The other major topic that ISS asked about in this year’s benchmark policy survey was how to handle shareholder proposals on racial equity audits/civil rights audits. As I noted last month on the Proxy Season Blog, ISS backed 77% of resolutions on this topic during the 2022 proxy season – compared to 22% in 2021. Looking ahead to 2023, here’s the feedback that will be guiding ISS’s policy development:
Discussions with clients and proponents and the survey results lead ISS to conclude that investors are roughly evenly split into two camps on this issue. Approximately 42 percent of investor respondents to the survey said most companies would benefit from an independent racial equity or civil rights audit, while a slightly larger 45 percent responded that whether a company would benefit from an independent racial equity or civil rights audit depends on company-specific factors including outcomes and programs.
A majority of non-investor respondents indicated that they believe company specific criteria are the best determinations of which companies would benefit from a racial equity audit.
When asked what factors were relevant to determine whether a company would benefit from an independent racial equity or civil rights audit, “significant diversity-related controversies” were the most popular choice – being selected by a majority of investor and non-investor respondents. This was followed by whether the company disclosed workforce diversity representation statistics, such as EEO-1 type data, and has undertaken initiatives/efforts aimed at enhancing workforce diversity and inclusion, including training, projects, and pay disclosure.
The least popular choice for investor respondents was whether the company offered products or services and/or made charitable donations with a specific focus on helping create opportunity for people and communities of color.
The question asked this year was the same as the one asked in the 2021 Benchmark Policy Survey to assess any changes in sentiment over time, especially given the strong vote support that many of these proposals received at annual meetings in 2022. The responses for investor and non-investor respondents changed only slightly from last year to this one.
– Liz Dunshee
Just in time for another round of polarizing mid-term elections, the Center for Political Accountability and the Zicklin Center for Governance & Business Ethics at the Wharton School have issued their annual “Index of Corporate Political Disclosure & Accountability.”
If there is one thing that has become clear over the past 11 years in which this Index has been published, it’s that companies that don’t carefully monitor “political spending” are playing with fire. And it’s important to note that – in addition to candidate donations – the term “political spending” includes contributions to trade associations, committees and lobbying organizations. In the wake of the Dobbs decision this summer, we wrote:
Carefully consider political and trade association contributions. Contributions to politicians, trade associations and other advocacy organizations are already receiving major scrutiny – and that’s only going to increase. Emily blogged recently that two lobbying-related shareholder proposals received majority support at recent meetings. Many trackers now exist that monitor the alignment of corporate political donations with stated values – with several companies already in the news for donations to anti-abortion politicians, and shareholder proponents also picking up the mantle with a new iteration of “values misalignment” shareholder proposals.
Gone are the days when a board could simply confirm that the company’s donations were striking a roughly even split between Republican and Democratic organizations. Now, management may need stricter directives to ensure that each donation aligns with overall values – and the board may need to dig deeper to ensure it’s informed of any potentially controversial activities.
When it comes to S&P 500 companies, this year’s Index finds:
– The number of S&P 500 companies with policies for general board oversight of political spending is 295, up 13.9 percent from 259 companies in 2020.
– Board committee review of direct political contributions and expenditures rose to 255 companies this year from 227 in 2020, an increase of 12.3 percent; board committee review of payments to trade associations and other tax-exempt groups rose to 228 this year from 199 in 2020, an increase of 14.6 percent.
– The number of companies that fully or partially disclosed their political spending in 2021 or that prohibited at least one type of spending is 370. This is over 75 percent of the S&P 500 companies evaluated. It is a record high since CPA and its shareholder partners launched their efforts.
– The number of companies that fully or partially disclosed their political payments to state or local candidates or committees, or that prohibited them, was 334, another record and well more than three-fifths of the S&P 500.
– The number of companies that disclosed some or all of their political spending was 293. The number of companies that prohibited direct donations to state and local candidates, political parties, and committees was 136.
For the first time this year, the Index also expanded to cover Russell 1000 companies (representing approximately 90% of the US market). It’s not a stretch to think that this move will lead to more scrutiny of spending by mid-sized and smaller companies – in the form of shareholder engagements & proposals, or questions from employees and customers. Right now, there’s a pretty big gap in transparency – and potentially, policies – between large & small companies. The Index finds:
– For all non-S&P 500 companies in the Russell 1000, the average score is 12.8 percent, on a scale of zero to 100. The overall Index score for all S&P 500 companies this year, for example, is 57.0 percent.
– There are 54 companies in the non-S&P 500 portion of the Russell 1000 with general board oversight of company political spending, compared with almost six times as many, 307 companies, in the full S&P 500 with the same oversight.
For “best practice” comparisons, take a look at the full Index – as well as the policies and disclosures of the six companies that scored a winning 100: AT&T, Becton Dickinson, Consolidated Edison, Edison International, HP Inc. and Visa. Also see the resources in our “Political Contributions” Practice Area.
– Liz Dunshee
According to the latest CPA-Zicklin Index, most large companies say their board oversees political spending – but few smaller companies are talking about it. PwC’s annual director survey seems to support that finding. Here’s one of the takeaways:
Only 39% of directors say their board has discussed the company’s stance on social issues in the past 12 months. Even fewer—30%—say they have discussed corporate political activity.
The survey gathered responses from 700+ directors. It has some other interesting findings as well. For example, 64% of male directors say that board diversity initiatives are driven by political correctness and that shareholders are too preoccupied with the topic. With the Supreme Court poised to overturn colleges’ ability to consider racial diversity in admissions, corporate boardrooms also seem to be growing skeptical of the near-term benefits of diversity, even while acknowledging that it brings unique perspectives to decision-making and prioritizing diversity in succession planning.
On the topic of ESG oversight, the survey notes a gap between small & large companies in board understanding of ESG data controls. Specifically, directors lack confidence in the board’s understanding of climate risk/strategy and carbon emissions, compared to human capital-type topics. And compared to a year ago, 9% fewer directors view ESG issues as impacting company financial performance. Again, the results vary based on demographics – with male directors being less likely to see ESG’s connection to strategy & performance.
– Liz Dunshee
Last week, ISS announced the results of its 2022 benchmark policy survey. ISS received responses to the survey from 205 investors – 29% more than last year – as well as 202 companies and corporate organizations.
The results will be used to formulate the proxy advisor’s voting policies, which will be released in draft form in November and finalized in December. Here are some key climate-related takeaways:
Board Accountability on Climate Risk: ISS asked what climate actions/non-actions from Climate Action 100+ “significant emitters” would constitute a “Material Governance Failure” that would call for an ISS recommendation against a director.
– A significant majority of both investor and non-investor categories of respondents expressed that they would consider there to be a material governance failure if a company that is considered to be a significant contributor to climate change is not providing adequate disclosure with regards to climate-related oversight, strategy, risks and targets according to a framework such the one developed by the Task Force on Climate-related Financial Disclosures (TCFD).
– Investor respondents generally agreed that the boards of companies that are large greenhouse gas (GHG) emitters are failing if they do not take steps to address emissions, but support for different actions that could be taken to address emissions varied. Besides a company failing to provide adequate disclosure according to a recognized framework, the three most common choices by investor respondents as demonstrating failures were targets-related, and were (i) a company not setting realistic medium-term targets (through 2035) for Scope 1 & 2 only (50% of investors), (ii) not declaring a net-zero by 2050 ambition (47% of investors), and (iii) not setting realistic medium-term targets (through 2035) for Scope 1, 2 & 3 if Scope 3 is relevant (45% of investors). A strong majority of investor respondents (69 percent) chose at least one of those “targets” responses, which was also the case for 43 percent of the non-investor respondents.
Management Say-on-Pay Proposals: When asked “What do you consider to be the top three priorities when determining if a company’s transition plan is adequate?”, the most popular responses among investor respondents were:
(i) whether the company has set adequately comprehensive and realistic medium-term targets for reducing operational and supply chain emissions (Scopes 1, 2 & 3) to net zero by 2050 (42 percent),
(ii) whether the company’s short- and medium-term capital expenditures align with long-term company strategy and the company has disclosed the technical and financial assumptions underpinning its strategic plans (41 percent),
(iii) and the extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards (38 percent).
The appropriateness of submitting management say-on-climate plans for shareholder approval was questioned by some investor respondents who believe these proposals improperly shift the responsibility for a company’s climate transition plan away from the board and management toward its shareholders.
Climate Risk as Critical Audit Matter: A substantial majority of investor respondents (75 percent) favored seeing commentary by auditors in the audit report on climate-related risks for significant emitters. A smaller majority (64 percent) of investor respondents supported climate-related risks being included by auditors in Critical Audit Matters / Key Audit Matters (CAMs).
– A majority of investor respondents (52 percent) would favor supporting a related shareholder proposal on this issue. Voting against the re-election of audit committee members and voting against the re-appointment of auditors got somewhat lower support (42 percent and 35 percent respectively).
– In comments, several respondents – including both those who favored and opposed the inclusion of climate risks – raised the question of whether auditors currently have the expertise to accurately gauge these risks. Others wrote that this issue is currently not a market norm but may develop quickly due to regulatory requirements that are being finalized in the U.S. and EU and as the International Sustainability Standards Board (ISSB) develops its sustainability standards. Non-investor respondents tended to not support seeing auditors comment on climate-related risk.
Financed Emissions: During the 2022 proxy season, a number of shareholder proposals were filed that asked companies to restrict their financing or underwriting for new oil and gas development in line with the assumptions in the International Energy Administration’s Net Zero 2050 Scenario, which prompted us to ask a question about expectations on climate-related disclosure and performance of financial institutions.
– Around half of investor respondents said that in 2023 large companies in the banking and insurance sectors should fully disclose their financed emissions (54 percent), have clear long-term and intermediary financed emissions reduction targets for high emitting sectors (51 percent), have a net-zero by 2050 ambition including financed portfolio emissions (49 percent), or should publicly commit to disclose financed emissions at some point in the future by joining a collaborative group such as the Partnership for Carbon Accounting Financials (PCAF) and/or the Glasgow Financial Alliance for Net Zero (GFANZ) (45 percent).
– Around 30 percent of investor respondents voiced support for these companies committing to cease financing for new fossil fuel projects.
Most survey respondents also predict that investors’ expectations for climate disclosure and performance will increase over time – with heightened focus on net-zero targets, comparable climate disclosures, greater Scope 3 disclosures and more interest in corporate investment in low-carbon products and strategies.
– Liz Dunshee
Yesterday, the SEC announced a $361 million settlement with Barclays for an unprecedented over-issue that is every security lawyer’s nightmare:
The SEC’s order states that, following a settled Commission action against a BBPLC affiliate in May 2017, BBPLC lost its status as a well-known seasoned issuer (WKSI). As a result, BBPLC had to quantify the total number of securities that it anticipated offering and selling and pay registration fees for those offerings upon the filing of a new registration statement.
The SEC’s order notes that, given this requirement, BBPLC personnel understood that the firm needed to track actual offers and sales of securities against the amount of registered offers and sales on a real-time basis; yet, no internal control was established for this purpose. According to the SEC’s order, as a result of this failure, BBPLC offered and sold approximately $17.7 billion of securities in unregistered transactions.
As the SEC’s order states, BBPLC self-reported its over-issuances to regulators, provided meaningful cooperation during the SEC staff’s investigation, and subsequently commenced a rescission offer.
This all relates to notes and corporate debt offerings that the bank attempted to conduct via a shelf registration statement. Barclays announced the over-issue back in March. Since the securities weren’t registered, they had to offer to buy them back at the price they were sold for – which the bank estimated would lead to a $600 million loss. The rescission offer expired earlier this month. With this settlement, Barclays is paying another $200 million in civil penalties on top of the money it lost (plus disgorgement and prejudgment interest that are deemed satisfied by the rescission).
The order says that Barclays established a multi-person working group when it lost WKSI status. That group talked about calculating the total amount of securities that the business expected to offer and sell, in order to pay registration fees in advance. They also talked about the need to track actual offers & sales. But they didn’t create any process or assign responsibility for that task. The SEC’s order describes what must have been a rough week:
On March 8, 2022, a member of Group Treasury reached out to the member of the legal department who had been part of the Working Group, inquiring as to how many securities remained available to be offered and sold off of the 2019 Shelf because Group Treasury was planning on doing a sale of corporate debt securities.
Over the course of that day and the next, various BBPLC personnel attempted to calculate the cumulative amount of securities offered and sold from the 2019 Shelf in order to determine the amount of securities that remained available for sale. Over the course of these efforts, it became clear to all involved that there was no internal control in place to track in real time the amount of securities offered and sold against the amount of securities registered.
On or around March 9, 2022, BBPLC personnel concluded that securities had been offered and sold in excess of what had been registered on the 2019 Shelf. Shortly thereafter, BBPLC halted new offers and sales of securities from the 2019 Shelf and, on March 14, 2022, alerted regulators about the over-issuance and disclosed to the market that BBPLC did not have sufficient issuance capacity to support further sales from inventory and any further issuances of certain ETNs.
Here are the new controls that Barclays is adopting as part of this settlement – which are a good benchmarking reference for other companies. Barclays has to internally audit these processes in a few months and submit a report to its audit committee and the SEC Staff:
1. The centralization of oversight of BBPLC’s SEC-registered shelves in Group Treasury;
2. The maintenance of clear minimum control requirements for BBPLC’s SEC-registered shelves, including, but not limited to, a process for reviewing any change in WKSI status for BBPLC and the tracking of offers and sales off of BBPLC’s SEC-registered shelves as appropriate; and
3. The maintenance of a data repository, with appropriate controls and governance designed to ensure reliability of the data, for the purpose of tracking offers and sales, as appropriate, off of BBPLC’s SEC-registered shelves.
In the press release, the SEC cautions non-WKSIs to make sure to have internal controls to track registration statement capacity after each takedown. That’s good advice! Check out our “Form S-3 Handbook” for how exactly to do it. I do wonder, will the Staff be tracking this more? That would be a lot of work. The release here urges self-reporting if you discover unregistered sales. Hopefully you catch it before getting to $18 billion.
– Liz Dunshee
Our thoughts go out to everyone in our community who has been affected this week by severe weather. Yesterday, the SEC announced that the Staff invites questions from anyone with securities law obligations that may be affected by Hurricanes Ian & Fiona. The Staff will evaluate the appropriateness of providing regulatory relief for those as applicable. Here is the applicable contact info:
– Division of Examinations staff in the SEC’s Miami Regional Office (covers Florida, Mississippi, Louisiana, U.S. Virgin Islands, and Puerto Rico) can be reached at 305-982-6300 or miami@sec.gov.
– Division of Corporation Finance staff can be reached at 202-551-3500 or via online submission at http://www.sec.gov/forms/corp_fin_interpretive.
– Division of Investment Management staff can be reached at 202-551-6825 or imocc@sec.gov.
– Division of Trading and Markets staff can be reached at 202-551-5777 or tradingandmarkets@sec.gov.
– Office of Municipal Securities staff can be reached at 202-551-5680 or munis@sec.gov.
Individuals experiencing problems accessing their securities accounts or with similar questions or concerns relating to the hurricanes are encouraged to contact the SEC’s Office of Investor Education and Advocacy by phone at 1-800-SEC-0330 or email at help@sec.gov. The SEC also urged investors to be vigilant of hurricane-related securities scams.
– Liz Dunshee
Whistleblower Network News and the National Whistleblower Center issued a response this week to critiques of the SEC whistleblower program that were published by Bloomberg Law and a professor earlier this year, which I blogged about at the time. WNN investigated the FOIA documents that formed the basis for those reports – and posted these findings to demonstrate that the program is “well-run, honest, and fair”:
– The Argument presented by Bloomberg and Platt that a small group of former SEC employees dominates the program is inaccurate. The FOIA documents revealed that 64 different law firms represented whistleblowers who obtained rewards and that over 80% of these firms never employed a former SEC attorney.
– The articles stated or implied that the program was prejudicial to whistleblowers not represented by attorneys. The FOIA documents revealed that 54 award recipients were pro se and not represented by counsel. This number is an incredibly high percentage of positive reward decisions, given that courts almost always dismiss pro se claims.
– The FOIA documents produced no direct evidence of any misconduct.
– No evidence that the SEC program was illegally “shrouded in secrecy.” Indeed, the FOIA requests identifying the law firms that represented whistleblowers were responded to in full, except in three cases where identifying the firm could have resulted in identifying the whistleblower. Regarding those cases, the SEC advised Platt of his right to appeal the withholding in court.
– The SEC FOIA office fully cooperated with Platt’s FOIA requests over two years. The FOIA documents identify attorneys and law firms representing successful applicants in all but three cases. They also identify the cases involved, copies of the decisions involved, and the amounts awarded (or the percentage of an award) in each case. Likewise, every award given to a pro se litigate was identified, along with the amount of each award and the underlying award decision.
– Liz Dunshee
Here we go again. In 2019, John wrote about Elon Musk’s revised agreement with the SEC to run a laundry list of certain types of tweets by an “experienced securities lawyer,” which arose out of the “funding secured” debacle and has been an enforcement headache ever since. John asked at that time, “Who will bell the cat?” And 82% of you predicted that we would just keep running through variations of the dispute for the foreseeable future.
You were right!* Bloomberg reported that Musk has filed a new brief asking a federal appeals court to throw out his “Twitter Sitter” agreement, making a “free speech” argument. Here’s more detail from the article:
Musk, Tesla’s chief executive officer, has claimed without success that the SEC is harassing him and that the agreement violates his free-speech rights. US District Judge Lewis Liman in April refused to release him from the deal and end the requirement for a “Twitter Sitter.” Liman said Musk was “simply bemoaning that he felt like he had to agree to it at the time” and now “wishes that he had not.”
In his April decision, Liman ruled that Musk waived his 1st Amendment Constitutional Right to free speech, a finding Musk denied in his appeal brief.
This appeal follows another SEC-jab from Musk back in June, when he supported a cert petition seeking SCOTUS review of the SEC’s use of “gag orders” in connection with the settlement of enforcement proceedings.
The case is Musk v SEC, 2nd U.S. Circuit Court of Appeals, No. 22-1291 – and this will probably not be the last we’ll hear of it.
*You were right…so far. There is still time for Musk to become dictator of the world for life.
– Liz Dunshee
Small-cap investor & adviser Adam Epstein recently shared these candid & succinct thoughts about buybacks:
– If your micro- or small-cap company is unprofitable, don’t buy back your stock.
– If your micro-or small-cap company has raised outside capital in the last 18 months, or will need to in the next 18 months, don’t buy back your stock.
– If you consider your micro- or small-cap company to be a “growth” company, use any/all extra capital to…grow.
– If your micro- or small-cap company feels it has no additive use for excess capital, then perhaps you’re not actually a growth company.
– If your micro- or small-cap company feels it has no additive use for excess capital, then just give it back to shareholders directly.
Remember that we’re posting memos about the new excise tax in our “Buybacks” Practice Area.
– Liz Dunshee
We’ve recently freshened up all 62 Handbooks here on TheCorporateCounsel.net – covering securities law topics from “Accountant Changes & Disagreements Disclosures” to “WKSIs”… and everything in between. These are essential resources, whether you are simply getting the “lay of the land” – or trying to quickly answer a complex question. We’ve gathered all of the guidance, practice tips, and common questions & answers into one place.
Our Handbooks are organized in an easy-to-navigate format, where you can either search or use the table of contents to find the specific issue you’re dealing with. In addition, pull up the “Detailed Table of Contents” for “Proxy Season Disclosure” and “In-House Essentials” to quickly find which Handbook is on-point.
We also maintain over 300 checklists that lay out practical step-by-step guidance on topics commonly encountered by corporate secretaries – and a “cheat sheet” that is a life-saver for staying on top of all of the SEC’s rulemaking activity.
There’s a reason why many of our members make these resources their first stop for daily issues that arise. If you aren’t already a member with access to these resources, sign up now and take advantage of our no-risk “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
– Liz Dunshee
