With about 2 weeks to go before the expiration of the time frame that the SEC had set to collect public input on the possibility of climate change disclosure rules, the Commission has held at least a couple dozen meetings with corporate leaders and trade organizations. In connection with those meetings, companies including Apple and Salesforce have spoken out in support of rulemaking. Most seem to be falling in line with support for principles-based disclosure.
Uber is one of the only companies so far that has taken the extra step of submitting a comment letter. In it, the ride-sharing company says it supports using existing principles-based frameworks to harmonize climate disclosures. Here’s an excerpt:
We support a climate disclosure framework that incorporates TCFD or SASB standards and is generally principles-based, so as to be sufficiently flexible to adapt to market and scientific developments and to accommodate the needs of public companies in various industries and at differing stages in their life cycles. We believe this approach would build upon years of thought leadership and stakeholder engagement by TCFD and SASB whose recommendations and standards are already utilized as a basis for voluntary reporting on climate change by many public companies…
…Incorporating the TCFD or SASB frameworks into a new,comprehensive and harmonized climate disclosure framework, promulgated by the Commission, will facilitate faster and more widespread adoption which would ultimately serve the best interests of investors.
In addition, we encourage the Commission to consider requiring that companies perform a company-specific materiality assessment to identify the ESG issues most relevant to their businesses. We believe that the most useful ESG disclosures will be grounded in the specific issues that are relevant to the particular company,as opposed to generic ESG disclosures that may or may not apply in a company’s individual circumstances.
Not everyone supports mandatory disclosure. I blogged about a First Amendment threat by West Virginia’s AG. The US Chamber of Commerce seems to be opposed to any legislation or Commission rules that would require ESG disclosures, and this letter argues that extra disclosure would have a disproportionate effect on smaller companies.
– Liz Dunshee
About a year ago, everyone was jumping on the SASB bandwagon and predicting it would become investors’ preferred disclosure framework. According to Morrow’s recent Institutional Investor Survey, though, sentiment has shifted. Here are some takeaways from 49 participants that collectively have $29 trillion in assets under management:
– 75% prefer the TCFD reporting framework
– 53% prefer SASB (down from 77% a year ago)
– 39% prefer proprietary in-house frameworks focused on material topics (up from 9% last year)
The TCFD framework encourages companies to use existing disclosure processes to report on climate-related risks and opportunities – focusing on governance, strategy, risk management, and metrics & targets. SASB is very industry-based and has been adopted by many companies as a way to map through and disclose financially material ESG information.
These two frameworks are also complementary in some ways – both are incorporated in the World Economic Forum’s “Stakeholder Capitalism Metrics” – which is part of the effort that was announced last fall to promote a single comprehensive reporting system. With standard-setters collaborating, companies becoming more mature in their own reporting, investors evolving the type of info they want, and an SEC proposal potentially on the horizon, it will be interesting to see where this all stands in another year.
– Liz Dunshee
Yesterday, in response to a directive from SEC Chair Gary Gensler, Corp Fin announced that:
1. It’s considering whether to recommend that the Commission revisit the proxy advisor rules that were adopted last summer – which would require proxy advisors to meet new conditions beginning December 1st of this year – and the Commission-level interpretive guidance that was issued the year before.
2. The Staff won’t recommend enforcement action to the Commission during the period in which the SEC is considering further regulatory action.
3. In the event that new regulatory action leaves the 2020 exemption conditions in place with the current December 1, 2021 compliance date, the staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by Institutional Shareholder Services Inc. of its litigation challenging the 2020 amendments and the 2019 Interpretation and Guidance. (ISS v. SEC, 1:19-cv-3275 (D.D.C.)
This is the latest chapter in the long, ongoing saga over proxy advisors. The 2020 rules and 2019 guidance define proxy advice as a “solicitation” and would require proxy advisors to disclose conflicts of interest and adopt policies that allow for companies to review & respond to voting recommendations, in order to be exempt from the information & filing requirements that would otherwise apply to a solicitation. The amendments also specify what circumstances would cause proxy advice to be “misleading” within the meaning of anti-fraud rules.
The rules were celebrated by many companies, but proxy advisors and their investor clients criticized the proposal process, took issue with the Commission’s statutory authority, and felt that the substance of the rules would delay and impair the proxy voting process. This, in turn, made some companies worry that the proxy voting timeline would become even more compressed. As mentioned in yesterday’s Staff statement, ISS even sued the SEC over its efforts to regulate the industry, and appeared to be moving forward with that proceeding as recently as last August.
In light of those issues and the fact that the compliance date has not yet arrived, I’ve been wondering whether we’d see some steps to unwind (or not defend) the rules. Some are pondering whether this is the beginning of a trend of “back & forth” rulemaking, which would create uncertainty.
Commissioners Hester Peirce and Elad Roisman issued a response to Chair Gensler’s statement yesterday, saying that the 2020 rules were the result of an unassailable process and that there is no data yet to evaluate whether the rules work in practice. Meanwhile, CII called yesterday’s directive “Christmas in June for investors.”
– Liz Dunshee
The premise of one of my favorite parenting books is that standard negotiation techniques – logic, bribes, threats – aren’t going to deliver when it’s 8pm and my 3-year-old has been refusing to leave the playground for the last 45 minutes. In that situation, the only way out is to use a Jedi mind trick to reverse engineer and validate his deepest desires, and make the ride home even more magical and exciting than another trip down the 2-story slide.
It seems like that’s kind of the position that the SEC finds itself in with Elon Musk, especially after reading this WSJ article yesterday about the Enforcement Division’s attempts to follow up on tweets that the Commission believed went against its 2018 settlement with the Technoking. Here’s an excerpt:
From the start, the social-media policy was difficult for the SEC to enforce. The SEC accused Mr. Musk of violating the rules in February 2019 and asked a Manhattan federal court to consider holding him in contempt. The judge signaled she wanted the two sides to settle the dispute and they agreed to modify the policy by clarifying which topics required pre-approval. Those were identified as including communications about production figures, new business lines and the company’s financial condition.
Within months, the SEC was writing Tesla again, questioning a tweet Mr. Musk wrote on July 29, 2019, that stated: “Spooling up production line rapidly. Hoping to manufacture ~1000 solar roofs/week by end of this year.”
It’s not surprising that this notion of “pre-clearing” tweets isn’t playing out smoothly – the question all along has been, what can the SEC do about it? The WSJ says that the latest dispute, over a May 2020 tweet, appears to have ended in a stalemate. The Enforcement Division encouraged the company to apply its disclosure controls & procedures, Tesla said it hadn’t done anything wrong, the SEC threatened to go back to court, and nothing happened.
Yes, the SEC is still working through the permissible ways for companies to use social media. The board and Elon are also defendants in shareholder suits because of these tweets. Maybe for this high-profile CEO, someone also needs to find a way to make compliance as fun as public taunting.
– Liz Dunshee
The BlackRock Investment Institute has relaunched its “Geopolitical Risk Dashboard” (there’s also an interactive version) – adding 4 new risks to the “top 10”:
– COVID-19 resurgence: The fight against COVID-19 falters in the developed world.
– Climate policy gridlock: Developed economies fail to take policy actions consistent with their goals to reach net-zero emissions.
– Emerging markets political crisis: Failure to arrest the COVID-19 pandemic severely stresses EM political systems and institutions.
– Global technology decoupling:Technology decoupling between the U.S. and China significantly accelerates in scale and scope.
The unique thing about BlackRock’s dashboard is that it includes indicators that show whether the risks are on investor radar screens, and it analyzes how much markets have already priced in each risk. BlackRock finds that investors have been feeling pretty good since the change in the US administration, and attention to geopolitical risks is below the average of the past four years. Unfortunately that means that if some of these risks materialize, they could catch the markets off-guard.
– Liz Dunshee
This HLS blog from Nell Minow predicts that we’ll see more ESG-focused proxy fights in light of the results last week at ExxonMobil. Here’s her concluding recommendation:
Every board should have a committee that oversees investor communications and lead directors should be liaisons for shareholder concerns. They should expect a lot more interest from shareholders in the quality of the board, with emphasis on independence that goes beyond resume disclosures. Wise boards will solicit suggestions from investors and make sure that all directors know that their obligation as fiduciaries is to shareholders, not executives, and that their actions make that message clear to shareholders as well. Engine No. 1 is the first of a new kind of activists; its success makes it clear it will not be the last.
– Liz Dunshee
Internal audit oversight is typically part of the audit committee’s charter because of listing exchange rules. It’s also part of ensuring the directors are getting quality info about the company’s risk profile & financial results.
The Institute of Internal Auditors recently launched a tool to help audit committees make sure the internal audit function is working well. Here are the sample questions it proposes the committee consider with regard to risk management:
– Does the IA activity expand the board or AC’s knowledge about current and emerging risks to the organization?
– Are there clear links between the audit plan and the organization’s strategic objectives and risks?
– Does the CAE explain to the AC how the audit plan covers challenging and critical areas, including emerging or existing risk areas that will or could impede the organization’s objectives?
– Liz Dunshee
A recent Law.com post from Alston & Bird attorneys Elizabeth Clark and Robert Long provides a summary of several initial court decisions involving Covid-19-related securities actions. In these cases, courts ruled on early-stage motions to dismiss and even though the decisions were mixed, the authors say plaintiffs will face major hurdles in bringing claims related to Covid-19’s impact on a company’s business operations.
Three initial decisions on motions to dismiss reflect that courts are going to closely scrutinize allegations related to COVID-19 and analyze challenged statements in view of the pandemic-related information available at the time, including scrutinizing what the company could have reasonably known at the time of its public statements.
The primary takeaway is that, even in the wake of a global pandemic and unprecedented volatility in the stock market, courts continue to recognize that the heightened pleading standard of the Private Securities Litigation Reform Act acts as a roadblock to ferret out thin and conclusory claims even at the earliest stage of a securities fraud case.
One case the authors discuss involved Norwegian Cruise Line and in that case, the court found certain company statements constituted nothing more than corporate puffery. The case emphasizes the importance of including a comprehensive safe harbor disclosure statement. In granting the motion to dismiss, the court said that many of the challenged statements were accompanied by specific, cautionary language and were protected by the PSLRA’s safe harbor provision.
Take Our Quick Surveys: Board Meeting Health Protocols & Insider Trading – COVID-19 Adjustments
We’re continuing to post memos about “return to work” and other pandemic issues in our “COVID-19” Practice Area – but one topic that isn’t getting as much attention is what companies are planning to do to keep their boards productive, cohesive & healthy. Please take a moment to participate in our anonymous “Quick Survey: Board Meeting Health Protocols”.
While you’re there, please also give your input on our “Quick Survey: Insider Trading – COVID-19 Adjustments”. Don’t forget to mark your calendars for our July 20th webcast, “Insider Trading Policies & Rule 10b5-1 Plans.”
Memorial Day Weekend
Many have made it through another long proxy season – as I blogged earlier this week, it’s been a wild ride this year. We wish each of you an enjoyable Memorial Day weekend, we’ll be back here on Tuesday. Please take a moment to honor and remember those who have sacrificed for our country.
– Lynn Jokela
This year’s wild proxy season continued yesterday when ExxonMobil announced that a dissident won at least two seats on the company’s 12-member board. The dissident – Engine No. 1 – has waged a campaign that pressures the company to set a “climate transition” plan that would result in net-zero emissions from the company – and its products – by 2050.
Considering Engine No. 1’s ownership stake in Exxon is only about 0.02%, it’s remarkable that the hedge fund pulled this off. It came at no small cost – this has been one of the most expensive proxy fights ever, with Exxon spending at least $35 million and Engine No. 1 spending $30 million. Reports are based on preliminary voting results, so until the final vote results are released it’s unclear how close the vote was for the two seats that were won. As of yesterday afternoon, there were two more seats still up for grabs. The vote was so hotly contested that Exxon called a recess during the meeting as votes were still being cast.
This WSJ article summarizes the proxy contest. Here’s a snippet about yesterday’s drama:
Both sides feverishly made their case to investors until the last minute. Exxon delayed the closing of the voting by an hour Wednesday morning and Engine No. 1 said the company was calling investors to ask them to change their votes. In a message sent to shareholders, the fund urged them ‘not to fall prey to any such strategic efforts.’
In another somewhat new practice, Vanguard posted a vote bulletin saying it backed two dissident nominees and BlackRock posted its vote bulletin for Exxon’s meeting yesterday afternoon, nearly in real time. As I blogged yesterday morning, word was already out that BlackRock was planning to support three dissident nominees. BlackRock said that, although Exxon had announced more commitments and transparency, it believes more urgent action is needed. Here’s an excerpt from BlackRock’s bulletin:
We believe that three of the four directors nominated by Engine No. 1 bring relevant private sector experience including independent U.S. energy production (Mr. Goff); renewable products, including wind energy (Ms. Heitala); and energy infrastructure, legislation and new energy technology (Mr. Karsner). Hence, we believe that this suite of directors will complement the skills and experience of the remaining incumbent directors, bringing fresh perspectives as well as successful track records of value creation for shareholders.
BIS supported the re-election of Mr. Frazier and Mr. Woods because our engagement with each of them over the past several months has given us greater confidence that they are prepared to internalize shareholder feedback, and lead the company, in their respective roles as Lead Independent Director and CEO, on a more ambitious course of action in adapting to the energy transition and responding to shareholders. We also believe some leadership stability is important in the context of the urgency with which the company is expected to deliver on its commitments.
Many predict the vote result will force the company to change its strategy, which has been fossil fuel focused. Institutional holders are signaling that they’re willing to take drastic action to reduce climate risks, which may also jolt the energy sector – and others. The vote is even more shocking in light of the fact that the company had already added three directors earlier this year in response to activist pressure, including Jeff Ubben. That means that if any additional dissidents are certified as elected, new directors would comprise at least half of the board.
As an exclamation point yesterday, shareholders not only approved a change in leadership, they also approved proposals calling for more info on climate lobbying and other lobbying activities, which weren’t supported by the board.
Whistleblower Awards Continue Rolling Along
Liz blogged back in March about a SEC whistleblower award and noted the Commission had already made 40 individual awards this year. Since then, the Commission has awarded more and last week announced a few more. First, there was an announcement of awards totaling more than $31 million in connection with two enforcement actions, with the awards divided between two whistleblowers in each action.
In the first order, the SEC awarded almost $27 million to two claimants who provided SEC staff with new information and assistance during an existing investigation, including meeting with the staff in person on multiple days. Their information and cooperation helped the Commission bring the enforcement action, which resulted in the return of millions of dollars to harmed investors.
In the second order, the SEC awarded one whistleblower an award of approximately $3.75 million and the other whistleblower an award of approximately $750,000. While both whistleblowers independently provided information that assisted SEC staff in an ongoing investigation, the whistleblower who received the larger award provided information and assistance that was more important to the resolution of the overall case.
Also last week, the Commission announced an award totaling more than $28 million and this one was in connection with an Enforcement Division action and a related action by another federal agency. Based on information received from the whistleblower’s attorneys, the WSJ reported that the award was in connection with a bribery settlement. Although the SEC’s whistleblower program provides that whistleblower’s can receive up to 30% of monetary penalties when their tips result in a successful enforcement action and when the penalties total more than $1 million, the WSJ said the $28 million award represented 10% of the monetary penalties collected from both the SEC and DOJ actions. It’s not entirely clear what led to the lower percentage award in this case, but the article does say that the settlement involved different regions than the one initially identified by the whistleblower.
Since first issuing an award in 2012, with last week’s awards, the agency has awarded approximately $903 million to 163 individuals. As these awards continue rolling along, it’s looking like it may be possible for the agency to surpass $1 billion in total awards under its program sometime later this year.
Former Chief of SEC Whistleblower Office Joins Arnold & Porter
The SEC announced back in April that Jane Norberg was leaving the agency that month, she had served as Chief of the agency’s Office of the Whistleblower. Jane had been with the Office since near its inception in 2012 serving as its first Deputy Chief and, since 2016, its Chief. With what’s seeming like pretty regular whistleblower award announcements, it appears that securities enforcement practices could see a good volume of work and earlier this week, Arnold & Porter announced that Jane has joined the firm’s Securities Enforcement and Litigation Practice as a partner in its Washington DC office. In the announcement, Richard Alexander, the firm’s chairman, commented that Jane’s joining the firm at a time when whistleblower-driven investigations and enforcement actions are ticking up. A Bloomberg piece citing Jane’s move to private practice quotes her as saying she ‘expects this administration to be very pro-whistleblower.’
Find More on Our Other Blogs!!
We are gradually resuming our blog email notifications – and hope you’ll enjoy the improvements. In the meantime, don’t forget that you can visit the blog landing pages for our latest entries. For members of TheCorporateCounsel.net, that includes Mike Gettelman’s Blog (with recent posts about NY private offerings and crypto predictions), as well as our Mentor Blog (with recent posts about director tenure, board assessments, and more).
Members of CompensationStandards.com can visit that page for recent proxy disclosure samples, via Mark Borges’ Proxy Disclosure Blog (with recent samples of corporate responsibility and perks disclosures) and for Mike Melbinger’s take on hot executive pay and related issues, via Melbinger’s Compensation Blog.
Members of Section16.net can access Alan Dye’s Section16.net Blog for news on that front (with a recent post about attorney’s fees on a profit disgorgement case).
And our free DealLawyers.com Blog is also still going strong every day with John’s M&A nuggets!
– Lynn Jokela
