Once again, a “control failure” is a lever used by SEC Enforcement to bring charges against a company, this time for failure to timely disclose a cybersecurity vulnerability. Yesterday, the SEC announced settled charges against a real estate settlement services company, First American Financial Corporation, for violation of the requirement to maintain adequate disclosure controls and procedures “related to a cybersecurity vulnerability that exposed sensitive customer information.” This action follows charges regarding control violations against GE (see this PubCo post), HP, Inc. (see this PubCo post) and Andeavor (see this PubCo post) where, instead of attempting to make a case about funny accounting or, in Andeavor, a defective 10b5-1 plan, the SEC opted to make its point by, among other things, charging failure to maintain and comply with internal accounting controls or disclosure controls and procedures. Companies may want to take note that charges related to violations of the rules regarding internal controls and disclosure controls seem to be increasingly part of the SEC’s Enforcement playbook, making it worthwhile for companies to make sure that their controls are in good working order. Perhaps we should pirate the Matt Levine mantra, “everything is securities fraud” (see this PubCo post): how ’bout “everything is also a control failure”?
Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock. What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8. The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
How often does this happen? SEC Commissioners Allison Lee (D) and Elad Roisman (R) on the same page? Ok, well, maybe they’re just on the same fragment of a sentence, but still…. Bloomberg is reporting that, at the WSJ’s CFO Network Summit, Lee expressed her view that companies’ compliance with any new SEC disclosure requirements on ESG should not be subject to “gotcha” enforcement, instead indicating that companies will be cut plenty of slack in experimenting with any new ESG rules that the SEC may adopt. She also offered several suggestions that, interestingly, were quite consistent with suggestions made last week by Roisman to mitigate the cost of compliance.
Audit firm Deloitte and the Alliance for Board Diversity have just released the Missing Pieces Report: The Board Diversity Census of Women and Minorities on Fortune 500 Boards, a study examining the representation of women and racial/ethnic minorities (including Black, Asian/Pacific Islander and Hispanic persons) on public company boards among the Fortune 100 and Fortune 500 companies. The analysis of the Fortune 100 began in 2004 and the Fortune 500 in 2010, based on public filings reviewed through the end of June 2020. The Report finds that the rate of change has been quite slow, espcially for some demographic groups. It remains to be seen whether the social unrest roiling the U.S. body politic—which has brought systemic racial inequity and injustice, exacerbated by the pandemic, into sharp focus—together with actions to mandate or encourage board diversity, such as California’s AB 979 or, if approved, the Nasdaq board diversity proposal, will accelerate the rate of change evidenced in the Report.
Yesterday, in remarks before the WSJ’s CFO Network Summit, SEC Chair Gary Gensler scooped the Summit with news of plans to address issues he and others have identified in Rule 10b5-1 plans. Problems with 10b5-1 plans have long been recognized—including by former SEC Chair Jay Clayton—so it will be interesting to see if any proposal that emerges will find support among the Commissioners on both sides of the SEC’s aisle. In an interview, Gensler also responded to questions about climate disclosure rules, removal of the PCAOB Chair, Enforcement, SPACs and other matters.
Earlier this week, SEC Commissioner Allison Lee delivered keynote remarks at the 2021 ESG Disclosure Priorities Event hosted by the AICPA, the Chartered Institute of Management Accountants, SASB and the Center for Audit Quality. Her topic: “Myths and Misconceptions about ‘Materiality.’” In the context of the discussion about potential mandatory ESG disclosures, Lee observed, there has been a lot of attention to the concept of materiality, which is fundamental to our securities laws. The public company disclosure system “is generally oriented around providing information that is important to reasonable investors,” and “the viewpoint of the reasonable investor is the lens through which we all are meant to operate.” Since investors are the ones who make the investment choices, “investors are also the ones who decide what information they need to make those choices.” But, in the course of the ongoing discourse about ESG, Lee has found that a number of myths have proliferated about the role and meaning of materiality; her purpose in these remarks is to dissect and dispel those myths, which she believes have hampered the “important debate on how best to craft a rule proposal on climate and ESG risks and opportunities.”
Leadership survey: How prepared are leaders to face key business issues? Do executives think boards give good advice?
While it’s certainly not yet in the rear-view mirror, as we start to see COVID-19 begin to fade as an all-consuming crisis for business—thank you science and scientists!—what are the next issues that corporate leaders must face and how ready are they to face them? Consultant Russell Reynolds Associates has just released its 2021 Global Leadership Monitor, designed to track top business issues and monitor leadership preparedness. Some of the more interesting findings: In terms of “stakeholder capitalism,” while customers are top of the heap, employees come in second as key stakeholders—ahead of stockholders. Most fascinating perhaps is this revelation: 40% of CEOs and other C-Suite executives “don’t believe the executive team receives good advice and input from the board.”
As reported by Bloomberg, Acting Corp Fin Director John Coates told a webinar audience that mandatory ESG disclosures were “overdue,” and that the SEC was moving quickly on related rulemaking. In the webinar, sponsored by NYU’s Institute of Accounting Research and the Institute for Corporate Governance & Finance, Coates said that he expects the SEC to soon be in a position to review and consider staff proposals for mandatory prescriptive rules on ESG addressing both general and industry-specific requirements. These actions are expected to be the SEC’s most significant action on climate since the 2010 guidance. (See this PubCo post.)
The outside pressure has been on. As reported by Bloomberg, “[e]nvironmental advocates in cities including New York, Miami, San Francisco, London and Zurich targeted BlackRock for a wave of protests in mid-April, holding up images of giant eyeballs to signal that ‘all eyes’ were on BlackRock’s voting decisions.” Of course, protests outside of the company’s offices by climate activists are nothing new. But why this pressure on BlackRock? BlackRock and its CEO, Laurence Fink, have played an outsized role in promoting corporate sustainability and social responsibility, announcing, in 2020, a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post.) Yet, BlackRock has historically conducted extensive engagement with companies and, in the end, voted with management much more often than activists preferred; for example, in the first quarter of 2020, the company supported less than 10% of environmental and social shareholder proposals and opposed three environmental proposals. As a result, as reflected in press reports like this one in the NYT, activists have reacted to the appearance of stark inconsistencies between the company’s advocacy positions and its proxy voting record. Even a group of Democratic Senators highlighted that inconsistency in this October 2020 letter, characterizing the company’s voting record on climate issues as “troubling and inconsistent.” But that impression may be about to change. In an interview with Reuters, BlackRock’s global head of investment stewardship since 2020 revealed that the company is “‘accelerating the pace of our stewardship activities; resulting in more engagement and more voting, reflecting heightened expectations, which … are just a function of the urgency of some of the issues.’” Indeed, in the first quarter of 2021, BlackRock supported 12 of 16 environmental and social shareholder proposals.
With the passage of SB 826 in 2018, California became the first state to mandate board gender diversity (see this PubCo post). In 2020, the California Partners Project, which was founded by California’s current First Lady, released a progress report on women’s representation on boards of California public companies, tracking the changes in gender diversity on California boards since enactment of the law. That same year, AB 979 was signed into law in California. That bill was designed to do for “underrepresented communities” on boards of directors what SB 826 did for board gender diversity. (See this PubCo post.) The CPP has just released a new report that not only updates its 2020 progress report on board gender diversity, but also provides data on women of color on California’s public company boards. The takeaway is that, while there has been tremendous progress in increasing the number of women on boards, nevertheless, much work remains “to tap all of our talent and achieve racial and cultural equity. Most women on California’s corporate boards are white, while women of color—especially Latinas—remain severely underrepresented.” In addition to new data, the report offers some strategies for overcoming these deficits in diversity.