Last December, John blogged when “The Holding Foreign Companies Accountable Act” (HFCA) was signed into law. The law amends the Sarbanes-Oxley Act to prohibit listing on US exchanges of foreign companies for which the PCAOB has been unable to inspect audit work papers and is primarily aimed Chinese companies listed in the US. Yesterday, this SEC press release announced the adoption of interim final amendments relating to the HFCA’s submission and disclosure requirements.
Under the HFCA, “Commission-Identified Issuers” will need to submit certain disclosures to the Commission establishing that they’re not owned or controlled by a governmental entity in that foreign jurisdiction. These amendments implement a process for this disclosure requirement. Even with adoption of the amendments, there’s more work for the Commission before issuers are required to comply with them:
The Commission is requesting public comment regarding implementation of the HFCA submission and disclosure requirements, as well as the appropriate mechanics for determining Commission-Identified Issuers. A registrant will not be required to comply with the amendments until the Commission has identified it as having a non-inspection year under a process to be subsequently established by the Commission with appropriate notice. Once identified, a registrant will be required to comply with the amendments in its annual report for each fiscal year in which it is identified. The Commission plans to separately address implementation of the trading prohibitions in Section 2 of the HFCA Act in a future notice and comment process.
Ever Changing CCPA: Additional Changes Approved
Throughout the last year, we’ve blogged about changes to the California Consumer Privacy Act. Last week, California’s Office of Administrative Law approved a new set of changes to the CCPA. The changes are intended to provide clarity to consumers about how they can opt out of the sale of their personal information. Among other things, the modifications prohibit businesses from creating confusion for consumers to opt out of the sale of their personal information by clicking through multiple screens or using confusing language such as double negatives.
To help everyone stay on top of all of the various changes to the CCPA, check out our “Cybersecurity” Practices Area – this Gibson Dunn memo provides a quick summary of the most recent modifications.
March-April Issue: Deal Lawyers Newsletter
The March-April Issue of the Deal Lawyers newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:
– Troubling Signs From Recent M&A Case Law: Forgetful Gatekeepers, Targeted Executives, and Poor Record Building
– COVID-19 Deal Terminations: Assessing Specific Performance Provisions
– A Canadian Perspective: The 2021 US and Canadian M&A Landscape
Remember that you can also subscribe to our newsletters electronically – an option that many people are taking advantage of in the “remote work” environment. Also – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we make all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 4th from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
A few weeks ago, I blogged about the Center for Audit Quality and AICPA’s roadmap to help auditors provide ESG data assurance services to companies. So, while Big 4 audit firms potentially ramp up ESG data assurance service offerings, over the UK there was big news last week when the government proposed to breakup the dominance of the Big 4. The proposal comes in response to large company collapses, such as Carillion and Thomas Cook, and aims to restore confidence in businesses.
This BBC story says there’s a 16-week consultation period to consider the proposal, which would require large companies to engage smaller audit firms to conduct part of their annual audits. Among other things, audit firms would be required to make their audits more rigorous, and they could be capped in terms of the number of FTSE 350 companies each firm could audit. The latest proposal follows last year’s attempt by the FRC, the UK audit regulator, to shakeup the accounting industry by separating audit functions from other operations, which this FT article says the accounting firms supported.
Still not all are optimistic the latest proposal will result in meaningful change. For one observation on past attempts, along with commentary on this most recent proposal, check out Francine McKenna’s take in her entry on The Dig titled “UK audit reform proposals: Full of sound and fury but likely to amount to nothing.”
If you’re looking for an updated audit committee resource, check out the recently released KPMG Audit Committee Guide. It’s 61 pages and among other things, provides information about the committee’s role in overseeing financial reporting, external and internal auditors and risk. In the section about disclosure controls and procedures, one item I found interesting was that it said some audit committee chairs occasionally attend disclosure committee meetings to see how the committee operates and to support its initiatives. For unscientific benchmarking about this practice, participate in our anonymous poll:
survey services
Sustainability Commitments: Energy-Producing States Preparing to Hit Back
Back in January when Liz blogged about Larry Fink’s letter to CEOs, she noted that in the BlackRock’s companion letter to clients, the asset manager said it would be implementing a “heightened-scrutiny model” in active portfolios, including potential divestments. Since then, we’ve read reports of financial services firms making commitments about achieving net-zero GHG emissions from financing activities. Earlier this week, Robeco released survey results that said investor divestment from carbon-intensive assets will rise sharply in the next five years. Although stakeholders are happy to see these actions, oil-rich states are preparing to deliver a new set of headaches for companies and investors.
A blog entry from Pew says that lawmakers in Alaska, North Dakota and Texas are introducing legislation that would force states to stop investing in companies that use sustainable strategies to make financial decisions and to sever ties with asset managers, banks and insurers that are doing the same. This excerpt from a Texas Tribune article explains proposed legislation in that state:
If passed, the legislation would require state entities — including state pension funds and Texas’ massive K-12 school endowment — to divest from companies that refuse to invest in or do business with fossil fuel-based energy.
The early version of the bill directs the state comptroller to create a list of companies and funds that ‘boycott’ fossil fuel companies and allows the attorney general to take enforcement action against state funds that do not divest from the companies on the list.
If the state fund determines that divesting would cause it to lose value or deviate from its benchmark, it could provide that information in a written report to the comptroller, the Legislature, and the Texas attorney general to request an exemption.
Yesterday, I blogged about BlackRock’s 2021 engagement priorities. Betsy Popken, JT Ho and Carolyn Frantz of Orrick kindly provided this guest post with more about BlackRock’s stewardship focus addressing human rights:
BlackRock, the world’s largest asset manager, which has been a vocal leader in climate change, sustainability and other ESG issues, has now turned its attention to human rights. BlackRock is now pushing companies to “implement processes to identify, manage, and prevent adverse human rights impacts that are material to their business” and “provide robust disclosures on these practices,” according to a recent Investment Stewardship Commentary. Moreover, BlackRock believes effective oversight of human rights issues also involves the board: “[T]he responsibility for managing human rights issues…lies with boardsand management of companies and the governments that regulate them” (emphasis added).
BlackRock notes that a company that fails to effectively manage potential or actual adverse human rights issues can not only harm the people directly affected, but also expose companies to significant legal, regulatory, operational, and reputational risks from business partners, customers, and communities. Further, it believes that human rights risks may call into question “a company’s social license to operate” in a certain location and benefit from the labor, raw material, or regulatory structures in place.
BlackRock provides a few examples of the sorts of human rights issues it expects companies to use their “best efforts” to address:
– Poor working conditions, substandard wages, and use of forced labor or child labor by a company or its suppliers;
– Community harm or displacement, particularly using contested land or infringing on indigenous rights;
– A hostile or discriminatory workplace; and
– Failure to manage content or applicable privacy laws, standards, or expectations.
Of particular note for companies are BlackRock’s inclusions of privacy and workplace discrimination in the category of human rights. And these are only examples – each company needs to consider human rights particular to its industry, business, and geographical footprint. A broad group of company representatives therefore need to be aware of these expectations, including persons working within the supply chain, human resources and privacy and information security groups.
To meet BlackRock’s expectations, a company should be prepared to show that it “prioritizes human rights across its value chain – its products and services, operations, and suppliers” through its policies and processes, and that it “adheres to applicable voluntary or mandatory disclosure frameworks” such as the United Nations Guiding Principles on Business and Human Rights, which require companies to develop a human rights policy and due diligence and remediation processes, among other things.
Companies should also ensure that “the board oversees human rights,” including “related policies and processes.” In what is becoming trend with institutional investors, who are seeking more effective board oversight of ESG, BlackRock wants companies to disclose whether this oversight occurs at the full board level or is performed by a specific committee, and the “type and frequency of information reviewed.” BlackRock has indicated that it may vote against directors if it believes that the company is not adequately addressing or disclosing material human rights risks. In light of this, companies should consider whether their committee charters need to be changed to specifically allocate oversight of these risks, and how to enhance their proxy statement disclosures and/or other public facing disclosures (e.g. CSR, Sustainability, and Human Rights reports) in a meaningful way.
The bottom line for in-house counsel of companies where BlackRock invests: It may be time for a comprehensive review of your human rights issues, policies, and governance. Each company should have an understanding of which human rights issues are most salient to its business, which could include, among other things, human rights related to operations, supply chain and sourcing, products and services, employees, and customers or users. You should ensure you have up-to-date policies addressing them (e.g., a human rights policy, anti-human trafficking and modern slavery policy, conflict minerals statement, supplier code of conduct, anti-harassment policy, privacy policy). And then you should evaluate whether you have defined processes to monitor, address, and remediate any potential negative impacts from violations of these policies.
Some companies may also benefit from adopting specific goals related to human rights, and actively measuring progress against such goals. Finally, you should make sure your board-level governance of these issues is clearly addressed in the relevant governance documents and that the nature of board or committee oversight can be appropriately and effectively disclosed. Even companies in which BlackRock does not invest today may benefit from following these recommendations – as BlackRock’s announcement will likely spur other institutional investors to seek a better understanding of how companies manage human rights risks.
SEC Launches New “ESG” Page!
The SEC’s website improvements continue. The latest change is Monday’s launch of this new page to bring together all of the latest Commission actions and info on ESG. It reflects the integrated, intra-agency approach to this topic – and the SEC says that it will be updated with more responses to investor demand on this topic. Clearly all things ESG are moving right along at the agency. In a further nod to ESG prominence, the page will be accessible right through the SEC’s homepage.
Transcript: “Your CD&A – A Deep Dive on Pandemic Disclosures”
We’ve posted the transcript for our recent CompensationStandards.com webcast: “Your CD&A – A Deep Dive on Pandemic Disclosures.” Mike Kesner of Pay Governance, Hugo Dubovoy, Jr. of W.W. Grainger and Cam Hoang of Dorsey shared their thoughts on:
– Trends & Investor Expectations for COVID-Related Pay Decisions
– Adjustments to CD&A Format in Light of Pandemic
– Investor & Proxy Advisor Policies for Disclosure
– Framework of Key Factors for Exercising Discretion
– Linking Your CD&A to Your Broader ESG and Human Capital Initiatives
– Ensuring Consistency Between Your CD&A and Minutes
BlackRock’s 2021 engagement priorities map each priority to UN Sustainable Development Goals – and include key performance indicators for each engagement priority. It’s not a surprise that one of the asset manager’s engagement priorities relates to how companies are dealing with climate-related risks. As emphasized in Larry Fink’s January letter to CEOs, the “climate risk” KPIs include expectations for companies to explain how they are aligned with achieving net-zero GHG emissions by 2050. The “natural capital” KPI builds on that theme, and encourages companies to disclose how their business practices are consistent with sustainable use and management of natural capital. It also calls on companies with material dependencies or impacts on natural habitats to publish “no-deforestation” policies and strategies on biodiversity.
One takeaway from BlackRock’s 2021 engagement priorities is that it appears the asset manager may vote “for” more shareholder proposals focused on sustainability. Here’s an excerpt:
In 2021, we see voting on shareholder proposals playing an increasingly important role in our stewardship efforts, particularly on sustainability issues. As a long-term investor, BIS has historically engaged to explain our views on an issue and given management ample time to address it. However, given the need for urgent action on many business relevant sustainability issues, we will be more likely to support a shareholder proposal without waiting to assess the effectiveness of engagement. Accordingly, where we agree with the intent of a shareholder proposal addressing a material business risk, and if we determine that management could do better in managing and disclosing that risk, we will support the proposal. We may also support a proposal if management is on track, but we believe that voting in favor might accelerate their progress.
State Street Releases 2021 Proxy Voting & Engagement Guidelines
Keeping step with BlackRock, last week State Street released its 2021 proxy voting & engagement guidelines. With State Street’s update, I was happy to see the asset manager also released a summary of material changes. We’ve blogged on our “Proxy Season Blog” about some of these changes or updates before – such as State Street’s policy to vote “against” nominating committee chairs at S&P 500 companies that don’t disclose gender and racial/ethnic board diversity information and integration of the asset manager’s R-Factor score into voting. State Street is reiterating that beginning in 2022, it will vote “against” certain directors at S&P 500 companies and other indices that are underperformers on their R-Factor score, where they haven’t shown positive momentum in the previous two years.
Other changes relating to racial and ethnic diversity disclosures include, starting in 2022, State Street will vote “against” comp committee chairs at S&P 500 companies that don’t disclose workforce EEO-1 data and “against” nominating committee chairs at S&P 500 and FTSE 100 companies that don’t have at least one director from an underrepresented group.
This excerpt from State Street’s summary highlights two changes to executive pay proposals:
Ongoing high level of dissent against a company’s compensation proposals may indicate that the company is not receptive to investor concerns. If the level of dissent against a company’s remuneration report and/or remuneration policy is consistently high, and we have determined that a vote against a pay-related proposal is warranted in the third consecutive year, we will vote against the Chair of the Compensation Committee.
For problematic pay practices, State Street may vote “against” the re-election of members of the Compensation Committee if the asset manager has serious concerns about pay practices and/or if the company has not been responsive to shareholder pressure to review its approach.
Circle March 30th for Our Upcoming Webcast: “Shareholders Speak: How This Year’s Expectations Are Different”
To learn more about this year’s institutional investor engagement priorities and voting expectations, mark your calendars for March 30th to tune in for our webcast – “Shareholders Speak: How This Year’s Expectations Are Different” – you’ll hear from Rob Main, Managing Partner & COO of Sustainable Governance Partners, Yumi Narita, Executive Director of Corporate Governance of the Office of NYC Comptroller, Ryan Nowicki, Assistant VP Asset Stewardship of State Street Global Advisors and Danielle Sugarman, Director Investment Stewardship of BlackRock.
Members of TheCorporateCounsel.net are able to attend this webcast at no charge. If you’re not a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
What if everything we’ve taken for granted about good corporate governance is wrong? According to a recent study, that just may be the case. As one of the authors, UVA Law School’s Cathy Hwang, discusses in this article, the study revisited a 2003 study that introduced the influential “Governance Index” or “G-index,” which measures how much governance rules protect shareholders.
That 2003 study has been cited nearly 10,000 times, and many other governance indices are based on the G-index it created. That study used the G-index to support its finding that stronger shareholder rights are correlated with higher value, profits & firm growth. There’s just one teensy-weensy problem with the G-index – it’s replete with errors. In fact, the authors found an astonishing 80% error rate in the G-index! What’s more, they concluded that “correcting these errors substantially weakens one of the most well-known results in law and finance, which associates good governance with higher investment returns.”
Ain’t that a kick in the head? The good news is that the authors decided to build their own dataset, called “Cleaning Corporate Governance,” that includes the 25 years of corporate charters from S&P 1500 companies that have been indexed across numerous governance metrics. This dataset will be free and open access, and hopefully will provide a better set of data for examining how governance affects shareholder value.
The governance industrial complex may find this news disconcerting, but those cynics (like me) who maintain that ideas about what constitutes “good governance” have a lot more to do with ideology than empirical data likely find it rather amusing.
Non-GAAP: Alternatives To EBITDAC
Earlier this week, I blogged about how relatively few companies are presenting adjusted EBITDA numbers that attempt to back-out expenses associated with Covid-19. That raises the question – how are companies getting the impact of the pandemic across to investors? This excerpt from a recent Lincoln International article says that companies appear to be adopting one of three alternative approaches:
– Annualizing Earnings. For some, business during Q4 2020 returned to more normal conditions than in April to June when COVID-19 was at its height. As such, for businesses disrupted by COVID-19 in the spring, annualized earnings either in the form of Last Quarter Annualized (LQA) or annualizing post June performance may be a more accurate measure of business performance than metrics from 2020.
– 2021 EBITDA. CFOs are more comfortable assessing 2021 EBITDA because they have better visibility into the full year’s budget, including contracted revenues and full implementation of cost-cutting measures, and as a result would prefer to focus on 2021 performance and underweight 2020 results.
– The Swap Out. Another twist to LTM EBITDA is to replace the months most impacted by COVID-19 with the earnings results of those same months from 2019. Swapping out those months with 2019 performance is an easy way to reflect actual levels that were once earned.
The article says that it is critical that the particular metric chosen is as defensible as possible – and that companies should evaluate KPIs to ensure the metric they select is one that market participants would actually rely upon.
Securities Litigation: 2020 Class Action Settlements
Cornerstone Research recently released its annual report on securities class action settlements. Over on The D&O Diary, Kevin LaCroix provides an in-depth review of the report. Here’s an excerpt summarizing the numbers:
According to the report, there were 77 securities class action settlements in 2020, compared to 74 in 2019. (The settlement date). The 77 settlements in 2020 was also slightly above the 2010-2019 average number of settlements of 72.
The total value of settlements in 2020 was $4.2 billion, which is double the 2019 total settlement amount of $2.0 billion. The increase in total settlements in 2020 was largely the result of the significant number of mega settlements in 2020. (At the end of this post, I have identified the largest of these mega-settlements.) If the 2020 settlements over $1 billion are excluded, the total settlement dollars actually declined 4% in 2020 compared to 2019
As a result of the number of very large settlements in 2020, the average securities settlement in 2020 doubled to $54.5 million from $27.8 million in 2019. Though the average settlement increased in 2020 relative to 2019, the 2020 average was below the 1996-2020 average of $58.1.
There are all sorts of other interesting tidbits in Kevin’s blog, including the fact that D&O insurance covered 90% of the settlement amounts in 1933 Act claims, and that the average case took 3.3 years to resolve. Unfortunately, Cornerstone believes that relatively high settlement amounts are likely here to stay, given the significantly increased volume of class action filings in recent years.
Well, it was fun while it lasted. We now return to our regularly scheduled series of ESG-related lead blogs. Yesterday, the SEC released the agenda for tomorrow’s meeting of its Asset Management Advisory Committee. Topping that agenda is a discussion of the ESG subcommittee’s recommendations on improving “the data and disclosure used for ESG investing, in order to create better transparency for investors, and better verifiability of investment products’ ESG strategies and practices.”
The subcommittee’s recommendations address both issuer disclosure and ESG-themed investment products. On the issuer side, the subcommittee calls on the SEC to adopt a standardized framework for disclosing material ESG risks – a process that the subcommittee acknowledged would be “lengthy and complex.” On the investment products side, the recommendations start with asking “How can we avoid ‘greenwashing,’ that is, investment products bearing the name ESG but not actually engaging in meaningful ESG investment?”
That focus on greenwashing is timely, because the AMAC meeting will be held just a few days after the publication of a scathing opinion piece by Tariq Fancy, BlackRock’s former head of sustainable investments, on how ESG investment products are “duping” the public. This excerpt gives you a sense for the tone of the piece:
The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.
As the former chief investment officer of Sustainable Investing at BlackRock, the largest asset manager in the world with $8.7 trillion in assets, I led the charge to incorporate environmental, social and governance (ESG) into our global investments. In fact, our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.
I’m not sure what to make of the fact that this appeared in – of all places – “USA Today.” That’s a publication I’m more accustomed to turning to for high school football rankings than for financial analysis & opinion, although I guess that’s beside the point. Anyway, if you read the whole thing, you come away with a feeling that the SEC’s new enforcement task force is going to find a target-rich environment when it comes to ESG themed mutual funds & ETFs.
Crowdfunding: Corp Fin Issues Guidance on EDGAR Filing of Form C
The SEC’s private offering simplification rule amendments became effective earlier this week, and as a follow-up to that, Corp Fin issued guidance yesterday on EDGAR filings of Form C for Regulation Crowdfunding offerings. The first part of the guidance addresses the fact that the form hasn’t caught up to the rule changes yet, and provides advice to companies that are taking advantage of the new $5 million size limit on how to fill out a form that only contemplates a $1.07 million maximum offering size.
The second part of the guidance contains 4 Q&As addressing how issuers taking advantage of their new ability to use a special purpose vehicle as a conduit in a Regulation Crowdfunding should complete & file Form C. The first Q&A addresses each party’s filing obligations:
Is a crowdfunding vehicle required to file its own Form C, separate from the Form C filed by the crowdfunding issuer?
Response: No. Under Regulation Crowdfunding Rule 203(a)(1), the crowdfunding issuer and crowdfunding vehicle are required to jointly file one Form C, providing all of the required Form C disclosure with respect to the offer and sale of the crowdfunding issuer’s securities to the crowdfunding vehicle and the offer and sale of the crowdfunding vehicle’s securities to investors.
However, if the crowdfunding issuer is offering securities both through a crowdfunding vehicle and directly to investors, Rule 203(a)(1) requires the crowdfunding issuer to file two Forms C: its own Form C covering the securities offered directly to investors, and a second Form C jointly with the crowdfunding vehicle for the securities offered through such vehicle.
Other Q&As address matters such as CIK numbers & access codes, how to furnish the XBRL information for the crowdfunding vehicle, and how the crowdfunding vehicle should comply with signature requirements.
Public Offerings: Financial Statement Requirements for US & Foreign Issuers
Latham recently published its annual memo on the financial statement requirements for public offerings. As usual, there’s a version for U.S. issuers and a separate version for non-U.S. issuers. These are always a good resource, but with the changes to acquired company financial information requirements that the SEC adopted last year, you may find them particularly useful this year.
In news that I’m delighted to say has nothing whatsoever to do with ESG, the SEC recently issued an Investor Alert about celebrity involvement with SPACs. Here’s the gist of it:
The SEC’s Office of Investor Education and Advocacy (OIEA) cautions investors not to make investment decisions related to SPACs based solely on celebrity involvement.
Celebrities, from movie stars to professional athletes, can be found on TV, radio, and social media endorsing a wide variety of products and services. Sometimes they are even involved in investment opportunities such as special purpose acquisition companies, or SPACs, as sponsors or investors. Those celebrities may even be well-known professional investors.
However, celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors. Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.
I know that most of you likely had the same reaction to this that I did – How can the SEC issue something like this during this very difficult time for A Rod & J Lo?
America may not be #1 in a lot of stuff anymore, but I’ll match our celebrities against anybody in the world. During the past couple of weeks alone, Meghan & Oprah caused the British monarchy more heartburn than George Washington or Mahatma Gandhi ever did, Geraldo entertained the Buckeye State by almost simultaneously announcing that he was, and that he was not, considering a run for the Senate, and Kanye reportedly offered to buy Rye, New York for $100 million & rename it “Ye,” which is totally sane and very cool. Meanwhile, the biggest professional investor celebrity SPACer, Bill Ackman, has been busy trying to both cultivate & stay one step ahead of the “Stonks” crowd on Reddit.
I guarantee that an investment in a SPAC sponsored by any of these folks will provide much greater entertainment value than an investment in other SPACs. I also bet that when the dust settles, public investors in celebri-SPACs & public investors in more mainstream SPACs will achieve just about the same really crappy return on their investments. So, to paraphrase the great American patriot Patrick Henry, I say, “I know not what course others may take, but as for me, give me Shaq SPAC or give me death!”
Financial Reporting: Big Year for Goodwill Impairment
If your company took a big goodwill impairment charge last year, it probably won’t come as a big surprise to learn that you weren’t alone. According to this Duff & Phelps report, goodwill impairments in 2020 were at their highest level since the financial crisis:
At the time of writing, the disclosed top 10 GWI events for 2020 reached a combined $54 bn, far surpassing the top 10 in 2019. Although full 2020 calendar year-end results for U.S. public companies will not be known for some time, early reporting points to overall GWI already exceeding $120 bn in 2020. For perspective, in 2008, at the height of the global financial crisis, U.S. companies recorded a total GWI of $188 bn, according to our prior studies.
According to the report, the energy sector took the biggest hit – approximately 34% of energy companies with goodwill on their books recorded an impairment charge. Duff & Phelps says that if 2020’s impairment charges don’t top financial crisis levels, we can thank the Federal Reserve & federal government for repeatedly firing their cash bazookas.
Sold! Glass Lewis Moves From Activist to Private Equity Ownership
Yesterday, Glass Lewis announced that it had been sold to the Toronto-based private equity firm Peloton Capital Management & its Chairman, Stephen Smith. Here’s the press release. As most of you know, Glass Lewis’s previous majority owner was an activist investor, the Ontario Teachers Pension Plan. Now that it’s in the hands of private equity, you’ll have to decide for yourselves whether there’s been a disturbance in the Force.
Well, it looks like this blog has to continue with its “All ESG, All the Time” format for at least another day. The latest event that’s preventing me from taking my preferred approach & blogging about literally any other topic is yesterday’s announcement from Acting SEC Chair Allison Herren Lee that the agency is soliciting public comment on climate change disclosure.
The announcement identifies 15 specific climate disclosure-related questions on which the SEC would like public input. These range from the fairly mundane (What are the advantages & disadvantages of rules that incorporate or draw on existing frameworks?) to the downright hair-raising (How should the SEC’s rules address climate change disclosure by private companies?).
The final question notes that the Staff is evaluating a range of ESG disclosure issues & asks if climate-related requirements should be one component of a broader ESG disclosure framework. That’s a good segue into the speech that Acting Chair Lee also gave yesterday at the Center for American Progress, in which she outlined her views on the SEC’s climate change & ESG agenda. In case you haven’t already figured it out, this excerpt indicates that the SEC is going to be a very different place than it has been over the past several years:
Human capital, human rights, climate change – these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues. We see that unmistakably in shifts in capital toward ESG investing, we see it in investor demands for disclosure on these issues, we see it increasingly reflected on corporate proxy ballots, and we see it in corporate recognition that consumers and investors alike are watching corporate responses to these issues more closely than ever.
That’s why climate and ESG are front and center for the SEC. We understand these issues are key to investors – and therefore key to our core mission.
While climate change & ESG may be front and center, Acting Chair Lee indicated that they aren’t the only items on the agenda. Others include potentially undoing last year’s changes to the shareholder proposal process, revisiting the SEC’s guidance on proxy voting by investment advisors and finalizing a universal proxy rule.
Non-GAAP: Companies Aren’t Pushing the “EBITDAC” Envelope
Throughout the pandemic, we’ve been keeping an eye on how companies have been reporting the financial impact of Covid-19. Early on, some companies were disclosing non-GAAP adjusted EBITDA that reflected pandemic-related expenses, such as PPE and other safety-related expenses and high comp for on-site employees.
This adjusted EBITDA presentation was derisively called “EBITDAC” by its critics. Last fall, the WSJ questioned how long companies could continue to characterize additional expenses like these as one-time charges justifying an “adjusted EBITDA” presentation. According to this CFO Dive article, it looks like companies are backing away from this approach in their Q4 disclosures:
Few companies are reporting adjustments to earnings before interest, taxes, depreciation and amortization (EBITDA) to account for COVID-19-related costs at this late stage of the pandemic. Some analysts say that’s not a bad thing. Adjustments to EBITDA, a non-GAAP performance measure, are intended to account for one-time events. The idea is to show that, but for these unique circumstances, the company’s sustained performance would show a different result.
In the first few quarters after the pandemic’s start, some companies were reporting adjusted EBITDA to account for purchases of personal protective equipment (PPE), higher pay to on-site employees and operational restructuring. Uber, for example, increased its adjusted EBITDA by $19 million in March to account for assistance payments to its drivers. Iron Mountain, an information management and storage company, included almost $10 million in expenses for PPE, plexiglass shields and facility cleaning in its second quarter financial results.
The article cites a Bass Berry blog which said that only 16% of large, public companies made COVID-related adjustments at the end of 2020. The blog says that most of the companies that presented adjusted EBITDA dumped the charges into a single “Covid-19 related charges” line item, but that 37% provided more granular detail on the nature of the charges.
“Technoking” & “Master of Coin”? Elon Strikes Again
Not too long ago, Tesla went through three General Counsels in a single year. My guess is that you need look no further than the Item 8.01 Form 8-K that Tesla filed yesterday if you want to know why the company finds it so hard to hang on to senior lawyers. Yesterday’s filing announced the following:
Effective as of March 15, 2021, the titles of Elon Musk and Zach Kirkhorn have changed to Technoking of Tesla and Master of Coin, respectively. Elon and Zach will also maintain their respective positions as Chief Executive Officer and Chief Financial Officer.
Ha Ha! Oh, that Elon – what a jokester! I’m not sure the Tesla board is laughing though, particularly since they were just sued again in Delaware for allegedly allowing Elon to continue to engage in “erratic” tweets that the plaintiffs contend violate the terms of the company’s settlement with the SEC.
One wit wondered via tweet if the 8-K filing also disclosed that the GC’s title had been changed to “He Who Sits In The Revolving Door Of Saying ‘No’ And Creating Forms?”
I was really hoping to lead with something other than an ESG-related topic this morning, but thanks to Acting Corp Fin Director John Coates, that’s not going to happen. Coates issued a statement on Thursday setting forth his views on ESG disclosure, and he had a lot to say. He addressed some of the key considerations in developing an ESG disclosure system, the costs of non-disclosure of ESG information, and, in this excerpt, called for the development of global disclosure standards:
On the issue of global comparability, in the first instance, arguments in favor of a single global ESG reporting framework are persuasive. ESG issues are global issues. ESG problems are global problems that need global solutions for our global markets. It would be unhelpful for multiple standards to apply to the same risks faced by the same companies that happen to raise capital or operate in multiple markets. In this regard, the work of the IFRS Foundation to establish a sustainability standards board appears promising.
This Davis Polk blog on the statement provides some additional color on the efforts to establish the sustainability standards board to which John Coates referred:
The IFRS is an international non-profit organization that has been steadily working on creating global sustainability reporting standards. By the end of September 2021, IFRS plans to release its definitive proposal, complete with a roadmap and timeline, on whether it will create a sustainable standards board to sit beside the International Accounting Standards Board, IFRS’s accounting standard-setting body.
In February 2021, the International Organization of Securities Commissions, or IOSCO, issued a public statement in support of IFRS’s work. IOSCO’s members include 34 international securities regulators, including the SEC and the CFTC, and the securities regulators of Brazil, China, France, Hong Kong, Spain and the UK, among others.
IOSCO said that it “sees an urgent need for globally consistent, comparable, and reliable sustainability disclosure standards and announces its priorities and vision for a Sustainability Standards Board under the IFRS Foundation.” However, despite the apparent consensus, the blog notes one particular challenge that needs to be confronted – getting all parties to agree upon a definition of “materiality” in the ESG context.
SEC Enforcement: Commissioner Crenshaw Throws a Grenade
Last week, Commissioner Caroline Crenshaw gave a speech at the CII’s spring meeting. She didn’t make much news – well, I mean unless you consider throwing a grenade at 15 years of SEC enforcement policy to be news. Over on Radical Compliance, Matt Kelly seemed to think this was kind of a big deal:
Compliance officers, clear your schedule and retreat to your reading nook! We have an important speech to consider on the future of enforcement at the Securities and Exchange Commission. Commissioner Caroline Crenshaw, a Democratic appointee who joined the SEC only seven months ago, spoke Tuesday at the spring meeting of the Council of Institutional Investors — and took a wrecking ball to longstanding assumptions about how large the penalties should be in cases of corporate misconduct.
Specifically, Crenshaw faulted an SEC enforcement policy in place since 2006 that says the agency should be careful not to impose a penalty that might unduly burden shareholders of the company in question. The logic behind that policy has been that a company’s current shareholders at the time of resolution might not have benefitted from the misconduct that happened earlier; and that those current shareholders would suffer because paying the penalty leaves that much less money for the company to put to good use.
Crenshaw’s response: what does any of that have to do with the need to, ya know, punish misconduct?
Commissioner Crenshaw said that in lieu of focusing on “amorphous concepts” like corporate benefits and shareholder harm, the SEC should set penalties based on the actual misconduct and the extent of cooperation with the Division of Enforcement staff. Higher penalties should be imposed for violations that cause more harm, and for those that are more difficult to detect. Stay tuned. . .
Tomorrow’s Webcast: “The Top Compensation Consultants Speak”
Tune in tomorrow for the CompensationStandards.com webcast – “The Top Compensation Consultants Speak” – to hear Blair Jones of Semler Brossy, Ira Kay of Pay Governance and Marc Ullman of Meridian Compensation Partners discuss what compensation committees should be learning about – and considering – evolving views of pay-for-performance, expanding roles for compensation committees, goal-setting and adjustments, and an early look & predictions for the 2021 proxy season.
If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now. The webcast cost for non-members is $595. You can renew or sign up online – or by fax or mail via this order form. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Transcript: “Private Offerings – Navigating the New Regime”
We have posted the transcript for the recent webcast “Private Offerings – Navigating the New Regime.”
This article about the “Morningstar Minority Empowerment Index” caught my eye. The Index taps into investor appetite for DEI data by selecting US stocks based on an NAACP scorecard & Sustainalytics data.
As is usually the case with these types of issues, investors aren’t just excluding “under-performing” companies from their portfolios – they’re also agitating for change. As I blogged earlier this week on the Proxy Season Blog, proponents have submitted more than 60 “diversity & racial justice” proposals this season. Over 20 companies have received proposals asking for a D&I report – and at least 6 companies have received a proposal asking them to conduct a “civil rights” or “racial equity” audit (including Amazon, Citi, BlackRock & State Street).
Corp Fin recently rejected J&J’s no-action request to exclude a Trillium proposal that requests a civil rights audit. The Staff didn’t agree that J&J’s publication of a D&I report was “substantial implementation” of the proposal, that it dealt with matters related to the company’s “ordinary business,” or that the proposal was “materially false & misleading.” This WSJ article speculates that the Staff might agree with fewer no-action requests this year.
Resolved, shareholders request the company conduct and publish a third-party audit (within a reasonable time, at a reasonable cost, and excluding confidential/proprietary information) to review its corporate policies, practices, products, and services, above and beyond legal and regulatory matters; to assess the racial impact of the company’s policies, practices, products and services; and to provide recommendations for improving the company’s racial impact.
If J&J ends up publishing an audit, it won’t be the first company to do so. Starbucks has published two assessments, and Facebook published a civil rights audit last summer.
As You Sow’s New “Scorecards”: Racial Justice & Workplace Equity
As You Sow is out with a pair of new scorecards for the S&P 500 (and they’ve filed a bunch of related shareholder proposals):
– Racial Justice – scoring companies based on their “racial justice statements,” corporate policies and practices across 22 data points
– Workplace Equity – assessing the quality of companies’ DEI disclosures
To gather data, they are looking at websites (including reporting/disclosure and career pages), social media accounts, and sustainability reports. The results of the findings are available as an overall composite list of the “top 10” & “bottom 10” – and also can be sorted by sector, HQ state, region, market cap, and number of employees. Here’s some of the key “Workplace Equity” findings:
– The largest companies by market cap, and the largest employers by headcount, are most likely to release meaningful workplace diversity and inclusion data.
– Almost half (46%) of the 100 largest companies by market cap in the S&P 500 release their consolidated EEO-1 forms, a good first step for sharing workplace composition. Within the 100 largest employers in the S&P 500, more than 1 in 4 do so. Of the companies that fall within both categories 30 of 53 (57%) release this form.
– More than 1 in 4 of the largest 100 companies release their recruitment rates of female employees. Almost 1 in 5 release their retention rates of female employees, and 1 in 10 release their recruitment rate of female employees.
– Disclosure rates of recruitment, retention, and promotion data by race and ethnicity is still catching up to gender data, likely a reflection of the #metoo movement gaining traction in 2017, while the protests in the aftermath of George Floyd murder began in late May, 2020, less than a year ago.
– Across sectors, a few companies have shown early leadership in publishing recruitment, retention, and promotion data by race and ethnicity. These companies include: Allstate, Apple, BlackRock, Norfolk Southern Corp and Oracle Corp which release their recruitment rates; Alphabet, Edison International, Intel, PVH Corp and Twitter, which release retention rates; and Consolidated Edison, Goldman Sachs, Progressive, Twitter and Walmart which release promotion rates.
– 16% of the S&P500 release at least one recruitment statistic related to race or ethnicity. Within the 100 largest companies by market cap, 23% do so. Within the 100 largest employers, 23% do so.
– 15% of the S&P 500 have released a quantifiable goal related to their workplace diversity, equity and inclusion goals. Within the 100 largest companies by market cap, 22% do so. Within the 100 largest employers, 22% do so. Of the companies that fall within both categories 13 of 53 (25%) release this form.
As You Sow is also continuing to release its scorecards on Waste & Opportunity – measuring 50 large companies in the beverage, quick-service restaurant, consumer packaged goods and retail sectors – and Pesticides in the Pantry – scoring 14 food manufacturers on transparency & risk in food supply chains – as well as its mainstay, the “100 Most Overpaid CEOs.”
California Board Diversity Statute: Less Than Half of Companies Report Compliance
At our “Women’s 100” session last week, there was some great back & forth about whether California-headquartered companies are relocating due to that state’s board diversity legislation. The gender diversity law, SB 826, required listed companies with principal executive offices located in California (no matter where they are incorporated) to include at least one woman on their board of directors by the end of 2019. That minimum increases to two by December 31, 2021, for companies that have five or fewer directors – and to three women directors, for companies that have six or more directors. The newer law, AB 979, which requires adding directors from other underrepresented groups, will first come into play at the end of this year.
According to the “Women on Boards” report that was released last week by the California Secretary of State, 22 listed companies moved their headquarters out of the state last year – and 6 moved into the state (the report doesn’t analyze whether the moves are in reaction to the legislation or for other, unrelated reasons). The report included a couple of other surprising data points as well:
– Out of the 647 companies subject to the rule, 318 filed the state’s required disclosure statement – and 311 of those statements showed that there’s at least one woman on the board
– 288 companies voluntarily filed the state’s disclosure statement
The Golden State publishes this annual review in order to monitor compliance with its board diversity laws – next year, there will also be a review of underrepresented communities on boards. But for now, the exercise seems to show that a lot of companies are ignoring the reporting requirement, which would appear to result in fines under the statute.
The report lists every company identified as being required to comply with the rule, the date they filed the disclosure statement (it’s blank for those that skipped the filing), and whether or not they reported having at least 1 female director in 2020. It doesn’t include company size as a data point, but a quick skim indicates that the larger & more familiar companies seem to be complying, and the smaller companies…not. There are exceptions on both ends of that spectrum.
The last thing to note is that this report isn’t all that useful if you’re looking to get a sense of the current composition of California boards, because it pulls data from backward-looking Form 10-Ks and California disclosure statements that were mostly filed during the early part of 2020 calendar year. But it paints a pretty telling picture of whether companies believe that filing the disclosure statement is worth their while.
