Category: Corporate Governance
“Diversity washing” is the new greenwashing
Is greenwashing old news? The latest component of ESG to be subject to a good scrubbing is diversity: specifically, “diversity washing.” What’s that? According to this paper authored by academics from several institutions, including Chicago Booth and the Rock Center for Corporate Governance at Stanford, there are a number of companies that actively promote their commitments to diversity, equity and inclusion in their public communications but, in actuality, their hiring practices, well, don’t quite measure up. The authors label companies with significant discrepancies—companies that “discuss diversity more than their actual employee gender and racial diversity warrants—as ‘diversity washers.’” What’s more, the authors found, companies that engaged in diversity washing received better ratings from ESG rating firms and were often financed by ESG-focused funds, even though these companies were “more likely to incur discrimination violations and pay larger fines for these actions.” The authors cautioned companies that getting a handle on the level of misrepresentation in this area is important because “a failure to adequately address deficiencies in DEI has real effects on firms, including costly ESG audits initiated by activist shareholders, increased scrutiny from regulators, and bad publicity that can negatively affect customer loyalty.” Not to mention the “social and economic loss” for ESG investors.
Geopolitics moves from the cocktail party to the boardroom
According to experts cited in this article from the WSJ, “[g]overnments are increasingly using ‘financial levers’ to advance national security goals,” a development that “has clear implications for businesses.” The war in Ukraine, with its related Russia sanctions, as well as the ongoing political tensions—and related tariffs and trade restrictions—with other countries to which we have deep economic ties have led risk experts to anticipate “more volatility ahead rather than less.” To be sure, war, political tensions and economic instability can affect companies’ current and prospective businesses. The Global Risks Perception Survey released this month by the World Economic Forum ranked “geoeconomic confrontation” as number three among the top ten identified risks over the next two years. Accordingly, conversations about geopolitics that, say, ten years ago might have been reserved for cocktail parties are now taking place among managements and boards, leading some companies to recognize the need for a “geopolitical risk management function.” In this article, “Board Oversight of Geopolitical Risks and Opportunities,” two academics at the IMD Global Board Center offer a framework designed to help boards implement effective oversight of geopolitical risk. To provide some insight into how boards are currently implementing oversight of geopolitical risk, Corporate Secretary has published the findings of a survey of governance professionals in a new report, “Geopolitical and economic risks: Board oversight in an evolving world.”
Audit committee oversight of ESG fraud risk
In this article, accounting firm Deloitte observes that boards and managements often experience “denial” when the topic of fraud risk arises—no one wants to feel that the trust they place in their own employees is actually misplaced. Still, fraud risk is one topic that typically finds its way onto the agendas of audit committees. Deloitte advises that, with the current attention to ESG and in anticipation of new rulemaking from the SEC on disclosure related to climate, human capital and other ESG-related topics (see this PubCo post), “fraud risk in this area should be top of mind for audit committees and a focal point in fraud risk assessments overseen by the audit committee.” While audit committees focus primarily on financial statement fraud risk, Deloitte suggests that audit committees should consider expanding their attention to fraud risk related to ESG, an area that is “not governed by the same types of controls present in financial reporting processes,” and, therefore, may be more susceptible to manipulation. In their oversight capacity, audit committees have a role to play, Deloitte suggests, by engaging with “management, including internal audit, fraud risk specialists, and independent auditors to understand the extent to which fraud risk is being considered and mitigated.”
SEC crams much into packed Fall 2022 agenda
The SEC’s Fall 2022 Reg-Flex Agenda—according to the preamble, compiled as of October 6, 2022, reflecting “only the priorities of the Chair”—has just been posted, and it looks like the SEC will have another frenetic year ahead dealing with new and pending proposals—and so will we. Describing the new agenda, SEC Chair Gary Gensler said that it “reflects the need to modernize our ruleset, moving deliberately to update our rules in light of ever-changing technologies and business models in the securities markets. Our ability to meet our mission depends on having an up-to-date rulebook—consistent with our mandate from Congress, guided by economic analysis, and shaped by public input.” Here are the short-term and long-term lists, which show all Corp Fin agenda items scheduled for action by either April or October 2023, with the first four months looking especially jam-packed. There’s no dispute that the agenda is laden with major proposals, and many of these proposals—climate disclosure, cybersecurity, SPACs, share buybacks—are apparently at the final rule stage. Implementing all of these proposals, if adopted, would likely represent a challenge for many companies; whether overwhelmingly so remains to be seen.
SEC adopts new rules on 10b5-1 plans [UPDATED]
[This post revises and updates my earlier post primarily to provide a more detailed discussion of the contents of the adopting release.]
At an open meeting in December last year—happy new year!—the SEC voted to adopt new rules regarding Rule 10b5-1 plans. The vote was unanimous—albeit somewhat grudgingly in one case. Still, the notion of unanimity on an important Corp Fin regulation has seemed like something of a pipe dream in the last several years. Commissioner Mark Uyeda was even complimentary of the process employed for this rulemaking—and he is typically quite critical of the process (see this PubCo post)—noting that the process employed this time facilitated the development of more responsive final rules. And did I detect a note of relief in the Chair’s voice? Perhaps the unanimity was in part the result of concerns long expressed about potential abuse of Rule 10b5-1 plans—from studies reported in media to letters from Senators to recent probes conducted by the SEC and DOJ (see this PubCo post, this PubCo post and this PubCo post). These concerns have been percolating for many years, and the adoption of rules adding new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: Rule 10b5-1 plans, he said in 2021, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post.) The final amendments add new conditions to the availability of the Rule 10b5-1(c) affirmative defense, including cooling-off periods for directors, officers and persons other than issuers, and create new disclosure requirements. According to Gensler, “[a]bout 20 years ago, the SEC established Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith—before becoming aware of material nonpublic information. Over the past two decades, though, we’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those potential gaps….These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that’s a good thing. It helps investors decide where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation.”
Nasdaq simplifies “confusing” timing requirements for board diversity rules
A new rule change designed to simplify the rules regarding the timing of compliance with the Nasdaq board diversity listing rules has been filed by Nasdaq and declared immediately effective. As you probably remember, on August 6, 2021, the SEC approved Nasdaq’s proposal for new listing rules regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards in a matrix format. (See this PubCo post.) Now, Nasdaq acknowledges that the formulation of the compliance deadlines, which were tied to the approval date of the proposal by the SEC, is “confusing and unnecessarily complicated.” Not Nasdaq’s fault though—it meant well! At the time of filing of the proposal, “Nasdaq and listed companies could not know when the proposal would be approved,” and Nasdaq “wanted to assure that listed companies had at least one year from the approval of the rules, or until their next annual meeting, to take necessary actions to satisfy the requirements” of the rules. Nasdaq is now making technical changes to several rules to address that problem by eliminating complicated references to the SEC approval date, and instead requiring compliance by December 31st of the applicable year (which, according to Nasdaq, is the fiscal year-end for approximately 80% of Nasdaq-listed companies subject to the rules).
Happy Holidays!
Finally, a unanimous vote—SEC adopts new rules on 10b5-1 plans
At an open meeting yesterday, the SEC voted to adopt new rules regarding Rule 10b5-1 plans. The vote was unanimous—albeit somewhat grudgingly in one case. Still, the notion of unanimity on an important Corp Fin regulation has seemed like something of a pipe dream in the last several years. Commissioner Mark Uyeda was even complimentary of the process employed for this rulemaking—and he is typically quite critical of the process (see this PubCo post)—noting that the process employed this time facilitated the development of more responsive final rules. Did I detect a note of relief in the Chair’s voice? Perhaps the unanimity was in part the result of concerns long expressed about potential abuse of Rule 10b5-1 plans—from studies reported in media to letters from Senators to probes conducted by the SEC and DOJ (see this PubCo post, this PubCo post and this PubCo post). These concerns have been percolating for many years, and the adoption of rules adding new conditions to the use of the Rule 10b5-1 affirmative defense and new disclosure requirements for 10b5-1 plans has long been anticipated. After all, these plans were one of the first rulemaking targets that SEC Chair Gary Gensler identified after he was sworn in as Chair: 10b5-1 plans, he said last year, “have led to real cracks in our insider trading regime” and called for a proposal to “freshen up” these rules. (See this PubCo post.) The final amendments add new conditions to the availability of the Rule 10b5-1(c) affirmative defense, including cooling-off periods for directors, officers, and persons other than issuers, and create new disclosure requirements. According to Gensler, “[a]bout 20 years ago, the SEC established Exchange Act Rule 10b5-1. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith—before becoming aware of material nonpublic information. Over the past two decades, though, we’ve heard from courts, commenters, and members of Congress that insiders have sought to benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information. I believe today’s amendments will help fill those potential gaps….These issues speak to the confidence that investors have in the markets. Anytime we can increase investor confidence in the markets, that’s a good thing. It helps investors decide where to put their money. It lowers the cost of capital for businesses seeking to raise capital, grow, and innovate, and thus facilitates capital formation.”
Corp Fin urges companies to amp up disclosure on impact of crypto market developments
Last week, Corp Fin posted another sample comment letter—this one urging affected companies to provide “specific, tailored disclosure” about the “disruption” in the crypto markets and collateral events, the “company’s situation in relation to those events and conditions, and the potential impact on investors.” The sample comments focus on “the material impacts of crypto asset market developments, which may include a company’s exposure to counterparties and other market participants; risks related to a company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations, or regulatory impacts in the crypto asset markets.” Below is a brief summary.
Corp Fin posts new CDIs regarding the use of universal proxy cards
Corp Fin has issued three new CDIs regarding universal proxy. In November 2021, the SEC amended the federal proxy rules to mandate the use of universal proxies in all non-exempt solicitations in connection with contested elections of directors of operating companies. By mandating the use of universal proxies—proxy cards that, when used in a contested election, include a complete list of all candidates for director duly nominated by both management and dissidents—the SEC’s rules now allow a shareholder voting by proxy to choose among director nominees in an election contest in a manner that closely mirrors in-person voting. (See this PubCo post.) The new CDIs address questions that have arisen in connection with compliance by dissident shareholders with advance notice provisions and the use by dissident shareholders of their own proxy cards. Below are brief summaries.
SEC reopens comment period (again) for proposal on stock buyback disclosure
Yesterday, the SEC announced that it was reopening (again) the public comment period for its proposed rule on stock buyback disclosure modernization, a rule proposed at the end of 2021. (Remember that the comment period for this proposal was previously reopened in October because of the “technical glitch.” See this PubCo post.) The proposal is focused on enhancing disclosure by requiring more detailed and more frequent and timely disclosure about stock buybacks. (See this PubCo post.) Why did the SEC reopen the buyback proposal comment period? Because, at the time the proposal was issued, the Inflation Reduction Act of 2022 had not yet been enacted, which meant that the implications of that Act could not be considered as part of the proposal’s original cost/benefit analysis. However, as demonstrated in a new memo from the SEC’s Division of Economic and Risk Analysis, the excise tax on stock buybacks imposed under the IRA could affect that analysis, and consequently, the public’s evaluation of the proposal. As a result, the SEC determined to make the DERA memo part of the comment file and to reopen the comment period for an additional 30 after publication of the reopening release in the Federal Register.
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