With ESG gaining most of its momentum relatively recently, it’s not too surprising that the executive careers of many directors didn’t include a strong focus on sustainable operations metrics. Now, though, there’s a risk that investors could start to view that as a skill gap. Here’s an excerpt from a study published last week that’s making the rounds:
NYU Stern’s Center for Sustainable Business undertook a deeper dive and analyzed the individual credentials of the 1188 Fortune 100 board directors based on Bloomberg and company bios in 2019 (see box 1 on methodology),and found that 29% of (1188) directors had relevant ESG credentials. 29% seems like a decent showing, until we drill deeper and find that most of the experience is under the S; 21% of board members have relevant S experience, against 6% each for E and G (numbers are higher than 29% as some members had more than one credential).
The “S” credentials were clustered around workplace diversity (5%) and healthcare issues (generally through board memberships with medical facilities).
An issue of growing materiality, cyber/telecom security, had just eight board members with expertise. There were very few directors who had experience with ethics,transparency, corruption, and other material good governance issues. The third largest category across E, S & G and the largest in the G category was accounting oversight (G) at 2.6%. U.S. boards are required to have a least one board member with audit/finance background and most boards have at least two with that background. However, we only included board members with exhibited leadership in this area, such as being a trustee of the International Financial Reporting Standards Board or a member of the Federal Accounting Standards Advisory Board. The second largest area of expertise (1.0%) under the G was experience with regulatory bodies such the SEC or FCC.
Two areas of material importance to most companies and to investors, climate and water,had just five and two board members with relevant experience, respectively, across all1188 Fortune 100 board members. In general, there is very little director expertise for the “E,” with all nine categories at approximately 1%.
The study has shocking numbers but loses some credibility due to the way it’s measuring “relevant credentials” – as noted in this Cooley blog. But the fact that the data is out there – and investors’ growing interest in disclosure about the board’s role in ESG oversight – does suggest that there could be a benefit to examining and enhancing board sustainability credentials (through education and/or recruitment), and tying skills disclosure to “ESG” experience. For more thoughts on how expectations are evolving, see this Morrow Sodali memo on the future of the board.
NYSE: Annual Compliance Reminders
The NYSE has sent its “annual compliance letter” to remind listed companies of their obligations. The letter reminds listed companies that in response to market and economic effects of the pandemic, the NYSE has provided relief to listed companies from certain shareholder approval requirements. The NYSE is seeking to enact this relief as a permanent change to its shareholder approval rules – John blogged recently that the SEC is soliciting public comment on the proposed rule change.
The NYSE annual compliance letter is a good resource to have on hand – all the NYSE email and telephone number contact information is provided and the letter explains when and how listed companies should contact the exchange for various matters.
SEC Enforcement: Melissa Hodgman Named Acting Director
The SEC announced last week that Melissa Hodgman has been named as Acting Director of the agency’s Enforcement Division. Melissa was previously serving as Associate Director in the Enforcement Division and began working in the Division in 2008. Prior to joining the SEC, she was in private practice with Milbank, Tweed, Hadley and McCloy.
I was hoping to punt coverage of the amateur trading insanity to John’s blog rotation next week, but it seems notable that the SEC’s Acting Chair Allison Herren Lee – along with Pete Driscoll, Director of the Division of Examinations, and Christian Sabella, Acting Director of the Division of Trading and Markets – issued this joint statement yesterday to say they’re on the case. Of course, the statement doesn’t name names, but it’s hard to think it’s referring to anything other than the out-of-this-world trading of GameStop and a few other companies, which has been the subject of at least 10 WSJ articles, an Elon Musk tweet and a Vox explainer in the past 24-48 hours.
GameStop’s stock triggered at least nine trading halts on Monday, according to Bloomberg News. It closed yesterday at $347.51, down slightly from its opening price but still more than a 1740% increase over the high-teens closing price of earlier this month. And while the company isn’t in passive index funds that track to the S&P 500, it is included in some retail exchange traded funds, so the trading is impacting more than just the company itself. Don’t worry, “All is well!”
My favorite coverage so far has been from Matt Levine – here’s an excerpt from yesterday’s “Money Stuff” column:
You know who has a weird job right now? George Sherman. GameStop’s executives and board of directors don’t seem to have said much recently. What could they say? “Huh, nice that the stock’s up.” One important thing to remember is that while you and I and Reddit and Elon Musk can all treat GameStop’s stock as an absurd gambling token, a toy adrift on market sentiment far from any economic reality, it is still the stock of a company. The company’s executives still come to work each day and have to figure out what this all means. Does the price signal sent by the capital markets tell them something about how they should invest and what their hurdle rate for new projects should be? (Lol no.) Should they keep doing the stock buyback that they still have authorized? (Lol no.)
Should they sell a ton of stock to all these redditors who want it so badly? Yes, of course, absolutely, I said so on Monday, but it’s tricky. For one thing if they sell stock at the top they will surely get sued. For another thing, even at these prices, you want something sensible to do with the money; you can’t be like “we’re gonna sell a billion dollars of stock because we can, and use the money to pay ourselves bonuses and open some stores I guess?” Also, though, what is happening with their stock is a strange and for all anyone knows delicate piece of magic, and it’s very possible that filing to sell more stock would mess it up.[3] For technical reasons (more shares for short sellers to borrow), for fundamental reasons (dilution?), for anti-establishment resentment reasons (“ahh Wall Street is taking advantage of this rally for its own ends”) or for general emotional reasons (“man even GameStop is a seller at these prices”). I would not be especially surprised if GameStop announced a stock offering and the stock fell all the way back to, you know what I am not going to type a number here, but let’s just say a normal price.
GameStop actually does have a $100 million ATM offering going right now, under a Form S-3ASR that it filed in early December – or at least, it did have an ATM offering going at some point in the recent past, and it hasn’t reported whether all of that stock has been sold. If there’s still room under the program, theoretically it could hit the market at these wild valuations.
That could be a little more doable than, say, filing a pro supp right now and including disclosure that anyone who buys in the offering is nuts. Hertz tried that last summer when it was in bankruptcy and also trading at weirdly high values, and then quickly suspended the offering when the SEC Staff raised questions. Any other fast moves to capitalize on this could not only open the company up to potential shareholder litigation, but also leave it holding a big bag of cash that looks pretty attractive to activists if and when the stock falls back to Earth.
It’s hard to say which company will next catch the eye of the Reddit YOLO crowd – there are a few contenders already, which the SEC is probably watching. If these speculative frenzies continue, it can’t hurt to be prepared for the questions you’ll inevitably get as counsel. As a starting point, check out these MoFo FAQs on at-the-market offerings and Regulation M – and the other resources in our “Equity Offerings” Practice Area.
Avoid a “Semi-Hack”: Change Your URLs
Last week, as reported in the Financial Times, Intel released its earnings about 12 minutes earlier than planned due to some people getting early access to an infographic that described the quarterly results. Kudos to the company for acting quickly to address the issue – they were scheduled to put everything out right after market close, but instead reported at about 3:48 p.m.
As Byrne Hobart notes, what actually caused people to have early access to the infographic in this case was that they realized the URL for each quarter’s earnings followed a sequential pattern, and the infographic was posted live to that page before earnings were officially released:
Intel had an infographic for their Q3 earnings, in a file that ended with “Q3_2020_Infographic.pdf” and had a URL with a sequential numbering scheme. Q4’s earnings presentation had the same file naming scheme, so it was easy to guess.
This kind of thing happens from time to time, and it’s an interesting edge case in US securities law. Technically, the information wasn’t misappropriated; no one at Intel violated a duty to keep it confidential in exchange for some consideration from a trader. But in practice, the technicality matters less than appearances. Because it looks like insider trading, and fits the broad definition of hacking, trading based on the possession of this infographic is a poor risk-reward even if it turns out to be legal.
I personally love sequential URLs for their convenience. But I guess whatever technical securities law questions this type of scenario might raise, the practical takeaway is that the convenience isn’t worth it when it comes to posting material non-public information. Either keep your files gated until go-time, or change your URLs to gobbledygook.
– Innovations in Transactional Law: Finding the Next Opportunities for Efficiency
Remember that you can also subscribe to our newsletters electronically – an option that many people are taking advantage of in the “remote work” environment. Also – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we make all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
According to Edelman’s 2021 Trust Barometer, we are experiencing a “rampant infodemic” of misinformation and widespread mistrust of societal institutions around the world. Poor information hygiene has left us unable to agree on or accomplish much of anything – including fighting the pandemic. Business has emerged as the most ethical, competent and trusted institution – with 61% of people globally and 54% of US respondents trusting business, compared to lower numbers for governments, NGOs and the media.
Few people would’ve predicted that a majority of Americans would trust big business when we were emerging from the financial crisis a dozen years ago, but here we are. Maybe we can attribute some of these results to the increased focus on “stakeholders” during the last couple of years, or maybe people are just desperate for someone to step up. But with great power comes great responsibility. According to the survey (also see this WSJ article):
– 86% of people expect CEOs to publicly speak out on social challenges like the pandemic impact, job automation, societal issues and local community issues
– 68% think that CEOs should step in when the government doesn’t fix societal problems
– Only 31% of people think brands are living up to expectations of doing an excellent job in helping the country overcome challenges
I blogged a couple of weeks ago on our Mentor Blog about the CLO’s role in CEO “activism” – and it looks like that’s likely to grow in importance. We also have memos on corporate political activism in our “ESG” Practice Area to help you navigate these expectations.
An earlier report from Edelman also looked at the role that executive pay can play in building trust, especially among institutional investors. I blogged last month on CompensationStandards.com that having a CEO pay ratio in line with those of peers and linking executive pay to ESG performance now impact trust “a great deal.”
Paul Munter Named SEC’s Acting Chief Accountant
Last Friday, the SEC announced that Paul Munter will become the agency’s Acting Chief Accountant, effective upon Sagar Teotia’s previously-announced departure from the Commission in February. Sagar had served as Chief Accountant since 2019 – and Paul has served as the SEC’s Deputy Chief Accountant since 2019.
Tune in tomorrow for the webcast – Conflict Minerals & Resource Extraction: Latest Developments – to hear our own Dave Lynn of Morrison & Foerster, Lawrence Heim of Responsible Business Alliance/Responsible Minerals Initiatives, Michael Littenberg of Ropes & Gray and Christine Robinson of Deloitte discuss what you should be considering as you prepare this year’s Form SD, and if you’re a resource extraction issuer, hear how to plan for the payments disclosure required under the SEC’s new rules to implement Exchange Act Section 13(q).
Larry Fink is sending his annual letter to CEOs this morning. It’s a little later than usual and I’ve been feeling like I was waiting for Moses to come down from the mountain. Based on the signals that BlackRock sent with the Stewardship Expectations it released in December (which, as I blogged on our Proxy Season Blog, said the asset manager would put more companies “on watch” for climate risks), it’s not too surprising that the letter urges companies to disclose their “net zero” business plan and to explain how their board oversees that strategy. But if anyone had any doubts that BlackRock wants that information, this letter should lay those to rest. Here are the high points (also see this NYT DealBook article):
– We are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050.
– We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.
– We strongly support moving to a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns.
– Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them. (While the world moves towards a single standard, BlackRock continues to endorse TCFD- and SASB-aligned reporting.)
– In addition, TCFD should be embraced by large private companies and public debt issuers
– As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region.
The letter says the lines are blurring between “E” & “S” issues – for example, climate change has a disproportionate impact on low-income communities. So improved data and disclosure are all the more important to understand the interdependence between these topics.
Mr. Fink is also bullish on sustainability investments. In his letter to clients that was also released today, he explained that they’ll be publishing a temperature alignment metric for their funds, implementing a “heightened-scrutiny model” in active portfolios (including potential divestments), launching more sustainability investment products, and “using stewardship to ensure that the companies our clients are invested in are both mitigating climate risk and considering the opportunities presented by the net zero transition.”
NYC Pension Funds to Divest $4 Billion From Fossil Fuels
BlackRock isn’t the only investor focused on climate change. We’ve been blogging about divestments over on the Proxy Season Blog (including pressure on BlackRock). Yesterday, NYC Comptroller Scott Stringer announced that two of the City’s pension funds had voted to divest their portfolios of $4 billion from fossil fuel companies. Here’s an excerpt:
The New York City Employees’ Retirement System (NYCERS) and New York City Teachers’ Retirement System (TRS) voted to approve divestments today and the New York City Board of Education Retirement System (BERS) is expected to move forward on a divestment vote imminently. Securities were identified based on demonstrated risk from fossil fuel reserves and business activity, and the trustees will continue to evaluate risk in their portfolios to determine additional actions as warranted. The names of companies and the final scope of the divestment will be released following the sale of all targeted securities, which will be completed in a prudent manner to achieve best execution. The divestment is expected to be complete within the original five year timeline. The announcement by the Mayor, Comptroller, and Trustees follows an extensive and thorough fiduciary process to prudently assess the portfolio’s exposure to fossil fuel stranded asset risk and industry decline and other financial risks stemming from climate change.
In January 2018, the trustees announced a goal to divest from fossil fuel reserve owners within five years, consistent with fiduciary duty. The Systems retained independent investment consultants who conducted investment analyses showing the risks posed by fossil fuel companies and the prudent nature of the divestment actions adopted by the Boards.
In September 2018, the Mayor and Comptroller also jointly announced a goal of doubling the pension funds’ investments in climate solutions from 1% to 2%, or about $4 billion within 3 years. Climate solutions include renewable energy, climate infrastructure, green real estate, and other investments that will help achieve the goals of the Paris Climate Agreement. The City is on track to achieve this goal.
Tomorrow’s Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the Section16.net webcast – “Alan Dye on the Latest Section 16 Developments.” This is our annual co-hosted program with the NASPP, in which Barbara Baksa interviews Alan about practical tips for refining your Section 16 procedures and avoiding pitfalls. Section16.net members can submit questions in advance to adye@Section16.net.
Last week, President Biden’s Chief of Staff, Ronald Klain, issued a memo to heads of executive departments & agencies to freeze new & pending rules (and guidance) until the incoming administration’s appointees have a chance to review them. This is a separate thing from the ability that Congress has to overturn recent laws under the Congressional Review Act – which, as I blogged earlier this month and this Cooley blog tracks through in great detail, could apply to SEC rules that have been adopted since last summer.
Here are three “regulatory freeze” points worth noting:
1. The regulatory freeze imposed by the new administration is a pretty routine thing – see this Davis Polk blog explaining the impact of a similar memo issued by the Trump administration in 2017 – but these notices still tend to generate a lot of questions each time around.
2. Because Klain’s memo expansively defines the term “rule,” this Gibson Dunn memo suggests the SEC could have an opening to delay rules that have not yet become effective.
3. However, like freezes issued under prior administrations, this one is addressed just to executive departments & agencies and doesn’t appear to apply to independent agencies like the SEC – nor does it request that independent agencies voluntarily comply with the freeze, as some prior iterations have done.
Given that last point, it appears right now that the SEC’s recently adopted and not-yet-effective rules on streamlined MD&A and financial disclosures, private placements, etc. will still go effective as planned. If there are any announcements one way or the other, we’ll make sure to blog about them here.
GDPR: First US Tech Company Gets Dinged – More To Come?
In mid December, the Irish Data Protection Commission announced that it was assessing a $546,000 fine against Twitter for late notification of a data breach that occurred in late 2018. Companies are supposed to notify the regulator 72 hours after a breach – but Twitter waited about two weeks, saying it didn’t appreciate the severity of the issue. It’s not the first GDPR fine against an American company – but this WSJ article explains that it’s an important bellwether because it’s the first in a long pipeline of privacy cases involving US tech companies, including Facebook, Apple and Google – and privacy advocates want those fines to be assessed more quickly than the two years it took for Twitter.
If you enjoy tracking this type of thing, check out this list of “major” GDPR fines to-date. This D&O Diary blog emphasizes that US companies should be paying attention to EU regulations and that privacy-related issues are a growing area of corporate risk:
The regulatory risk is an important exposure, and could also result not just in regulatory enforcement actions, but also follow-on actions as investors and others allege that companies either failed to take steps to protect the company against regulatory action or misrepresented the level of its regulatory compliance. No matter how you slice it, privacy-related issues and concerns represent a significant potential future source of corporate liability exposures.
Edgar: Goodbye “Fake” Filings, Hello Reliability!
In August, Lynn blogged about amendments the SEC had proposed making to Reg S-T in order to promote the reliability and integrity of Edgar submission. The SEC recently announced that it had adopted those amendments – by adding new Rule 15 of Reg S-T, which will become effective if & when the final rule is published in the Federal Register. Although this might be the nail in the coffin for “fake” SEC filings that we enjoy blogging about so much, we’re celebrating that these improvements could help resolve Edgar outages and other administrative problems.
Another big part of Rule 15 is that it establishes a process for the SEC to notify filers and other “relevant persons” – vendors or suppliers who make the submission on behalf of the company – about actions that it takes under the rule. That will hopefully make it even easier to resolve submission issues, although the Commission will typically just continue to work with filers in advance of taking action, as it already does. Here are the steps that new Rule 15 will allow the SEC to take:
• Redact, remove, or prevent dissemination of sensitive personally identifiable information that if released may result in financial or personal harm;
• Prevent submissions that pose a cybersecurity threat;
• Correct system or Commission staff errors;
• Remove or prevent dissemination of submissions made under an incorrect EDGAR identifier;
• Prevent the ability to make submissions when there are disputes over the authority to use EDGAR access codes;
• Prevent acceptance or dissemination of an attempted submission that it has reason to believe may be misleading or manipulative while evaluating the circumstances surrounding the submission, and allow acceptance or dissemination if its concerns are satisfactorily addressed;
• Prevent an unauthorized submission or otherwise remove a filer’s access; and
• Remedy similar administrative issues relating to submissions
And in related news, the SEC announced that it has named Jed Hickman as the Director of the SEC’s Edgar Business Office. Jed’s been serving as Acting Director of that office since April 2019. The person holding this office has authority to take the actions under new Rule 15 – as well as under existing rules about filing date adjustments and the continuing hardship exemption.
If you’re looking for an easy way to connect the dots on disclosure and ESG issues, we’ve got you covered with podcasts! Sit in on a convo between Dave Lynn and his guests on our “Deep Dive With Dave” series, or get governance highlights from my interviews of members of our community. Check out our latest episodes below – and you can also visit our podcast page for new postings:
In this 23-minute episode, Dave and WilmerHale’s Lillian Brown discuss these shareholder proposal developments:
– Key takeaways from the 2020 proxy season
– Evaluating the SEC Staff’s approach to no-action requests in 2020
– Should I include a board analysis in my shareholder proposal no-action letter?
– New and revised proposal topics for 2021
In this 30-minute episode, Dave and our own John Jenkins give a “risk factor workshop” for companies preparing to comply with the SEC’s amendments to Item 105 of Reg S-K and to explain the impact of the pandemic. Dave and John built on the very practical “Best Practices for Drafting Your Risk Factors” in the January-February 2018 issue of The Corporate Counsel newsletter and covered these topics:
– Tackling the amendments to Item 105 of Regulation S-K
– Hypothetical risk factor language – where are we now?
– What should I do with my COVID-19 risk factor in the next Form 10-K?
– What are some other risk areas for 2021?
– John’s risk factor tips
In this 13-minute episode with EY Partner and former Corp Fin Chief Accountant Mark Kronforst, Dave and Mark examine the Reg S-X amendments for disclosure about acquisitions & dispositions, including:
– How significant are these changes to Regulation S-X for public companies?
– How do the new significance tests work?
– Will companies need to provide more pro forma financial information?
– Do the changes to the significance tests affect disclosures outside of Rule 3-05, such as Rule 3-09?
– What potential pitfalls should companies consider with this new approach?
– When do these changes go into effect and how does early compliance work?
In this 15-minute episode, I talked with Alan Smith, chair of Fenwick & West’s corporate group, about the phenomenon of virtual board meetings. We covered these topics:
– What special issues exist for boards of directors who are meeting in a virtual format
– What should board advisors be doing to ensure that the board meetings are secure from a technology perspective and that all document retention policies are being followed for notes or recordings
– What are some effective practices to encourage the type of dialogue and interaction that boards would have at an in-person meeting
– Beneficial “virtual” practices that could continue after the pandemic
– Recommended steps for companies who are bringing on one or more directors while we’re in this environment – either because they’re newly public or just because of regular refreshment practices
– Traps for the unwary that board advisors should be watching for
Lastly, I continue to team up with Courtney Kamlet of Vontier to interview “Women Governance Gurus” about their career paths – and what they see on the horizon. Feedspot recently ranked us as one of the “Top 15” corporate governance podcasts on the web. Check out our latest episodes:
– Kristina Fink, Vice President, Group Counsel, Deputy Corporate Secretary at American Express
– Tanuja Dehne, President & CEO of the Geraldine R. Dodge Foundation and a public company board member
SEC Rulemaking: Will 2020’s Efforts Be Undone?
Our colleague Mike Gettelman blogged earlier this week about the prospect of recent SEC rulemaking being undone by the Congressional Review Act – a complicated and rarely used law that allows Congress to overturn rules adopted by federal agencies like the Commission. Mike cited 11 rules adopted by a 3-2 vote since July, which could be vulnerable to this clawback.
In the year-end report on the activities of the Office of the Investor Advocate (which is required to be delivered to committees in the House and Senate), Rick Fleming also called for the SEC to reverse several of its own rules, including:
– Rule 14a-8 Amendments – arguing the rules diminish the ability of shareholders with smaller investments to submit proposals and disagreeing with the economic analysis in the rulemaking
– Proxy Advisor Rules – saying investors shouldn’t be forced to pay for feedback mechanisms for companies and that the rules may result in the suppression of dissenting views
– Private Offering Harmonization – expressing a concern with the continued shift of capital-raising from public to private markets
The report also urges the Commission to adopt rules about ESG disclosures, making companies’ SEC filings machine-readable and minimum listing standards for all stock exchanges. Time will tell whether the SEC under the new Administration will revisit – or refine – activities under former Chair Jay Clayton, or will prioritize other initiatives.
A Corner of Normality
What a week. I blogged on Wednesday about BlackRock’s new expectations for political spending disclosure and also on our Mentor Blog about the CLO’s role in CEO “activism.” By the end of that day, a major trade organization which counts 14,000 companies in its membership ranks called for the Vice President to invoke the 25th Amendment. The Business Roundtable, the US Chamber and several individual CEOs also issued statements condemning the assault on the Capitol and the threat to the peaceful transition of power.
On the one hand, it’s difficult to focus on “business as usual” in the midst of the events of this week and the past year. But I, for one, also appreciate having a corner of normality – some form of connection to each other, some info that can make work easier and maybe even some entertainment. We’ll do our best to continue to offer stability – and an alternative to doomscrolling.
Despite 81% of boards saying that they want to add diverse directors, it could be a long process due to low turnover among existing directors. Lynn has blogged that many boards seem to be focusing on overboarding to move the needle, but that isn’t a solution for all companies. The latest Spencer Stuart Board Index highlights these stats from S&P 500 boards during the 2020 proxy season:
– 55% appointed a new independent director – translating to an overall turnover of 0.84 new directors per board – which is similar to rates during the past 5 years
– Of the 272 boards that appointed new independent directors, 28% increased the size of the board to add women – yet increasing board size for more diversity isn’t a sustainable option
– 25% had no change to board composition
– 16% of sitting independent directors on boards with retirement age caps are within 3 years of mandatory retirement
– 6% report having explicit term limits for non-executive directors – the most common limits are 12 or 15 years
– Female representation rose to 28% of all S&P 500 directors – but only 22% of new S&P directors are from underrepresented racial or ethnic groups
– 24% included a commitment in the proxy statement to consider diverse slates when adding a new director
The report goes on to note that the preferred method for board refreshment is a robust board assessment process that includes director self-assessments and peer evaluations. Although director surveys consistently indicate that there’s room for improvement with this process – here’s Lynn’s blog about this year’s PwC director survey, saying that 49% of directors think at least one of their fellow board members should be replaced – anecdotally, things might be improving. Some members are saying that they’ve seen an increase in board evaluations and peer reviews over the last few months.
Small-Cap Capital Formation: COVID’s “Roadshow” Impact
The SEC’s “Office of the Advocate for Small Business Capital Formation” – which covers emerging, privately-held companies up to small-cap public companies – recently released its second Annual Report, which as you might guess by the name of the office, provides data on the state of small business capital formation. There were several SEC rulemakings last year that impacted this set of companies – and page 7 of the report links to video summaries of these changes:
– Accredited investor amendments
– COVID-19 crowdfunding relief
– Accelerated filer amendments (SOX 404(b))
– Capital formation proposal
– Modernizing Rule 15c2-11 governing quotations for OTC securities
– Accredited investor proposal
Of course, the biggest stories in 2020 were the impact of the pandemic and the challenges faced by founders and investors from underrepresented groups. The report says that the number of small businesses decreased by 27% from January through September last year – and gives a state-by-state breakdown of those losses on page 18. The IPO process has also changed in ways that some think will become the “new normal” – at least for companies that are well-known enough to get noticed without needing an in-person meeting. Here are some highlights:
– While traditionally issuers and their underwriters traveled across the country and sometimes across continents to pitch the IPO, in the face of the pandemic, companies and investors have quickly adopted virtual roadshows – benefits to companies included saving time & money from travel and expanded geographical reach
– The average roadshow shortened from 8 days to 4 days
– The reduction in launch time from roadshow to IPO decreased companies’ exposure to market risk & volatility
– Test-the-waters meetings have lengthened
– Prospective investors are indicating interest earlier, giving greater visibility in pricing
– Companies are providing more sophisticated and detailed disclosures about new developments and the impact of the pandemic
Check out the full report for data on Reg D and Reg A offerings, IPOs, the “small size trap” and the state of the market for small public companies (spoiler: there’s been a 52% decline in the number of public companies since 1997, but only a 5% decline in the amount of corporate assets in the public market). On February 4th, the Office is hosting a “Capital Call” to cover the content of the report and allow the public to ask live questions.
Transcript: “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments”
We’ve posted the transcript for our recent webcast, “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments.” This program focused on the SEC’s amendments to Reg S-K Items 101, 103 and 105 – with tips on human capital disclosures, risk factors, and what you should be thinking about for your disclosure controls & procedures. On this upcoming Tuesday, January 12th, we’ll be having another program on the topic of “Streamlined MD&A and Financial Disclosures: Early Considerations.” Don’t miss it!
BlackRock’s Investment Stewardship team recently shared this commentary on corporate political activities – which urges companies to provide transparent disclosure so that investors and other stakeholders can understand how public messaging and strategy are aligned with contributions to lobbying efforts and trade associations. Where the stewardship team notes “material inconsistencies” with stated policy priorities and spending, BlackRock may support a shareholder proposal requesting additional disclosure or explanation.
The asset manager says that companies should provide easy-to-navigate info on their website – and should consider disclosing:
1. The purpose of the company’s political contributions and engagement in lobbying activities and trade associations,and how this activity aligns with the company’s strategy and/or goals of public participation, including the company’s legislative and regulatory priorities.
2. How the company engages in these activities (ex: Government Relations/Policy Team).
3. The company’s political contribution and lobbying policy, including management and board responsibilities.
4. The board’s oversight process for monitoring political contributions and lobbying activities.
5. If the company has established a PAC,and if so,how the PAC’s spending furthers the aims of the company’s political contributions.
6. Trade association memberships for which dues exceed a predetermined threshold that requires board approval or oversight.
7. An affirmation ofcompliance with federal and state laws governing political activities and lobbying.
Congress Expands SEC’s Disgorgement Powers
Lynn blogged last week about the proposed expansion of SEC’s disgorgement powers that was nestled in the 1480-page National Defense Authorization Act for Fiscal Year 2021. Although the President vetoed the bill, Congress overrode that and it became law on January 1st. As Lynn noted, the amendments double the statute of limitations for the SEC to seek disgorgement for fraud claims – from 5 to 10 years – as well as raise a number of interpretive questions. This WilmerHale memo discusses possible implications – here’s an excerpt (also see this commentary from Russ Ryan, former Assistant Director of the SEC’s Enforcement Division and Partner with King & Spalding):
The amendments are notable for the SEC’s enforcement program. Most prominently, the extended statute of limitations for scienter-based fraud may incentivize Division of Enforcement staff to investigate conduct that is much more dated than the familiar five-year statute and to expend additional efforts to find evidence supporting a scienter-based charge, which risks complicating responses to Commission requests and increasing defense costs. Moreover, in order to seek disgorgement from a broader period that is only available for scienter-based fraud, the Division of Enforcement may be less inclined to accept settled resolutions that charge non-scienter-based alternatives. This has the potential to complicate settlement negotiations, including because scienter-based resolutions can trigger more significant collateral consequences for some respondents.
The amendments also leave open several questions, including the extent to which the new statutory disgorgement framework supplants the requirements for disgorgement outlined in Liu. For example, the amendments do not expressly address Liu’s requirement that the Commission return disgorged funds to injured investors. They also are silent on Liu’s holding that the Commission must net a defendant’s legitimate expenses when calculating disgorgement awards and on whether and when the Commission may hold defendants jointly and severally liable for disgorgement awards. However, the statutory language’s focus on “unjust enrichment by the person who received such unjust enrichment” provides compelling arguments in favor of netting legitimate expenses and against expansive joint and several liability
Regulatory Risks: Global Chart
One lesson from the pandemic has been that boards need to find a way to identify and address emerging risks – and ideally have contingency plans in place to be able to quickly pivot. This is by no means a new concept, but it remains difficult to master. One resource that we recently posted in our “Risk Management” Practice Area could help – at least with legal risks. It’s an interactive database from Lex Mundi that allows you to select countries around the world to compare regulatory and legislative developments. Also check out this 52-page TCFD guidance on risk management integration and disclosure.
I blogged a few weeks ago about the need to double down on vendor management processes in light of the SolarWinds hack. We’re posting memos in our “Cybersecurity” Practice Area with more detailed advice on what to do right now. For example, most companies should be evaluating whether they’ve been compromised and whether any legal or contractual notices are triggered. This Quarles & Brady memo outlines how your incident response plan can be deployed for this particular event:
1. Work with your IT team to determine whether your organization uses the Orion product and, if so, if the tainted software was downloaded and whether any steps have been taken to mitigate.
2. If the malware was downloaded, investigate any potential malware risks, including whether the hacker accessed your networks and whether any data has been accessed or acquired.
3. Consider engaging a forensics firm for the investigation. Whether you use internal or external resources, we recommend conducting the investigation under legal privilege.
4. If data was accessed or acquired, determine whether notices are required under notification laws or contracts.
5. Consider putting your cyber insurance carrier on notice as the costs may be covered under your policy.
6. Bear in mind that the threat actor may still have visibility into your network when engaging in incident response activities and planning and implementing a remediation plan.
7. Even if you don’t use Orion or did not put the update into production,determine whether any third parties that connect to your network or handle your data were impacted.
8. Stay on top of advisories from your vendors, government, and trusted advisors.
For companies in or servicing the banking industry, things are even more urgent due to new legal requirements that are arising out of this incident. This Eversheds Sutherland memo explains that the NY Department of Financial Services is requiring all financial institutions to immediately report whether they’ve been affected in any way – and this Sullivan & Cromwell memo says that the FDIC and other agencies have also proposed rules that would require banks to notify federal regulators of cyber incidents within 36 hours, and would require bank service providers to notify affected banks immediately.
Skyrocketing Cyber Insurance Premiums: Not a Fait Accompli
With recent increases to the number and cost of cyber claims, it’s not too surprising that premiums are also on the rise – some are reporting increases of 50% of the expiring rate, according to this D&O Diary blog. It also says you might end up with lighter coverage even though you’re paying more – due to decreasing liability limits and tighter underwriting standards.
To keep your fees & coverage in check, the blog suggests 11 steps to take before your next renewal negotiation. Here’s #1 – and note that even if you’ve done this in the past, you likely need to do it again due to the current WFH environment and the increase in cyber crime:
1. Perform a vulnerability assessment as soon as possible: To assess your network versus the cyber threats to your network (which you previously identified in your risk assessment), where is your network vulnerable? Is it a staffing and resource issue, where you do not have the staff to monitor your network? Is it a patching problem (where you might be two or three or more “Patch Tuesdays” behind the eight ball)? Is it a structural problem (are you still running Windows 7)? Or, is it an employee training and education that rears up every time one of your employees “clicks on a link” or attachment from which he or she doesn’t know the sender?
Many of these issues are easily remediated for very little money. Some issues will need more TLC, and others will take some money to remediate. There is little doubt remediation will be easier, cheaper and better to swallow than a theoretical $200,000 premium increase and maybe an $8 million ransomware settlement that jeopardizes your credibility with your customers and investors.
Of course, these extra efforts also come at a cost – this Bloomberg article reports that 64% of bank executives are forecasting an increase in cybersecurity spending next year. That’s on top of the 15% jump this past year – equating to almost $1 billion for each of the largest US banks.
Carbon Markets: ESG’s Next Frontier?
Last fall, the BRT said that the US should adopt a “market-based approach” to reduce carbon emissions – such as a carbon tax or cap-and-trade scheme. That was followed a couple months later by the international Taskforce on Scaling Voluntary Carbon Markets releasing this consultation document – which includes a draft blueprint for a carbon market and a roadmap for implementation (a final version is expected this month). According to the Taskforce, if carbon trading is the key to reducing emissions, the market needs to grow by at least 15x over the next decade.
If investors end up viewing participation in these trading arrangements as “material,” we could also eventually see information about them trickle into sustainability reports and even SEC disclosures – which means we’ll all have to get somewhat familiar with how they work, so that we can make sure they’re accurately described. Right now, focus on climate risk management seems to be intensifying:
We’ve been blogging on our Proxy Season Blog about BlackRock’s updated Stewardship Expectations – which say that the asset manager expects companies to disclose a plan for how their business model will be compatible with a low-carbon economy and that the boards of companies that are “on watch” and don’t show significant progress on the management and reporting of climate-related risks could see themselves getting “against” votes. And the New York State Common Retirement Fund announced last month that it has a goal to transition its portfolio to net zero greenhouse gas emissions by 2040. This KPMG memo summarizes how large companies are reporting on their “net zero” transitions.
The concept of carbon markets is also getting some traction at the state level. This White & Case memo summarizes a proposed cap-and-invest system for the transportation sector in the Northeast and mid-Atlantic region (Massachusetts, Rhode Island, Connecticut and DC). And for general climate-related risks, financial institutions are also getting more state-level scrutiny, with the New York Department of Financial Services recently encouraging banks to set up governance and risk frameworks to manage climate change risks. We’re constantly posting new resources in our “ESG” Practice Area – including industry-specific developments.
Readers of The Corporate Counsel newsletter received updates on several important annual reporting items in the latest issue – including a reminder on changes to the Form 10-K cover page. Here’s more info:
The Form 10-K cover page is changing again. When the SEC adopted amendments to the “accelerated filer” and “large accelerated filer” definitions last spring, it added a check box to the cover pages of Annual Reports on Forms 10-K, 20-F and 40-F to indicate whether an internal control over financial reporting auditor attestation is included in the filing. The check box will need to be tagged using Inline XBRL, when applicable.
Last month, I blogged that companies conducting Rule 506 offerings in New York need to file a completed Form D through the NASAA Electronic Filing Depository in order to notify the state. Danielle Benderly of Perkins Coie member wrote in to share this additional point:
While under these amended regulations New York is streamlining its requirements for an issuer selling its own securities to New York residents by requiring the issuer to file Form D alone, instead of as an attachment to Form 99, an issuer that files Form D in New York under these amended regulations is still registering as a dealer under New York law for itself, and registering as salespersons the officers, directors, principals or partners identified on the Form D, for a 4-year period – not just making a notice filing and paying a fee.
This article recommends that issuers consider making the Form D filing in NY for Rule 506(c) offerings – but not necessarily for Rule 506(b) offerings.
Our January E-Minders is Posted
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!
