In July, Representative Carolyn Maloney contacted SEC Commissioner Robert Jackson to solicit his views on legislation that would require public companies to disclose their corporate political spending. Jackson has now responded. In his view, the absence of transparency about political spending has led to a lack of accountability, allowing executives to “spend shareholder money on politics in a way that serves the interests of insiders, not investors.” But because investors typically put their money into mutual funds and other similar investment vehicles, their voting rights are typically exercised, not by the investors themselves, but instead by these institutions on their behalf—and most often not in sync with the surveyed preferences of investors: “while ordinary investors overwhelmingly favor transparency in this area, the biggest institutions consistently vote their shares to keep political spending in the dark.” And, he charges, it’s not just corporations that are opaque about their own political spending—institutional investors are likewise opaque about their votes against shareholder proposals for spending disclosure.
The NYSE has filed with the SEC a proposed rule change that would allow companies going public to raise capital through a primary direct listing. Under current NYSE rules, only secondary sales are permitted in a direct listing. As a result, thus far, companies that have embarked on direct listings have been more of the unicorn variety, where the company was not necessarily in need of additional capital. If approved by the SEC, will the new proposal be a game changer for the traditional underwritten IPO?
You might recall that, earlier this month, the SEC voted to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to “modernize” the shareholder proposal rules by increasing the eligibility and resubmission thresholds. (See this PubCo post and this PubCo post.) At the SEC open meeting, in explaining his perspective on the proposals, SEC Chair Jay Clayton indicated that, following the SEC’s proxy process roundtable (see this PubCo post), the SEC had received hundreds of comment letters, but there were seven letters that were most striking to him. Clayton seemed to be genuinely moved by these letters, ostensibly submitted by various Main Street investors, a group that Clayton considers to be core to the SEC’s protective mission. (See this PubCo post.) But, according to Bloomberg, there’s something not quite right—something “fishy”—about those letters. To borrow a phrase, did Clayton get punked?
When a company’s CFO serves on another company’s board, does it help or hurt the financial reporting of the CFO’s company? It’s easy to imagine that the time commitment associated with outside board service would be a distraction from the CFO’s primary job and ultimately impair the CFO’s performance—especially since, as reported in CFO.com, a majority of finance chiefs on outside boards are appointed to the time-consuming audit committee. But, according to an academic study, “CFO Outside Directorship and Financial Misstatements,” just published in Accounting Horizons, a peer-reviewed journal of the American Accounting Association (link is to a version on SSRN), that’s not the case. In fact, the study demonstrated that outside board service can actually enhance the quality of the financial reporting of the CFO’s company.
As noted in thecorporatecounsel.net, the EY Center for Board Matters has released a new study of human capital disclosures. Human capital has recently become recognized, especially by many institutional investors, as among companies’ key assets in creating long-term value. SEC Chair Jay Clayton has observed that, in the past, companies’ most valuable assets were plant, property and equipment, and human capital was primarily a cost. But now, human capital and intellectual property often represent “an essential resource and driver of performance for many companies.” According to EY, a “company’s intangible assets, which include human capital and culture, are now estimated to comprise on average 52% of a company’s market value.” And human capital has “emerged as a critical focus area for stakeholders. There is clear and growing market appetite to understand how companies are managing and measuring human capital.” These developments have led the SEC to propose adding human capital as a topic for discussion in companies’ business narratives. (See this PubCo post.) To see how companies are voluntarily disclosing their practices regarding human capital and culture—and perhaps in anticipation of a new SEC requirement—EY undertook to review the proxy statements of 82 companies in the 2019 Fortune 100. The study may prove to be especially useful for companies trying to understand the contours of human capital disclosure, whether or not the SEC ultimately goes ahead with its proposal to require material human capital disclosures.
Last week, the SEC’s Investor Advisory Committee held a meeting focused in part on the use of environmental, social and governance information in the capital allocation process—how do investors use ESG information in making investment decisions? The panelists—an academic and several representatives of asset managers—all viewed ESG data as important to decision-making, particularly in relation to potential financial impact, even for investment portfolios that were not dedicated to sustainability.
There’s now another legal challenge to SB 826, California’s board gender diversity statute, filed today in the federal district court in the Eastern District of California. In Creighton Meland v. Alex Padilla, Secretary of State of California, a conservative legal organization filed a complaint on behalf of a shareholder of a publicly traded company that is incorporated in Delaware and headquartered in California. The case seeks a declaratory judgment that the statute is unconstitutional under the equal protection provisions of the 14th Amendment and a permanent injunction preventing implementation and enforcement of the statute. A representative of the legal organization contended that the statute “puts equal numbers above equal treatment….This law is built on the condescending belief that women aren’t capable of getting into the boardroom unless the government opens the door for them. Women are capable of earning a spot on corporate boards without the government coercing businesses to hire them.” This case appears to be the second complaint filed to challenge the new law, the first being, Crest v. Alex Padilla. As you may recall, Crest, filed in California State Court, was framed as a “taxpayer suit” that sought to enjoin Padilla from expending taxpayer funds and taxpayer-financed resources to enforce or implement the statute, claiming violations of the equal protection provisions of the California constitution. (See this PubCo post.)