It’s International Women’s Day! On March 1, the California Secretary of State, Dr. Shirley N. Weber issued the Secretary’s 2022 report required by SB 826, California’s board gender diversity law, and by AB 979, California’s law related to underrepresented communities on boards, on the status of compliance with these laws. The report counts 716 publicly held corporations listed on major exchanges that identified principal executive offices in California in their 2021 10-Ks, and indicates that 358 (compared to 318 last year) of these “impacted corporations” filed a 2021 California Publicly Traded Corporate Disclosure Statement reflecting their compliance (or lack thereof) with the board diversity requirements. Of the 358 companies that filed, only 186 reported that they were in compliance with the board gender diversity mandate, a significant decline from the 311 reported last year. Undoubtedly, the decline reflects the higher thresholds for compliance that applied at the end of 2021. The report also shows that 301 companies reported being in compliance with the phase-one requirements of the 2020 law related to underrepresented communities on boards. But is any of this data from the report really meaningful?
In September last year, Corp Fin posted a sample letter to companies containing illustrative comments regarding climate change disclosures, presumably designed to help companies think about and craft their climate-related disclosure. (See this PubCo post.) Corp Fin began by noting that, under its 2010 guidance (see this PubCo post), depending on the facts and circumstances, climate change disclosure could be elicited in a company’s SEC filings in connection with the description of business, legal proceedings, risk factors and MD&A. Still, right now, there is little in the way of prescriptive climate disclosure requirements, although a proposal for climate disclosure regulation is high on the SEC’s agenda. (See this PubCo post.) Instead, companies have instead looked largely to standards of materiality to determine whether climate disclosure is required in their SEC filings. However, many companies provide climate disclosure in corporate social responsibility reports that are not filed with the SEC, but instead typically posted on company websites. As reported in a recent analysis by Audit Analytics, in the SEC’s most recent round of comment letters about climate last month, the climate disclosure on which the SEC is commenting is primarily contained in these CSR reports. And the SEC wants companies to justify—in some detail—why that disclosure isn’t also in companies’ SEC filings.
With the Court decision still to come, what happened in the first trial of California’s board gender diversity statute?
You might remember that the first legal challenge to SB 826, California’s board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought a judgment declaring the expenditure of taxpayer funds to enforce or implement SB 826 to be illegal and an injunction preventing the California Secretary of State from expending taxpayer funds and taxpayer-financed resources for those purposes, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. A bench trial began in December in Los Angeles County Superior Court that was supposed to last six or seven days, but you know, one thing and another, closing arguments were just completed and the case has now been submitted. As we await the Court’s decision—and in anticipation of International Women’s Day—it might be interesting to review some of the testimony from the trial.
With the passage of SB 826 in 2018, California became the first state to mandate board gender diversity (see this PubCo post). To measure the impact of that legislation, in 2020, California’s current First Lady co-founded the California Partners Project. In 2020, the CPP released a progress report on women’s representation on boards of public companies headquartered in California, tracking the changes in gender diversity on California boards since enactment of the law. (See this PubCo post.) Now, the CPP has released another report, Mapping Inclusion: Women’s Representation on California’s Public Company Boards by Region and Industry. The new report, the CPP’s third, found “much to celebrate in the progress California has made. All-male boards are a thing of the past—from nearly a third of public company boards in 2018 to less than two percent now—and women hold a record number of California public company board seats.” The report asserts that the “California experiment proves that where there’s a will, there’s a way. Concern that there were not enough qualified women to serve on boards is unfounded.” Most revealing perhaps, the report tells us that, in 2021 “more women have joined California’s public company boards than men, likely for the first time.” But just barely—469 of the 930 directors that started in 2021, or 50.4%, were women. Whether this new statistic is attributable to SB 826 is anyone’s guess—correlation is not necessarily causation and investors and others have also pressured companies on diversity issues—but it certainly helped to dial up the heat.
On Tuesday, the SEC announced settled charges against Baxter International Inc., its former Treasurer and Assistant Treasurer, for misconduct related to improper intra-company foreign exchange transactions that resulted in the misstatement of the company’s net income. From at least 1995 to 2019, the SEC alleged, Baxter converted foreign-currency-denominated transactions and assets and liabilities on its financial statements using its own “convention”—not in accordance with U.S. GAAP. Then, beginning around 2009, the SEC charged, Baxter leveraged the convention to devise a series of non-operating intra-company foreign exchange transactions “for the sole purpose of generating foreign exchange accounting gains or avoiding foreign exchange accounting losses.” In the order against Baxter, the SEC found that the company violated the negligence-based anti-fraud, public reporting, books and records, and internal accounting controls provisions of the federal securities laws and imposed an $18 million penalty. In this order and this order, the SEC found that the company’s Treasurer “did not take any steps to investigate how Baxter’s treasury department generated consistent gains or whether the transactions that generated the gains were permissible,” and that the Assistant Treasurer, working with others at his direction, was “primarily responsible for executing the transactions.” The Treasurer and Assistant Treasurer were determined to have violated the negligence-based anti-fraud provisions of the federal securities laws and to have caused Baxter’s public reporting and books and records violations.
In the folklore of corporate governance, is there a governance structure that is more anathema to corporate governance mavens and shareholder democracy activists than the staggered board? (Ok, that’s an exaggeration, but you get my point.) Proxy advisory firms and activists oppose them, institutional investors vote against them and shareholders proposals to eliminate them are unusually successful. Staggered boards, where subsets of board members are elected in separate classes every three years—and therefore cannot be easily or quickly voted out—are often viewed as the archetypal technique to prevent hostile takeovers. Opponents also argue that staggered boards entrench boards and managements by insulating them from the shareholders and making it tough for shareholders to dethrone the CEO. That has to be bad for the company, right? Not so fast, says this study co-authored by a professor at Stanford Graduate School of Business and Stanford Law School. According to the author, quoted in Insights by Stanford Business, “[f]rom Adam Smith on, the concern of corporate governance has been how to mind the managers….Corporate governance has been about building up checks and monitors on the managers. The idea is that if we can fire them, and they know we can fire them, then maybe they will do the right thing.” But for some companies—in this case, early-life-cycle technology companies facing more Wall Street scrutiny—the evidence showed that, by allowing managers to focus on long-term—perhaps bolder and riskier—investments and innovations, staggered boards can actually be a benefit.
When, in August 2020, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K, the SEC applied a “principles-based” approach, limiting the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” At the time, SEC Commissioner Allison Herren Lee argued for a more balanced approach that would have included some prescriptive line-item disclosure requirements and provided more certainty in eliciting the type of disclosure that investors were seeking. (See this PubCo post.) Subsequent reporting has suggested that companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand.” (See this PubCo post.) Accordingly, Corp Fin is reportedly working on a proposal to enhance company disclosures regarding human capital management. Now, Senators Sherrod Brown and Mark Warner, the Chair and a member, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs, have written a letter to SEC Chair Gary Gensler, calling on the SEC to include in its proposal a requirement that companies report about—not just employees—but also the number of workers who are not classified as full-time employees, including independent contractors. It may be a topic to keep in mind as companies prepare the disclosures for this proxy season.
[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
The SEC has proposed to amend the complex beneficial ownership reporting rules. In the press release announcing the changes in beneficial ownership reporting, SEC Chair Gary Gensler described the amendments as an update designed to modernize reporting requirements for today’s markets, including reducing “information asymmetries,” and addressing “the timeliness of Schedule 13D and 13G filings.” Currently, according to Gensler, investors “can withhold market moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders. The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner. The proposed amendments also would clarify when and how certain derivatives acquired with control intent count towards the 5 percent threshold, clarify group formation, and create related exemptions.” Here is the fact sheet, and here is the proposing release. Consistent with the apparently new comment period formula, the public comment period for each proposal will be open for 60 days following publication of the proposing release on the SEC’s website (April 11, 2022) or 30 days following publication in the Federal Register, whichever period is longer.
Who doesn’t love the latest gossip—I mean reporting—about internal squabbles—I mean debate—at the SEC? This news from Bloomberg sheds some fascinating light on reasons for the ongoing delay in the release of the SEC’s climate disclosure proposal: internal conflicts about the proposal. But, surprisingly, the conflicts are not between the Dems and the one Republican remaining on the SEC; rather, they’re reportedly between SEC Chair Gary Gensler and the two other Democratic commissioners, Allison Herren Lee and Caroline Crenshaw, about how far to push the proposed new disclosure requirements, especially in light of the near certainty of litigation, and whether to require that the disclosures be audited. Just how tough should the proposal be? The article paints the SEC’s dilemma about the rulemaking this way: “If its rule lacks teeth, progressives will be outraged. On the flip side, an aggressive stance makes it more likely the regulation will be shot down by the courts, leaving the Biden administration with nothing. Either way, someone is going to be disappointed.”
Yesterday, without first holding an open meeting, the SEC posted proposals related to changes in beneficial ownership reporting and changes to the whistleblower program. In the press release announcing the changes in beneficial ownership reporting, SEC Chair Gary Gensler described the amendments as an update designed to modernize reporting requirements for today’s markets, including reducing “information asymmetries,” and addressing “the timeliness of Schedule 13D and 13G filings.” Currently, according to Gensler, investors “can withhold market moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders. The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner. The proposed amendments also would clarify when and how certain derivatives acquired with control intent count towards the 5 percent threshold, clarify group formation, and create related exemptions.” The fact sheet indicates that the current deadlines for filing these initial Schedules have not been updated since 1968 (Schedule 13D) and 1977 (Schedule 13G). A lot has changed since the debut of “Hair” on Broadway and the release of “Hey Jude”—but how come platform shoes are still a thing?—so perhaps a reassessment is in order. Here is the fact sheet, and here is the proposing release.