On March 1, the new California Secretary of State, Dr. Shirley N. Weber (who replaced Alex Padilla, newly appointed Senator) issued the Secretary’s 2021 report required by SB 826, California’s board gender diversity law, on the status of compliance with the law. The report counts 647 publicly held corporations that identified principal executive offices in California in their 2020 10-Ks, and indicates that 318 of these “impacted corporations” had filed a 2020 California Publicly Traded Corporate Disclosure Statement, which would reflect their compliance with the board gender diversity requirement (slightly fewer than the 330 filed last year). Of the 318 companies that had filed, 311 reported that they were in compliance with the board gender diversity mandate, slightly more than the 282 reported last year, but still less than half of the companies subject to the law. (See this PubCo post.) But is that data from the report really meaningful?
Environmental, social and governance activism continues to adopt new approaches. One of the latest is from The Shareholder Commons, a non-profit organization founded by CEO Rick Alexander—you might recognize the name from B-Lab and Morris Nichols in Delaware—that uses “shareholder activism, thought leadership, and policy advocacy to catalyze systems-first investing and create a level playing field for sustainable competition.” In essence, TSC seeks to shift the focus from the impact of a company’s activities and conduct on its own financial performance to “systemic portfolio risk,” the impact of the company’s activities and conduct on society, the environment and the wider economy as a whole, which would affect most investment portfolios. In particular, the group has helped with submission of a number of shareholder proposals that address issues in its sweet spot—influencing corporate behavior regarding social and environmental systems that affect the economy as a whole. This season, the proposals have advocated conversion to public benefit corporations (see this PubCo post), disclosure of reports on the external public health costs created by the subject company’s retail food business, studies on the external costs resulting from underwriting of multi-class equity offerings, and reports on the external social costs (e.g., inequality) created by the company’s compensation policy. Earlier this year, TSC, working with a long-term shareholder, submitted a shareholder proposal to Yum! Brands, asking the company to disclose a study on “the external environmental and public health costs created by the use of antibiotics in the supply chain of [the] company… and the manner in which such costs affect the vast majority of its shareholders who rely on a healthy stock market.” TSC has just announced that it has withdrawn its proposal because Yum! has agreed to “provide comprehensive reporting on the systemic effects of the use of antibiotics in its supply chain by the end of 2021.”
It’s not just mandatory climate disclosure that’s on the agenda for Acting SEC Chair Allison Lee. Last week, as reported by Reuters, in remarks to a forum for securities industry professionals, she said that the SEC “should think more ‘creatively and broadly’ about tackling issues of race and gender diversity, including by potentially revisiting public companies’ disclosure requirements.” In the past, Lee has not hesitated to emphasize her concerns about the absence of prescriptive requirements in rulemakings that would have more certainly elicited disclosure regarding diversity. (See, for example, her statement regarding amendments to Reg S-K as well as her remarks to the Council of Institutional Investors, Diversity Matters, Disclosure Works, and the SEC Can Do More.) Now that she has directed Corp Fin to focus on climate disclosure, will diversity be next?
Disclosure of executive perks is once again in the SEC Enforcement spotlight. Just last year, there were two actions against companies for disclosure failures regarding perks—Hilton Worldwide Holdings Inc. (see this PubCo post) and Argo Group International Holdings, Ltd. (see this PubCo post). Now, Enforcement has brought settled charges against Gulfport Energy Corporation, a gas exploration and production company that filed for Chapter 11 in November, and its former CEO, Michael G. Moore, for failure to disclose some of the perks provided to Moore as well as related-person transactions involving Moore’s son. The case serves as a reminder that the analysis of whether a benefit is a disclosable perk can be complicated.
Is mandatory climate risk disclosure a done deal yet? Acting SEC Chair Allison Lee has taken almost every opportunity to emphasize the importance of the SEC’s taking action to mandate climate risk disclosure. (See, for example, this NYT op-ed, her remarks at PLI entitled Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation and this statement, “Modernizing” Regulation S-K: Ignoring the Elephant in the Room.”) And now, according to Reuters, Acting Corp Fin Director John Coates remarked during a conference on climate finance that the SEC “‘should help lead’ the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations.” But how to craft the new rules? With the new Administration in Washington, many of the think tanks and advocacy groups are making their voices heard on just that—crafting mandatory climate disclosure regulations. The reports of two are discussed below; there are definitely some common threads, such as the need for the SEC to onboard climate expertise and organize a platform or two for stakeholder input. Their recommendations may also provide some ideas for voluntary compliance and some insight into the direction the SEC may be going.
In his 2021 letter to CEOs, BlackRock CEO Laurence Fink asked companies to disclose a “plan for how their business model will be compatible with a net zero economy”—that is, “one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC.” (See this PubCo post.) Now BlackRock Investment Stewardship has posted a powerpoint presentation that sets out BIS’s expectations in greater detail. The presentation concludes with a caution that, “where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy, including short- medium- and long-term targets, we may vote against the directors we consider responsible for climate risk oversight.”
Issues regarding political donations have been thrown into sharp relief recently in light of the stands taken by a number of companies to pause or discontinue some or all political donations in response to the shocking events of January 6. A number of companies announced that their corporate PACs had suspended—temporarily or permanently—their contributions to one or both political parties or to lawmakers who objected to certification of the presidential election. But how widely adopted was this approach? To find out, The Conference Board conducted a survey. It turns out that those announcements reflected only a slice of the actions taken by corporate PACs. What’s more, the survey indicated that corporate boards typically had little role in these decisions. Nevertheless, for some companies, boards may find that political spending associated with their companies is front and center this proxy season.
Democrats and Republicans are busy “lobbying” the SEC these days. Republicans want the SEC to nix Nasdaq’s proposal for new listing rules regarding board diversity and disclosure. Democrats want the SEC to beef up its insider trading rules in connection with Rule 10b5-1 plans. Will either find a receptive audience?
In November 2020, amendments to Reg S-K to modernize the required business narrative became effective. The amendments including changes related to disclosure about a company’s human capital resources, replacing a requirement to disclose only the number of employees with a new requirement to disclose, to the extent material, information about human capital resources. In particular, the amendments identified as non-exclusive examples of measures or objectives that the company may focus on in managing the business “measures and objectives that address the attraction, development, and retention of personnel.” Even these measures, the SEC emphasized, were not a mandate. However, then-SEC Chair Jay Clayton said at the time of adoption that he expected “to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.” The principles-based rules did not articulate specific metrics for human capital resources disclosure, allowing companies wide latitude in crafting their disclosure to focus on information that is material to each company. At the same time, however, the rules did not provide much direction, leaving many companies at something of a loss for how to proceed. In this paper, Compensation Advisory Partners provides an “early read on developing best practices” regarding human capital disclosure, analyzing the earliest disclosures to provide some guidance on topics, trends and level of detail provided. The CAP paper also includes a number of useful samples. Similarly, Willis Towers Watson reviewed the first three dozen human capital disclosures by companies in the S&P 500 published in 10-Ks filed since the effective date of the new requirement and, in this report, provides some data on the prevalence of topics and metrics.
In December 2019, as part of its strategy of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB launched an effort to engage with audit committees, conducting conversations with almost 400 audit committee chairs focused on audit committee perspectives on topics such as audit quality assessment and improvement and auditor communications. (See this PubCo post.) As noted by PCAOB Chair William Duhnke in this PCAOB webinar for audit committees, the PCAOB prioritized this engagement, viewing informed and engaged audit committees as “force multipliers.” The PCAOB continued this outreach to audit committee chairs during 2020, contacting the audit committee chairs of most of the U.S. public companies that had audits inspected by the PCAOB during 2020. The PCAOB spoke with almost 300 audit committee chairs and discussed the results in this new report. The discussions involved Covid-19, communications by the auditor with the audit committee, new auditing and accounting standards and emerging technologies. As part of their discussions with the PCAOB, the chairs identified a number of practices in connection with each topic that they viewed as particularly effective—advice that could be useful to other audit committees.