For the many of you that have registered for our Conferences coming up next Monday, September 16th, we have posted the “Course Materials” (attendees received a special ID/PW last week via email that will enable access to them; note that copies will be available in New Orleans). The Course Materials are better than ever before – with numerous sets of talking points. We don’t serve typical conference fare (ie. regurgitated memos and rule releases); our conference materials consist of originally crafted practical bullets & examples. Our expert speakers certainly have gone the extra mile this year!
Here’s some other info:
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take a few hours to post the video archives after the panels are shown live). A prominent link called “Enter the Conference Here” – which will be visible on the home pages of those sites – will take you directly to the Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: HTML5, Windows Media or Flash Player).
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the conference agendas; times are Central.
– How to Earn CLE Online: Please read these “FAQs about Earning CLE” carefully to see if it’s possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see our “CLE Credit By State” list.
– Register Now to Watch Online: There is still time to register for our upcoming pair of executive pay conferences – which starts on Monday, September 16th – to hear Keith Higgins, Meredith Cross, etc. If you can’t make it to New Orleans to catch the program in person, you can still watch it by video webcast, either live or by archive. Register now to watch it online.
– Register to Watch In-Person in New Orleans: Starting next Thursday, you will no longer be able to register online to attend in New Orleans – but you can still register to attend when you arrive in New Orleans! You just need to bring payment with you to the conference and register in-person. Through the end of next Thursday, you can still register online to attend in-person in New Orleans. And you can always register online to watch the conference online…
More on “Directors, How Well Do You Really Know the Shareholders You Represent?”
Recently, I blogged about a cute little cocktail party story where a director failed to follow-up with probing questions to a retail shareholder he met at a party. One of our members had this comment in reaction:
David Shaw’s story likely is the fault of lawyers. Indeed, many lawyers routinely tell directors they have no right to speak for the corporation and have no obligation to do so. These lawyers proceed, telling clients that a corporation must speak with one or two – perhaps three (for example, CEO, CFO and IR head) voices – and no more. Threat of liability is the clear concern, but perhaps overstated today relative to the need for companies – and their directors – to understand the perspectives of other stakeholders.
SEC Sanctions for 10-K Misrepresentation on Loan Covenant Compliance
In this blog, Stinson’s Steve Quinlivan describes the facts behind the SEC’s recent enforcement action against a company – Omega Protein – for its 10-K disclosure that it “was in compliance with all of the covenants contained” in its borrowings (repeated in three subsequent 10-Qs)…
A few months ago, we blogged about how Corp Fin was considering changing how their “referee” role. Well, that change has happened. On Friday, Corp Fin announced that some of its no-action responses going forward may be in oral form rather than in writing. A written response can be expected if Corp Fin “believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.”
Here’s a few “food for thought” items to start with (thanks to Ron Mueller & Dave Lynn for their 10 cents on some of these):
1. Will There Really Be No Writings?– Good lawyers like to see things documented, particularly if they achieve a result they seek. So mere oral responses may feel like kissing your sister. Surely, Corp Fin will have some type of writing somewhere about their decision?
This announcement seems like the kind of approach that Corp Fin’s accounting staff has employed over the years for financial statement waivers – and that Chief Counsel’s office has used with S-3 eligibility waivers. In both situations, I believe the Staff still puts an internal (ie. nonpublic) note up on Edgar, so maybe they will do the same thing here. Of course, if this writing is nonpublic, that’s not doing you much good…
2. Can I Record My Conversation With Corp Fin? – If a Staffer leaves a voicemail as its oral response, you’ll at least have some sort of “writing” that you can archive and share with your working group. But what if you pick up the phone when they call? Can you tape it? Or should you just write a memo to the file memorializing the conversation?
I guess you’ll find out when you ask (I wouldn’t record the convo without the Staffer’s permission). But I threw this item in here so I can go back in the day to when I started in Corp Fin in the late ’80s. Back before computers. We wrote comment letters by hand – they would eventually get typed up by a secretary. But the Corp Fin “branches” had one secretary for about 10 lawyers. So comment letters didn’t get typed up until the deal went to market in most cases. Instead, Staffers would call and read off their comments over the phone – and the law firm on the other side would record the conversation and transcribe it. So there is some sort of precedent…
3. What Happens If Corp Fin Doesn’t Take Any Position? – Corp Fin’s announcement states that the Staff’s failure to take a position on a no-action request should not be construed as an indication that the company’s failure to include a shareholder proposal in its proxy materials is a violation of Rule 14a-8. As noted in this Gibson Dunn blog, the Staff may now more frequently decline to give a definitive response. That used to be rare – perhaps now it will be more common.
Gibson Dunn notes: “In considering whether to omit a proposal in such situation, a company will need to consider the potential reaction of its shareholders, the risk of adverse publicity, possible reactions from proxy advisory firms (discussed below), the risk of litigation, and the possibility that including the proposal in its proxy statement will attract more proposals in future years.”
4. Why Bother Seeking No-Action Relief At All? – Unfortunately, this Corp Fin position doesn’t change anything for companies in terms of spending resources to seek no-action relief. (Remember that a no-action response only means that Corp Fin won’t refer the matter to the SEC’s Enforcement Division if a company excludes a shareholder proposal from the proxy. It ain’t a “get out of jail free” card).
Companies still are required by Rule 14a-8 to notify Corp Fin that they intend to omit a proposal and the “reasons” for excluding it, and since (at this point at least) we don’t have a good sense of when Corp Fin will respond with a definitive position, companies still have to make as strong of a case as they can because you don’t want to be so unconvincing that Corp Fin says (whether orally or in writing) that they don’t concur.
5. Will Corp Fin’s Announcement Result in More Lawsuits? – Corp Fin’s announcement notes – as has always been the case – that proponents & companies are free to seek adjudication of the Staff’s positions in federal court. Personally, I don’t think we’ll see more lawsuits.
For the bigger investors that have submitted shareholder proposals in the past, they may gravitate to other methods to pressure companies in the wake of the Staff’s new position – for example, engage in more “just vote no” campaigns or more joint activities with other investors to apply pressure. Lawsuits take too long, cost too much and the judges involved typically don’t know the nuances of the securities laws. But you never know, maybe we’ll see more litigation after all…
6. Will Corp Fin Give Broader Guidance More Frequently? – As noted in this Gibson Dunn blog, “The Staff announcement indicates that one instance in which the Staff will issue response letters will be to provide “more broadly applicable guidance about complying with Rule 14a-8.”
Although the Staff has on occasion used a Rule 14a-8 no-action response to elaborate on its interpretation of the rule, historically the Staff has utilized Staff Legal Bulletins to provide “more broadly applicable guidance” regarding its interpretation of Rule 14a-8. The Staff’s announcement appears to suggest that it now will more commonly spring guidance on the shareholder proposal community in the middle of the season and in the context of specific factual situations, which may make such guidance harder to apply in other contexts than if the Staff addressed such issues more generally.”
Tomorrow’s Webcast: “Secrets of the Corporate Secretary Department”
Tune in tomorrow for the webcast – “Secrets of the Corporate Secretary Department” – to hear Norfolk Southern’s Ginny Fogg and Home Depot’s Stacy Ingram debunk myths on how to run the corporate secretary department, as well as provide oodles of practice pointers on how to leverage outside resources & technology; tips for caring of the board; managing a budget; streamlining the board materials process; optimizing director orientation & education; and much more.
Poll: Desirability of Receiving Oral Responses to No-Action Requests?
Please take a moment to participate in this anonymous poll:
With everybody debating big picture issues like corporate purpose & stakeholder v. shareholder interests, this “Ethical Boardroom” article by Harvard’s Stephen Davis is a reminder that when it comes to good governance, there are more fundamental issues that need to be addressed – like making sure directors have the information they need to do their jobs.
The article points out that directors are “on the short end of a massive information imbalance.” They’re entirely dependent on management for their information flow, and even when they retain outside advisors, those advisors may be primarily loyal to management. This disparity gives management a routine advantage in influencing what gets on the board’s agenda and how matters are addressed. This excerpt says that the solution to this information imbalance may be an independent staff serving only the board:
Cementing the information imbalance is the fact that the typical company board has no everyday dedicated staff. Instead, directors rely on an executive – usually a company secretary or general counsel – who is accountable to and works for management. These officers are often the silent heroes of corporate life, as they attend to multiple, sometimes conflicting, constituencies and do so with high ethics and professionalism.
But make no mistake: they are not employed by and for the board. Indeed, outside observers would find it hard to fathom how companies go to such lengths to recruit great independent directors – only to make them largely dependent for help on the team they are supposed to oversee.
One of the interesting things that the article points out is that some companies have taken steps in this direction – although most of them appear to have done so in response to massive scandals. In that regard, in the wake of the Carlos Ghosn scandal, Nissan announced that it would establish an “office of the board” to improve the board’s ability to access information independently.
LIBOR Transition: FASB Exposure Draft Would Ease Accounting Burden
This recent blog from Stinson’s Steve Quinlivan flags a new FASB exposure draft that would make life a little easier when it comes to accounting for the impact of the upcoming elimination of LIBOR. Why should you care? Well, here’s an excerpt about the accounting hurdles companies could face absent the proposed relief:
Without any relief by FASB any contract modifications resulting from contract modification to implement a new reference rate would be required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The application of existing accounting standards on modifications could be costly and burdensome due to the significant volume of affected contracts and the compressed time frame for making contract modifications.
In addition, changes in a reference rate could disallow the application of certain hedge accounting guidance, and certain hedge relationships may not qualify as highly effective during the period of the market-wide transition to a replacement rate. The inability to apply hedge accounting because of reference rate reform would result in financial reporting outcomes that would not reflect entities’ intended hedging strategies when those strategies continue to operate as effective hedges.
The proposed ASU would simplify accounting analyses under current GAAP for contract modifications if qualifying criteria are met & would allow hedging relationships to continue without de-designation as a result of certain LIBOR reform-related changes in their critical terms.
The Martin Act Gets Its Claws Sharpened
I’ve previously blogged about New York’s formidable Martin Act, which the NY AG uses as the basis to investigate and prosecute . . . well . . . just about anything. Last year, the statute had its claws trimmed when the NY Court of Appeals pared back its limitations period for non-scienter based fraud claims from 6 years to 3 years. But this New York Law Journal article reports that last month, NY Governor Andrew Cuomo signed legislation that essentially undid the Court’s decision & restored the 6 year statute of limitations.
Last month, Delaware Chief Justice Leo Strine co-authored a NYT opinion piece about the failure of retirement & index funds to approach voting & corporate governance issues with the needs of their own investors – the workers who invest their retirement savings with them – in mind. Here’s an excerpt:
Growing inequality and stagnant wages are forcing a much-needed debate about our corporate governance system. Are corporations producing returns only for stockholders? Or are they also creating quality jobs in a way that is environmentally responsible, fair to consumers and sustainable? Those same corporations recognize that things are badly out of balance. Businesses are making record profits, but workers are not sharing in those gains.
This discussion is necessary. But an essential player is missing from the debate: large institutional investors. For most Americans, their participation in the stock market is limited to the money they have invested in mutual funds to finance retirement, usually in 401(k) accounts through their employers. These worker-investors do not get to vote the shares that they indirectly hold in American public companies at those companies’ annual meetings. Rather, the institutions managing the mutual funds do.
Institutional investors elect corporate boards. Institutional investors vote on whether to sell the company and on nominations for new directors, and whether to support proposed compensation packages for executives. At the average S. & P. 500 company, the 15 largest institutional investors own over half the shares, effectively determining the outcomes of shareholder votes. And the top four stockholders control over 20 percent.
What this all means is that corporate governance reform will be effective only if institutional investors use their voting power properly. Corporate boards will not value the fair treatment of workers or avoid shortcuts that harm the environment and consumers if the institutional investors that elect them do not support them in doing the right thing. And they are unlikely to end the recent surge in stock buybacks as long as there is pressure from institutional investors for immediate returns.
Among other things, Strine and his co-author, Kennedy School senior fellow Andrew Weiss, argue that mutual funds should have voting policies “tailored to the objectives of long-term investors,” and should include “environmental, social, and most important of all, employee factors” in their investment & voting decisions. They’d also like to see a reduction in the number of shareholder votes, noting that each year, mutual funds are required to cast over 30,000 votes at shareholder meetings.
The failure of financial intermediaries to serve the broader interests of the working investors they represent has been a recurring theme for Chief Justice Strine. In one recent article, the Chief Justice called out them out for allowing companies to spend “worker-investors” money on political activities promoting policies that negatively impact those investors. In another article, he criticized the current corporate governance system for giving the most power over corporate decisions to investors like hedge funds – whose interests are least aligned with those of average shareholders.
Financial Intermediaries: 3 Cheers for the Big 3?
Liz recently blogged about research suggesting that the major index funds were “patsies” for management. Between that research, Chief Justice Strine’s critique of their failure to serve the interests of their investors, & concerns expressed over the implications of their ever-growing ownership positions in U.S. companies, BlackRock, State Street & Vanguard could sure use a friend.
It looks like they may have just found one in a new study that says the Big 3 have both the ability & the incentive to police misconduct by their portfolio companies – and that there’s evidence that they’re doing exactly that. Here’s an excerpt from the abstract:
In this paper, I argue that the remarkable size, permanence, and cross-market scope of the Big Three’s ownership stakes gives them the capacity and, in some cases, the incentive to punish and deter fraud and misconduct by portfolio companies. Corporate governance and securities regulation scholars have argued that these institutions have generally overriding incentives to refrain from meaningful corporate stewardship, but the facts on the ground tell a somewhat different story.
Drawing on a comprehensive review of the Big Three’s enforcement activities and interviews with key decision-makers for these institutions, I show how they have been using engagement, voting, and litigation to discipline culpable companies and managers. I also identify the “pro-enforcement” incentives that explain these actions.
The study bases its conclusions on an analysis of the involvement of the Big 3 in direct securities litigation, litigation arising out of the financial crisis, “just vote no” activism against directors of companies involved in fraud or misconduct, and significant engagements. It’s an interesting perspective – and a much more effective defense of the Big 3 than the specious stuff they’re peddling.
Restatements: 2018’s Scorecard
Audit Analytics recently released its annual report on public company restatements. Here’s an excerpt from Audit Analytics’ blog with some of the highlights:
– After 12 years of decline, the number of reissuance (“Big R”) restatements increased slightly in 2018.
– Around 70% of restatements disclosed were revision (“Little R”) restatements.
– Total restatements dropped for four consecutive years to an 18-year low.
– There were 171 restatements filed by accelerated filers, and 229 restatements disclosed by non-accelerated filers.
– About 54% of the restatements disclosed by publicly traded companies had no impact on earnings.
Shortly before the BRT issued its statement redefining its position on corporate purpose, Andrew Ross Sorkin profiled Jamie Gamble in the NYT DealBook. Gamble is a former Wall Street lawyer who has had a conversion experience and now says that the corporate clients he worked for are legally compelled to act like Patrick Bateman. Here’s an excerpt from his manifesto:
The most important problem in the world is a reasonable sounding provision of the corporate law that governs most major U.S. companies. That’s a big claim. It’s also slightly misleading. A better answer is that the above complex network of horribles all connect back to a common root that is nourished and guarded by the extraordinary power of corporate “persons” who are legally obligated to act like sociopaths.
The rule: corporate management and Boards of directors are obligated by law to make decisions that maximize the economic value of the company. Colloquially: when you invest your money in a company, the people who run that company are required to do their best to bring you the highest possible financial return on your investment rather than using your money to pursue any personal or social agenda.
Sociopath? Yes. The corporate entity is obligated to care only about itself and to define what is good as what makes it more money. Pretty close to a textbook case of antisocial personality disorder. And corporate persons are the most powerful people in our world.
Gamble’s solution – or at least part of it – would be to include language in corporate bylaws requiring boards to consider the interests of a broad range of constituencies beyond shareholders whenever they make a decision. By making this mandatory & providing shareholders with the ability to sue directors for violating these provisions, he thinks the beast can be tamed.
Counterpoint: Like Heck It Does!
Sorkin’s piece initially attracted a lot of attention, but then it sort of got overwhelmed by the sound & fury surrounding the BRT’s decision to bid farewell to shareholder primacy. That’s too bad, because I think Gamble’s views about the legal obligations of corporate directors are based on a false premise, and it’s the same one that seems to have framed at least some of the reaction to the BRT’s new statement of purpose.
I doubt there’s a single corporate lawyer who would dispute the contention that true sociopaths are by no means absent from America’s boardrooms or C-suites. But does the law really require sociopathic behavior? UCLA’s Stephen Bainbridge says no way – and also says that Sorkin & Gamble’s arguments amount to “a mass dump of uninformed silliness.” (You won’t like the Prof. when he’s mad). Here’s an excerpt from his recent blog responding to the DealBook article:
This argument is patently absurd. The corporation is a legal fiction. To paraphrase the first Baron Thurlow, who observed that the corporation has neither a soul to be damned nor a body to be kicked, the corporation has neither a mind to be psychoanalyzed not a brain to be diseased. Corporations are run by people, so if “they” act like sociopaths, it must be because they are run by sociopaths. It is estimated that psychopaths make up at most 1% of the population, so are we to believe they are disproportionately located in corporate C-suites?
Second, both Gamble and Sorkin grossly misstate the law. Sorkin writes:
“It may be an oversimplification, but if they veer from seeking profits in the name of other stakeholders, shareholders may have a legal case against them.”
That is not an oversimplification; it is a gross oversimplification. Absent proof that the directors were engaged in a breach of the duty of loyalty or certain takeover situations, the business judgment rule would preclude courts from reviewing director decisions. To be sure, that is not the purpose of the business judgment rule, but that is its effect.
Prof. Bainbridge is absolutely right on the law (see also this 2015 NYT opinion piece by the late Prof. Lynn Stout). But if you asked directors & officers of public companies what they think their legal obligations are, my guess is that their responses would be pretty consistent with Gamble’s characterization of what the law requires. The “value maximization” imperative has been internalized by a whole lot of D&Os, and has been used to justify some pretty cold-blooded corporate decisions.
By the way, if this debate sounds familiar, pundit Matthew Yglesias tweeted a similar comment last year – and got clobbered by legal academics.
“Stakeholder Governance”: What Happens to the BJR?
This recent blog from Alison Frankel poses an interesting question: if corporations undertake obligations to “stakeholders” & not merely shareholders, what does that mean for the business judgment rule? Here’s an excerpt:
Law firms are beginning to contemplate whether corporate boards will continue to be entitled to the deference afforded by the business judgment rule – which broadly shields directors from liability as long as they’re deemed to have acted in the corporation’s interest – if their decisions are prompted by rationales other than maximizing profits.
That’s particularly relevant in Delaware, where, as Chief Justice Leo Strine explained in a 2015 paper, The Dangers of Denial, corporate law is resolutely focused on stockholder welfare. Strine (who is due to retire from the Delaware Supreme Court by the end of October), is of the view that Delaware precedent does not provide leeway for judges to sanction board decisions that subordinate shareholder interests.
In other words, if directors put the interests of other stakeholders first, they risk losing the protection of the business judgment rule – at least in Delaware. If that’s so, then isn’t Gamble right about the law obligating boards to act like sociopaths in the pursuit of value maximization?
Nope. Except in very limited situations, the authority provided to Delaware directors under Section 141(a) of the DGCL includes the authority to set the time frame for achieving corporate goals without – as the Delaware Supreme Court put it in Paramount Communications v. Time – a “fixed investment horizon.” Deterimining that time frame is a matter of business judgment.
So, if you’re a director who is thinking about the long-term, you’ve got plenty of discretion to conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value. But that doesn’t mean that members of the only stakeholder constituency that can vote won’t still lean on you mighty hard to do otherwise.
The sound & fury surrounding the BRT’s pronouncement prompted it to issue a lengthy “clarification” of its position – and it draws heavily on the idea of promoting the interests of other constituencies as being essential in order to create long-term shareholder value.
Dorsey’s Whitney Holmes shared the following comment, which I think nicely summarizes the issue of what Delaware law requires:
I believe that much of the debate misses the point that impact investors understand and now the BRT are starting to understand: for a given corporate decision not involving a sale of corporate control (or enactment of a preemptive defense against an acquisition), if
– choice A demonstrably returns $100 to shareholders and no benefit to anyone else, and
– choice B demonstrably returns $90 to shareholders and a meaningful but unquantifiable benefit to another interest (e.g. the environment, the wellbeing of employees, the community in which a manufacturing facility sits, etc.) that cannot be supported by a vague future benefit to the corporation that might somehow, someday be worth $10 or more, do the corporation’s directors have discretion in line with their fiduciary duties to choose B over A?
He says the answer under Delaware case law is “no,” and I think that’s right. If you’re ultimately called upon to make some sort of corporate “Sophie’s Choice,” you can’t prefer other stakeholders to shareholders – but given the deference under the BJR to the board’s assessment of the future shareholder value a particular decision would create, it’s doubtful that a board would ever find itself in this position.
According to a recent University of Alabama study, when you draft your next 10-K, it might be a good idea to put down your copy of Reg S-K and pick up a copy of “The Power of Positive Thinking.” That’s because, according to this CLS Blue Sky blog on the study, an upbeat 10-K correlates with improved stock performance, while a more downcast filing can result in your stock taking a hit:
Our results show that positive (negative) sentiment predicts higher (lower) abnormal return over days (0, +3) around the 10-K filing date, i.e., the filing period. Both sentiment measures also predict higher abnormal return over event windows of up to one month after the filing period. This finding suggests that the market underreacts to positive sentiment and overreacts to negative sentiment in the 10-K filing during the filing period. Moreover, both sentiment measures are significantly related to abnormal trading volume around the filing date.
By the way, it looks like Norman Vincent Peale was on to something – because the study also says that that companies with happier 10-Ks also produce better results over the course of the year than their more dour counterparts.
Transcript: “Joint Ventures – Practice Pointers (Part II)”
We have posted the transcript for the recent DealLawyers.com webcast: “Joint Ventures – Practice Pointers (Part II).” Here’s the transcript for the first “Joint Ventures – Practice Pointers” webcast.
Our September Eminders is Posted
We’ve posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
If you’re looking to meld with your couch this holiday weekend, Matt Kelly has identified the best shows and films about corporate compliance, business ethics and regulatory issues (and since he published this, Homecoming also came out – which I knew Matt would also endorse, and he’s now informed me that he devoted an entire separate post to it). Binge-watching these definitely can be justified as “work-related.” Here’s the criteria for the lists:
Several weeks ago I posted a question on LinkedIn: What are some of the best representations of corporate compliance, business ethics, or regulatory issues that you’ve ever seen?
My only requirements were that the shows be fictional, and portray a legal business behaving in a corrupt manner (rather than an illegal business like a drug cartel). The response was overwhelming — nearly 28,000 views of the post in less than a week, plus dozens of suggestions.
We’ve seen people in the “sustainability” industry starting to call for a uniform ESG disclosure framework – like this article from the CEO of the Global Reporting Initiative (GRI). A few bills on that topic also have been introduced. Now, a recent McKinsey study says that investors are also calling for change.
This Cooley blog summarizes the findings – here’s the intro:
Although there has been an increase in sustainability reporting, McKinsey’s survey revealed that investors believe that “they cannot readily use companies’ sustainability disclosures to inform investment decisions and advice accurately.” Why not? Because, unlike regular SEC-mandated financial disclosures, ESG disclosures don’t conform to a common set of standards—in fact, they may well conform to any of a dozen major reporting frameworks and many more standards, selected at the discretion of the company.
That leaves investors to try to sort things out before they can make any side-by-side comparisons—if that’s even possible. According to McKinsey, investors would really like to see some type of legal mandate around sustainability reporting. The rub is that, ironically, it’s the SEC that isn’t on board with that idea—at least, not yet.
As this blog from Elm Sustainability Partners points out, executives also aren’t enthralled with the current approach – they spend a ton of time responding to specialized surveys for what is essentially the same info – e.g. emissions data that is tabulated in different ways to conform to different standards.
Of course, “something is better than nothing” – so companies need to continue to attempt to meet investors’ information demands by providing relevant sustainability info. To get the scoop how companies that may have fewer resources are implementing sustainability initiatives – and making their disclosure as usable as possible – tune in to our October 16th webcast, “Sustainability Reporting: Small & Mid-Cap Perspectives.”
Making Sense of ESG Reporting Frameworks
Until we get a standardized approach to ESG disclosure, companies (and investors) will continue to wade through the current “alphabet soup” of reporting frameworks – and this issue of “Corporate Secretary” is worth a read to make sense of it all. Starting on page 5, it details how companies can use the GRI, SASB and other approaches to ESG disclosure. Here’s an excerpt from the write-up on SASB’s recent work:
In March 2019, SASB and the Climate Disclosure Standards Board published “Laying the groundwork for effective TCFD aligned disclosures,” which includes on page 8 a checklist of 11 preliminary steps companies can take to start integrating the recommendations of the Task Force on Climate-related Financial Disclosures. This is a hands-on, how-to resource that can help both directors and management get started.
Companies can also start their reporting journey by conducting a materiality assessment with the SASB materiality map, an interactive tool to look up industry-specific disclosure topics and metrics and identify and compare disclosure topics across different industries and sectors. SASB’s Engagement Guide for Asset Owners & Asset Managers can be a valuable resource for companies just starting to think about sustainability disclosures.
EU Credit Ratings: Impact of ESG Factors
I’ve blogged about how some credit rating agencies are voluntarily committing to look at ESG criteria in a more systemic way, and are starting to offer one-off explanations of how social issues can diminish or enhance credit ratings. In the EU, regulators appear to be imposing a more uniform approach. This announcement from the European Securities & Markets Authority says that credit rating agencies aren’t required to consider sustainability in their assessments (as explained in more detail in this 38-page document). But if they do, they need to follow new guidelines in explaining how ESG factors impact the rating.
Page 26 of the guidelines say that if ESG factors are a “key driver” behind a change to a credit rating or rating outlook, the rating agency’s accompanying press release or report should:
– Outline whether any of the key drivers behind the change to the credit rating or rating outlook correspond to that CRA’s categorisation of ESG factors
– Identify the key driving factors that were considered by that CRA to be ESG factors
– Explain why these ESG factors were material to the credit rating or rating outlook
– Include a link to either the section of that CRA’s website that includes guidance explaining how ESG factors are considered as part of that CRA’s credit ratings or a document that explains how ESG factors are considered within that CRA’s methodologies or associated models
Yesterday, SEC Commissioners Rob Jackson & Allison Herren Lee issued this joint statement about the “modernization” amendments to Reg S-K that were proposed several weeks ago. Although they’re in favor of the proposed addition of human capital disclosure requirements, they want to encourage comments on the shift towards principles-based disclosure and the absence of the topic of climate risk. Here’s the body of their statement:
The proposal favors a principles-based approach to disclosure rather than balancing the use of principles with line-item disclosures as investors—the consumers of this information—have advocated. The flexibility offered by principles-based disclosure makes sense in some cases, but the benefits of that flexibility should be carefully weighed against its costs.
One concern with principles-based disclosure is that it gives company executives discretion over what they tell investors. Another is that it can produce inconsistent information that investors cannot easily compare, making investment analysis—and, thus, capital—more expensive. Our concern is that the proposal’s principles-based approach will fail to give American investors the information they need about the companies they own.
For example, the proposal takes a crucial step forward for investors who have long asked for transparency about whether and how public companies invest in the American workforce. But, because it favors flexibility over bright-line rules, the proposal may give management too much discretion—sacrificing important comparability—when describing a company’s investments in its workers.
That’s why investors representing trillions of dollars, and our Investor Advisory Committee, have urged the SEC to require specific, detailed disclosures reflecting the importance of human capital management to the bottom line. We hope that commenters will make sure we get this balance right by letting us know what, if any, specific measures would be useful for investors.
Additionally, the proposal does not seek comment on whether to include the topic of climate risk in the Description of Business under Item 101. Estimates of the scale of that risk vary, but what is clear is that investors of all kinds view the risk as an important factor in their decision-making process. Yet it remains tough for investors to obtain useful climate-related disclosure. One argument against mandating such disclosure is that climate risk is too difficult to quantify with acceptable accuracy. Whatever one thinks about disclosure of climate risk, research shows that we are long past the point of being unable to meaningfully measure a company’s sustainability profile.
For example, recent work shows that some sustainability measures reveal material information to the market. Despite early skepticism about the utility of those measures, recent efforts to refine them through engagement with issuers and investors have borne real fruit. We hope commenters will weigh in as to whether and how this topic should be included in a final rule. In addition, to the extent the SEC may consider whether and how additional rules should be updated to provide more transparency on climate risk, we hope commenters will provide data and analysis to help guide that important work.
Audit Committee Disclosure: Cyber Risks Getting More Play
Deloitte’s annual survey on audit committee disclosure shows that large companies are continuing to increase the amount of information they voluntarily provide – with more than half now explaining why the audit committee decided to appoint the independent auditor, and nearly 80% explaining how the independent auditor is evaluated.
As has been the case for a few years, 99 companies in the S&P 100 also disclose the audit committee’s role in risk oversight. What’s new on that front is that a growing number specifically describe whether & how the audit committee is involved in overseeing cyber risks.
Deloitte gives these suggestions to further enhance transparency & usefulness of the proxy (also see our newly updated “Audit Committee Disclosure Handbook“):
3. Discuss issues encountered during the audit and how they were resolved (see KMI’s 2019 proxy statement)
4. Enhance readability by using graphics, or personalize the audit committee with photos or other messages tailored to readers (see Visa’s 2019 proxy statement)
Transcript: “Company Buybacks – Best Practices”
We’ve posted the transcript for our recent webcast: “Company Buybacks – Best Practices.”
Last week, the SEC issued this fee advisory that sets the filing fee rates for registration statements for fiscal 2020. Right now, the filing fee rate for Securities Act registration statements is $121.2 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, this rate will increase to $129.8 per million, a 7.1% increase.
Although we saw a modest 2.6% reduction in fee rates last year, this price hike puts fees back on the upward trajectory – they increased by 7-15% in fiscal 2018 and 2017. And since the annual adjustments to the SEC’s fee rate have been made under a formula prescribed by the Dodd-Frank Act since 2010, the “politics” of the timing and amount have been removed for a while.
As noted in the SEC’s order, the new fees will go into effect on October 1st (as has been the case since 2011, and as mandated by Dodd-Frank). That’s a departure from the old way of doing things – before Dodd-Frank, the new rate didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year – which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
Low-Cost Index Funds: Management’s “Absentee” Best Friend?
John’s blogged a couple of times about efforts by large institutional investors to avert a gathering storm of criticism. Maybe they can add this research to their fodder – it says that index funds are 12.5% more likely than “active” funds to vote with management’s recommendations when they differ from ISS, with that percentage being even higher for funds with low expense ratios (presumably, because they have fewer resources to spend on monitoring).
The research acknowledges that funds could be voting with management and still monitoring to ensure corporate governance – by either selling their shares, or by engaging with the company and then supporting pre-negotiated proposals. Sales are rare, as you’d expect from an index fund. But here’s the surprising part: in a complete departure from all anecdotal evidence and company complaints about the outsized influence of institutional investors, the researchers conclude that there’s no evidence of engagement. Zero!
If they’re right, maybe companies really can rest easy about the prediction that the “Big 3” will control 40% of the S&P 500 within the next 20 years. In my opinion, though, they’ve reached that conclusion based on a flawed understanding of Schedule 13D filing requirements and the shareholder proposal & engagement process. Specifically:
– They ignore the fact that engagement on executive compensation, social issues and corporate governance doesn’t disqualify a shareholder from filing a Schedule 13G
– They assume that there’s no engagement in the absence of a fund submitting its own proposal or voting against the company in a proxy contest
Glass Lewis Going “All In” With CGLytics…And Considering Pay-for-Performance Changes
Here’s something I blogged yesterday on on CompensationStandards.com: In June, I blogged that Glass Lewis is now using CGLytics (instead of Equilar) for compensation & data analysis of North American companies. According to this Georgeson blog, Glass Lewis has now elaborated on what that means – and confirmed that its new business partner will be its exclusive global provider of peer groups, compensation data and analytics.
In light of this move and client & company feedback, the proxy advisor is considering changes to its pay-for-performance peer review and scoring methodology. We’ll know more about the potential changes in a few months. For now, effective January 1st, Glass Lewis will:
– Use CGLytics as the sole provider of compensation data and analytical tools globally
– Provide model access exclusively through Glass Lewis and CGLytics
– No longer use Equilar’s peer groups
– No longer use Equilar data in any of their products
– Be the exclusive access point to Glass Lewis research reports and vote recommendations
