On Monday, the SEC announced that John Coates has been appointed Acting Director of Corp Fin. He has been the John F. Cogan Professor of Law and Economics at Harvard University, where he also served as Vice Dean for Finance and Strategic Initiatives. If that name sounds familiar—even if you haven’t been one of his students—it may be because he sometimes pops up in Matt Levine’s column in Bloomberg as the author of “The Problem of Twelve,” which he describes as the “likelihood that in the near future roughly twelve individuals will have practical power over the majority of U.S. public companies.” Beyond that, he has been a very active member of the SEC’s Investor Advisory Committee, and Committee recommendations he has authored may give us some insight on his perspective on issues.
In this paper, Gaming the System: Three ‘Red Flags’ of Potential 10b5-1 Abuse, from the Rock Center for Corporate Governance at Stanford, the authors examined data from over 20,000 Rule 10b5-1 plans to investigate the extent of insider trading abuse. The study found that some executives did use 10b5-1 plans to conduct “opportunistic, large-scale selling that appears to undermine the purpose of Rule 10b5-1” and highlighted three “red flags” that could be used to detect potentially improper exploitation of Rule 10b5-1. Although the authors acknowledge that they could not determine for certain whether any insiders that avoided losses or otherwise achieved “market-beating returns” actually traded on the basis of material nonpublic information, they contended that average trading returns of the magnitude they found in the study “are highly suspect and, as such, these red flags are suggestive of potential abuse.”
In his 2020 annual letter to CEOs, Laurence Fink, CEO and Chair 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.” According to Fink’s letter, “[c]limate change has become a defining factor in companies’ long-term prospects.” What’s more, he made it clear that companies need to step up their games when it came to sustainability disclosure. (See this PubCo post.) At the Northwestern Law Securities Regulation Institute this week, former SEC Chair Mary Schapiro said that, at companies where she was on the board, Fink’s statement had “an enormous impact last year.” Fink has just released his 2021 letter to CEOs, in which he asks companies to disclose a “plan for how their business model will be compatible with a net zero economy.” Will this year’s letter have the same impact?
For several years, we’ve witnessed a fierce debate regarding the extent to which, in making decisions, boards of traditional corporations may take into account constituencies or stakeholders other than shareholders, such as employees and the larger community, or must consider only the impact of the decision on shareholder value. In a 2014 article In the Harvard Business Law Review, then-Chief Justice Leo Strine of the Delaware Supreme Court argued forcefully that, notwithstanding the allure of “stakeholder capitalism,” current corporate accountability structures make it difficult for directors to “do the right thing.” However, he contended, there is a way to effectively shift the power balance to create incentives for good corporate citizenship: the public benefit corporation. By articulating new corporate purposes and mandates, in Strine’s view, the PBC tweaks the normal corporate accountability and incentive structure that traditionally has made corporate managers accountable to only one constituency—shareholders. (See this PubCo post.) But while there have been a few corporations willing to take the IPO plunge as PBCs, there haven’t been any that have taken the risk, as public companies, of changing to the benefit corporation form—until now that is. And what’s most intriguing is that the shareholder vote at this company in favor of becoming a PBC was overwhelming. Is there more public shareholder support for PBCs than we thought?
Today, the SEC announced that President Biden —Happy Inauguration Day +1—has appointed Democratic SEC Commissioner Allison Lee as the new Acting SEC Chair to replace the Republican appointee, Elad Roisman. (Former CFTC Chair Gary Gensler is expected to serve as the permanent SEC Chair, but will first need to go through the confirmation process. See this PubCo post.) Lee has focused much of her attention at the SEC on ESG issues, such as climate and diversity, and, in the press release, she indicated that climate and sustainability would “continue to be a priority” for her. (See, e.g., this PubCo post and this PubCo post.) In addition, yesterday, the new administration imposed, at least informally, a regulatory freeze. The memorandum from the President’s Chief of Staff asks the agency heads not to propose or issue any rules or publish any rules in the Federal Register until a new department or agency head appointed or designated by the new President approves the rule. While Congress can use the Congressional Review Act to scrap agencies’ “midnight regulations” (see this PubCo post), this action represents a speedy approach to the same end available to the Executive branch for some recent rulemakings, many of which were adopted in the surge at the end of the last term.
One topic that directors were asked about in the PwC 2020 Annual Corporate Directors Survey was ESG. Although 55% of directors surveyed considered ESG issues to be a part of the board’s enterprise risk management discussions, 49% saw a link between ESG issues and the company’s strategy and 51% recognized that ESG issues were important to shareholders, directors were “not convinced that they’re connected to the company’s bottom line. Only 38% of directors say ESG issues have a financial impact on the company’s performance—down from 49% in 2019.” And only 32% thought that the board needed more reporting on ESG-related measures. Notably, 51% thought that their boards had “a strong understanding of ESG issues impacting the company.” As you may discern from its title, this study from the NYU Stern Center for Sustainable Business, U.S. Corporate Boards Suffer From Inadequate Expertise in Financially Material ESG Matters, begs to differ.
In his 2021 letter to directors, Cyrus Taraporevala, President and CEO of State Street Global Advisors, one of the largest institutional investors, announced SSGA’s main stewardship priorities for 2021: systemic risks associated with climate change and the absence of racial and ethnic diversity. SSGA intends, he said, “to hold boards and management accountable for progress on providing enhanced transparency and reporting on these two critical topics.” SSGA’s new voting policies reflect those intentions.
Reuters has reported that former CFTC Chair Gary Gensler will be President-elect Biden’s choice for SEC Chair. According to the article, in light of his “reputation as a hard-nosed operator willing to stand up to powerful Wall Street interests”—notwithstanding his former life as an investment banker—the appointment is “likely to prompt concern” among some that he will promote “tougher regulation.” The NY Post attributed his nomination to the most recent Democratic wins in the Senate, which allowed selection of “the more progressive candidate. Only two weeks ago, people close to the Biden transition team had penciled in centrist Robert Jackson Jr….as the SEC frontrunner because he was seen as more likely to win confirmation by a GOP-controlled Senate.” Jackson is a former Democratic SEC Commissioner appointed in 2017. Gensler is an MIT professor and has been leading the Biden transition planning for financial industry oversight.
You might remember that the first piece of legislation signed into law by the then-new (now outgoing) administration in 2017 was, according to the Washington Post, a bill that relied on the Congressional Review Act to dispense with the resource extraction payment disclosure rules. (See this PubCo post.) Under the CRA, any rules that were recently finalized by the executive branch and sent to Congress could be jettisoned by a simple majority vote in Congress and a Presidential signature. According to the Congressional Research Service, before the current outgoing administration took up the cudgel in 2017, “[o]f the approximately 72,000 final rules that [had] been submitted to Congress since the [CRA] was enacted in 1996, the CRA [had] been used to disapprove one rule: the Occupational Safety and Health Administration’s November 2000 final rule on ergonomics, which was overturned using the CRA in March 2001.” That’s because the stars are rarely in proper alignment: generally, the CRS indicated, for successful use, there will have been a turnover in party control of the White House and both houses of Congress will be majority–controlled by the same party as the President. That was the case in 2017, and, as of January 9, 2020, the CRA had been used to overturn a total of 17 rules, according to the CRS. Well, the stars are in proper alignment now. To observe that the new Congress and new administration have a lot on their plates is quite an understatement. Will they use the CRA to scrap any of the SEC’s “midnight regulations”?
Let’s just say that the SEC’s Investor Advocate, Rick Fleming, was none too pleased with the work of the SEC this year. Although, in his Annual Report on Activities, he complimented the SEC for its prompt and flexible response to COVID-19, that’s about where the accolades stopped. For the most part, Fleming found the SEC’s rulemaking agenda “disappointing.” While cloaked in language about modernization and streamlining, he lamented, the rulemakings that were adopted were too deregulatory in nature, with the effect of diminishing investor protections. But issues that definitely called for modernization—such as the antiquated proxy plumbing system—despite all good intentions, were not addressed, nor did the SEC establish a “coherent framework” for ESG disclosure. And the SEC “also selectively abandoned its deregulatory posture by erecting higher barriers for shareholders’ exercise of independent oversight over the management of public companies” through the use of shareholder proposals and by imposing regulation on proxy advisory firms. That regulation could allow management to interfere in the advice investors pay to receive from proxy advisory firms and was widely opposed by investors. What’s your bet that he’ll be a lot happier next year?