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.
In August, the PCAOB reached a tentative deal with China’s securities regulators to permit the PCAOB to fully inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. Although the PCAOB was willing to move forward on the basis of the deal, they didn’t exactly sound optimistic about its outcome. But because implementation of the Holding Foreign Companies Accountable Act could ultimately result in the wholesale delisting of China-based companies, Chinese authorities presumably had some incentive to play ball.
Yesterday, PCAOB Chair Erica Williams issued a statement about actions taken by the PCAOB based on its experience to date inspecting China-based firms under the accord. That statement took a slightly more optimistic tone. Here’s an excerpt:
For the first time in history, the PCAOB has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong. And this morning the Board voted to vacate the previous determinations to the contrary.
This historic and unprecedented access was only possible because of the leverage Congress created by passing the Holding Foreign Companies Accountable Act. Congress sent a clear message with that legislation that access to U.S. capital markets is a privilege and not a right, and China received that message loud and clear.
Investors are more protected today because of Congress’ leadership, and I want to thank Members of the House and the Senate for their ongoing work to hold China accountable.
I want to be clear: this is the beginning of our work to inspect and investigate firms in China, not the end. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward. Our teams are already making plans to resume regular inspections in early 2023 and beyond, as well as continuing to pursue investigations.
The Board does not have to wait another year to reassess its determinations. Should PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access – in any way and at any point in the future – the Board will act immediately to consider the need to issue a new determination.
It is important to understand: today’s announcement is about one question and one question only – is the PCAOB able to inspect and investigate firms in mainland China and Hong Kong completely at this time? The answer, following thorough and systematic testing, is yes.
The statement goes on to say that the PCAOB found numerous potential deficiencies in its inspection, but that these results weren’t out of line with what would be expected for firms in other jurisdictions being subjected to inspection for the first time.
The SEC has brought enforcement actions against a number of companies offering digital assets in which it has alleged that the assets are a “security” within the meaning of Section 2(a)(1) of the Securities Act. Much to the consternation of the crypto bros, the answer to that question is often a straightforward “yes”, based upon application of the Howey test. But the answer isn’t so simple when it comes to other digital assets.
To get a sense for the complexity of this issue for some digital assets, check out the comment letter exchange that David Kitchin & Jay Knight recently flagged on Bass Berry’s Securities Law Exchange Blog. The Staff issued a comment (see comment No. 2) on a Form 10 filing by Graystone Horizen Trust, which was organized to hold the ZEN cryptocurrency, requesting it to furnish the Staff with its analysis as to why ZEN wasn’t a security. The company’s response letter included a 30-page analysis (featuring more than 130 footnotes) of the issue from its outside counsel that reached the following conclusion:
The SEC could claim that ZEN is a security on the basis that holders would rely on the efforts of the Foundation or the Company. Even so, while not free from doubt, the Sponsor could make arguments to the contrary that, in light of the full facts and circumstances, ZEN does not meet all the elements of Howey such that it would be an investment contract.
The Staff and the company engaged in several more rounds of comments in which it requested additional disclosure concerning ZEN’s potential classification as a security. But at the end of the process, the Staff decided to kick the can down the road and issued this final comment:
Refer to your responses to comment 2 in our June 13, 2022 letter and related comments. While we do not have any further comments at this time regarding your responses, please confirm your understanding that our decision not to issue additional comments should not be interpreted to mean that we either agree or disagree with your responses, including any conclusions you have made, positions you have taken and practices you have engaged in with respect to this matter.
The result of this exchange isn’t surprising – after all, the resolution of the status of a particular cryptocurrency under the Securities Act is likely an issue that will ultimately need to be decided by the courts or by more senior SEC officials. But it does illustrate just how complicated the issues surrounding whether some digital assets are securities can be.
The SEC’s Office of the Advocate for Small Business Capital Formation just issued its 2022 Annual Report, which highlights the OASB’s activities during the year and discusses the overall state of capital formation, the capital needs of early stage and more mature businesses, and other matters. There’s a lot of interesting data in the report, but one thing in particular that I’d like to note is that on p. 6 of the Report, the OASB singles out Deputy Director Sebastian Gomez Abero’s appearance on our own Dave Lynn’s “Deep Dive with Dave” podcast as one of the year’s highlights. Check it out!
