Last year, Goldman Sachs’ CEO David Solomon announced that the bank wouldn’t be taking any company public unless the company met diversity quotas – one diverse director in 2020, two in 2021. In this LinkedIn post, DJ D-Sol notes that they’ve taken 54 companies public since the policy went into effect – and they’ve started a new initiative to get first-timers on boards.
Goldman Sachs isn’t alone in these initiatives – the NYSE is also involved with getting diverse directors connected with companies who are seeking new directors. This recent report from the NYSE & Diligent says that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon. However, 45% lacked a specific timeframe for meeting diversity goals. Check out the full survey for info on board refreshment practices and other diversity efforts.
Critical Audit Matters: PCAOB Says CAMs Made Ripples, Not Waves
Last week, the PCAOB issued this analysis of the impact of the “critical audit matter” disclosure requirement, which has already been in effect for large accelerated filers and will take effect for other companies at the end of this year. This Cooley blog summarizes some of the high expectations and worries that people had when the requirement was adopted. But so far, other than auditors putting in some long hours (or maybe because of auditors putting in long hours), it seems like CAMs are making more of a ripple than a wave. Here are some of the key PCAOB findings:
• 2,420 audit reports contained CAMs – averaging 1.7 per report (7 was the highest). The most common CAMs reported related to revenue recognition (604), goodwill (462), other intangible assets (385) and business combinations (355).
• Audit firms made significant investments to support initial implementation of CAM requirements – but so far, they don’t appear to be passing those costs on to companies.
• Audit committee chairs and company preparers participating in the interview process indicated that the CAM implementation process was a “generally smooth experience” for companies, largely as a result of the significant upfront preparation by auditors. In particular, those interviewed considered the “dry runs” conducted by auditors to be useful.
• 41% of engagement partners who participated in the survey felt that the CAM requirement enhanced audit committee communications – less than 2% felt they constrained communications.
• Investor awareness of CAMs communicated in the auditor’s report is still developing, but some investors are reading CAMs and find the information beneficial. Only 31% of surveyed investors had seen a CAM “in the wild.”
• Only 2% of engagement partners reported issuer changes to internal control over financial reporting because of CAMs.
• The staff has not found evidence of significant unintended consequences from auditors’ implementation of CAM requirements for audits of large accelerated filers in the initial year.
COVID-19: Heightening Investors’ Focus on Social Issues?
Social issues are attracting greater attention from asset managers this year, compared to the “Before Times” – but governance remains the most important issue. That’s according to a recent survey of 65 asset managers by ISS ESG, asking how the pandemic has impacted their consideration of ESG factors in investment decision-making and stewardship or engagement activities. The press release lists these key findings (see our “ESG” Practice Area for a bevy of surveys and memos):
– 62.5 percent of respondents report that social issues attract more of their attention now than before the COVID-19 pandemic.
– Governance remains the most important ESG factor in the investment analysis and stewardship activities of 86 percent of respondents.
– Respondents report the primary drivers of growth in their ESG engagements include client and stakeholder demand, racial inequality and diversity, and regulatory changes.
– 44.1 percent of respondents expect future ESG ratings to place a greater weight on workplace safety, treatment of employees, diversity and inclusion, as well as supply chain labor dynamics.
– 37.5 percent of respondents have either already added or intend to add new staff to manage ESG-related issues.
Last week, Bloomberg reported that the SEC was shelving its proposal to raise the Form 13F reporting threshold. If that’s true, it would come as a relief to the 2,238 people who penned letters to oppose the proposal – and disappoint all 24 who supported it.
As Lynn blogged and others pointed out, the higher threshold probably would made things more difficult for corporate folks involved in shareholder engagement. Keep an eye on future Reg Flex Agendas to see if this one comes back or just fades into oblivion.
Measuring “TCFD” Disclosures
According to this progress report from Climate Action 100+, 120 companies now have a board committee with express responsibility for oversight of climate risks and 59 companies now formally support the disclosure framework from the Task Force on Climate-related Financial Disclosures. The TCFD is a voluntary set of climate-related financial risk disclosures that is intended to help price climate risks – the task force is chaired by Mike Bloomberg.
As this Paul Weiss memo explains, although the TCFD’s recommendations were first published only three years ago, it’s one of the frameworks that’s become more popular. Late last week, TCFD issued its third annual status report to document progress. Here are a few of the key findings (for more benchmarking, also see this 15-page memo from Vigeo Eiris and Four Twenty Seven):
– Almost 60% of the 100 largest global public companies support the TCFD, report in line with the TCFD recommendations, or both
– The largest increase in disclosure was related to how companies identify, assess, and manage climate-related risk – but disclosure of the potential financial impact of climate change on businesses remains low
– Less than 1% of companies disclosed information on the resilience of their business strategy, taking into consideration different climate-related scenarios
– The most useful piece of info according to “expert users” is the impact of climate change on a company’s business & strategy – check out Appendix 5 beginning on pg 93 to see how these users ranked the usefulness of other information, which could help you prioritize your disclosure efforts
– Guidance on Risk Management Integration & Disclosure: aimed at companies interested in integrating climate-related risks into their existing risk management processes and disclosing information on their risk management processes in alignment with the Task Force’s recommendations
Putting Sustainability into Action: 10-Year Roadmap
Recently, Ceres launched a 10-year sustainability action plan for companies to consider as a framework for governance, disclosure and strategic actions – along with this micro-site that includes performance milestones for each category of action, and other resources.
Speaking of putting sustainability into action, Coca-Cola recently announced that they would be discussing the company’s approach to sustainability, diversity and inclusion during a webcast for investors on November 13th. They’ll discuss the company’s sustainability strategy and goals, response to COVID-19 and stance on racial equity, among other topics.
Following its open meeting yesterday, the SEC announced that it adopted amendments to simplify & harmonize the private offering framework. The Commission had proposed these rules in March following a concept release last summer. Here are highlights from the SEC’s Fact Sheet about what the amendments do:
– Establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings – and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. The amendments also provide 4 non-exclusive safe-harbors from integration.
– Increase the offering limits for Reg A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits
– Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities
– Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions
As has become the norm, the amendments were adopted by a 3-2 vote, with Commissioners Hester Peirce and Elad Roisman saying the rules don’t go far enough, and Commissioners Allison Herren Lee and Caroline Crenshaw saying that the rules strip away investor protections and were adopted without adequate data. Here’s a link to all of the statements from the Commissioners and SEC Chair Jay Clayton.
The amendments will go effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register. Publication often takes about a month – so if that’s the case, that would put us in the February time frame for this new private offering regime.
New PPP “Loan Necessity Questionnaire” – 10 Days to Respond!
The Small Business Administration published a notice last week that it would release a new “loan necessity questionnaire” – Form 3509. If your company borrowed $2 million or more from the Paycheck Protection Program, you’ll need to complete the form to show the necessity of the borrowings – and it’ll be due within 10 business days of receiving it from your lender.
Although copies of the Form are popping up online, this Kaplan blog points out that the SBA website hasn’t posted an official version. This McDermott memo gives an overview of the information that borrowers will be expected to provide and suggests that they start collecting supporting documentation, given that the time frame for responding will be short.
Sustainability Reporting: XBRL Coming Soon?
PwC is working with SASB to translate its sustainability reporting standards into an XBRL taxonomy, according to this “Accounting Today” article – and the charge is being led by former SEC Chief Accountant Wes Bricker. The “Big 4” accounting firms definitely see an opportunity in ESG. As I blogged a couple of months ago on the Proxy Season Blog, they’re also working together to develop a set of common metrics for reporting.
Sure, common metrics and even XBRL could be helpful to investors, but I think the biggest opportunity here is to use this “alphabet soup” to create our very own, modern take on the “Mickey Mouse Club” song: S-A-S-B, X-B-R-L, E-S-G, M-O-U-S-E! Who’s with me?
Tomorrow’s the day everyone’s been waiting for: my son’s birthday. Also, Election Day. Lots of people think that if there’s a “Blue Wave,” it would accelerate the push for “stakeholder capitalism” – especially after a group of Democratic senators announced a working group on Friday to signal that the rights of workers and long-term, sustainable operations would be a priority if their party gets wins up & down the ballot.
That may well be the case, but I don’t think a Trump victory means that we’ll be able to write off ESG. Remember the aftermath of the 2016 election and the US withdrawal from the Paris Climate Agreement? It only moved ESG momentum from the government to the patchwork of private ordering – if anything, it seemed to energize investors and companies to push in that direction.
For example, BlackRock first urged companies to serve a “social purpose” in a January 2018 letter, which ignited interest in “long-termism” and “corporate purpose.” Then we had the BRT statement last year, which is still making waves. Last week, this As You Sow review catalogued shareholder proposals on the topic of whether companies are adopting plans to implement the ideals of the BRT’s “corporate purpose” statement. And we’ve all been drowning in the proliferation of ratings and disclosure standards over the last four years.
DOL Leaves “ESG Investing” on Life Support
Then again, this administration has done a thing or two to try to divert attention from ESG issues. On Friday, the Department of Labor published the final version of its rule to require private-sector retirement plans to prioritize “pecuniary factors” when making investment decisions (I blogged about the proposal on our Proxy Season Blog back in June). It doesn’t expressly limit the use of ESG-themed investments, as had been proposed – but the substance of the proposal remained largely intact. This “Plan Adviser” article gives more detail:
The final version does include some significant changes compared with the proposal, which will seemingly protect the use of ESG investing to some extent. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance. In this sense, the rule does seem to leave ample room for the use of ESG-minded investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.
The preamble to the final rule, on the other hand, does speak directly to the ESG topic. The DOL and EBSA officials said the preamble seeks to help stakeholders understand how the pecuniary framework may apply to the assessment of ESG investments in practice.
Another important change emphasized by senior DOL and EBSA leaders is that the final rule does not explicitly prohibit the selection of a fund that uses ESG factors as a plan’s qualified default investment alternative (QDIA). Once again, the final rule requires that a fund being selected as the QDIA must be assessed using purely pecuniary factors that are directly material to its financial performance. Beyond this, the final rule does stipulate that a fund is not appropriate as a QDIA if its stated objectives include explicitly non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors.
Our November Eminders is Posted!
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Yesterday, I blogged about a letter writing campaign focused on climate lobbying disclosure. With diversity disclosure getting a lot of attention these days, there’s now another effort focused on that too. The “Russell 3000 Board Diversity Disclosure Initiative” issued a press release saying the group is calling on Russell 3000 companies to disclose the racial/ethnic and gender composition of their boards in 2021 proxy statement filings. The initiative is being led by the State Treasurers of Illinois and Connecticut and includes investors representing over $3 trillion in assets under management. Here’s an excerpt about the initiative from the Illinois Treasurer’s website:
Many institutional investors, including the Illinois Treasurer, have advocated for gender diversity on corporate boards through proxy voting policies and through direct shareholder-company engagement. These actions, now broadly adopted by institutional investors across the world, have helped generate an increase in gender diversity on corporate boards. The lack of data on racial/ethnic composition, however, makes it difficult to apply the same tools and creates unnecessary barriers to investment analysis and academic study.
The Black Lives Matter movement and the widespread outrage sparked by the murder of George Floyd have prompted a national conversation on issues of racial equity and inclusion. Many companies have issued statements in support of racial justice, and in some cases announced responsive efforts at their operations. This initiative urges companies to harness this national movement and the momentum on gender diversity to consider publicly reporting the racial/ethnic and gender composition of the Board of Directors in their annual proxy statement for the 2021 filing.
Members of the initiative have or are examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement. Members agree that voluntary corporate reporting in the proxy statement is the most reliable data source.
The website includes a sample letter sent to Russell 3000 companies and the letter includes a proxy statement excerpt as an example of the disclosure the group would like to see. The example shows racial/ethnic and gender information by director as additional information at the bottom of a “director skills matrix.” We’ve blogged before about potentially gathering some of this information as part of annual D&O questionnaires and it looks like more companies could be headed down that path…
Trillium Engages to “Get Out the Vote”
With the election right around the corner, a recent press release from Trillium Asset Management says it has engaged with 20 companies to understand and influence their civic engagement policies and practices. With most shareholder engagement meetings focused on governance matters, executive compensation and various social issues, civic engagement seems like a new one – then again, if there was a year for it, 2020 might be it.
Those familiar with Trillium know that the socially responsible asset manager is a frequent proponent of various social matters – it has led initiatives relating to workplace diversity, plastics, LGBT issues and others. In this most recent engagement effort, Trillium released a report back in July intended to encourage companies to provide paid time off for employees to vote. Here’s an excerpt:
Trillium is pressing the companies that can make a difference, to take this opportunity and to become part of the solution. Support for civic engagement can benefit our democracy, can increase employee satisfaction, and we believe, improve the bottom line.
We wanted to know what companies with large numbers of hourly workers are doing to support civic engagement, so we asked each of these companies: Is there a company-wide policy that provides employees with time off to vote? Who does this policy extend to? Full-time, part-time, salaried, seasonal, and hourly employees? Contractors? How much time off is provided? If time off is provided, is it paid? In states with existing time off laws does the company do more than comply with state law? What kind of education is provided to make employees aware of this benefit? We also gathered information about how companies make employees aware of these benefits and any other education they offer around civic engagement.
The report includes a “Democracy Scorecard” and praises several companies, while also noting others have room for improvement. Companies that exhibited what we believe are “best practices” on this issue have robust policies that provide employees with paid time off to vote. Many also have strong engagement programs that provide employees important information about voting locations and deadlines. Some companies provided paid time off while others deferred to adhoc conversations with managers in order to schedule time off. Companies that rely on vacation time and the structure of employee schedules are not showing a sincere commitment to employee engagement.
Some states require that employers give employees time off to vote but the laws vary. When the mid-term elections come up in a couple of years, it’ll be interesting to see if this topic makes its way into engagement meetings again. Separately from this engagement initiative, some companies have begun offering paid time off to ensure employees have time to vote – here are a few stories I saw – including Coca-Cola’s tweet in response to Sarah Silverman’s call for time off and news from Goldman Sachs and Symetra Life Insurance Company.
September-October Issue of “The Corporate Executive”
The September-October issue of The Corporate Executive was just posted – & also sent to the printer. It’s available now electronically to members of TheCorporateCounsel.net who also subscribe to the electronic newsletter (try a no-risk trial). This issue includes articles on:
– Companies Changing Incentive Compensation Plan Performance Targets or Metrics Due to Covid-19
– ISS Releases Preliminary Guidance on the Pandemic and Pay Decisions
In a recent letter writing campaign, a group of institutional investors sent letters to CEOs and board chairs of 47 U.S. companies urging the companies to disclose how their climate lobbying aligns with the Paris Agreement and to take action when there’s misalignment. Earlier this week, Ceres issued an announcement about the initiative. As stated in the investors’ letter, it’s follow-up to letters on climate lobbying sent last year and is being sent in advance of benchmarking on climate progress that’s slated for public release next year:
Earlier this year, all 161 focus companies of the Climate Action 100+, including the 47 notified this month, were informed that they would be benchmarked on their climate progress against a set of key indicators that reflect the goals of the initiative. Paris-aligned corporate lobbying is a key indicator in which corporate progress will be assessed. The full assessment — Climate Action 100+ Net- Zero Company Benchmark — is set to be released in early 2021.
The letter directs these companies to this Ceres document outlining recommendations on how companies can establish systems that address climate change as a systemic risk and integrate this understanding into their direct and indirect lobbying on climate policies.
Investors signing this most recent letter campaign include BNP Paribas Asset Management, Boston Trust Walden, CalPERS, CalSTRS, Mercy Investment Services, NYC Comptroller’s Office, New York State Common Retirement Fund and Wespath Benefits & Investments.
Looking Back at 16 Years of ICFR
Section 404 of the Sarbanes-Oxley Act requires companies to review internal control over financial reporting and report whether it’s effective. John recently blogged about how newly public companies have fared with ICFR and Audit Analytics recently issued its annual recap of negative auditor attestations and management-only assessments of ICFR. The report takes a look at how public companies have fared more broadly by looking back at the last 16 years since SOX 404 first applied to U.S. accelerated filers. The report shows differing trends for accelerated filers disclosing adverse auditor attestations versus adverse management-only attestations filed by non-accelerated filers.
After starting out at 15.9% for fiscal year 2004, adverse auditor attestations declined to 3.5% for fiscal year 2010 and now have been hovering between 5 – 7%, which is where they’ve been for the last several years. Conversely, adverse management-only assessments rose steadily for seven years from 2008 to 2014 and are much higher than accelerated filers, peaking at 40.9% before declining, although adverse management-only assessments have remained between 39 – 42% since. Here’s an excerpt for reasons behind 2019 adverse attestations and assessments:
– The most common internal control reason auditors indicated as leading to conclusions about ineffective ICFR were issues requiring year-end adjustments, followed by a need for more highly trained accounting personnel
– The most common accounting issue that triggered an adverse ICFR determination was revenue recognition issues, which was followed by accounts receivable and other cash issues
– For management-only assessments, the most common internal control reason given to support a conclusion about ineffective ICFR was that accounting personnel within the company were not adequately trained, followed by a lack of personnel necessary to implement proper segregation of duties
– The most common accounting issue that triggered a conclusion about ineffective ICFR was accounts receivable and cash issues, although it was only identified and disclosed 69 times – the report notes that non-accelerated filers tend to disclose deficiencies absent an identified accounting error
Transcript: CFIUS After FIRRMA: Navigating the New Regime
Yesterday, the SEC issued a press release announcing that Corp Fin Director Bill Hinman intends to leave the SEC later this year. The range of rulemaking adopted under Director Hinman’s leadership has been impressive. As high-lighted in the press release:
The Division advanced nearly 50 mission-oriented initiatives during Director Hinman’s tenure, including efforts to modernize, streamline and improve public company disclosures, the proxy process and the securities offering framework. Mr. Hinman also guided the Division and the agency in addressing emerging issues and providing timely guidance to market participants. For example, Mr. Hinman led efforts regarding the rapid innovation in digital assets, including by providing a framework that market participants could use to evaluate whether digital assets are offered and sold as securities. In addition to these proactive engagement and modernization efforts, Mr. Hinman’s oversight of the Division’s core functions, including the disclosure review program, addressed a number of novel and complex issues leading to substantial benefits for investors.
SEC Chairman Jay Clayton released a statement commending Director Hinman for all that he’s accomplished at the agency during his tenure and thanked him for his sage advice.
Upon Director Hinman’s departure, Deputy Director Shelley Parratt will serve as Acting Director as she has done in previous transitions…
SEC Open Meeting: Harmonization of Private Offerings on the Agenda for Monday
Benjamin Franklin has been credited with many famous quotes, here’s one: “don’t put off until tomorrow what you can do today.” Keeping with that mantra, sort of, the SEC continued its forward march and scheduled an open meeting for Monday, November 2nd. The topic will be of interest to those that have been waiting for action on the proposed amendments to the private offering framework – we blogged about the proposal when it was announced back in March. Here’s an excerpt from the Sunshine Act Notice:
The Commission will consider whether to adopt rule amendments to facilitate capital formation and increase opportunities for investors by expanding access to capital for small and medium-sized businesses and entrepreneurs across the United States. Specifically, the Commission will consider whether to adopt rule amendments to simplify, harmonize, and improve certain aspects of the framework for exemptions from registration under the Securities Act of 1933 to promote capital formation while preserving or enhancing important investor protections and reducing complexities in the exempt offering framework that may impede access to investment opportunities for investors and access to capital for businesses and entrepreneurs.
Tomorrow’s Webcast: “Virtual Annual Meetings: What To Do Now”
Tune in tomorrow for our webcast – “Virtual Annual Meetings: What To Do Now” – to hear Amy Borrus of CII, Doug Chia of Soundboard Governance, Dorothy Flynn of Broadridge, Carl Hagberg Independent Inspector of Elections and Editor of The Shareholder Service Optimizer and Kate Kelly of Bristol-Meyers Squibb discuss baseline best practices for virtual shareholder meetings, investor views, getting remote technology in order, how to ensure your platform allows for shareholder entry & participation, virtual “rules of conduct”, voting & tabulation issues and contingency planning.
One open question from the Supreme Court’s Liu decision relates to determining “legitimate expenses” that must be deducted from disgorgement awards so the “net profits” can be distributed to victims. At a recent SEC Speaks conference, Enforcement Division Chief Counsel Joseph Brenner and Chief Litigation Counsel Bridget Fitzpatrick provided insight for those trying to understand what might constitute “legitimate expenses” in context of a disgorgement award. This McGuireWoods memo summarizes remarks from the conference, including these relating to determining legitimate expenses:
Chief Counsel Brenner noted that the Enforcement Division would be on the lookout for “expenses” that in its view were just wrongful gains under another name, such as expenses that furthered the scheme, or deductions for the defendant’s personal services to the fraudulent enterprise. If defense counsel believe there are legitimate expenses that should be deducted from a potential disgorgement amount, Chief Counsel Brenner recommended counsel to consider the following questions:
1. What makes the expense legitimate within Liu’s framework — in particular, did the expense provide actual value to investors, was the expense consistent with how investors understood their money would be used, or is the expense really just disguised profits?
2. If the expenses are legitimate, how closely were those expenses tied to the unlawful profits? Thus, the Enforcement Division may not view all “legitimate” expenses as deductible if they were in furtherance of the violation.
3. What is the right amount of the offset?
With respect to the third point, Chief Counsel Brenner stated that, in the Enforcement Division’s view, counsel must come prepared to demonstrate both the entitlement to a deduction for a legitimate expense and its amount. Based on practical experience gained since Liu, the Staff stated that counsel can make a more persuasive case for a reduction from the full amount of disgorgement by doing the work up front to support both the basis for the deductible legitimate expense and, critically, its amount. In the Staff’s view, it is not sufficient for counsel to claim it is too difficult or resource-intensive to quantify the expense, or to claim that the analysis supporting a request was work product that the Staff could not review.
NYSE Proposes Changes to Shareholder Approval Requirements for Certain Equity Issuances
In early October, the NYSE proposed changes to its rules on shareholder approval requirements relating to certain equity issuances set forth in Section 312.03 of the NYSE Listed Company Manual. In the proposed amendments, the NYSE notes that the changes would make the NYSE’s rules for cash sales to related parties substantively identical to those of Nasdaq. This Mayer Brown blog walks through the proposed amendments that would affect Section 312.03(b) and 312.03(c), here’s an excerpt:
The NYSE proposes to amend Section 312.03(b) to limit the class of related parties that would require shareholder approval. Section 312.03(b) as amended would require prior shareholder approval only for sales to directors, officers and substantial security holders and would no longer require approval for sales to such related party’s subsidiaries, affiliates or other persons closely related or to entities in which a related party has a substantial interest. Further, Section 312.03(b) as amended would no longer require shareholder approval of issuances of more than 5% of outstanding shares to a related party so long as they are issued at a minimum price. The NYSE proposes to require that any listed company obtain shareholder approval for a transaction in which a director, officer or substantial security holder has a 5% or greater interest (or such persons collectively have a 10% or greater interest) in the company or assets to be acquired or in the consideration to be paid in the transaction and the issuance of shares could result in an increase in outstanding shares of 5% or more.
With respect to Section 312.03(c), the NYSE proposes to replace the reference to “bona fide private financing” with “other financing in which the company is selling securities for cash.” This change would effectively eliminate the 5% limit for any single purchaser but retain the minimum price requirement.
Refreshing Governance Documents – Recent Trends
As companies start preparing now for the coming proxy season, a common to-do item involves reviewing governance documents for any potential updates. Many companies monitor peer companies for governance document changes and a recent Sullivan & Cromwell memo provides a good recap of recent trends in governance documents. The memo acknowledges that many companies have revised governance documents in response to Covid-19 to ensure they’re able to operate remotely.
Among other provisions, the memo discusses refreshment trends for advance notice bylaws, ESG oversight, and federal exclusive forum provisions. One area getting a lot of attention these days is board composition. As companies take steps to ensure governance documents are current and say the right things, the memo is a good reminder to make sure the governance provisions synch with your company’s actual practices. Here’s an excerpt about provisions relating to board leadership and evaluation guidelines:
Shareholders, institutional investors and proxy advisors are now calling for enhanced transparency around why a company’s independent board leadership structure is appropriate for the company. In response, many companies are providing more detail in their corporate governance guidelines regarding their processes for determining their leadership structures, the roles and responsibilities of their board leader(s) and their board evaluation practices.
Acknowledging several of the recent board diversity lawsuits, the memo notes that the plaintiffs’ complaints referenced statements that were included in corporate governance documents, including committee charters and proxy statements. The plaintiffs allege these disclosures do not accurately represent the companies’ practices. As more companies consider whether to provide enhanced transparency around their leadership structures and evaluation practices in their corporate governance guidelines and other governing documents, it is important to ensure that any disclosures remain consistent not only with the company’s other public disclosures, but also with the company’s actual practices.
Earlier this fall, Liz blogged about Corp Fin’s increased scrutiny of supply-chain finance arrangements. Last June, in Topic 9A Disclosure Guidance, Corp Fin called out supply-chain finance arrangements and now last week, this WSJ article reports that the FASB voted to add a project to its agenda to explore greater disclosure on the use of supply-chain finance arrangements. Cydney Posner posted a blog entry detailing some of the recent focus on supply-chain finance disclosure and suggests that companies engaged in this type of financing might want to take the opportunity now to revisit the adequacy of their disclosure.
The WSJ article says a joint letter from the Big Four accounting firms is what led to the FASB’s decision to work on the matter as more transparency could lead to a better understanding of a company’s financial position. It’s unclear exactly what additional disclosure would entail but today there are questions about whether the arrangements should be classified as debt or accounts payable and it’s generally understood that disclosure is lacking:
Board members during Wednesday’s meeting highlighted the growing use of supply-chain finance among companies as well as the lack of disclosure. Fewer than 5% of the nonfinancial companies that Moody’s Investors Service rates globally disclose supply-chain financing in their financial statements, the ratings firm said last year. Companies generally aren’t required currently to disclose that information.
One result could be requiring companies to add footnotes to their financial statements explaining the nature of the programs they use.
ISS’ Proposed Board Diversity Policy Change: Aggregated Data Won’t Cut It
The comment period for ISS’ policy changes closes at 5 pm Eastern Time today and when Liz blogged about the potential changes a couple of weeks ago, one U.S. change that has received a fair amount of attention is the proposed change relating to board diversity. Under that proposed policy, beginning in 2022, at companies where there are no identified racial or ethnically-diverse board members, the proposed U.S. policy will be to recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis). If the proposed policy is adopted, all companies in the Russell 3000 and S&P 1500 indexes would be subject to it.
As stated in ISS’ proposed policy changes document, as of Sept. 21, 2020, 1,260 of the Russell 3000 companies, 492 of the S&P 1500 and 71 of the S&P 500 do not have minority ethnic and/or racial board representation. The document also states that in 2021, ISS research reports will highlight boards that lack racially or ethnically diverse board members (or lack disclosure of such) to help investors identify companies they may want to engage with to foster dialogue on the topic. A recent AgendaWeek piece (subscription required) includes commentary from Marc Goldstein, head of U.S. research at ISS, that sheds more light on information ISS wants to see:
‘The real problem for us is when companies disclose diversity and then aggregate race, ethnicity and gender all together and say, for example, that ‘30% of our board is diverse,’ but then they don’t say what that means,’ says Goldstein. ‘We don’t consider that good enough.’
Instead, says Goldstein, ISS wants to see companies that haven’t provided specific disclosure to disclose what percentage of the board is composed of women, what percentage is racially diverse, and what percentage is ethnically diverse. ‘We want to see gender diversity separated out from racial and ethnic diversity. And obviously, there are other ways to define diversity too, including background, thought, nationality — lots of things. But we’re specifically interested in racial and ethnic diversity for the purposes of this policy.’
ISS expects to announce its final 2021 benchmark policy changes in the first half of November, so we’ll find out soon if the proxy advisory firm adopts this board diversity policy. In the event ISS adopts this policy change, given that ISS research reports will begin flagging companies for lack of disclosure in 2021, even companies that have historically included aggregated director diversity information in their proxy statements might want to consider updating their disclosure or prepare for potential questions from investors.
ISS to Expand QualityScore with FICO Cyber Risk Score
For more on ISS, the proxy advisory firm issued a press release late last week announcing it entered into an agreement to acquire FICO cyber risk score business. With FICO cyber risk score, ISS’ announcement says that institutional investors will be able to use cyber risk scores as part of ISS’ Governance QualityScore ratings in 2021 to evaluate portfolio company risk. ISS also says that it will integrate the cyber risk score into other product offerings such as ISS ESG ratings.
What else can you say when the SEC announces that somebody just rang the whistleblower bell to the tune of $114 million? Here’s an excerpt from the SEC’s press release:
The Securities and Exchange Commission today announced an award of over $114 million to a whistleblower whose information and assistance led to the successful enforcement of SEC and related actions.
The $114 million award consists of an approximately $52 million award in connection with the SEC case and an approximately $62 million award arising out of the related actions by another agency. The combined $114 million reward marks the highest award in the program’s history, and eclipses the next highest award of $50 million made to an individual in June 2020.
It sounds like the award came at the end of a tough road for the whistleblower. The SEC’s press release says that the individual repeatedly reported that person’s concerns internally, and then, “despite personal and professional hardships,” the whistleblower alerted the SEC and the other agency of the wrongdoing and provided ongoing assistance that was critical to the success of the proceeding.
Now for the fun part – guessing which company is involved in the underlying case. For what it’s worth, here’s the SEC’s order, but it won’t be much help. The order contains more redactions than the average CIA response to a FOIA request.
Given the size of the award & the reference to another agency’s involvement, I’m sure some might guess that it’s related to the Goldman Sachs 1MDB settlement that was also announced yesterday, but I’m pretty sure that this doesn’t relate to that proceeding. For one thing, the SEC hasn’t yet issued a Notice of Covered Action for that case, which is required for any potential whistleblower case in which more than $1 million in sanctions have been imposed.
I have far too much journalistic integrity to speculate on such matters – but not enough to prevent me from pointing you to a Twitter thread where lots of people are doing just that.
Human Capital: Addressing the New Disclosure Requirement
One of the problems with adopting a principles based disclosure requirement is that you often end up with some poor soul staring at a blank sheet of paper trying to come up with something to say. If you’re worried about finding yourself in that position, this Freshfields blog provides some advice about how to address the SEC’s new human capital disclosure requirement. This excerpt lays out some potential disclosure topics:
– Diversity and inclusion: Programs or initiatives related to recruitment and retention of diverse candidates and other corporate partners, programs or initiatives to mentor and ensure equal opportunities at the company for diverse employees, unconscious bias trainings, and community involvement. For instance, if a company has adopted the Rooney Rule for directors or other positions, it could be helpful to provide that disclosure.
– Workforce compensation and pay equity: Company-wide compensation program design and implementation more generally, including incentive structures, internal minimum rates of pay, as well as efforts to promote gender and diversity pay equity. This may include involvement of outside compensation advisors or use of benchmarking data. This coming year, we expect to see disclosures around changes made to compensation programs in response to COVID-19 and the considerations that were involved.
In the case of companies that had to reduce compensation or furlough employees, we expect to see disclosure of actions taken to ease departures or reduced wages that demonstrate a commitment to the workforce. For example, many companies provided severance packages, extended health insurance to part-time employees or furloughed employees, offered paid sick leave, or established wellness initiatives and mental health services.
– Talent acquisition and retention: Competitive trends affecting recruitment and retention of employees (including, if material, voluntary and involuntary turnover rates), trends in overall workforce composition and talent needs, and succession planning for senior leadership roles.
Other potential topics include employee engagement and wellness, development and training, company culture, and oversight and governance. If you’re looking for more insights into the new human capital disclosure requirement, we’re posting memos in our “Human Capital Management” & “Regulation S-K” Practice Areas.
Corporate Governance: Preparing for “Black Elephants”
This year has been a barrel of laughs. Pandemic, lockdowns, recession, divisive politics – and now to top it all off, I’m going to have to subscribe to Apple TV if I want to watch Charlie Brown! Thanks for nothin’ 2020.
I guess my point is that we live in interesting times, where unexpected and downright extraordinary events happen with alarming regularity. That’s why I thought that this recent HBR article made for interesting reading. The article discusses how corporate boards can build the resilience necessary for companies to address the “black elephants” that they’re likely to encounter in the future. According to the authors, these creatures are a cross between a “black swan” and the “elephant in the room,” and describe a “looming disaster that’s clearly visible, yet no one wants to address.”
The article addresses how boards can build the resilience necessary to deal with these stygian pachyderms through effective corporate governance, leadership development and compensation program design. Here’s an excerpt on governance:
Boards have a variety of means for promoting resilience and monitoring potential black elephant events. They can encourage stress tests in comprehensive risk reviews. They can press management on the worst-case scenarios for each black elephant, including when the threat becomes existential for the company. They can then suggest “war games” to develop principles for effective responses — with lessons brought back to the board for assessment and discussion.
The authors also highlight some of the operational steps that the board can take on the governance front, including pushing management to fortify the company’s physical & digital defenses, taking actions to improve resilience in supply chains, and promoting technological solutions to minimize potential disruptions.
