Category: Corporate Governance
Commissioner Roisman talks cybersecurity
On Friday, in remarks before the L.A. County Bar Association, SEC Commissioner Elad Roisman addressed some of the challenges associated with cybersecurity and cyber breaches and similar events. In his presentation, Roisman considers cybersecurity in a variety of contexts, such as the exchanges, investment advisers and broker-dealers, but his discussion of cybersecurity in the context of public companies is of most interest here. Although the SEC has imposed some principles-based requirements and issued guidance about cybersecurity disclosure, Roisman believes that there is more in the way of guidance and even rulemaking that the SEC should consider “to ensure that companies understand [the SEC’s] expectations and investors get the benefit of increased disclosure and protections by companies.”
Upcoming corporate governance forum and new resource for public companies
A new conference and a new public company resource!
What are the latest trends in SOX 404 reporting?
As you probably recall, SOX 404 requires public reporting companies to disclose the effectiveness of their internal control over financial reporting. SOX 404(a) public companies to provide an assessment of ICFR by management; SOX 404(b) requires public companies—other than non-accelerated filers and emerging growth companies—to provide an auditor attestation regarding management’s assessment of the effectiveness of ICFR. A new study by Audit Analytics examining the most recent trends in SOX 404 disclosures over 17 years showed a decline in the number of adverse auditor attestations—auditor attestations indicating ineffective ICFR—and adverse management assessments, while the number of adverse management-only assessments increased. Why that variation? Could it reflect the effect of the recent SEC carve-out from the 404(b) requirement for low-revenue companies?
SEC Acting Chief Accountant urges scrutiny of auditor independence in current environment
This week, Acting Chief Accountant Paul Munter issued a statement regarding the importance of auditor independence—a concept that is “foundational to the credibility of the financial statements.” The responsibility to monitor independence is a shared one: “[w]hile sourcing a high quality independent auditor is a key responsibility of the audit committee, compliance with auditor independence rules is a shared responsibility of the issuer, its audit committee, and the auditor.” That has long been the case. But what is happening in the current setting to prompt this statement? It is the recent trend toward the use of “new and innovative transactions” to access the public markets, such as SPACs, together with the continued expansion by audit firms of business relationships with non-audit clients. That is, gatekeepers must be especially vigilant to prevent an audit firm from unwittingly losing its independence in the event of a transaction by an audit client with a non-audit client, a risk that is enhanced as audit firms engage in consulting relationships with more non-audit clients. This environment, Munter cautions, requires audit committees to be especially attentive in considering “the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that potentially affect auditor independence.” And it requires audit firms to consider “the impact of business relationships and non-audit services on existing and prospective audit relationships.” It is important for companies to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should certainly be a recurring menu item on the audit committee’s plate.
NAM sues SEC over decision not to enforce proxy advisory firm rules
For years, many companies and business lobbies, such as the National Association of Manufacturers, repeatedly raised concerns about proxy advisory firms’ concentrated power and significant influence over corporate elections and other matters put to shareholder votes, leading to questions about whether these firms should be subject to more regulation and accountability. (See, e.g., this PubCo post, this PubCo post and this PubCo post.) In July 2020, the SEC adopted, by a vote of three to one, new amendments to the proxy rules regarding proxy advisory firms. At the time of adoption of the new rules, then-SEC Chair Jay Clayton observed that the final rules were the product of a 10-year effort—commencing with the SEC’s 2010 Concept Release on the U.S. Proxy System—which led to “robust discussion” from all market participants. Commissioner Allison Herren Lee, who dissented, objected to the rule changes as “unwarranted, unwanted, and unworkable.” When new SEC Chair Gary Gensler was confirmed, he asked the SEC staff to take another look at the rule amendments, and Corp Fin stated that, during the reconsideration period, it would not recommend enforcement action. Now, as reported on thecorporatecounsel.net blog, NAM has just announced that it has filed suit in federal court against the SEC for failure to enforce its final rules on proxy advisory firms.
Hearing on board gender diversity statute—will the court issue a preliminary injunction?
On October 19, a federal district court judge held a hearing on a motion for a preliminary injunction in Meland v. Weber, a case challenging SB 826, California’s board gender diversity statute, on the basis that it is unconstitutional under the equal protection provisions of the 14th Amendment. The judge had previously dismissed the case on the basis of lack of standing, but was reversed by the 9th Circuit. What did the hearing reveal?
The Conference Board reports on board diversity
The Conference Board has just released a new report, Corporate Board Practices in the Russell 3000, S&P 500, and S&P MidCap 400: 2021 Edition, a primary focus of which is board diversity. According to the press release, the study is the “most current and comprehensive review of board composition, director demographics, and governance practices at US public companies.” Key to the study is that more companies are now actually disclosing the racial and ethnic composition of their boards (based on self-reporting by directors): companies providing data are up from 24% of the S&P 500 in 2020 to 59% in 2021, and from 7.7% of the Russell 3000 in 2020 to 26.9% in 2021. With regard to progress in board diversity, the data shows that women have made significant advances—on the Russell 3000 this year, women represented about 38% of this year’s newly elected class of directors, bringing total representation of women on Russell 3000 boards to 24.4%, up from 21.9% in 2020. However, boards have significant catching up to do when it comes to racial and ethnic diversity. Based on self-reported data, “boards remain overwhelmingly white,” and, for 2021, the class of new directors was 78.3% white, with only 11.5% African-American, 6.5% Latinx/Hispanic and 3.1% Asian, Hawaiian or Pacific Islander.
Investors urge governments to act on climate, including risk disclosure
A group of 587 institutional investors managing over $46 trillion in assets have signed a new statement calling on governments to undertake five priority actions to accelerate climate investment before COP26, the 26th United Nations Climate Conference in Glasgow in November. The statement, the 2021 Global Investor Statement to Governments on the Climate Crisis, was coordinated by The Investor Agenda, a group founded by Asia Investor Group on Climate Change, CDP, Ceres, Investor Group on Climate Change, Institutional Investors Group on Climate Change, Principles for Responsible Investment and UNEP Finance Initiative. According to the Agenda, the statement comes after “a month which brought more catastrophic weather events around the world, and the alarming predictions of the Intergovernmental Panel on Climate Change that without immediate, rapid and large-scale emissions reductions, limiting global warming to 1.5 degrees Celsius will be beyond reach. The risks this brings to the portfolios of asset managers and owners are enormous.” The statement urges governments to address the “gaps—in climate ambition, policy action and risk disclosure—[that] need to be addressed with urgency.”
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