What’s in store for your 2022 annual shareholder meeting? Please participate in this anonymous poll to show what’s trending:

– Liz Dunshee

We’ve posted the transcript for our recent webcast for members, “Understanding LTSE Listings.” LTSE Services’ Martin Alvarez and Jane Storero, Asana’s Katie Colendich and Eleanor Lacey, and Twilio’s Mariam Sattar shared practical tips about the listing process and what it means to be traded on the LTSE, including this nugget from Mariam:

Unlike Asana, we were already a public company when we started to have internal discussions around listing with LTSE. The champions internally for our organization were our IR organization. They were intrigued both about and around aligning the values of LTSE with those that Twilio already has; particularly with respect to our social impact and DEI initiatives, which we’ve been championing and are proud of internally. Additionally, we wanted to attract long-term capital and some of the technological solutions that would allow us to target and build a shareholder base that’s consistent with our social values and our DEI initiatives.

Our board was excited about LTSE in general. The practicalities of the listing process from our perspective were a minimal lift, and that will be an overarching theme here. The principles-based approach enabled us to produce one LTSE policy in which we addressed all the different principles: the long-term stakeholder policy, compensation, strategy, investor policy and board policy. Within that one policy and those overarching values, we leveraged what we were already doing internally. There weren’t shifts that we had to make as a company to bring ourselves into alignment with LTSE.

When we had made the decision to do one policy, we created an internal working group that consisted of our head of social impact, our head of DEI, our chief people officer, our head of IR, myself as the legal person and outside counsel. Together, we brainstormed on what that policy would look like and the ways in which it spoke to our organization and was consistent with Twilio’s ideologies. For us, that ended up being not a significant lift.

– Liz Dunshee

Yesterday, BlackRock CEO Larry Fink rounded out the guidance we’ve seen over the past week from the “Big 3” asset managers, by sending his annual letter to portfolio CEOs. This year’s tone seems a little defensive – it is less “Moses coming down from the mountain” and more “heading off rebellion in the wilderness.” Here’s an excerpt:

Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.

As far as practical takeaways for companies, one of the most noticeable things is the emphasis near the front of the letter on the importance of workers. Similar to the guidance SSGA just released, BlackRock wants more disclosure about “human capital” oversight. Here’s an excerpt:

At BlackRock, we want to understand how this trend [of worker turnover and new expectations of work and social issues] is impacting your industry and your company. What are you doing to deepen the bond with your employees? How are you ensuring that employees of all backgrounds feel safe enough to maximize their creativity, innovation, and productivity? How are you ensuring your board has the right oversight of these critical issues? Where and how we work will never be the same as it was. How is your company’s culture adapting to this new world?

Climate is still important too:

Our question to these companies is: what are you doing to disrupt your business? How are you preparing for and participating in the net zero transition? As your industry gets transformed by the energy transition, will you go the way of the dodo, or will you be a phoenix?

We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients. That requires understanding how companies are adjusting their businesses for the massive changes the economy is undergoing. As part of that focus, we are asking companies to set short-, medium-, and long-term targets for greenhouse gas reductions. These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders. It’s also why we ask you to issue reports consistent with the Task Force on Climate-related Financial Disclosures (TCFD): because we believe these are essential tools for understanding a company’s ability to adapt for the future.

None of this will be very surprising to folks who have been tracking BlackRock’s voting policies and investment stewardship principles. While this annual letter signals broadly applicable themes that BlackRock plans to emphasize, companies should continue to consult those policy documents for guidance on specific topics as we head into proxy season.

Lastly, although BlackRock remains hugely influential and its policies will continue to be a deciding factor in voting outcomes at many companies for the foreseeable future, Mr. Fink took this opportunity to remind people that the asset manager will soon be giving up some voting power (here’s our earlier analysis of that announcement):

Just as other stakeholders are adjusting their relationships with companies, many people are rethinking their relationships with companies as shareholders. We see a growing interest among shareholders – including among our own clients – in the corporate governance of public companies.

That is why we are pursuing an initiative to use technology to give more of our clients the option to have a say in how proxy votes are cast at companies their money is invested in. We now offer this option to certain institutional clients, including pension funds that support 60 million people. We are working to expand that universe.

We are committed to a future where every investor – even individual investors – can have the option to participate in the proxy voting process if they choose. .

That doesn’t mean that BlackRock wants to exit the conversation, though. The asset manager is launching a “Center for Stakeholder Capitalism” – which will “bring together leading CEOs, investors, policy experts, and academics to share their experience and deliver their insights.”

– Liz Dunshee

Cleary Gottlieb is out with its “Selected Issues for Boards of Directors in 2022” – this year’s edition covers 16 topics over the course of 83 pages. One item that I found particularly useful was the summary of how Delaware courts are analyzing director independence & disinterest (pg. 28), which is almost always an important issue in derivative suits and any other challenges to potentially conflicted transactions.

The Cleary team notes that recent Delaware cases – United Food & Commercial Workers Union v. Zuckerberg and others – are showing that judges are closely analyzing both economic conflicts and personal relationships. Here are the takeaways:

– The independence analysis under Delaware law is distinct from, and more nuanced, than under stock exchange rules. While the Delaware courts have noted that independence for purposes of stock exchange rules is one factor they consider, the Delaware law analysis is more holistic and fact-specific and considers, in addition to the traditional financial factors, such things as personal friendships or other relationships of a “bias-producing nature.

– Independence of directors is critical under Delaware law in a number of situations, including when the board is sued in a shareholder derivative action or when the board is asked to consider a related-party transaction. The Delaware courts have developed doctrines, including the demand futility test announced in Zuckerberg and the “MFW test” – which requires the approval of an independent special committee of directors for obtaining business judgment review of controlling stockholder squeeze-outs and other conflicted controlling stockholder transactions – that place a premium on the independence of directors in managing litigation risk.

– In evaluating director independence, Delaware courts have not hesitated to scrutinize closely personal relationships, taking into account facts such as co-ownership of unique assets, personal admiration, longstanding and overlapping business network ties, and shared philanthropic contributions. Boards should give serious consideration to these factors when selecting new directors or constituting special committees for the purposes of potentially conflicted transactions. It is advisable to stay aware of potential independence issues raised by interconnected personal relationships as Delaware courts continue to focus on this issue.

– Liz Dunshee

A recent SEC order serves as a reminder that the Commission is paying attention to disclosures about director relationships. This Stinson blog explains:

The SEC announced settled charges against formerly publicly-traded Leaf Group Ltd. for failing to adequately evaluate and disclose in its annual proxy statement the lack of independence of a director and a board committee as well as an “interlocking” board-of-directors relationship between that director and Leaf’s Chief Executive Officer.

According to the SEC’s order, Leaf made material misstatements in 2020 concerning the independence of a director and the existence of an interlocking relationship between that director and Leaf’s CEO. The order finds that Leaf materially misstated that the director was independent even though he served as Chief Financial Officer of another company, for which Leaf’s CEO served as a director and whose compensation committee Leaf’s CEO chaired. The order further finds that this “compensation committee interlock” disqualified the Leaf director as independent under the listing standards of the securities exchange on which Leaf’s stock traded and also required specific disclosure, under the SEC’s Regulation S-K, in Leaf’s proxy statement.

According to the order, Leaf further materially misstated the independence of a special committee that it had established to explore strategic alternatives, including a possible sale of Leaf, and also failed to maintain, during the 2019-20 period, disclosure controls concerning director independence and interlocks.

The blog points out several other interesting points from the order – and says that the company paid a penalty of $325,000 to settle the charges. As you head into proxy season, our “Director Independence” Handbook is an essential resource to help navigate the tricky world of interlocks and independence standards.

– Liz Dunshee

Dave blogged last week about State Street Global Advisors’ 2022 priorities. SSGA’s expectations on climate disclosures, climate transition plans, board & workforce diversity, human capital management, and human rights disclosures & practices are rightfully getting a lot of attention – but if you’re of the view that corporate governance is the linchpin that holds E&S together, then the asset manager’s updated guidance on director time commitments is also something to pay attention to.

The guidance notes that S&P 500 boards averaged more than 9 formal meetings during 2021 – a 25% increase over 2020 – in light of intensifying challenges & oversight expectations. This means that it’s more important than ever for boards to manage their directors’ time commitments. SSGA has updated its overboarding guidelines to emphasize that Nominating Committees are in the best position to establish, enforce & disclose corporate policies that support director effectiveness.

Starting in March 2022, for non-NEO directors who hold what SSGA deems to be “excessive commitments,” the stewardship team may consider waiving the typical policy to vote “against” the overboarded director. SSGA will consider voting in support of the director if the company publicly discloses its overboarding policy (which may be in corporate governance guidelines, the proxy statement, or on the company website) – and the policy includes:

– A numerical limit on public company board seats a director can serve on (which cannot exceed SSGA’s policy by more than one seat)

– Consideration of public company board leadership positions (e.g., Committee Chair)

– Affirmation that all directors are currently compliant with the company policy

– Description of an annual policy review process undertaken by the Nominating Committee to evaluate outside director time commitments

As a reminder, SSGA’s “standard” policy is to vote against:

– Non-executive board chairs or lead independent directors who sit on more than 3 public company boards

– Director nominees who sit on more than 4 public company boards

– NEOs of a public company who sit on more than 2 public company boards

The new disclosure waiver policy applies only to the first two categories – i.e., directors who are not NEOs. If you want to utilize the waiver, the SSGA team asks companies to share their publicly disclosed director commitment policy (including primary source materials), or intention to establish such a policy in 2022 with our team via email at GovernanceTeam@SSGA.com. If a director is imminently leaving a board and the departure is disclosed in a written, time-bound and publicly available manner, SSGA may also consider waiving its withhold vote.

SSGA also points out that in addition to service on mutual fund boards and UK investment trusts not counting towards the overboarding total, service on a SPAC board won’t be considered when evaluating directors for excessive commitments. However, SSGA does expect these roles to be considered by Nominating Committees when evaluating director time commitments.

– Liz Dunshee

On Friday, Vanguard posted its 2022 proxy voting policies for US portfolio companies – which go into effect March 1st. Like SSGA, Vanguard’s updates also address governance & disclosure practices around director overboarding. Here’s an excerpt:

For 2022, the Vanguard funds will also look for portfolio companies to adopt good governance practices regarding director commitments, including the adoption of an overboarding policy and disclosure of how the board oversees policy implementation.

Here are Vanguard’s thresholds for overboarding:

– Non-NEO Directors: Vanguard will generally vote against directors who serve on 5 or more public company boards – at each company except the one where they serve as board chair or lead independent director.

– Directors Who Are NEOs: Vanguard will generally vote against a director who is a current NEO at a public company and sits on more than 2 public company boards (which the new policy clarifies could be either the NEO’s “home board plus one outside board, or two outside boards if the NEO doesn’t serve on their home board). A fund will typically vote against the nominee at each company where they serve as a non-executive director.

In addition, Vanguard’s new voting policy steps up expectations for board diversity and related disclosures, by saying:

Boards can inform shareholders of the board’s current composition and related strategy by disclosing at least the following:

– Statements from the nominating committee (or other relevant directors) on the board’s intended composition strategy, including expectations for year-over-year progress

– Policies related to promoting progress toward increased board diversity

– Current attributes of the board’s composition

Board diversity disclosure should at least include the genders, races, ethnicities, tenures, skills, and experience that are represented on the board. Disclosure of personal characteristics (such as race and ethnicity) should be on a self-identified basis and may occur at an aggregate level or at the director level. Disclosure of tenure, skills, and experience at the director level is expected (see details on “skills matrix” formats below)

New this year, Vanguard will vote against the nominating and/or governance committee chair (or other director if needed) if a company’s board is making “insufficient progress” in its diversity composition and/or in addressing its board diversity-related disclosures. Vanguard will consider applicable market regulations & expectations, company-specific context, diversity of personal characteristics (gender, race, ethnicity, tenure, skills, experience), and believes that boards should reflect a composition that is appropriately representative given their markets and strategies.

Vanguard’s approach to shareholder proposals that call for skills matrix disclosures and board diversity policies is unchanged from last year.

Vanguard’s new voting policies also address factors that funds will consider when assessing climate risk oversight failures (pg. 7) and shareholder proposals calling for “hybrid” or “virtual-only” meetings (pg. 18).

– Liz Dunshee

Tune in at 2pm Eastern tomorrow for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss all the latest issues to consider as you prepare your upcoming proxy disclosures – including say-on-pay trends, shareholder proposals, ESG metrics, clawbacks, director compensation disclosure, pay ratio considerations and more. We are making this CompensationStandards.com webcast available on TheCorporateCounsel.net as a bonus to members – it will air on both sites.

If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.

Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.

– Liz Dunshee

Having just finished grading 19 final exams for the course I co-teach at the Georgetown University Law Center, I can certainly recognize the difficulty in coming up with one letter grade to mark a long semester of work. That challenge doesn’t slow down the Institute for Internal Auditors and the Neel Corporate Governance Center at the University of Tennessee Knoxville, which come up with an annual grade for the state of corporate governance in the United States, which they call the American Corporate Governance Index (ACGI). The ACGI is described as follows:

The ACGI gauges the extent to which companies are effectively achieving each of the Guiding Principles from the perspectives of Chief Audit Executives (CAEs). CAEs are uniquely positioned to provide an independent and objective enterprise-wide perspective of the organization. The index goes beyond the publicly observable aspects of corporate governance to provide an internal perspective on the effectiveness of corporate governance throughout the organization. In forming the survey questions that support the ACGI, it is assumed that corporate governance does not allow for a one-size-fits-all approach and that companies will need to find their own best practices based on the company’s age, size, complexity, extent of international operations, etc.

The 2021 overall ACGI score for corporate governance health in the U.S. is a B- (81), down from an 82 in 2020. The report indicates that this year’s score suggests “that improvements in governance quality may be stymied as companies deal with the ongoing uncertainty of a global pandemic and the complexity of its fallout on supply chains, talent management, economic and political volatility, and more.”

Data from the 2021 ACGI survey signal a number of areas where governance improvements retreated: (i) companies earning “A” grades in governance dropped to 14% from 19% in 2020; (ii) potential declines in important employee-related governance measures were noted, such as providing adequate training and compensating in a way that promotes ethical decisions; and (iii) despite increased activism related to social and environmental issues, companies are slow to address the needs of a broad range of stakeholders in their business decisions.

– Dave Lynn

One of the many interesting topics that came up during our webcast “Rule 10b5-1 & Buybacks: Practical Impacts of SEC’s Proposals” earlier this week (a replay is now available and a transcript will be coming soon) was whether companies should review and update their insider trading policies now given the SEC’s proposed disclosure requirement in Item 408(b) of Regulation S-K. Proposed Item 408(b) of Regulation S-K would require companies to disclose whether the company has adopted insider trading policies and procedures governing the purchase, sale, and other dispositions of the company’s securities by directors, officers, and employees or the company itself that are “reasonably designed to promote compliance with insider trading laws, rules, and regulations, and any listing standards applicable to the issuer.” If a company has not adopted such insider trading policies and procedures, the company must explain why it has not done so, and if the company has adopted insider trading policies and procedures, it must disclose such policies and procedures.

I note that yesterday the SEC took the unusual step of posting a new version of the Rule 10b5-1 and Insider Trading proposing release and removing the prior version from the website. There is no indication of why the old version was replaced. The original version of releases that are posted on the SEC’s website are sometimes replaced with corrected versions to conform to the Federal Register version, but that does not appear to be the case in this instance because the website does not indicate that the proposing release has been published in the Federal Register.

As we discussed during the webcast, there are a few areas that companies may want to revisit now in their insider trading policies:

• The treatment of bona fide gifts – in the proposing release, the SEC says the disclosure “could address not only policies and procedures that apply to the purchase and sale of the registrant’s securities, but also other dispositions of the issuer’s securities where material nonpublic information could be misused such as, for example, through gifts of such securities.”
• The approach to monitoring material nonpublic information – in the proposing release, the SEC mentions as a potential disclosure item “information on the issuer’s process for analyzing whether directors, officers, employees, or the issuer itself when conducting an open-market share repurchase have material nonpublic information.”
• The preclearance process – in the proposing release, the SEC mentions as a potential disclosure item “the issuer’s process for documenting such analyses and approving requests to purchase or sell its securities.”
• The policy’s compliance mechanisms – in the proposing release, the SEC mentions as a potential disclosure item “how the issuer enforces compliance with any such policies and procedures it may have.”

One of the perennial challenges with updating insider trading policies is trying to benchmark a company’s policies against those of other companies, because only some companies voluntarily choose to post their insider trading policies on their website. Over the years, we have often conducted surveys about practices around things like trading restrictions and to whom within the organization the various aspects of the policy apply, as well as other areas of common interest, but it is usually impossible to get a picture of the entire landscape from the voluntary disclosures and survey results. As a result, if Item 408(b) were adopted, it would probably go a long way to helping companies get a handle on what their peers are doing in their insider trading policies.

– Dave Lynn