Overboarding remains one of the primary reasons for votes against directors, as Emily noted earlier this year on our “Proxy Season Blog.” While State Street and Vanguard allow for some flexibility in applying their overboarding policies, this Financial Times article says that BlackRock’s recent votes show that it has been less forgiving, at least at Big Tech.
The article identifies directors at Salesforce, Twitter, Alphabet, and Amazon whose re-elections were opposed by BlackRock due to “overcommitment” – which for non-executives, BlackRock defines as serving on more than 4 public company boards. The article says that Alphabet changed its overboarding policy this year due in part to BlackRock pressure.
In the voting summary that BlackRock released in July, the asset manager said that it voted against 182 directors in the Americas because of overboarding concerns – which is less than the number of directors who got the “thumbs down” for independence, board diversity or misaligned compensation decisions, but still within its “top 4” reasons for not supporting director elections.
Make sure to visit the “Overboarding” resources in our “Board Composition” Practice Area to keep up with all of the policies you need to know – and protect your directors. If you’re not already a member with access to this useful resource, 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
Yesterday, the SEC’s Acting Chief Accountant, Paul Munter, issued a statement to say that the SEC & PCAOB are skeptical of alternative audit engagement structures that companies might attempt to use as a workaround to HFCAA compliance. The statement follows the tentative deal that the PCAOB has reached with China-based regulators regarding inspections – and the apparently growing practice of some China-based firms to switch to US-based lead audit firms in an effort to avoid delistings. Here’s the bottom line:
Issuers and accounting firms looking to avoid the uncertainty about whether they will be in compliance with HFCAA may be tempted to engage in an efficient breach of other applicable legal and audit requirements. Such issuers and accounting firms should be forewarned that doing so may well result in investigations and enforcement actions by the PCAOB, the Commission, or both, and that the attendant liabilities may attach not only to the accounting firms and their associated persons, but also to issuers, their audit committees, and officers and directors. Any attempt by issuers or accounting firms to engage in such an efficient breach and avoid the consequences of HFCAA in contravention of other legal and audit requirements should therefore be avoided.
– Liz Dunshee
Reuters reported yesterday that Digital World Acquisition Corp., the SPAC that’s attempting to merge with Donald Trump’s social media venture, has so far failed to get the approval from 65% of shareholders that’s necessary to extend the deadline to complete the deal.
Management is once again postponing the vote tally, this time until Thursday – and if that doesn’t pan out, the sponsors will sink in more of their own funds in order to extend the life of the SPAC by three months. The deal has been on hold while the SEC and others investigate how it came about – here’s more detail from the article:
Digital World has disclosed that the SEC, the Financial Industry Regulatory Authority and federal prosecutors have been investigating the deal with TMTG, though the exact scope of the probes is unclear.
The information sought by regulators includes Digital World documents on due diligence of potential targets other than TMTG, relationships between Digital World and other entities, meetings of Digital World’s board, policies and procedures relating to trading, and the identities of certain investors, Digital World has said.
Per the playbook, the media company blames political bias for the regulatory scrutiny of this transaction. But what that statement misses is that the SEC and others are searching for ways to kill SPAC deals regardless of who’s involved. In a separate enforcement action announced yesterday, the Commission charged a New-York based investment adviser with failing to disclose conflicts of interest relating to SPAC sponsor compensation and failing to timely file a Schedule 13D. The investment adviser agreed to a censure and a $1.5 million penalty to settle the charges.
– Liz Dunshee
If you haven’t already received a comment letter, be aware that Corp Fin is taking a close look at disclosure of board leadership structures and risk oversight functions. These comments are going to many companies – it’s not apparent that this initiative is focusing on companies in particular industries or with particular governance structures. What’s the Staff looking for? Here’s one of the comments:
Please expand your discussion of the reasons you believe that your leadership structure is appropriate, addressing your specific characteristics or circumstances. In your discussion, please also address the circumstances under which you would consider having the Chair and CEO roles filled by a single individual, when shareholders would be notified of any such change, and whether you will seek prior input from shareholders.
Other comments suggest that the Staff is seeking detailed disclosure about how the board administers the risk oversight function and the role of the independent chair or lead independent director.
So far, it sounds like all of the comments request that changes be made in future filings, versus amending earlier disclosures. It is striking how far beyond any specific disclosure line items these comments seek to go, but at the same time the requested disclosures seem innocuous enough that some companies may just agree to the disclosures to make it go away.
If you’re working on a response to this or any other Staff comments, make sure to consult our “SEC Comment Letter Process” Handbook – which includes fresh, practical insights from Sidley’s Sonia Barros and Sara von Althann on how to best navigate that process. If you’re not already a member with access to this useful resource, 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
Back in 2011, the SEC found itself on the losing end of litigation over its “proxy access” rulemaking, after the US Chamber of Commerce challenged the Commission’s economic analysis. In its July lawsuit against the SEC that takes issue with the rollback of 2020 proxy advisor rules, the Chamber is once again leveraging this argument.
Critiques of the SEC’s cost-benefit figures aren’t new, but they have become particularly acute in light of the current rulemaking agenda. This WSJ article says that it is a major theme in recent comments to the SEC’s proposal to enhance ESG disclosure by investment companies.
Compliance costs are also top-of-mind for companies facing down the SEC’s climate disclosure proposal. Among other impacts, this 27-page Gibson Dunn memo dives into what public company oil & gas companies are telling the SEC about their expected regulatory burden if and when that proposal is adopted. Here’s an excerpt:
The Commission estimates that annual direct costs to comply with the proposed rules (including both internal and external resources) would range from $490,000 (smaller reporting companies) to $640,000 (non-smaller reporting companies) in the first year and $420,000 to $530,000 in subsequent years.
52% of public company letters and 43% of industry association letters raised concerns about the actual (and economic) cost of the Proposed Rules. Many believe the SEC underestimated the implementation costs, and a handful of companies provided quantitative estimates as to actual cost.
Sample Comments:
• “We are . . . concerned about the cost, complexity and practicability of complying with parts of the Proposal (in particular, the proposed amendments to Regulation S-X) that will be borne by registrants of all sizes, and which we believe, will significantly exceed the estimates set forth in the Proposal. Our company expects implementation costs in the $100-500 million range, and annual costs for on-going compliance in the $10-25 million range — costs that will ultimately be borne by investors and the public markets.”
• “This additional reporting [on GHG emissions] will come at a high costs: EPA estimated if it lowered its own de minimis reporting thresholds from 25,000 to 1,000 metric tons of CO2e per year it would cost an additional $266 million (in 2006 dollars). . . . EPA updated the reporting requirements for petroleum and natural gas systems in 2010. In doing so, EPA estimated that the incremental cost to reduce the bright line threshold from 25,000 to 1,000 would cost an additional $54.43 million (2006 dollars). . . . Based on EPA’s figures, the Proposed Rule could mean an additional cost to [the company] of $7,000,000 or more in 2006 dollars just to track and report Scope 1 emissions from additional facilities. These figures also suggest that the Commission has not fully accounted for the cost of this rule.”
• “[The company] estimates the cost of voluntarily reporting Scope 3 GHG emissions to be more than $1 million. . . . This does not include accounting personnel to incorporate Scope 3 emissions reporting into our Form 10-K or any commercial efforts needed to amend contracts or attempt to gather and verify Scope 3 emissions data across our value change to the extent it can be identified. Furthermore, [the company] estimates implementing the amendments to Regulation S-X would also be in the millions of dollars.”
• “[A small cap public company] estimate[s] that the total annual cost of satisfying the disclosure requirements set forth in the Proposal would be approximately $500,000 to $800,000, which would be significant for a company of our size.”
• “We believe the Commission’s cost estimates are significantly understated for large accelerated filers. . . . Currently, [the company’s] climate-related disclosures activities in line with TCFD recommendations require time and several million dollars in costs for data and information collection, IT system solutions, services provided and other related tools, techniques, and expertise. This does not include the significant additional time and cost of assurance of our performance data and disclosures.”
• “[W]e believe the SEC has significantly underestimated the costs of compliance, which we believe would be many multiples of the projected $640,000 per year initially and would likely increase over time.”
• “The cost of registrants trying to report in alignment with just certain aspects of TCFD for their first time on a voluntarily basis can be around $500,000. This does not account for the level of rigor, financial line items, attestation, and liability costs associated with complying with this Proposed Rule. The actual cost for complete alignment to TCFD could be up to $1,000,000 per registrant over several years. This does not include the annual cost associated with preparing for and conducting attestation.”
• “[B]y only considering the costs of compliance to the public companies that are required to file, SEC misses completely the costs to companies that supply SEC filers, the largest being the induced requirement to gather and report their GHG emissions to the filing company as a condition of their supply relationship. . . . [B]ecause filing companies will have to undertake the herculean task of estimating their Scope 3 emissions, they will have no other choice but to require their suppliers to provide their GHGs, even if those suppliers have no regulatory requirement otherwise to report to SEC or EPA.”
While these comments don’t seem to be moving SEC Chair Gary Gensler to give up on these proposals, they could influence parts of the final rules. The risk of not heeding these concerns could be that industry groups pounce on the economic analyses in court – like the Chamber is already doing – and the rules get vacated post-adoption.
– Liz Dunshee
The comments on the SEC’s pair of proposals for ESG investment funds are showing that these rules could increase pressure for portfolio companies, which is something that Lawrence said to watch for when he blogged about the proposals earlier this year. Here’s an excerpt from BlackRock’s recent comment letter to the SEC on the proposal to enhance disclosure about investment companies & advisers’ ESG practices:
Final rules on corporate GHG disclosures should be implemented before requiring fund level disclosures. Climate risk is financial risk and as a fiduciary to our clients, we have taken a number of steps to address climate-related financial risk, including by providing greater transparency. However, climate metrics continue facing methodological and data challenges. Corporate level disclosure requirements should precede requirements for fund level disclosures to provide market participants with climate-related information, including greenhouse gas (“GHG”) metrics.
We also respectfully disagree with the SEC’s proposal for funds to resort to “best efforts” when disclosure of GHG emissions is not available. Locating and estimating information that is not required to be publicly available is an undue burden and likely to lead to disclosure across funds that is not comparable or consistent across funds, negating the purpose of the SEC’s proposed amendments.
Moreover, in the absence of mandatory GHG emissions reporting across the public and private markets, the proposed rule would force funds to step into what we believe is an inappropriate role of policing their portfolio investments through negotiating for and monitoring data needed for their own disclosures. Further, as we noted in our response to The Enhancement and Standardization of Climate-Related Disclosures for Investors, we respectfully request that the SEC consider its approach with respect to Scope 3 emissions which is distinct from Scope 1 and 2, given the higher degree of estimation and methodological complexity in the former.
The proposals for investment advisers also contemplate requiring more disclosure about ESG voting & engagement strategies. Here’s an excerpt from the SEC release:
We also are proposing amendments to fund annual reports to require a fund for which proxy voting or other engagement with issuers is a significant means of implementing its strategy to disclose information regarding how it voted proxies relating to portfolio securities on particular ESG-related voting matters and information regarding its ESG engagement meetings
BlackRock has recommendations for that part of the proposal as well:
Recognize that engagement and proxy voting are standard parts of asset management. Engagement and proxy voting are a standard part of asset management, for both active and index products, and are not definitive characteristics of an ESG-Focused Fund, or even definitive characteristics of ESG integration. Engagement is a mechanism for investors to seek clarity and provide feedback to companies on governance topics; particularly for index funds, it is not done to exert power over a company’s management team’s decision-making or engineer specific outcomes.
It is crucial to note that stewardship engagement and proxy voting are at their core about encouraging transparency and enabling investment managers to hold company leadership to account where board directors or executive management seem not to have acted in long-term shareholders’ interests. As the bedrock of engagement is governance, which is the “G” of “ESG”, all engagement has an ESG component and indeed nearly 90% of our engagements in 2021 covered a governance topic.
When “E and “S” topics are raised in engagement meetings, the intent is to seek greater transparency for our investors on those issues to make informed investment decisions not to dictate a specific outcome to company management. Additionally, the detailed nature of the disclosure required on both engagement and proxy voting is unnecessary, potentially misleading and, particularly in relation to voting, duplicative of already existing disclosure in Form N-PX and the fund’s annual shareholder report.
BlackRock’s comment letter also warns that parts of the SEC’s proposal could actually worsen “greenwashing” and investor confusion. Like many of the SEC’s recent “ESG”-related rulemaking initiatives, the two proposals aimed at investment companies & investment advisers are drawing a lot of suggestions for improvement.
– Liz Dunshee
You can still register for our always-popular conferences – the “Proxy Disclosure & 19th Annual Executive Compensation Conferences” – to be held virtually Wednesday, October 12th – Friday, October 14th. With new SEC rules, record numbers of shareholder proposals, and relentless regulatory & investor scrutiny, your proxy disclosures – and the actions that support them – are more important than ever. Our Conferences provide practical guidance about rule changes, Staff interpretations, emerging disclosure risks, investor and proxy advisor positions, executive pay expectations, the board’s role, and more.
Here’s who should attend:
– Anyone responsible for preparing and reviewing proxy disclosures – including ESG and executive pay disclosures and responses to shareholder proposals.
– Anyone responsible for implementing executive and equity compensation plans or who counsels or advises boards on their oversight responsibilities, including CEOs, CFOs, independent directors, corporate secretaries, legal counsel, HR executives and staff, external reporting teams, accountants, consultants, and other advisors.
For more details, check out the agenda – 18 panels over 3 days. Our speakers are fantastic and this is truly a “can’t miss” event for anyone involved with proxy disclosures, corporate governance, and executive compensation.
Conference attendees will not only get access to our unique & valuable course materials (coming soon) – we’ll also be making video archives and transcripts available after the conference, so that you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures and engagements. Plus, our live, interactive format gives you a chance to earn CLE credit and ask real-time questions.
Register today! In addition, check out the agenda for our “1st Annual Practical ESG Conference” – which is happening virtually on Tuesday, October 11th. This event will help you avoid ESG landmines and anticipate opportunities. You can bundle the Conferences together for a discount.
– Liz Dunshee
I blogged yesterday about my dismay in reading that today’s retail investors find equity investing to be hopelessly complicated. Law Profs Christina Sautter & Sergio Alberto Gramitto Ricci sent a word of encouragement, by pointing me to their latest paper. It was just posted last week and addresses the important topic of “investing education” in the age of mobile apps & financial inclusion. The paper is a response to another recent analysis – “Regulating Democratized Investing” – by Abraham Cable, which proposes a way to encourage investor choice & access on new apps, without people losing their life savings in misguided day trading.
In their paper, Christina & Sergio walk through the rise of “finfluencers” – social media influencers who have become informal educators to a huge number of retail investors, for better or for worse. Companies that get mentioned often have to contend with misinformation & rumors. The professors suggest that mandatory investing education at the high school level would help the public navigate information sources (and save corporate secretaries from headaches).
Here’s the part that I found especially thought-provoking:
Private Ordering: … In the future, Fisch’s “just-in-time education” recommendation could also be extended to proxy materials and proxy voting to make materials and corporate governance more accessible and engaging for retail investors. Although many retail investors care about corporate governance engagement, they are not generally well versed in corporate governance legal terminology. There are examples on social media of retail shareholders showing a lack of knowledge regarding the meaning of a “record date,” what happens on the record date, and when voting occurs.
Retail investors are not just unfamiliar with corporate law terminology but also the mechanics of corporate governance as well as the substantive issues at play in proxy items. For example, some technicalities like a partially completed proxy card resulting in the remainder of votes being cast in accordance with management recommendations is not necessarily intuitive. Investing education courses should include instruction not just on investing but these intricacies of corporate governance to empower retail investors.
Including Corporate Governance in Education: Civics education has been found to nurture political engagement with positive ramifications on equality and citizens’ agency. In a globalized world, with corporations rivaling nation states in power and influence, the benefits of widespread investing education cannot be overstated. Corporate governance allows citizens to partake in decision making affecting virtually all aspects of their lives. Share ownership is the key that provides access to corporate governance.
Including corporate governance in investing education curricula not only completes the set of knowledge necessary for investing in companies’ shares, but also enhances the agency of investors as citizens. Investing education bridges the gap between citizens and Wall Street. It also provides citizens with the tools to engage with the companies in which they invest.
There you have it: a call to action for corporate governance experts to save the world. Maybe I can finally convince my non-lawyer friends to follow this blog.
– Liz Dunshee
In a new 18-minute episode of our “Women Governance Trailblazers” podcast, Courtney Kamlet & I interviewed Rachel Kahn-Troster, Executive VP at the Interfaith Center on Corporate Responsibility, about her unique career path and mentor experiences.
Rachel also shares her thoughts on how companies can continue to improve on human rights issues – and how she works with ICCR members to engage with companies on this and other topics. It’s worth hearing Rachel’s perspective, because as I blogged earlier this week, members of the ICCR coalition engaged in a record level of activity during the 2022 proxy season.
– Liz Dunshee
PwC recently published its annual roundup of comment letter trends – detailing the types of issues that Corp Fin has raised on company filings, from July 2021 through June 2022. Here’s the “Top 10” – and how the comment volume is trending compared to last year at this time:
1. Non-GAAP – up
2. MD&A – up
3. Segment reporting – down
4. Risk factors: climate change matters – up
5. Revenue recognition – down
6. Fair value measurement – unchanged
7. Disclosure controls and ICFR – unchanged
8. Inventory and cost of sales – unchanged
9. Form compliance and exhibits – unchanged
10. Business combinations – unchanged
In terms of real-time trends, Dave recently blogged about continued inquiries about disclosure on the war in Ukraine, and John blogged about comments on inflation & supply chain pressures. We also just posted the latest edition of our “SEC Comment Letter Process Handbook” – 47 pages of practical insights to help you anticipate comments and navigate responses. Special thanks to Sidley’s Sonia Barros and Sara von Althann for contributing their expertise to this resource, which helps our entire securities law community!
– Liz Dunshee
