November 11, 2020

Board Diversity: Companies Focus On Overboarding to Move the Needle

Last week, Liz blogged about a recent report from the NYSE & Diligent that said that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon, but that 45% lacked a specific timeframe for meeting diversity goals. However, the report goes on to say that those companies that have established a timeframe plan to move fast, and are limiting the number of boards on which directors may serve to help them achieve their diversity goals. Here’s an excerpt from this article:

But when a timeframe is set, it is ambitious: 35% of companies have set a one to three-year period in which to meet their diversity goals. The most widely adopted approach companies are taking to promote board refreshment is limiting the number of boards a director can sit on (17%). This brings a new focus on the concept of overboarding – a growing issue for investors in recent years. Although the Diligent and NYSE study doesn’t provide numbers when talking about limiting the number of boards a director can sit on, both ISS and Glass Lewis have tightened their stance on this in recent years.

The report says that 14% of companies have also introduced age limits for their directors in order to promote board refreshment & greater diversity. Another 11% percent have added more seats to their boards in order to make room for more diverse directors to join.

Covid-19: U.S. Chamber Petitions SEC for Liability Protection

The Covid-19 pandemic has already prompted a wave of litigation, including nearly three dozen securities lawsuits.  In an effort to protect businesses from what it characterizes as “unjustified Covid-19 lawsuits,” the U.S. Chamber of Commerce recently filed a rulemaking petition with the SEC seeking to enhance protections against pandemic-related securities claims.  Here’s an excerpt from Kevin Lacroix’s D&O Diary blog:

On October 30, 2020, the U.S. Chamber Institute for Legal Reform and the Chamber’s Center for Capital Markets Competitiveness filed a petition with the Securities Exchange Commission, pursuant to Rule 192(a) of the Commission’s Rules of Practice. (Rule 192(a) provides that “Any person desiring the issuance, amendment or repeal of a rule of general application may file a petition therefor with the Secretary” of the SEC.) The petition urges that the SEC should exercise the authority given to the agency in the PSLRA an “act without delay to place reasonable limits on securities litigation arising out of the COVID-19 pandemic.”

The Chamber’s petition asks the SEC to consider several specific actions. These include:

– Using its authority under the PSLRA to “bar liability for statements about a company’s plans or prospects for getting back to business, resuming sales or profitability, or other statements about the impacts of COVID-19, whether forward-looking or not—as long as suitable warnings were attached.”

– Alternatively, limiting liability for all such statements to circumstances in which the plaintiff can prove that the speaker had actual knowledge of their falsity (which would have the effect of treating all such statements as “opinions” for purposes of the securities laws).

– Requiring financial statements – which aren’t protected by the PSLRA safe harbors – to include language reminding users that a number of the elements of those statements “are determined on the basis of projections of future business or market conditions or by applying “mark to market” standards and stating that due to the tremendous uncertainties flowing from the pandemic and its effect on the economy, there is a greater possibility of variation than in the past.” Liability for pandemic-related misstatements in financial statements that include these warnings would be barred or, or alternatively, treated as the equivalent of opinions requiring proof that the company subjectively knew they were false in order for them to be actionable.

Kevin’s blog reviews the petition in detail, as well as some of the impediments to any quick action by the SEC on it.  He also provides additional context for the concerns about a potential explosion in Covid-19-related securities litigation in light of the rise of “event driven” securities class actions in recent years.

Tomorrow’s Webcast: “The Top Governance Consultants Speak”

Tune in tomorrow for the webcast – The Top Governance Consultants Speak – to hear Laura Wanlass of Aon, Rob Main of Sustainable Governance Partners, Allie Rutherford of PJT Camberview and Chris Young of Jefferies discuss what you should be focusing on in fall engagements and what proposals are emerging for the upcoming year.

John Jenkins

November 10, 2020

SEC Enforcement: More Edgar Hackers Face the Music

The ongoing proceeding against the alleged perpetrators of the 2016 hack of the Edgar system is one of the Division of Enforcement’s most high-profile cases. Last week, the SEC announced that it had reached a settlement with three of the defendants in that case, Sungjin Cho, Ivan Olefir, and Capyield Systems, Ltd., an entity affiliated with Olefir. According to the SEC’s complaint, the defendants allegedly traded on the basis of the hacked information during the period from July to October 2016. The SEC’s litigation release lays out the sanctions imposed:

Cho, Olefir and Capyield consented to the entry of final judgments that would permanently enjoin them from violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933. Additionally, Cho and Olefir agreed to conduct-based injunctions limiting their ability to trade U.S.-listed securities and derivatives. Cho agreed to pay a civil penalty of $175,000, and Olefir and Capyield agreed to pay a joint and several penalty of $250,000.

Earlier this year, the SEC reached a similar settlement with two other defendants. But the two alleged masterminds of the scheme – Ukrainian nationals Artem Radchenko & Oleksandr Ieremenko – are currently being sought by the Secret Service & the State Dept. The U.S. government has offered a reward of $2 million for information leading to their arrest or conviction.

SEC Enforcement: 2020 Annual Report

Last week, the SEC’s Division of Enforcement issued its annual report for the 2020 fiscal year.  This Sullivan & Cromwell memo summarizes the report’s highlights:

As the Report details, the Division obtained a record-breaking $4.68 billion in monetary remedies in FY 2020, including $3.59 billion in disgorgement and $1.10 billion in penalties. Total monetary relief in FY 2020 exceeded that in FY 2019 by $330 million, or 8%.

The Division filed 715 enforcement actions in FY 2020, which reflected a 17% decline from the previous year. Of the total actions brought, 405 were so-called “standalone” enforcement actions, 180 were follow on administrative proceedings, and 130 were actions to de-register companies that were delinquent in their SEC filings. Of the total number of enforcement actions, 492 were brought after instituting mandatory telework in mid-March. The decline in the number of actions is attributable largely to the disruptions resulting from COVID-19, as well as the fact that the prior year included numerous actions filed as part of the SEC’s Share Class Selection Disclosure self-reporting initiative.

Three enforcement areas drove the majority of the SEC’s standalone cases: (i) securities offerings (32%); (ii) investment advisory and investment company issues (21%); and (iii) issuer reporting/accounting and auditing (15%). The SEC also brought actions relating to broker-dealers (10%), insider trading (8%), market manipulation (5%), Public Finance (3%), and FCPA (2%). The SEC continued to pursue charges against individuals; 72% of the SEC’s standalone cases involved charges against one or more individuals.

The Division of Enforcement received 23,650 tips, complaints, and referrals in FY 2020, with most of them being received during the pandemic. That represents a substantial increase over the comparable FY 2019 figures, and the report says that they’ve helped to create a “strong pipeline for future enforcement actions.”

Virtual Annual Meetings: Gearing Up for 2021

At this point, most of us have reconciled ourselves to the fact that things aren’t getting back to normal anytime soon. Since that’s the case, companies will need to prepare for possibility that their 2021 annual meeting will once again need to be a virtual or hybrid meeting. This recent Bryan Cave blog offers up some tips on preparing for next year’s virtual meetings. This excerpt lays out some things to think about when it comes to such a meeting’s format and rules of conduct:

Companies need to decide whether a meeting will be virtual-only, physical-only or a hybrid. For any virtual component, they need to decide whether the access will be audio-only or audio plus video. While a majority of virtual meetings during the 2020 proxy season appeared to be in audio-only format, we expect that in 2021 companies will increasingly use video for their meetings, as video conferencing has evolved during the pandemic.

Clear rules of conduct are imperative. As more companies transitioned to virtual meetings in 2020, one area of focus was on how and when shareholders could submit questions. Investors and others questioned whether companies might be “cherry-picking” the questions they answered and requested that all shareholders have access to the questions submitted. Companies in 2021 will need to put in place and clearly address the Q&A process. For example, issuers need to decide whether questions may be asked live during the meeting via a chat function and/or over the phone, and/or prior to the meeting by submitting online or through email.

If you’re not already thinking about the possibility of a virtual component to your meeting next year, you probably ought to be. The blog says that many companies are already exploring retention of virtual meeting providers and video and real-time Q&A alternatives, and have also begun drafting disclosure about meeting logistics to include in their proxy materials.

John Jenkins

November 9, 2020

What Will the Election Mean for the SEC?

This Bloomberg Law article lays out some thoughts on what the Biden administration might mean for the SEC & its rulemaking and enforcement priorities. This excerpt points out that the recent amendments to the proxy rules targeting proxy advisors & shareholder proposals top the list of rules that could be undone by a reconstituted SEC:

In July 2020, the SEC made significant changes to the proxy advisor rules. Critics, such as Commissioner Allison Herren Lee, argued that the new rules were unwarranted, as they addressed no identifiable problem. The scope of the opposition to this measure makes it a candidate for early reversal in 2021. A to-do list of similar measures could also include recent changes to the shareholder proposal rules that make it more difficult for a small investor to submit or resubmit a proposal for inclusion in company proxy materials.

The article also predicts a more receptive environment for ESG-related disclosure requirements, and a more aggressive enforcement posture.  Whether a Democratic led SEC can find a way to reach consensus on issues like these and end its string of 3-2 votes on rulemaking proposals remains to be seen, but I sure wouldn’t bet the farm on it.

Disclosure: Prescriptive v. Principles-Based Approaches

Since the S-K modernization amendments just became effective, I thought this recent Bass Berry blog provided a timely illustration of the differences in disclosure practices that might result when a principles-based rule replaces a prescriptive one.

The blog reviewed a Staff comment letter & response involving a company that disclosed its dependence on a handful of 10%+ customers.  In its comment letter the Staff requested the company to disclose the identities as required – until recently – by the prescriptive language of Item 101(c) of S-K. However, as a smaller reporting company, the company was permitted to adopt the principles-based approach sanctioned by Item 101(h).  Here’s an excerpt from the company’s response to the Staff:

The Company respectfully asserts that disclosure of the names of its customers is not required by Item 101(h)(4)(vi) of Regulation S-K, nor does the Company believe the identity of its largest customers is material to an understanding of its business taken as a whole or necessary for investors to make an informed investment decision. Unlike Item 101(c)(1)(vii) of Regulation S-K, Item 101(h)(4)(vi) does not require a smaller reporting company to identify the name of any customer that accounts for 10% or more of its revenue. The Company also believes that the identities of its customers are of significantly less importance than a qualitative and quantitative description of the extent to which revenue from such customers is relied upon.

Each of the Company’s top three customers in 2019 have been customers for many years. The Company’s largest customer, representing 36.8% of revenue in 2019, has been a customer for 30 years. The second and third largest customers in 2019 have been customers for approximately 10 years and 7 years, respectively. While the Company does consider the loss of revenue from any one of its largest customers significant, warranting appropriate risk factor disclosure of the potential consequences of such loss, the Company does not believe investors will be more informed of these risks by knowing the customers’ identities.

The Company also indicated that both it & its customers regarded their identities to be highly confidential and commercially sensitive, but also agreed to provide additional disclosure about the percentage of its revenue derived from sales to those customers during the prior year. The Staff did not comment further on the company’s disclosure.

Stock Buybacks: Guidance for Your Repurchase Program

The SEC’s recent enforcement action against Andeavor LLC arising out of internal control lapses relating to the company’s stock repurchase plan has caused many companies to take a hard look at the mechanics of their own plans. If you’re working with one of those companies, take a look at this recent Mayer Brown memo, which reviews the application of the Rule 10b-18 safe harbor and a variety of other potential issues that may arise under the federal securities laws, state corporate law, and – for some issuers – applicable provisions of the CARES Act.

John Jenkins

November 6, 2020

Reg S-K Modernization: Corp Fin Issues 3 Transitional FAQs

Yesterday, Corp Fin issued three FAQs to address transitional issues that companies have been wondering about in light of the recent amendments of Regulation S-K Items 101, 103 and 105, which are effective for filings made after today. Thanks to the Staff for addressing these questions – and it was also great that the SEC sent out a separate email showing exactly which interpretations had been added. Here are the topics that are covered (also see this Cooley blog):

1. Whether a Form S-3 prospectus supplement that’s filed after November 9th, relating to a registration statement that became effective before that date, has to comply with the new rules.

2. Whether new Item 101 requires companies to disclose info in the Form 10-K for more than the fiscal year covered by the report.

3. Whether a company must always provide a full discussion of the general development of its business in an annual report or registration statement that requires Item 101 disclosure.

Tesla D&O Coverage Gets an “Elon Exclusion”

Earlier this year, John blogged that Tesla struck a deal in which CEO Elon Musk would personally provide D&O coverage to the board. Last week, the company’s latest Form 10-Q reported that the coverage came with a $3 million price tag for 90 days of coverage – which apparently was a 50% discount from the market quotes that Tesla received!

Tesla says that it’s now decided to line up a customary policy with third-party carriers. You’ve gotta wonder whether they’ve been able to negotiate a more reasonable price, since according to this article, the new policy has an “Elon exclusion.”

Will Mr. Musk play it safe without the safety net of insurance coverage? We’ll see, but my guess is he feels fine being self-insured. He now has $3 million more to cover mishaps, and that’s just pocket change for the fourth-richest man in the world.

Visit Our “Proxy Season Blog”

We continue to share daily posts on our “Proxy Season Blog” – which is available to members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Emerging Shareholder Proposal: B-Corp Conversions
– ISS to Cease Providing Draft Reports to S&P 500
– 14a-8 No-Action Letters: Key Points for Next Year
– Investors’ Letter-Writing Campaigns Just Got Easier
– Trends in Audit Committee Disclosures

Liz Dunshee

November 5, 2020

More on “Board Diversity: Goldman Says No More ‘Boys Club’ IPOs”

Last year, Goldman Sachs’ CEO David Solomon announced that the bank wouldn’t be taking any company public unless the company met diversity quotas – one diverse director in 2020, two in 2021. In this LinkedIn post, DJ D-Sol notes that they’ve taken 54 companies public since the policy went into effect – and they’ve started a new initiative to get first-timers on boards.

Goldman Sachs isn’t alone in these initiatives – the NYSE is also involved with getting diverse directors connected with companies who are seeking new directors. This recent report from the NYSE & Diligent says that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon. However, 45% lacked a specific timeframe for meeting diversity goals. Check out the full survey for info on board refreshment practices and other diversity efforts.

Critical Audit Matters: PCAOB Says CAMs Made Ripples, Not Waves

Last week, the PCAOB issued this analysis of the impact of the “critical audit matter” disclosure requirement, which has already been in effect for large accelerated filers and will take effect for other companies at the end of this year. This Cooley blog summarizes some of the high expectations and worries that people had when the requirement was adopted. But so far, other than auditors putting in some long hours (or maybe because of auditors putting in long hours), it seems like CAMs are making more of a ripple than a wave. Here are some of the key PCAOB findings:

• 2,420 audit reports contained CAMs – averaging 1.7 per report (7 was the highest). The most common CAMs reported related to revenue recognition (604), goodwill (462), other intangible assets (385) and business combinations (355).

• Audit firms made significant investments to support initial implementation of CAM requirements – but so far, they don’t appear to be passing those costs on to companies.

• Audit committee chairs and company preparers participating in the interview process indicated that the CAM implementation process was a “generally smooth experience” for companies, largely as a result of the significant upfront preparation by auditors. In particular, those interviewed considered the “dry runs” conducted by auditors to be useful.

• 41% of engagement partners who participated in the survey felt that the CAM requirement enhanced audit committee communications – less than 2% felt they constrained communications.

• Investor awareness of CAMs communicated in the auditor’s report is still developing, but some investors are reading CAMs and find the information beneficial. Only 31% of surveyed investors had seen a CAM “in the wild.”

• Only 2% of engagement partners reported issuer changes to internal control over financial reporting because of CAMs.

• The staff has not found evidence of significant unintended consequences from auditors’ implementation of CAM requirements for audits of large accelerated filers in the initial year.

The PCAOB analysis was accompanied by two whitepapers: one covering stakeholder outreach on CAM implementation and the other providing an econometric analysis of CAM requirements. Riveting stuff. The PCAOB plans to issue another report in 2022 and a comprehensive post-implementation review in 2024.

COVID-19: Heightening Investors’ Focus on Social Issues?

Social issues are attracting greater attention from asset managers this year, compared to the “Before Times” – but governance remains the most important issue. That’s according to a recent survey of 65 asset managers by ISS ESG, asking how the pandemic has impacted their consideration of ESG factors in investment decision-making and stewardship or engagement activities. The press release lists these key findings (see our “ESG” Practice Area for a bevy of surveys and memos):

– 62.5 percent of respondents report that social issues attract more of their attention now than before the COVID-19 pandemic.

– Governance remains the most important ESG factor in the investment analysis and stewardship activities of 86 percent of respondents.

– Respondents report the primary drivers of growth in their ESG engagements include client and stakeholder demand, racial inequality and diversity, and regulatory changes.

– 44.1 percent of respondents expect future ESG ratings to place a greater weight on workplace safety, treatment of employees, diversity and inclusion, as well as supply chain labor dynamics.

– 37.5 percent of respondents have either already added or intend to add new staff to manage ESG-related issues.

Liz Dunshee

November 4, 2020

SEC Might Abandon Proposed 13F Amendments

Last week, Bloomberg reported that the SEC was shelving its proposal to raise the Form 13F reporting threshold. If that’s true, it would come as a relief to the 2,238 people who penned letters to oppose the proposal – and disappoint all 24 who supported it.

As Lynn blogged and others pointed out, the higher threshold probably would made things more difficult for corporate folks involved in shareholder engagement. Keep an eye on future Reg Flex Agendas to see if this one comes back or just fades into oblivion.

Measuring “TCFD” Disclosures

According to this progress report from Climate Action 100+, 120 companies now have a board committee with express responsibility for oversight of climate risks and 59 companies now formally support the disclosure framework from the Task Force on Climate-related Financial Disclosures. The TCFD is a voluntary set of climate-related financial risk disclosures that is intended to help price climate risks – the task force is chaired by Mike Bloomberg.

As this Paul Weiss memo explains, although the TCFD’s recommendations were first published only three years ago, it’s one of the frameworks that’s become more popular. Late last week, TCFD issued its third annual status report to document progress. Here are a few of the key findings (for more benchmarking, also see this 15-page memo from Vigeo Eiris and Four Twenty Seven):

– Almost 60% of the 100 largest global public companies support the TCFD, report in line with the TCFD recommendations, or both

– The largest increase in disclosure was related to how companies identify, assess, and manage climate-related risk – but disclosure of the potential financial impact of climate change on businesses remains low

– Less than 1% of companies disclosed information on the resilience of their business strategy, taking into consideration different climate-related scenarios

– The most useful piece of info according to “expert users” is the impact of climate change on a company’s business & strategy – check out Appendix 5 beginning on pg 93 to see how these users ranked the usefulness of other information, which could help you prioritize your disclosure efforts

The TCFD also published two guidance documents:

Guidance on Scenario Analysis for Non-Financial Companies: provides ways to use scenario analysis and ideas for disclosing resilience of strategies to different climate-related scenarios

Guidance on Risk Management Integration & Disclosure: aimed at companies interested in integrating climate-related risks into their existing risk management processes and disclosing information on their risk management processes in alignment with the Task Force’s recommendations

Putting Sustainability into Action: 10-Year Roadmap

Recently, Ceres launched a 10-year sustainability action plan for companies to consider as a framework for governance, disclosure and strategic actions – along with this micro-site that includes performance milestones for each category of action, and other resources.

Speaking of putting sustainability into action, Coca-Cola recently announced that they would be discussing the company’s approach to sustainability, diversity and inclusion during a webcast for investors on November 13th. They’ll discuss the company’s sustainability strategy and goals, response to COVID-19 and stance on racial equity, among other topics.

Liz Dunshee

November 3, 2020

SEC Simplifies Exempt Offering Framework!

Following its open meeting yesterday, the SEC announced that it adopted amendments to simplify & harmonize the private offering framework. The Commission had proposed these rules in March following a concept release last summer. Here are highlights from the SEC’s Fact Sheet about what the amendments do:

– Establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings – and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. The amendments also provide 4 non-exclusive safe-harbors from integration.

– Increase the offering limits for Reg A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits

– Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities

– Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions

As has become the norm, the amendments were adopted by a 3-2 vote, with Commissioners Hester Peirce and Elad Roisman saying the rules don’t go far enough, and Commissioners Allison Herren Lee and Caroline Crenshaw saying that the rules strip away investor protections and were adopted without adequate data. Here’s a link to all of the statements from the Commissioners and SEC Chair Jay Clayton.

The amendments will go effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register. Publication often takes about a month – so if that’s the case, that would put us in the February time frame for this new private offering regime.

We’ll be updating our “Reg D Handbook” for these new rules as well as the changes to the accredited investor definition that go effective next month. We’ll also be posting memos in our “Private Placements” Practice Area.

New PPP “Loan Necessity Questionnaire” – 10 Days to Respond!

The Small Business Administration published a notice last week that it would release a new “loan necessity questionnaire” – Form 3509. If your company borrowed $2 million or more from the Paycheck Protection Program, you’ll need to complete the form to show the necessity of the borrowings – and it’ll be due within 10 business days of receiving it from your lender.

Although copies of the Form are popping up online, this Kaplan blog points out that the SBA website hasn’t posted an official version. This McDermott memo gives an overview of the information that borrowers will be expected to provide and suggests that they start collecting supporting documentation, given that the time frame for responding will be short.

Sustainability Reporting: XBRL Coming Soon?

PwC is working with SASB to translate its sustainability reporting standards into an XBRL taxonomy, according to this “Accounting Today” article – and the charge is being led by former SEC Chief Accountant Wes Bricker. The “Big 4” accounting firms definitely see an opportunity in ESG. As I blogged a couple of months ago on the Proxy Season Blog, they’re also working together to develop a set of common metrics for reporting.

Sure, common metrics and even XBRL could be helpful to investors, but I think the biggest opportunity here is to use this “alphabet soup” to create our very own, modern take on the “Mickey Mouse Club” song: S-A-S-B, X-B-R-L, E-S-G, M-O-U-S-E! Who’s with me?

Liz Dunshee

November 2, 2020

ESG: Election Edition

Tomorrow’s the day everyone’s been waiting for: my son’s birthday. Also, Election Day. Lots of people think that if there’s a “Blue Wave,” it would accelerate the push for “stakeholder capitalism” – especially after a group of Democratic senators announced a working group on Friday to signal that the rights of workers and long-term, sustainable operations would be a priority if their party gets wins up & down the ballot.

That may well be the case, but I don’t think a Trump victory means that we’ll be able to write off ESG. Remember the aftermath of the 2016 election and the US withdrawal from the Paris Climate Agreement? It only moved ESG momentum from the government to the patchwork of private ordering – if anything, it seemed to energize investors and companies to push in that direction.

For example, BlackRock first urged companies to serve a “social purpose” in a January 2018 letter, which ignited interest in “long-termism” and “corporate purpose.” Then we had the BRT statement last year, which is still making waves. Last week, this As You Sow review catalogued shareholder proposals on the topic of whether companies are adopting plans to implement the ideals of the BRT’s “corporate purpose” statement. And we’ve all been drowning in the proliferation of ratings and disclosure standards over the last four years.

DOL Leaves “ESG Investing” on Life Support

Then again, this administration has done a thing or two to try to divert attention from ESG issues. On Friday, the Department of Labor published the final version of its rule to require private-sector retirement plans to prioritize “pecuniary factors” when making investment decisions (I blogged about the proposal on our Proxy Season Blog back in June). It doesn’t expressly limit the use of ESG-themed investments, as had been proposed – but the substance of the proposal remained largely intact. This “Plan Adviser” article gives more detail:

The final version does include some significant changes compared with the proposal, which will seemingly protect the use of ESG investing to some extent. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance. In this sense, the rule does seem to leave ample room for the use of ESG-minded investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.

The preamble to the final rule, on the other hand, does speak directly to the ESG topic. The DOL and EBSA officials said the preamble seeks to help stakeholders understand how the pecuniary framework may apply to the assessment of ESG investments in practice.

Another important change emphasized by senior DOL and EBSA leaders is that the final rule does not explicitly prohibit the selection of a fund that uses ESG factors as a plan’s qualified default investment alternative (QDIA). Once again, the final rule requires that a fund being selected as the QDIA must be assessed using purely pecuniary factors that are directly material to its financial performance. Beyond this, the final rule does stipulate that a fund is not appropriate as a QDIA if its stated objectives include explicitly non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors.

Our November Eminders is Posted!

We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply entering your email address!

Liz Dunshee

October 30, 2020

Board Racial Diversity Disclosure: Letter Campaign to Entire Russell 3000!

Yesterday, I blogged about a letter writing campaign focused on climate lobbying disclosure. With diversity disclosure getting a lot of attention these days, there’s now another effort focused on that too. The “Russell 3000 Board Diversity Disclosure Initiative” issued a press release saying the group is calling on Russell 3000 companies to disclose the racial/ethnic and gender composition of their boards in 2021 proxy statement filings. The initiative is being led by the State Treasurers of Illinois and Connecticut and includes investors representing over $3 trillion in assets under management. Here’s an excerpt about the initiative from the Illinois Treasurer’s website:

Many institutional investors, including the Illinois Treasurer, have advocated for gender diversity on corporate boards through proxy voting policies and through direct shareholder-company engagement. These actions, now broadly adopted by institutional investors across the world, have helped generate an increase in gender diversity on corporate boards. The lack of data on racial/ethnic composition, however, makes it difficult to apply the same tools and creates unnecessary barriers to investment analysis and academic study.

The Black Lives Matter movement and the widespread outrage sparked by the murder of George Floyd have prompted a national conversation on issues of racial equity and inclusion. Many companies have issued statements in support of racial justice, and in some cases announced responsive efforts at their operations. This initiative urges companies to harness this national movement and the momentum on gender diversity to consider publicly reporting the racial/ethnic and gender composition of the Board of Directors in their annual proxy statement for the 2021 filing.

Members of the initiative have or are examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement. Members agree that voluntary corporate reporting in the proxy statement is the most reliable data source.

The website includes a sample letter sent to Russell 3000 companies and the letter includes a proxy statement excerpt as an example of the disclosure the group would like to see. The example shows racial/ethnic and gender information by director as additional information at the bottom of a “director skills matrix.” We’ve blogged before about potentially gathering some of this information as part of annual D&O questionnaires and it looks like more companies could be headed down that path…

Trillium Engages to “Get Out the Vote”

With the election right around the corner, a recent press release from Trillium Asset Management says it has engaged with 20 companies to understand and influence their civic engagement policies and practices. With most shareholder engagement meetings focused on governance matters, executive compensation and various social issues, civic engagement seems like a new one – then again, if there was a year for it, 2020 might be it.

Those familiar with Trillium know that the socially responsible asset manager is a frequent proponent of various social matters – it has led initiatives relating to workplace diversity, plastics, LGBT issues and others. In this most recent engagement effort, Trillium released a report back in July intended to encourage companies to provide paid time off for employees to vote. Here’s an excerpt:

Trillium is pressing the companies that can make a difference, to take this opportunity and to become part of the solution. Support for civic engagement can benefit our democracy, can increase employee satisfaction, and we believe, improve the bottom line.

We wanted to know what companies with large numbers of hourly workers are doing to support civic engagement, so we asked each of these companies: Is there a company-wide policy that provides employees with time off to vote? Who does this policy extend to? Full-time, part-time, salaried, seasonal, and hourly employees? Contractors? How much time off is provided? If time off is provided, is it paid? In states with existing time off laws does the company do more than comply with state law? What kind of education is provided to make employees aware of this benefit? We also gathered information about how companies make employees aware of these benefits and any other education they offer around civic engagement.

The report includes a “Democracy Scorecard” and praises several companies, while also noting others have room for improvement. Companies that exhibited what we believe are “best practices” on this issue have robust policies that provide employees with paid time off to vote. Many also have strong engagement programs that provide employees important information about voting locations and deadlines. Some companies provided paid time off while others deferred to adhoc conversations with managers in order to schedule time off. Companies that rely on vacation time and the structure of employee schedules are not showing a sincere commitment to employee engagement.

Some states require that employers give employees time off to vote but the laws vary. When the mid-term elections come up in a couple of years, it’ll be interesting to see if this topic makes its way into engagement meetings again. Separately from this engagement initiative, some companies have begun offering paid time off to ensure employees have time to vote – here are a few stories I saw – including Coca-Cola’s tweet in response to Sarah Silverman’s call for time off and news from Goldman Sachs and Symetra Life Insurance Company.

September-October Issue of “The Corporate Executive”

The September-October issue of The Corporate Executive was just posted – & also sent to the printer. It’s available now electronically to members of who also subscribe to the electronic newsletter (try a no-risk trial). This issue includes articles on:

– Companies Changing Incentive Compensation Plan Performance Targets or Metrics Due to Covid-19

– ISS Releases Preliminary Guidance on the Pandemic and Pay Decisions

– Perks and the Pandemic: The SEC Staff Weighs In

– Human Capital Disclosure: Are You Ready?

– Lynn Jokela

October 29, 2020

Investors Call for Climate Lobbying Disclosure

In a recent letter writing campaign, a group of institutional investors sent letters to CEOs and board chairs of 47 U.S. companies urging the companies to disclose how their climate lobbying aligns with the Paris Agreement and to take action when there’s misalignment. Earlier this week, Ceres issued an announcement about the initiative. As stated in the investors’ letter, it’s follow-up to letters on climate lobbying sent last year and is being sent in advance of benchmarking on climate progress that’s slated for public release next year:

Earlier this year, all 161 focus companies of the Climate Action 100+, including the 47 notified this month, were informed that they would be benchmarked on their climate progress against a set of key indicators that reflect the goals of the initiative. Paris-aligned corporate lobbying is a key indicator in which corporate progress will be assessed. The full assessment — Climate Action 100+ Net- Zero Company Benchmark — is set to be released in early 2021.

The letter directs these companies to this Ceres document outlining recommendations on how companies can establish systems that address climate change as a systemic risk and integrate this understanding into their direct and indirect lobbying on climate policies.

Investors signing this most recent letter campaign include BNP Paribas Asset Management, Boston Trust Walden, CalPERS, CalSTRS, Mercy Investment Services, NYC Comptroller’s Office, New York State Common Retirement Fund and Wespath Benefits & Investments.

Looking Back at 16 Years of ICFR

Section 404 of the Sarbanes-Oxley Act requires companies to review internal control over financial reporting and report whether it’s effective. John recently blogged about how newly public companies have fared with ICFR and Audit Analytics recently issued its annual recap of negative auditor attestations and management-only assessments of ICFR. The report takes a look at how public companies have fared more broadly by looking back at the last 16 years since SOX 404 first applied to U.S. accelerated filers. The report shows differing trends for accelerated filers disclosing adverse auditor attestations versus adverse management-only attestations filed by non-accelerated filers.

After starting out at 15.9% for fiscal year 2004, adverse auditor attestations declined to 3.5% for fiscal year 2010 and now have been hovering between 5 – 7%, which is where they’ve been for the last several years. Conversely, adverse management-only assessments rose steadily for seven years from 2008 to 2014 and are much higher than accelerated filers, peaking at 40.9% before declining, although adverse management-only assessments have remained between 39 – 42% since. Here’s an excerpt for reasons behind 2019 adverse attestations and assessments:

– The most common internal control reason auditors indicated as leading to conclusions about ineffective ICFR were issues requiring year-end adjustments, followed by a need for more highly trained accounting personnel

– The most common accounting issue that triggered an adverse ICFR determination was revenue recognition issues, which was followed by accounts receivable and other cash issues

– For management-only assessments, the most common internal control reason given to support a conclusion about ineffective ICFR was that accounting personnel within the company were not adequately trained, followed by a lack of personnel necessary to implement proper segregation of duties

– The most common accounting issue that triggered a conclusion about ineffective ICFR was accounts receivable and cash issues, although it was only identified and disclosed 69 times – the report notes that non-accelerated filers tend to disclose deficiencies absent an identified accounting error

Transcript: CFIUS After FIRRMA: Navigating the New Regime

We’ve posted the transcript for the recent webcast: “CFIUS After FIRRMA: Navigating the New Regime.”

– Lynn Jokela