Author Archives: Liz Dunshee

To the jubilation of proxy statement drafters and voting tabulators everywhere, late last week, the SEC gave notice of an NYSE proposal to amend the definition of “votes cast” for items that require shareholder approval under NYSE Rule 312.07 (e.g., equity compensation plans, certain stock issuances). This White & Case memo explains (also see this Cooley blog):

The NYSE’s proposal would amend Section 312.07 of the NYSE Listed Company Manual to provide that a company must calculate “votes cast” on a proposal subject to that section “in accordance with its own governing documents and any applicable state law.”

Effectively, this means that the NYSE would change its current policy of requiring companies to count abstentions as votes “against” a proposal subject to NYSE rules – even when applicable state law would consider abstentions to have no effect on the outcome of the vote. The Exchange has observed that its current policy has historically caused confusion among listed companies, and the Exchange believes that this rule change will avoid any complications among issuers and shareholders when different voting standards are applied under the NYSE rule, a company’s governing documents, and/or applicable state laws. The rule change will also result in NYSE being consistent with Nasdaq in their treatment of abstentions.

The memo cautions that even if this rule change is approved, you’ll still have to carefully review disclosure about voting standards and ensure votes are properly tabulated in light of numerous standards under state law and companies’ governing documents.

There’s a 21-day comment period for the proposal, and the SEC will either approve or disapprove of the rule change within 45 days of publication in the Federal Register.

– Liz Dunshee

Here’s the intro from this Allen Matkins blog:

California Superior Court Judge Maureen Duffy-Lewis issued her ruling on September 28th on the parties’ respective motions for summary judgment in Crest v. Padilla (Cal. Super. Ct. Case No. 19STCV27561). In this case, the plaintiffs are seeking a judgment declaring that any and all expenditures of taxpayer funds to enforce and carry out the provisions of California’s female director quota law (SB 826) are illegal. SB 826 is codified at Sections 301.3 and 2115.5 of the California Corporations Code.

The basis for the plaintiffs’ claim is Art. I, Section 31 of the California Constitution which forbids the state from discriminating against, or granting preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.

Judge Duffy-Lewis denied both motions on the grounds that there are triable issues of material facts. While the fundamental question presented by the case appears to be legal, the ruling notes that each side provided with their moving papers “substantial amounts of extrinsic evidence” and that each side disputed facts presented by the other.

As this Cooley blog reports, Crest v. Padilla was the first complaint filed against California’s board gender diversity law, back in 2019. It’s framed as a “taxpayer suit.” There are several pending challenges to SB 826, as well as AB 979, which is the California statute that requires representation on boards from underrepresented communities.

– Liz Dunshee

On Friday, ISS announced the results of its 2021 benchmark policy survey. 159 investors responded – as well as 246 companies, directors, advisors and other company-related folks. Here are some of the highlights (see my blog on CompensationStandards.com for details about ESG metrics and other exec comp-related findings):

1. Racial Equity Audits: The survey evidences a philosophical split on these proposals. Almost half of investors chose “most companies would benefit” and almost half chose “it depends on company-specific factors.” About a tenth of investor respondents chose that most companies would not benefit from an independent racial equity audit. That percentage was higher for non-investor respondents. The case-by-case analysis approach was by far the most popular answer for non-investor respondents. Investors & companies said that involvement in controversies was a factor that could merit a recommendation in favor of a racial equity audit proposal.

2. Virtual-Only Meetings: When asked which practices would be considered problematic related to a company’s virtual-only meeting, the top three most concerning practices according to investor respondents were management unreasonably curating questions, the inability to ask live questions at the meeting, and question and answer opportunities not provided. Each of these practices were considered problematic by at least 90 percent of investors. The majority of investor respondents indicated that problematic practices related to virtual meetings could warrant votes against directors.

3. Pre-2015 Poor Governance Provisions: As time goes by, there’s less of a reason to distinguish between companies that went public prior to 2015 and were allowed to continue “poor governance provisions” – such as multi-class shares, supermajority voting requirements, and classified boards – and those that have gone public since then. A high percentage of investor respondents supported ISS revisiting this policy and considering issuing adverse director recommendations at any company that maintains these poor governance provisions. A little over half of non-investors answered the same way.

4. Recurring Adverse Director Recommendations: ISS’ current policy is to recommend against director nominees every year while certain poor governance provisions – such as supermajority vote requirements – are maintained. In some cases, the company has sought shareholder approval to eliminate supermajority vote requirements, but the proposal has failed (because it is hard to get the supermajority support). On this question, the most popular answer indicated by investors was for ISS to continue to recommend against directors every year there is not a management proposal on the ballot to reduce the supermajority vote requirement.

The most popular answer choice among non-investors was that a single try by the company to get shareholder support for a provision to remove the supermajority standard is enough. The second most popular choice among investor respondents was that if a company has tried and failed for several years to eliminate the supermajority vote requirement, ISS should stop recommending against directors. When asked how many years the company should offer the proposal, three years was the most popular answer choice.

5. SPACs & Proposals with Conditional Poor Governance Provisions: Current ISS policy is to evaluate SPAC transactions (business combination with a target company) on a case-by-case basis, with one of the main drivers being the market price relative to the redemption value. However, due to the mechanics of SPACs and considering SPAC investor voting practices over recent years, ISS is considering changing its policy to generally favor supporting the transaction. Responses on the survey showed that most institutional investors did not own SPACs. Among those who did, the response was split, but a preference not to change ISS’s policy received a slightly higher response.

ISS noted that it was seeing instances where shareholders were asked to approve a new governing charter with poor governance or structural features as a condition for a transaction to close. The proxy statements will commonly state that these closing conditions may be “waived” by the parties to the transaction if they are not approved by shareholders, but there is the risk that waiving the provisions would jeopardize the transaction. When asked what the best course of action was in this case, a strong majority of both investors and non-investors responded that ISS’s current policy was the right way forward: to support the transaction but make note of disapproval with any poor governance provisions.

Don’t miss our “Navigating ISS & Glass Lewis” panel coming up next Thursday, October 14th, at our virtual “Proxy Disclosure & Executive Compensation Conferences” – which runs October 13th – 15th. We’ll be discussing policy expectations, engagement do’s & don’ts, and more. You can still register – and anyone who has a paid subscription to any one of our sites gets a discount! Check out the agenda – 18 panels over 3 days.

– Liz Dunshee

As I blogged a few months ago on our Proxy Season Blog, this year ISS also conducted a separate policy survey about climate-related matters. The proxy advisor announced the results of that survey on Friday as well. 164 investors responded, along with 152 companies, advisors and affiliates. Here are the takeaways:

1. Climate-Related Board Accountability: A significant majority of all categories of respondents expect a company that is considered to be a strong contributor to climate change to be providing clear and detailed disclosure, such as according to the Task Force on Climate-related Financial Disclosures. A smaller majority of investor respondents support all of the criteria listed except “medium-term Scope 1 & 2 targets” and “starting to show a declining trend in absolute GHG emissions.”

Other than detailed disclosure, the other criteria that were popular among investors were demonstrating improvement in disclosure and performance, declaring a long-term ambition to be in line with Paris Agreement goals, disclosing a strategy and capital expenditure program in line with Paris goals, and showing that its corporate and trade association lobbying activities are in line with Paris goals.

The comments by investors were strongly supportive of companies’ setting goals in line with the more stringent 1.5 degrees of warming limit than the “well below 2 degrees” target that was in the Paris Agreement as it was adopted in 2016. Corporate responders also were strongly supportive of disclosure and demonstrating improvement, although support drops precipitously for ambition and targets in line with Paris goals.

2. Easier Expectations for Some Companies: Regarding the question about whether companies not deemed to be strongly contributing to climate change should be held to similar standards as those that do, one-third of investor respondents and a majority of non-profit respondents preferred to see minimum expectations the same regardless of company contribution to climate change, but the most common response by investors and corporate responders was that there should be some level of expectations but that they should be lower.

3. Say-on-Climate – Management Proposals: As ISS looks to further develop its framework for analyzing climate transition plans presented by companies, the dealbreakers indicated by investor respondents were similar to the responses about board climate accountability. The top five dealbreakers for investor respondents were a lack of the following: detailed disclosures (such as according to the TCFD framework), a long-term ambition to be aligned with Paris-type goals, a strategy and capital expenditure program, reporting on lobbying aligned with Paris goals, and a trend of improvement on climate-related disclosures and performance.

4. Climate Transition Plans – Vote Targeting: The highest numbers of both investors and non-investors who responded answered that, when a climate transition plan is on the ballot, they considered that the plan is the primary place to vote to express sentiment about the adequacy of climate risk mitigation but that escalation to votes against directors may be warranted in future years if there is multi-year dissatisfaction.

5. Say-on-Climate – Shareholder Proposals: Responses to the question about when Say-on-Climate shareholder proposals requesting a regular advisory vote on a company’s climate transition plan would warrant shareholder support, the answers reflected a split in sentiment. The answer with the highest support from investors was “Always: even if the board is managing climate risk effectively, a shareholder vote tests the efficacy of the company’s approach and promotes positive dialogue between the company and its shareholders.”

However, just a little below that for investors but the most frequent response from corporate respondents was that it should be case-specific and would be warranted only when the company’s climate transition plan or reporting fell short. Fourteen percent of investor respondents answered such a proposal never warranted support and preferred voting directly against directors if the company was not adequately managing climate risk. Just over thirty percent of corporate respondents answered that a shareholder Say on Climate was never warranted because it was a matter for the company to decide.

This was a global survey – 18% of the responding investors were US-based. As I’ve blogged, US-based investors seem less gung-ho about shareholder say-on-climate proposals, due to a concern that these proposals will insulate directors and slow down change. Geography may be driving some of the split on that question, but the survey doesn’t delve into that level of detail.

The survey also includes responses that affect ISS’s specialty climate voting policy. There appears to be consensus that high-impact companies should be subject to more stringent evaluations. Most respondents favored the policy assessing a company’s alignment with net zero goals.

– Liz Dunshee

We’ve been watching with intrigue the steps that the SEC is taking to put an end to “fake SEC filings” and make the filing process more reliable. My latest blog on this saga was earlier this year, when the Commission amended Reg S-T. Now, the SEC has also announced that it’s considering a big EDGAR upgrade that could change how filers access the system and manage people who file on their behalf. Here are a few details (see the SEC’s info page for more):

1. Requirement to obtain individual account credentials and use of Login.gov: If the SEC implements the potential technical changes to EDGAR filer access and account management processes, each individual who seeks to file on EDGAR would need unique account credentials from a third-party service provider to log in to EDGAR filing websites.

2. Filer Admins & Users: Each filer would designate at least one filer administrator, an individual authorized by the filer to manage individual users.Individuals authorized to make submissions on behalf of the filer would be known as the filer’s users.

3. Transition: If the potential technical changes to EDGAR filer access and account management processes are implemented, all current EDGAR filers would be required to transition their accounts to the new processes.

If you have opinions, you can provide those via the SEC’s request for comment. You can also sign up to test the beta version of “EDGAR Next” starting next Tuesday, October 12th.

– Liz Dunshee

We’re regularly posting new podcasts for members. In this 11-minute podcast, Jolie Yang – Corporate Counsel at Coinbase – talks with me about her journey from BigLaw to Fintech. We discuss:

1. How it feels coming from established BigLaw firms to a high-profile, newly public company where things might move more quickly and processes might still be getting worked out

2. Advice for other in-house folks whose companies might be considering going public via a direct listing

3. What’s it like being a securities lawyer in an industry that’s innovating and disrupting the very definition of “securities”

4. One thing that more “traditional” securities lawyers would benefit from understanding about crypto and fintech

– Liz Dunshee

Lynn predicted several months ago that this would be the year that the SEC would surpass the $1 billion mark for lifetime awards under its whistleblower program. That happened on Wednesday, when the SEC announced its second-highest award in the history of the program – $110 million! – along with a $4 million award.

The SEC’s press release recaps how many payouts there have been since the whistleblower program started – and where the money comes from:

The SEC has awarded approximately $1 billion to 207 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10-30% of the money collected when the monetary sanctions exceed $1 million.

This Compliance Week article says that over $500 million has been awarded this fiscal year alone, on top of $175 in fiscal 2020! The Commission is on a roll, and as this Arnold & Porter memo explains, Chair Gensler has signaled that he may unwind the limitations on whistleblower awards that were put in place during the prior administration. I blogged when those rules were adopted that they were somewhat controversial.

The biggest award ever happened in October last year, in the amount of $114 million. Of course, we never know for sure who these payments are made to or what allegations are involved, but the order says that the big winner here contributed significant independent information that raised a strong inference of securities law violations, and suffered significant hardships because of it. I blogged earlier this year about what companies can do to prepare for the possibility of a whistleblower.

– Liz Dunshee

The transcript from our recent webcast – “Newly Public: Building Reporting & Governance Functions” – is now available to our members. This webcast was full of practical tips for anyone preparing for or recently emerging from an IPO – or considering a move to a company that’s preparing to go public. Fenwick’s Dave Bell, National Vision’s Jared Brandman, Vontier’s Courtney Kamlet and DocuSign’s Trâm Phi discussed:

1. IPO Backstories

2. Why Advance IPO Planning is Required

3. Identifying Responsibilities

4. Setting Cost Expectations

5. Engaging Service Providers

6. Setting Timetables

7. Establishing Director Relationships & Expectations

8. Determining Your Disclosure Style

9. Cultural Transition

10. How Outside Counsel & Peers Can Help

– Liz Dunshee

SEC Chair Gary Gensler testified yesterday before the Senate Committee on Banking, Housing and Urban Affairs. Here are his prepared remarks – and here’s the 2-hour C-SPAN video.

Chair Gensler covered human capital disclosures as well as cybersecurity, climate risk, SPACs, China-based companies, Rule 10b5-1, crypto and more. As regular readers of this blog know, Chair Gensler has initiated projects on all of those topics and various remarks have suggested that he is in the “cryptocurrency is a security” camp.

Yesterday’s testimony reinforces the expectation that we’ll see proposed rulemaking for additional human capital disclosure, on top of the incremental disclosure requirements that were adopted late last year. What are companies doing so far in response to those 2020 amendments? This DFIN memo highlights recent Form 10-K disclosure from three companies about the specific topics of employee turnover & talent management. Here are some takeaways from the samples:

– ConocoPhillips included an employee demographics table. It showed the percentage of male & female employees, and the percentage of “person of color” and non-POC employees, in the categories of all employees, all leadership, top leadership and junior leadership. The company committed to publicly disclose its next Consolidated EEO-1 Report (which is now available on the company’s Diversity & Inclusion page).

– Cummins disclosed that its Board “recast our Compensation Committee as the Talent Management & Compensation Committee to reflect the Board’s commitment to overseeing and providing guidance to our leadership team in this important work.

– Signet Jewelers also added “Human Capital Management” to the title of its Compensation Committee, and described the board’s oversight role on those activities.

At our “Proxy Disclosure & Executive Compensation Conferences” – coming up virtually on October 13th – 15th – we’ll be covering new expectations for human capital management and diversity & inclusion, Form 10-K disclosures, and how to effectively share your progress. Check out the full agenda – 17 panels over 3 days. Register today so that you’re armed with these insights as you head into the 2022 proxy season! Members of our sites can attend for a discounted rate!

– Liz Dunshee

The Aspen Institute recently published a 34-page collection of essays that explore whether & how adding “employee directors” to boards would allow for better decision-making about corporate risks & opportunities. Doug Chia authored one of the six included essays and shared excerpts from each one. From Doug’s blog:

Expanding Diversity in the Boardroom by Adding Worker Voice

By David Berger (Partner, Wilson Sonsini)

How times have changed. Now that cracks are appearing in the ideology of shareholder primacy, it is time to reconsider the potential benefits from having some directors chosen by employees. Several studies have shown that employee representation on board provides for better performance on a variety of ESG measures, including climate policy, community support and job security (but interestingly not necessarily higher wages). Simply put, the empirical evidence does not support the grave concerns raised about having employees represented on boards, while the most current studies show that adding employees to the board furthers many of the ESG goals that are broadly supported today, including by such organizations as the Business Roundtable.

Director Perspectives: The Value of Worker Voice

By Michelle Greene (President Emeritus and Board Member, Long-Term Stock Exchange)

Workers have valuable perspectives to inform decision-making, reduce risk, and identify untapped opportunity. This perspective is particularly valuable to U.S. boards, which often lack consistent ways of hearing it. As societal and worker expectations evolve, U.S. companies must ensure that the worker voice is heard loud and clear as part of the boardroom conversation, including potentially by making worker-representatives members of the board.

Reimagining Board Committees to Accommodate Worker Voice

By Doug Chia

Demands for worker voice are on the rise, and if trends continue, boards could soon be challenged to accommodate worker voice more formally in corporate governance. Rather than being caught flat-footed, boards can start reimagining now. Looking at their own committees would be a good place for boards to start.

Those Who Work are Labor Investors: Recognizing the Two Core Constituencies of Capitalist Firms

By Isabelle Ferreras (Senior Tenured Fellow, Belgium National Fund for Scientific Research)

Firms are political entities with key economic dimensions, whose very existence is made possible by the joint investment of labor and capital. But despite the fact they would not operate without the former, firms currently only recognize the rights of the latter, those who contribute financial capital, via the structuring of capital investment in the corporate structure which is given a monopoly of the – political – rights to govern the firm. Labor investors should be recognized as the forgotten constituency of the firm, and as such, should be afforded the same rights in its government. Corporate law should require that labor investors, as capital investors, benefit from at least the same rights as those enjoyed by capital investors, and have thus a defining role in strategic corporate decisions.

Why (and How) Workers Should Be Represented on U.S. Corporate Boards

By Lenore Palladino (Assistant Professor of Economics and Public Policy, University of Massachusetts Amherst and Fellow at Roosevelt Institute)

Workers are crucial stakeholders for the success of large corporations, the drivers of the U.S. economy. The economic model of shareholder primacy, in which shareholders (through financial intermediaries) solely elect directors to corporate boards, does not reflect the institutional factors that contribute to innovative enterprises and does not accurately reflect the role of shareholders in 21st century corporations. There is growing consensus that shareholder primacy should be replaced with a stakeholder theory of the corporation; one key element is to include worker representatives on U.S. corporate boards. Though such a policy reform will only be effective if it is enacted along with other reforms to U.S. industrial relations, and certainly faces political headwinds, worker representation on corporate boards is a key policy that can encourage innovation and sustainable prosperity in the 21st century.

From Shareholder Primacy to a Dual Majority Board

By Julie Battilana (Joseph C. Wilson Professor of Business Administration at Harvard Business School) & Isabelle Ferreras (Senior Tenured Fellow, Belgium National Fund for Scientific Research)

Measured either normatively or through contribution to productive processes, labor investors are not the “junior partner” of capital. They are an equal constituency of the firm, in need of enfranchisement and a coequal role in making its main decisions, including the selection of the CEO and strategic choices that will affect labor as much as capital investors and their respective returns on investment. Labor investors ought to have “the collective right to validate or veto these decisions.” All workers should not only be able to vote for union representation to bargain over wages and working conditions that concern the entire industry, but also should be able to choose their representatives at the firm level so that they can participate in decision making about the life of the firm such as the choice of the CEO, what product and market strategies it should pursue, what to prioritize in times of crisis, and how profits are shared.

– Liz Dunshee