State Street Global Advisors recently issued its annual stewardship report. The 80-page recap details 2021 engagements, voting activity, and explains how SSGA’s ESG function is organized (and new headcount). It gives clues on what to expect in the off-season and next year. Here are some excerpts:
– Climate Transition: We are planning a targeted engagement campaign in 2022 to encourage the most significant carbon emitters that we invest in to disclose climate transition plans. SSGA is concerned about “brown-spinning” and wants to see responsible transition planning. The report highlights case studies beginning on page 39. Interestingly, SSGA supported 84% of say-on-climate proposals worldwide, but continues to have reservations that it will insulate directors from accountability.
– Board Gender Diversity: In 2022, we expect that all companies we invest in, across the globe, will have at least one woman on their board. If we do not see companies engaging on this topic, we are prepared to vote against the Chair of the board’s Nominating Committee or the board leader. Additionally, beginning in the 2023 proxy season, we will expect boards to comprise at least 30% women directors for companies in major indices in the US, Canada, UK, Europe, and Australia.
– R-Factor: We currently vote against companies that fail to improve their R-Factor score and show no signs of taking action to improve their score. In 2022, we will continue to vote against companies where we do not see action to improve their score; we will now also vote against companies that show a downward trend in their R-Factor scoring as well as those that consistently underperform their peers in the same market sector.
– 2022 Engagement Priorities: We will continue to focus on our key stewardship priorities of climate change, diversity, equity and inclusion, human capital management, and effective board leadership. This commitment is clearly demonstrated through material changes to our voting policies. In 2022, we expect to ask companies to report against the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD), and we will publish our own TCFD report. This year we announced that in the upcoming 2022 proxy season we will take voting action against responsible directors if (1) companies in the S&P 500 and FTSE 100 do not have a person of colour on their board and (2) companies in the S&P 500 do not disclose their EEO-1 reports.
Last week, the Senate Banking Committee held a hearing to consider the nomination as SEC Commissioners of:
– Jaime Lizarraga – whose testimony included comments on facilitating capital formation for small businesses and keeping pace with rapid technological change, and
– Mark Uyeda – whose testimony emphasized his state-level securities regulation experience (in California) and the need for start-up financing and capital formation.
This Thomson Reuters article says that Jaime and Mark cruised through the hearing and skillfully dodged controversial Q&A – there are “no obvious roadblocks to confirmation in sight.”
Congresswoman Maxine Waters (D-CA), who chairs the House Financial Services Committee, and Senator Sherrod Brown (D-OH), who chairs the Senate Banking, Housing & Urban Affairs Committee, are calling for more prescriptive human capital disclosure rules. . . and more. Earlier this week, the lawmakers sent this letter to SEC Chair Gary Gensler, saying:
We write to urge the Securities and Exchange Commission (SEC) to require the disclosure of standardized data of race, ethnicity, gender, sexual orientation, and disability status. As the SEC continues to update its disclosure rules to ensure today’s investors have reliable data to make informed investment decisions, such data should be included in all future rulemaking related to human capital management and diversity.
The letter notes the increase in voluntary disclosure of EEO-1 data in response to investor initiatives and says that rulemaking would align with the SEC’s mission to protect investors, ensure fair, orderly, and efficient markets, and facilitate capital formation. But perhaps the most striking part of this letter is that it pushes for info not only at the board, executive, and workforce levels – but also when it comes to supplier diversity and procurement data.
That new & expansive aspect of “human capital” apparently stems from this 68-page report from last December that was focused on the practices of investment firms. The legislators then cite to the “ESG Disclosure Simplification Act” that was passed by the House Committee last year. Despite this letter being only 2 pages in length, there are a lot of “asks” to unpack here.
The SEC’s current Reg Flex Agenda, which reflects the priorities of the chair, shows that there may be a proposal in the works on human capital management disclosure. In light of the current murmurings about SEC rulemaking authority, I’d be surprised if any proposal went as far as this letter urges… but you never know.
We’ve been tracking human capital management oversight & disclosure since way back when the Human Capital Management Coalition first petitioned the SEC for rulemaking on this topic. Visit our Practice Area for lots of practical resources. If you don’t have member access, email sales@ccrcorp.com.
Dave blogged last week that a California court struck down the state’s board gender diversity statute, finding that it violated the Equal Protection Clause of the California Constitution. The same plaintiffs also recently prevailed on a motion for summary judgment to challenge the statute that would require a certain number of directors from “underrepresented communities.”
According to this Cooley blog, the California Secretary of State has announced that the state will appeal the May 13th decision. As the blog details, the Secretary of State believes that the statute is narrowly tailored to serve a compelling interest.
If you’re advising a California-headquartered company on next steps, remember to check the voting policies of the company’s shareholders and consider that in your analysis. For example, State Street announced that beginning in 2023, it expects Russell 3000 companies to have boards composed of at least 30% women directors. It may vote against the chair of the nominating committee if the company fails to meet expectations – and against all members of the nominating committee if the failure continues for 3 consecutive years. For convenience, we’ve collected voting policies from major institutional investors and asset managers in our “Institutional Investors” Practice Area – along with interpretive analysis, info on voting outcomes, and more.
Join us today at 2 pm Eastern Time for the third & final webinar of our 3-part DEI series – “Using DEI Data: Goal Setting & Reporting” – to hear Hook & Fasten’s Deesha Dyer, Jenner & Block’s Courtney Carter, Skadden’s Caroline Kim, and Vityl’s George Ho discuss practical ways to use DEI data to set goals and report on DEI progress. If you’ve not yet registered, you can still sign up here. This PracticalESG.com workshop is free, courtesy of our wonderful sponsors, Morrison & Foerster and Holmes Murphy.
If you can’t make it today, the replay of this session will be available on-demand to PracticalESG.com members. If you aren’t already a member, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
Dave blogged last week about a Fifth Circuit decision that ruled against the SEC’s use of Administrative Law Judges to conduct civil trials without a jury. As he noted, the opinion went a step further and also said that the ALJ system relies on unconstitutionally delegated legislative power.
Some people are saying that’s a big deal, because it could lay the groundwork for challenges to actual SEC rulemaking. In this column, Bloomberg’s Matt Levine explains:
But the panel is making a broader point here. The broader point is Justice Gorsuch’s point about political accountability, an excess of lawmaking, etc.; the opinion talks about those principles at length and cites Justice Gorsuch’s Gundy dissent. The point is that the nondelegation doctrine is alive again, and the Fifth Circuit is making a bet that the next time it goes before the Supreme Court it will win. The point is that the SEC’s actual legislative actions — writing rules about stock buybacks or swaps disclosure or climate change — are now in danger. It used to be accepted as a routine matter that the SEC could make rules under a very broad grant of power from Congress to regulate securities markets in the public interest. I am not sure that is true anymore.
This may not be a particularly big deal. Two judges on one panel of one appeals court found that one small part of what the SEC does is an unconstitutional delegation of power. It is possible that this decision is fairly narrow: Congress did delegate this decision — about whether to bring cases in federal courts or its own forums — to the SEC, fairly recently, without any guidance at all, which is unusual. Perhaps the “intelligible principle” standard allows the SEC to do all of its other rulemaking (because Congress has mostly given it some broad guidance about protecting investors in the public interest, and because SEC rules do help to fill in a fairly detailed statutory system), but not to make this particular decision. Still. I think the Fifth Circuit went out of its way to find a nondelegation problem because the Supreme Court has changed and now there will be a lot more courts finding a lot more nondelegation problems. I think this might be a sign of where things are going.
John blogged a couple months ago that the non-delegation doctrine could be a key part of challenges to the Commission’s climate change disclosure rule. Now, there is precedent.
Earlier this month, the SEC extended the deadline for its controversial climate change disclosure proposal. Thousands of comments have been received so far. While most of the late-landing letters have come from individuals, there have also been thoughtful comments along the way that examine the SEC’s rulemaking authority and the impact on smaller companies.
CII’s May 19 letter to the SEC, penned by General Counsel Jeff Mahoney generally supports the basic disclosure requirements in the commission’s March 21 proposed rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” but also recommending changes to the proposed initial compliance dates and to the threshold for the proposed footnote disclosure on climate-related metrics and impacts. Overall, CII supports the SEC’s proposed disclosure requirements on climate-related risks, Scope 1 and Scope 2 emissions, and Scope 3 emissions with certain accommodations for companies.
Among other changes, CII is urging the SEC to extend the compliance date for climate disclosure by at least one year. It supports the proposal to include financial footnote disclosure about climate-related metrics – but not the “bright-line” 1% threshold. Rather, CII supports a more traditional “reasonable investor” materiality test.
CII supports the provisions of the proposal that would require disclosure about board oversight of climate-related risks, the potential & actual impact of material climate-related risks, scenario analysis, and emissions disclosure. For Scope 3 emissions, CII suggests a liability safe harbor, an exemption for smaller companies, and other accommodations to ease the corporate compliance burden. The comment letter also suggests extending the compliance date for the proposed attestation requirement.
We are closely monitoring the proposal – and we’re wading through the practical disclosure & process implications so that you aren’t caught flat-footed when your directors and investors ask about your plan. If you haven’t already bookmarked the transcript from our April webcast with Sidley’s Sonia Barros, Travelers’ Yafit Cohn, NuStar Energy’s Mike Dillinger, and our own Dave Lynn & Lawrence Heim, head over there now. This conversation wasn’t just a review of the proposal – we discussed what you need to do now to prepare for final rules as well as investor demands.
If you aren’t already a member with access to that guidance, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com. Make sure to also check out our new membership resource, PracticalESG.com, for comprehensive & practical guidance to goal-set, measure & disclose progress on climate and other E&S issues.
On its “submitted comments” page, the SEC has recorded more than 8100 form letters in response to its climate disclosure proposal – plus a hefty number of bespoke, thoughtful letters. Lawrence has predicted that we’ll hit 10k before the extended June 17th deadline. I’ll owe him five bucks if he’s right!
Who’s with me on this wager? Please participate in this anonymous poll to share your guess of where we’ll end up:
The universal proxy rules go effective in only 3 short months – August 31st, 2022. A recent article from The Activist Investor explains how the rule could significantly decrease activists’ costs to conduct a proxy contest. That means that companies & boards will be facing more threats and more distractions, and navigating proxy contest responses in a dramatically altered landscape. Now is the time to prepare.
In our webcast earlier this year, Goodwin Proctor’s Sean Donohue, Gibson Dunn & Crutcher’s Eduardo Gallardo, Sidley Austin’s Kai Liekefett and Hogan Lovells’ Tiffany Posil suggested tactical steps that companies should take in advance of the compliance date. Make sure to take a spin through the transcript if you haven’t already. Kai also emphasized that:
“We have an entire business that is functioning as profession second guessers, and they will be coming for you once they see an opening. So, you need to get ready for it and the universal proxy is just another reason to get ready for shareholder activists.”
We’ve posted memos about the final rule in our “Proxy Cards” Practice Area, and we explained the steps that companies need to take to comply in the November-December ‘21 issue of The Corporate Counsel newsletter. More analysis is available in our “Proxy Fights” Practice Area on DealLawyers.com. John has also blogged about the difference between “proxy access” and “universal proxy” – a key point.
If you aren’t already a member of our sites, sign up now and take advantage of our “100-Day Promise” – During the first 100 days as an activated member, you may cancel for any reason and receive a full refund! You can sign up online, by calling 800-737-1271, or by emailing sales@ccrcorp.com.
The universal proxy rule will change tactics for activists & companies. The investor resource The Activist Investor is exploring the ramifications with a collection of articles and other information. In this article, Michael points out that the SEC rule doesn’t directly address the situation of multiple activists – leaving companies & challengers to sort that out in the trenches. He notes:
The rule is silent on the critical elements of how the UPC will apply to proxy contests with more than one activist investor. Without further guidance from the SEC, companies and activists may handle these situations in dramatically different ways.
We see three such critical elements:
– The proxy card contents and format
– Notifications among the activists and the company
– Reference in proxy statements to information about director nominees.
The article goes on to outline ways this might play out, in the absence of SEC guidance:
We can easily envision situations in which a company wishes to comply strictly with the SEC rule. If the SEC doesn’t require something, then (conveniently!) it won’t do it.
It might notify each activist only of the company’s nominees, since that’s all the rule requires. Each activist would then have an incomplete proxy card.
Or, a company may list all activist candidates together, alphabetically as the rule prescribes. This will likely confuse shareholders, and perhaps prompt them to vote for company nominees.
We can also envision situations in which one activist wishes to avoid ceding any advantage to another activist. Then, one activist might want to not list director nominees from another. Or, one activist might refer shareholders to proxy materials only for the company, and not for other activists.
This is just a start. Resourceful companies (and activists) can no doubt think of other ways that creative interpretation of the new rule will confound multiple activists that nominate director candidates at a company.
The SEC hasn’t given indications that it will provide additional guidance on this rule before the August 31st effective date. It may wait to see what issues actually materialize and how companies & activists respond. Remember that if you encounter a sticky situation, you can use our “Q&A Forum” to get thoughts from the securities law community.
