According to the Financial Times, “[p]ension funds and retail investors have complained for years over their lack of ability to vote at annual meetings when using an asset manager.” Last week, BlackRock, the largest asset manager in the galaxy with $9.5 trillion under management, announced that, beginning in 2022, it will begin to “expand the opportunity for clients to participate in proxy voting decisions.” BlackRock said that it has been developing this capability in response “to a growing interest in investment stewardship from our clients,” enabling clients “to have a greater say in proxy voting, if that is important to [them].” BlackRock will make the opportunity available initially to institutional clients invested in index strategies—almost $2 trillion of index equity assets in which over 60 million people invest across the globe. It is also looking at expanding “proxy voting choice to even more investors, including those invested in ETFs, index mutual funds and other products.” Will this be a good thing?
SEC Chair testifies before House Committee on Financial Services—climate, human capital and cybersecurity disclosure proposals likely delayed
On Tuesday, SEC Chair Gary Gensler testified for over four hours (without a break!) before the thousands (it seemed) of members of the House Committee on Financial Services. His formal testimony covered a number of topics on the SEC’s agenda that Gensler (and others) have addressed numerous times in past: market structure and equity markets, predictive analytics, crypto, issuer disclosure, China, SPACs and Rule 10b5-1 plans and was remarkably similar to his formal testimony in September before the Senate Committee on Banking, Housing and Urban Affairs. (See, e.g., this PubCo post and this PubCo post.) If you followed any of the coverage of Gensler’s testimony before the Senate committee (see this PubCo post), there was a Groundhog-Day feel to much of the questioning, but the five-minute limitation on questioning (because there are thousands of House committee members) did not really offer much opportunity for in-depth conversation about anything.
A new petition has been filed challenging the Nasdaq board diversity rule (see this PubCo post). The National Center for Public Policy Research filed the petition on Tuesday with the U.S. Court of Appeals for the Third Circuit, but asked the court to transfer the proceeding to the Fifth Circuit, where an earlier petition filed by the Alliance for Fair Board Recruitment is pending. (See this PubCo post.) The new Nasdaq listing rules, which were approved by the SEC on August 6, adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards.
ISS has just released the results of its 2021 global benchmark policy survey, which, this year, actually comprises two surveys—one related to a broad array of policies and the other specifically addressing climate change. Along with issues related to executive pay and governance, the broad survey also addressed issues such as non-financial ESG performance metrics in executive compensation, racial equity audits and virtual-only shareholder meetings. The climate survey solicited views on topics such as board oversight of climate risks, say-on-climate proposals and other issues relevant to ISS’ climate voting policy.
In this new paper by a group of academics from the University of Richmond (and elsewhere), the authors explore whether companies might be timing when they record changes in their accounting estimates (CAEs) to meet earnings benchmarks. Because accounting estimates are “by their nature forward-looking, often subjective and difficult to quantify with precision,” they would seem to offer an excellent “opportunity for management to misrepresent the firm’s financial performance.” CAEs, the authors suggest, may be used to meet or beat earnings benchmarks or, alternatively, to smooth earnings or take a “big bath” when the current period’s earnings are particularly low. For purposes of the study, the authors assumed that “most CAEs are fully justified and reasonable, and the ‘manipulation’ stems primarily from their timing, not the nature or appropriateness of the CAEs themselves.” The study concludes, particularly with respect to analyst forecast earnings, that companies do indeed “appear to time CAEs to meet earnings benchmarks or achieve other reporting objectives.” It’s worth noting that the SEC has recently brought charges in a couple of cases involving earnings or expense management (see this PubCo post and this PubCo post), so violations resulting from earnings management practices appear to be a focus for Enforcement.
You might remember that the first legal challenge to California’s board gender diversity statute, Crest v. Alex Padilla, was a complaint filed in 2019 in California state court by three California taxpayers seeking to prevent implementation and enforcement of the law. Framed as a “taxpayer suit,” the litigation sought to enjoin Alex Padilla, the then-California Secretary of State (now U.S. Senator), from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, SB 826, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution. The court in that case has just denied each side’s motion for summary judgment after concluding that there were triable issues of material fact. The case will now be going to trial, which was initially set for October 25. However, on the court’s own motion, the trial was “trailed” to December 1. Stay tuned.
Currently, where a matter requires shareholder approval under NYSE rules, the minimum vote required is a majority of the votes cast on the matter. But how do you count votes cast? Do you count abstentions? What about broker non-votes? The NYSE has historically advised that broker non-votes do not count as votes cast, but abstentions do. That means that, under the NYSE rules, approval requires that the votes in favor exceed the aggregate of the votes cast against the proposal plus abstentions. Unfortunately, that’s not how “votes cast” is typically defined for Delaware corporations. If Delaware corporations elect in their charter or bylaws to use a “votes cast” standard, abstentions are generally not counted as “votes cast”—because an abstention reflects a decision not to vote on the matter and the holder has not cast those votes—with the result that, for a proposal to be approved, the votes in favor of the proposal must exceed the votes cast against. Confused? You’re not alone. The NYSE has “observed that this approach has caused confusion among listed companies.” That’s why the NYSE has just filed with the SEC a proposal to amend that provision of the NYSE Listed Company Manual. [Update: This proposal has been approved.]
How do companies tackle the assignment of conveying to their shareholders and other stakeholders how they approach sustainability—in a way that is accurate, clear and genuine and that does not sound like a confected facsimile of every other peer company? That sounds like a challenging task. To address that challenge, The Conference Board convened a working group of over 300 executives from more than 150 companies who met five times between July 2020 and May 2021 to share ideas about how companies can effectively “tell their sustainability stories.” The Board captured some of those ideas in this report.
In the last couple of years, many CEOs have felt the need to voice their views on political, environmental and social issues, such as racial justice and voting restrictions. For example, after the murder of George Floyd and resulting national protests, many of the country’s largest corporations expressed solidarity and pledged support for racial justice. After 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. However, as The Conference Board has recently stated, in the current “era of intense political polarization in the United States, and with the immediacy, ubiquity, and (often) inaccuracy of social media, companies are subject to ever-greater scrutiny for their political activities.” In this article, Deloitte and the Society for Corporate Governance report on a survey they conducted in July 2021 about companies’ approaches to publicly addressing controversial social and political issues. As the authors note, “taking a stance publicly on controversial or sensitive topics poses both risks and opportunities, including alienating or appealing to key stakeholders; enhancing or damaging the corporate culture; and eroding or building trust and brand reputation,” leading some companies to consider more systematically how they approach public engagement on these types of issues.
SEC Chair testifies before Senate Banking Committee—firmly denies paternity of all public companies!
On Tuesday last week, SEC Chair Gary Gensler gave testimony before the Senate Committee on Banking, Housing and Urban Affairs. His formal testimony covered a number of topics on the SEC’s agenda that Gensler (and others) have addressed numerous times in past: market structure and equity markets, predictive analytics, crypto, issuer disclosure, China, SPACs and Rule 10b5-1 plans. (See, e.g., this PubCo post and this PubCo post.) While the formal testimony covered some well-trod territory, the questioning highlighted the political polarization that we are likely to see continue as these proposals are presented for consideration.