Legislation—such as California’s board racial/ethnic diversity mandate (see this PubCo post) and board gender diversity mandate (see this PubCo post)—is not the only route that diversity advocates are employing to diversify the ranks of corporate directors. Moral suasion—together with implicit or explicit voting pressure—is another avenue that some groups are pursuing. One group following this path is the Russell 3000 Board Diversity Disclosure Initiative, a new initiative recently organized by the Illinois State Treasurer. At the end of October, the Initiative sent a letter to companies on the Russell 3000, urging that they all disclose board racial/ethnic/gender data. Signed by over 20 investor organizations representing more than $3 trillion in assets under management and advisement, the letter waited until the end to note that many of the signatories “either have or are examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement.”
ISS has provided some early guidance regarding how it will view pandemic-related changes to executive compensation as part of its pay-for-performance qualitative evaluation. According to ISS, the guidance was informed by direct discussions with investors as well as the results of its annual policy survey. The guidance is summarized below.
Don’t forget to vote!
According to Protiviti, in 2019, 90% of companies in the S&P 500 issued separate sustainability reports—not part of SEC filings—and, as of February 2020, over 1,000 companies with an aggregate market cap of $12 trillion have endorsed the Task Force on Climate-related Financial Disclosures (TCFD) recommendations for sustainability disclosure (see this PubCo post and this PubCo post). Similarly, use of the Sustainability Accounting Standards Board (SASB) framework has increased by 180% over the last two years (see this PubCo post). With this heightened focus on sustainability, how can boards best oversee ESG? To that end, in this article, consultant Protiviti offers ten questions about ESG reporting that boards should consider with their management teams.
A couple of weeks ago, the SEC settled charges against Andeavor, an energy company formerly traded on the NYSE and now wholly owned by Marathon Oil, in connection with stock repurchases, authorized by its board in 2015 and 2016. Pursuant to that authorization, in 2018, Andeavor’s CEO directed the legal department to establish a Rule 10b5-1 plan to repurchase company shares worth $250 million. At the time, however, the company’s CEO was on the verge of meeting with the CEO of Marathon Oil to resume previously stalled negotiations on an acquisition of Andeavor at a substantial premium. Of course, a 10b5-1 plan typically doesn’t work to protect against insider trading charges if you have material inside information when you establish the plan, and the SEC’s order highlights facts that, from the SEC’s perspective, make the information appear material—at least in hindsight. But wait—this isn’t even an insider trading case. No, it’s a case about inadequate internal controls—at least, that’s how it ended up. Instead of attempting to make a 10b-5 case based on a debatably defective 10b5-1 plan, the SEC opted instead to make its point by focusing on the failure to maintain effective internal control procedures and comply with them. Companies may want to take note that charges related to violations of the rules regarding internal controls and disclosure controls seem to be increasingly part of the SEC’s Enforcement playbook, making it worthwhile for companies to emphasize, in the words of SEC Chair Jay Clayton, the practice of “good corporate hygiene.”
Tuesday, at the CNBC Financial Advisor Summit, SEC Chair Jay Clayton was interviewed by CNBC’s Bob Pisani, touching on a variety of issues, including SPACs, proposed changes to Form 13F, ESG ratings and investing, emerging market listings and other topics of interest. No breaking news, but some insight into the SEC’s thinking on these subjects.
Last week, ISS released for public comment a number of proposed voting policy changes to be applied for shareholder meetings taking place on or after February 1, 2021. The proposed changes for U.S. companies relate to board racial/ethnic diversity, director accountability for governance failures related to environmental or social issues and shareholder litigation rights, i.e., exclusive forum provisions. Comments may be submitted on the proposals through October 26, 2020.
With the passage of SB 826 in 2018, California became the first state to mandate board gender diversity (see this PubCo post). The California Partners Project, which was founded by California’s current First Lady, has just released a new progress report on women’s representation on boards of California public companies, tracking the changes in gender diversity on California boards since enactment of the law. According to the report, “[r]esearch has shown us that companies with women on the board of directors outperform those without them. Women directors are more effective at managing risk, better able to balance long-term priorities, and have a keen sense of what customers, shareholders, and employees need to thrive.” The report observes that, if “all of the companies in the Russell 3000 followed California’s lead, over 3,500 women’s voices would be added to corporate governance.”
Back in January, in Davos, the World Economic Forum International Business Council— a group of 120 of the largest businesses—together with the Big Four accounting firms, announced a new initiative “to develop a core set of common metrics to track environmental and social responsibility” and released a draft set of metrics for review and consideration. (See this PubCo post.) Last month, the final results, the IBC Stakeholder Capitalism Metrics, were presented in this whitepaper, “Measuring Stakeholder Capitalism—Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” The preface to the whitepaper observes that we are “in the midst of the most severe series of challenges the world has experienced since World War Two. The COVID-19 pandemic has exposed the fragility of our global systems. It has exacerbated underlying economic and social inequalities and is unfolding at the same time as a mounting climate crisis…. The private sector has a critical role to play.” The whitepaper is presented in that larger context, as an effort
“to improve the ways that companies measure and demonstrate their contributions towards creating more prosperous, fulfilled societies and a more sustainable relationship with our planet. It also recognizes that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable—and valuable—in the long-term. The culmination of a year’s effort from contributors on every continent, this work defines the essence of stakeholder capitalism: it is the capacity of the private sector to harness the innovative, creative power of individuals and teams to generate long-term value for shareholders, for all members of society and for the planet we share. It is an idea whose time has come.”
Quite a heavy lift. But will the framework be widely adopted?
SEC Commissioner Allison Lee has been speaking up quite a bit recently about diversity and inclusion and about climate change—and not just at SEC open meetings. In her recent dissents in voting on proposals regarding amendments to Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors (see this PubCo post) and amendments to the SEC’s shareholder proposal rules (see this PubCo post), Lee did not hesitate to express her misgivings about the failure of the first proposal to mandate disclosure regarding diversity and climate change and the anticipated adverse impact of the second proposal on shareholder proposals related to ESG. In recent remarks to the Council of Institutional Investors Fall 2020 Conference, Diversity Matters, Disclosure Works, and the SEC Can Do More, and in this NYT op-ed, Lee reinforces her view that the SEC needs to do more in terms of a specific mandate for diversity and climate disclosure.
Failure to disclose perks seems to be a fairly attractive target for SEC Enforcement these days. In another fiscal year-end action, Enforcement has charged Hilton Worldwide Holdings Inc. with failure to disclose in its proxy statements various perks and personal benefits provided to its executive officers. This action has the distinction of being the result of the staff’s use of risk-based data analytics to uncover potential violations related to corporate perks. The case serves as a reminder that the analysis of whether a benefit is a disclosable perk can be complicated and is not the same as the “business purpose” test used for tax purposes.