You may have noticed a conspicuous absence in the list of speakers for this year’s Conference. Yes, you can look high and low, but you won’t find me anywhere. When I saw that I didn’t make the cut, my immediate reaction was that – like Fredo Corleone – I had been “stepped over.” However, when I approached our management team, they assured me that wasn’t the case, and suggested that I should think of myself as Michael Collins, not Fredo Corleone.
Management also assured me that I would have a prominent role in our upcoming webcasts and podcasts. I don’t want to brag, but they went out of their way to tell me that I have the perfect “face for radio.” You know, not everybody can say that! Anyway, everyone was very appreciative of my willingness to hold down the fort here this week while they were busy with the Conference. Liz even gave me her Netflix password so I could watch “Squid Game” while she was gone.
The September-October issue of “The Corporate Counsel” newsletter is in the mail. 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 the “remote work” environment (subscribe here to be “in the know”). The issue includes articles on:
– Test Driving Testing the Waters
– Staff Comments on Non-GAAP Financials: The 2021 Edition
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
The Delaware Chancery Court’s decision in the Boeing case is the latest in a series of cases suggesting that, as Liz put it in a recent blog, we’re in an era of “easier” Caremark claims. Whatever else that may mean, in this environment, it’s pretty clear that directors need to keep their heads on a swivel when it comes to identifying potential sources of alleged breaches of their duties of oversight. This Directors & Boards article identifies one such area – compliance with COVID-19 mandates. Here’s an excerpt:
On Sept. 9, President Joe Biden announced his six-pronged COVID-19 Action Plan, which will have a significant impact on employers across the country by mandating vaccinations for many employees and requiring regular testing of certain others. Although key details are unknown at the time of this writing, the plan will have a significant impact on many private sector employers, particularly companies that contract with the federal government, those that receive Medicare or Medicaid reimbursement and, most sweepingly, companies with 100 or more employees.
The rule applicable to employers of more than 100 individuals is being developed by OSHA now and, once issued via temporary standard, will require these companies to ensure that their staff is fully vaccinated against or tested weekly for the COVID virus. Employees who are not vaccinated will have to show proof of a negative virus test before reporting to work. The White House estimates this requirement will impact over 80 million workers.
OSHA is seeking to issue its new rule initially pursuant to rarely used emergency authority that it may exercise only where there is evidence of “grave danger from exposure to … agents determined to be toxic or physically harmful or from new hazards.” This basis for the regulation will almost certainly be challenged in court, but in the meantime, it sets forth an unambiguous statement of the importance of a vaccine requirement for employee safety.
Although the COVID-19 Action Plan includes frequent testing as an alternative to vaccination, boards may justifiably be concerned that if the company fails to comply with the regulations, this response could be second-guessed in lawsuits brought alleging that the board’s response reflected inadequate oversight of the “grave danger” to employee (and possibly customer) safety posed by COVID-19. Even if the board requires compliance but relies primarily on testing and not by mandating employee vaccinations, this could possibly still be alleged to be an inadequate response to the risk.
Putting the vaccine mandate aside, the article notes that boards will have a tough time in the current environment arguing that addressing the employee safety risks posed by the pandemic isn’t the kind of essential and mission critical function that triggers a duty to actively oversee the company’s response. That means the company’s overall response to the pandemic, and not just to the COVID-19 Action Plan, needs to be carefully considered and appropriately documented.
Last week, the DOJ announced a new cyber-fraud initiative, and if your company is a government contractor, you’re on the front line. Here’s an excerpt from the DOJ’s announcement:
The Civil Cyber-Fraud Initiative will utilize the False Claims Act to pursue cybersecurity related fraud by government contractors and grant recipients. The False Claims Act is the government’s primary civil tool to redress false claims for federal funds and property involving government programs and operations. The act includes a unique whistleblower provision, which allows private parties to assist the government in identifying and pursing fraudulent conduct and to share in any recovery and protects whistleblowers who bring these violations and failures from retaliation.
The initiative will hold accountable entities or individuals that put U.S. information or systems at risk by knowingly providing deficient cybersecurity products or services, knowingly misrepresenting their cybersecurity practices or protocols, or knowingly violating obligations to monitor and report cybersecurity incidents and breaches.
The DOJ says that it will work closely with other federal agencies, subject matter experts and law enforcement partners throughout the government. This Miller & Chevalier memo on the Initiative notes that it follows on the heels of President Biden’s executive order on cybersecurity, and also discusses a number of recent cybersecurity cases where the government has used the formidable False Claims Act as the basis for its claims.
For me, the one unbending rule of corporate board and committee meetings has always been that the minutes should be the definitive record of the actions taken at them, so I have been dismayed to learn that some companies have opted to record video board meetings held during the pandemic. This Bryan Cave blog discusses the privilege, consent and privacy issues involved in recording board and other corporate meetings. This excerpt reviews the privilege issues that can arise when a company records its board meetings:
Recorded video conferences could be subject to discovery in the litigation context. Board discussions are not inherently privileged, and thus board members who become witnesses may, under some circumstances, be asked about what they discussed at a meeting. But a recording of the meeting is likely to provide a fuller account than participants’ memories or written minutes, and so may yield more powerful evidence. Further, to the extent all or part of a meeting is subject to the attorney-client privilege or other confidentiality provision, the existence of a recording that can be distributed raises the risk of waiver through sharing of the document with parties outside the scope of the privilege.
I don’t care how well-functioning your board is – I guarantee you that a plaintiff’s lawyer would consider an unedited recording of an entire board meeting to be an absolute gold mine. So, if you’re recording these meetings, expect those recordings to be included in a books & records request from a plaintiff’s lawyer on a fishing expedition for derivative claims.
On the heels of last week’s SEC proposal for enhanced proxy voting disclosure, yesterday BlackRock announced that it will give institutional index investors, such as pensions & endowments, the option to vote their own holdings – rather than having the asset manager cast votes on their behalf. This change will begin on January 1st and will apply to about 40% of BlackRock’s managed assets – a big expansion from the limited number of existing BlackRock clients who’ve been able to do this to-date.
BlackRock also said that this is just the beginning of a bigger initiative. Tulane Law prof Ann Lipton pointed out on Twitter that this could even be a step toward pass-through voting. Here are a couple of excerpts from the announcement:
Beginning in 2022, BlackRock is taking the first in a series of steps to expand the opportunity for clients to participate in proxy voting decisions where legally and operationally viable. To do this, BlackRock has been developing new technology and working with industry partners over the past several years to enable a significant expansion in proxy voting choices for more clients.
And:
BlackRock is committed to exploring all options to expand proxy voting choice to even more investors, including those invested in ETFs, index mutual funds and other products. This initiative will require the cooperation of additional partners across the investment and proxy voting ecosystem. In certain instances, it will also require regulatory and operational system change.
The asset manager says that it expects many clients will continue to want BlackRock Investment Stewardship to vote on their behalf, but it is making this option available because some clients want greater participation in proxy voting. Here are the ways that eligible investors will now be able to vote:
– Use their own proxy voting policies and transmit their votes using their own voting infrastructure.
– Choose from a menu of third-party proxy voting policies (e.g., sustainability policies, etc.) and have votes cast using BlackRock’s voting infrastructure.
– Vote directly on select resolutions or select companies using BlackRock’s voting infrastructure (This option is available only to clients in institutional separate accounts.)
– Continue to have BlackRock Investment Stewardship cast proxy votes using BlackRock’s voting policies and using its voting infrastructure.
– Liz Dunshee
Programming Note: Our office is closed on Monday, October 11th and we aren’t blogging that day. We’ll be back on Tuesday, October 12th.
BlackRock’s announcement says that its change to voting options is due to client demand. That would make sense, given the investment world’s growing interest in having their voice heard on ESG matters. The announcement may also ease the unease that some have expressed about the level of influence that can currently be exercised by a handful of behemoth asset managers.
In hindsight, though, some people who wished that BlackRock had less power over votes might end up regretting this “wish come true.” It is very early to predict exactly how this policy will play out in practice. But it seems that it may make it even more difficult for companies to track & predict votes during proxy season. Companies will now need to engage not just with BlackRock, but will also need to understand whether the index investor whose funds BlackRock manages will be following their own unique voting policy, following a specialty voting policy, continuing to use BlackRock Investment Stewardship, or casting unique votes only at particular companies or on particular resolutions. That’s a lot to figure out and track each year! Aon’s Karla Bos sent me this note:
Without attaching any judgment here, it certainly appears one logical result of extending more say in voting to institutional clients will be that it becomes more challenging for companies to know / reach / influence the voting shareholders and predict voting behavior across BlackRock-held shares. And that has broader implications given the explosion in ESG focus and voting support—although it is difficult for me to guess how that will manifest, e.g., will the voting institutions take a more or less stringent or consistent approach than BIS?
We also don’t know yet whether other big asset managers will follow BlackRock’s lead and offer something similar (Vanguard had already transitioned some of its voting power back in 2019). Even if they don’t, it’s possible that more investors who are interested in voting alternatives will migrate to BlackRock because of this “competitive advantage.” At any rate, on top of the changing number & nature of retail investors, changes to shareholder proposal rules, evolving ESG expectations, and the question mark on proxy advisor rules, 2022 is already shaping up to be a challenging proxy season. You might want to line up your proxy solicitor now, in case they get booked up.
Just in time for our “Proxy Disclosure & Executive Compensation Conferences” next week – where our agenda includes a panel covering “clawbacks” issues – the SEC issued this Sunshine Notice about an open meeting next Wednesday, October 13th. The purpose of the meeting is to consider whether to re-open the comment period for the clawback proposal that the Commission issued back in 2015, which would – at a very high level – direct the stock exchanges to require listed companies to implement policies to recover incentive-based pay in the event of an accounting restatement.
This doesn’t come as a huge surprise, because consideration of a re-proposal has been an item on the SEC’s “Reg Flex Agenda” for the past two years. Consistent with the priorities that he identified in that Agenda, SEC Chair Gary Gensler also has been remarking at recent conferences, such as the CII Fall Conference, that he wants to knock out remaining Dodd-Frank rulemaking in short order.
If & when clawback rules are finalized, that would satisfy the requirement in Section 954 of the Dodd-Frank Act. As I blogged a couple weeks ago for members of CompensationStandards.com, the SEC has proposed “say-on-pay” voting disclosure requirements that would take care of the rulemaking mandates under Section 951 of that Act. The list of outstanding Dodd-Frank rulemaking requirements rightfully continues to shrink.
This Stinson blog highlights things to think about for the upcoming proxy season. Here’s an excerpt discussing a few things to watch for in D&O questionnaires:
NYSE listed issuers who have detailed questions in their D&O questionnaires which reflect the current version of Item 404 of Regulation S-K should not need to update their D&O questionnaires. It may be worthwhile for NYSE listed issuers to double check their audit committee charters to make sure the charters reflect other changes made by the rule amendments.
As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition or “grandfather” rule. While likely few compensation arrangements are still grandfathered, this should be confirmed before eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members or references to §162(m) in compensation committee charters.
Nasdaq issuers may wish to begin modifying their D&O questionnaires to prepare for disclosures for the Board Diversity Matrix which is discussed below.
Other reminders from the blog include double-checking whether you’re due for a say-on-pay frequency vote, complying with the new MD&A rules (listen to our recent webcast), complying with modernized property disclosure if you’re a mining registrant, using Inline XBRL, and potentially using the SEC’s amended shareholder proposal thresholds to evaluate whether a proposal must be included in the company’s proxy statement (part of the transition rule is still in effect).
As we look ahead to the upcoming annual reporting season, don’t forget about new Item 9C of Form 10-K, which was added under the “Holding Foreign Companies Accountable Act.” The Stinson blog points out that the HFCAA will affect your Form 10-K even if you’re not directly impacted by the law:
The HFCA Act became law on December 18, 2020. Among other things the HFCA Act requires the SEC to identify each “covered issuer” that has retained a registered public accounting firm to issue an audit report where that registered public accounting firm has a branch or office that:
– Is located in a foreign jurisdiction; and
– The PCAOB has determined that it is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.
We do not expect the HFCAA to affect the issuers we work with. We do note however that the SEC interim amendments requires companies subject to the interim rules to make certain disclosures in new Item 9C to Form 10-K captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.” As such issuers should include the Item and caption in their Form 10-K and indicate the item is not applicable where appropriate.
We’ve blogged about the HFCAA a few times – including back in March, when the SEC adopted interim final rules, and in late summer, when SEC Chair Gary Gensler talked about additional disclosure requirements for China-based companies.
