On Friday, Corp Fin updated its guidance for conducting shareholder meetings in light of COVID-19 concerns. Here’s the new stuff:
Exchange Act Rule 14a-8(h) requires shareholder proponents, or their representatives, to appear and present their proposals at the annual meeting. In light of the possible difficulties for shareholder proponents to attend annual meetings in person to present their proposals, the staff encourages issuers, to the extent feasible under state law, to provide shareholder proponents or their representatives with the ability to present their proposals through alternative means, such as by phone, during the 2020 and 2021 proxy seasons.
Furthermore, to the extent a shareholder proponent or representative is not able to attend the annual meeting and present the proposal due to the inability to travel or other hardships related to COVID-19, the staff would consider this to be “good cause” under Rule 14a-8(h) should issuers assert Rule 14a-8(h)(3) as a basis to exclude a proposal submitted by the shareholder proponent for any meetings held in the following two calendar years.
Some have noted that encouragement falls short of a mandate – but companies are already reacting. Following the Staff’s announcement, Reuters reported that Berkshire Hathaway is now permitting As You Sow to present a diversity-related proposal remotely for the company’s upcoming annual meeting. As You Sow welcomed the accommodation and said Berkshire cited the updated Staff guidance when it contacted As You Sow.
SPACs: Less Risky Than IPOs? Corp Fin Chief Says “Don’t Bet On It”
As I’ve previously blogged, some commentators have suggested a driving force behind the SPAC boom may be the availability of the PSLRA safe harbor for a de-SPAC merger. The availability of the safe harbor supposedly provides greater freedom for sponsors to share projections than would be the case in an IPO, to which the safe harbor doesn’t apply. The presumed availability of the safe harbor is one reason why some have suggested that a de-SPAC transaction involves less risk than a traditional IPO.
In a statement issued yesterday, the Acting Director of Corp Fin, John Coates, called the assumption that de-SPAC deals involve less liability risk than traditional IPOs into question. Here’s an excerpt:
It is not clear that claims about the application of securities law liability provisions to de-SPACs provide targets or anyone else with a reason to prefer SPACs over traditional IPOs. Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst. Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOs, due in particular to the potential conflicts of interest in the SPAC structure.
More specifically, any material misstatement in or omission from an effective Securities Act registration statement as part of a de-SPAC business combination is subject to Securities Act Section 11. Equally clear is that any material misstatement or omission in connection with a proxy solicitation is subject to liability under Exchange Act Section 14(a) and Rule 14a-9, under which courts and the Commission have generally applied a “negligence” standard. Any material misstatement or omission in connection with a tender offer is subject to liability under Exchange Act Section 14(e).
De-SPAC transactions also may give rise to liability under state law. Delaware corporate law, in particular, conventionally applies both a duty of candor and fiduciary duties more strictly in conflict of interest settings, absent special procedural steps, which themselves may be a source of liability risk. Given this legal landscape, SPAC sponsors and targets should already be hearing from their legal, accounting, and financial advisors that a de-SPAC transaction gives no one a free pass for material misstatements or omissions.
Director Coates also highlighted the limitations of the PSLRA’s safe harbor for forward-looking statements. Among other things, he noted that it only applies in private litigation, not SEC enforcement proceedings, applies only to forward-looking statements, and doesn’t apply to statements that are made with actual knowledge of their falsity. He also suggested that a de-SPAC merger may well be regarded as an “initial public offering” not subject to the safe harbor, and raised the possibility of clarifying rulemaking from the SEC concerning the scope of the safe harbor and its application to SPAC transactions.
PCAOB Issues Audit Committee Resource About 2021 Inspections
The PCAOB recently issued an Audit Committee Resource aimed at helping audit committees engage with their auditors about the PCAOB’s planned focus areas for 2021 inspections of public company audits. The resource provides a list of questions for audit committees as suggestions to spur dialogue between the audit committee and the company’s auditor. The suggested questions relate to the auditor’s risk assessments, auditor quality control systems, how auditors comply with auditor independence requirements, fraud procedures, critical audit matters, implementation of new auditing standards and supervision of audits involving other auditors.
Also, the PCAOB will continue to seek feedback from audit committee chairs as part of its effort to support improvements in audit quality. Like it has done in previous years, the PCAOB will seek feedback from audit committee chairs of companies where the PCAOB conducted inspections of the audit.
John blogged last December about a provision in the Consolidated Appropriations Act, 2021 restricting the SEC from finalizing a rule requiring company political spending disclosures. So as much as it could be a while before the SEC could take action relating to company political spending, Congress has shown interest in allowing it to happen.
First, H.R. 1, the For the People Act has not only been introduced in the House, but it also passed. The bill would require additional disclosure of campaign-related fundraising and spending. The Shareholder Protection Act of 2021, which has been introduced in the Senate, takes things a bit further.
The Senate bill, would among other things, require political spending disclosure and prohibit company political spending unless it has been approved by shareholders. Cydney Posner, in this Cooley blog, runs through some of the bill’s other requirements, which include penalties for officers or directors who authorize any political contribution expenditures without shareholder approval.
Members of the Commission have also expressed interest in the topic. Although a lot of commentary about SEC interest in ESG disclosures centers on climate risk, another topic Acting Chair Lee addressed in a speech last week was political spending disclosure. In her speech, Acting Chair Lee said political spending disclosure deserves attention and that it’s “inextricably linked to ESG issues.”
As a potential sign the Commission wants to take action in this area, some may have read commentary that Gary Gensler, the nominee for SEC Chair, and Commissioner Caroline Crenshaw each voiced interest too. Back in early March at his Senate confirmation hearing to serve as SEC Chair, Gary Gensler expressed support for the SEC to consider company political spending disclosures. Commissioner Crenshaw recently expressed her thoughts on company political spending disclosures in a HLS Corporate Governance post co-authored with HBS Professor Michael Porter. In that post, Commissioner Crenshaw urges business leaders to call on Congress and the SEC to provide investors with political spending disclosures.
After the events of January 6, interest in company political spending has certainly intensified. One sign that this increased interest has had an impact can be found in company announcements about pausing political contribution activity. More recently, Popular Information reported that at least two companies have paused or suspended contributions in response to voter suppression bills introduced in Arizona. Although far from certain (see commentary in yesterday’s NYT Dealbook column about Senator Pat Toomey’s letter to Acting Chair Lee), it’s possible company pauses on political contributions will lead to some Congressional action. As Cydney observes in her blog, if the Senate bill is signed into law, political spending and more will be on the SEC’s plate.
Auditors & ESG Data Assurance: High-Level Summary for Audit Committees
With ESG reporting the topic du jour, ESG data assurance continues garnering attention. Besides issuing a roadmap for attestation services, the Center for Audit Quality issued another memo, this one directed at audit committees to help them understand the role of auditors in connection with company-prepared ESG information.
For companies reporting ESG information, the memo outlines high-level information to help audit committees understand what’s involved with third-party assurance services by answering questions about reasons a company might engage an auditor to provide third-party assurance, ESG information within the scope of an attestation engagement, levels of attestation services and ESG information readiness assessments. The memo summarizes factors that differentiate auditor third-party assurance services from those provided by other service providers, such as engineering or consulting firms, and notes other service providers may or may not be required to adhere to an independence framework. It also includes this Q&A about auditor independence:
Can a public company use the same independent accounting firm for its financial statement audit and attestation over its ESG information?
Yes, performing a review or examination engagement of a public company’s ESG information is considered a permissible service for the independent accounting firm performing the financial statement audit, subject to pre-approval from the audit committee. The performance of review or examination attestation services by an independent accounting firm requires that firm to meet certain independence requirements.
Free ESG Scores: S&P Global Joins In
Last month, I blogged about how Refinitiv has started making its ESG rating information, including sub-theme scores, publicly available. At that time, I wondered whether other firms would start doing the same, and now we know at least one firm is following Refinitiv’s path. Not too long ago, S&P Global joined in by making S&P Global ESG scores publicly available. S&P Global’s announcement says the firm has ESG scores on 9200 companies.
S&P Global says it’s committed to providing more transparent and comparable insights on ESG performance. The firm also recently announced the addition of 400 new data points that it uses to inform company ESG scores.
The newly released data points encompass information across companies’ environmental, social and governance performance, including environmental reporting disclosures, biodiversity commitments, direct and indirect CO2 and greenhouse emissions, waste/hazardous disposal, energy consumption, water usage, social disclosures across safety, human rights and codes of ethics, and policies across anti-crime, corruption & bribery, board governance, executive compensation and supply chain management, among others.
Last December, John blogged when “The Holding Foreign Companies Accountable Act” (HFCA) was signed into law. The law amends the Sarbanes-Oxley Act to prohibit listing on US exchanges of foreign companies for which the PCAOB has been unable to inspect audit work papers and is primarily aimed Chinese companies listed in the US. Yesterday, this SEC press release announced the adoption of interim final amendments relating to the HFCA’s submission and disclosure requirements.
Under the HFCA, “Commission-Identified Issuers” will need to submit certain disclosures to the Commission establishing that they’re not owned or controlled by a governmental entity in that foreign jurisdiction. These amendments implement a process for this disclosure requirement. Even with adoption of the amendments, there’s more work for the Commission before issuers are required to comply with them:
The Commission is requesting public comment regarding implementation of the HFCA submission and disclosure requirements, as well as the appropriate mechanics for determining Commission-Identified Issuers. A registrant will not be required to comply with the amendments until the Commission has identified it as having a non-inspection year under a process to be subsequently established by the Commission with appropriate notice. Once identified, a registrant will be required to comply with the amendments in its annual report for each fiscal year in which it is identified. The Commission plans to separately address implementation of the trading prohibitions in Section 2 of the HFCA Act in a future notice and comment process.
Ever Changing CCPA: Additional Changes Approved
Throughout the last year, we’ve blogged about changes to the California Consumer Privacy Act. Last week, California’s Office of Administrative Law approved a new set of changes to the CCPA. The changes are intended to provide clarity to consumers about how they can opt out of the sale of their personal information. Among other things, the modifications prohibit businesses from creating confusion for consumers to opt out of the sale of their personal information by clicking through multiple screens or using confusing language such as double negatives.
To help everyone stay on top of all of the various changes to the CCPA, check out our “Cybersecurity” Practices Area – this Gibson Dunn memo provides a quick summary of the most recent modifications.
March-April Issue: Deal Lawyers Newsletter
The March-April Issue of the Deal Lawyers newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:
– Troubling Signs From Recent M&A Case Law: Forgetful Gatekeepers, Targeted Executives, and Poor Record Building
– COVID-19 Deal Terminations: Assessing Specific Performance Provisions
– A Canadian Perspective: The 2021 US and Canadian M&A Landscape
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 – 4th 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.
A few weeks ago, I blogged about the Center for Audit Quality and AICPA’s roadmap to help auditors provide ESG data assurance services to companies. So, while Big 4 audit firms potentially ramp up ESG data assurance service offerings, over the UK there was big news last week when the government proposed to breakup the dominance of the Big 4. The proposal comes in response to large company collapses, such as Carillion and Thomas Cook, and aims to restore confidence in businesses.
This BBC story says there’s a 16-week consultation period to consider the proposal, which would require large companies to engage smaller audit firms to conduct part of their annual audits. Among other things, audit firms would be required to make their audits more rigorous, and they could be capped in terms of the number of FTSE 350 companies each firm could audit. The latest proposal follows last year’s attempt by the FRC, the UK audit regulator, to shakeup the accounting industry by separating audit functions from other operations, which this FT article says the accounting firms supported.
Still not all are optimistic the latest proposal will result in meaningful change. For one observation on past attempts, along with commentary on this most recent proposal, check out Francine McKenna’s take in her entry on The Dig titled “UK audit reform proposals: Full of sound and fury but likely to amount to nothing.”
If you’re looking for an updated audit committee resource, check out the recently released KPMG Audit Committee Guide. It’s 61 pages and among other things, provides information about the committee’s role in overseeing financial reporting, external and internal auditors and risk. In the section about disclosure controls and procedures, one item I found interesting was that it said some audit committee chairs occasionally attend disclosure committee meetings to see how the committee operates and to support its initiatives. For unscientific benchmarking about this practice, participate in our anonymous poll:
survey services
Sustainability Commitments: Energy-Producing States Preparing to Hit Back
Back in January when Liz blogged about Larry Fink’s letter to CEOs, she noted that in the BlackRock’s companion letter to clients, the asset manager said it would be implementing a “heightened-scrutiny model” in active portfolios, including potential divestments. Since then, we’ve read reports of financial services firms making commitments about achieving net-zero GHG emissions from financing activities. Earlier this week, Robeco released survey results that said investor divestment from carbon-intensive assets will rise sharply in the next five years. Although stakeholders are happy to see these actions, oil-rich states are preparing to deliver a new set of headaches for companies and investors.
A blog entry from Pew says that lawmakers in Alaska, North Dakota and Texas are introducing legislation that would force states to stop investing in companies that use sustainable strategies to make financial decisions and to sever ties with asset managers, banks and insurers that are doing the same. This excerpt from a Texas Tribune article explains proposed legislation in that state:
If passed, the legislation would require state entities — including state pension funds and Texas’ massive K-12 school endowment — to divest from companies that refuse to invest in or do business with fossil fuel-based energy.
The early version of the bill directs the state comptroller to create a list of companies and funds that ‘boycott’ fossil fuel companies and allows the attorney general to take enforcement action against state funds that do not divest from the companies on the list.
If the state fund determines that divesting would cause it to lose value or deviate from its benchmark, it could provide that information in a written report to the comptroller, the Legislature, and the Texas attorney general to request an exemption.
Yesterday, I blogged about BlackRock’s 2021 engagement priorities. Betsy Popken, JT Ho and Carolyn Frantz of Orrick kindly provided this guest post with more about BlackRock’s stewardship focus addressing human rights:
BlackRock, the world’s largest asset manager, which has been a vocal leader in climate change, sustainability and other ESG issues, has now turned its attention to human rights. BlackRock is now pushing companies to “implement processes to identify, manage, and prevent adverse human rights impacts that are material to their business” and “provide robust disclosures on these practices,” according to a recent Investment Stewardship Commentary. Moreover, BlackRock believes effective oversight of human rights issues also involves the board: “[T]he responsibility for managing human rights issues…lies with boardsand management of companies and the governments that regulate them” (emphasis added).
BlackRock notes that a company that fails to effectively manage potential or actual adverse human rights issues can not only harm the people directly affected, but also expose companies to significant legal, regulatory, operational, and reputational risks from business partners, customers, and communities. Further, it believes that human rights risks may call into question “a company’s social license to operate” in a certain location and benefit from the labor, raw material, or regulatory structures in place.
BlackRock provides a few examples of the sorts of human rights issues it expects companies to use their “best efforts” to address:
– Poor working conditions, substandard wages, and use of forced labor or child labor by a company or its suppliers;
– Community harm or displacement, particularly using contested land or infringing on indigenous rights;
– A hostile or discriminatory workplace; and
– Failure to manage content or applicable privacy laws, standards, or expectations.
Of particular note for companies are BlackRock’s inclusions of privacy and workplace discrimination in the category of human rights. And these are only examples – each company needs to consider human rights particular to its industry, business, and geographical footprint. A broad group of company representatives therefore need to be aware of these expectations, including persons working within the supply chain, human resources and privacy and information security groups.
To meet BlackRock’s expectations, a company should be prepared to show that it “prioritizes human rights across its value chain – its products and services, operations, and suppliers” through its policies and processes, and that it “adheres to applicable voluntary or mandatory disclosure frameworks” such as the United Nations Guiding Principles on Business and Human Rights, which require companies to develop a human rights policy and due diligence and remediation processes, among other things.
Companies should also ensure that “the board oversees human rights,” including “related policies and processes.” In what is becoming trend with institutional investors, who are seeking more effective board oversight of ESG, BlackRock wants companies to disclose whether this oversight occurs at the full board level or is performed by a specific committee, and the “type and frequency of information reviewed.” BlackRock has indicated that it may vote against directors if it believes that the company is not adequately addressing or disclosing material human rights risks. In light of this, companies should consider whether their committee charters need to be changed to specifically allocate oversight of these risks, and how to enhance their proxy statement disclosures and/or other public facing disclosures (e.g. CSR, Sustainability, and Human Rights reports) in a meaningful way.
The bottom line for in-house counsel of companies where BlackRock invests: It may be time for a comprehensive review of your human rights issues, policies, and governance. Each company should have an understanding of which human rights issues are most salient to its business, which could include, among other things, human rights related to operations, supply chain and sourcing, products and services, employees, and customers or users. You should ensure you have up-to-date policies addressing them (e.g., a human rights policy, anti-human trafficking and modern slavery policy, conflict minerals statement, supplier code of conduct, anti-harassment policy, privacy policy). And then you should evaluate whether you have defined processes to monitor, address, and remediate any potential negative impacts from violations of these policies.
Some companies may also benefit from adopting specific goals related to human rights, and actively measuring progress against such goals. Finally, you should make sure your board-level governance of these issues is clearly addressed in the relevant governance documents and that the nature of board or committee oversight can be appropriately and effectively disclosed. Even companies in which BlackRock does not invest today may benefit from following these recommendations – as BlackRock’s announcement will likely spur other institutional investors to seek a better understanding of how companies manage human rights risks.
SEC Launches New “ESG” Page!
The SEC’s website improvements continue. The latest change is Monday’s launch of this new page to bring together all of the latest Commission actions and info on ESG. It reflects the integrated, intra-agency approach to this topic – and the SEC says that it will be updated with more responses to investor demand on this topic. Clearly all things ESG are moving right along at the agency. In a further nod to ESG prominence, the page will be accessible right through the SEC’s homepage.
Transcript: “Your CD&A – A Deep Dive on Pandemic Disclosures”
We’ve posted the transcript for our recent CompensationStandards.com webcast: “Your CD&A – A Deep Dive on Pandemic Disclosures.” Mike Kesner of Pay Governance, Hugo Dubovoy, Jr. of W.W. Grainger and Cam Hoang of Dorsey shared their thoughts on:
– Trends & Investor Expectations for COVID-Related Pay Decisions
– Adjustments to CD&A Format in Light of Pandemic
– Investor & Proxy Advisor Policies for Disclosure
– Framework of Key Factors for Exercising Discretion
– Linking Your CD&A to Your Broader ESG and Human Capital Initiatives
– Ensuring Consistency Between Your CD&A and Minutes
BlackRock’s 2021 engagement priorities map each priority to UN Sustainable Development Goals – and include key performance indicators for each engagement priority. It’s not a surprise that one of the asset manager’s engagement priorities relates to how companies are dealing with climate-related risks. As emphasized in Larry Fink’s January letter to CEOs, the “climate risk” KPIs include expectations for companies to explain how they are aligned with achieving net-zero GHG emissions by 2050. The “natural capital” KPI builds on that theme, and encourages companies to disclose how their business practices are consistent with sustainable use and management of natural capital. It also calls on companies with material dependencies or impacts on natural habitats to publish “no-deforestation” policies and strategies on biodiversity.
One takeaway from BlackRock’s 2021 engagement priorities is that it appears the asset manager may vote “for” more shareholder proposals focused on sustainability. Here’s an excerpt:
In 2021, we see voting on shareholder proposals playing an increasingly important role in our stewardship efforts, particularly on sustainability issues. As a long-term investor, BIS has historically engaged to explain our views on an issue and given management ample time to address it. However, given the need for urgent action on many business relevant sustainability issues, we will be more likely to support a shareholder proposal without waiting to assess the effectiveness of engagement. Accordingly, where we agree with the intent of a shareholder proposal addressing a material business risk, and if we determine that management could do better in managing and disclosing that risk, we will support the proposal. We may also support a proposal if management is on track, but we believe that voting in favor might accelerate their progress.
State Street Releases 2021 Proxy Voting & Engagement Guidelines
Keeping step with BlackRock, last week State Street released its 2021 proxy voting & engagement guidelines. With State Street’s update, I was happy to see the asset manager also released a summary of material changes. We’ve blogged on our “Proxy Season Blog” about some of these changes or updates before – such as State Street’s policy to vote “against” nominating committee chairs at S&P 500 companies that don’t disclose gender and racial/ethnic board diversity information and integration of the asset manager’s R-Factor score into voting. State Street is reiterating that beginning in 2022, it will vote “against” certain directors at S&P 500 companies and other indices that are underperformers on their R-Factor score, where they haven’t shown positive momentum in the previous two years.
Other changes relating to racial and ethnic diversity disclosures include, starting in 2022, State Street will vote “against” comp committee chairs at S&P 500 companies that don’t disclose workforce EEO-1 data and “against” nominating committee chairs at S&P 500 and FTSE 100 companies that don’t have at least one director from an underrepresented group.
This excerpt from State Street’s summary highlights two changes to executive pay proposals:
Ongoing high level of dissent against a company’s compensation proposals may indicate that the company is not receptive to investor concerns. If the level of dissent against a company’s remuneration report and/or remuneration policy is consistently high, and we have determined that a vote against a pay-related proposal is warranted in the third consecutive year, we will vote against the Chair of the Compensation Committee.
For problematic pay practices, State Street may vote “against” the re-election of members of the Compensation Committee if the asset manager has serious concerns about pay practices and/or if the company has not been responsive to shareholder pressure to review its approach.
Circle March 30th for Our Upcoming Webcast: “Shareholders Speak: How This Year’s Expectations Are Different”
To learn more about this year’s institutional investor engagement priorities and voting expectations, mark your calendars for March 30th to tune in for our webcast – “Shareholders Speak: How This Year’s Expectations Are Different” – you’ll hear from Rob Main, Managing Partner & COO of Sustainable Governance Partners, Yumi Narita, Executive Director of Corporate Governance of the Office of NYC Comptroller, Ryan Nowicki, Assistant VP Asset Stewardship of State Street Global Advisors and Danielle Sugarman, Director Investment Stewardship of BlackRock.
Members of TheCorporateCounsel.net are able to attend this webcast at no charge. If you’re not 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.
We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
That was quick! Following last week’s SEC announcement that Corp Fin will be scrutinizing climate-related disclosures, yesterday the SEC issued an announcement about creation of an Enforcement Division Task Force focused on climate and ESG. Acting Deputy Director of Enforcement Kelly Gibson will lead the task force, which will include 22 members. Here’s an excerpt from the SEC’s press release:
Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.
The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.
Besides noting that the task force will work closely with other SEC Divisions and offices, the announcement says the task force will pursue tips and referrals on ESG-related issues and includes a link to the agency’s TCR webpage for submitting tips, referrals and whistleblower complaints.
With the earlier announcement directing Corp Fin to scrutinize climate-related disclosures and now with the creation of an Enforcement Division climate and ESG task force, the SEC’s sending a message that it intends to focus and dedicate resources to review of climate and ESG disclosures. Yesterday’s announcement also follows Wednesday’s announcement of priorities for the Examinations Division for climate risks relating to brokers and investment advisors, as it seems like they’re going to scrutinize ESG investments. The announcement about Examinations Division priorities includes mention that they’ll review investment advisors and investment company proxy voting policies and procedures and votes to assess whether they align with the strategies.
In an apparent effort to add context to these recent announcements, Commissioners Hester Peirce and Elad Roisman issued a statement saying time will tell what these recent announcements really mean because right now it’s not yet clear. Commissioners Roisman and Peirce note that the Enforcement Division will continue to identify, investigate, and bring actions against those who violate SEC laws and rules but such actions would not be based on any new standard.
In response to these recent announcements, some may want to step-up their efforts around climate-related disclosures. As a resource to help those reviewing and preparing climate-related disclosures, check out the “Internal Controls” memos in our “ESG” Practice Area.
ESG Reporting: Roadmap for Attestation Services
A few weeks ago, I blogged about how investors want to see companies enhance ESG reporting. One enhancement investors want to see is improved data credibility through assurance. Now with the Enforcement Division’s new task force potentially preparing to sift through company ESG disclosures, more companies may be thinking about possible actions to assure themselves and investors of ESG data quality. Recently, the Center for Audit Quality and AICPA issued a memo providing a roadmap for audit practitioners about their role in assisting companies with ESG data assurance efforts, which might offer some help.
Although the report is aimed at audit practitioners, it outlines information to help companies understand what might be involved with a review or examination level attestation from an independent accounting firm. The report includes representative samples from 2 US companies that included an attestation report in their SEC filings. Here’s an excerpt describing several topics to consider prior to engaging a firm to provide ESG attestation services:
Important decision attributes include, but are not limited to, (a) what information will fall within the scope of the attestation engagement (the subject matter); (b) what reporting criteria will the subject matter be measured against (e.g., GRI, SASB, company developed); (c) what level of attestation service will be provided (examination engagement, review engagement); and (d) how will the ESG information and attestation report be disclosed and used?
In determining whether to seek an examination level engagement or a review level engagement, the report suggests where and how the ESG information will be disclosed plays a part in the decision. Management may determine a review level of engagement is sufficient when the information will be disclosed on a company website rather than disclosed in a SEC filing. The nature of intended users and the significance of the ESG information to them will also affect the level of attestation service for a particular company – when ESG disclosures are being used for investment decision making, the report says an examination level engagement may be more appropriate.
For more about the need for assurance services, last week, the International Federation of Accountants and the International Integrated Reporting Council announced an initiative to help determine how to best deliver integrated report assurance. The organizations plan to roll the initiative out in phases and the first installment announced last week sets out what integrated reporting assurance involves, the difference between limited and reasonable assurance and what is required of auditors and organizations to strive for reasonable integrated reporting assurance.
Transcript: “Audit Committees in Action: The Latest Developments”
We’ve posted the transcript for our recent webcast: “Audit Committees in Action: The Latest Developments” – it covered these topics:
Last week, John blogged about Acting SEC Chair Allison Herren Lee’s statement directing Corp Fin to scrutinize climate change disclosures. Many companies had already been focused on their climate-related disclosures given the increased focus coming from investors and other stakeholders. But, with Corp Fin now directed to look closer, a recent Audit Analytics blog looked back what happened with SEC comment letters following release of the Commission’s 2010 guidance.
Corp Fin could scrutinize more than they did a decade ago, after all company initiatives and disclosures relating to climate risk have changed in that time. Still looking back at comment letters is one way to help gauge potential focus areas. Here’s what Audit Analytics had to say about comment letters issued back around the time of the 2010 SEC guidance:
The most common area of focus for climate change comment letters was the risk factors section. This was followed by the business overview section, reserves reporting, and the liquidity section of the MD&A. And top five concluded with the accounting for contingencies. This was to be expected as these were the areas focused on in the 2010 guidance.
In terms of industries most likely to receive comment letters, the findings weren’t surprising – the Mining and Extraction sectors, including oil and gas companies, topped the list. They were followed by Power Generation and Manufacturers, respectively, with Insurance being the only other notable industry.
Looking at things today, Audit Analytics predicts we’ll see many of the same industries bear the brunt of potential SEC comment letters. But, the firm also says companies in industries that were largely spared the last time around will likely see more scrutiny this time. For those sharpening pencils for possible updates in their upcoming Q1 reports, check out our “Climate Change” Practice Area for the latest memos and other resources.
Do Social Boycotts Influence Board Turnover?
According to an academic study, researchers say social boycotts can lead to increased board turnover at targeted companies. The study’s abstract provides an overview explaining that researchers studied how personal social values affect directors’ willingness to serve on boards. The researchers found when director ideologies are aligned with those of activists targeting a company on which they serve, a director is more prone to leaving.
The findings aren’t that surprising as one would hope directors and companies are somewhat aligned with their values. In terms of what this could mean, the researchers note social values may become an even more central part of future director recruitment as millennials and younger generations tend to place more emphasis on social impact. This excerpt from the Academy of Management Insights (subscription required) summarizes the study’s findings:
– Boycotted firms experienced a 7% increase in board director turnover
– Boards faced a greater likelihood of director turnover among directors who shared ideologies with boycotters (liberal directors were more likely to leave after liberal boycotts, and vice versa)
– Directors became more loyal to firms that were targeted by movements from the opposing ideology. Conservatives, compared to liberals, were especially prone to loyalty when their firms faced challenges from liberal activists
– The link between shared social values and director exits was stronger after boycotts that caused stock prices to drop
Audit Committee Oversight: 10 Topics for Leveraging Internal Audit
Now that March is here, many audit committees might be reflecting on their workload over the last couple of months as, among other things, they wrapped up tasks related to year-end reporting. To help understand company-wide risks and mitigation activities, many audit committees lean on internal audit to provide insight into whether company risk mitigation efforts are effective. 2020 brought increased attention to risks that previously weren’t always top of mind. Besides focusing on financial controls and operational audits, a PwC memo says some internal audit departments have expanded their work to areas beyond the traditional internal audit world.
The memo outlines 10 areas for audit committees to consider leveraging internal audit, with examples of internal audit focus areas for each. To help ensure audit committees are providing effective oversight, here are a few topical areas that audit committees might consider tapping internal audit for help:
– Organizational culture, values and compliance: effectiveness of the compliance program considering new guidance from the DOJ and with a deeper focus on the state of the risk and compliance culture, key reporting indicators of company culture, assessment of culture as part of routine internal audits, review of the organization’s process and controls related to diversity and inclusion metrics and reporting
– Health and safety: sufficiency of return to the workplace plans, including the process undertaken to create and vet the policy as well as compliance with any applicable regulations, assessment of health and safety protocols, process for monitoring and reporting of ethics and compliance hotline activity related to health and safety
– Brand management: management’s processes for monitoring and responding to content on social media and its impact on reputation, the organizations policies around employee use of social media
– Human capital and talent management: mechanisms to monitor and obtain feedback on programs focused on employee satisfaction and well-being, processes to measure workforce productivity, the company’s recruitment and retention programs
As we see more Form 10-Ks with new Item 101 human capital resource disclosures, it’s becoming clear that companies are taking this opportunity to tell their “diversity & inclusion” story. This WSJ article from Monday says that about one-third of S&P 500 companies are including at least some information on diversity in their annual report. A recent Semler Brossy report found some companies are also including HCM disclosure in their proxy statements – which makes sense as companies tell their stories about board oversight of human capital and related initiatives. Semler Brossy’s report says that of the proxy statement HCM disclosures reviewed, diversity & inclusion was the most frequent topic covered.
Companies want to do the right thing and tell all they’re doing on the D&I front, and stakeholders want to see this. At the same time, disclosures need to be accurate. They’ll not only be scrutinized by investors and other stakeholders, but also could attract unwanted attention from plaintiffs’ attorneys – as explained in this recent Keith Bishop blog.
Over the last year, we’ve blogged about several board diversity lawsuits that have cropped up. These lawsuits seem to have quieted down, perhaps as a result of California’s law mandating certain board diversity requirements for companies based in the state and Nasdaq’s proposed listing standard relating to board diversity disclosures. But, this D&O Diary blog provides a discussion of a more recent board diversity lawsuit – this one involving Micron Technology. We don’t know whether these lawsuits will continue or whether they’ll be successful, but they certainly are an unwelcome development for the companies involved.
As noted in the D&O Diary blog, the most recent lawsuit differs from prior board diversity lawsuits in that it involves a company based in Idaho – not California – and it was brought by a law firm not involved with the prior lawsuits. As much as companies carefully consider disclosures during what is usually an iterative drafting process, this most recent lawsuit serves as another reminder to consider disclosures relating to diversity and inclusion from all angles, including from the potential perspective of plaintiff firms.
Legislative Push for Board & Executive Diversity Disclosures
Last week, a bill that would require public companies to disclose the gender, race, ethnicity and veteran status of directors, board nominees and senior executive officers was reintroduced in the House and Senate. The bill, called “Improving Corporate Governance Through Diversity Act of 2021” was simultaneously introduced by Congressman Gregory Meeks in the House and Senator Bob Menendez in the Senate.
First introduced in 2017, the bill passed the House in 2019 but then stalled in the Senate. It’s too early to gauge whether the bill will pass but with Democrats in control of both chambers, there’s a chance it could – although it’d likely be a challenge – see John’s blog from last week about Senators urging the SEC to reject Nasdaq’s board diversity listing standard proposal. Various organizations support the proposed legislation, including the US Chamber of Commerce. In addition to requiring board and executive diversity disclosures, this press release describes other provisions:
– Empowers SEC’s Office of Minority and Women Inclusion (OMWI) to publish triennially best practices, in consultation with an advisory council of investors and issuers, for compliance with these enhanced disclosure rules.
– Mandates OMWI to create an advisory council consistent with the Federal Advisory Committee Act requiring formal reporting, public openness and accessibility, and various oversight procedures.
– Allows OMWI to solicit public comment on its best practices publication consistent with the formal rulemaking process under the Administrative Procedures Act.
Board Diversity Matters: There’s More!
With board diversity, there’s a lot more going on besides the introduction of federal legislation and concern about potential plaintiff firms, it’s almost a bit of an extravaganza. Today, I blogged on our “Proxy Season Blog” about the NY State Comptroller’s recent press release outlining its proxy voting guidelines addressing board diversity matters – the Comptroller has expanded its voting position at S&P 500 companies and in certain cases, anticipates increased votes “against” directors.
Also, in response to comments and criticism launched by members of the Senate Banking Committee that John blogged about last week, Nasdaq amended its proposed listing standard relating to board diversity disclosures. This Bryan Cave blog summarizes the changes – and there are several. First, one change relates to companies that have five or fewer directors – these companies would only need to include one diverse director rather than two. In another change, Nasdaq has proposed a one-year grace period for companies with a vacancy on the board that would put the company under Nasdaq’s recommended diversity objective. At this point, the SEC still has to approve Nasdaq’s proposal so stay tuned.
Also, Reuters reported that during a virtual forum last week Acting SEC Chair Allison Herren Lee said the SEC should consider revisiting disclosure requirements and strengthening guidance on board diversity in an effort to address a lack of board diversity. This Cooley blog questions whether enhanced diversity disclosure will follow Acting Chair Lee’s recent directive to Corp Fin to enhance its focus on climate-related disclosures. It’s hard to say where all of this will lead but in the near term anyway stakeholder focus on board diversity ranks right up there with focus on climate.
Back in September, Liz blogged about the SEC’s adoption of amendments to the SEC’s whistleblower awards program, which had been in the works for a while. With a new SEC, whistleblower awards continue rolling along. Last week the SEC issued two press releases relating to awards that high-lighted certain aspects of the amendments.
First, this SEC press release announced an award of more than $9 million. What’s unique about this award is that the SEC’s press release says it marks the first SEC whistleblower award based on a non-prosecution agreement or deferred prosecution agreement since the amendments to the SEC’s whistleblower program became effective last December. Some may recall the amendments to the SEC whistleblower rules included a change allowing awards based on deferred prosecution agreements and non-prosecution agreements entered into by the DOJ. The SEC’s press release doesn’t say how much the whistleblower received from the original award, but another $9 million coming from the related DOJ action is a nice payday. Here’s an excerpt:
The whistleblower provided significant information about an ongoing fraud to the SEC that enabled a large amount of money to be returned to investors harmed by the fraud. The SEC in turn provided that information to the DOJ. The whistleblower also provided significant assistance by traveling at the whistleblower’s own expense to be interviewed by DOJ.
Also last week, the SEC announced two additional whistleblower awards totaling more than $1.7 million. Although the award amounts were smaller for these awards, the SEC highlighted in its press release that the whistleblowers provided Forms TCR to the Commission within 30 days of their first learning of the Form TCR filing requirement under the agency’s new whistleblower rules. Not sure we’ve seen the agency draw attention to Form TCR previously, here’s an excerpt about that:
‘As these awards show, deserving whistleblowers may receive an award if they comply with the Form TCR filing requirements within 30 days of first obtaining actual or constructive notice of the filing requirement or 30 days from the date the whistleblower hires a lawyer to represent them in connection with the whistleblower’s previous submission of information to the Commission, whichever occurs first, and they otherwise meet the eligibility requirements,’ said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. ‘These whistleblowers earned their awards by providing high quality information that supported a pair of successful Commission enforcement actions.’
Compliance Programs Stay on Front Burner, Virginia Passes Privacy Legislation
Over the last year, as California’s Consumer Privacy Act became effective, we blogged about some of the late changes and here’s John’s blog about passage of the California Privacy Rights and Enforcement Act of 2020. Although various states have proposed privacy laws, Virginia is the first state this year to adopt new privacy legislation. Virginia’s Consumer Data Protection Act is awaiting the governor’s signature and presuming it’s signed, it is slated to take effect in January 2023. This Morgan Lewis memo outlines considerations for businesses, here are a few takeaways:
First, unlike the CCPA’s limited private right of action for security breaches, Virginia’s legislation does not provide for a private right of action. Instead, the attorney general will have the exclusive right to enforce the law.
Second, Virginia’s legislation would impose stricter requirements than the CPRA as to how businesses obtain consent from consumers before processing sensitive data. While the CPRA accounts for sensitive personal information and permits consumers to submit opt-out requests specific to this sensitive personal information, the Virginia legislature borrowed the stricter standard in the GDPR and requires a business to obtain affirmative consent before any sensitive data may be collected and processed.
Third, covered businesses that only process consumer requests to opt out of the sale of personal data will need to expand their opt-out compliance programs. If passed, the Virginia legislation goes further than just granting Virginians the right to opt out of the sale of their personal data and broadens that opt-out right to the use of personal data for targeted advertising and profiling purposes.
Companies that have already taken measures to comply with the CCPA, CPRA and GDPR likely have a head start to ensure compliance with Virginia’s legislation. But, the differences with Virginia’s legislation probably mean it’d be a good idea to add compliance program review back to the to-do list. For a comparison between Virginia’s legislation and the CCPA, this GreenbergTraurig blog has a chart showing how certain aspects of Virginia’s legislation are broader than the CCPA.
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