Results from a new Deloitte survey of 350 global audit committee members suggest that audit committees may not feel prepared to oversee the data collection and other changes that enhanced climate change disclosures and strategies may require. The survey also shows that at this point, there’s quite a bit of variation in the climate change responsibilities that audit committees are taking on. Some committee members feel that they lack a clear mandate to do what may be expected externally.
Here are some key stats (also see this Cooley blog):
– 62% of audit committee respondents in the Americas believe that climate change has no material impact on the organization
– When it comes to climate related matters, audit committees in the Americas are most likely to have oversight responsibility for risk management (63%), the front half of disclosure in the annual report, such as narrative climate risk and TCFD info (52%), the impact of climate risks & opportunities in financials, including in relation to judgments & estimates (54%), external audit’s work in climate-change related financial statement risks (53%) and assurance of climate-related info and disclosure (42%)
– 54% of audit committee respondents in the Americas said they don’t have the information, capabilities, or mandate to fulfill climate regulatory responsibilities or climate reduction targets
– The main internal challenges in overseeing climate change was the lack of clear strategy in relation to climate for the organization (65%), followed by poor quality of data (46%)
– Although 8% of audit committees in the Americas discuss climate change at every meeting, nearly 60% of global respondents said that their audit committees do not discuss climate change at all or as a fixed agenda item.
– 52% said that some or all of their audit committee members are “climate literate” – 48% said their committees were not “climate literate” or relied on just one committee member – nearly 90% seem to want more education versus different board members
– 18% of global respondents said that their climate impact assessment is reflected in the financial statements
– 42% of global respondents said that their organization’s climate response is not as swift and robust as they would like – 58% were satisfied
– Liz Dunshee
EY is out with their 10th annual survey of audit committee disclosures – finding that committees are continuing to share more info about their role and work. The survey primarily looks at 2021 proxy statements from Fortune 100 companies. It also includes stats about auditor ratification support and audit committee composition at a bigger group of companies. The areas with the most year-over-year change relate to audit quality & the committee’s oversight role for non-financial risks. Here are some of the key takeaways:
– This year, 71% of reviewed companies disclosed factors used in the audit committee’s assessment of the external auditor qualifications and work quality, up from 64% last year. Only 15% of these companies made that disclosure in 2012.
– Nearly 92% of reviewed companies disclosed that the audit committee considers non-audit fees and services when assessing auditor independence vs. just 16% in 2012.
– Nearly 70% of reviewed companies stated that they consider the impact of changing auditors when assessing whether to retain the current external auditor, and 79% disclose the tenure of the current auditor. That’s up from just 3% and 23%, respectively, in 2012.
EY also found that 76% of the reviewed companies included additional disclosures around risks beyond financial reporting that were being overseen by the audit committee. Some of these top risks being overseen by audit committees include cybersecurity, data privacy, enterprise risk management and ESG. Here’s more detail on that piece:
– Nearly 70% of reviewed companies disclosed that the audit committee oversees cybersecurity matters.
– Notably, 10% of reviewed companies discussed the audit committee’s role in ESG matters, up from 6% last year. These matters include oversight of climate change risks as they relate to financial and operational risk exposures and other environmental, health and safety-related matters.
On “Critical Audit Matters,” EY found that 16 out of 72 companies discussed the audit committee’s review and discussion of CAMs with the external auditors. Only one company noted the number of CAMs identified.
As you prepare your disclosures for 2022, remember that our 49-page “Audit Committee Disclosure” Handbook can help you efficiently resolve questions that arise. It covers the regulatory requirements for audit committees as well as real-world disclosure trends.
– Liz Dunshee
Here are results from our recent survey on COVID-related adjustments to insider trading policies:
1. Who owns/administers your company’s insider trading policy (e.g., sets window open/close dates, determines employees subject to window periods, provides pre-clearance for transactions, etc.)?
– Corporate secretary department – 77%
– Ethics & compliance office or similar function – 11%
– Corporate stock plan department – 1%
– Combination of 1 or more of the above – 11%
2. Has your company made changes to the policy as a result of Covid-19?
– Yes, it covers more employees – 2%
– Yes, we’ve instituted an event-specific closed window period – 10%
– No – 88%
3. Has your company issued more frequent communication about the policy during the Covid-19 pandemic?
– Yes – 22%
– No – 78%
4. If you’ve issued more frequent communication about the policy, how frequent?
– Once – 67%
– Twice so far – 28%
– More often – 5%
5. If you haven’t issued more frequent communication, are you planning to do so and if so when?
– No – 69%
– Yes, within the next month – 2%
– Haven’t decided yet, will depend upon ongoing developments – 29%
As a reminder, we’ve previously posted the transcript from our webcast for members, “Insider Trading Policies & Rule 10b5-1 Plans.” We’re keeping an eye out on further SEC developments with insider trading policies – stay tuned!
Please also take a moment to participate anonymously in these surveys:
– “Quick Survey on Board Meeting Health Protocols”
– “Quick Survey on Board Committees – Risk and Cybersecurity”
– Liz Dunshee
Here’s something John recently wrote on our free DealLawyers.com blog:
The question of the legality of a dividend or repurchase under Delaware law is one that often arises in leveraged recaps and other transactions involving large distributions to shareholders. The answer usually depends on whether the company has sufficient “surplus” within the meaning of Section 154 of the DGCL. The Delaware Supreme Court has held that what matters in the surplus calculation is the present value of the company’s assets & liabilities, not what’s reflected on the balance sheet. Since that’s the case, valuations are often used to determine the amount of available surplus.
While that’s a pretty common practice, there’s not a lot of Delaware case law on how the board’s valuation decisions will be assessed. That’s kind of disconcerting, particularly since directors face the prospect of personal liability for unlawful dividends or stock repurchases. Fortunately, the Chancery Court’s recent decision in In re The Chemours Company Derivative Litigation, (Del. Ch.; 11/21), provides some guidance to boards engaging in this process. Here’s an excerpt from this Faegre Drinker memo on the decision:
In this case, the board approved both dividends and stock repurchases at a time when the company also faced legacy contingent environmental liabilities that conceivably could render Chemours insolvent.
The court deferred to the board’s determination that there was sufficient surplus to permit these transactions, even though the board looked beyond GAAP-metrics to evaluate its contingent liabilities. The court held that it “will defer to the Board’s surplus calculation ‘so long as [the directors] evaluate assets and liabilities in good faith, on the basis of acceptable data, by methods that they reasonably believe reflect present values, and arrive at a determination of the surplus that is not so far off the mark as to constitute actual or constructive fraud.” This standard is consistent with the court’s prior guidance that the DGCL “does not require any particular method of calculating surplus, but simply prescribes factors,” total assets and total liabilities, “that any such calculation must include.”
As for reliance on experts, the court held that, under the DGCL, utilization of and good faith reliance on experts “fully protects” directors from personal liability arising from their surplus calculation. In reaching this conclusion, the court rejected the argument that the directors were required to second-guess the GAAP-based reserves calculated by the experts — an analysis that permitted the board to significantly reduce the size of these liabilities on Chemours’ balance sheet.
The memo goes on to provide some thoughts on the key takeaways from the decision, including the need for the board to carefully compile and review accurate data on assets & liabilities, and to retain an expert in any situation where the calculation of surplus may be an issue.
– Liz Dunshee
We continue to share daily posts about career issues and board matters on our “Mentor Blog” – which is available to TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Time to Refresh Your Compliance Training
– C-Suite Executives Want More Effective & More Diverse Directors
– Supply Chains: How to Manage Cyber Risk
– PCAOB 2020 Inspection Reports for the Big 4+ Are Out!
– Books & Records Demands: A Primer for Boards
– Liz Dunshee
The SEC’s Acting Chief Accountant, Paul Munter, issued a statement earlier this week. I might be reading too much into it, but when public statements are issued out of the blue, I take it to mean that there’s some urgency and importance to the issue, and the SEC might be paying extra attention to it.
The purpose of this particular statement is to remind auditors, managers, and audit committees of the importance of auditor independence – and the need to continually monitor independence in light of business activities & relationships. Here’s an excerpt:
We continue to encourage audit committees to consider the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that potentially affect auditor independence. This is particularly relevant in the current environment as companies seek to access public markets through new and innovative transactions, and audit firms continue to expand business relationships and non-audit services.
Management, the audit committee and the independent auditor should proactively seek to inform themselves of any potential impact to auditor independence, in fact and appearance, as companies negotiate potential transactions with third parties. This requires all parties to potential transactions to understand the filings that could be required by such transactions, the existing auditors’ relationship with counterparties, and the potential impact of transactions and the auditor’s relationships with the counterparty on the existing auditor’s ability to continue to comply with the Commission’s auditor independence rule applicable to such filings. This proactive monitoring requires management, the audit committee, and the independent auditor to each consider the potential effects of the auditor’s existing business and service relationships with other companies on the auditor’s ability to remain independent of the issuer if a contemplated transaction is consummated.
For example, it is important to understand what business relationships exist, including non-audit service relationships, between the audit firm and other entities that will, or in the future could, require an audit, become the existing audit entity’s affiliates, or result in other companies that have significant influence over the entity. Given the importance of independence as it relates to the audit of financial statements, these relationships and services and their implications to auditor independence should be carefully considered when management is negotiating the timing and substance of a transaction with third parties.
The statement also urges an understanding of the general standard of independence in Rule 2-01 of Reg S-X. This Cooley blog provides even more context and lays out the bottom line for companies:
It is important for companies to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should certainly be a recurring menu item on the audit committee’s plate.
– Liz Dunshee
Earlier this week, I blogged about the PCAOB’s summary of 2020 inspection findings. A member emailed to ask whether the results of PCAOB audits are made public – because deficiencies in auditor performance could be very relevant to an audit committee’s decision to retain the auditor for the next year.
The PCAOB does indeed post inspection reports – as well as disciplinary actions. However, there’s a big lag between when inspections occur and when reports are issued. Audit committee chairs have told the PCAOB that they’re concerned about that, according to Appendix B of this Center for Audit Quality memo (pg. 14) – which also provides questions that audit committees can ask auditors about their inspections.
In his statement from earlier this week, SEC Acting Chief Accountant Paul Munter noted that the PCAOB inspection program is a key component of ensuring audit quality, and that audit committees should always be focused on audit quality. In my experience, the Big Four and some other large accounting firms always present to the audit committee about inspection findings – but you can’t count on all firms to do that. Especially OUS firms. A lot of mid-sized foreign private issuers that have a primary listing on the NYSE or Nasdaq aren’t a good fit for the Big Four, and one reason their audit quality can suffer is that their audit committees aren’t able to reliably get inspection info from smaller OUS audit firms in advance of engagement decisions.
If an audit committee is unable to access detailed inspection findings, the sample questions from the CAQ memo and the PCAOB’s summary of findings can be a starting point for digging for information.
– Liz Dunshee
The SEC announced yesterday that John Nester, formerly the Director of the Office of Public Affairs, is retiring from the agency at the end of this month after nearly 25 years of SEC service. Since April, John has been helping the Office of the Chief Operating Officer prepare the SEC and its Staff for success in a post-pandemic environment. As Public Affairs Director from 2006 until April 2021, John helped modernized the SEC’s external and internal communications, which doubled the agency’s web traffic!
Earlier in his SEC career, John was a member of the SEC’s investor education office, where he conceived and helped organize a national financial literacy campaign backed by state securities regulators and nearly three dozen government agencies, public service organizations, industry associations, and educational groups. John received many awards throughout his SEC tenure, including the Distinguished Service Award, which is the Commission’s highest honor. We would like to congratulate John on his career and his contributions to the SEC’s mission.
– Liz Dunshee
This WSJ article recaps findings from the annual Spencer Stuart Board Index and The Conference Board’s annual Corporate Board Practices analysis. The big takeaway from both surveys is that large US companies are adding directors from underrepresented racial & ethnic backgrounds. Here’s an excerpt from Spencer Stuart’s findings:
The new class of S&P 500 directors is the most diverse ever. Directors from historically underrepresented groups — including women and Black/African American, Asian, Hispanic/Latino/a, American Indian/Alaska native or multiracial men — account for 72% of all new directors, compared with 59% last year. Nearly half — 47% — of the 456 new independent director class are from historically underrepresented racial and ethnic groups, and 43% are women, including 18% female Black/African American, Asian, Hispanic/Latina, American Indian/Alaska native or multiracial directors.
But as the WSJ article points out, people who identify as white and/or male are far from getting squeezed out:
With the new arrivals, a little over three-quarters of S&P 500 board members were white and 70% were men, according to Spencer Stuart.
The Conference Board’s findings show that the demographics of smaller companies’ boards are slower to change. Yet, companies of all sizes are adding more disclosure to their proxy statements about board composition, which makes it easier to track data. 59% of the S&P 500 now disclose demographics info (compared to 24% last year), and 27% of the Russell 3000 (compared to 8% last year).
There’s mixed data on director tenure:
– According to Spencer Stuart, the average tenure of S&P 500 directors is 7.7 years, which is a year less on average than in 2011.
– According to The Conference Board, the longest average sitting director tenure was recorded in the Russell 3000, at 34.1 years; in comparison, the longest average tenure found in the S&P 500 was 22.4. (Median tenure is much shorter and more aligned with Spencer Stuart’s findings.)
So, for anyone who wants to join a board or change director demographics, it appears that the lack of turnover is one of the biggest ongoing barriers. Spencer Stuart continues to advocate for board refreshment based on meaningful director evaluations as the way to get a variety of valuable backgrounds, experiences & skills – versus relying on a mandatory retirement age or tenure policy, or expanding the size of the board. This Russell Reynolds blog gives additional thoughts on how to improve the board refreshment process.
Similarly, The Conference Board recommends the boards prioritize diversity by taking these steps:
– Revisit director performance assessment processes to ensure they promote skill renewal and the injection of new ideas and perspectives. Directors should appreciate the importance of maintaining diversity of tenures across the board and commit to a healthy rate of refreshment.
– Develop a multi-year board succession plan where the need for strategic skills and expertise is evaluated through the lens of diversity and inclusion. The long-term plan should include developing relationships with diverse junior executives who may one day become attractive director candidates for boards of other companies. Rather than an episodic exercise, director succession should align with an ongoing board development program and be rigorously informed by an emphasis on diversity.
– Investigate best practices on the integration of DEI metrics into senior executives’ incentive plans. Recent studies illustrate how more and more companies, including large ones, have started to set executive targets meant to raise minority representation in managerial positions. Many companies that are still lagging in the promotion of diversity, equity, and inclusion have much to learn from peer experiences. Moreover, setting DEI objectives can help to develop a diverse pool of senior managers who could one day aspire to become board nominees. To support these endeavors, in July 2021, The Conference Board has introduced a new screening tool to its ESG Advantage Benchmarking Platform that allows access to granular information on the use of ESG-related metrics of performance across the Russell 3000 index.
– Consider adopting a Board Diversity Matrix disclosure model that complies with the guidelines recently published by the NASDAQ Listing Center. The information provided (whether in the proxy statement or the company’s corporate website) must be based on the self-identification of each member of the board of directors. For a US incorporated company, any director who chooses not to disclose a gender should be included under “Did Not Disclose Gender” and any director who chooses not to identify as any race or not to identify as LGBTQ+ should be included in the “Did Not Disclose Demographic Background” category. Following the first year of adoption of the matrix, to allow readers to appreciate the progress made, the guidelines establish that all companies must include in their disclosure the current year and immediately prior year diversity statistics.
– Some commentators have observed that the new California law, other similar new state laws, and the NASDAQ listing rule have missed the opportunity to extend the notion of board diversity to executives with disabilities. In a press release following the approval of the NASDAQ rule, in particular, Disability:IN (a global organization driving disability inclusion and equality in business) and the American Association of People with Disabilities (AAPD) expressed their deep disappointment with the SEC’s decision, which took place despite the vigorous lobbying campaigns by a wide group of stake-holders — including New York State Comptroller Thomas P. DiNapoli, the Leadership Council on Civil and Human Rights, the National LGBT Chamber of Commerce, the US Black Chamber and Women Impacting Public Policy.
Boards of directors committed to a more diverse and inclusive leadership development and board recruitment program can remedy this omission. They can learn from experiences such as the Valuable 500, a global disability network launched at the annual Davos gathering of business leaders hosted by the World Economic Forum in 2019: the organization recently announced having reached its target of 500 major companies that officially put disability inclusion on their boardroom agenda—including Microsoft, Unilever, Google, and Coca-Cola.
– Liz Dunshee
This Clermont Partners blog points out that – although there’s a growing expectation among investors that boards will expressly oversee “ESG” risks & opportunities – some companies are facing gridlock & indecision about who gets the assignment.
The blog acknowledges that there’s no one way to approach this. It lays out pros & cons for assigning ESG oversight in full to one of the “regular” standing committees, creating a standalone ESG committee, or involving the full board. For example, here’s what it says about the “full board” approach – which involves dispersing the responsibility for parts of ESG oversight to various committees:
The Pros:
Full board oversight ensures that ESG management will receive a broad and diverse set of perspectives, experiences, and ideas. It also allows for the group to integrate ESG into all board committees in appropriate ways, rather than selecting just one committee to carry the load.
The Cons:
Especially for boards with upward of 10 members, there may simply be too many cooks in the kitchen. A variety of perspectives is helpful, until it begins to meaningfully slow down processes. Full board ownership also can lead to involvement and management that is too strategic and abstract and not rooted in measurable actions for the company.
Along similar lines, this NACD blog discusses how to create a “climate fluent” board. Panelists from a recent NACD summit urged companies to rely not just on one director who is an “expert” but to have a diverse board that’s willing to ask questions and learn. NACD says that “climate governance” means keeping sustainability front of mind during all decisions and is the most reliable way to set and achieve ESG goals.
– Liz Dunshee
