Each year, we blog about Larry Fink’s annual letter to CEOs. With BlackRock being among the largest shareholders for many companies, the letters are read with interest to help understand BlackRock’s key focus areas for the upcoming shareholder meeting season. A recent academic study examined whether “broad-based public engagement”, such as Larry Fink’s annual letter, is effective at influencing company behavior and it found that it is.
The study examined several questions, including among others, whether companies adjust disclosures following the release of Larry Fink’s annual letter and if so, whether BlackRock values the disclosures. For each of these questions, the researchers said yes, companies adjust their disclosures and BlackRock values them.
The researchers studied disclosures from 2016 – 2019 of 3,550 companies and observed a change in portfolio firms’ 8-K disclosures around the letter release date, suggesting that companies are responding to Fink’s call for more disclosure about topics of interest. Specifically, we find that portfolio firms’ disclosures during the post-letter period reflect an increase in language similar to that included in the letter, controlling for a variety of firm and disclosure characteristics. Moreover, our results indicate that the observed change in disclosure around the BlackRock letters is a response to BlackRock’s broad-based public engagement letters, rather than to a general demand for information from other important stakeholders (e.g., Vanguard and State Street) or to BlackRock’s private engagement.
Further, BlackRock appears to value these additional disclosures, as evidenced by less opposition to management recommendations in votes during subsequent annual shareholder meetings. This result extended to the subset of proposals related to environmental and social issues.
This Institutional Investor article discusses the research and in it the authors appear to advocate for investor public engagement. Hard to say whether we’ll see more of this from other investors but the authors say their research suggests public engagement is an effective way for investors to communicate broadly with portfolio companies beyond more costly individual interactions.
Welcome Back! Clayton Returns to Sullivan & Cromwell, Avakian to WilmerHale
In the time since former SEC Chair Jay Clayton departed the agency, some have wondered whether he would return to private practice. Some may recall last summer when the DOJ issued an announcement that the President intended to nominate Jay to become the US Attorney for the SDNY – that nomination didn’t really go anywhere as he stayed at the SEC until the holiday season. A couple of weeks ago, Sullivan & Cromwell announced that Jay is returning to the firm’s New York office as Senior Policy Advisor and of counsel. The announcement also says that he’s been appointed as Lead Independent Director of Apollo Global Management.
Separately, last week WilmerHale announced that Stephanie Avakian, former Co-Director of the SEC’s Enforcement Division, is returning to the firm later in the year as Chair of its Securities and Financial Services Department and as a member of the firm’s Management Committee. Stephanie had been a partner at the firm prior to joining the SEC back in 2014.
January-February Issue of “The Corporate Executive”
The January-February issue of The Corporate Executivehas been sent to the printer (try a no-risk trial). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– The Impact of COVID-19: Our Model CD&A Disclosure
– Recent Case Tests Attorney-Client Privilege for Law Firm Assisted Internal Assessments
– Deferred Compensation Plan Funded by a Rabbi Trust but Participants are Shut Out by Company and 409A
– Officer and Director Indemnification Provisions May Need Review
Yesterday, I blogged about how investors want to see companies enhance ESG reporting. ESG ratings are just one information source but it’s an area highlighted by investors for improvement. Some ratings firms release a “combined ESG” score at no charge and now, Refinitiv is one ratings firm taking things a step further. Recently, Refinitiv began making its ESG rating information available for free on its website and this includes sub-theme scores within each of “E”, “S” and “G” beyond just the overall combined ESG rating. Refinitiv has an extensive database – this blog post says it provides access to ESG scores on 10,000 companies.
With Refinitiv’s sub-theme scores freely available, investors and other stakeholders can find a company’s Refinitiv score for human rights, product responsibility, innovation, etc. Even if a company’s major investors don’t typically cite Refinitiv scores, with thematic scores freely available, this information could become fodder for questions during shareholder engagement meetings and it’s possible ESG ratings questions could start coming from directors, employees and other stakeholders. For example, if a company talks up its commitment to community, knowing Refinitiv’s “community” sub-theme score can be helpful and if it doesn’t seem to jive, check out whether Refinitiv has pulled accurate information to generate its score.
Dealing with ESG rating challenges can seem like climbing a never-ending hill and for companies without a chief sustainability officer, ESG ratings challenges might increase the odds that they start thinking about appointing one. Given the usual responsibilities of corporate secretaries and IR professionals, it’s hard to imagine either would have time to dive into ESG ratings to the extent needed. If other rating firms follow Refinitiv’s lead in sharing ESG thematic scores freely, anyone dealing with understanding and validating ESG rating provider data just got a whole lot more work.
A recent Paul Weiss memo discusses implications from ESG ratings and serves as a reminder of actions companies can take to protect themselves from ratings inaccuracies. As a first step, companies should actively monitor their current ESG ratings and develop an approach to engage with ESG rating agencies to ensure an accurate assessment of the company’s ESG performance. This includes confirming that ESG rating agencies are using correct data for their analysis. In addition to Refinitiv, the memo identifies MSCI, ISS, RobecoSAM, Sustainalytics and RepRisk AG as common ESG ratings firms but also says there are at least 125 organizations providing ESG ratings and research.
Chief Sustainability Officer Focus: Doing Good or Doing Less Bad
I blogged back in December about continued growth in ESG investing and that’s another reason, among many, helping motivate companies to appoint a chief sustainability officer. Appointing a CSO is one way companies can show various stakeholders that they’re prioritizing and focused on sustainability. This INSEAD Knowledge blog notes CSOs are fast becoming a fixture and provides insight about the impact of the CSO.
The blog discusses research of 400 large US companies that found CSOs have an impact by improving a company’s sustainability record. What was interesting to me was a finding about the degree of a CSO’s impact on company engagement in “socially responsible” activities versus reducing “irresponsible” activities. Here’s an excerpt:
As expected, companies with a CSO engage in more socially responsible activities (e.g. investments to reduce carbon emissions) and fewer socially irresponsible activities (e.g. polluting the environment). Significantly, we found that CSO presence has a greater effect on companies ‘doing less bad’ than ‘doing more good.’ This effect is particularly pronounced in companies in so-called “sin” or culpable industries like tobacco, and, notably, in companies with a board committee for sustainability.
The researchers attribute this to more condemnation companies would likely receive it they were found to have polluted a river than the goodwill they would earn from granting more generous sick leave. The blog also says that they’ve found ‘doing good’ pays and they hope the study’s findings spur companies to design CSO contracts to incentivize the CSO to channel more resources to socially responsible activities even while striving to reduce those that are irresponsible.
January-February Issue of “The Corporate Counsel” – New Podcast!
The January-February Issue of “The Corporate Counsel” newsletter is in the mail (try a no-risk trial). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. The issue includes articles on:
– Virtual Reality: Investors Want More from 2021 Virtual Meetings
– Form 10-K Tidbit: Can You Drop Rule 3-09 Financial Statements?
– A Form 8-K Pitfall: Fallout from Changes to Section 162(m)
– Wither The Integration Doctrine? A New Approach Dawns this Spring
For those who haven’t previously subscribed to the newsletter, you may not realize what a wealth of information these publications provide. That’s part of the reason our intrepid editors, Dave Lynn & John Jenkins, also got together to tape this 28-minute podcast about the latest issue. The podcast is available to all members. Check it out!
A few weeks ago, I blogged about shareholders overwhelmingly voting to approve Veeva Systems recent conversion to public benefit corporation. For more on that story, Liz talks with Meaghan Nelson, Veeva Systems’ Associate General Counsel and Assistant Corporate Secretary in a new 19-minute podcast.
In this podcast, Meaghan discusses Veeva Systems’ journey to PBC conversion. Conversation topics include:
1. How the possibility of a PBC conversion to be on the board’s agenda – and what advantages were identified
2. What type of shareholder outreach Veeva conducted before the special meeting – and what type of reaction it received from outside shareholders when it told them it was considering this as a possibility
3. What Veeva did under state corporate law to effect the conversion – and whether it’s planning many changes to its board committees and SEC disclosures to reflect the broader “stakeholder” focus
4. Whether PBC conversions will become a trend
5. Meaghan’s advice for in-house lawyers or outside counsel who might be advising clients on whether to convert to a PBC
The CEO of Veeva Systems posted this op-ed yesterday saying there’s a need for companies to evolve and he urges other CEOs and directors to take action by considering a PBC conversion.
Investor Tips for Enhancing ESG Reporting
EY recently issued a report outlining investor expectations for the 2021 proxy season based on conversations with more than 60 institutional investors representing $38 trillion in assets under management. One topic that’s sure to be top of mind for many investors this proxy season is portfolio company ESG reporting and the report provides tips for how companies can enhance ESG reporting.
When assessing a company’s ESG practices and performance, the report found investors place the most value on direct company engagement, which is reassuring since direct engagement can help ensure investors receive a fulsome picture of company ESG initiatives and progress. Third-party ratings aren’t as high on the list in terms of perceived value but 40% of investors still ranked them as a medium or high-value information source. This excerpt describes how investors want companies to help ensure their disclosures are picked up by third-party data aggregators:
Some large asset managers rely on third-party data providers to aggregate and structure company disclosures in a way that is more scalable and efficient to their processes, allowing raw ESG data across thousands of companies to be uploaded into their internal platforms for assessment. While investors generally acknowledged limitations of third-party data (e.g., gaps, data quality issues) they stressed their need to have data at scale. To make these processes successful, investors encouraged companies to take a more proactive role in confirming that their data is being picked up correctly by leading third-party providers.
The report says other ESG reporting enhancements investors would like to see align with one or more of the following: focus on what is material and the connection to strategy, align disclosures with external frameworks, disclose metrics, performance and goals, consider integrating material ESG disclosures alongside traditional frameworks and enhance data credibility through assurance.
PCAOB Conversations with Audit Committee Chairs: Year 2
Following the launch of an engagement program in 2019, the PCAOB recently issued a report summarizing information gathered from conversations with nearly 300 audit committee chairs. The conversations addressed several topics, with the report saying the overarching theme of conversations involved effects of the pandemic on the audit. Other conversation topics included the auditor and communications with the audit committee, new auditing and accounting standards and emerging technologies. With respect to emerging technologies, here’s an excerpt about what audit committees say works well:
– Discussing how use of technology will impact the audit team’s time and resource allocation
– As new technologies are implemented, discussing with management if/how the underlying controls will change and discussing with the auditors how they will evaluate and test any changes to the new controls
– Holding deep dive sessions on specific topics related to emerging technologies, new technology tools used in the audit and cybersecurity
– Discussing whether third-party software or data processing is used in the company’s financial reporting processes and if so, how risks and controls are considered and addressed
Audit committee chairs also identified several areas for improvement including guidance around auditing of certain controls for third-party vendors. So, as much as discussion of use of third-party software is among the emerging tech items identified as working well, it can be a challenging topic and one that auditors and audit committees each grapple with amid heightened attention on risk oversight responsibilities.
Last summer, Liz blogged about one take on what a “stakeholder” board could look like. She noted how some view re-examining the board’s structure as an opportunity to more closely align the board with strategy & culture. As much as stakeholder interests are in the spotlight, so is the concept of business transformation – which, among other things, often relates to advancements in digital and AI technologies.
Not only that, but stakeholders will be holding companies accountable for failures to safeguard data and systems. The SolarWinds hack from late last year shows that vulnerabilities are constantly being found and exploited – and we’re facing a pretty dystopian future if those weaknesses aren’t addressed.
We’ve blogged several times over the years about the appeal of board technology committees and the need for a digitally savvy board. But recent events are reigniting that conversation. Just today, Liz blogged on the Proxy Season Blog that ISS ESG will now be rating boards on information security risk management & oversight as part of QualityScore. A couple of recent articles offer views on board oversight related to data integrity and digital and AI technologies – and serve as a reminder that the need for board technology expertise isn’t likely to diminish:
In a HBR article, Brad Keywell, founder and CEO of Uptake Technologies, makes an argument for creation of a board-level “data integrity committee.” Keywell asserts that data integrity is foundational and that operational data is a company’s most undervalued and risk-embedded asset. Observing that data integrity lacks a specific guardian in most corporate governance structures, Keywell says companies that want to stay ahead of the curve should have a board committee take the lead.
In another article, Karen Silverman, CEO and founder of The Cantellus Group, says boards need a plan for AI oversight in context of the company’s mission and risk management. Silverman suggests boards be proactive to ensure they have a plan for AI oversight so they can leverage the benefits of AI while also considering the legal, regulatory, brand/reputational and business continuity risks it presents.
With directors already stretched thin, boards may be reluctant to form yet another committee. But leading IT research and advisory firm, Gartner, predicts 40% of boards will have a dedicated cybersecurity committee by 2025. Some companies have already moved in this direction – here’s a recent Accenture blog citing several examples of companies with a dedicated board level technology or cybersecurity committee. The blog opines that a dedicated committee is useful because it allows the board to focus on digital or cybersecurity risk – as well as the upsides & downsides of advanced technologies. This sends a strong signal to not only stakeholders, but also hackers.
For boards thinking about structure and expertise needs, check out our “Board Composition” and “Board Succession” Practice Areas and for memos about cybersecurity and the board’s oversight role, see our “Cybersecurity” Practice Area.
Resource for Board Composition Data
For those who work frequently with boards, you’ve probably been asked to pull together comparative board composition data. Among other things, questions about board tenure, mandatory retirement, average age and board size are not uncommon. To help answer those questions in a pinch, Spencer Stuart has an interactive comparison chart that provides key data for each S&P 500 sector. You’ll also find more resources in our “Board Composition” Practice Area that can help when you’re on the receiving end of an unexpected call from one of your board members.
Tomorrow’s Webcast: “Audit Committees in Action: The Latest Developments”
Tune in tomorrow for our webcast – “Audit Committees in Action: The Latest Developments” – to hear Consuelo Hitchcock of Deloitte, Josh Jones of EY and Mike Scanlon of Gibson Dunn discuss evolving audit committee oversight responsibilities, updates to the auditor independence rules, the impact of Covid-19 to oversight of internal controls, internal audit risk assessments and external audit assurance for ESG data.
Yesterday, Corp Fin issued a sample comment letter for companies conducting securities offerings during times of extreme price volatility. The Staff cautioned that the risks associated with price volatility are particularly acute when companies are seeking to raise capital during times of stock run-ups, high short interest or reported short squeezes, or atypical retail investor interest – i.e., the type of “market mania” that we saw a couple weeks ago with GameStop, and last summer with Hertz.
The letter highlights issues for companies to consider when preparing disclosure documents – including automatically effective registration statements and pro-supps that wouldn’t typically be subject to Staff review. In particular, the Staff wants companies to consider disclosing on the prospectus cover page:
– A description of recent stock price volatility in the company’s stock and any known risks of investing in the stock under the circumstances
– Comparative stock price information prior to recent volatility and any recent change (or lack thereof) in the company’s financial condition or results of operation that are consistent with the recent stock price change
– Any recent change in the company’s financial condition or results of operations, such as earnings, revenues or other measure of company value that is consistent with the recent change in your stock price – if no such change to financial condition or results of operations exists, disclose that fact
Corp Fin also suggests companies provide information about potential risk factors addressing the recent extreme volatility in a company’s stock price, effects of a potential “short squeeze,” the potential impact of the offering on a company’s stock price and investors and the potential dilutive impact of future offerings on investors purchasing shares in the current offering. The sample letter includes information each of these potential risk factors should include.
For use of proceeds, the sample letter also suggests that companies disclose the possibility that they may not be successful in raising the maximum offering amount and the priorities for proceeds received.
Corp Fin cautions that the sample comment letter doesn’t provide an exhaustive list of issues companies should consider. Companies experiencing extreme price volatility are encouraged to contact their Corp Fin industry office with questions about proposed disclosure. Kudos to Corp Fin for issuing this guidance so that advisors of companies that might get caught up in a fast-moving #stonk craze can prepare in advance.
SEC Acting Chair Lee Announces Executive Staff Roster
Last week, John blogged with big news about the recent SEC appointment of Satyam Khanna as Senior Policy Advisor for Climate and ESG and John Coates as Acting Director of Corp Fin. Along with those appointments, the SEC released a roster of executive staff for Acting SEC Chair Allison Herren Lee. It’s a fair lengthy list of between 15-20 appointments, check it out to see who’s all involved with SEC activities.
Last Friday, the SEC continued with its string of appointments and issued an announcement that Kelly Gibson has been named Acting Deputy Director of the Enforcement Division. Kelly has been serving as the Director of the Philadelphia Regional Office since February 2020 and has served in the Philadelphia Regional Office for the past 13 years. Congratulations Kelly!
Insight into Perspectives of Acting Corp Fin Director
Along with the SEC appointment of Satyam Khanna, many practicing in securities law took note of the appointment of John Coates as Acting Director of Corp Fin. In addition to serving on faculty at Harvard Law School, Coates is a member of the SEC’s Investor Advisory Committee and also Chair of the Investor as Owner Subcommittee. To help shed light about Coates’s perspective on issues, this Cooley blog provides highlights about a few Committee recommendations he’s authored. The blog is worth a read, particularly for those interested several hot-button issues involving shareholder proposals and proxy advisors, and proxy plumbing.
CEO succession has been near the top of business news cycles lately – last week’s news about Jeff Bezos stepping down as Amazon’s CEO certainly played a part. One key board responsibility relates to CEO succession planning. Investors expect boards to have a plan and when the need arises – to appoint a new CEO in due course. As boards need to deal with views of multiple stakeholders, one dilemma is what board should say to investors and a SquareWell Partners report says it found only 20% of companies that have appointed a new CEO since January 2019 provided comprehensive disclosure of their succession planning process.
Some companies aren’t in a position like Amazon – where the company’s announcement named Andy Jassy as incoming CEO. Jassy reportedly previously described himself as Bezos’ shadow – and the announcement also said Bezos will transition to executive chairman. To underscore the importance of CEO succession planning, the SquareWell report cites research that found companies that are unprepared to appoint a successor in a timely manner lose on average $1.8 billion in shareholder value. The report notes, when it comes to succession planning, it’s understandable that companies may want to hold their cards close to the vest, but investors want reassurance that boards are ready to act. Here’s an excerpt about succession planning disclosure that can help reassure investors:
There might be a misunderstanding that investors expect to learn the names of potential successors or to micromanage the choice of the next leader while what they actually want is to see evidence that the board is fulfilling its fiduciary duty and is ready to ensure a smooth transition for all scenarios.
Companies taking succession planning seriously should allow different executives to gain experience in engaging with investors. Investor focus should be on the frequency of the review of the succession plans and asking boards how they ensure that the pipeline of potential candidates and the successor profile are always aligned with the evolution of the company’s strategy. Investors could also question the company’s leadership development programs to understand how the leaders of tomorrow are being groomed. The quality of the board’s answers to these questions should reveal how prepared the board really is to face the next CEO transition.
For a look at trends in Russell 3000 and S&P 500 succession practices, Heidrick & Struggles and The Conference Board recently issued their “2020 CEO Succession Practices” report. The report discusses trends, the Covid-19 impact on succession planning and predicts that if company performance continues to be unsteady, it’s likely more boards will face the need to navigate a leadership change sooner than they might have anticipated. And for more practical insights about CEO succession planning, check out the transcript from our webcast “CEO Succession Planning in the Crisis Era” – there you’ll find tips about disclosure issues and steps boards and advisors can take now!
Form 10-K Considerations & Reminders
With calendar year Form 10-K filings coming along, a recent Gibson Dunn memo walks through substantive and technical considerations to keep in mind when preparing 2020 Form 10-Ks. The memo covers recent amendments to Reg S-K, disclosure considerations in light of Covid-19, amendments to MD&A & financial disclosure rules and other considerations in light of recent and upcoming changes at the SEC. The memo includes a fairly extensive discussion of the new human capital disclosures and among other things, reminds companies to be mindful of what they’ve said about composition of their workforce in their CEO pay ratio disclosures. Here are a few other considerations, check out the complete 25-page memo for more:
KPIs: The SEC’s Interpretive Release issued in January 2020 was a reminder that companies must disclose key variables and other qualitative and quantitative factors that management uses to manage the business and that would be peculiar and necessary for investors to understand and evaluate the company’s performance, including non-financial and financial metrics. The memo reminds companies that if changes are made to the method by which they calculate or present the metric from one period to another or otherwise, the company should disclose, to the extent material, the differences between periods, the reasons for the changes and the effect of the changes. Changes may necessitate recasting the prior period’s presentation to help ensure the comparison is not misleading.
Covid-19 Impact on Risk Factors: It is important that the COVID-19 risk factor disclosure be appropriately tailored to the facts and circumstances of the particular company, whether due to (i) risks that directly impact the company’s business, (ii) risks impacting the company’s suppliers or customers, or (iii) ancillary risks, including a decline in the capital markets, a recession, a decline in employee relations or performance, governmental regulations, an inability to complete transactions, and litigation. The SEC has reiterated that risk factors should not use hypotheticals to address events that are actually impacting the company’s operations and brought enforcement actions against certain companies for portraying realized risks as hypothetical.[11] Accordingly, companies should be specific in providing examples of risks that have already manifested themselves.
Disclosure Controls and Procedures: In light of the substantial number of changes to the Form 10-K requirements and disclosure guidance, it is important for personnel and counsel to consider the manner in which the company’s disclosure controls and procedures are addressing the changes. It is also important that the disclosure committee and audit committee are briefed on the changes and the company’s approach to addressing them.
Transcript: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season”
We’ve posted the transcript for our recent webcast: “Glass Lewis Dialogue: Forecast for the 2021 Proxy Season” – it covered these topics:
– Proxy Season Review Highlights
– Policy Guideline Updates
– Board Diversity
– ESG Reporting
– Compensation
For those diving in to drafting a company’s proxy statement, check it out for insight into what Glass Lewis and the firm’s investor clients will want to see in this year’s disclosures.
Yesterday, the SEC announced that President Biden designated Commissioner Allison Herren Lee as Acting Chair of the agency. Right before the end of the year, President Trump designated Commissioner Elad Roisman as Acting Chair following former Chairman Jay Clayton’s departure. Commissioners Hester Peirce, Elad Roisman and Caroline Crenshaw issued a statement congratulating Commissioner Lee on her designation as Acting Chair. Earlier this week, the President nominated Gary Gensler to serve as SEC Chair and until he goes through the confirmation process, Acting Chair Lee will preside over a four-person Commission.
Plan Ahead: 2021 Peak Edgar Filing Dates
Now that 2021 is here, it might be a good idea to check your calendar – the SEC published the list of 2021 peak filing days. Identified peak filing dates are based on historical data and the SEC says that the filing volume on peak days tends to be highest in the last hour of the filing day. The SEC also says that filers who contact Filer Support on peak filing dates may experience longer than usual wait times.
I recently blogged about how, during what is a challenging D&O pricing environment, some insurers are starting to look at company diversity practices. As the SPAC craze continues, SPACs are running into more issues with D&O insurance pricing. A recent Mayer Brown Free Writing & Perspectives blog says D&O pricing for SPAC sponsors has increased dramatically in just a few weeks:
The contributing factors to the difficult D&O pricing environment include the fact that there are only a handful of insurers who are willing to write D&O coverage for SPACs and these same insurers have been inundated with requests for such coverage over the last few weeks and are running out of annual capacity.
These factors and others have driven SPAC D&O pricing to levels that are 100% to 200% higher than they were just a few weeks ago. As a result, the cost of a $20 million D&O policy has jumped from mid-$400,000s to between $900,000 and $1,100,000 just in the last month and in turn has led to hundreds of thousands of dollars in unplanned expenditures. SPACs looking at previous SPAC S-1 registration statements should be mindful that D&O insurance cost estimates in typical S-1s may have been actionable several years ago but are wishful thinking in today’s D&O market.
A recent Business Insurance article says D&O liability pricing isn’t getting any better. The article says pricing is going up and underwriters are raising retentions. As to when we’ll start seeing pricing improvements, the article says some believe there won’t be a letup until sometime in the third quarter of this year.
The new rules governing financial information that public companies must provide for significant acquisitions & divestitures, which were adopted last May, became effective January 1st. The amendments made conforming changes to Items 2.01 and 9.01 of Form 8-K relating to, among other things, determining significance of an acquisition.
Those conforming changes to Form 8-K are outlined beginning on page 71 of the rules published in the Federal Register. However, as a heads up to anyone preparing this Form 8-K disclosure, it appears that the Form 8-K available on the SEC’s Forms List was last updated in May 2019 and does not yet reflect these updates. For those looking for information about M&A financial disclosure – we have memos about the new rules posted in our “Accounting Overview” Practice Area.
It doesn’t appear these rules will be affected by the regulatory freeze President Biden imposed yesterday, which we’re still learning more about. As noted in this Cooley blog, these rules could be among several as possibly being negated under the Congressional Review Act, but at least historically, it’s been rare for that to happen.
“Say-on-Climate”: Future Routine Vote?
Back in December, Liz blogged on our “Proxy Season Blog” about Unilever’s plan to seek shareholder approval for its climate action plan. A recent Agenda Week article reports that at least seven North American companies received shareholder proposals requesting advisory votes on company climate change plans. The article says investors behind the proposals include hedge fund TCI Fund Management and As You Sow – they want regular votes on climate change so shareholders have a say on whether company progress on climate change is moving along fast enough. Although seven proposals aren’t a lot, the proposals are taking hold in Europe:
While this may be the first time many companies in the U.S. are dealing with say-on-climate proposals, the vote has been gaining traction in Europe.Aena, a Spanish airline operator, was the first company to adopt an annual shareholder advisory vote on its climate plan and progress after engaging with TCI late last year. And one European investor, Ethos Foundation, which serves as a proxy advisor to Swiss pension funds, adjusted its proxy-voting guidelines for the 2021 season to support say-on-climate proposals.
The article quotes the CEO of Ethos Foundation as saying ‘We don’t expect too many votes this year, but the pressure is increasing as some European companies already decided to adopt this advisory vote, and Unilever is one of them. We decided to put this in our guidelines early to set the tone and tell companies what we expect and to influence other investors to push for the right to vote on climate transition plans.’
For U.S. companies, a proposal at Moody’s has been withdrawn, presumably in response to Moody’s announcement that it would support the “say-on-climate” campaign – shareholders will vote on Moody’s climate transition plan at its 2021 shareholder meeting. It’s possible more of the seven North American proposals will be withdrawn before this year’s shareholder meetings but in the meantime, it doesn’t seem like much of a stretch to think we may see more of these proposals coming down the pike. It’s probably a little early though to make a call saying whether these proposals might be on their way to becoming another “routine” annual meeting voting matter.
Financial Fraud Schemes: Familiar Common Themes
Throughout the last year, we’ve continued to read about SEC enforcement actions and the Enforcement Division’s continued focus on financial fraud. Many expect the Enforcement Division to be more active and aggressive in the coming years. To help companies protect against financial fraud, a recent study from the Anti-Fraud Collaboration analyzed SEC enforcement actions and provides insight into common financial fraud themes – it says the most common schemes and areas at higher risk for manipulation aren’t necessarily new. Here are some of the study’s findings:
The kinds of business challenges that were frequently present in enforcement cases—pressure to meet analyst expectations, increased supplier costs, slowing demand for products, and more—are exacerbated during a crisis like COVID-19. These kinds of challenges and issues suggest a need for the board and audit committee, management, and internal and external auditors to be attuned to both quantitative and qualitative metrics.
The most common type of fraud incident was improper revenue recognition (43%). Reserves manipulation (24%), inventory misstatement (11%), and loan impairment issues (11%) were other common financial statement fraud schemes. Improper revenue recognition was among the top two fraud schemes from 2014 through mid-2019.
Some industries were charged more frequently than others. Technology services companies (17%) were the most commonly charged industry. Finance (13%), energy (11%), and manufacturing (9%) were also charged in the enforcement actions.
The study cites case examples of common financial fraud schemes along with the result. In terms of what companies should do, the study reminds companies to continue exercising skepticism and attention to potential risks. It suggests companies should remain focused on the fundamentals—controls, processes, and environments that impact financial recordkeeping and decision-making—and company-specific risks by conducting regular risk assessments.
Yesterday, the SEC announced Shelley Parratt is retiring after a remarkable 35 years of service with the agency. For many, Shelley’s name is synonymous with Corp Fin – she’s currently the Division’s Acting Director and joined Corp Fin in 1986. Over the years, Shelley served on three occasions as the Division’s Acting Director – here’s Broc’s blog from 2009 when she became Acting Director – and has served as Corp Fin’s Deputy Director since 2003. The press release includes several highlights of Shelley’s career and notes she led Corp Fin’s Disclosure Program for more than 25 years. In recognition of her service, Shelley has received numerous awards, including the Distinguished Service Award, the SEC’s highest honorary award. She’s also been recognized for her role in promoting women in leadership roles, this excerpt from the SEC’s press release provides a highlight:
Throughout her tenure, Ms. Parratt served as a trusted mentor for countless current and former SEC staff members. As one of the longest serving female senior executives at the SEC, Ms. Parratt used her role to mentor and promote women into leadership roles. Always focused on the present and future needs of the Division, she helped lead the Division’s efforts to enhance diversity and inclusion, knowledge management and staff training with a primary focus on developing the Division’s future leaders. SEC Chair Mary Jo White recognized these efforts by presenting her with the Leading for the Future award in 2016.
Acting Chair Roisman recognized Shelley’s service and contributions, saying ‘Shelley epitomizes the dedication and expertise that are hallmarks of the SEC’s professionals, and we owe her a great debt of gratitude for her decades of public service.’
Shareholders Approve Public Company Conversion to PBC – In a Landslide!
Last fall, Liz blogged about some of the possible benefits of B-corps. At that time, Veeva Systems had formed a board committee to explore becoming a public benefit corporation. Of course one hurdle to a public company PBC conversion is the need for shareholder approval. Last week, Veeva announced that its shareholders gave the company two thumbs up as they overwhelmingly approved the company’s proposal to convert to a PBC – the company received support from 99% of its voting shareholders. On February 1, Veeva will become a PBC, making it the first publicly traded company and largest-ever to convert to a PBC, here’s an excerpt from the company’s press release:
As a PBC, Veeva will remain a for-profit corporation but will be legally responsible to balance the interests of multiple stakeholders, including customers, employees, partners, and shareholders. It will also broaden its certificate of incorporation to include a public benefit purpose, ‘to help make the industries it serves more productive and create high-quality employment opportunities.’
A key technology partner to the life sciences industry, Veeva is dedicated to customers’ mission to advance human health and wellbeing. This move aligns Veeva’s legal charter with this broader mission and the company’s core values, including do the right thing, customer success, and employee success.
Tomorrow’s Webcast: “The Latest: Your Upcoming Proxy Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance – including the latest SEC positions – about how to use your executive & director pay disclosure to improve voting outcomes and protect your board, as well as how to handle the most difficult issues on oversight, engagement and disclosure of executive & director pay.
Yesterday President-elect Biden announced several additional picks for his administration, including his intention to nominate Gary Gensler to serve as SEC Chair. Gensler is currently a professor at MIT’s Sloan School of Management, previously served as Chairman of the Commodity Futures Trading Commission and is a former Goldman Sachs executive. Speculation about who President-elect Biden would nominate for the SEC chair position has been swirling for a while now, although over the last week, several media outlets began reporting that Gensler would get the nomination – here’s a NYT story from last week.
With the incoming administration, the NYT reports that the SEC might focus on disclosures relating to climate change risk, political donations and boardroom diversity, while also potentially rethinking rules around stock buybacks. Some have noted that Gensler taught courses on cryptocurrencies at MIT and speculate that rules on digital currencies may also come into focus. He’s also likely to step up enforcement efforts at the agency and some are saying he will favor aggressive regulation for financial institutions and companies.
It’s hard to say exactly when the agency’s new chair will be confirmed. Back in 2017 when former Chairman Clayton was nominated, the timeline went like this: nomination announced in early January, Senate Banking Committee met to approve the nomination in early April and full Senate confirmation came along in early May.
Glass Lewis Refines Policy on Virtual Shareholder Meetings
In our webcast last week, one of the topics Courteney Keatinge, Glass Lewis’s Senior Director of ESG Research, talked about was the proxy advisor’s policy on virtual shareholder meetings. Glass Lewis supports virtual participation in shareholder meetings but has concerns when a company doesn’t provide “robust” disclosure about shareholder participation rights. There’s been a refinement to that policy, which Glass Lewis shared in a recent blog post.
One tweak in the proxy advisor’s expectations relates to when there are restrictions on the ability of shareholders to question the board during the meeting. In these situations, the proxy advisor expects a transparent disclosure about the company’s commitment to post questions and answers on the company’s shareholder meeting or IR website. The blog post also provides insight about the proxy advisor’s views relating to hybrid meetings, in-person meetings, amendments allowing virtual or hybrid meetings and allowing virtual participation by directors and executives. After last year, many, if not most, companies have experience holding a virtual shareholder meeting so shareholder expectations about information they need to participate and ask questions will likely be higher. Here’s an excerpt about the proxy advisor’s VSM disclosure expectations:
Companies can mitigate risk of reduction in shareholder rights by transparently addressing:
– When, where, and how shareholders will have an opportunity to ask questions related to the subjects normally discussed at the annual meeting, including a timeline for submitting questions, types of appropriate questions, and rules for how questions and comments will be recognised and disclosed to shareholders.
– In particular where there are restrictions on the ability of shareholders to question the board during the meeting – the manner in which appropriate questions received prior to or during the meeting will be addressed by the board; this should include a commitment that questions which meet the board’s guidelines are answered in a format that is accessible by all shareholders, such as on the company’s AGM or investor relations website.
– The procedure and requirements to participate in the meeting and/or access the meeting platform.
– Technical support that is available to shareholders prior to and during the meeting.
In the most egregious cases where inadequate disclosure of the aforementioned has been provided to shareholders at the time of convocation, we will generally recommend that shareholders hold the board or relevant directors accountable and depending on a company’s governance structure, country of incorporation and meeting agenda Glass Lewis may recommend shareholders vote “against” members of the governance committee, board chair or other agenda items relating to board composition and performance.
Inauguration Day: Business as Usual for Edgar
With the inauguration tomorrow, some have SEC filings top of mind. For those that do, the SEC issued an announcement that Edgar will operate normally that day. The announcement is somewhat matter of course for the agency as it issued a similar announcement for the 2017 inauguration.