A new report from ISS Corporate Services reviews shareholder proposals received in 2024. Among the report’s other conclusions, it says that pro-ESG shareholder proposals have seen a slight uptick in support during the current proxy season. Here’s an excerpt with some of the key takeaways:
– The volume of shareholder proposals submitted for annual meetings held between Jan. 1 through May 31 increased to 739 proposals with 273 voted thus far and 249 still pending.
– The median support level of all shareholder proposal is largely unchanged at 20.6% for 2024, but those receiving majority support is ticking up.
– Governance and compensation proposals are regaining focus and interest from investors, with 268 such proposals submitted for the first five months of 2024. The median support surged to 34.9%, a level unseen in the past five years.
– The volume of environmental proposals decreased to 130 proposals and social proposal volume remained mostly flat. However, support on both environmental and social proposals are up slightly, reversing the two-year consecutive decline in support since 2021.
– Anti-ESG proposals continue to increase in number, but the support remains low.
-Top 5 most prevalent proposals on ballot represent a broad range of topics, including shareholder rights, board accountability, executive pay, GHG emissions, and political spending.
To put some numbers around the excerpt’s characterization of “slightly” increased support for ESG related proposals, support for environmental proposals increased from 19.8% last year to 21.0% this year, and support for social proposals rose from 18.5% in 2023 to 20.7% this year. In contrast, support for anti-ESG proposals dropped from 1.7% to 1.6%. Part of the increase in support for environmental proposals may reflect a little more selective approach by proponents – the 130 proposals submitted this year represent more than a 11% drop from the 147 submitted last year.
If you are looking for motivation to take a deep dive into artificial intelligence, my guess is this information may do the trick – according to PwC’s “AI Jobs Barometer” report, lawyers are at the top of the list when it comes to the premium they earn for having AI skills. Here’s an excerpt from the press release announcing the report’s findings:
Across the five major labour markets for which wage data is available (US, UK, Canada, Australia and Singapore), jobs that require AI specialist skills carry a significant wage premium (up to 25% on average in the US), underlining the value of these skills to companies. Across industries (in the US for example), this can range from 18% for accountants, 33% for financial analysts, 43% for sales and marketing managers, to 49% for lawyers.
A little reality check – you aren’t going to command a premium if you just play around with ChatGPT to help you write a memo or brief. The lawyers that businesses will pay through the nose for are those with what the report calls “AI specialist skills.” These are technical AI skills like deep learning or cognitive automation, so no posers need apply. Obviously, that leaves me out.
When the SEC announced its decision to stay the climate disclosure rules pending the outcome of litigation challenging them, it didn’t address the issue of whether there would be any changes in the implementation period for the new rules if the agency prevailed. This Gibson Dunn blog addressing the briefing schedule established by the 8th Circuit for that litigation highlights a recent court filing by the SEC that indicates that it intends to establish a new implementation period:
The SEC stated in a subsequent court filing that its voluntary stay eliminates the harms challengers had asserted that compliance with the rule would impose, including in the form of costs incurred to prepare for compliance with the rule, and that “[t]he Commission will publish a document in the Federal Register at the conclusion of the stay addressing a new effective date for the [final climate disclosure rules].” While the SEC has not specified the duration of the further implementation period if the rules survive the litigation, it thus has confirmed that a new implementation period will be provided.
The blog says that in light of this statement, companies may prefer to monitor the litigation and delay significant compliance investments until the outcome of the litigation is known, but observes that a complete “pencils down” approach isn’t viable for those companies that must prepare for climate disclosure requirements under other reporting regimes.
Artificial intelligence tools are becoming a key part of growth strategies for companies across a wide range of industries. In turn, keeping pace with developments in AI and the issues they create has become a top priority for legislators and regulators, including the SEC. The growing importance of AI and the risks associated with it means that it can be added to the list of critical data governance issues that corporate boards must effectively address. This Freshfields blog provides some thoughts on what boards need to know about AI and other data governance topics in order to satisfy their oversight responsibilities.
The blog reviews the rapidly evolving regulatory environment for AI, cybersecurity and data privacy, as well as the growing risks of privacy litigation. It advises boards to engage with management in order to understand how the company assesses and manages the risks associated with data collection, use and storage and to set expectations for levels of acceptable risk. The board should also be involved in budgeting for risk mitigation efforts and monitor the progress of those efforts. The blog says that the board should also set “red flag” rules ensuring that management informs it when certain risks are elevated. This excerpt highlights some of the key questions boards should ask concerning their oversight of data-related governance:
– Does the company have a framework for measuring risks related to data, understanding controls and mitigations for those risks, and accepting residual risks?
– Does management keep the board informed regarding critical risks, including risks related to its most important “crown jewel” data, ongoing regulatory risks, and potential reputation impact of its data practices?
– Does the board understand the company’s data strategy and how data is used in its key products?
– Is data central enough to the company’s mission and success that a board committee should be assigned oversight of data governance? Has a cadence of regular reporting to the committee and the board been established? Have committee charters been updated or revised to conform to this allocation of responsibilities?
The blog identifies several other areas of inquiry for the board, including the frequency with which the board discusses existing, new and emerging data-related risks and the level and amount of information required to permit the board to fulfill its oversight responsibilities.
Happy T+1 Settlement Day to those who celebrate! All the ink that’s been spilled about the transition to T+1 settlement – including by us – reminded me a little of the fuss surrounding Y2K. That’s why I thought it would be appropriate to celebrate the big day by recalling one of the most entertaining bits of silliness from that era – ESPN SportsCenter’s epic “Follow me! Follow me to freedom!” Y2K commercial.
Earlier this week, I shared a statement from Corp Fin Director Erik Gerding encouraging companies that choose to voluntarily disclose an immaterial cybersecurity incident or choose to disclose early while a materiality determination is still being made to do so under a different item of Form 8-K — like 8.01 for Other Events — not Item 1.05. This Gibson Dunn blog on the statement gives some statistics on Item 1.05 8-Ks filed so far that provide some context for why Director Gerding issued this statement.
[A]s of May 22, 2024, 17 companies have disclosed cybersecurity incidents under Item 1.05 over the course of 26 filings (inclusive of 8-K amendments) whereas 7 companies reported cybersecurity incidents under Item 7.01 or 8.01. Of those 17 companies reporting events under Item 1.05, with some companies disclosing material operational impact while the incident was ongoing or material impact on financial quarterly results, most of these companies disclosed no material impact on their operations and also generally disclosed (either as part of original filing or by amendment) that the cyber incidents have not had, or were not expected to have, a material impact on such companies’ overall financial condition or results of operations (or that companies have not yet made a materiality determination).
I think companies are very accustomed to filing under Item 8.01 for other disclosures that may be related to but don’t trigger another 8-K item, and I chalk this up to growing pains as they adapt to the new requirements. The blog also describes why these voluntary filings are so common.
Companies have often encountered challenges in reaching a materiality determination with respect to cybersecurity incidents due to the often tedious process of evaluating the nature and scope of an incident, the extent of unknown information, and the difficulty of assessing future consequences, particularly in the context of an evolving situation. Since the new rules went into effect, companies now must conduct an on-going reassessment of whether the incident has crossed the tipping point to become, in some aspect, material to investors, based on the known state of information and assessment of potential impacts. As such, companies facing potential scrutiny for not making timely disclosure have opted to voluntarily disclose cybersecurity incidents before reaching a definitive materiality determination.
Since Director Gerding’s statement was very explicit that it was not discouraging voluntary filings, I assume we’ll continue to see them, but hopefully under another item.
This HLS blog is authored by a UK-based KPMG team, but most of the nine matters it recommends for 2024 audit committee agendas are just as applicable for US-based companies. In addition to the continuing need to focus on financial reporting, internal controls and risk oversight, particularly given the current geopolitical, macroeconomic, and risk landscape, which can significantly impact forecasting and forward-looking disclosures and put stress on internal controls, the blog also highlights the following areas that need particular attention from audit committees this year:
– Committee bandwidth and skillsets as the audit committee’s areas of oversight further expand beyond its core responsibilities, particularly for new climate and sustainability reporting requirements
– Cybersecurity and data privacy as AI, geopolitical conflicts and ill-defined lines of responsibility cause cyber risk to intensify
– New climate & sustainability disclosures, with a particular focus on the quality and reliability of underlying data
– Audit quality by setting expectations with the external auditor regarding communications with the audit committee, including beyond what’s required, and by considering the results of inspections and efforts to address deficiencies
– Ensuring internal audit is focused on critical operational and technology risks and related controls — beyond just financial reporting and compliance risks
– Managing leadership and talent in the accounting and finance teams, given talent shortages, and overseeing digital strategies and transformations
– Closely monitoring the tone at the top to maintain a culture of ethics and compliance
– Oversight of generative AI, which may be focused on compliance and internal controls or may be broader depending on the audit committee’s mandate
The blog’s discussion of the audit committee’s role in audit quality is UK-focused, but audit quality is an issue that’s been getting a lot of attention from regulators here in the US as well. The suspension of BF Borgers showed one of the worst-case scenarios in terms of auditor issues creating complications for public company clients. At a minimum, audit committees should be heeding the advice in the February 2024 statement from the SEC’s Office of Chief Accountant, which suggested committees evaluate whether and how they consider things like results of PCAOB inspections, industry expertise of the engagement team, sufficient involvement and leadership by the audit partner, the appropriateness of time spent and staffing and any changes in hours or staffing from previous audits.
This spring, a number of questions have been posted on our “Q&A Forum” related to 10b5-1 plan disclosures. One common question, asked a few different ways, relates to whether public companies must disclose their 10b5-1 trading plans in periodic reports.
The Fifth Circuit has vacated the SEC’s Share Repurchase Disclosure Rule. That rulemaking added a paragraph (d) to Item 408 of Regulation S-K. Was that addition to Item 408 also vacated by the Fifth Circuit?
Do the new SEC rules requiring quarterly disclosure of the adoption or termination of 10b5-1 trading plans by directors or officers extend to the company itself? If so what precisely needs to be disclosed?
Current disclosure requirements are counterintuitive because “new” Item 408(a) of Regulation S-K was part of the SEC’s rulemaking related to insider trading & Rule 10b5-1 reform, while Item 408(d) was part of the SEC’s share repurchase disclosure amendments, which were vacated. This Debevoise memo concisely addresses this question:
Q: Is an issuer required to disclose its 10b5-1 trading plans in periodic reports?
A: No, an issuer is no longer required to comply with proposed Item 408(d) of Regulation S-K regarding disclosure of the adoption or termination of any of the issuer’s trading plans that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) in its periodic reports. However, an issuer is required to continue to disclose the adoption, modification and termination of Rule 10b5-1 and other trading arrangements by directors and officers in its periodic reports under Item 408(a) of Regulation S-K.
As an aside, there’s now a bipartisan push to re-propose the SEC’s stock buyback rule! See this Cooley PubCo blog for more.
Programming Note: Our blogs will be off on Monday for the holiday. We wish each of you an enjoyable Memorial Day weekend. We’ll be back to celebrate “T+1 day” with you on Tuesday!
Yesterday, the SEC posted this notice & request for comment for a proposed Nasdaq rule change that would amend Rules 5605, 5615 and 5810 to make the following (and other non-substantive) changes:
– Clarify and modify the phase-in schedules to the independent director and committee requirements for IPOs by amending Rule 5615:
To include the text of the phase-in provisions of SEC Rule 10A-3 regarding the number of independent audit committee members required post-IPO (rather than simply referencing the rule)
To provide that companies may also phase in compliance with the three-member requirement for audit committees on a schedule that tracks Rule 10A-3 (i.e., at least one member by the listing date, at least two members within 90 days and at least three members within one year)
To allow companies to comply with the requirement to have one independent director on the compensation and nominations committees by appointing such director by the earlier of the date the IPO closes or five business days from the listing date (to avoid conflicting with a common practice of holding a meeting to appoint additional independent directors shortly after the listing date but prior to closing)
– Clarify and/or modify certain phase-in periods for companies emerging from bankruptcy, transferring from national securities exchanges, listing securities previously registered under Section 12(g), listing in connection with a carve-out or spin-off transaction or ceasing to qualify as a foreign private issuer or controlled company
– Codify its current positions that:
A company relying on the applicable phase-in period is not eligible for a cure period immediately following the expiration of the phase-in period unless it complied with the applicable audit committee, compensation committee or majority independent board requirement during the phase-in period but fell out of compliance, and
If a company demonstrated compliance but subsequently fell out of compliance before the end of the phase-in period, the cure period is calculated based on the event that caused the non-compliance (not the end of the phase-in period)
– Amend Rule 5810 to describe cure period procedures if a company fails to meet the compensation committee composition requirement due to one vacancy or one member ceasing to be independent: Nasdaq will notify the company and the company must cure by the earlier of its next annual meeting or one-year from the event (with a minimum of 180 days if the annual meeting is held sooner)
Yesterday, Chair Gensler issued a statement regarding the crypto legislation pending in the House of Representatives — the Financial Innovation and Technology for the 21st Century Act — which, according to this Better Markets Fact Sheet “claims to seek to modernize the regulation of investment contracts by creating a new category called ‘investment contract assets,'” which “are excluded from the definition of a ‘security,’ likely eliminating SEC oversight.”
Chair Gensler believes the bill would “create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk.” He identifies seven concerns in detail. Here are two:
[T]he bill’s regulatory structure abandons the Supreme Court’s long-standing Howey test that considers the economic realities of an investment to determine whether it is subject to the securities laws. Instead, the bill makes that determination based on labels and the accounting ledger used to record transactions. It is akin to determining the level of investor protection based on whether a transaction is recorded in a notebook or a software database. But it’s the economic realities that should determine whether an asset is subject to the federal securities laws, not the type of recordkeeping ledger. The bill’s result would be weaker investor protection than currently exists for those assets that meet the Howey test.
[T]he bill specifically excludes crypto asset trading systems from the definition of an exchange and thus removes, for investors on crypto asset trading platforms, the protections that benefit investors on registered exchanges. These crypto trading platforms would be able to legally comingle their functions in a way that fosters conflicts of interest, may allow trading against their customers, and reduces custody protections for their customers.
He then warns that the bill could undermine the broader capital markets “by providing a path for those trying to escape robust disclosures, prohibitions preventing the loss and theft of customer funds, enforcement by the SEC, and private rights of action for investors in the federal courts.” For example, if “perpetrators of pump and dump schemes and penny stock pushers” were to “contend that they’re outside of the securities laws by labeling themselves as crypto investment contracts or self-certifying that they are decentralized systems [as permitted by the bill].” The bill only allows the SEC 60 days to contest any self-certification.
