Category: Corporate Governance

SEC charges CBRE for violation of whistleblower protections

One area where SEC Enforcement appears to have focused its attention recently is whistleblower protections. In this Order against CBRE, Inc., the SEC brought settled charges against the commercial real estate services and investment firm for using an employee release form that the SEC alleged violated Exchange Act Rule 21F-17, the SEC’s whistleblower protection rule. The purpose of the whistleblower provisions in the Exchange Act, added in 2010 as part of Dodd-Frank, was to “encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections.” To prevent obstruction of that reporting, the SEC adopted Rule 21F-17, which provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” The SEC’s order found that, “by conditioning separation pay on employees’ signing the release, CBRE took action to impede potential whistleblowers from reporting complaints to the Commission.” According to an SEC Regional Director, it “is critical that employees are able to communicate with SEC staff about potential violations of the federal securities laws without compromising their financial interests or the confidentiality protections of the SEC’s whistleblower program….We commend CBRE for its swift and far-reaching remediation and for its high level of cooperation with our staff, which is reflected in the terms of the resolution.” Is it time to take another look at your employee separation agreements and release forms?

Cydney Posner / September 21, 2023

Corporate Governance ESG Executive Compensation

Alliance Advisors wraps up the 2023 proxy season

Alliance Advisors, a proxy solicitation and corporate advisory firm, has posted its 2023 Proxy Season Review, an analysis of trends from the 2023 proxy season. Its principal message: ESG proposals saw sagging results again this year, “continuing a downward trend” from 2021. Although the number of shareholder proposals submitted to U.S. public companies was substantial (958 as of June 30, 2023, compared with 987 for all of 2022), Alliance Advisors reports that there was a dramatic decline from last year in “average support across all categories of shareholder proposals,” and “the number of majority votes plunged from 80 in 2022 to 28 in the first half of 2023.” More specifically, according to Alliance, average support on governance proposals fell to 29.9% in 2023 from 37.4% in 2022 and 38.4% in 2021, and there was a bit of a roller-coaster effect on compensation-related proposals, where average support declined to 23.7% in 2023 from 31.4% in 2022 but increased from 21% in 2021. Most pronounced was the change in average support for environmental and social (E&S) proposals, which declined to 18.3% in 2023 from 27.3% in 2022 and 37.2% in 2021. Will it turn out that 2021 was the “high-water mark” for shareholder proposals on ESG? The report explores trends in shareholder proposals and examines what may account for the flagging voting results.

Cydney Posner / September 18, 2023

Corporate Governance ESG Securities

California climate bills head to Governor— will he sign? [reposted]

Two far-reaching California climate bills, together the “Climate Accountability Package,” have passed in the California legislature and are headed to Governor Gavin Newsom for a final decision. If signed into law, Senate Bill 253, the Climate Corporate Data Accountability Act, would mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities (public or private) with total annual revenues in excess of a billion dollars that “do business in California.” SB 253 has been estimated to apply to about 5,300 companies. Final amendments to the companion bill, SB261, Greenhouse gases: climate-related financial risk, passed in the California legislature yesterday. SB 261, with a lower reporting threshold of total annual revenues in excess of $500 million, would require subject companies to prepare reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describing their measures adopted to reduce and adapt to that risk. SB 261 has been estimated to apply to over 10,000 companies. While there has been substantial opposition to these bills, Bloomberg has reported that “[c]orporate support for the legislation has been growing this year. More than a dozen companies have submitted a letter to lawmakers in support of SB 253” and another dozen wrote in support of SB 261, including, in both cases, some very familiar names. Will the Governor sign these bills into law? Newsom has not yet weighed in. According to the NYT, historically, Newsom “has championed aggressive new climate measures,” but, on SB 253, he has been “uncharacteristically quiet,” perhaps given that his “administration’s finance department issued an analysis in July that opposed the emissions reporting legislation.” Newsom has until October 14 to sign or veto the bills. If he does neither, the measures will become law automatically.

Cydney Posner / September 14, 2023

Corporate Governance Corporate law ESG

Starbucks decision to adopt DEI initiative within Board’s business judgment

In August last year, the National Center for Public Policy Research filed a complaint against Starbucks and its officers and directors, National Center for Public Policy Research v. Schultz, alleging that they caused Starbucks to adopt a group of policies that discriminate based on race in violation of a “wide array of state and federal civil rights laws.” Starbucks characterized the policies as designed to “realize its ‘commitment to Inclusion, Diversity, and Equity[.]’” Starbucks, its officers and directors moved to dismiss, and a hearing on the motion was held on August 11, 2023. At the hearing, the Federal District Court for the Eastern District of Washington granted the motion to dismiss with prejudice and closed the case. A month on, the Court’s Order has now been released. While the Order discusses the various legal bases for the dismissal, the Court’s sentiment was perhaps best summed up by its statement in the Order that “[t]his Complaint has no business being before this Court and resembles nothing more than a political platform.” Much like the recent decision of the Delaware Chancery Court in Simeone v. The Walt Disney Company, the Court concluded that “[c]ourts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations.” Are we starting to see a trend with regard to board business decisions about corporate social policy?

Cydney Posner / September 13, 2023

Accounting and Auditing Corporate Governance Litigation

SEC charges Fluor with improper accounting and inadequate internal accounting controls

In this Order, the SEC brought settled charges against Fluor Corporation, a global engineering, procurement and construction company listed on the NYSE, in connection with alleged improper accounting on two large-scale, fixed-price construction projects. Five current and former Fluor officers and employees were also charged. (The press release includes links to the orders for the five individuals.) Fixed-price contracts mean that cost overruns are the contractor’s problem, not the customer’s, and Fluor’s bids on the two projects were based on “overly optimistic cost and timing estimates.” When Fluor experienced cost overruns, the SEC alleged, Fluor’s internal accounting controls failed, with the result that Fluor used improper accounting for these projects that did not comply with the percentage-of-completion accounting method under GAAP, leading Fluor to materially overstate its net earnings for several annual and quarterly periods. A restatement ultimately followed. Fluor agreed to pay a civil penalty of $14.5 million and the officers to pay civil penalties between $15,000 and $25,000. According to the Associate Director in the Division of Enforcement, “[d]ependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on….We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”

Cydney Posner / September 11, 2023

Corporate Governance Securities

Nasdaq proposes to amend listing rules regarding waivers of code of conduct

Yesterday, the SEC posted, and declared immediately effective, a Nasdaq rule proposal that would modify the requirements related to waiver of the code of conduct in Listing Rules 5610 and IM-5610. Under current listing rules, all listed companies must adopt a code of conduct (which must meet the definition of a “code of ethics” in SOX 406(c)), applicable to all directors, officers and employees, and make that code publicly available. Each code of conduct must also contain an enforcement mechanism that ensures prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations. Under current listing rules, waivers of the code for directors or executive officers must be approved by the Board and must be publicly disclosed. The proposal expands the approval authority for code waivers and adds new time deadlines for disclosure of code waivers by foreign private issuers. Companies may want to review their codes of conduct to make changes as appropriate.

Cydney Posner / September 6, 2023

Accounting and Auditing Corporate Governance Securities

SEC Chief Accountant warns against narrow focus in risk assessments

In this Statement, The Importance of a Comprehensive Risk Assessment by Auditors and Management, SEC Chief Accountant Paul Munter cautions auditors and company managements against conducting risk assessments that focus too narrowly “on information and risks that directly impact financial reporting, while disregarding broader, entity-level issues that may also impact financial reporting and internal controls.” Similarly, auditors and managements may sometimes dismiss isolated incidents, perhaps as a result of confirmation bias, without adequately analyzing whether these issues might be indicative of larger issues that require responsive action and disclosure. Munter warns that “[s]uch a narrow focus is detrimental to investors as it can result in material risks to the business going unaddressed and undisclosed, thereby diminishing the quality of financial information.” Management, Munter warns, must “take a holistic approach when assessing information about the business and avoid the potential bias toward evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks.” Managements and audit committees may want to take note.

Cydney Posner / August 30, 2023

Corporate Governance ESG Litigation

Is California going to set the gold standard on climate disclosure?

Are you fretting about when (or if) the SEC is going to take action on its climate disclosure proposal and what exactly the SEC has in store for public companies in its final regulations? Consider this: California might just beat the SEC to the punch. You might remember that, in 2021, a California State Senator introduced the Climate Corporate Accountability Act, which failed last year after sailing through one chamber of the legislature but coming up one vote shy in the second (see this PubCo post). But that bill was re-introduced this year as the Climate Corporate Data Accountability Act (SB 253) and packaged with other bills, notably SB 261, Greenhouse gases: climate-related financial risk, into California’s Climate Accountability Package, a “suite of bills,” according to the press release, “that work together to improve transparency, standardize disclosures, align public investments with climate goals, and raise the bar on corporate action to address the climate crisis. At a time when rising anti-science sentiment is driving strong pushback against responsible business practices like risk disclosure and ESG investing,” the press release continued, “these bills leverage the power of California’s market to continue the state’s long tradition of setting the gold standard on environmental protection for the nation and the world.” (See this PubCo post.) If signed into law this time, SB 253 would mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” SB 261, with a lower reporting threshold of $500 million, would require subject companies to prepare reports disclosing their climate-related financial risk, in accordance with TCFD framework, and describe their measures adopted to reduce and adapt to that risk. If signed into law, according to Bloomberg, SB 253 would apply to over 5,300 companies and SB 261 would apply to over 10,000 companies. But, given their history, what makes anyone think these bills will be signed into law this time? As Politico observes, “[w]hen do you know a bill might have legs? When there’s a bit of horse-trading going on.” And that’s apparently just what’s been happening recently with these bills.

Cydney Posner / August 21, 2023

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