Another challenge to California’s board gender diversity law
There’s now another legal challenge to SB 826, California’s board gender diversity statute, filed today in the federal district court in the Eastern District of California. In Creighton Meland v. Alex Padilla, Secretary of State of California, a shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California filed a complaint seeking a declaratory judgment that the statute is unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute. A representative of a legal organization contended that the statute “puts equal numbers above equal treatment….This law is built on the condescending belief that women aren’t capable of getting into the boardroom unless the government opens the door for them. Women are capable of earning a spot on corporate boards without the government coercing businesses to hire them.” This case appears to be the second complaint filed to challenge the new law, the first being, Crest v. Alex Padilla. (And here is the amended complaint.) As you may recall, Crest, filed in California State Court, was framed as a “taxpayer suit” that sought to enjoin Padilla from expending taxpayer funds and taxpayer-financed resources to enforce or implement the statute, claiming violations of the equal protection provisions of the California constitution. (See this PubCo post.)
SEC proposes to “modernize” shareholder proposal rules
Last week, the SEC voted to issue a new rule proposal intended to “modernize” the shareholder proposal rules, with Commissioners Robert Jackson and Allison Lee dissenting. Generally, the proposal would modify the criteria for eligibility and resubmission of shareholder proposals; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; and facilitate engagement with the proponent. As anticipated, at the meeting, the commissioners expressed strong views on these issues, with Chair Jay Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and Commissioner Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” The proposal is subject to a 60-day comment period.
SEC proposes new disclosure and engagement requirements for proxy advisory firms
Last week, the SEC voted (by a vote of three to two) to propose amendments to the proxy rules to add new disclosure and engagement requirements for proxy advisory firms, such as ISS and Glass Lewis. The proposal is part of the third phase of the SEC’s efforts to address perceived problems in the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). Of course, not everyone perceives the same problems in the system or perceives them the same way—a disparity that was plainly evident at the open meeting as the proposal’s advocates and critics were hardly reticent in expressing their views. (For a discussion of the goings-on at the open meeting, see this PubCo post.) The proposal is subject to a 60-day comment period and, if adopted, the rules would be subject to a one-year transition period.
Glass Lewis’s expectations in response to new Corp Fin approach to shareholder proposals
You may recall that, last month, Corp Fin announced that it had revisited its approach to responding to no-action requests to exclude shareholder proposals. In essence, under the new policy, the staff may respond to some requests orally, instead of in writing, and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. (See this PubCo post.) In its most recent proxy guidelines, Glass Lewis explains its expectations from companies in light of the new approach.
SEC proposes new obligations for proxy advisory firms and changes to rules for shareholder proposals
Are issuers precluded from raising concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that form the basis of a recommendation? Are firm conflicts of interest insufficiently transparent? Are proxy advisory firms an effective “market-based solution” helping large numbers of institutional investors with time and resource constraints make better voting decisions? Are proxy advisory firms “faux regulators,” wielding too much influence—with too little accountability—in corporate elections and other corporate matters? Maybe all of the above? At an open meeting this morning, the SEC voted, with two dissents, to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to “modernize” the shareholder proposal rules by increasing the eligibility and resubmission thresholds. These actions represent the third phase of the SEC’s efforts to address the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). As anticipated, at the meeting, the commissioners expressed strong views on these topics, with Chair Jay Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and Commissioner Robert Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” Both proposals are subject to 60-day comment periods. Next up, according to Clayton, proxy plumbing and universal proxy.
Does appointment of a former partner of the client’s audit firm to the client’s audit committee impair audit quality?
Studies of former partners of audit firms that have assumed management positions at audit clients have raised concerns, at least pre-SOX, about potentially lower audit quality, perhaps reflecting hesitation by the audit firm to “challenge aggressive accounting decisions” made by former partners of their firms. But what happens when a former partner joins the audit client’s audit committee? Does the former partner feel pressured not to question the audit firm’s decisions or lose objectivity about the quality of the work of the audit firm? Does the audit firm feel pressured to accept the company’s more aggressive accounting decisions when a former partner sits on the audit committee? In this study, published in Auditing: a Journal of Practice & Theory, a group of academics looked at that question. Their conclusion was that affiliated former partners on audit committees actually led to improved audit processes and outcomes. Why? Applying psychology’s “social identity theory,” the authors posit that the former partners continued to identify with their former firms, but instead of losing their objectivity, the former audit partners “use their knowledge of, and identification with, the audit firm to improve the audit process and the communication between the two parties,” leading to improvement in audit quality.
ISS sues the SEC—what will it mean for regulation of proxy advisory firms?
Today, 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 (referred to as the “Proxy Adviser Release” in the complaint) confirmed that proxy advisory firms’ vote recommendations are, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9. In its complaint, ISS contends that the Proxy Adviser Release is unlawful and its application should be enjoined for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” is contrary to law, that the SEC failed to comply with the Administrative Procedures Act and that the views expressed in the Release were arbitrary and capricious.
Interestingly, the litigation comes right before the SEC is scheduled to consider and vote (on November 5) on a proposal to amend certain exemptions from the proxy solicitation rules to provide for disclosure, primarily by proxy advisory firms such as ISS and Glass Lewis, of material conflicts of interest and to set forth procedures to facilitate issuer and shareholder engagement and otherwise improve information provided. There are various rumors circulating about the details of the proposal, including this Reuters article stating that the proposal would require proxy advisory firms to “give companies two chances to review proxy materials before they are sent to shareholders.” (Note that also on the agenda is a proposal to “modernize” the shareholder proposal rules by changing the submission and resubmission requirements.) Whether the firms’ advice is a “solicitation” takes on particular significance given that the SEC’s anticipated proposal appears to be predicated on the firms’ reliance on the exemptions from the proxy solicitation rules.
Are companies that follow a stakeholder model more “effective”?
New research from the Drucker Institute, published in the WSJ, applied the Institute’s analytical framework to assess companies’ “effectiveness,” defined for this purpose as “doing the right things well.” Notably, the authors of the article find a harmonious congruence—or is it a “harmonic convergence”?—between the “indicators” of effectiveness that make up their model and the various commitments for the benefit of all stakeholders in the Business Roundtable’s new “Statement on the Purpose of a Corporation.” What’s more, the authors suggest that their own framework was created to promote exactly “the kind of stakeholder mind-set that the Business Roundtable has now endorsed.” With that in mind, the authors highlight the group of companies led by CEOs who signed the BRT Statement to see how well these companies fared. While some have viewed the BRT Statement as mere “virtue signaling” (see the SideBar below), the article sets out to measure the extent to which the signatories put their money where their mouths are. How did they do? “Quite well,” but with “notable room for improvement.”
What is going on at the PCAOB?
Yikes! What is going on at the PCAOB? You may recall that, back in 2018, former staffers at the PCAOB and former partners of KPMG were charged by the SEC in connection with “their participation in a scheme to misappropriate and use confidential information relating to the PCAOB’s planned inspections of KPMG.” You know, that case where the former PCAOB staffers were accused of leaking to KPMG the plans for PCAOB inspections of KPMG—“literally stealing the exam.” (See this PubCo post.) The same scheme led the U.S. Attorney’s Office for the SDNY to file criminal charges against the former staffers, and some have actually been sentenced to prison. But that’s not even the half of it.
New SEC proposal to modernize filing fee disclosure and payment methods
The SEC today slipped a new proposal in on us, without an open meeting or even so much as a press release. Could they perhaps have had a premonition that we might not be spellbound in reading it? The proposal is intended to modernize filing fee disclosure and payment methods, which are currently manual and labor-intensive. The proposal would amend almost everything—“most fee-bearing forms, schedules, statements, and related rules”—to require each fee table and accompanying explanatory notes (which would be expanded by the proposal) to include “all required information for fee calculation in a structured format.” You know what that means—more inline XBRL. The proposed amendments would add an option for fee payment using Automated Clearing House (“ACH”) and retain the current option for payment by wire transfer, but eliminate fee payment with paper checks and money orders. According to the proposing release, the proposed amendments “are intended to improve filing fee preparation and payment processing by facilitating both enhanced validation through fee structuring and lower-cost, easily routable payments through the ACH payment option.”
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