I am a big believer in the saying “if it ain’t broke, don’t fix it.” I am not entirely sure where this saying comes from (and trying to figure that out sent me down a bit of a rabbit hole), but suffice it to say, there are plenty of things that we deal with as securities and governance professionals that are best left alone because they work just fine. I think disclosure committees often fall neatly into this category, because there have been relatively few developments which have necessitated significant changes to the disclosure committee’s responsibilities over the years, and disclosure committee charters are usually flexible enough to allow the committee to adapt to changes in rules and practices over time.
All of that said, I do think that a disclosure committee tune-up may be advisable right now. As this Morrison & Foerster alert notes, this year the SEC has ramped up its actions against companies for ineffective disclosure controls and procedures with respect to cybersecurity incidents, with the agency now focusing on how companies ensure that cybersecurity incidents are identified and communicated to management so that appropriate disclosure decisions can be made on a timely basis. Further, a push for more voluntary environmental and social disclosures, as well as the prospect of mandatory SEC disclosure in the coming months, has focused attention on the disclosure controls and procedures that companies have in place for those disclosures. As Corp Fin’s recent sample letter on climate change disclosures has demonstrated, the Staff is looking closely at how disclosures about climate change included in CSR and sustainability reports relates to the disclosures that the company includes in its SEC filings. Here are my suggestions for areas that the disclosure committee should consider:
Does the disclosure committee have the right mandate? Disclosure committees were established when disclosure controls and procedures requirements were adopted as part of the SOX certification rulemaking, but in the almost 20 years since that time, we have certainly observed some “mission creep” for the disclosure committee. As a result, it is advisable to review the disclosure committee charter to see if it accurately describes the scope of the committee’s responsibilities and its role in the disclosure process, including the committee’s role in analyzing and assessing whether disclosure is required under SEC or other requirements.
Are the right people in the room? Given the SEC’s focus on cybersecurity disclosure controls and procedures, does the disclosure committee include a representative from the company’s information technology function, or does someone from that function report to the committee on a regular basis? Further, does the disclosure committee have an appropriate level of involvement in the company’s ESG disclosure efforts, and are there representatives on the committee who can assist with understanding what is being disclosed in SEC reports and in other communications and how that disclosure is developed?
Is the disclosure committee in a silo? Is the disclosure committee properly positioned within the organization, and does it have the appropriate authority to have access to the raw data that it needs to make informed recommendations for disclosure decisions on a timely basis? In some cases, the disclosure committee may be too tilted toward the company’s financial reporting function, which can cause it to lose sight of, and not have appropriate access to information about, broader disclosure topics such as cybersecurity and ESG.
Does the disclosure committee have the right framework in place for assessing materiality? One of the most important roles that the disclosure committee serves is assisting management with making informed decisions about the materiality of information. As we all know, materiality is not a static concept, so it is advisable for the disclosure committee to take steps to articulate the framework that is used for analyzing and determining whether information is material, and tweak that framework as necessary given changes at the company, new SEC rules and evolving investor expectations.
Does the disclosure committee have an active role in the design and evaluation of disclosure controls and procedures? The members of the disclosure committee are usually best situated to determine if the company’s disclosure controls and procedures are operating effectively, and have the best perspective on what improvements may be necessary or when changes are necessary due to new SEC requirements. As a result, the disclosure committee should have clearly articulated responsibilities with respect to disclosure controls and procedures, and a mechanism should be in place for recommending regular adjustments and following up on their implementation.
One topic that disclosure committees are particularly focused on these days is the prospect for SEC disclosure requirements concerning climate change risks, which the SEC has identified as a top regulatory priority. Back in July, SEC Chair Gary Gensler indicated in a speech on the U.N. Principles for Responsible Investment “Climate and Global Financial Markets” webinar that he had asked for climate disclosure recommendations from the staff for consideration by the Commission by the end of the year.
It has now been reported that, during a recent interview at the Council of Institutional Investors Fall conference, Gensler indicated that climate rule proposals may not be considered by the Commission until late this year or early next year, and that human capital disclosure rules would follow in a very active period between now and next spring.
What we can expect from the SEC on these and other rulemaking initiatives (and when) will be topics that we will discuss in detail at our upcoming conferences, which are now less than two weeks away! Be sure to register today!
Shareholder proposals relating to the environment had a big year during the 2021 proxy season. As noted in D.F. King’s Proxy Season Review and Fall Engagement Guide, nearly half of all environmental proposals that made it onto ballots this year received majority shareholder support, compared to none just two years ago. Requests for climate change reporting received the highest number of submissions, as well as the highest number of proposals in this category that received majority shareholder support, followed by proposals requesting reporting or targets for GHG emissions. 80% of the GHG emissions-related proposals that made it onto ballots received majority shareholder support this year.
The breakout star of environment proposals in 2021 was the Say-on-Climate proposal. This proposal requested an annual advisory vote on a company’s climate-related plans. One say-on-climate proposal received majority shareholder support. The proposals received a lot of attention in 2021 and, as a result, they are likely to be featured in future shareholder proposal campaigns. This raises the inevitable comparison, could Say-on-Climate evolve into a universal requirement like Say-on-Pay?
It is easy to forget that, prior to the enactment of the Dodd-Frank Act’s Say-on-Pay requirement in 2010, the concept of getting an annual advisory vote on executive compensation had started in the United States as a shareholder proposal campaign. Following the lead of the Say-on-Pay votes that had been instituted in the United Kingdom and some other jurisdictions, shareholder proponents begin submitting Say-on-Pay resolutions to U.S. public companies in 2007, as concerns about excessive executive compensation reached their peak and new SEC rules went into effect requiring more comprehensive disclosure about executive compensation. By 2009, in response to the financial crisis, Congress picked up the baton and mandated Say-on-Pay votes for certain financial institutions, and the broader Say-on-Pay mandate took hold when the Dodd-Frank Act came together one year later.
One of the things that clearly facilitated the rise of Say-on-Pay proposals was the 2006 executive compensation disclosure rule changes, which established CD&A and more detailed compensation disclosures. By comparison, we could see how Say-on-Climate proposals could benefit from SEC-mandated disclosures on climate change risks, which we are expecting to see from the SEC in the near future.
While it is too soon to tell what path Say-on-Climate proposals are on, companies should be monitoring their progress and considering their ultimate impact, much like we did with Say-on-Pay proposals back in the 2000s.
Earlier this week, the SEC announced that it had barred two individuals from the whistleblower award program. According to the SEC, each of these individuals filed hundreds of frivolous award applications.
These bars were issued pursuant to the 2020 amendments to the SEC’s whistleblower program rules. New Exchange Act Rule 21F-8(e) authorizes the Commission to permanently bar a claimant from the Whistleblower Program based on submissions or applications that are frivolous or fraudulent, or that otherwise hinder the effective and efficient operation of the Whistleblower Program. The SEC’s adopting release for this rule defines “frivolous claims” as “those that lack any reasonable or plausible connection to the covered or related action.”
These bars are permanent, applying to any pending applications from the claimant at any stage of the claims review process as well as to all future award claims.
At the Small Business Capital Formation Advisory Committee meeting earlier this week, SEC Chair Gary Gensler focused his remarks on SPACs. He noted concerns about the PIPE investors getting a better deal than retail investors, as well as the costs associated with SPACs, including sponsor fees, dilution from the PIPE investors, and fees for investment banks or financial advisers. Gensler reiterated that he has asked the staff “for recommendations about how we might update our rules so that investors are better informed about the fees, costs, and conflicts that may exist with SPACs.”
It is good to know that, with major issues looming such as a government shutdown and the need to extend the debt ceiling, some of our representatives in Congress are focused on pieces of legislation like the Mind Your Own Business Act of 2021. Senator Marco Rubio announced that he had introduced this legislation last week, with the purpose of enabling shareholders to hold “woke” corporations accountable. The announcement states:
Specifically, the legislation would require corporate directors to prove their “woke” corporate actions were in their shareholders’ best interest in order to avoid liability for breach of fiduciary duty in shareholder litigation over corporate actions relating to certain social policies. It would also incentivize corporate management to stop abusing their positions to advance left-wing social policies by increasing their personal liability to shareholders for breaches of fiduciary duty resulting from those policies.
The provisions of the legislation include the following:
Requiring large public companies listing on national stock exchanges to provide shareholders with significant holdings with certain privileges with respect to claims for breach of fiduciary duty under covered circumstances, including if a company takes an action on a primarily non-pecuniary basis in response to State law, boycotts a class of persons or industry on a primarily non-pecuniary basis, or uses primarily non-pecuniary public reasoning for an action.
Corporate defendants would be bound by presumptions that pecuniary interest does not include common defenses used to defend exercises of business judgment, including the media image of the company or employee morale.
For claims of breach of fiduciary duty against management brought by shareholders under these covered circumstances, management would have the burden of proof and, if found in breach of their duties, be liable without indemnification by the company for a minimum amount of damages and attorney’s fees.
We will monitor the progress of this legislation, but my guess is that, in the current political environment, this one might be singing “I’m just a bill/Yes, I’m only a bill/And I’m sitting here on Capitol Hill.”
The SEC announced that John Coates, who served as Acting Director of the Division of Corporation Finance and then as Acting SEC General Counsel, will leave the SEC in October to return to teaching at Harvard University. Dan Berkovitz, who now serves as a Commissioner of the CFTC, has been named SEC General Counsel. Michael Conley, currently the SEC’s Solicitor, will serve as Acting General Counsel until Berkovitz joins the agency. As noted in the SEC’s announcement, SEC Chair Gary Gensler and Berkovitz previously worked together when Berkovitz served as the CFTC’s General Counsel from 2009 to 2013.
I look forward to participating in our upcoming conferences on October 13-15. I will be speaking with Renee Jones, the Director of the Division of Corporation Finance, on October 14th about all of the things that are happening in the Division right now, and then I will be joining the “SEC All-Stars” on October 14th and 15th to cover proxy season highlights and executive pay nuggets. With so much going on in the world of public company disclosure and corporate governance right now, I encourage you to sign up for these important conferences if you have not done so already!
This is a big week in Washington, as Congress works through a number of significant pieces of legislation, including funding the government for fiscal 2022 (the government fiscal year ends on Thursday). With all of the partisan fighting going on, we find ourselves hearing yet again about the threat of a potential government shutdown. So we must ask ourselves — what could a government shutdown mean for the SEC this time around?
A few weeks after I joined Corp Fin back in 1995, there was talk of a government shutdown and we sat through a flurry of internal meetings explaining what might happen if the agency did actually have to shut down. Having only worked in the private sector before coming to the SEC, I recall thinking “what did I get myself into?” Thankfully, the partial government shutdown that ensued for 21 days back then did not impact the SEC’s operations – the agency found money from somewhere, and was able to continue normal operations. Government shutdowns that have happened since then generally followed that same pattern, where part of the government shut down but the SEC kept going. That was of course until the end of December 2018, when we saw the SEC’s operations were almost completely curtailed for almost a month until the shutdown ended on January 25, 2019.
Something that the 2018-2019 shutdown taught us is that you cannot count on the SEC’s ability to find “emergency” appropriations to keep the lights on, so be prepared for when the inevitable “real” shutdown happens. With each successive shutdown, we get more guidance from Corp Fin and we all develop more experience dealing with the consequences. During the prolonged shutdown in 2019, we dealt with some very knotty issues, such as dealing with pending registration statements (e.g., considering whether to remove the delaying amendment) and shareholder proposal no-action requests (e.g., considering whether to exclude a proposal without a Staff response). Given the present uncertainty, now may be a good time to take a look at the coverage of the Staff’s shutdown guidance from early 2019, and plan accordingly. If you have a registration statement pending with Corp Fin or are otherwise awaiting action from the Staff on some matter, reach out to your contact now so you can get a sense of the Staff’s timing. Also, begin making contingency plans, just in case a shutdown happens (and drags on more than a few days).
