The November-December Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Universal Proxy Puts Directors on Notice
– Controlling Stockholders: Managing Liquidity Conflicts and Other Special Benefits
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you don’t subscribe to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
Last week, the SEC posted this notice for an immediately effective change to Nasdaq’s “disclose or comply” board diversity rule.
NASDAQ’s amendment relates to the compliance dates. Because it was one year after the original approval date of the rule, August 8, 2022 was set as the initial compliance deadline for board matrix disclosures under this rule, and all of the other compliance deadlines in the rule were keyed to that anniversary date. Nasdaq now wants to simplify the timeframe for disclosures made outside of the proxy statement. Here’s more detail:
– Rules 5605(f)(7)(A) and 5605(f)(3) – requirement for companies on The Nasdaq Global Select Market, The Nasdaq Global Market, and The Nasdaq Capital Market to have at least one “Diverse” director (or explain why you don’t) – moved from August 7, 2023 to December 31, 2023 (which is the deadline under the current rule for a company with a December 31st fiscal year-end to hold its annual shareholder meeting during the calendar year of the First Effective Date).
– Rules 5605(f)(7)(B) and 5605(f)(3) – requirement for companies listed on The Nasdaq Global Select Market or The Nasdaq Global Market to have at least two “Diverse” directors (or explain why you don’t) – moved from August 6, 2025 to December 31, 2025.
– Rules 5605(f)(7)(C) and 5605(f)(3) – requirement for companies on The Nasdaq Capital Market to have at least two Diverse directors (or explain why they don’t) – moved from August 6, 2026 to December 31, 2026.
– Rule 5605(f)(3) – in addition to the date changes above, the rule change will also permit companies to submit the URL link to disclosure that’s made outside of the proxy statement via email, to drivingdiversity@nasdaq.com (in addition to being able to submit it through the Nasdaq Listing Center).
– Rule 5606(e) – matrix disclosure after year 1 – the amendment clarifies that December 31st is the annual deadline for this required disclosure.
This rule change is immediately effective, although the Commission may temporarily suspend it if it determines that it’s necessary to do so. Interested persons are also invited to submit comments. These are welcome changes in my book – one less “gotcha” date to keep track of!
I blogged a few weeks ago about a new initiative from the “Russell 3000 Board Diversity Disclosure Initiative” that is urging companies to disclose demographic information about directors on an individualized basis. When these requests are made, one question that we often get from clients and directors is: “Why?” Or from the more cynical folks, “Why aren’t investors ever satisfied?”
One reason is that providing the extra info up front could help make the director voting & election process more efficient, in this era of investors needing to apply board diversity voting policies. A member sent this perspective:
First of all, regarding the gap between the requested disclosure and the Nasdaq board diversity matrix, that disclosure is not required for NYSE companies and is always as of a date that is weeks or months earlier than the shareholder meeting. As a result, it captures directors who will be stepping off the board upon completion of the meeting, and does not capture directors who will be joining the board. Shareholders might prefer a matrix that reflects the composition of the board on a going-forward basis. Moreover, there are often cases where one or more directors are listed in the matrix as “did not provide demographic information”, which limits the usefulness of the entire thing.
As for why shareholders might prefer individualized disclosure, I can think of at least two reasons.
1. Shareholders may be reluctant to vote against a board’s only African-American director to protest a lack of women on the board (or vice versa), and having individualized disclosure will help them avoid that outcome. (These things aren’t always apparent from looking at director names, and many companies do not provide photos of their directors.)
2. Shareholders may want to know whether the board’s one Black director and its one female director are the same person, or two different people. In theory it’s possible to figure this out from the Nasdaq matrix, but I’ve seen cases where the disclosure is less than clear – and again, NYSE companies don’t have to provide a matrix at all.
While the policies of proxy advisors and many investors don’t insist on individualized disclosure, it is understandable why some investors might logically prefer it.
As my earlier blog noted, one factor that weighs against making individualized disclosure is that it may create privacy concerns for directors. In addition, some companies and directors are uncomfortable with individualized disclosure because they don’t want to apply labels or contribute to a perception that certain directors were nominated primarily for their gender or ethnicity rather than their specific qualifications and experiences. Related to that, people may not fit into neatly defined, binary categories. These are not easy issues – but an understanding of all of the perspectives can help you and your board weigh the pros & cons.
We’ve posted the transcript from our recent webcast – “Dissecting the Quarterly Earnings Process.” This was a fun program, full of essential guidance on a topic that we all deal with every single quarter. Goodwin’s Sean Donahue, O’Melveny’s Shelly Heyduk and Cooley’s Reid Hooper shared their insights on these topics:
– Earnings Process Framework
– Social Media Issues
– Key Documents & Rules That Apply to Them
– Orchestrating the Earnings Call
– Preparing for Q&A
– Earnings Guidance
– Timing with Form 10-Q and Form 10-K
If you aren’t already a member with access to this transcript and the on-demand audio replay, sign up today for a no-risk trial! You can do that online or by emailing sales@ccrcorp.com. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
Yesterday, BlackRock Investment Stewardship issued its 2023 proxy voting guidelines – along with updated Global Principles that outline the 7 key governance themes that the asset manager focuses on. Thanks to the Aon team for being so on top of things and letting me know!
Everything is effective January 1st. This 6-page summary ties together the voting guidelines & Global Principles. BlackRock’s policy summary makes sure to note that it’s a long-term corporate partner (emphasis added):
Consistent with BlackRock’s fiduciary duty as an asset manager, BlackRock Investment Stewardship’s (BIS) purpose is to support companies in their efforts to deliver long-term durable financial returns on behalf of our clients, the asset owners. BIS serves as an important link between our clients and the companies they invest in. We aim to build constructive relationships with companies, engaging in dialogue with company leadership throughout and over the years. As has long been the case, we focus on effective corporate governance and management of material sustainability-related risks and opportunities, which in our experience supports company resilience and long-term financial performance.
The summary also says that BlackRock won’t support shareholder proposals that it believes would result in “over-reaching into the basic business decisions of the company” – which tracks with its voting record this past season. BlackRock’s express nod to corporate support comes right as certain big asset managers are facing accusations that they’re too “woke”. It strikes a similar tone to a memo that State Street Global Advisors published a couple months back.
BlackRock also clarifies in the updated voting guidelines that it is only voting proxies for clients that have given it the authority to do so, in light of its new “voting choice” programs. And, it dials down some of the “ESG” terminology and references in the voting guidelines – e.g., in the section on “oversight role of the board,” the guidelines now refer to consideration of “material risk factors (including, where relevant, sustainability factors)” – rather than focusing on “material ESG risk factors.” BlackRock continues to see engagement with & election of directors as one of its most important responsibilities.
The bottom line when it comes to the voting policies, though, is that not much has changed. There are some wording changes that likely reflect what is already happening in practice. BlackRock says:
Consistent with our long-term approach, the changes made to our stewardship policies for 2023 build on our approach in prior years. We do not anticipate material changes in our voting as a result, and much of our engagement with companies will be continuing the dialogue on material risks and opportunities that we had in 2022.
As far as how all these different documents fit together, the voting guidelines explain how BIS’s Global Principles inform voting decisions on specific ballot items at shareholder meetings. Remember that BlackRock always applies its guidelines on a case-by-case basis, which the Principles make sure to note:
The issue-specific Guidelines published for each region/country in which we vote are intended to summarize BlackRock’s general philosophy and approach to issues that may commonly arise in the proxy voting context in each market where we invest. The Guidelines are not intended to be exhaustive. BIS applies the Guidelines on a case-by-case basis, in the context of the individual circumstances of each company and the specific issue under review. As such, the Guidelines do not indicate how BIS will vote in every instance. Rather, they reflect our view about corporate governance issues generally, and provide insight into how we typically approach issues that commonly arise on corporate ballots.
Just like it’s done for the past several years, the Investment Stewardship team plans to issue engagement priorities & thematic commentaries during Q1, which will give more info about what to expect during engagements.
Blackrock Investment Stewardship made two modifications to its 2023 Global Principles, prompted by market-level developments:
• Nature-related factors: We continue to encourage companies to consider reporting on material sustainability-related risks and opportunities in their business models. While guidance is still under development for a unified disclosure framework related to natural capital, given the growing materiality of these issues for many businesses, we believe enhanced reporting would help investors’ understanding, and we note that the emerging recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD) may prove useful to some companies. We recognize that some companies may report using different standards, which may be required by regulation, or one of a number of other private sector standards.
• Sustainability reporting: We recognize that companies may need time after fiscal year-end to collect, analyze and report accurate climate- and sustainability-related data. To give investors time to assess the data, we encourage companies to produce climate and other sustainability-related disclosure sufficiently in advance of their annual meeting.
The Global Principles are organized around 7 key themes:
– Boards & directors
– Auditors & audit-related issues
– Capital structure, mergers, asset sales, and other special transactions
– Compensation & benefits
– Material sustainability-related risks & opportunities
– Other corporate governance matters & shareholder protections
– Shareholder proposals
The Principles continue to urge companies to disclose strategies that they have in place to mitigate material risks to the long-term business model associated with a range of climate-related scenarios – noting that those strategies must be defined by each company, it is not the role of BlackRock or other investors. Here’s more detail on disclosure expectations:
Many companies are asking what their role should be in contributing to an orderly and equitable transition – in ensuring a reliable energy supply and energy security, and in protecting the most vulnerable from energy price shocks and economic dislocation. In this context, we encourage companies to include in their disclosure a business plan for how they intend to deliver long-term financial performance through a transition to global net zero carbon emissions, consistent with their business model and sector.
We look to companies to disclose short-, medium- and long-term targets, ideally science-based targets where these are available for their sector, for Scope 1 and 2 greenhouse gas emissions (GHG) reductions and to demonstrate how their targets are consistent with the long-term economic interests of their shareholders. Many companies have an opportunity to use and contribute to the development of low carbon energy sources and technologies that will be essential to decarbonizing the global economy over time. We also recognize that continued investment in traditional energy sources, including oil and gas, is required to maintain an orderly and equitable transition — and that divestiture of carbon-intensive assets is unlikely to contribute to global emissions reductions. We encourage companies to disclose how their capital allocation to various energy sources is consistent with their strategy.
The latest issue of The Corporate Executive has been sent to the printer (email sales@ccrcorp.com to subscribe to this essential resource). 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 our “new normal” of remote work. The issue includes articles on:
– Taking a Deep Dive into the SEC’s New Clawback Rules
– ISS and Glass Lewis Update Proxy Voting Guidelines
If you don’t already subscribe to this newsletter, put it on your holiday wish list! Dave always ensures that it is full of must-have, practical information.
Last week, State Street Global Advisors announced a new program that will offer “proxy voting choice” to more institutional funds, as soon as this proxy season. The announcement follows an earlier memo that hinted this could be in the works. Here are the highlights:
State Street Global Advisors’ clients in separately managed accounts already have the ability to either vote their own shares directly or delegate proxy voting of their shares to the firm’s asset stewardship team.
With the addition of this new program, investors in more than 40% of the index equity assets managed by State Street Global Advisors will have the ability — by the start of the 2023 proxy season — to make choices regarding how shares held in the funds and separately managed accounts they own are voted. Over time, the firm intends to expand investor directed voting choice to as many of its index equity assets under management as possible.
As explained on SSGA’s website, the funds that participate in this voting option will do so using various ISS proxy voting policies – including the benchmark policy, sustainability policy, socially responsible investment policy, Catholic faith-based policy, public fund policy, Taft-Hartley policy, and board aligned policy (which generally votes in favor of management recommendations).
SSGA says that it will continue to engage with portfolio companies through conversations, proxy voting and thought leadership. Pass-through voting / voting choice is shaping up to be a hot topic for the upcoming proxy season, with all 3 of the biggest asset managers now offering it (here’s info on BlackRock and on Vanguard). I blogged a few weeks ago on the Proxy Season Blog about fintech platforms to watch – and last week, about potential consequences for companies.
The Center for Audit Quality & Audit Analytics are out with the 9th annual “Audit Committee Transparency Barometer.” The report gauges audit committee disclosure of external audit committee oversight activities in the S&P 1500 – broken down by trends in the S&P 500, S&P MidCap 400 and S&P SmallCap 600.
This year’s report shows an uptick in many key areas – including info about the audit committee’s role in cyber risk oversight and ESG oversight:
– 54% of the S&P 500 audit committees reported having responsibility for cyber risk oversight, an 8% increase since 2021
– For S&P 500 companies, 39% of audit committees disclosed having an ESG or sustainability expert on the board, while 18% of audit committees disclosed responsibility of oversight of ESG
That said, there are also opportunities for improvement when it comes to transparency – specifically, around the audit committee’s decision process for external auditor engagements. The CAQ’s press release highlights these stats:
– While 71% of audit committees of S&P 500 companies disclose auditor tenure in the proxy statement, only 9% of such audit committees disclose how the audit committee considers length of auditor tenure when re-appointing the external auditor
– While 51% of audit committees of S&P 500 companies disclose that they are involved in the selection of the audit engagement partner, few disclosed what their involvement in the selection of the audit engagement partner entails
Time to plan ahead: EDGAR will be closed next Monday, December 26th – as well as the following Monday, January 2nd. That means filing websites won’t be operational, filings won’t be accepted in EDGAR, and EDGAR Filer Support won’t be available. Here’s more detail from the SEC’s announcement:
Both days will be treated as federal holidays for filing purposes, and the federal government will be closed on both days.
Filings required to be made on Monday, December 26 will be considered timely if filed on December 27, 2022 or before December 26, 2022. December 27, 2022 is EDGAR’s next operational business day following the December 26, 2022 closure.
Filings required to be made on Monday, January 2, 2023 will be considered timely if filed on January 3, 2023 or before January 2, 2023. January 3, 2023 is EDGAR’s next operational business day after the January 2 closure.
