The US stock market is closed for nine days every year. Today, Good Friday, is one of those days – and the only one that isn’t also a federal holiday (the bond market is open till noon Eastern today). According to this article, it’s a long-standing tradition – but nobody really knows its origin. The article offers a few ideas:
1. Religion – it could be to mark the occasion of Easter – and often, Passover occurs at the same time. Volume is also down anyway due to observance of these Christian & Jewish holidays, and many non-US markets are closed
2. Superstition – legend has it that there was a huge sell-off when the market opened on Good Friday, but the crashes that are typically blamed – Black Friday and the Panic of 1907 – actually occurred later in the year
3. Lease Clause – some think that the NYSE’s lease requires it to be closed on major Christian holidays, but there are some holes in the theory
When it comes to more recent shut-down decisions that have been considered due to weather emergencies, technical issues, and the pandemic, there’s more daylight about the decision-making process among exchange operators (and in extreme situations, the federal government). This interview last year about reopening the NYSE trading floor is pretty interesting too.
The SEC is conducting scheduled maintenance tonight on EDGAR’s public access system, according to this notice posted on the “company filings” search page:
Maintenance for the SEC EDGAR public access system is scheduled for Friday, April 2nd, 2021, at 11:30 pm Eastern Time. Estimated duration is 30-45 minutes. Filing documents will be available, but some EDGAR searches may not return results during this time period. We apologize for the inconvenience.
The outage is only scheduled for 30-45 minutes, but it’s not a bad idea to plan ahead in case it lasts longer. Hopefully there are very few people who will be needing to search company filings late on Friday night of a holiday/spring break weekend!
More on “California Board Diversity Statute: Less Than Half of Companies Report Compliance”
I blogged a few weeks ago that only 318 companies that are subject to California’s board diversity statute have filed a disclosure statement to report whether or not they have the required number of women on their board. I was surprised by that – but Allen Matkins’ Keith Bishop sent this point of clarification:
The statutes requiring publicly traded corporations to file the Corporate Disclosure Statement predate the statutes relating to board composition. There is no specific fine associated with failure to file the Corporate Disclosure Statement in those statutes.
The statutes governing board composition provide that the Secretary of State may impose a $100,000 fine for failure to file to timely file board member information with the Secretary of State pursuant to a regulation. However, the Secretary of State has not adopted a regulation and is not required to do so (the statutes say that the Secretary of State “may” adopt implementing regulations).
I am not aware of any enforcement activity by the Secretary of State for actual violations of the composition requirements. Any enforcement action is likely to be defended on constitutional grounds and that is already being litigated in state and federal court.
Keith also went on to say that his understanding is that the Secretary of State compiles the data for the report solely from the Form 10-K and Corporate Disclosure Statements. Through no fault of their own, but because of how the statute is worded, they do not look at proxies or other disclosures made by a company. That reinforces that the corporate disclosure statements – and the “Women on Boards” report – isn’t all that useful in analyzing whether companies headquartered in California are satisfying the underlying board diversity requirements in the statute. As Keith explained in a recent blog, companies are permitted to file updated disclosure statements – but it’s not required.
Should we assume that companies that did not file are not in compliance? I looked at the proxy statements for a number of the companies identified as “impacted corporations” that nevertheless were not reported as having filed Disclosure Statements — selected at random, unscientifically and completely arbitrarily — all of them had at least one woman on the board and often two or more. So, I would guess that the number of women on boards is probably much greater than the report indicates.
Unfortunately, however, to compile the report, the Secretary can’t simply look at companies’ proxy statements as I did. That’s because the language in the statute defines “female” as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.” As a result, the Secretary is not reviewing 10-Ks or proxy statements to determine whether a company is compliant with the new board composition requirement, but is instead determining compliance based only on the California Statement, which includes a specific inquiry regarding the number of “female” directors. And if half the companies subject to the law don’t file, well, so much for the accuracy of the report.
It’s also worth noting that there are timing issues in connection with these annual reports and statements, resulting in “some gaps in available data” in the 2021 Report, as the report points out. Forms 10-K are due, generally depending on the size of the company’s public float, 60, 75 or 90 days after the end of the company’s fiscal year, and the deadline for filing the California Statement is 150 days after the end of the company’s fiscal year.
Yesterday afternoon, Corp Fin issued this “Staff Statement” to highlight accounting, financial reporting & governance issues that they want people to carefully consider before taking private companies public via a SPAC. Acting Chief Accountant Paul Munter also issued this statement to further emphasize the complex financial reporting & audit considerations that come into play with these transactions. These statements are being made at the Staff level and aren’t approved by the Commission, but they underscore that people at the SEC think the SPAC frenzy warrants caution.
Corp Fin’s statement points out that private companies need to thoroughly lay the groundwork for going public – even if they’re not doing it via a traditional IPO. Here are a few (paraphrased) reasons why:
– Financial statements for the acquired business must be filed within four business days of the completion of the business combination pursuant to Item 9.01(c) of Form 8-K. You aren’t entitled to the 71-day extension of that Item.
– The SPAC – and the combined company – need adequate expertise, books & records and internal controls to be able to meet reporting deadlines, satisfy the form & content requirements of financial statements, adopt accounting standards that may not have applied when private, understand “predecessor” implications, and generally ensure that they’re providing timely & reliable reporting
– The combined company will need to continue to satisfy quantitative & qualitative listing standards – e.g., the SPAC may lose round lot holders during the business combination; the private operating company may not have in place adequate independent director oversight, appropriate audit committee expertise, or a code of ethics
In addition, the Staff wants everyone to understand that going the SPAC route means that the combined company will be more restricted in future capital raising transactions. For example, for 3 years following the business combination, they’ll be an “ineligible issuer” (no WKSI status, no FWPs, etc.) – and also during that 3-year period, they won’t be able to incorporate by reference on Form S-1.
These limitations on capital raising aren’t new rules – they’re really just saying that the more recent “fast track” alternatives aren’t available to former shells. But they bear emphasis with the business crowd who are excited about a fast deal now and will be decidedly less excited about a slow deal later. Do yourself a favor and put it in writing!
ESG: Pru Previews Progress Before Annual Meeting
Prudential has been one of the ongoing leaders in sustainability disclosure. In late 2019, the company adopted a “multi-stakeholder” focus – and in 2020, it used its sustainability report to share progress under that framework. This year, we’re getting an even earlier look at some of Pru’s most impactful metrics – via this first-of-its-kind “summary ESG report” that was posted to the company’s sustainability page last week. It’s 18 pages long – and gives details on:
– The status of the Company’s Global Environmental Commitment’s operational and investment targets.
– Employees’ race/ethnicity and gender by job category, including preliminary EEO-1 data for 2020.
– Actions taken to support the Company’s nine commitments to racial equity, including disclosure of our diversity talent goals, which will serve as a baseline to illustrate our progress going forward.
– Disclosure of the Company’s gender and pay equity results.
The report was posted the same day the company filed its proxy statement. As usual, the proxy statement is very fulsome – and on page 58, it gives details on the “diversity modifier” that’s mentioned in the ESG summary as a way the company is supporting its commitment to racial equity. Although the company typically doesn’t post its full sustainability report until May/June, the ESG summary report provides key info to investors and other stakeholders in advance of the annual meeting on May 11th.
Our April E-Minders is Posted
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That was fast. Only a couple of weeks ago, Acting SEC Chair Allison Herren Lee gave a speech and issued a corresponding request for public comment on 15 aspects of climate change disclosure. Hunton Andrews Kurth’s Scott Kimpel alerted us that West Virginia’s Attorney General promptly responded with this letter to threaten a First Amendment lawsuit if the SEC adopts rules that require ESG disclosure.
The letter says the “strict scrutiny” framework applies to speech “compelled” by the government – and concludes that the SEC disclosure rules wouldn’t pass muster. The AG rests that conclusion on the theory that ESG info isn’t financially material and is merely meeting investor “demand.” Here’s an excerpt:
Strict scrutiny is the highest First Amendment standard and imposes three requirements. First, the regulation must advance a compelling government interest; second, it must be directly and substantially related to advancing that end; third, it must use the least restrictive means. See United States v. Playboy Entertainment Group, Inc., 529 U.S. 803, 813 (2000). This is a high bar for the government, and it is the “rare case[]” in which a regulation “withstands strict scrutiny.” Williams-Yulee v. Florida Bar, 575 U.S. 433, 444 (2015).
In Reed v. Town of Gilbert, the Court held that strict scrutiny applies to the type of content based speech regulation at issue here. 576 U.S. 155, 159 (2015). According to Justice Breyer, the holding in Reed “inevitably involve[s]” the “governmental regulation of securities.” Id. at 177. In NIFLA v. Becerra, the Court again applied strict scrutiny in a case dealing directly with compelled speech. 138 S. Ct. 2361, 2365-66 (2018). And most recently in an opinion by Justice Kavanaugh, the Court reaffirmed the same standard. Barr v. Am. Ass ‘n of Political Consultants, Inc., 140 S. Ct. 2335, 2346 (2020) ( citing Reed for its holding that “content-based laws are subject to strict scrutiny”). Concurring in part and dissenting in part in that case, Justice Breyer again remarked that this affects “the regulation of securities sales” because, “the regulatory spheres in which the Securities and Exchange Commission … operate[s]” is “defined by content.” Barr at 2360.
First Amendment strict scrutiny is an unmistakable roadblock for your proposal because merely meeting a “demand” for company statements is not a compelling government interest. And while protecting investors from fraud and deceptive practices in the issuance and trading of public securities will likely be held to be a compelling government interest, it is highly unlikely courts will find requiring statements of the kind you propose to directly and substantially serve that end. Moreover, the Commission would be hard-pressed to demonstrate that mandating companies to issue statements regarding environmental, social, and governance matters which are not material to future financial performance constitutes the least-restrictive means for investors to obtain such information. Private competition for customers and investors already leads companies to issue statements on a wide variety of matters of public interest without government compulsion.
It would be preferable for you and the Commission to recognize now that the First Amendment stands in the way of the plans you outlined. If not, these issues will be raised during rulemakings that proceed down this path.
It’s not too surprising to see a threat like this, given the fact that everything these days has become so politically charged. And remember, a First Amendment challenge was successful against the conflict minerals rule.
However, it’s bold to make a preemptive threat on behalf of the citizens of West Virginia before we can even assess whether proposed rules are appropriately tailored. Especially when we hear from companies that they want more certainty for information demands – and investors (including retail investors) are saying they want protection & accuracy when investing in ESG funds & indexes.
What’s clear is that both supporters and detractors will be gearing up for legal battles if rules materialize, and the Constitutional interpretation will land with the courts. That means we’ll probably be dealing with ambiguities in the “ESG disclosure” realm for quite a while.
“Responsible” Investors: Better to Engage Than Divest?
We’ve blogged several times about investor divestment initiatives – and pressure on big asset managers to eliminate fossil fuel companies from their portfolios. That’s a pretty blunt tool to use to effect social change – and recent research says it might not be as effective as engagement. Here’s an excerpt:
This paper is an attempt to analyze the welfare implications of two traditional strategies aimed at shaping corporate outcomes: exit and voice. To make the problem tractable we have made a number of simplifying assumptions: identical firms with zero marginal cost up to a capacity constraint, a linear demand curve, constant absolute risk aversion, normal distribution, etc. We have also studied the three principal socially responsible strategies, divestment, boycotting and engagement, separately, without considering how they might interact with each other.
Subject to these limitations, we find that in a competitive world exit is less effective than voice in pushing firms to act in a socially responsible manner. Our conclusion is consistent with Kruger et al.’s (2020) survey of institutional investors, which finds that such investors consider engagement, rather than divestment, to be the better approach for addressing an externality such as climate risk. Furthermore, we show that individual incentives to join an exit strategy are not necessarily aligned with the social incentive, while they are when investors are allowed to express their voice.
We have derived these results under the best possible scenario for the exit strategies: investors and consumers who can announce their strategies to the world and commit to them. If we relax these assumptions, exit becomes even less effective.
The authors go on to note that company-by-company engagement is also a better alternative than regulatory efforts – because it’s more flexible, cost-effective and “less prone to capture than political voice.” The authors note, however, that the US proxy system tends to limit shareholders’ ability to influence corporate policy and makes engagement less effective – and of course, engagement isn’t very effective at controlled and privately held companies.
Transcript: “Conduct of the Annual Meeting”
If you’re preparing for your shareholder meeting right now, make sure to check out the transcript from our recent webcast: “Conduct of the Annual Meeting.” Crown Castle’s Masha Blankenship, AIG’s Rose Marie Glazer, Rocket Companies’ Tina V. John, American Election Services’ Christel Pauli and Oracle’s Kimberly Woolley gave practice pointers on meeting format & logistics, voting tabulations, “rules of conduct” and other helpful topics.
When the Rule 14a-8 amendments were approved in high-drama fashion last fall, they were the first revisions to the submission thresholds in over 20 years, and the first revisions to the resubmission threshold since 1954. Some viewed them as a “capstone” to former SEC Chair Jay Clayton’s tenure. Now it’s become more likely that could all be undone.
Late last week, Senator Sherrod Brown (D-OH) introduced a resolution calling for reversal of last year’s Rule 14a-8 amendments under the Congressional Review Act. As I blogged in January, that’s a complicated and rarely used law that allows Congress to overturn rules that have been recently finalized by federal agencies. This Medium post from Morningstar’s Global Head of Sustainable Investing Research explains how a rescission could happen – and what the impact would be:
The CRA allows Congress to pass a joint resolution disapproving of an agency’s final rule, which requires only a simple majority of both chambers to pass, along with the president’s signature. Congress must invoke the CRA within 60 days of a finalized rule. For rules that go final within 60 legislative days of the end of one Congress, the new Congress gets a new 60-day period to invoke the CRA.
Once the joint resolution is signed, the shareholder rule will not only be rescinded, the SEC will be prohibited from reissuing the same or a substantially similar regulation in the future, unless authorized by Congress to do so.
That means the SEC will revert back to the status quo ante, which required only that a shareholder needed to hold $2,000 worth of company’s stock for 12 months in order to propose a resolution. To be eligible for resubmission, a resolution must receive 3% of the vote the first time it appears on a ballot, 6% the second time, and 10% thereafter.
It would be very unusual to overturn an SEC rule using the Congressional Review Act. The only time that’s ever happened was when the 2016 “resource extraction rule” was killed the following year. This FAQ says that only a total of 17 rules have ever been overturned, 16 of which were “Obama-era” rules overturned by the Trump administration.
That said, plenty of people have been speculating that the shareholder proposal amendments would be vulnerable to this type of reversal, due to the fact that they were adopted via a 3-2 vote and the expected priorities of the incoming SEC Chair. That speculation intensified after Interim SEC Chair Allison Herren Lee gave a speech two weeks ago saying that reversal was on the table. Here’s an excerpt:
I have asked the staff to develop proposals for revising Commission or staff guidance on the no-action process, and potentially revising Rule 14a-8 itself. The goal is to bring greater clarity to the no-action relief process, increase the number of proposals on the ballot that are well-designed for shareholder deliberation and votes, and reduce the number that are not.
This could involve reversing last year’s mistaken decision to bar proponents from working together and restricting their ability to act through experienced agents. It could also involve reaffirming that proposals cannot be excluded if they concern socially significant issues, such as climate change, just because they may include components that could otherwise be viewed as “ordinary business.”
Many companies welcomed the modernization of Rule 14a-8, and a reversal now could be like snatching a gift back from a kid on Christmas. On the other hand, investors have been vocal in their criticism. The shareholder proponent speakers in our January webcast argued that the amendments could cause companies to suffer unintended consequences, as investors’ outlet for expressing dissatisfaction would shift from submitting precatory shareholder proposals to voting “against” directors or even conducting “vote no” campaigns or proxy contests. But, companies would probably prefer to assess that risk on a case-by-case basis and include proposals in their proxy statements at their discretion.
This Reuters article reports that the National Association of Manufacturers and the US Chamber have spoken out against the effort to overturn the amendments. The resolution has been referred to the Senate Committee on Banking, Housing & Urban Affairs – they haven’t scheduled a date for next steps – and it’s hard to predict with certainty whether the all Senate Democrats would approve the resolution, which is what it would need to pass (along with almost all Dems in the House). Nothing going on here will affect this year’s annual meetings, since the Rule 14a-8 amendments aren’t scheduled to go into effect until next year.
SPACs: Enforcement Actions Coming Soon?
SPAC deals have raised nearly $90 billion so far this year in the US alone! It’s making some folks nervous. The SEC’s Office of Investor Education & Advocacy warned people a few weeks ago that they might want to think twice before throwing money onto the pile. Yes, even if the SPAC is run by A-Rod – and even if it’s a Shaq de-SPAC doing what a traditional IPO couldn’t accomplish for WeWork (if, this time around, all goes according to plan, the coworking space company also will raise $800 million through a PIPE as part of the deal).
Last week, Reuters reported that the SPAC boom also might be attracting attention from the SEC’s Enforcement Division. Underwriters who’ve been involved in these deals have received letters asking about deal fees, volumes, compliance, reporting and internal controls. To be clear, there’s no formal investigation demand at this point. But, the SEC’s interest in this information shows that it’s continuing to closely monitor these IPOs – so you should make sure there are strong compliance procedures in place. The article gives some guesses about what the Commission could be watching:
The SEC has also scrutinized some companies that went public via SPAC deals, including electric vehicle-makers Lordstown Motors Corp, Nikola Corp and Clover Health Investments, the companies have disclosed.
Investors have sued eight companies that combined with SPACs in the first quarter of 2021, according to data compiled by Stanford University. Some of the lawsuits allege the SPACs and their sponsors, who reap huge pay-days once a SPAC combines with its target, hid weaknesses ahead of the transactions.
The SEC may be worried about the depth of due diligence SPACs perform before acquiring assets, and whether huge payouts are fully disclosed to investors, said a third source.
Another potential concern is the heightened risk of insider trading between when a SPAC goes public and when it announces its acquisition target, the second source added.
Whistleblowers: Record-Setting Year…And It’s Only March!
The SEC announced yet another whistleblower award yesterday. While the award itself was rather modest – a cool $500k – what caught my eye was that the Commission has now made 40 individual awards this year, surpassing last year’s record of 39. And it’s only March!
The SEC highlighted in its announcement & the related order that the whistleblower had first reported alleged securities violation internally to their employer, which prompted an internal investigation. The whistleblower was eligible for the SEC award because they also reported the info the SEC within 120 days of the internal report. Lynn blogged earlier this month about how the Commission has been applying recent amendments to its whistleblower program to recent awards…
Although the absence of a Senate-confirmed Chair hasn’t stopped the existing Commissioners from articulating disclosure & enforcement priorities these past few months, rulemaking will likely accelerate once the new Chair is confirmed and all of the leadership positions get finalized. The Senate was previously scheduled to vote on Gary Gensler’s confirmation last week, but that didn’t happen. The legislative calendar now says that the session is scheduled for Tuesday, April 12th – but it’s possible it will get bumped back again.
In 2017, former Chair Jay Clayton was confirmed in early May. He appointed Bill Hinman as the Director of Corp Fin about a week later.
ESG: Not Just For Public Companies
Earlier this year, BlackRock’s Larry Fink made a point of saying that large private companies and public debt issuers need to embrace the Task Force on Climate-related Financial Disclosures. John also blogged a couple of weeks ago that private company climate change disclosure is one of the points for which Acting SEC Chair Allison Herren Lee is soliciting comments.
This announcement from ISS ESG that it’s launching a scorecard for private companies is more evidence that it isn’t just public shareholders who want this info. Here’s how ISS expects the data to be used:
Use cases for ESG Scorecards include the assessment of ESG risk exposure of investee companies during due diligence processes for private equity portfolios, the evaluation of ESG risk during credit risk assessment, and to facilitate engagement with private companies regarding sustainability.
Tomorrow’s Webcast: “Shareholders Speak – How This Year’s Expectations Are Different”
There is always some uncertainty during proxy season, but this year it is more pronounced. Tune in tomorrow for our webcast, “Shareholders Speak: How This Year’s Expectations Are Different” – to hear Rob Main of Sustainable Governance Partners, Yumi Narita of the Office of the NYC Comptroller, Ryan Nowicki of State Street Global Advisors and Danielle Sugarman of BlackRock explain how this year’s in-season engagements and voting expectations might be different from prior years.
Bonus: If you attend the live version of this 60-minute program, CLE credit will be available in most states! You just need to submit your state and license number and complete the prompts during the program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
This article about the “Morningstar Minority Empowerment Index” caught my eye. The Index taps into investor appetite for DEI data by selecting US stocks based on an NAACP scorecard & Sustainalytics data.
As is usually the case with these types of issues, investors aren’t just excluding “under-performing” companies from their portfolios – they’re also agitating for change. As I blogged earlier this week on the Proxy Season Blog, proponents have submitted more than 60 “diversity & racial justice” proposals this season. Over 20 companies have received proposals asking for a D&I report – and at least 6 companies have received a proposal asking them to conduct a “civil rights” or “racial equity” audit (including Amazon, Citi, BlackRock & State Street).
Corp Fin recently rejected J&J’s no-action request to exclude a Trillium proposal that requests a civil rights audit. The Staff didn’t agree that J&J’s publication of a D&I report was “substantial implementation” of the proposal, that it dealt with matters related to the company’s “ordinary business,” or that the proposal was “materially false & misleading.” This WSJ article speculates that the Staff might agree with fewer no-action requests this year.
Resolved, shareholders request the company conduct and publish a third-party audit (within a reasonable time, at a reasonable cost, and excluding confidential/proprietary information) to review its corporate policies, practices, products, and services, above and beyond legal and regulatory matters; to assess the racial impact of the company’s policies, practices, products and services; and to provide recommendations for improving the company’s racial impact.
If J&J ends up publishing an audit, it won’t be the first company to do so. Starbucks has published two assessments, and Facebook published a civil rights audit last summer.
As You Sow’s New “Scorecards”: Racial Justice & Workplace Equity
As You Sow is out with a pair of new scorecards for the S&P 500 (and they’ve filed a bunch of related shareholder proposals):
– Racial Justice – scoring companies based on their “racial justice statements,” corporate policies and practices across 22 data points
– Workplace Equity – assessing the quality of companies’ DEI disclosures
To gather data, they are looking at websites (including reporting/disclosure and career pages), social media accounts, and sustainability reports. The results of the findings are available as an overall composite list of the “top 10” & “bottom 10” – and also can be sorted by sector, HQ state, region, market cap, and number of employees. Here’s some of the key “Workplace Equity” findings:
– The largest companies by market cap, and the largest employers by headcount, are most likely to release meaningful workplace diversity and inclusion data.
– Almost half (46%) of the 100 largest companies by market cap in the S&P 500 release their consolidated EEO-1 forms, a good first step for sharing workplace composition. Within the 100 largest employers in the S&P 500, more than 1 in 4 do so. Of the companies that fall within both categories 30 of 53 (57%) release this form.
– More than 1 in 4 of the largest 100 companies release their recruitment rates of female employees. Almost 1 in 5 release their retention rates of female employees, and 1 in 10 release their recruitment rate of female employees.
– Disclosure rates of recruitment, retention, and promotion data by race and ethnicity is still catching up to gender data, likely a reflection of the #metoo movement gaining traction in 2017, while the protests in the aftermath of George Floyd murder began in late May, 2020, less than a year ago.
– Across sectors, a few companies have shown early leadership in publishing recruitment, retention, and promotion data by race and ethnicity. These companies include: Allstate, Apple, BlackRock, Norfolk Southern Corp and Oracle Corp which release their recruitment rates; Alphabet, Edison International, Intel, PVH Corp and Twitter, which release retention rates; and Consolidated Edison, Goldman Sachs, Progressive, Twitter and Walmart which release promotion rates.
– 16% of the S&P500 release at least one recruitment statistic related to race or ethnicity. Within the 100 largest companies by market cap, 23% do so. Within the 100 largest employers, 23% do so.
– 15% of the S&P 500 have released a quantifiable goal related to their workplace diversity, equity and inclusion goals. Within the 100 largest companies by market cap, 22% do so. Within the 100 largest employers, 22% do so. Of the companies that fall within both categories 13 of 53 (25%) release this form.
As You Sow is also continuing to release its scorecards on Waste & Opportunity – measuring 50 large companies in the beverage, quick-service restaurant, consumer packaged goods and retail sectors – and Pesticides in the Pantry – scoring 14 food manufacturers on transparency & risk in food supply chains – as well as its mainstay, the “100 Most Overpaid CEOs.”
California Board Diversity Statute: Less Than Half of Companies Report Compliance
At our “Women’s 100” session last week, there was some great back & forth about whether California-headquartered companies are relocating due to that state’s board diversity legislation. The gender diversity law, SB 826, required listed companies with principal executive offices located in California (no matter where they are incorporated) to include at least one woman on their board of directors by the end of 2019. That minimum increases to two by December 31, 2021, for companies that have five or fewer directors – and to three women directors, for companies that have six or more directors. The newer law, AB 979, which requires adding directors from other underrepresented groups, will first come into play at the end of this year.
According to the “Women on Boards” report that was released last week by the California Secretary of State, 22 listed companies moved their headquarters out of the state last year – and 6 moved into the state (the report doesn’t analyze whether the moves are in reaction to the legislation or for other, unrelated reasons). The report included a couple of other surprising data points as well:
– Out of the 647 companies subject to the rule, 318 filed the state’s required disclosure statement – and 311 of those statements showed that there’s at least one woman on the board
– 288 companies voluntarily filed the state’s disclosure statement
The Golden State publishes this annual review in order to monitor compliance with its board diversity laws – next year, there will also be a review of underrepresented communities on boards. But for now, the exercise seems to show that a lot of companies are ignoring the reporting requirement, which would appear to result in fines under the statute.
The report lists every company identified as being required to comply with the rule, the date they filed the disclosure statement (it’s blank for those that skipped the filing), and whether or not they reported having at least 1 female director in 2020. It doesn’t include company size as a data point, but a quick skim indicates that the larger & more familiar companies seem to be complying, and the smaller companies…not. There are exceptions on both ends of that spectrum.
The last thing to note is that this report isn’t all that useful if you’re looking to get a sense of the current composition of California boards, because it pulls data from backward-looking Form 10-Ks and California disclosure statements that were mostly filed during the early part of 2020 calendar year. But it paints a pretty telling picture of whether companies believe that filing the disclosure statement is worth their while.
In what investors are saying is a big win, the DOL announced yesterday that it won’t enforce its pair of recent rules that limited consideration of ESG factors in retirement plans’ voting & investment decisions. The details of the non-enforcement stance are explained in a 1-page policy statement. Here are the key takeaways:
The Department has heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers, and investment advisers, who have asked whether these two final rules properly reflect the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries. Stakeholders have also questioned whether those rulemakings were rushed unnecessarily and failed to adequately consider and address the substantial evidence submitted by public commenters on the use of environmental, social, and governance (ESG) considerations in improving investment value and long-term investment returns for retirement investors.
The Department has also heard from stakeholders that the rules, and investor confusion about the rules, have already had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules can be read to explicitly allow. Accordingly, the Department intends to revisit the rules.
Until it publishes further guidance, the Department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights. This enforcement statement does not preclude the Department from enforcing any statutory requirement under ERISA, including the statutory duties of prudence and loyalty in section 404 of ERISA. The Department will update its website at https://www.dol.gov/agencies/ebsa as more information becomes available.
CalSTRS Says “Activist Stewardship” Is Here
It’s shaping up to be an active proxy season. As this Wachtell Lipton memo explains, ESG & TSR activists are teaming up. In the throes of Engine No. 1’s dissident campaign – and facing pressure from hedge fund D.E. Shaw – ExxonMobil last week appointed two new directors to its board.
The new directors, Michael Angleakis of Atairos and Jeff Ubben of the “activist E&S fund” Inclusive Capital Partners, weren’t part of Engine No. 1’s dissident slate. so while D.E. Shaw welcomed the appointments, Engine No. 1 said they weren’t enough – and that campaign continues.
In this recent HLS blog, two influential leaders at CalSTRS – the country’s second largest pension fund, with approximately $275 billion in assets – suggest that this is just the beginning of a bigger “activist stewardship” trend. Here’s why:
1. Divestment of individual companies isn’t an attractive option for “universal owners” whose portfolios essentially reflect a representative slice of the economy – they need to manage systemic risks, as I blogged yesterday
2. These investors are growing frustrated with ineffective engagements at some companies
3. Activist techniques – such as replacing directors – can effect the types of changes that investors believe will improve the value of their overall portfolio
The blog points to Engine No. 1’s campaign, which CalSTRS supports, as a “pilot” for future activist stewardship. It lays out a game plan and says that CalSTRS’ goal is to create activist stewardship capabilities “at scale” in order to protect future investment returns. That means board composition – and disclosure about director skills – will continue to grow in importance.
Net-Zero Planning: Investors Want More Than “Offsets”
Yesterday, the UK’s “Institutional Investors Group on Climate Change” – representing 35 trillion Euro in assets under management – published this “Net-Zero Investment Framework 1.0.” The most surprising nugget in the 30-page document is that the use of carbon market offsets in achieving net-zero goals is specifically discouraged. While a lot of people in the sustainability space believe that offsets are mostly smoke & mirrors, the investor position stands in stark contrast to the “market-based solution” that the BRT and many companies have been embracing as a way to meet their recently announced corporate greenhouse gas reduction goals.
This Politico article also emphasizes that quality offsets are in short supply. The article says that today’s market isn’t big enough for a single major corporate pledge. As I blogged earlier this year, the Taskforce on Scaling Voluntary Carbon Markets found that the market would need to grow by at least 15-fold by 2030, enough to absorb 23 gigatons of GHGs per year, to be able to support the pledges that companies are making.
Yesterday, Corp Fin revised “Disclosure Guidance Topic No. 7” to be more specific about how to handle expiring orders. When this piece of the guidance was first added last September, it tied the analysis for the different alternatives to orders issued “less than 3 years ago” or “more than 3 years ago.” Now, Corp Fin has helpfully put a stake in the ground at October 15, 2017. So the alternatives upon expiration are are:
1. If the contract is still material, refile it in complete, unredacted form
2. Extend the confidential period – using the short-form application for orders initially issued after October 15, 2017, or filing a new and complete application for orders initially issued on or before October 15, 2017
3. Transition to the “redacted exhibit rules” in Reg S-K Item 601(b)(10), if the contract continues to be material and the initial confidential treatment order was issued on or before October 15, 2017
Corp Fin also reiterated that if a confidential treatment order was granted on or before October 15, 2017, you don’t need to wait for the order to expire to transition to compliance with the redacted exhibit rules. You can just start doing that in a new filing or by amending a previously filed document.
Mandatory Climate Disclosure: California Bill Sets Ambitious Tone
California has been a bellwether for board diversity & consumer privacy movements. Now, it could be setting the tone for mandatory climate disclosures. California Senate Bill 260 – which was introduced in late January and will be taken up by committees this month – would apply to publicly traded domestic and foreign corporations with annual revenues in excess of $1 billion that do business in California, and would require:
– Public disclosure of their greenhouse gas emissions, categorized as scope 1, 2, and 3 emissions, from the prior calendar year – beginning in January 2024
– Setting & disclosing “science-based emissions targets” based on the covered entity’s emissions that have been reported to the state board, which would be consistent with the Paris Agreement goal of limiting global warming to no more than 1.5 degrees Celsius – beginning in 2025
– Public disclosures to be independently verified by a third-party auditor, approved by the state board, with expertise in greenhouse gas emissions accounting
This Akin Gump blog explains why this bill would be a big deal if it passes:
While many large companies already issue climate disclosures on a voluntary basis, SB 260 would no longer give them—or their more reluctant peers—a choice. Importantly, the bill’s required scope 2 and 3 emissions reporting would force companies to disclose, for the first time, the indirect emissions that result from their purchase and use of electricity as well as their supply chains, business travel, procurement efforts, water use and wastes.
Covered entities also would have to engage certified third-party auditors to verify their disclosures and emissions targets, another noteworthy first that should lead to a greater degree of standardization over time in climate reporting. Given the bill’s capacious reach and the minimum contacts with California required to trigger its applicability, most large companies in virtually every sector would soon face climate disclosure requirements.
As the blog explains, the bill faces a long road before it could become law. But even if it doesn’t end up passing, the dialogue that comes out of this process could influence company practices and investor preferences – and maybe even other disclosure regimes.
Value Vs. Values: False Dichotomy?
When pressed on “social policy” positions, the talking point for index funds and long-term investors seems to be that they’re simply taking positions that promote long-term financial value for the company. This recent study points out that it’s not so much the financial value of each individual company that they’re trying to maximize – it’s the financial value of their overall portfolio. And because that overall financial value increases when society prospers, investors have strong incentives to promote “ESG” issues, which reduce systemic risk and lead to diversified gains. Here’s an excerpt:
The analysis also shows why it is generally unwise for such funds to pursue stewardship that consists of firm-specific performance-focused engagement: Gains (if any) will be substantially “idiosyncratic,” precisely the kind of risks that diversification minimizes. Instead asset managers should seek to mitigate systematic risk, which most notably would include climate change risk, financial stability risk, and social stability risk. This portfolio approach follows the already-established pattern of assets managers’ pursuit of corporate governance measures that may increase returns across the portfolio if even not maximizing for particular firms.
Systematic Stewardship does not raise the concerns of the “common ownership” critique, because the channel by which systematic risk reduction improves risk-adjusted portfolio returns is to avoid harm across the entire economy that would damage the interests of employees and consumers as well as shareholders.
These theories probably don’t mean much for boards as a whole – who will still need to focus on their specific shareholders, and the business judgment rule will protect most decisions. But when it comes to individual directors, the paper makes the case that rejecting “weak directors” is one company-by-company action investors can take that has portfolio-wide effects. That seems to be consistent with some of the investor policies that have been published lately, and means the focus on board composition & skills isn’t going away anytime soon.
We’ve just posted the registration information for our “Proxy Disclosure” & “Executive Compensation Conferences” – which will be held virtually October 13th – 15th. We’re excited to offer a format that can be either “live & interactive” or “on-demand” (your choice! or do both!) – to deliver candid & practical guidance, direct from the experts.
These Conferences will help you tackle ESG & executive pay issues that will be essential to your proxy disclosures and engagements. Check out the agendas – 17 panels over three days.
Early Bird Rates – Act Now! As a special “thank you” for early registration, we’re offering an “early bird” rate for a limited time to both members & non-members of our sites. In addition, anyone who subscribes to one of our sites will get a special “member discount” when they register for these Conferences (both of the Conferences are bundled together with a single price). Register online or by mail/e-mail today to get the best price and make sure that you’ll have access to all of the latest guidance.
ICOs: Investment Advisers Face Scrutiny
This Reuters article says that in his confirmation hearings last week, SEC Chair nominee Gary Gensler signaled openness to additional crypto regulations if his nomination is approved. Overall, the remarks seem pretty non-committal. But in the meantime, the SEC’s Examinations Division has issued a risk alert to explain its continued focus on digital assets – in particular, the Staff will be taking a closer look at the practices of investment advisers to make sure that digital assets are properly classified as “securities” when necessary, and at the disclosures those firms are making about the risks of crypto purchases.
The risk alert also casts a spotlight on transfer agents using distributed ledger technologies and says the Examinations Division will review whether those services comply with Exchange Act Rules 17Ad-1 to 17Ad-7. See this Mayer Brown memo for more details & practice implications.
“Machine Readable” SEC Filings: What Does It Mean?
I blogged recently about how the year-end report from the SEC’s Investor Advocate urged the Commission to adopt rules that would make companies’ SEC filings machine-readable. This paper points out that corporate disclosure has already been reshaped by machine processors, since those types of downloads have been steadily increasing over the past 15-20 years – and looks at how companies are adjusting their SEC disclosures when they know that machines are doing the reading.
“Machine readability” means that it’s easy for machines to separate and extract tables and numbers from text, it’s easy to identify tabular info because of clear headings, column separators and row separators, the filing contains all the needed info (without relying on external exhibits) and the characters are mostly standard ASCII. See page 31 for examples of high and low machine readability, pulled from actual reports. The researchers say that we humans are starting to make adjustments in our behavior to cater to our robot friends:
Our findings indicate that increasing AI readership motivates firms to prepare filings that are more friendly to machine parsing and processing, highlighting the growing roles of AI in the financial markets and their potential impact on corporate decisions. Firms manage sentiment and tone perception that is catered to AI readers by differentially avoiding words that are perceived as negative by algorithms, as compared to those by human readers.
Such a feedback effect can lead to unexpected outcomes, such as manipulation and collusion (Calvano, Calzolari, Denicolo, and Pastorello, 2019). The technology advancement calls for more studies to understand the impact of and induced behavior by AI in financial economics.
On Friday afternoon, the SEC announced that it had filed this complaint against AT&T and three of its IR execs for violations of Regulation Fair Disclosure. This is the first Reg FD enforcement action that we’ve seen in a couple of years – the Enforcement Division does indeed seem to be “powering up” and wasting no time in bringing litigation.
The charges show that the SEC views talking down analyst estimates as a problem under Reg FD. One of the most surprising points in the SEC’s announcement is that the IR execs allegedly disclosed info that the company’s internal policies specifically said could be “material.” Here’s an excerpt (also see this Stinson blog):
According to the SEC’s complaint, AT&T learned in March 2016 that a steeper-than-expected decline in its first quarter smartphone sales would cause AT&T’s revenue to fall short of analysts’ estimates for the quarter. The complaint alleges that to avoid falling short of the consensus revenue estimate for the third consecutive quarter, AT&T Investor Relations executives Christopher Womack, Michael Black, and Kent Evans made private, one-on-one phone calls to analysts at approximately 20 separate firms.
On these calls, the AT&T executives allegedly disclosed AT&T’s internal smartphone sales data and the impact of that data on internal revenue metrics, despite the fact that internal documents specifically informed Investor Relations personnel that AT&T’s revenue and sales of smartphones were types of information generally considered “material” to AT&T investors, and therefore prohibited from selective disclosure under Regulation FD. The complaint further alleges that as a result of what they were told on these calls, the analysts substantially reduced their revenue forecasts, leading to the overall consensus revenue estimate falling to just below the level that AT&T ultimately reported to the public on April 26, 2016.
While we don’t know yet whether this claim will end up being settled and what type of penalties (if any) AT&T will face (at this point, the SEC’s allegations are unproven), the fact that the company is charged in the complaint is a reminder that simply having a policy in place isn’t enough to avoid litigation. Check out our 135-page “Reg FD” Handbook if you need to jump-start your compliance efforts.
EDGAR Gets a Makeover!
Wow. The EDGAR filings page has been completely remade (here’s Apple’s page as an example). Our members are giving it mixed reviews so far, but that might be because it takes time to get accustomed to a new interface.
In addition to being able to revert to “classic version” via a button at the top right (h/t Lowenstein Sandler’s Daniel Porco), you can still use “form descriptions” to search for filings – click the “view filings” box in the top left box, and then use the “search table” box just like on the old page.
The updated version also has a new field to be able to search text in filed documents, which will be helpful. Perhaps the “company information” box at the top of the page will eventually be populated with more key info that’s pulled in from filings…
Tomorrow’s Webcast: “Conduct of the Annual Meeting”
Tune in tomorrow for our “Conduct of the Annual Meeting” webcast – to hear Crown Castle’s Masha Blankenship, AIG’s Rose Marie Glazer, Rocket Companies’ Tina V. John, American Election Services’ Christel Pauli and Oracle’s Kimberly Woolley discuss expected “virtual meeting” trends for the 2021 proxy season, annual meeting logistics, rules of conduct, handling shareholder questions, and voting & tabulation issues.
Bonus: If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
