Category: Corporate Governance

Company charged for improper intra-company foreign exchange transactions

On Tuesday, the SEC announced settled charges against Baxter International Inc., its former Treasurer and Assistant Treasurer, for misconduct related to improper intra-company foreign exchange transactions that resulted in the misstatement of the company’s net income. From at least 1995 to 2019, the SEC alleged, Baxter converted foreign-currency-denominated transactions and assets and liabilities on its financial statements using its own “convention”—not in accordance with U.S. GAAP. Then, beginning around 2009, the SEC charged, Baxter leveraged the convention to devise a series of non-operating intra-company foreign exchange transactions “for the sole purpose of generating foreign exchange accounting gains or avoiding foreign exchange accounting losses.” In the order against Baxter, the SEC found that the company violated the negligence-based anti-fraud, public reporting, books and records, and internal accounting controls provisions of the federal securities laws and imposed an $18 million penalty. In this order and this order, the SEC found that the company’s Treasurer “did not take any steps to investigate how Baxter’s treasury department generated consistent gains or whether the transactions that generated the gains were permissible,” and that the Assistant Treasurer, working with others at his direction, was “primarily responsible for executing the transactions.” The Treasurer and Assistant Treasurer were determined to have violated the negligence-based anti-fraud provisions of the federal securities laws and to have caused Baxter’s public reporting and books and records violations.

Are staggered boards ever good for shareholders?

In the folklore of corporate governance, is there a governance structure that is more anathema to corporate governance mavens and shareholder democracy activists than the staggered board? (Ok, that’s an exaggeration, but you get my point.)  Proxy advisory firms and activists oppose them, institutional investors vote against them and shareholders proposals to eliminate them are unusually successful.  Staggered boards, where subsets of board members are elected in separate classes every three years—and therefore cannot be easily or quickly voted out—are often viewed as the archetypal technique to prevent hostile takeovers.  Opponents also argue that staggered boards entrench boards and managements by insulating them from the shareholders and making it tough for shareholders to dethrone the CEO. That has to be bad for the company, right? Not so fast, says this study co-authored by a professor at Stanford Graduate School of Business and Stanford Law School. According to the author, quoted in Insights by Stanford Business, “[f]rom Adam Smith on, the concern of corporate governance has been how to mind the managers….Corporate governance has been about building up checks and monitors on the managers. The idea is that if we can fire them, and they know we can fire them, then maybe they will do the right thing.”  But for some companies—in this case, early-life-cycle technology companies facing more Wall Street scrutiny—the evidence showed that, by allowing managers to focus on long-term—perhaps bolder and riskier—investments and innovations, staggered boards can actually be a benefit.

The ongoing debate at the SEC: just how tough should the climate disclosure rule be?

Who doesn’t love the latest gossip—I mean reporting—about internal squabbles—I mean debate—at the SEC? This news from Bloomberg sheds some fascinating light on reasons for the ongoing delay in the release of the SEC’s climate disclosure proposal: internal conflicts about the proposal. But, surprisingly, the conflicts are not between the Dems and the one Republican remaining on the SEC; rather, they’re reportedly between SEC Chair Gary Gensler and the two other Democratic commissioners, Allison Herren Lee and Caroline Crenshaw, about how far to push the proposed new disclosure requirements, especially in light of the near certainty of litigation, and whether to require that the disclosures be audited.  Just how tough should the proposal be? The article paints the SEC’s dilemma about the rulemaking this way: “If its rule lacks teeth, progressives will be outraged. On the flip side, an aggressive stance makes it more likely the regulation will be shot down by the courts, leaving the Biden administration with nothing. Either way, someone is going to be disappointed.”

ISSB global sustainability reporting standards—will the SEC’s expected climate disclosure rules be in sync?

As part of the Deloitte Global Boardroom Program, in Q4 2021, Deloitte surveyed over 350 audit committee members in 40 countries about climate issues. In the survey, 60% of respondents said “the lack of global reporting standards makes it hard to compare their organization’s progress against meaningful external benchmarks.” The International Sustainability Standards Board established by the IFRS Foundations is developing a set of global sustainability reporting standards. Will climate disclosure rules expected from the SEC be in sync with ISSB global standards? Could some companies be subject to both climate disclosure regimes?

For the 2022 proxy season, SSGA continues its emphasis on climate and diversity transformation

In his last letter to boards as CEO of State Street Global Advisors, Cyrus Taraporevala (who has announced his planned retirement this year) writes that we are at a “moment of significant transition,” facing many challenges, including a pandemic, climate change and gender, racial and ethnic inequities, that have led to economic disruption and even political instability.  How should companies address these challenges?  SSGA expects its portfolio companies to manage “these threats and opportunities by transitioning their strategies and operations—enhancing efforts to decarbonize and embracing new ways of recruiting and retaining talent—as the world moves toward a low-carbon and more diverse and inclusive future.”  Accordingly,  SSGA’s “main focus in 2022 will be to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.”

Is the Rooney Rule just window dressing?

At the beginning of Black history month, in a class action complaint against the NFL and others replete with heart-breaking allegations of racism, former Head Coach of the Miami Dolphins, Brian Flores, charged that, among many other things, he and other members of the proposed class have been denied positions as head coaches and general managers as a result of racial discrimination.  Defendants that have responded publicly have reportedly denied the allegations and said that the claims are without merit.  Particularly notable from a governance and DEI perspective are allegations regarding the disingenuous application of the vaunted “Rooney Rule”—which originated in the NFL back in 2002 in an effort to address the dearth of Black head coaches—but has since become almost de rigueur in governance circles as one effective approach to increasing diversity in a wide variety of contexts, including boards of directors. However well-intentioned originally, the complaint alleges, “the Rooney Rule is not working.” Flores claims that, to fulfill the admonitions of the Rooney Rule, NFL teams “discriminatorily subjected” him and other Black candidates “to sham and illegitimate interviews due in whole or part to their race and/or color.”  While this claim is far from the most incendiary in the complaint, if shown to be accurate, it would certainly seriously damage the reputation of the defendants involved.  Can an approach that has allegedly failed to work in its original setting still be made to work effectively in other contexts?

Being a “good corporate citizen”: how can ESG be integrated with corporate compliance and board oversight functions?

In light of accelerating concerns about climate change and sustainability, economic inequality, worker safety and racial inequity, companies have faced increasing calls to answer to a variety of stakeholders—stakeholders other than shareholders. These concerns are often collected under the heading of environmental, social and governance issues, sometimes adding in “employees” as a separate “E” category. How should companies that aim to be good corporate citizens identify relevant components of EESG?  How does EESG align with existing Caremark compliance efforts? How should we think about incorporating EESG oversight into the board’s organizational structure?  Is this another job for the already burdened audit committee? This article, Caremark and ESG, Perfect Together: A Practical Approach to Implementing an Integrated, Efficient, and Effective Caremark and EESG Strategy, co-authored by former Delaware Chief Justice Leo Strine, observes that “boards and management teams are struggling to situate EESG within their existing reporting and committee framework and figure out how to meet the demand for greater accountability to society while not falling short in other areas.” Strine and his co-authors offer a framework for doing just that.

Proxy plumbing is still a challenge—will we see improvement in 2022?

Shareholder voting is viewed as fundamental to keeping boards and managements accountable, and, every year, billions of shares are voted at thousands of shareholder meetings of public companies. However, it is widely recognized that the current system of share ownership and intermediaries is a byzantine one that accreted over time and certainly would not be the system anyone would create if starting from scratch. There is also broad agreement that the current system of “proxy plumbing” is inefficient, opaque and, all too often, inaccurate. As the SEC’s Investor Advisory Committee has observed, under the current system, shareholders “cannot determine if their votes were cast as they intended; issuers cannot rapidly determine the outcome of close votes; and the legitimacy of corporate elections, which depend on accurate, reliable, and transparent vote counts, has been called into doubt.” Nevertheless, while the IAC and others have made recommendations for action to the SEC, nothing has yet been done or proposed, and the topic of proxy plumbing has been relegated to the SEC’s long-term agenda. (See this PubCo post.) Now, however, some aspects of the problem may be addressed through private ordering. Broadridge Financial Solutions, which provides services related to the proxy voting process, including vote tabulation, has announced that “it will provide end-to-end proxy vote confirmation this year to all shareholders in the annual meetings of the 2,000+ U.S. public companies whose votes it tabulates.”

Gensler discusses cybersecurity under the securities laws

In remarks yesterday before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute, SEC Chair Gary Gensler addressed cybersecurity under the securities laws. Gensler suggests that the economic cost of cyberattacks could possibly be in the trillions of dollars, taking many forms, including denials-of-service, malware and ransomware. It’s also a national security issue.  He reminds us that “cybersecurity is a team sport,” and that the private sector is often on the front lines. Given the frequency of cybersecurity incidents, the SEC is “working to improve the overall cybersecurity posture and resiliency of the financial sector.” To Gensler, the SEC’s cybersecurity policy has three components: “cyber hygiene and preparedness; cyber incident reporting to the government; and in certain circumstances, disclosure to the public.”  In his remarks, Gensler considered cybersecurity in a variety of contexts, including SEC registrants in the financial sector, such as broker-dealers, investment companies, registered investment advisers and other market intermediaries; service providers and the SEC itself, but his discussion of cybersecurity in the context of public companies is of most interest here.

Is stakeholder capitalism still capitalism?

Emphatically yes, says the highly influential CEO of BlackRock, Larry Fink, in his latest annual letter to CEOs. BlackRock, according to the NYT, now manages $10 trillion in assets, so the company would be persuasive even if its CEO never put pen to paper (or fingers to keyboard), but for a number of years, Fink has staked out positions in his annual letters on a variety of social and environmental issues that made companies (and media) pay attention. At the Northwestern Law Securities Regulation Institute in 2021, former SEC Chair Mary Schapiro said that, at companies where she was on the board, Fink’s 2020 statement (which announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach”) had had “an enormous impact last year.” However, he has also had his denigrators, and this year’s letter allocates a lot of terrain to deflecting criticism that his positions are more aligned with “woke” politics than with making money for shareholders. Not so, he contends, stakeholder capitalism is capitalism: BlackRock’s conviction “is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities, and their shareholders.” Ultimately, he asserts, cultivating these beneficial relationships will drive long-term value. How will this year’s letter land?