Category: Corporate Governance
Happy Earth Day!
Climate Action 100+ reports that, last year, there were 22 climate-related weather disasters in the U.S. that “each caused more than $1 billion in damages—far and away a record. To investors, climate change poses not only physical risks of damage to assets, supply chains and infrastructure but also transitional risk if portfolio companies do not adjust rapidly enough as the economy decarbonizes and systemic risk posed to the entire economy.” According to environmental nonprofit Ceres, as of April 21, 408 businesses and investors “with a footprint” in the U.S. have signed an open letter to the President indicating their support for the administration’s commitment to climate action and for setting a new climate target to reduce emissions. The signatories collectively represent over $4 trillion in annual revenue, over $1 trillion in assets under management and employ over 7 million U.S. workers across all 50 states. The letter states that to “restore the standing of the U.S. as a global leader, we need to address the climate crisis at the pace and scale it demands. Specifically, the U.S. must adopt an emissions reduction target that will place the country on a credible pathway to reach net-zero emissions by 2050. We, therefore, call on you to adopt the ambitious and attainable target of cutting GHG emissions by at least 50% below 2005 levels by 2030.” As reported by the NYT and others, the President announced today that the U.S. is setting a new climate target with a goal of reducing U.S. emissions by 50% to 52% below 2005 levels by 2030. The target “calls for a steep and rapid decline of fossil fuel use in virtually every sector of the American economy and marks the start of what is sure to be a bitter partisan fight over achieving it.”
Can SEC Commissioner Hester Peirce avert adoption of ESG metrics?
It’s widely anticipated that we’ll soon be seeing more action from the SEC on sustainability disclosure, including possibly a prescriptive ESG framework that draws on some global metrics. (See, e.g., this PubCo post and this PubCo post.) Trying to head those prescriptive ESG metrics off at the pass is Commissioner Hester Peirce—yes, she who once described “ESG” as standing for “enabling shareholder graft”—in her statement, Rethinking Global ESG Metrics. With Gary Gensler now sworn in as SEC Chair, the revised composition of the SEC does not bode well for Peirce’s mission. Peirce concludes her statement with the admonition, “[l]et us rethink the path we are taking before it is too late.” But has the train already left that station?
Does gender diversity in the C-suite change the way management thinks?
There’s been a lot written about the benefits of board gender diversity, but this article from the Harvard Business Review, Adding Women to the C-Suite Changes How Companies Think, reports on a study by three academics of the impact of adding women to the C-Suite—not just whether the businesses performed better, but why they performed better. In other words, “[w]hat are the specific mechanisms that drive the positive business outcomes associated with increasing the number of women in the C-suite?” According to the authors, much past research has revealed that companies with more women executives “are more profitable, more socially responsible, and provide safer, higher-quality customer experiences.” But why is that the case? To find out, the authors looked at a narrower question of how the addition of women to top management teams changes companies’ “strategic approach to innovation”? The authors conclude that the addition of women executives to the management team brought more than “new perspectives”—they “actually shift how the C-suite thinks about innovation, ultimately enabling these firms to consider a wider variety of strategies for creating value.”
What’s ahead for this proxy season?
Alliance Advisors, a proxy solicitation and corporate advisory firm, has just posted its 2021 Proxy Season Preview, a useful introduction into the major themes of this season—well worth a read. First, and most obviously, there is COVID-19 and its direct and indirect impact. The pandemic is having a significant direct impact this year—not just in necessitating recourse to virtual-only annual meetings again this season—but also in focusing the attention of investors and proxy advisors on “how well corporate leaders navigated the crisis and protected business operations, liquidity and the health and welfare of employees.” But the pandemic has also had a somewhat surprising broader indirect impact. While it was widely anticipated that the challenges of COVID-19 would overwhelm any other concerns, the impact appears to be otherwise, as the pandemic has highlighted our increasingly precarious condition, including the effects of climate change, and intensified our social and economic inequality—all issues that are front and center this season. The Preview predicts that environmental and social proposals “are likely to see stronger levels of support in view of last year’s record 21 majority votes… and more assertive investor policies on diversity, climate change and political spending.”
Staff posts guidance on accounting for warrants issued in SPAC transactions
Warrants are frequently issued in connection with the formation and initial registered offerings of SPACs, but apparently there have been some problems with accounting for some of these warrants, or at least, so it appears from this Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) from Acting Corp Fin Director John Coates and Acting Chief Accountant Paul Munter. The Statement is intended to “highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions” and to discuss what needs to be done if this Statement leads a company and its auditors to determine there is an error in any previously filed financial statements. The primary issue identified in the Statement is whether these warrants should be classified as equity or liability, which depends largely on the specific terms of the warrant and the entity’s specific facts and circumstances. If warrants are classified as a liability, according to the Statement, they should be “measured at fair value, with changes in fair value reported each period in earnings.”
SEC approves NYSE amendment of shareholder approval provisions
In December 2020, the NYSE proposed to relax the requirements for shareholder approval of related-party equity issuances and bring them into closer alignment with the comparable Nasdaq rules by amending Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual. The amendments were intended to provide more flexibility to raise capital and included modifications that were similar to the temporary waiver in effect during the COVID-19 crisis. (See this PubCo post and this PubCo post.) In observing the impact of that temporary waiver at that time, the NYSE indicated that it had seen “that a significant number of companies have benefited from the flexibility provided by the waiver and has not observed any significant problems associated with companies’ completion of transactions permitted by the waiver.” (For a description of the original proposal, see this PubCo post.) The NYSE subsequently amended the proposal, and the SEC has just approved the proposal, as amended, on an accelerated basis.
How do we incorporate ESG factors into incentive compensation?
In BlackRock Investment Stewardship’s recent commentary, BIS observed that ESG-related metrics have increasingly been incorporated as performance measures in companies’ incentive plans. BIS cited a recent study from the GECN Group, which showed that 67% of companies in the study used ESG measures (but only 56% in the U.S. alone) and that COVID-19 had accelerated the incorporation of ESG factors into incentive plans. Importantly, however, BIS cautioned that, to the extent that companies included sustainability metrics in their incentive plans, they should “be material and aligned with a company’s long-term strategy. It is important that companies using sustainability performance metrics explain carefully the connection between what is being measured and rewarded alongside business goals and long-term performance. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts.” How do companies determine which sustainability objectives are most material for them, and how do they transform those goals into measures for purposes of incentive compensation? This new article from consultant Semler Brossy offers some advice. What is the overarching message? “Move carefully, but move.”
Corp Fin and OCA have advice regarding SPACs
According to the staff of the SEC’s Office of the Chief Accountant, in “just the first two months of 2021, both the number of new SPACs and amount of capital raised by those SPACs have been reported to already match approximately three-fourths of all such activity last year.” And there was quite a bit of SPAC activity last year. In light of the incredible volume of SPAC deals, on Wednesday, the staffs of Corp Fin and the OCA issued special guidance for SPACs. These statements address shell company, financial reporting, accounting, internal control, governance and auditor considerations in connection with a de-SPAC transaction, that is, a transaction in which a private operating company undertakes a business combination with a SPAC, ultimately becoming a public operating company. Both staffs seem to question whether the timing and other circumstances of de-SPAC transactions mean that the private operating company targets may not be fully equipped for what comes next and want stakeholders to carefully consider whether each of these private targets, in the words of OCA, has “a clear, comprehensive plan to be prepared to be a public company.” Corp Fin also wants all those who are clamoring for SPACs to be aware of all restrictions, impediments and other potential hiccups that come with the package. Could they possibly be trying to put the kibosh on SPAC fever? According to Reuters, analysts think the SEC is “worried about how much due diligence is performed by SPACs before acquiring assets, and about disclosures to investors.”
How should we approach corporate political activity?
A new piece in the NYT, “Corporations, Vocal About Racial Justice, Go Quiet on Voting Rights,” starts off this way: “As Black Lives Matter protesters filled the streets last summer, many of the country’s largest corporations expressed solidarity and pledged support for racial justice. But now, with lawmakers around the country advancing restrictive voting rights bills that would have a disproportionate impact on Black voters, corporate America has gone quiet.” The author is talking about new voting laws just passed in Georgia and the reluctance, with some exceptions, of the largest corporations to say anything or do anything—beyond anodyne statements of support for voting rights in general—that might pressure the state to back down, as major corporations did when several states passed their infamous transgender bathroom bills and many companies threatened to move business out of those states. As the NYT observed, the “muted response—coming from companies that last year promised to support social justice—infuriated activists, who are now calling for boycotts.” Last night, the NYT reported that two of the largest corporations in Georgia have abruptly reversed course and issued statements in opposition to the voting bills after a large group of prominent Black business leaders called on companies “to publicly oppose a wave of similarly restrictive voting bills that Republicans are advancing in almost every state.” In an interview with the WSJ, one of those business leaders emphasized that this “is a nonpartisan issue, this is a moral issue.” This battle is expected to continue as other states enact similar legislation, not to mention potential fights over guns, immigration and climate, to name a few. How do companies navigate the terrain of political activity and public scrutiny while staying true to their core values? In this new report, “Under a Microscope: A New Era of Scrutiny for Corporate Political Activity,” The Conference Board attempts to address this complicated issue.
Do behavioral biases impede board dynamics?
Although an audit firm might not be the first place you’d look for advice on board behavioral psychology, here’s an exception: a really interesting article from PwC about board dynamics and psychological biases that can impede boards from optimal performance and decision-making. The article identifies four common biases—authority bias, groupthink, status quo bias and confirmation bias—and provides clues for recognizing when your board might be afflicted with any of these problems, along with tips to address them. Well worth a read!
You must be logged in to post a comment.