Last year, the Business Roundtable created quite a buzz when it released a new Statement on the Purpose of a Corporation that moved “away from shareholder primacy” as a guiding principle and opted in to a kind of “stakeholder capitalism” (see this PubCo post). Now, just in time for climate week, in another striking sign of changing perspectives, the Business Roundtable has released a new principles-and-policies guide endorsing a new approach to action on climate change. According to the press release, the BRT is now advocating “new principles and policies to address climate change, including the use of a market-based strategy that includes a price on carbon where feasible and effective. Such a strategy would incentivize the development and deployment of breakthrough technologies needed to reduce greenhouse gas (GHG) emissions. To combat the worst impacts of climate change, Business Roundtable CEOs are calling on businesses and governments around the world to work together to limit global temperature rise this century to well below 2 degrees Celsius above pre-industrial levels, consistent with the goals of the Paris Agreement. In the United States, this means reducing net-greenhouse gas emissions by at least 80 percent by 2050 as compared to 2005 levels.” As this article in the WSJ observes, it’s not that the principles and policies break new ground—they don’t—rather, “the significance of the statement is that it shows how business is shifting from a source of resistance to a force for action on climate.”
The SEC may have postponed until next week the open meeting originally scheduled for yesterday to consider adoption of revisions to the shareholder proposal rules, but Reuters has the inside scoop on the outcome of at least one controversial provision: according to Reuters, say farewell to the “momentum” provision. The expected deletion of the provision, Reuters observed, “marks a critical reprieve for supporters of social and environmental motions, which can take years on the ballot to gain traction.” Reuters reports that investors have continued to press the SEC in letters and meetings with SEC staff, hoping to put the kibosh on the proposed amendments altogether. They appear to be having some impact. Will the SEC move ahead in the face of this strong opposition?
In this new study, Equilar and the Rock Center for Corporate Governance at Stanford examine how COVID-19 has affected CEO compensation. Are boards focused more on making sure that CEOs have the right incentives to continue their jobs under trying circumstances? After all, in the case of the pandemic, the trying circumstances are not of their own making. Or are boards more inclined to focus on showing the public and other stakeholders, especially employees, that CEOs are “sharing the pain”? CEO pay attracts a lot of attention in ordinary times, but in times of severe economic distress when corporate performance and stock prices plummet and companies engage in substantial layoffs, furloughs and pay cuts for employees—who likewise are not responsible for the economic crisis—CEO pay can attract intense scrutiny. In those circumstances, paying the same or greater levels of CEO comp can seem unfair to the employees and invite shareholder and public criticism. How have boards addressed this issue?
CFTC report on climate change finds major risk to financial system—advocates enhanced disclosure requirements for public companies
This blog doesn’t typically write about the goings-on at the Commodity Futures Trading Commission, but here’s an exception—especially given that its recommendations encompass the SEC. In July, the CFTC voted to establish a Climate-Related Market Risk Subcommittee, which was asked to provide a report that would “identify and examine climate change-related financial and market risks.” The Subcommittee comprised over 30 financial market participants, including members from “financial markets, the banking and insurance sectors, as well as the agricultural and energy markets, data and intelligence service providers, the environmental and sustainability public policy sector, and academic disciplines focused on climate change, adaptation, public policy, and finance.” That Report was released yesterday. What does it conclude? That “[c]limate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy,” calling for U.S. financial regulators to “move urgently and decisively to measure, understand, and address these risks.” The Report includes 53 recommendations, such as putting an “economy-wide price on carbon,” developing a strategy for integrating climate risks into the monitoring and oversight functions of financial regulators, allowing 401(k) retirement plans to use ESG factors in making investments (contrary to currently proposed controversial DOL regulations) and developing standardized classification systems for physical and transition risks. Importantly, the Report also concludes that current disclosure by U.S. companies is inadequate—in no small part because of what might be a cramped interpretation of the concept of “materiality”—and recommends, as discussed further below, that the SEC update its 2010 guidance on climate risk disclosure and impose specific climate-related disclosure requirements on public companies. Will the Report make a difference?
After taking up the challenge of increasing board gender diversity, companies are now increasingly facing the challenge of achieving board racial diversity. Recent social unrest over systemic racial injustice has pushed racial inequity into sharp relief, leading many companies to consider actions they could take to implement the needed systemic transformation. Because, as it’s often said, change starts at the top, one approach has been to increase the number of African-Americans represented on boards. This recent paper in the Harvard Business Review asks “Why Do Boards Have So Few Black Directors?” And the “Black Corporate Directors Time Capsule Project,” a survey undertaken by Barry Lawson Williams, a retired director who has served on 14 corporate boards, seeks to “capture the experiences” of 50 seasoned Black directors “for the benefit of the next generation of Black corporate directors.” The survey, which in part addresses the issue of recruitment of Black directors, is also replete with other great observations and advice, too extensive to cover in full here, including advice for aspiring directors.
With the SEC presumably about to adopt enhanced disclosure requirements for human capital next week (see this PubCo post), this new report from the World Economic Forum in Davos, prepared in collaboration with consultant Willis Towers Watson, offers a timely new framework for valuing human capital. While the COVID-19 pandemic has increased our focus on the value of the workforce as an asset, this shift in perspective is not entirely new: SEC Chair Jay Clayton has long recognized that, while, historically, companies’ most valuable assets were plant, property and equipment, and human capital was primarily a cost, now, human capital often represents “an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.” But he also recognized that developing a metric around this issue was not so easy. (See this PubCo post.) The pandemic, however, serves as a springboard: the new WEF report contends that, as “companies look to reset for the new world of work that emerges from the pandemic, they would benefit from an approach that values talent as a key asset that contributes to an organization’s sustained value creation. This calls for the development of a new human capital accounting framework, which would enable a company’s board and management to track how their investment in people is augmenting the firm’s human capital, and support the delivery of better outcomes for the business, the workforce and the wider community.” The report seeks to offer that framework. Whether it actually catches on is another question.
We’ve certainly seen any number of examples of companies taking a big hit when sexual harassment of employees by key executives comes to light—sometimes someone even makes a pretty good movie about it. But what about your everyday non-CEO harasser? Does workplace sexual harassment affect the value of the company? Some might argue that it’s just a case of correlation, not causation, but in this study, the authors found that a high incidence of workplace sexual harassment has a powerful adverse impact on company value. Toxic culture, it turns out, matters when it comes to shareholder value.
In a recent survey of over 70 nominating/governance committee chairs of S&P 500 and Fortune 500 companies, consultant SpencerStuart asked respondents about how their boards responded to COVID-19 and the nature of any long-term governance changes they anticipated post-pandemic. Somewhat surprisingly, given the issues COVID-19 has created or highlighted for companies, committee chairs do not appear to be in any kind of rush to institute changes—in fact, quite the opposite seems to be the prevailing perspective. Is it just too soon to be thinking about structural or other adjustments to the board? Or, does “stay at home” also mean “stay the course”?
For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” or “NCJs,” including China. To address this issue, in May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on public companies that are audited by a registered public accounting firm that the PCAOB is unable to inspect, and a version was subsequently passed by the House as an amendment to a defense funding bill. Around the same time, Nasdaq also proposed rule changes aimed at addressing similar issues in restricted markets, including new initial and continued listing standards. (See this PubCo post.) Now, the President’s Working Group on Financial Markets, which includes Treasury Secretary Steven T. Mnuchin, Fed Chair Jerome H. Powell, SEC Chair Jay Clayton and CFTC Chair Heath P. Tarbert, has issued a Report on Protecting United States Investors from Significant Risks from Chinese Companies. The Report makes five recommendations “designed to address risks to investors in U.S. financial markets posed by the Chinese government’s failure to allow audit firms that are registered with the Public Company Accounting Oversight Board (PCAOB) to comply with U.S. securities laws and investor protection requirements.” In this Statement, the SEC Chair Jay Clayton, Chief Accountant Sagar Teotia and the Directors of various SEC Divisions responded to the Report, indicating that Clayton had already “directed the SEC staff to prepare proposals in response to the report’s recommendations for consideration by the Commission and to provide assistance and guidance to investors and other market participants as may be necessary or appropriate. The SEC staff also stands ready to assist Congress with technical assistance in connection with any potential legislation regarding these matters.”
In 2018, in recognition of the increasing expectation of shareholders to see disclosure regarding material environmental, social and governance issues that affect financial performance and communities, Senator Mark Warner asked the GAO to prepare a report on public company disclosure regarding ESG. That report has now been issued. According to Warner, “[m]ost institutional investors find current company financial disclosures limited in their usefulness, and augment company disclosures through burdensome engagement with the company, purchasing third party compilation data, or initiating shareholder proposals. It is time for the SEC to establish a task force to establish a robust set of quantifiable and comparable ESG metrics that all public companies can adhere to.” Although SEC Chair Jay Clayton has acknowledged “the growing drumbeat for ESG reporting standards,” he has made clear his lack of enthusiasm for imposing a prescriptive sustainability disclosure requirement that goes beyond principles-based materiality. (See, e.g., this PubCo post and this PubCo post.) Will the SEC address the drumbeat?