All posts by Cydney Posner

SEC adopts final pay-versus-performance disclosure rule

It’s been 12 years since Dodd-Frank mandated, in Section 953(a), so-called pay-versus-performance disclosure, and amazingly, no rules had been adopted to implement that mandate…until yesterday, when adoption of the final rule crept in “on little cat feet.” Well, ok, there was a press release, but it was still quite a surprise. Yesterday, without an open meeting, the SEC finally adopted a new rule that would require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance. The SEC proposed a rule on pay versus performance in 2015 (see this PubCo post and this Cooley Alert), but it fell onto the long-term, maybe-never agenda until, that is, the SEC reopened the comment period in January (see this PubCo post).  According to SEC Chair Gary Gensler, “[t]oday’s rule makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies. I am pleased that the final rule provides for new, more flexible disclosures that allow companies to describe the performance measures it deems most important when determining what it pays executives. I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies.” Commissioners Hester Peirce and Mark Uyeda dissented. 

SEC posts draft strategic plan for fiscal 2022 to 2026

Yesterday, the SEC published for public comment a draft of its strategic plan for fiscal 2022 to 2026. According to SEC Chair Gary Gensler, the SEC “can’t take our leadership in capital markets for granted….Technology and business models always are changing, and it is important for our agency to evolve in kind. Through the goals we’ve laid out in this strategic plan, we will continue to bring a skilled and steady hand to the capital markets of a changing world. We look forward to reviewing public comments.”  Here is the press release and the request for public comment. The SEC regularly develops strategic plans, and as is the nature of strategic plans, they tend to be long on gauzy statements of high-minded, ambitious objectives and short on details.

What do the public comments on the SEC’s climate disclosure proposal tell us?

In this July report, Responses to the SEC’s Climate Proposal, KPMG discusses various themes and observations that it gleaned from its review of comment letters on the SEC’s 510-page comprehensive and stunningly detailed climate disclosure proposal issued in March.  As you probably recall, the proposal was designed to require disclosure of “consistent, comparable, and reliable—and therefore decision-useful—information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.”  KPMG found that the sentiment about climate standard-setting as a general concept was favorable, with 29% of those commenting very supportive and 50% supportive of the concept. Only 21% had a negative response—12% very unsupportive and 9% generally unsupportive.  But that positive attitude toward the general concept did not necessarily translate to support for the specific proposal from the SEC.

Cooley Alert: Tax Implications of the Inflation Reduction Act

Earlier this week, the President signed into law the historic Inflation Reduction Act.  Along with important provisions regarding climate and healthcare, the IRA contains several significant tax provisions, including a 15% alternative minimum tax for corporations and a 1% excise tax on corporate stock buybacks. Want more information?  Read this Cooley Alert, Tax Implications of the Inflation Reduction Act, from our terrific Cooley Tax Department.

State legislation targets company policies on ESG—how will it affect the corporate balancing act?

Over the past several years of political discord, many CEOs have felt the need to voice their views on important political, environmental and social issues. For example, after the murder of George Floyd and resulting national protests, many of the country’s largest corporations expressed solidarity and pledged support for racial justice. After January 6, a number of companies announced that their corporate PACs had suspended—temporarily or permanently—their contributions to one or both political parties or to lawmakers who objected to certification of the presidential election.  Historically, companies have faced reputational risk for taking—or not taking—positions on some political, environmental or social issues, which can certainly impair a company’s social capital and, in some cases, its performance.  These types of risks can be more nebulous and unpredictable than traditional operating or financial risks—and the extent of potential damage may be more difficult to gauge. As if it weren’t hard enough for companies to figure out whether and how to respond to social crises, now, another potent ingredient has been stirred into the mix: the actions of state and local governments—wielding the levers of government—to enact legislation or take executive action that targets companies that express public positions on sociopolitical issues or conduct their businesses in a manner disfavored by the government in power.  As described by Bloomberg, while “companies usually faced mainly reputational damage for their social actions, politicians are increasingly eager to craft legislation that can be used as a cudgel against businesses that don’t share their social views.” And many of these actions are aimed, not just at expressed political positions, but rather at environmental and social measures that companies may view as strictly responsive to investor or employee concerns, shareholder proposals, current or anticipated governmental regulation, identified business risks or even business opportunities. How will these legislative trends affect the difficult corporate balancing act?

SEC approves new PCAOB requirements for lead auditor’s use of other auditors

At the end of last week, the SEC approved the PCAOB’s updated standards for audits that involve multiple auditing firms. SEC Chair Gary Gensler said that the amended standards “will strengthen the requirements for lead auditors who supervise other auditors in an audit, helping to enhance audit quality and protect investors.”  Why were these updates necessary? According to Gensler, the globalization and increasing complexity of public company operations has meant that auditors must increasingly “rely on other auditors—working across different firms, countries, and even languages—in completing an audit. Last year,” he said, “26 percent of all issuer audit engagements used multiple auditors, and more than half of large accelerated filer audits used multiple auditors. Given the challenges that such multi-firm audits present, it is important that there be robust standards for how lead auditors supervise, communicate with, and coordinate with other auditors on the audit engagement.”  Gensler noted that the updates enhance the standards “across two broad areas. First, the amended standards specify certain procedures for lead auditors to perform when supervising other auditors. Second, they require lead auditors to prioritize their supervisory activities around higher-risk areas in the audit.”  PCAOB Chair Erica Williams observed that companies “continue to increase their global presence. As a result, the use of other auditors has become more prevalent in the conduct of an audit, which can create additional challenges for the lead auditor. Adding other auditors into the process requires careful consideration and clear communications between all auditors involved in the audit. And when miscommunication occurs or when there are misunderstandings about the nature, timing, and extent of the other auditor’s procedures, audit quality will likely suffer.” It’s worth noting that some aspects of the new amendments will affect communications with the audit committee. The amendments will be effective for audits of financial statements for fiscal years ending on or after December 15, 2024.

ESG metrics in compensation plans—a growing trend

Consultant Semler Brossy’s new report, ESG+Incentives, examines the prevalence of various ESG metrics as part of incentive compensation structures among companies in the S&P 500. Although some view ESG targets as just too nebulous to measure—how do you measure company culture?—and too amenable to “architecting” to ensure executive payouts, the use of ESG metrics as part of executive compensation plans appears to be a growing trend. The report concludes that the majority of companies in the S&P 500 now include ESG metrics, largely reflecting increased stakeholder interest in human capital and environmental issues. In 2022, “there was a nearly 23% increase in the proportion of S&P 500 companies applying ESG metrics in incentive plans, at 70% prevalence compared to 57% prevalence a year ago”—that’s a 13 percentage point increase year over year. Metrics related to human capital management were included most often as part of comp plans—used by 65% of all companies in the S&P 500, meaning that almost all companies that included any ESG metrics included HCM metrics.  And, while environmental metrics still remained scarce at only 23%, that percentage reflects a 64% increase over the 14% reported last year. The report indicates that the predominant metric overall was diversity and inclusion (46% of companies in the S&P 500); carbon-footprint metrics predominate in the environmental category, having increased by over 300% from last year.

Board refreshment: are evaluations preferable to retirement policies?

A new report from The Conference Board (together with ESG data analytics firm ESGAUGE) , Board Refreshment and Evaluations, indicates that, in pursuit of board diversity—in skills, professional experience, gender, race/ethnicity, demography or other background characteristic—companies must overcome one key impediment: relatively low board turnover.  One approach is just to increase the size of the board; another is through “board refreshment.” To that end, the report observes, companies are relying less on director retirement policies based on tenure or age—which may sometimes be viewed as misguided and arbitrary—and looking instead to comprehensive board evaluations, sometimes conducted by a facilitator, as a way to achieve board refreshment. The Conference Board advocates that companies foster a “culture of board refreshment” that removes any stigma that could otherwise attach to an early departure from the board. In any event, The Conference Board cautions that “companies should expect continued investor scrutiny in this area. Indeed, while institutional investors may defer to the board on whether to adopt mandatory retirement policies, many are keeping a close eye on average board tenure and the balance of tenures among directors and will generally vote against directors who serve on too many boards.”

What’s wrong with ESG ratings?

About a year ago, the Brookings Institution held a panel discussion regarding the role that the SEC should play in ESG investing and invited SEC Commissioner Hester Peirce to speak at the panel. It’s well known, of course, that she is not exactly a fangirl of ESG in any of its manifestations, and she came prepared to engage, armed with a voluminous speech consisting of 10 theses, footnoted to the hilt. One of her theses was that figuring out what “good” means in the context of ESG is very subjective—that’s why, she said, there’s a lot of debate over best ESG practices and that’s especially why ESG ratings firms are so inconsistent in their results. (See this PubCo post.) There may be even more to it than that.  This new paper, ESG ratings—a compass without direction, from the Rock Center for Corporate Governance at Stanford University, looks at ESG ratings and examines issues about their reliability. The authors conclude that, “while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments.” 

More prescriptive proposals, less support for 2022 proxy season

This proxy season, companies saw more shareholder proposals than in the past, a change that has been widely attributed to actions by the SEC and its Division of Corporation Finance that had the effect of making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. As discussed in this article in the WSJ, investors are taking the opportunity to press for more changes at companies. Nevertheless, the prescriptive nature of many of the proposals, especially climate-related proposals, has prompted many shareholders, including major asset managers, to vote against these proposals. Will next season reflect lessons learned by shareholder proponents from this proxy season?