Recently, Reuters reported that the SEC’s Dallas-Fort Worth office is investigating claims made by some companies who are walking a line between shareholder ESG demands and state regulatory restrictions. This Mintz blog explains:
Specifically, the SEC is “scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with gunmakers and fossil fuel companies.” This investigation appears to stem from a recent Texas law that prohibits companies doing business with Texas state governmental entities from discriminating against firearms or fossil fuel companies. The SEC appears to be concerned about how companies may have acted in ways inconsistent with their ESG disclosures when complying with that Texas state law.
Although this enforcement activity is perhaps not the precise type that was anticipated when the SEC announced a focus on ESG issues — as both companies and the private bar thought that SEC enforcement actions would be directed against failures to comply with ESG disclosure standards articulated by the SEC — this type of enforcement activity, centering on potential inconsistencies between information disclosed to different types of recipients, is squarely within the SEC’s remit.
This clash has been many months in the making. Lynn blogged about a year ago that energy-producing states were preparing legislation to push back on banks’ net-zero commitments. Last fall, Bloomberg reported that some banks were withdrawing from doing business in Texas, after new laws there went into effect that barred state & local governments from working with banks that have taken a stance against the firearms and fossil fuels industries.
The Leiutenant Governor of the Lone Star State also urged the state comptroller to cut off BlackRock following Larry Fink’s 2022 letter to CEOs – even though the asset manager is pushing for a gradual transition versus boycotting or divesting from oil & gas companies. Similarly, the West Virginia State Treasurer recently announced that the state will no longer use BlackRock in its banking transactions, because of its stance on fossil fuels and its investments in Chinese companies.
It’s easy to think of robust ESG commitments as “good” and lagging advancement as “bad.” These conflicts are a reminder that it’s not always that simple. There will be trade-offs – even if investors & companies follow the “orderly transition” that BlackRock outlined in a 16-page report last week. An important part of making ESG commitments will be balancing environmental advancements with social impacts (and vice versa). That is part of why board oversight of E&S strategy is so important.
– Liz Dunshee
Codes of ethics are adapting to ESG issues:
The average length of ethics codes increased from 6,054 words in 2008 to 7,821 words in 2019, an average increase of 29 percent. Although a handful of firms defied the trend and shortened their codes, most increased by a relatively large amount. Terms such as social media, slavery, sustainability, footprint, and trafficking appeared not at all or only infrequently in 2008 but appeared with significantly higher frequencies in 2019.
Consistent with codes of ethics playing an important part in building and maintaining corporate culture, we document a positive linkage between Trust and Moral Behavior words (e.g., ethics, respect, and trust) and being selected as a most ethical firm by the Ethisphere Institute. We also find that changes in Inappropriate Behavior words are positively linked with changes in ESG ratings
That’s part of the conclusion from Notre Dame professors Tim Loughran, Bill McDonald and James Otteson in a recent study (and next time you review your code, it’s worth checking out their detailed appendices about word count, companies studied, and specific words related to Environmental, Social & Governance issues).
Companies have leeway in deciding whether their code of ethics should meet the bare minimums required by Item 406 and NYSE and Nasdaq listing standards. When Item 406 was adopted nearly 20 years ago, there were a lot of folks in the “bare minimum” camp. Now, this study suggests that companies are using the code of ethics to hold their employees & executives to a higher standard.
In this “Money Stuff” column, Matt Levine points out the reasons that companies might have for going above & beyond: using the code as a management tool to minimize legal & reputational risk, using the code as an advertising tool to shareholders & other stakeholders – especially with ESG getting so much attention. Companies should exercise some caution in adding commitments, though. Matt explains the risk:
[T]he biggest problem with a strict and specific code of ethics is that everything is securities fraud. If someone at your company does something bad and the stock goes down, your shareholders will sue, claiming in essence that you didn’t tell them that you were doing the bad thing. Technically, though, securities law does not require companies to disclose every bad thing; for the most part it penalizes active lies, not passive omissions. So the shareholders will not say “you didn’t tell us about the bad thing”; rather, they will say “you actively lied to us, saying or implying that you were not doing the bad thing.”
Codes of ethics are very helpful to the shareholder plaintiffs here, meaning that they are dangerous for the company, and the more strict and detailed they are the more dangerous they are. If your code of ethics says “executives are expected to act ethically where appropriate,” and your chief executive officer is revealed to be a sexual harasser and the stock drops, you can say “well that vague statement couldn’t possibly have induced anyone to buy our stock” and maybe win the shareholder lawsuit. If your code of ethics says “we have zero tolerance for sexual harassment of any kind and we hold everyone accountable immediately,” then it will be easier for shareholders to argue that they were deceived.
Those takeaways come in big part from this 2020 Davis Polk memo and a $240 million securities class action settlement against Signet Jewelers. Not only could these shortfalls eventually be used in litigation, but you might find yourself in a disclosure and listing quandary early on, due to the requirements under Item 5.05 of Form 8-K and listing standards to promptly announce waivers from the code.
All that to say, it’s tempting to make sweeping ESG commitments – and shareholders, employees & communities are definitely pushing for them. But companies need to be able to back up those commitments, and it may fall to securities lawyers to ask the hard questions when the code gets reviewed.
– Liz Dunshee
Shareholder proposals that seek enhanced “political spending” disclosure garnered high levels of support last year, and I recently blogged on our “Proxy Season Blog” that proponents are continuing to pursue more transparency this year. Not only that, but Emily blogged that proposals are also taking aim at contributions that appear to conflict with companies’ publicly stated values. And as Dave wrote last week, the Principles for Responsible Investment further encourages investors to examine political engagement by portfolio companies.
When it comes to oversight of political spending activities, a recent survey from The Conference Board found that most people expect corporate political activity to be an even more challenging topic this year than last year, now that many corporate PACs have resumed political donations (and groups are tracking whether those funds go to politicians who objected to the 2020 presidential election results). The Conference Board suggests these “best practices” to manage this topic in the year ahead:
1. Prepare for backlash. Have a clear set of standards and guidelines that you can use in making and defending any positions you take – whether through a statement from your CEO, political contributions, or lobbying efforts.
2. Ramp up educational and engagement efforts with stakeholders. Corporate political activity is multifaceted, of growing importance to multiple stakeholders, and an ongoing source of controversy and risk. This reality places a premium on not just educating, but appropriately engaging, key audiences.
• Focus on employees. 69 percent of our recent survey respondents cited pressure and attention from employees as a significant driver in making corporate political activity challenging in 2021. Employees often expect companies to take stands on issues that may be politically divisive and may not be related to the firm’s business or align with its core corporate values. It’s vitally important to educate employees – and, indeed, the general public – about your company’s activities. 84 percent of survey respondents say they are going to increase their efforts to engage and educate employees in 2022.
• Clarify the role of PACs. Company-sponsored PACs are funded by voluntary contributions from employees, not by corporate funds. But the press, employees, and others conflate corporate giving and PAC giving. To some extent, that’s understandable given the legal authority companies have to create, administer and, if they wish, determine who receives funds from the PAC. Companies and their PACs should reinforce the message about the purpose and governance of PACs on an ongoing basis, not just in a crisis.
• Clarify the process for publicizing PAC decisions. A majority (51 percent) of corporate PACs surveyed changed their contribution criteria in light of January 6th. But 30 percent changed their standards last year in response to other social and environmental issues, and 24 percent have not yet resumed their contributions. This means that more changes to PAC programs are still to come. Companies need to have a clear process for deciding whether and how to get word out. Be mindful that the legal, communications, and government relations functions may have conflicting views on disclosing PAC decisions.
3. Augment board oversight. While boards have traditionally focused more on political contributions than on lobbying activities, companies should consider what kind of role boards should play with respect to lobbying (and other forms of political activity). Their role might include approving broad principles and processes for corporate political activity.
4. Align political activity with corporate values. Aligning politics and values is much easier said than done because companies or their PACs often support candidates whose positions do not fully align with their stated corporate values, and companies may advocate policy positions that are not evidently in the interests of their stakeholders, such as employees and customers. But there are ways to achieve greater alignment.
• Keep it simple – the more complex your political activity, the more difficult it can be to manage reputational or other risks. Consider, for example, giving to candidates only through PACs and not via direct corporate contributions, and limit contributions to third-party organizations.
• Thoroughly vet third-party organizations to which you donate money, including the governance process in place to control their activities. Our survey found that companies have become more vigilant about their affiliations with external organizations in 2021: For example, 38 percent increased vetting of/supporting for/membership in industry trade associations.
• Consider involving the corporate citizenship function or executives in reviewing political activity.
• Adopt (or have your PAC adopt) a policy for political contributions that incorporates your company’s and your employees’ values as part of the framework for managing political spending.
5. Increase coordination internally and with third parties. It’s important to ensure that the multiple ways your company can engage in political activity are coordinated. You don’t want your CEO to take a stand on an issue, only to discover that it’s at odds with your PAC’s political contributions or the work of one of your third-party lobbyists. Coordination is particularly important with respect to lobbying. New state and local regulations are forcing more and faster disclosures about lobbying activities, sometimes within 48 hours. There’s reputational exposure if a consultant discloses activity on a sensitive topic and the company’s government relations and communications team are caught off guard.
For more thoughts on how to navigate board oversight, shareholder proposals & disclosure, visit our “Political Contributions” Practice Area. Included there is the CPA-Wharton Zicklin “Model Code of Conduct for Corporate Political Spending” that I blogged about during the 2020 election season. This new Directors & Boards article from the CPA’s Bruce Freed & Karl Sandstrom advocates for companies to use the Model Code to guide decisions.
– Liz Dunshee
Disclosure also remains an important part of the “political spending” picture. This Mayer Brown blog looks at where disclosures are showing up in filings (MD&A, risk factors, business section) – and suggests ways to enhance transparency.
– Liz Dunshee
Tune in at 2pm Eastern tomorrow for the webcast – “Activist Profiles & Playbooks” – when Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors LLC’s Damien Park and Abernathy MacGregor’s Dan Scorpio discuss lessons from 2021’s activist campaigns & expectations for what the 2022 proxy season may have in store. We are making this DealLawyers.com webcast available as a bonus to members of TheCorporateCounsel.net.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
– Liz Dunshee
When we last checked in on Corp Fin’s review of filings for climate change disclosure, many of the reviews appeared to be ongoing. This Bloomberg Law article highlights a few companies’ amendments to registration statements in response to climate disclosure scrutiny last spring & fall. Here’s an excerpt (edited with links to the amended disclosures):
Morgan Stanley, for example, added to its risk factor disclosures (pg. 81) that laws requiring mortgaged commercial properties to comply with Energy Star, Leadership in Energy and Environmental Design (LEED), and other green building certification programs may hurt borrowers’ ability to pay their loans.
Verizon (pgs. 59 & 69), Nissan (pgs. 16 & 25), and Toyota (pgs. 39 & 43) updated their filings to say extreme weather conditions resulting from climate change could delay customers’ payments, lowering the value of the asset-backed securities they’re offering to investors. Ford (pg. 31) changed its filing to say investors could lose money if its reputation is harmed by public perception about greenhouse gas emissions from its gas-powered vehicles.
Morgan Stanley Capital I Inc., Verizon ABS II LLC, Ford Credit Auto Receivables Two LLC, Nissan Auto Leasing LLC II, and Toyota Auto Finance Receivables LLC filed the registration statements to help their parent companies sell securities backed by mortgages, auto lease contracts, and other assets.
While comment letters are always company-specific, the nature of amendments sheds some light on what the Staff could be looking for in its Exchange Act filing reviews – and it may also give clues as to what a climate disclosure proposal would touch on. The article notes that the original comment letters to these companies were generic and that the agency didn’t engage in multiple rounds of letters with the companies – so the amendments appeared to resolve the Staff’s questions.
– Liz Dunshee
John blogged last fall about the SEC’s new rules to modernize the filing fee process. The new rules went effective last week – and as this Mayer Brown blog notes, the changes will affect all shelf takedowns:
For capital markets practitioners, it is important to now that all Rule 424 final prospectus filings for shelf takedowns from either Form S-3 or Form F-3 will require a separate filing fee exhibit, whether or not fees were prepaid. For “pay as you go” filers relying on Rule 456(b), amended Rule 424(g)(1) and the relevant form (S-3 or F-3) requires a very specific table format. General Instruction II.F. and Item 16(b) of Form S-3 have been amended, as have been General Instruction II.G. and Item 9(b) of Form F-3. Examples of the new tables and detailed instructions are in Item 16(b) of Form S-3 and Item 9(b) of Form F-3.
The amendments move the filing fee table update for “pay as you go” from the cover of the prospectus supplement to a separate exhibit. For Rule 424 filings that are not using “pay as you go,” Rule 424(g)(2) does not require the use of a table, but the maximum aggregate amount or maximum aggregate offering price of the securities to which the prospectus relates, and a statement that the prospectus is a final prospectus for the offering, are required to be included in the narrative.
We’ve also updated our 77-page “Filing Fees Handbook” to reflect the ins & outs of the new rules.
– Liz Dunshee
Tune in at 2pm Eastern tomorrow for the webcast – “Whistleblowers: Best Practices in a New Regime” – to hear from Cooley’s Zach Hafer, WilmerHale’s Susan Muck and Gibson Dunn’s Harris Mufson discuss the latest best practices for whistleblower policies and procedures. We’ll be discussing what companies need to know to get ahead of the “new normal,” in light of the possibility that the SEC’s current penalty posture signals a willingness to grant more awards, and that recent data and high-profile incidents show employees are more willing to submit tips.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
– Liz Dunshee
As if you needed another sign that life isn’t “back to normal” quite yet, Corp Fin has once again updated its guidance for conducting shareholder meetings in light of COVID-19 concerns. The section on “presentation of shareholder proposals” now encourages issuers to continue to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2022 proxy season.
We blogged about the original guidance way back in March 2020, as well as updates that the Staff made in April 2020. The guidance was also updated last year in regards to the 2021 proxy season. It would have been great to share this new update with my blog yesterday on annual meeting formats, but oddly Corp Fin’s announcement didn’t arrive in our inboxes until mid-morning yesterday. Based on the poll I ran yesterday, it’s looking like many meetings will continue to be “virtual only” this year – but don’t rule out the outdoor “foam party” option, which is making a strong showing of 7% of votes (more than hybrid!).
– Liz Dunshee
The NYSE has sent its “annual compliance guide” to listed companies to remind them of their obligations on a variety of topics and summarize developments since last year. The letter points out these two changes:
On April 2, 2021, the SEC approved changes to the NYSE’s shareholder approval rules. The changes eliminated related party limitations and bona fide private financing requirements in Listed Company Manual Section 312.03 for market price cash transactions. (Approval Order Amendment No. 1 to Sections 312.03 and 312.04) The related party transaction rules in Section 314.00 were also clarified in connection with this and a subsequent amendment on August 26, 2021. (Approval Order Amendment to Section 314.00)
On November 19, 2021, the SEC approved changes to NYSE’s policy on how abstentions are treated in votes cast on matters requiring shareholder approval. Issuers now must calculate the votes cast in accordance with their own governing documents and any applicable state law. (Approval OrderAmendment to Section 312.07)
The NYSE’s annual letter is a good resource to have on hand – all the NYSE email and telephone number contact information is provided and the letter explains when and how listed companies should contact the exchange for various matters. For links to NYSE resources, as well as memos & analysis on NYSE compliance issues, visit our “NYSE Guidance” Practice Area.
– Liz Dunshee
