November 28, 2022

SEC’s Strategic Plan: Continued Goal for Modernized Disclosure

Last week, the SEC announced its Strategic Plan for fiscal years 2022 – 2026. As Dave previewed in August when the draft plan was issued, the 16-page Strategic Plan focuses on three goals to advance the SEC’s mission:

1. Protect the investing public against fraud, manipulation, and misconduct;

2. Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and

3. Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives.

When it comes to protecting investors, the Strategic Plan says that the SEC will do this through rulemaking as well as enforcement & examination. It also articulates this goal:

Modernize design, delivery, and content of disclosures so investors, including in particular retail investors, can access consistent, comparable, and material information to make informed investment decisions.

The markets have begun to embrace the necessity of providing a greater level of disclosure to investors. From time to time, the SEC must update its disclosure framework to reflect investor demand. Today, investors increasingly seek information related to, among other things, issuers’ climate risks, cybersecurity hygiene policies, and their most important asset: their people. In order to catch up to that reality, the agency should continue to update the disclosure framework to address these areas of investor demand, as well as continue to take concrete steps to modernize the systems that support the disclosure framework, to make public disclosures easier to access and analyze and thus more decision-useful to investors.

Goal #2 – the regulatory framework – includes this sub-goal:

Update existing SEC rules and approaches to reflect evolving technologies, business models, and capital markets.

The ongoing movement of assets into private or unregulated markets, the continual creation of new financial instruments and technologies, and the challenges of increased globalization all require the agency to rapidly update and evolve.

To do so, the SEC must enhance transparency in private markets and modify rules to ensure that core regulatory principles apply in all appropriate contexts. To maintain the integrity of the markets, the SEC needs to develop specific regulations to ensure investors remain informed and protected via a broad-based disclosure frameworks.

The agency must also continue to focus on supervising global entities appropriately. Inherent in the interplay with international markets is the challenge of protecting sensitive information when coordinating with other regulators. Consistent data protection policies are essential for this effort.

Throughout the Strategic Plan, there’s an emphasis on using technology & data, and the SEC’s evolution to meet new market issues. Here’s the 4-year Strategic Plan published by former SEC Chair Jay Clayton in 2018, which shared a few similar themes.

Liz Dunshee

November 28, 2022

SEC’s Investor Advisory Committee Meeting Next Week: Tax Transparency on Agenda

In developing the Strategic Plan that it released last week, the SEC took into account information gathered from many sources – including Congress and congressional committees, investors, businesses, academics, other stakeholders, comments to rule proposals, and more. It also considered input from SEC roundtables and advisory committee meetings. On that note, the Investor Advisory Committee continues to be an active group, and the SEC has announced another upcoming public meeting on December 8th.

The agenda includes a panel discussion on corporate tax transparency. Here’s more detail:

This panel will focus on the potential benefits to investors of greater tax transparency, including country-by-country tax reporting. New regulations require companies to provide this information to tax authorities, but investors currently do not have access to this information. Given financial, reputational and regulatory risks of a company’s tax practices, investors need more information to be able to evaluate the scope of tax risks facing multinational companies. The speakers will provide an overview of the existing requirements, emerging investor expectations and new transparency requirements in other jurisdictions, and provide insight on how regulators and standard-setters might address the existing information gaps.

Liz Dunshee

November 23, 2022

Happy Thanksgiving!

We’re taking a few days off for the holiday and our blogs will return on Monday. In the past, we’ve left you with recipe tips and cookbook recommendations to improve your Turkey Day, but I’ve got to admit that I’ve been struggling a little to come up with something for this Thanksgiving.

My daughter and son-in-law are hosting this year, and I was thinking about what to do with today’s blog last night as I was going over the shopping list with her. When she pointed to a very large bag of potatoes that it appears I’ll be in charge of peeling tomorrow, I decided that this year, it might be nice to provide our readers with a little music to accompany their Thanksgiving Day food prep.

We’re still all reeling from Dave’s bombshell revelation about his lack of fondness for the Fab Four, so I’m trying to make this selection non-controversial. With that objective in mind, what better musical accompaniment to Thanksgiving Day celery chopping & potato mashing could there be than Thelonious Monk’s “Stuffy Turkey”?

Happy Thanksgiving from everyone here at – and as always, thanks for reading!

John Jenkins

November 22, 2022

ESG: Materiality Isn’t Just About the Bottom Line – or Maybe Even About the Bottom Line

When it comes to ESG disclosure, it’s become apparent that a lot of folks at the SEC don’t seem to approach the materiality concept in the traditional way. A recent speech by a senior Division of Enforcement official emphasized that point.  Here’s an excerpt from a CFO Dive article on her remarks:

The Securities Exchange Commission (SEC) will look beyond the figures that underlie net income when determining whether a company is in compliance with the agency’s proposed climate risk disclosure rule, an SEC enforcement official said Tuesday. “If the company has really put a lot of emphasis in its marketing around, for example, what it’s doing in the climate space, those are ways that I think it can become material even if you don’t necessarily see that translate to the bottom line,” according to Carolyn Welshhans, associate director of the SEC’s Enforcement Division.

“Something can be material to a company — for example specific to that company’s business or its operations — not just as financial statements,” Welshhans said at Securities Enforcement Forum 2022 after noting that her comments did not necessarily reflect the view of the agency. “It’s not just quantitative — it’s not just ‘does something impact the bottom line.’”

The idea that financial materiality involves both quantitative and qualitative considerations is something that the Staff has made clear since at least the time that SAB 99 was issued. But I think there needs to be some connection to a statement’s impact on a reasonable investor, and I’m not sure that the example of ESG-related puffery around a marketing campaign makes that connection. That kind of position risks unmooring materiality entirely from financial considerations, which I think will ultimately undermine the SEC’s credibility as a financial regulator.

On the other hand, who cares what I think?  This is where we are, and companies need to act accordingly when it comes to ESG disclosure. I think the article’s quote from Kelly Gibson of Morgan Lewis, who previously led the SEC’s Climate & ESG Task Force, sums up the way companies should approach ESG-related statements in the current environment:

“If you’re making a statement about ESG [environmental, social and governance performance], the SEC is going to consider it to be material. . . I know that’s a blanket generalization, but at least from what I’m seeing that’s not a point to argue with the SEC.”

John Jenkins

November 22, 2022

Board Diversity: Welcoming New Board Members

Liz recently blogged about how the director onboarding process is evolving. This article from Nasdaq’s Center for Board Excellence focuses on a discrete aspect of the onboarding process – welcoming diverse directors to the board. One of the realities about adding new directors with different backgrounds and life experiences is that their addition will alter the board’s group dynamics.

That’s a feature of a more diverse board, not a bug, but the article points out that it creates challenges that need to be addressed in order to ensure the board works well together while welcoming new members with different experiences and expertise. This excerpt discusses ways to teach the culture of the boardroom to new directors:

One suggested action is to appoint existing directors to act as a mentor for new directors—a practice already in place at Zoom. According to Janet Napolitano, Former Secretary of Homeland Security and Board Member of Zoom, the company also “arranged a comprehensive series of meetings with different leaders throughout the company to help me understand the company’s organization and various functions.” She found that a lengthy session on how financial information was presented to the board was most useful.

Joanna Coles, Board Member of Sonos, Snap, The Original Bark Company, and Density, explained that for established boards, it may be useful for new directors to talk to other board members and the executive leadership team, while for new boards, it may be useful to understand the skills and strengths of the other board members and where one can be useful. Moreover, for boards with newly appointed members from underrepresented communities, Joanna Coles advised that they onboard two candidates together. She shared, “This is very effective and takes the attention from the diversity, giving them support with each other to ensure they aren’t talked over.”

Other topics covered by the article include how to build consensus among board members on the purpose of board diversity initiatives, how to create space for new perspectives on the board, and how to develop a pipeline of diverse board talent.

John Jenkins

November 22, 2022

Universal Proxy: Non-Traditional Contestants on the Way?

Some commenters on the newly implemented universal proxy rules have predicted that the ability to use a single proxy card and the potential to run a proxy contest a lot more cheaply than in the past may attract non-traditional players to enter the fray. This recent blog from Jim McRitchie announcing a forum on using the UPC process to advance board nominees focusing on ESG issues suggests that prediction may soon come to pass – and Jim appears to have a target in mind:

Amazon is an example. If it can be done at an affordable price at Amazon, we can run candidates at many other companies. Engine No. 1’s campaign at Exxon Mobil made history. Yet, they ran industry experts, not directors aimed at converting XOM to a CSR company. I would run a candidate(s) at Amazon concerned with worker rights… as well as other ESG concerns. At the very least, we should start looking for potential candidates.

Jim goes on to say that “We need to move beyond filing 20+ proposals at Amazon and other companies facing a plethora of issues. We need board candidates who share our concerns and to anticipate, rather than just react to issues as they arise. Otherwise, we will continue fighting the symptoms of undemocratic corporate governance.” Stay tuned. This is likely to be a very interesting proxy season.

John Jenkins

November 21, 2022

Officer Exculpation: Glass Lewis Weighs In

Ever since Delaware amended its corporate statute to permit charter amendments exculpating certain officers from damages liability for certain duty of care breaches, companies and their advisors have been anxious to see how ISS & Glass Lewis would react. Glass Lewis became the first firm to definitively address this issue when it issued its 2023 Policy Guidelines last week. Is Glass Lewis on board? Not really:

Under Section 102(b)(7), a corporation must affirmatively elect to include an exculpation provision in its certificate of incorporation. We will closely evaluate proposals to adopt officer exculpation provisions on a case-by-case basis. We will generally recommend voting against such proposals eliminating monetary liability for breaches of the duty of care for certain corporate officers, unless compelling rationale for the adoption is provided by the board, and the provisions are reasonable.

I guess that’s not a definitive no, but I wouldn’t get your hopes up if I were you.

John Jenkins

November 21, 2022

Officer Exculpation: What About ISS?

Okay, so we know where Glass Lewis stands on officer exculpation – what about ISS?  This guest blog from Orrick’s J.T. Ho and Bobby Bee says that ISS seems to be more open to the concept:

ISS recently released proposed changes to its benchmark voting policies for the 2023 proxy season. Among the 17 proposed policy changes announced was an indication ISS will recommend “FOR” proposals to add officer exculpation provisions in a Delaware company’s charter. Such a charter amendment (an “officer exculpation charter amendment”) would be adopted to implement the August 2022 change in Section 102(b)(7) of the Delaware General Corporate Law permitting corporations to limit or eliminate the personal liability of officers for claims of breach of the fiduciary duty of care. For officers of Delaware corporations, adopting such a charter amendment can bring some parity with existing protection for directors.

While ISS is not expected to release its final U.S. Proxy Voting Guidelines for the 2023 proxy season until mid-December, it has already made a few “FOR” recommendations in line with these proposed policy changes. In making such recommendations, ISS identified the below factors as generally supporting adoption of an officer exculpation charter amendment:

– an expectation the protection afforded by the amendment will become commonplace for officers, and failure to provide could put a company at a disadvantage in recruiting or retaining executives;

– the amendment balances shareholders’ interest in accountability and their interest in attracting and retaining quality agents to work on their behalf; and

– the amendment does not appear to negatively impact shareholder rights and conforms to state law.

ISS will also consider company specific factors such as:

– whether a company is involved in the kind of litigation impacted by the proposed amendment at the time of the proposal; and

– whether a company was otherwise considered a “bad actor” with respect to corporate governance.

As of mid-November, there have been at least ten officer exculpation charter amendment proposals announced, with six already acted upon. Of those six, four were overwhelmingly approved by shareholders, while two failed. However, both failures were due to an inability to gain sufficient voting participation. Actual votes cast were overwhelmingly “FOR” adopting the amendment, just not enough votes were cast to cross the majority, or supermajority, participation mark required for approving a charter amendment.

While the above results are generally a good sign of things to come, Delaware companies considering an officer exculpation charter amendment proposal for the 2023 proxy season should take note of the company specific factors being considered by ISS, and consider the need for a proxy solicitor to ensure any majority or supermajority participation thresholds are met in connection with such a vote.

John Jenkins

November 21, 2022

Board Minutes: Best Practices Before, During & After the Meeting

There have been enough articles, blogs & memos written about best practices in keeping board minutes to fill an entire Practice Area here on, but that doesn’t mean there isn’t room for more. In that regard, this recent series of blogs by Perkins Coie’s Erin Gordon covering best practices before, during and after a board or committee meeting is a worthy addition.  This excerpt comes from her second blog, which addresses minute practices during the meeting itself:

Use a clear and concise drafting style that generically reflects the topics addressed and acted upon, and the extent of discussion undertaken. Include defined terms as necessary; minutes should be able to stand on their own.

For more significant decisions or discussions, more detail may be appropriate, but minutes should never be akin to a transcript of the conversation. For executive sessions, even if extended in time, only a high-level overview of the topics for discussion is typically appropriate. If any resolutions are adopted during executive session, use the recitals included in the resolutions to reflect any important considerations or information relied on.

John Jenkins

November 18, 2022

Farewell to Scott Spector

It is with great sadness that I acknowledge today the passing of Scott Spector, who died last week from injuries he sustained in a biking accident. Scott was a very important part of our community for many years, participating in so many of our programs and contributing to our publications for the benefit of our members. Scott was truly a legend in the area of executive compensation and employee benefits law, having practiced for many years at Fenwick, where he was partner emeritus.

As this Fenwick tribute notes, Scott was not only an extraordinary lawyer, but also a great friend and mentor:

Scott created a legacy at Fenwick through his practice, but his greatest impact is felt through his friendship, charisma, and adventurous spirit.

Scott was an exceptional lawyer and devoted friend. He embodied the very essence of Fenwick, always putting people first and serving as a loyal and supportive colleague and mentor. He was magnetic and funny, had an infectious laugh, and was a fearless adventurer who lived life with passion and without regrets.

Scott will be remembered for his selfless leadership and capacity for friendship. His aptitude for making connections influenced every relationship around him. The care and attention he poured into his relationships made everyone he touched feel singularly special. Almost every day, he would rally colleagues to go to lunch, helping forge connections that moved beyond collegial pleasantries and into genuine compassion and support. He enriched the lives and relationships of everyone, simply by knowing him.

Scott was that unique sort of person that I always learned something new from whenever I spoke with him. He was always generous with his time, and was the master of explaining complex issues and “seeing around corners” whenever a new issue emerged. I always enjoyed talking with Scott about cars and his exciting travel schedule. Scott was a great friend to so many in our community, and I know that we will feel his loss deeply.

Our condolences go out to Scott’s wife Holly and their children Stephanie and Melanie, as well as to all of Scott’s many friends and colleagues.

– Dave Lynn