US, since SSGA often starts with S&P 500 when raising expectations for US companies, so this may also come as a surprise to smaller companies who thought the main US entity applying a 30% threshold this proxy season would be Glass Lewis.
Thanks again to Karla for this info! We always welcome tips from members – and we’re pretty friendly to chat with, if I do say so myself. If you see something that you think the community would want to know about, feel free to email John at john@thecorporatecounsel.net, me at liz@thecorporatecounsel.net, or anyone else on our team.
1) no longer use numerical limits to identify overcommitted directors, and instead
2) vote against the chair of the nominating and governance committee at companies in the S&P 500 that do not disclose their internal policy on director time commitments.
This heads-up about the 2024 change to the firm’s overboarding policy is consistent with the preference that SSGA shared in “Managing Through a Historic Transition: The Board’s Oversight of Director Time Commitments.” It also aligns with the new policies on risk management and board & director evaluations. SSGA urges nominating committees to “evaluate their directors’ time commitments, regularly assess director effectiveness, and provide public disclosure on their policies and efforts to investors.”
Some companies may want to revisit their policies – and related disclosures – in light of this threat to the nom/gov chair. If changes are needed, it could take some time to prepare those and work through all of the channels for approval. It’s helpful that SSGA is giving us a year to do that.
R-Factor, we barely knew thee. Launched in 2019, State Street is apparently now bidding adieu to its proprietary scoring system, the R-Factor – which stood for “Responsible-Factor” – or at least, not incorporating it into voting decisions this season. Karla pointed out that it no longer appears in the firm’s “Proxy Voting and Engagement Guidelines” other than in the closing notes. Last year’s guidelines had said:
R-Factor™ is a scoring system created by State Street Global Advisors that measures the performance of a company’s business operations and governance as it relates to financially material ESG factors facing the company’s industry. R-Factor™ encourages companies to manage and disclose material, industry-specific ESG risks and opportunities, thereby reducing investment risk across our own portfolio and the broader market. State Street Global Advisors may take voting action against the senior independent board leader at companies on the S&P 500 that are R-Factor™ laggards and momentum underperformers and cannot articulate how they plan to improve their score.
As a follow-up to its position as a “long-term corporate partner,” which I blogged about on our Proxy Season Blog last fall, and consistent with BlackRock, SSGA has also backed away from hot-button “ESG” terminology and partnerships. Karla flagged these updates:
• About State Street Global Advisors – Revised wording somewhat to align with December 2022 changes to same section in “Global Proxy Voting and Engagement Principles,” primarily removing “As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance.”
• Environmental And Social Issues – Revised wording somewhat to align with December 2022 changes to same section in “Global Proxy Voting and Engagement Principles,” primarily removing “We use our voice and our vote through engagement, proxy voting, and thought leadership in order to communicate with issuers and educate market participants about our perspective on important sustainability topics.”
But perhaps the most significant change on the “ESG” front is that SSGA has significantly abbreviated its “Climate-Related Disclosure” policy. The old policy said:
We believe climate change poses a systemic risk to all companies in our portfolio.
State Street Global Advisors has publicly supported the global regulatory efforts to establish a mandatory baseline of climate risk disclosures for all companies. Until these consistent disclosure standards are established, we find that the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) provide the most effective framework by which companies can develop strategies to plan for climate-related risks and make their businesses more resilient to the impacts of climate change.
As such, we may vote against the independent board leader at companies in the S&P 500 and S&P/TSX Composite that fail to provide sufficient disclosure in accordance with the TCFD framework, including:
• Board oversight of climate-related risks and opportunities
• Total Scope 1 and Scope 2 greenhouse gas emissions
• Targets for reducing greenhouse gas emissions
The 2023 guidelines continue to encourage providing TCFD-related disclosures – but they no longer threaten “against” votes for companies that omit GHG emissions data or targets for reducing greenhouse gas emissions. Here’s the new language:
State Street Global Advisors finds that the recommendations of the Taskforce on Climate related Financial Disclosures (TCFD) provide the most effective framework for disclosure of climate-related risks and opportunities. As such, we may take voting action against companies in the S&P 500 and S&P/TSX Composite that fail to provide sufficient disclosure regarding climate-related risks and opportunities related to that company, or board oversight of climate-related risks and opportunities, in accordance with the TCFD framework.
We don’t know whether the SEC will take this change into account as it works towards finalizing its climate disclosure rule, but it seems to detract from the notion that investors resoundingly want emissions data.
Earlier this week, the SEC announced charges against a “crypto asset entrepreneur” and three of his wholly-owned companies for what the SEC is saying were unregistered offers & sales of crypto asset securities, as well as market manipulation allegations based on purported “wash trades.” What’s interesting even if you’re not generally following the ins & outs of crypto is that in its 50-page (!) complaint – the SEC has taken an expansive view of the type of activity that violates Sections 5(a) and 5(c) of the Securities Act, which require issuers to register offerings of securities through an effective registration statement before the securities are offered and sold to the public (or to have a valid exemption from registration).
The Commission has taken issue not just with sales for cash, but also “giveaways.” For example, in regard to an “emoji contest” in which participants could win a combined 31,000 of the coins at issue for sharing what the SEC calls “promotional artwork” and emojis on social media, the complaint says:
By entering the “emoji contest,” participants provided the defendants with valuable consideration—the online promotion of the their platform and ecosystem, promotional artwork to feature on the their website, and the Twitter and Facebook handles of entrants and their tagged friends—in exchange for an opportunity to receive their crypto assets.
Neither the defendant nor his entities took any steps to exclude U.S. persons from receiving coins in this offering, and at least one of the winners who received the crypto assets was a resident of this District.
Airdrops: also problematic, in the SEC’s view.
There’s a lot more to this complaint, which as I mentioned goes on for 50 pages. It’s just the latest in a string of SEC crypto-related enforcement actions and head-shakings, all of which build on a a 50% year-over-year increase in enforcement actions in 2022. Coinbase also furnished a Form 8-K this week to disclose its receipt of a Wells Notice which the company believes could relate to its spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.
Since John covered an NBA connection a few weeks ago and I don’t want to let anyone down who follows this blog for celebrity gossip, I’ll note that expectant mom Lindsay Lohan and several others were also caught up in this. They settled allegations that they illegally touted the crypto assets.
At the risk of the boomers telling me to “get off their lawn” and millennials asking, “what about us?” – I’d like to flag a study from three assistant/associate professors at the University of New Hampshire that says Gen Xers have left their “slacker” stereotype behind in the boardroom and are associated with significantly better company performance. Here’s more detail:
Our analysis indicates that the percentage of Gen X directors on the board is significantly and positively related to firm value. We use several econometric techniques to address the concern that this effect could be driven by a simple age effect or by other director and firm characteristics correlated with the likelihood of having Gen X directors on the board.
Furthermore, we shed light on the potential channels through which Gen X directors could be influencing company performance. First, we find that firms with Gen X directors make value enhancing investments in corporate social responsibility (CSR). Second, we document that male Gen X directors facilitate the inclusion of women on the board which ultimately leads to better firm performance. Lastly, we find that Gen X directors are especially valuable for firms that engage in knowledge-intensive activities.
The usual caveats apply here – the data is backward-looking & has already aged (although the data set goes through 2017, that feels like a lifetime ago…how are these companies doing today?). As someone “on the cusp” and not clearly a member of any specific generation, I have no real dog in this fight. The point is that for one shining moment in time, Gen X is the MVP. Let’s allow them to relish it.
Maybe you find this inspiring. “Now I can hedge against a painful encounter with MRSA!” you say as you trade stocks on your way to the hospital. If that’s the case, good on you, please do not let me rain on your parade.
ICS makes a compelling case for this being a measurable “ESG” issue – with these types of data points:
– Share of net sales of antibiotics dedicated to intensive animal farming
– Hygiene management methods at healthcare facilities
– Reducing pharmaceutical ingredients, including antimicrobials, in wastewater at production sites
This all makes sense, but the headline without that context is the type of thing that gives ESG a reputation for being totally absurd in some circles. You would think that humanity could pull together just for the sake of the common good, but apparently “seeking alpha” is the only thing that folks can agree on.
