Author Archives: Liz Dunshee

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– Liz Dunshee

Looks like we can add “predictable proxy voting outcomes” to the list of things that Millennials are blamed for killing – along with doorbells, voicemail and the birth rate. Although the retail investor segment has exploded, there’s a chance it may not continue to deliver reliable support for management recommendations.

Recent changes to broker no-vote policies are partially responsible for this emerging issue – but it may also be due to the “eat the rich” mentality of recent stock market entrants. Last week’s “Investor Sentiment Study” from Broadridge & Engine Group found that over 60% of retail investors thought that companies they invest in should be taking active steps to improve E&S issues – and 46% of Millennial investors, the highest percentage of any generation, say they will vote their proxy this year. (For more details about retail voting trends & communications, see the Proxy Season Blog that Lynn ran for members earlier this week.)

This forthcoming article from LSU Law Prof. Christina Sautter and Monash (Australia) Law Prof. Sergio Gramitto Ricci explores whether this new generation of Millennial & Gen Z investors – who might come to stocks through online forums & gaming dynamics – will band together to pursue ESG voting initiatives. Here’s an excerpt:

If disintermediation and wireless investors reach a critical mass, wireless investors could cause a radical shift in the way corporations are run by exercising their aggregate power in shareholders’ meetings. If wireless investors are able to determine who sits on the board of directors and pick directors who have displayed an ESG record, the shift in the governance of corporations would be so deep-seated that the very purpose of the corporation would be impacted. After decades of debates on whether corporations should pursue any goals,but maximizing returns for share-holders, shareholders themselves would align the aim of a corporation with that of socially and environmentally conscious citizens. …

The wireless investors’ movement to make corporations serve people and the planet will also benefit from brokers no longer voting uninstructed shares. As brokers are transitioning out of voting uninstructed shares, unless shareholders express their votes, their shares will go unvoted. In fact, retail investors would not be able to rely on discretionary or proportionate voting by brokers. Discretionary voting involves brokers voting in line with board recommendations while with proportionate voting they vote uninstructed shares in proportion to how the broker was instructed by the other holders of those shares.351Hence, either they express their votes or they leave the corporation’s destiny in the hands of other unknown investors.

Furthermore, corporations risk failing to obtain quorums at shareholders’ meetings. In response, corporations might have to nurture their relations with retail investors and solicit them to vote, and retail investors would have an additional reason to internalize the frictional cost attached to inform themselves, possibly through online communication venues, and vote their shares. Compelled to stay informed and vote, other retail investors might vote with wireless investors and take part in the game-changing movement to make corporations serve people and the planet.

If this comes to pass, it could alleviate the voting apathy that others have recognized negatively impacts corporate governance, which companies have been trying to cure for many years through “swag bags” and donations. Prof. Sautter suggests that that gaming dynamics are a good thing because they’re making shareholder meetings more accessible – investors are even using gaming platforms like Twitch & Discord to communicate.

That said, a gaming approach to shareholder voting likely would terrify companies. The GameStop frenzy showed how difficult it is to control the “mob mentality” – and we wouldn’t be able to consult published voting policies to predict voting behaviors (although perhaps new advisory services would pop up). The Boadridge/Engine Group survey found that 43% of new market entrants are trading every week, so you can’t even predict whether they’re in your stock for the long haul! Similar to the “Clubhouse” trend that I wrote about a few weeks ago, this WSJ article says that some companies are getting ahead of the game by using social media channels to communicate with their retail holders.

Personally, my guess is that the retail revolution is still a ways off. I missed the Gen X cutoff by only a few days, so maybe I’m less idealistic – or less downtrodden? – than others in my assigned cohort. But I think institutional investors are going to do whatever they can to keep a lot of assets under their control. Profs. Ricci & Sautter suggest that big investors’ new emphasis on E&S could be one way to keep shareholders in their fold. This 2020 study – “Index Fund ESG Activism and the New Millennial Corporate Governance” – also makes that suggestion, and has been getting quite a bit of traction.

Cyber Disclosure: “Risk Ratings” Could Help Tell Your Story

Cyber issues continue to plague organizations big & small. Last week’s big pipeline shutdown due to a ransomwear attack on a privately held energy company emphasizes the need for boards to be paying attention. This Aon memo also suggests that cyber risk disclosures from public companies might get more detailed due to recent ISS QualityScore changes. The dilemma facing companies from a disclosure perspective is that, while investors need transparent disclosure to be able to assess risks, explaining technical shortcomings and incidents can also create a roadmap for the bad guys.

This 10-page report from NACD, Cyber Threat Alliance, IHS Markit, Security Scorecard and Diligent says that cyber-risk ratings could be the answer to that dilemma, because they’d convey information about threat levels without disclosing sensitive technical information. The report says that companies have been disclosing more info about board oversight of cyber risks and acknowledging vulnerabilities, but that recent events underscore the need for continued attention to this area. Here’s an excerpt:

In the wake of SolarWinds and the increased supply-chain security scrutiny in Washington DC, companies should be explaining to investors the specific risks they face from cybersecurity threats, including, among others, operational disruption, intellectual property theft, loss of sensitive client data, and fraud caused by business email compromises. Companies should also be explaining the categories of both technologies and processes they employ to mitigate those risks. Failure to do so is increasingly costly and is described by former SEC Commissioner Robert J. Jackson Jr. as “the most pressing issue in corporate governance today.”

In practice, businesses are slowly but unmistakably moving in the direction of increased transparency. This trend must continue for investors to begin deriving actionable value from cyber-risk disclosures. For example, certain companies are beginning to identify the specific technologies they are using in their program through their cyber-risk disclosures; others have started noting the materiality of their vendor risk exposure, to which regulators are paying particular attention in the aftermath of the 2020 SolarWinds attack. The next logical step is for these evolutions to converge.

Mark your calendars for our June 17th webcast – “Cyber, Data & Social: Getting in Front of Governance” – to hear VLP Law Group’s Melissa Krasnow, Lumen Worldwide Endeavors’ Lisa Beth Lentini Walker, Serna Social’s Sue Serna and Stroz Friedberg/Aon’s Heidi Wachs discuss unique governance challenges presented by cybersecurity, data privacy and social media and how it’s essential to proactively manage your risks, response plans and disclosure processes.

Transcript: “ESG Considerations in M&A”

We have posted the transcript for our recent DealLawyers.com webcast – “ESG Considerations in M&A.” This was a really excellent program and it’s worth perusing the remarks. Richard Massony of Hunton Andrews Kurth, Andrew Sherman of Seyfarth Shaw and Bela Zaslavsky of K&L Gates discussed:

1. Introduction to ESG Issues and Trends

2. ESG & Fiduciary Duties

3. ESG Opportunities in Transaction Financing

4. ESG Due Diligence and Risk Mitigation

5. Negotiating ESG-Related Deal Terms

6. Post-Closing Considerations

– Liz Dunshee

We’re in the midst of the first proxy season in which ISS is flagging companies that have no apparent racially or ethnically diverse directors – next year, they’ll start making adverse voting recommendations. Because companies aren’t required by SEC rules to disclose diversity characteristics, ISS has been urging companies to either include the info in proxy statements or provide it directly to the proxy advisor.

Now, in its recently updated “Policies & Procedures” FAQs, the proxy advisor has also explained how it’ll go about making ethnicity assessments if companies don’t volunteer the info:

Where definitive information is not disclosed, ISS classifies directors — largely along standards put forth by the U.S. Office of Management and Budget’s Directive 15 — by carefully assessing race and ethnicity through a variety of publicly available information sources. These include company investor relations websites, LinkedIn profiles, press releases, leading news sites, as well as through identifying affiliations between individuals and relevant associations and organizations focused on race and/or ethnicity, such as the Latino Corporate Directors Association.

The FAQs also list the ethnic & racial categories that ISS uses in its database, how each category is defined, and what qualifies as “diverse” under the voting policies. And, they clarify that ISS will recommend against nominating chairs of insufficiently “diverse” boards – even if that director is themselves from an under-represented community – because the voting recommendation is intended to convey dissatisfaction with the person’s action taken in that role, rather than as a call for the person to step off the board.

ISS seems to be devoting a lot of resources to making sure its diversity voting policies will be accurately applied – presumably for the benefit of its investor clients who find this information valuable. And although this blog from Keith Bishop raises the question of whether a company could face a securities law claim if its directors insincerely self-identify as a member of an under-represented group – practically speaking, companies who want to get a favorable ISS recommendation for their director elections would probably want to make diversity info easy to find.

Bitcoin: Beaten Back By Strongly Worded Statements?

The ETF and Bitcoin trends got a little closer to converging earlier this week, when Cboe filed an application with the SEC to serve as an exchange for a Bitcoin ETF that Fidelity wants to launch. But the next day, the SEC’s Investment Management Division issued a Staff Statement about mutual funds & Bitcoin futures that also touches on ETFs.

The Statement says that, sure, there could be some mutual funds that can invest in Bitcoin futures in a way that works under the Investment Company Act – but the Staff is going to be closely monitoring a bunch of technical compliance issues. Add this to the list of things being scrutinized, along with accounting treatment for SPAC warrants and companies’ climate disclosures. The Statement says the Staff will be welcoming further input on ETF compliance efforts, specifically.

The Staff statement didn’t appear to make much of a splash, maybe because the Commission has been crypto-skeptical for several years, and Chair Gensler has signaled that he supports investor protections in this space. Commissioner Peirce also tweeted along with the IM Statement that she hopes the SEC will get comfortable with investors having access to crypto-based securities products, so perhaps crypto supporters took heart from that. Staff Statements are also always carefully crafted to emphasize that they aren’t rulemaking or Commission-level guidance, and there’s no indication (yet) of an enforcement sweep.

Last night, SNL star and Technoking Elon Musk made bigger waves with his own strongly worded statement. He tweeted that Tesla would suspend vehicle purchases using Bitcoin until that currency’s mining transitions to more sustainable energy. This WSJ article explains why Bitcoin uses more energy than newer cryptocurrencies. Elon says Tesla still owns its pile of Bitcoin, he continues to believe in crypto, and he’s also looking at alternatives that use less energy. Many people have been wondering whether ESG would overtake crypto hype at some point – we could be in for a horse race.

ESG Assurances: Watching the Watchers

As the SEC & investors seek reliable ESG data, it’s looking more likely that they could start to expect some third-party assurance of those disclosures. It’s also looking like audit firms will most likely be the ones to provide that service. Lynn blogged recently about the CAQ’s roadmap for auditor attestation of ESG metrics – and Lawrence shared more color on PracticalESG.com about how this could work. XBRL initiatives are also in the works.

But how can we know that the assurances are accurate? Dan Goelzer, current SASB member and former Acting Chair and founding member of the PCAOB (among other high-profile roles), is also calling for an expansion of the PCAOB’s powers to include oversight of ESG metrics. He outlines that concept in article that he recently authored for the CPA Journal. Here’s an excerpt:

Expand the PCAOB’s mission beyond financial statement auditing. The PCAOB’s authority is over public company “audits,” defined in SOX as examinations of financial statements. Traditional financial reporting, however, is becoming a smaller part of the information that companies disclose and that investors utilize. For example, investors increasingly use non-GAAP measures and key performance indicators, along with traditional financial reporting, in investment decision making. Moreover, investors have become more focused on the risks and opportunities presented by external, nonfinancial factors that can affect a company’s long-term success or failure. This type of information is often referred to as ESG — environmental, social, and governance

As investors increasingly demand non-GAAP measures and ESG reporting, auditors are being called upon to provide assurance over these types of information. Congress should expand the PCAOB’s authority to ensure that, as auditors’ assurance over nontraditional information becomes more common and more critical to capital allocation, the board will have the ability to set standards and inspect this aspect of auditors’ work. information. Virtually all large companies make ESG disclosures, and most do so in a sustainability report.

At the end of March, the PCAOB announced the formation of a new 18-person “Standards Advisory Group.” The charter doesn’t expressly say that the SAG will weigh in on ESG-related services, but the group’s purpose is to advise the Board on “key initiatives” – including auditing & attestation standards. The group will consist of 5 investor representatives, 4 audit professionals, and 3 seats each for audit committee members, academics and others with specialized knowledge.

– Liz Dunshee

A lot of discussions are happening right now about board diversity – including what that means, how to achieve it, and who it benefits. This 25-page Glass Lewis report (available for download) acknowledges that these are nuanced issues. Here’s an excerpt:

Whether increasing gender diversity in boardrooms poses a benefit or a detriment to companies is a complex question. Increasing the number and influence of women on boards must involve recruiting uniquely qualified directors who bring a breadth of experience and insight to the board table. Companies operate in myriad industries and locations and have unique strategies, challenges, and opportunities. Simply adding women to the board for diversity’s sake and without careful consideration of qualifications and experience is unlikely to automatically effect any positive corporate change. However, we view a companies’ placement of women on boards as being representative of companies’ consideration of broader, and harder to measure, diversity.

Glass Lewis believes that diversity, in general, is a positive force for driving corporate performance, as qualified and committed directors with different backgrounds, experiences, and knowledge will likely enhance corporate performance. We believe that gender is just one, albeit important, aspect of diversity and boards should ensure that their directors, regardless of gender, possess the skills, knowledge, and experience that will drive corporate performance and enhance and protect shareholder value.

More on “Board Diversity: Does Diversity Enhance Shareholder Value?”

John blogged last month about a paper from Harvard Law Prof. Jesse Fried that questioned the empirical support for Nasdaq’s board diversity listing proposal. University of MN Law Prof. and former chief White House ethics lawyer Richard Painter has written up a thorough rebuttal. Here’s an excerpt from his CLS summary:

Fried cites only one study showing a slightly negative impact on stock price from gender diversity on corporate boards. This study uses a data set two decades old that did not include the financial crisis of 2008. The same study found that women board members are more effective in monitoring management. The authors of the study attributed the slightly negative impact of board gender diversity on stock price to a number of factors, including most notably the fact that excessive monitoring of management by board members may decrease shareholder value.

Had the data set included stock price performance in 2008 and 2009, the aftermath of the financial crisis, it might have shown different results given that insufficient monitoring for exposure to financial risk was at least partially responsible for destroying so much shareholder value during that period It is also ironic that many academics have been pushing for more monitoring of management by corporate directors, including Harvard’s shareholder rights project which aggressively campaigned for annual election of directors, only to see at least some of them get cold feet about the board monitoring function when directors happen to be women.

The original piece also said there was a negative market reaction to California’s board diversity statute and attributed that to investor hesitation about the benefits of diversity. Professor Painter pointed out that the reaction actually may have been in response to the very controversial & significant fact that the law was a departure from the internal affairs doctrine. That aspect of the law could have concerned investors who don’t want to move toward a model in which states can regulate the corporate aspects of companies headquartered within their borders, even if incorporated elsewhere.

Professor Painter also emphasizes that the Nasdaq rule is a “comply or explain” rule, and aimed at companies that are lagging behind market averages. He says:

Nasdaq chose the more flexible “comply or explain” option carefully, knowing that while studies on the impact of boardroom diversity on firm performance are not uniform in their conclusions, boardroom diversity is important to some investors, particularly institutional investors, and that disclosure of this information to investors is important. Nasdaq, unlike the California legislature, is also very much focused on shareholder value. Finally, the Nasdaq rule could discourage California and other states from moving further in the direction of intruding upon the internal affairs of corporations headquartered within their borders but incorporated elsewhere.

Board Gender Diversity: What About Women of Color?

All of this back & forth aside, due to investor demands and legislation, the makeup of boards is gradually evolving. A new report from the California Partners Project updates earlier stats on board composition. While the report doesn’t delve in to all different aspects of diversity, it suggests that most of the gains right now are coming in the form of directors who are part of a single underrepresented group – e.g., white women – versus those whose identities intersect with multiple underrepresented communities – e.g., women of color. Here are some takeaways:

In the two years before California’s board gender diversity statute – SB 826 – was enacted, just 208 corporate board seats were newly filled by women. In the two years since, that number grew to 739. And in the first quarter of 2021, women filled 45% of public company board appointments in California, an indicator that women’s representation on boards is on the rise.

Although women now hold 26.5% of California’s public company board seats, only 6.6% of board seats are held by women of color, even though females of color comprise 32% of our state’s population. When it comes to Latinas, the disparity is truly shocking. Latinas make up more than 19% of California’s population and Latinos comprise over 37% of California’s workforce, yet Latinas hold only 1% of the seats on California’s public company boards.

Pages 20-24 of the report suggest strategies to further diversify boards – expand where you’re looking for candidates, expand your definition of “qualified,” take seriously the risks of homogeneous thinking, and prioritize different backgrounds over getting a “cultural fit.” See this Cooley blog for more info about the report and related topics.

– Liz Dunshee

Last week, the House Financial Services Committee heard testimony from new SEC Chair Gary Gensler about January’s market volatility. Here’s an excerpt from his prepared remarks (also see this 18-page CII Research report from last week):

As we work to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, I’d like to highlight seven factors that were at play in these volatile events:

1. Gamification and User Experience

2. Payment for Order Flow

3. Equity Market Structure

4. Short Selling and Market Transparency

5. Social Media

6. Market “Plumbing”: Clearance and Settlement

7. System-Wide Risks

We expect to publish a staff report assessing the market events over the summer. While I cannot comment on ongoing examination and enforcement matters, SEC staff is vigorously reviewing these events for any violations. I also have directed staff to consider whether expanded enforcement mechanisms are necessary.

Stonks’ Silver Lining: Same-Day Settlement?

In his remarks to the House Financial Services Committee, Chair Gensler said the two-day settlement cycle was partially to blame for the trading freeze-out that some investors experienced at the height of the “GameStonk” market frenzy. Here’s an excerpt about that:

The longer it takes for a trade to settle, the more risk our markets assume. The good news is, though it will take a lot of work by many parties, we now have the technology to further shorten the settlement cycles, not only to the settlement cycle we had a century ago, but even to same-day settlement (T-0 or “T-evening”).

I believe shortening the standard settlement cycle could reduce costs and risks in our markets. I’ve directed the SEC staff to put together a draft proposal for the Commission’s review on this topic.

Chair Gensler isn’t the first or only person to raise this possibility. CII’s Research & Education Fund suggested in a paper last week that slow settlement times were a potential contributor to the GameStop frenzy. And although it was only 4 years ago that the SEC said “hasta la vista” to T+3 settlement, former SEC Commissioner Michael Piwowar – who was an enthusiastic supporter of that 2017 rule change – also argued in a February WSJ op-ed that the 2-day settlement period is now past its prime.

DTCC then issued this 14-page whitepaper to identify steps necessary to move toward a T+1 settlement period – by 2023. DTCC says:

We believe the opportunity exists to accelerate the settlement cycle and optimize the process further, to T+1, T+1/2 or someday, even netted T+0, in which trades are netted and settled at the end of the same trading day.

DTCC goes on to say that real-time settlement is unlikely. It would put market makers in the very tricky position of having to see into the future and know what their net obligations will be at the end of each day, and have enough shares or dollars to meet those obligations. They’d basically have to change all of their processes and move to a transaction-by-transaction system. Last week, the Investment Company Institute (ICI), the Securities Industry and Financial Markets Association (SIFMA), and DTCC issued this follow-up FAQ to reiterate what needs to be done to accelerate the settlement cycle, and why T+0 isn’t feasible for all trades. But with Chair Gensler’s remarks, they could be taking a closer look at those obstacles.

In addition, DTC might be facing some competition. Paxos Trust Company announced that it’s already using blockchain technology to achieve same-day settlement for some equity trades. Paxos has also applied for full clearing-agency registration with the SEC and hopes to be approved sometime this year.

If and when a shorter settlement cycle arrives, it’ll have the most impact on broker-dealer obligations. The 2017 amendments didn’t change the settlement cycle for securities sold in most cash-only, firm commitment underwritten offerings – as explained in this Skadden memo at the time – and settlement on public offerings is still all over the place. While most deals are at T+3 or even T+4, some debt issuers want to push out settlement even further so that interest doesn’t start accruing.

Tomorrow’s Webcast: “Capital Markets 2021”

The capital markets have been a wild ride lately! Tune in tomorrow for our webcast: “Capital Markets 2021” – to hear Katherine Blair of Manatt, Phelps & Phillips, Sophia Hudson of Kirkland & Ellis and Jay Knight of Bass, Berry & Sims discuss what 2021 has in store for companies looking to access the capital markets, including discussion of financing alternatives. This webcast is available to members of TheCorporateCounsel.net as well as members of DealLawyers.com – you can tune in on either site!

We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.

No registration is necessary – and there is no cost – for this webcast for our members. If you are not a member, sign-up now to access the programs. You can sign up online, send us an email at info@ccrcorp.com – or call us at 800.737.1271.

– Liz Dunshee

Over the years, the SEC’s Accounting leaders have used the Baruch College Financial Reporting Conference to message disclosure review initiatives, such as the non-GAAP review that happened in 2016. At last week’s conference, Corp Fin’s Chief Accountant Lindsay McCord warned that the Staff is scrutinizing how companies account for climate-related risks & impacts based on accounting rules. This blog from Cooley’s Cydney Posner has more details (also see this Accounting Today article):

According to McCord, as they conduct reviews of SEC filings, the staff will consider the impact of environmental matters in the application of current accounting standards, such as the standards for asset retirement, environmental obligations and loss contingencies. In that regard, at the same conference, Acting SEC Chief Accountant Paul Munter referred the audience to FASB guidance, issued in March, regarding the intersection of ESG and financial accounting standards, which addresses accounting as well as management disclosures.

The FASB guidance gives examples of how GAAP can intersect with ESG – e.g., going concern evaluations, risks & uncertainities disclosures, inventory issues, impairments, contingencies, and tax estimates. Page 48 of this slide deck from the conference walks through how the finance function fits in to ESG governance & controls – from data collection, to data controls, to reporting know-how. It notes that assurance over non-financial reporting is slowly increasing (see the internal controls resources in our “ESG” Practice Area).

In light of how these remarks build on February’s directive to the Corp Fin Staff to scrutinize climate change disclosures, it’s a good idea to loop in your financial reporting team on your climate disclosures. SEC Chair Gary Gensler also said last week before the House Financial Services Committee that the Commission would likely propose disclosure rules later this year.

Say-on-Pay: The Reckoning Continues

I’ve been blogging about this year’s unprecedented say-on-pay results on CompensationStandards.com. Here’s the latest entry, from last week:

Wow. This Semler Brossy memo recounts say-on-pay results through April 29th. Three takeaways jump out:

– The current failure rate (4.2%) is 2x higher than the failure rate at this time last year (2.1%); however, it is still early in the season and we will monitor whether the failure rate remains at an elevated level following annual meetings for the 12/31 FYE filers

– 13.6% of companies thus far have received an “Against” recommendation from ISS, which is nearly as high as any full-year “Against” rate observed since 2011

– The average vote results of 89.0% for the Russell 3000 and 87.1% for the S&P 500 thus far in 2021 are well below the average vote results at this time last year

At least three more failures rolled in since this memo was published. Here’s a WSJ article about two of them, and one company’s comp committee members also faced a “vote no” campaign for approving mid-stream changes to the CEO’s inducement grant. Diving into company-by-company results underscores what an unusual season this is, because there also have been several high-profile votes at which say-on-pay technically passed, but received less than 70% approval.

Coming in below the 70% level is dangerous because ISS will recommend against comp committee members next year if it doesn’t feel the board adequately responds to shareholders’ pay concerns. Moreover, a low say-on-pay vote can be “blood in the water” for activists.

If you haven’t held your meeting, keep up your engagements. Some companies are even filing additional soliciting material to encourage positive votes. We could be seeing a lot of changes to comp plans next year…

More on “Tweaks to NYSE’s Related Party Transaction Rule”: Are You Amending Your Policy?

Lynn blogged about recent amendments to the NYSE Listed Company Manual that would decouple NYSE pre-approval requirements for related party transactions from the $120,000 threshold in Item 404 of Regulation S-K. A few members have asked whether other NYSE-listed companies are amending their policies in light of this change. Please participate in this anonymous poll to help your fellow corporate secretaries decide what to do:

– Liz Dunshee

The retail segment of shareholders had been holding steady around 30% the last couple of years, well below the 85% levels of the 1960s, before the dawn of huge asset managers. But now we’re in the age of stonks – and no-fee trading platforms. Although some are noticing that retail trading is slowing, there’s no denying that the number of retail accounts has swelled in the last year. Kris Veaco wrote me last week to say that it’s the fastest growing group of investors – some proxy intermediaries have noticed an uptick of 50% in email accounts compared to last year!

As I’ve noted a couple of times on our Proxy Season Blog, companies need to anticipate higher proxy distribution costs if they’ve seen a jump in retail holders. You may also need to brace yourselves for less predictable voting outcomes – especially with TD Ameritrade’s elimination of broker discretionary voting.

But there’s also an opportunity here – retail investors can be long-term, loyal supporters of management, and may also be enthusiastic participants in capital raises. This NYT article reports that some companies are rolling out the red carpet to welcome them – even changing the earnings release process to allow for more interaction with individuals. Here’s an excerpt (also see this Axios article):

After CarParts.com reported its quarterly results last month, executives at the company, which sells replacement auto parts, did what many of their ilk do: They held a conference call with Wall Street analysts, fielding questions about inventory levels, profit margins and corporate strategy.

Roughly 30 minutes later, the same executives were on Clubhouse, hosting an entirely different kind of audience. Their 2,000 or so guests had gathered at the buzzy online meeting spot to learn about the company. Their questions were far more straightforward. How did the business work? Why was CarParts.com able to offer lower prices than brick-and-mortar rivals? Were CarParts.com shares worth buying?

CarParts.com isn’t the only company to do this – Restaurant Brands International also invited “customers & guests” to discuss Q4 earnings with its leaders on Clubhouse, and other companies are using podcasts and YouTube to reach the retail audience. Tesla has also been using the interactive “Say” platform for earnings calls for a while now – I blogged a couple of years ago about the impact that was having on the Q&A portion of the call.

The thought of extra conversations with different groups of investors makes me a little skittish – but as long as execs comply with Reg FD, it seems like it’s probably fine to do. Please correct me if you disagree!

New Director of SEC Enforcement: Alex Oh

Yesterday, the SEC announced that Alex Oh has been appointed Director of the Division of Enforcement. Alex was most recently a partner at Paul, Weiss – where she co-chaired the firm’s Anti-Corruption & FCPA Practice Group and had an extensive pro bono practice. She also has prior experience as an AUSA in the Criminal Division of the U.S. Attorney’s Office for the Southern District of New York, where she was a member of the Securities & Commodities Fraud Task Force and the Major Crimes Unit.

PracticalESG.com: Thank You – And More Trees!

I want to give a huge “thank you” to those of you who subscribed to our new practicalESG.com blog on its very first day – we are so excited to begin this journey with you.

Our Earth Day launch offer of planting a tree for the first 422 subscribers was way more popular than we anticipated! We actually ran out of the allotted trees.

So we got more. Now, the first 1000 subscribers will have a tree planted on their behalf! Click here for your subscription and tree.

– Liz Dunshee

PracticalESG.com is here! To celebrate our Earth Day launch, we’re planting a tree in the name of the first 422 people who sign up to receive the free practicalESG.com blog in their inbox. Sign up now and get your honorary tree!

As I blogged a few weeks ago, I’m thrilled that Lawrence Heim has joined our team to lead this new ESG platform. With Lawrence being a longtime ESG professional, you’ll be able to use his daily updates and more than 30 years of experience to get practice pointers and real talk on developments that affect your sustainability programs – including how to manage ESG data tracking and reporting.

Eventually, practicalESG.com will be home to membership-based portals that take a deeper dive into environmental, social & governance issues. We’ll be unveiling those features in the coming months, and of course we’ll also continue to cover corporate governance, proxy season issues and SEC rulemaking here on TheCorporateCounsel.net

Remember, help us celebrate by signing up for Lawrence’s free daily blog and getting a tree planted in your name!

More on “Senate Confirms Gary Gensler as SEC Chair”

Lynn blogged last week that the Senate had confirmed Gary Gensler’s nomination as the next SEC chair. He’s now been sworn in, meaning all 5 Commissioners are now in place! And while the original confirmation ran only through June 5th of this year, the Senate has now also approved (54-45) his nomination for the succeeding 5-year term that ends June 5th, 2026.

Transcript: “Shareholders Speak: How This Year’s Expectations Are Different”

We’ve posted the transcript for our recent webcast: “Shareholders Speak: How This Year’s Expectations Are Different.” If you’re gearing up for your annual meeting – or shareholder engagements – you’ll want to check this out. Sustainable Governance Partners’ Rob Main led a program with Yumi Narita of the Office of the NYC Comptroller, Ryan Nowicki of State Street Global Advisors, and Danielle Sugarman of BlackRock. Among the topics covered:

– Key 2021 Priorities

– Voting Expectations

– Changes to In-Season Engagements

– Liz Dunshee

On Friday afternoon, the SEC announced that it voted to reopen the comment period for the 2016 “universal proxy” proposal – which would amend Schedule 14A and related rules to require the use of a single proxy card in all non-exempt solicitations for contested director elections.

Last summer, it looked like this rule was nearing the finish line – and Acting SEC Chair Allison Herren Lee noted just last month that it was still on the near-term agenda. But – and this might be the greatest understatement to ever appear in this blog – a lot has happened since these amendments were proposed in October 2016. The 15-page reopening release says that the Commission wants more input in light of corporate governance developments that could affect how universal proxy cards work, such as:

– There have been several contests where one or both parties have used a universal proxy card

– Increased adoption of proxy access bylaws

– Use of virtual shareholder meetings

– New forms of advance notice bylaws that require dissident nominees to consent to being named in the company’s proxy statement and on its proxy card

The release identifies 25 topics on which the Commission would appreciate input – about half relate to fund-specific issues. The formal comment period will be open for 30 days after the release is published in the Federal Register, which often takes about a month. Here are all the comments submitted to-date. For even more background, see this Cooley blog.

The SPAC Bubble Is Leaking

The SEC’s recent scrutiny of SPACs (which we’ve blogged about repeatedly) appears to be sidelining some deals. According to this WSJ article, there were only 12 SPAC offerings in the past 3 weeks. That compares to about 25 per week from January – March!

Last week, the CII Research & Education Fund also released this 17-page memo to investors. While it doesn’t expressly advocate against the SPAC model of going public, it does identify several reasons why the SPAC/de-SPAC process is particularly risky.

The memo notes that at particular risk are SPAC investors who elect not to redeem their shares in the de-SPAC transaction, especially if the combined company adopts weak shareholder rights provisions – like a dual-class share structure. It suggests that these investors may be better off by either selling or redeeming before the de-SPAC, or by negotiating a favorable subscription through a PIPE.

Although the memo is aimed at investors, it’ll also be helpful to companies and advisors who are considering SPAC deals. Not only does it foreshadow investor demands that could be coming in the future, it also examines & pokes holes in some perceived SPAC benefits. Here are a couple that caught my eye:

Speed to Market: From the standpoint of the private company entering the public markets through a de-SPAC, the process is sometimes touted for beingfaster than a traditional IPO. But is that speed meaningful, and does that speed benefit investors? The typical timeline for a de-SPAC is 10 weeks, while a traditional IPO usually takes 19 weeks, but preparation for IPOs tends to extend this difference. Investors should be aware that a speedier time frame may attract a pool of operating companies that is disproportionately focused on capitalizing on a hot market, a hot sector or “short-term fads.”

Underwriting Costs: Underwriting fees for SPAC IPOs are based on a percentage of the proceeds raised, as with traditional IPOs. However, it is important to keep in mind that due to a SPAC’s redemption phase, cash raised can be different from cash received. The nominal fee percentage is often lower for SPACs than the usual 7% fee for traditional IPOs. It is unusual for SPAC underwriting fees to be adjusted for redemptions at the time of the de-SPAC. Without adjustment, that “attractive” 5% underwriting fee with a redemption rate of 50% is the equivalent of the merged company paying 10%.

Voting Statements: Can Anything Be “Non-Partisan”?

As I blogged a few months ago, businesses are now the most trusted institution in society. Unfortunately, that also means that 86% of people now expect CEOs to speak out on social challenges. Last week, hundreds of executives, companies, law firms and non-profits did just that – by signing their names to this 2-page ad in the WaPo and NYT.

The statement at the top of the ad is only 8 lines long and speaks of the importance of democracy. The two lines that drew the most attention (and were reportedly the most difficult to agree upon) were:

We all should feel a responsibility to defend the right to vote and to oppose any discriminatory legislation or measures that restrict or prevent any eligible voter from having an equal and fair opportunity to cast a ballot.

Voting is the lifeblood of our democracy and we call upon all Americans to join us in taking a nonpartisan stand for this most basic and fundamental right of all Americans.

Of course, the statement and the reporting on it was immediately criticized as partisan. People were looking to see whether or not their employers and local companies had signed, etc. I’ve been waiting for a statement from the Center for Political Accountability – haven’t seen one yet – about whether and how they’ll use companies’ endorsement/lack of endorsement in political spending proposals. (As this ICCR release notes, 81 institutional investors did send a statement on the risks of political spending to members of the Business Roundtable back in February.)

What’s clear is that this type of thing is very difficult for companies and their leaders to navigate. You’re bound to anger some people regardless of what you say. You’re bound to anger some people if you remain silent (contrary to some opinions that that’s typically the safer choice). And then, whatever choice you make is viewed through a lens of suspicion. Are you grandstanding? Who are you trying to appeal to? Have you said or done anything contradictory in the past?

This Perkins Coie memo outlines a framework for deciding when to speak out. It also lists a few factors that could trigger lobbying or ethics rules that you need to watch out for:

– Is the topic in which the company is engaging related to an election or ballot measure? If yes, the laws in many jurisdictions limit election-related activity but do not bar it entirely. For example, federal law provides corporations a number of opportunities to engage in voter registration, get out the vote, and other civic engagement activities as long as they do so on a nonpartisan basis. (Federal Election Commission regulations have specific requirements for what counts as nonpartisan in this context.)

– If the company is speaking out on legislation, is the bill still pending, or has the bill been passed and signed into law? Speaking out about a bill that has already been enacted will rarely be regulated (though companies will also have to weigh whether such after-the-fact statements are effective in addressing their strategic goals).

– If the legislation is still pending, does the communication or other activity include a call to action? A call to action is a statement urging employees, customers, or members of the public to contact their government official to support or oppose legislation or some other government action. Some jurisdictions do not regulate statements that don’t include a call to action.

– If the legislation is still pending, is the company paying to promote the communication in any way, such as by taking out a print or digital ad campaign or paying to boost social media posts? Some jurisdictions treat paid and unpaid content differently for ethics and compliance purposes.

At a bigger-picture level, this Korn Ferry memo makes the case that defining core values is now more important than ever. It sounds a little “woo-woo,” but clear values can give you something to lean on and return to when a novel issue arises. The devil’s in the details, though, because you have to make sure these values are consistently applied, and consistently articulated internally & externally. And while CEOs may have their own personal values that drive decisions, remember that CEO tenure averages about 7 years. Company values should be tied more to stakeholders than who is currently at the helm.

It’s also important to note that, at least for now, shareholders don’t appear to be making buy/sell decisions based on the statement or the ensuing commentary. This Economist article points out that after the ad was published, stocks performed almost identically for companies that did and didn’t sign.

– Liz Dunshee

I’m thrilled to announce that Lawrence Heim has joined our team – and will be leading the charge on our upcoming launch of a new sustainability/E&S platform! With the plethora of ESG ratings models & reporting frameworks, and what feels like a rapid but uncertain move towards new regulations, one of the hardest things about this exploding practice area is being able to cut through the deluge of information & gobbledygook. You need to know which developments matter – and what you actually need to be doing to gather E&S data and report on progress & risks. Lawrence is here to break that down for all of us.

Lawrence is going to be sharing insights & tips based on over 35 years of experience in ESG management. He’s been in the trenches to evaluate supply chains & environmental risks, he sits on the board of ASSET (a non-profit anti-slavery organization), and he wrote the book “Killing Sustainability.” Back when the conflict minerals rules were under consideration, he was the only non-financial auditor selected to give testimony to the SEC. You might also recognize his name from our webcasts over the years.

Lawrence understands the players in this space and how multi-disciplinary ESG teams can work together to make real progress and avoid risks. One of Lawrence’s early professional highlights was saving a major petroleum refinery $150 million through a unique waste management regulatory strategy. He built on that experience to help create the Global Environmental Risk Consulting Practice at Marsh and to support clients in environmental, health & safety compliance and management for many years at Elm Sustainability Partners. Most recently, Lawrence led development of supply chain due diligence standards at the Responsible Business Alliance/Responsible Minerals Initiative.

When we launch our new sites, we’ll be able to give more in-depth & practical coverage to the wide range of E&S topics that you’re grappling with – tailored to the corporate counsel and sustainability officer perspectives. We’ll continue to cover the “G” here on TheCorporateCounsel.net. We’ll also continue to act as a “hub” in our network of ESG experts, so always feel free to reach out with questions or topics that you want to see covered – or practice pointers that you want to share.

This has been in the works for a while and I’ve been dying to share the news with all of you. So, consider this the “preliminary announcement,” with more details coming soon about how you can sign up for Lawrence’s blogs and the new resources. In the meantime, Lawrence is going to be running a few blogs here on TheCorporateCounsel.net, starting today, so that you can get to know him! You can also contact him via email – lheim@ccrcorp.com.

– Liz Dunshee

Principle Responsibility

Last Thursday (April 1), Responsible Investor wrote about an initiative intended to stem proliferation of new ESG codes/principles, or at least encourage collaboration between existing frameworks. According to the article, the “Principles for Responsible Principles” were launched due to:

“… concern that the growing number of voluntary codes creates a reputational risk for the better known and more established sets of responsible principles if their numbers continue to proliferate unchecked.”

The program contains five main points that “reflect those of similar initiatives and aim to create self-regulation within a sector that lacks clear KPIs.” Details are here, but if you want to skip that I can quickly summarize it thusly: pay attention to the date of publication.

Yes, I fell for it. No, none of my colleagues did.

To many ESG practitioners, this prank brings an uncomfortable grin because we painfully recognize the truth therein. And with that, my new career I begin. Inauspiciously.

Want to Get Ahead on ESG Data Quality? Internal Audit Is Your Not-So-Secret Weapon

Last month, Doug Hileman published this white paper on Internal Audit’s role in corporate ESG programs. Among Doug’s rather stark findings:

– 44% of respondent companies indicated a “complete commitment” to ESG, yet 25% don’t know where the ESG function “lives”

– 44% of respondents had not performed any internal audits of ESG topics in the past 5 years

– Another 36% didn’t know if any internal audits performed in the past 5 years included ESG topics

– Diversity & inclusion was identified as the top material ESG topic (44%). Supply chain ESG risks garnered exactly zero votes.

The results are based on polling at the Institute of Internal Auditing (IIA) March 2021 Los Angeles conference, so it’s not too surprising that this cohort would think they should be more involved with anything that could border on a compliance issue. Nor is it surprising that there’s some reluctance to add this layer of review to voluntary disclosures. In fact, it’s consistent with my own experience.

But, my humble prediction is that the absence of internal audit from ESG data gathering, evaluation & disclosure is going to start raising alarm bells very soon. Now’s the time to get ahead by starting to involve your own team, if you haven’t done so already. Much rides on ESG information quality these days: investors make decisions/issue guidance on it, media outlets write about it and the Biden administration has made clear that regulatory actions and enforcement will be taken based on it. With so much at stake, it’s only a matter of time before companies will be expected to have more stringent internal controls over this non-financial information – or face reputational & litigation risks for inaccurate disclosure.

Some simple steps for bringing Internal Audit to the ESG party:

– Have IA include internal environmental and social responsibility experts in audits. Blended teams merge IA’s governance and controls expertise and the E&S technical subject matter knowledge.

– Ensure established audit procedures are understood and followed by the blended team – especially evidence sampling methodologies. IA may be concerned about the amount of in scope E&S data and E&S staff may not understand controls testing. E&S staff can filter E&S data/evidence for technical appropriateness and IA can ensure evidence sufficiency.

– Recognize that there are risks with industry collaborative supplier ESG audit programs and certifications. IA needs to understand how these programs produce audit results on which companies rely and disclose to customers, the public and increasingly – regulators.

– Lawrence Heim