You might recall that, at the end of October, proxy advisory firm ISS filed suit against the SEC and its Chair, Jay Clayton (or Walter Clayton III, as he is called in the complaint) in connection with the interpretation and guidance directed at proxy advisory firms issued by the SEC in August. (See this PubCo post.) That interpretation and guidance addressed the application of the proxy rules to proxy advisory firms, confirming that proxy advisory firms’ vote recommendations are, in the view of the SEC, “solicitations” under the proxy rules, subject to the anti-fraud provisions of Rule 14a-9, and providing some suggestions for disclosures that would help avoid liability. (See this PubCo post.) Then, in November, the SEC proposed amendments to the proxy rules to add new disclosure and engagement requirements for proxy advisory firms, codifying and elaborating on some of the earlier interpretation and guidance. (See this PubCo post.) As reported in Bloomberg, the SEC has now filed an Unopposed Motion to Hold Case in Abeyance, which would stay the litigation until the earlier of January 1, 2021 or the promulgation of final rules in the SEC’s proxy advisor rulemaking. In the Motion, the SEC confirmed that, during the stay, it would not enforce the interpretation and guidance. ISS did not oppose the stay, and the Court has granted that motion. As a result, this proxy season, companies should not expect proxy advisory firms to feel compelled to comply with the SEC interpretation and guidance, including advice to proxy advisors to provide certain disclosures to avoid Rule 14a-9 concerns.
Last week, the NYT, reporting from Davos, said that the “business titans” at the annual World Economic Forum seemed to show a “newfound enthusiasm” for the cause of climate change, rallying “around a consensus that accelerating global temperatures pose a significant risk to society—and to business. Missing, though, was a clear answer to the question of what exactly they would do about it and how quickly. ‘It’s an increase in rhetoric, absolutely,’ said one commentator, ‘Will we see a walking of the talking? The jury is out.’” One way that a group of some of the largest businesses at Davos, together with the Big Four accounting firms, have been trying to “walk the talking” is through an effort “to develop a core set of common metrics to track environmental and social responsibility.” Is it just virtue-signaling or will the effort toward creation of new metrics make a difference?
You might recall that in the FAST Act Modernization and Simplification of Regulation S-K, adopted last year, the SEC amended Item 303 of Reg S-K to provide that, where a company includes in the filing financial statements covering three years, the company may omit “discussion about the earliest of the three years…if such discussion was already included in the registrant’s prior filings on EDGAR…, provided that registrants electing not to include a discussion of the earliest year must include a statement that identifies the location in the prior filing where the omitted discussion may be found.” (See this PubCo post.) Notably, there was no specific condition in the new amendment that discussion of the earliest year not be material, although MD&A continued to be subject to an overarching materiality analysis. Corp Fin has now issued three new CDIs that address omission of the earliest year, summarized below.
SEC’s Investor Advisory Committee critical of SEC proposals on proxy advisory firms and shareholder proposals
At a meeting on Friday of the SEC’s Investor Advisory Committee, the Committee members voted (ten in favor, five opposed, with two abstentions) to submit to the SEC a recommendation regarding SEC guidance and rule proposals on proxy advisory firms and shareholder proposals. The recommendation is highly critical of the guidance and of both proposals as unlikely to reliably achieve the SEC’s own stated goals, ultimately advising the SEC to rethink and republish the proposals and reconsider its guidance. (Apparently, the initial draft of the recommendations was even more of a scold, as the author, John Coates, indicated to the Committee that the current version reflected substantial revisions, including removing the word “failure” throughout.) The recommendation contends that the proposals and guidance are almost futile without addressing in parallel more basic proxy plumbing issues (as the Committee had previously recommended) (see this PubCo post), that none of the SEC’s actions at issue adequately identifies the underlying problems that are intended to be remedied, provides a sufficient cost/benefit analysis or discusses reasonable alternatives that might have been proposed. SEC advisory committees typically have a fair amount of sway, so time will tell whether the recommendation will lead the SEC to do any revamping of its actions.
What’s the news from Davos? Well, the new Goldman Sachs CEO made some news when he told CNBC that, starting July 1, in the U.S. and Europe, Goldman will take companies public only if there is “at least one diverse board candidate, with a focus on women…. And we’re going to move towards 2021 requesting two.” He continued that, recently, there have been about 60 companies in the U.S. and Europe that have gone public with all white, male boards. However, over the last four years, “the performance of public offerings of U.S. companies with at least one female director is ‘significantly better’ than those without.” [Emphasis added.] While he recognized that the decision could cause Goldman to lose some business, “in the long run,” he said, “this I think is the best advice for companies that want to drive premium returns for their shareholders over time.” Will other investment banks follow suit?
Consultant Russell Reynolds Associates opens this report on 2020 corporate governance trends by observing that, “[f]or the first time, in 2020, we see the focus on the ‘E’ and the ‘S’ of environment, social and governance (ESG) as the leading trend globally, including in the United States, where it traditionally has not received as much attention by boards.” That conclusion—that sustainability has now ascended to the forefront of corporate governance trends—is reinforced by this year’s annual letter to CEOs from BlackRock CEO, Laurence Fink, announcing initiatives to put “sustainability at the center of [BlackRock’s] investment approach,” as well as the Business Roundtable’s new Statement on the Purpose of a Corporation, which outlined a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. (See this PubCo post and this PubCo post.) For its report, RRA interviewed over 40 governance professionals, including institutional and activist investors, pension fund managers and proxy advisors to “identify the corporate governance trends that will impact boards and directors in 2020.” Those trends are summarized below.
If you need a good scare, take a look at this study on climate risk from consultant McKinsey. The study was the result of a year’s effort to measure the potential socioeconomic impact of climate change. As the risk of acute and chronic hazards intensifies, McKinsey assessed physical risk, looking at nine examples to illustrate the potential impact. Could this study focusing on socioeconomic impact have been one of factors driving BlackRock CEO Laurence Fink to put sustainability at the center of BlackRock’s investment strategy? (See this PubCo post.) According to the WSJ, “[c]limate crises in the next 30 years may resemble financial crises in recent decades: potentially quite destructive, largely unpredictable and, given the powerful underlying causes, inevitable. Climate has muscled to the top of business worries….Yet worrying about it isn’t the same as doing something about it.” McKinsey suggests that climate change will “need to feature as a major factor in decisions. For companies, this will mean taking climate considerations into account when looking at capital allocation, development of products or services, and supply chain management, among others.” As the study asks, “could climate become the weak link in your supply chain?” The study makes plain that companies will need to think carefully about climate risk and its “knock-on effects” in considering, planning for and describing for investors the risks of their businesses. McKinsey also provides some questions for companies to consider in that regard.
In 2015, an academic study, reported in the WSJ, showed that corporate insiders consistently beat the market in their companies’ shares in the four days preceding 8-K filings, the period that the researchers called the “8-K trading gap.” The study also showed that, when insiders engaged in open market purchases—relatively unusual transactions for insiders—during that trading gap, insiders “are correct about the directional impact of the 8-K filing more often than not—and that the probability that this finding is the product of random chance is virtually zero.” The WSJ article reported that, after reviewing the study, Representative Carolyn Maloney, D.N.Y., a member of the House Financial Services Committee, characterized the results as “troubling” and said she was preparing legislation to address the issue. Five years later, in January 2020, by a vote of 384 to 7, the House has passed HR 4335, the “8-K Trading Gap Act of 2019.” A substantially similar bill has been introduced in the Senate. Given the remarkably bipartisan vote in the House—and assuming that the legislation isn’t suddenly tinged with politics—the bill appears likely to pass in the Senate as well…sometime.
BlackRock puts sustainability at the center of investment strategy, expects more transparency in sustainability disclosure
Was it the heartbreaking photos of scorched koalas in Australia? Was it the pressure from activists such as As You Sow, which submitted a shareholder proposal asking for a report on how the company plans to implement the new Business Roundtable statement of purpose? (See this PubCo post.) Was it the press reports, like this one in the NYT, highlighting what appeared to be stark inconsistencies between the company’s advocacy positions and its proxy voting record? Was it the protests outside of the company’s offices by climate activists? The letters from Senators? The charges of greenwashing? Whatever the precipitating factor, in this year’s annual letter to CEOs, Laurence Fink, CEO of BlackRock, the world’s largest asset manager, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” What’s more, he made clear that companies need to step up their games when it comes to sustainability disclosure.
In December, the PCAOB posted a report on the results of its 2019 conversations with almost 400 audit committee chairs, focused on audit committee perspectives on audit quality assessment and improvement, auditor communications, new auditing and accounting standards, and technology and innovation. Valuably, the report identifies practices—not necessarily endorsed by the PCAOB—that the committee chairs found to be most effective for improving audit quality across these categories. The report also includes a few PCAOB staff responses to FAQs raised during the conversations.