Warren Buffett’s annual letter to Berkshire Hathaway shareholders came out this weekend. Although he says there wasn’t much “new or interesting” at the company in 2021, there are a few nuggets worth noting in the letter and the annual report that it accompanies. The letter:
– Prominently touts the company’s substantial federal income tax payments as a good thing. Berkshire Hathaway paid $3.3 billion in corporate income tax in 2021 – a figure you’ll find at the front of Saturday’s letter rather than on the back page. Warren Buffett has been a long-time proponent of reinvesting in the business and paying taxes “at the office” versus on take-home taxable income. At a time when the tax obligations of billionaires and their businesses are drawing more national attention (and starting to be discussed as an “ESG” issue), Buffett emphasizes “the invisible and often unrecognized financial partnership between government and American business” and says Berkshire wouldn’t be what it is today if its operations weren’t based in the USA.
– Applauds Apple and its CEO Tim Cook for strong performance and share repurchase decisions that caused Berkshire’s percentage ownership to increase to 5.55%. That might be useful praise heading into Apple’s shareholder meeting this Friday, where the tech company faces 6 shareholder proposals and an adverse ISS recommendation on say-on-pay. Later in the letter, Buffett expounds on Berkshire’s own repurchase decisions.
Additionally, it appears that the Oracle of Omaha is coming around to the business benefits of planning for the net-zero transition. The letter plays up these environmental achievements:
– BNSF’s role in the American supply chain comes with an emissions advantage – “If the many essential products BNSF carries were instead hauled by truck, America’s carbon emissions would soar.”
– BHE has made the “societal accomplishment” of becoming a leading force in wind, solar & transmission – and the letter highlights previously-identified successor Greg Abel’s leadership role in that company’s transformation. Buffett takes a dig at “greenwashing” and brags that BHE has a lengthy history of making climate-conscious moves that soak up all of its earnings.
In a rare move, Abel also gets dedicated space in the company’s annual report. His Vice-Chair letter details annual GHG emissions from BHE and BNSF – and the 2030 targets for those two businesses – which represent more than 90% of Berkshire’s overall emissions. The 2030 targets are about 54% of the 2005 baseline (close to the “halving emissions by 2030″ goal that gained support after the IPCC report last summer). Abel’s letter highlights that BHE has invested in renewables while retiring coal plants and that it routinely communicates its approach to decarbonization. For more info on Abel’s background and the significance of his “sustainability” letter getting space in the annual report, check out this Bloomberg article.
Buffett’s letter ends with a plug for the company’s “annual gathering of capitalists.” This year’s incentives to attend include a discount on a “cousin” Jimmy Buffett-designed pontoon party boat that is manufactured by a Berkshire subsidiary. At a time when other companies are elbowing for positive attention & turnout from retail shareholders, Warren Buffett’s ability to connect the dots in a straightforward way seems to be a continued formula for success.
Supply chain disruptions continue to grow. Last week, the largest international logistics company in the US shut down most of its operations after announcing a cyberattack (see reports by ZDNet and the WSJ). This follows several supply chain attacks over the past few months – including a ransomware attack on Switzerland’s Swissport airport management services and a data breach that affected Germany’s billion-dollar logistics firm Hellman Worldwide – along with chatter from cyber-criminals last fall that they have access to networks for companies in the supply chain and are targeting that sector.
This is one of those areas where if you have been informed of a specific issue, your risk factors need to be tailored accordingly. So, do your procurement folks know to keep you in the loop? Do you have a sense for what type of disruption would warrant discussion with your board? As Dave blogged last week, the Russian conflict also means that cyber threats have grown to unprecedented levels for companies and the infrastructure that we all rely on. Preparedness for different types of scenarios is key.
Tune in tomorrow from 2-3pm EST for our PracticalESG.com webcast – “Shareholder Engagement: Fallout From the ‘ESG’ Tsunami” – featuring RLB Governance’s Rhonda Brauer, Close Consulting Group’s Tamara Close, Freshfields’ Pamela Marcogliese and Georgeson’s Hannah Orowitz. Shareholders have become more vocal than ever about ESG issues. The question now is, what should companies be thinking about before & after they commit to action? These experienced practitioners will discuss the “next steps.” Directors elections may be at risk if companies fail to show responsiveness, so it’s important to get this right!
Members of PracticalESG.com are able to attend this critical webcast – and access the transcript afterwards – at no charge. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com or calling us at 800.737.1271. If you sign up for a membership today, you can also receive 25% off the regular pricing. Don’t delay – this introductory promotion ends next week.
Even before SEC Chair Gary Gensler was officially confirmed to his current office, people were predicting that Section 13(d) reform would be high on his list of priorities. Yesterday, the SEC announced that it is proposing amendments to Regulation 13D-G. If adopted, the primary impact of the amendments would be to accelerate the filing deadline for Schedule 13D and 13G reports – to address the concern over “information asymmetry” that John blogged about last month.
This is a welcome development for the contingent of folks who think the current rules are outdated – see this 2011 WLRK petition, for example. If this proposal is adopted, it’ll be the most significant amendment to Regulation 13D-G since the rules were adopted in 1968.
– Accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports – generally, from 10 to 5 days for Schedule 13D and from 45 days from the end of the year to 5 business days from the end of the month for Schedule 13G;
– Expand the application of Regulation 13D-G to certain derivative securities;
– Clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; and
– Require that Schedules 13D and 13G be filed using a structured, machine-readable data language.
Chair Gensler issued a statement in support of the proposal. But not everyone is celebrating. Commissioner Peirce, who doesn’t share the view that information asymmetry is a problem in this context, issued a dissenting statement. We’ll be posting memos about this proposal in our “Schedules 13D & 13G” Practice Area. Comments are due 30 days after publication in the Federal Register or April 11th, whichever is later.
Also yesterday (and on the heels of our excellent webcast from earlier this week about whistleblower policies & procedures), the SEC announced that it had issued proposed amendments to two whistleblower program rules. From the fact sheet:
The SEC is proposing two amendments to Exchange Act Rules 21F-3 and 6, the rules governing its whistleblower program:
– The first proposed amendment would allow the Commission to make an award for a related action that might otherwise be covered by an alternative whistleblower program even where the alternative whistleblower program has the more direct or relevant connection to the related action in certain circumstances.
– The second proposed amendment would affirm the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount, but would eliminate the Commission’s authority to consider the dollar amount of a potential award for the purpose of decreasing an award.
As expected (and previously criticized by Commissioner Peirce and former Commissioner Roisman), this proposal revisits whistleblower program rules that were most recently amended in late 2020. So, it’s not surprising that Commissioner Peirce dissented. Chair Gensler issued a supporting statement to say that the amendments will provide reassurance to prospective whistleblowers. We’ll be posting memos in our “Whistleblowers” Practice Area. Comments are due 30 days from the date of publication in the Federal Register or April 11th, whichever is later.
Dave blogged last month that the SEC has drawn criticism for proposing rules with comment periods that are shorter than the traditional 60 days, which typically runs from the date that the proposal is published in the Federal Register. On the flip side, it seems to be taking a very long time to get proposals published. As far as I can tell, the proposals on buybacks and Rule 10b5-1 reform still have not made it into the Federal Register – so the comment period clock has not yet started ticking.
For this week’s slew of rulemaking, the SEC seems to be taking a new approach. Comments are due 30 days after publication in the Federal Register OR 60 days after issuance of the proposal, whichever is later. At a minimum, that gives people until April 11th to submit comments on these proposals.
The SEC announced yesterday that the Commissioners voted to propose “market plumbing” rules that would shorten the settlement cycle for most broker-dealer transactions from T+2 to T+1 – i.e., trades would settle one business day after the trade date – aimed at addressing one of the areas identified by the Staff Report on 2021 market volatility. A shortened settlement cycle is something that industry groups have been recommending – I most recently blogged about that in December – and all 4 of the current Commissioners issued statements in support of the proposal (Gensler, Lee, Peirce, Crenshaw).
As explained in the 247-page proposing release – and the accompanying 2-page fact sheet – the proposal also goes beyond merely shortening the settlement cycle to T+1. Specifically, the proposed changes would:
– Shorten the standard settlement cycle for securities transactions from two business days after trade date (T+2) to one business day after trade date (T+1)(by March 31, 2024);
– Eliminate the separate T+4 settlement cycle for firm commitment offerings priced after 4:30 p.m.;
– Improve the processing of institutional trades by proposing new requirements for broker-dealers and registered investment advisers intended to improve the rate of same-day affirmations (T+0); and
– Facilitate straight-through processing by proposing new requirements applicable to clearing agencies that are central matching service providers (CMSPs) – i.e., fully automated transactions processing.
The proposal also seeks comment on the path toward same-day settlement (T+0). In her statement, Commissioner Peirce laid out specific issues for which she would like comments:
(1) Would a T+0 settlement cycle unnecessarily increase trading costs, including in some cases potentially requiring prefunding of transactions?
(2) Would it force other changes that may significantly affect market structure in ways that decrease liquidity?
(3) Would blockchain technology be useful in facilitating the transition to a T+0 timeframe?
(4) How could the Commission go about working with the market to make the transition to T+0 if it does in fact seem worthwhile?
In addition to proposing to shorten the settlement cycle, yesterday’s open meeting also resulted in a proposal on compliance issues for private fund advisers under the 1940 Act – which John blogged about today on DealLawyers.com – and a proposal on cybersecurity risk management for registered investment advisers and investment companies. This one was issued on a 3-1 vote, with Commissioner Peirce issuing this dissenting statement (she wants a rule that fosters more direct & transparent cooperation between regulators & financial firms) and Chair Gensler, Commissioner Lee and Commissioner Crenshaw issuing supporting statements.
The cybersecurity proposal is significant because it underscores the SEC’s (and Biden administration’s) focus on cyber threats and shows what the Commission might view as “best practices” that could be implemented even outside of the investment adviser space. The SEC’s fact sheet explains that the proposal would:
– Require advisers and funds to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risks;
– Require advisers to confidentially report significant cybersecurity incidents to the Commission on proposed Form ADV-C within 48 hours of discovery;
– Enhance adviser and fund disclosures related to cybersecurity risks and incidents; and
– Require advisers and funds to maintain, make, and retain certain cybersecurity-related books and records
A Skadden memo from earlier this week previews cyber rulemaking and suggests steps for companies and their service providers to consider. In regards to yesterday’s proposal, this Wachtell Lipton memo offers these takeaways:
We have long highlighted the critical importance for public companies of maintaining effective disclosure controls concerning cybersecurity breaches and risks, and that boards of directors maintain focus on oversight of cybersecurity risks, including cultivating an understanding of the idiosyncratic risks companies face based on the systems they use and data they collect. We have also repeatedly stressed the need to maintain robust written policies and procedures with respect to cybersecurity protective measures, incident detection and response, and disclosure protocols.
Apart from their direct applicability to RIAs and funds, the SEC’s new proposed rules constitute a significant step toward formalization of national standards and regulatory expectations for corporate approaches to cybersecurity risk management, public disclosure of cyber-related risks, and timely regulatory and public notification of significant cyber incidents. As cybersecurity threats proliferate and become ever more sophisticated, companies both within and without the investment industry should carefully consider the SEC’s prescriptions and consider whether any or all of these proposed components should be integrated into their existing cybersecurity risk management systems and procedures.
We’ve posted the transcript for our recent webcast for members, “ISS Forecast for 2022 Proxy Season.” Marc Goldstein, Head of US Research at ISS, was joined by Ning Chiu from Davis Polk and Bob Lamm from Gunster to review what happened in the 2021 proxy season, the changes that ISS is making to its policies in 2022, and a variety of hot topics for the upcoming proxy season. Here’s what Marc had to say about ISS’s new climate accountability policy:
The other aspect of climate I wanted to mention is a new climate accountability policy, which is a new approach for us. We’re rolling it out fairly slowly, by which I mean it’s baby steps for 2022. We are looking at high-emitting companies as identified by Climate Action 100+, which is 167 companies globally. However, the policy actually isn’t going to be applied in every single country for 2022. In the U.S., UK, continental Europe and Russia, we’re going to be applying the accountability policy at companies that are both significant carbon emitters and also have poor disclosure and no greenhouse gas reduction targets.
We are setting the bar low for 2022 and we don’t expect a lot of negative recommendations under this policy. It’s possible that we may raise the bar in future years, but we would be happy to be able to conclude that every company clears the bar, so that we don’t feel compelled to recommend votes against directors. Our clients have made it very clear to us that this is a risk oversight issue and Boards need to be on top of these risks, taking them seriously and taking steps to align the business with the reality of the need to reduce greenhouse gas emissions and transition to renewable energy.
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