Category: Corporate Governance
PCAOB staff provides guidance on audit committee communications in wake of independence violations
Under PCAOB Rule 3520, the auditor “must be independent of the firm’s audit client throughout the audit and professional engagement period,” which includes satisfying the independence criteria of the SEC and the PCAOB. But what happens when the auditor violates one of the independence rules—let’s say one of the specific prohibitions under Rule 2-01(c) of Reg S-X? Can the auditor’s violation be “cured”? Can the auditor still affirm its independence? How is that determined?
Companies report financial impact of climate risk
Non-profit CDP (fka the Carbon Disclosure Project) has released its analysis of the responses to its climate change questionnaire for 2018 from two groups of companies—a large group of almost 7,000 respondents and, analyzed separately, a group of 366 respondents that were among the world’s 500 largest companies (by market cap). The analysis focused on the risks and opportunities presented by climate change and, for the first time, the analysis considered companies’ expectations regarding the potential financial impact of climate risk. In the aggregate, the amount reported was eye-popping, if not exactly surprising, and, given that many companies did not respond at all, is undoubtedly an underestimate. Notably, however, the aggregate amount companies attributed to potential climate-related opportunities was even “bigger than the risks.” The significance of the potential financial implications, together with the imminence of these risks, suggest that companies may need to think hard about climate risks and the associated financial implications in crafting their public disclosures.
Mandatory arbitration shareholder proposal to J&J takes on larger dimensions
Here’s an interesting turn of events with regard to the case involving the mandatory arbitration shareholder proposal to Johnson & Johnson. You may recall that, last year, a Harvard law professor submitted a shareholder proposal to Johnson & Johnson requesting that the company adopt mandatory shareholder arbitration bylaws. Corp Fin issued a no-action letter to J&J granting relief if the company relied on Rule 14a-8(i)(2) (violation of law) to exclude the proposal. (See this PubCo post.) In that letter, the staff relied on an opinion from the Attorney General of the State of New Jersey advising the SEC that the proposal was excludable under Rule 14a-8(i)(2) because “adoption of the proposed bylaw would cause Johnson & Johnson to violate applicable state law.” The issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position and advocating, in effect, that the parties seek a binding answer in court—which is exactly what happened. On March 21, the proponent of the proposal filed this complaint. (See this PubCo post.) Now, two big public pension funds have sought to intervene and, as a result, the case may have just taken on larger dimensions.
SSGA provides guidance for board oversight of climate risk
As noted in the proxyseason blog from thecorporatecounsel.net, asset manager State Street Global Advisors has recently published an updated Climate Change Risk Oversight Framework For Directors. Climate change is identified as a continuing priority for SSGA’s asset stewardship and company engagement program. In the commentary introducing the framework, SSGA advises that boards should look at climate change “as they would any other significant risk to the business and ensure that a company’s assets and its long-term business strategy are resilient to the impacts of climate change.” A similar view was expressed by the NACD in Board Oversight of ESG, which advises that “climate-related risks must be integrated into the company’s ongoing risk assessment and quantification processes and the board’s oversight of risk management.”
What’s on the SEC’s new RegFlex Agenda?
SEC Chair Jay Clayton has repeatedly made a point of his intent to take the Regulatory Flexibility Act Agenda “seriously,” streamlining it to show what the SEC actually expected to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following twelve months. See this PubCo post and this PubCo post.) The SEC’s Spring 2019 short-term and long-term agendas have now been posted, reflecting the Chair’s priorities as of March 18, when the agenda was compiled. What stands out is not so much the matters that show up on the short-term agenda—although there are plenty of significant proposals to keep us all busy—but rather the legislatively mandated items that have taken up protracted residency on the long-term (i.e., the maybe never) agenda.
Is there a business case for ESG?
Do companies that ignore long-term environmental or social costs in the pursuit of near-term profits pay another price in foregoing potentially long-term sustainable profit opportunities? The Business Case for ESG, from the Rock Center for Corporate Governance at Stanford University, authored by Stanford academics and representatives of ValueAct Capital, considers a framework for incorporating sustainability or ESG (environmental, social and governance) factors into corporate strategy and decision-making. The prevailing theory is that the failure to take sustainability into account is a component of short-termism, “leading to decisions that increase near-term reported profits at the expense of the long-term sustainability of those profits. The costs of those decisions are assumed to manifest themselves as externalities borne by members of the workforce or society at large.” The paper cites investors like Laurence Fink of BlackRock and innovative approaches like The New Paradigm as examples of efforts to encourage companies to take into account stakeholders other than solely shareholders. The paper suggests that, properly analyzed, sustainability can affect not only externalities, but can also benefit the business itself—there is a business case for ESG.
New PCAOB guidance on auditor communications regarding CAMs
The PCAOB has just published new guidance on auditors’ communication of critical audit matters in the auditor’s report. The guidance includes some new FAQs related to how auditors should describe their principal considerations in determining CAMs, how they should describe audit procedures and the outcome of audit procedures, as well as the relationship between CAMs and company disclosures and the treatment of recurring CAMs. While the FAQs are intended for auditors, they can provide some insight for company management into the process and the resulting auditor communications.
Whistleblower receives award after internal reporting resulted in SEC case
In February 2018, SCOTUS handed down its decision in Digital Realty v. Somers, holding that the Dodd-Frank whistleblower anti-retaliation protections apply only if the whistleblower blows the whistle all the way to the SEC; internal reporting to the company alone would not suffice. As Justice Gorsuch remarked during oral argument, the Justices were largely “stuck on the plain language” of the statute. However, by requiring SEC reporting as a predicate, it was widely thought that the decision might have a somewhat perverse impact: while the win by Digital would limit the liability of companies under Dodd-Frank for retaliation against whistleblowers who did not report to the SEC, the holding that whistleblowers were not protected unless they reported to the SEC could well discourage internal reporting by driving all securities-law whistleblowers directly to the SEC to ensure their protection from retaliation under the statute—which just might not be a consequence that many companies would favor. (See this PubCo post.)
The LTSE has just been approved as an exchange—will it make a difference?
Many have recently lamented the decline in the number of IPOs and public companies generally (about half the number since the boom in 1996), and numerous reasons have been offered in explanation, from regulatory burden to hedge-fund activism. (See this PubCo post and this PubCo post.) In response, some companies are exploring different approaches to going public, leading to a resurgence in SPACs and the launch of IPOs as “direct listings,” which avoid the underwritten IPO process altogether. At the same time, companies are seeking ways to address some of the perceived drawbacks associated with being public companies—including the pressures of short-termism, the risks of activist attacks and potential loss of control of companies’ fundamental mission—through dual-class structures and other approaches. Even the SEC is currently planning a roundtable to address the causes of and potential solutions to short-termism. (See this PubCo post.) Changing dynamics are not, however, limited to the IPO process itself. And one of the most interesting concepts designed to address these issues on completely different turf was just approved by the SEC this month—a novel concept for a stock exchange located in San Francisco, the Long-Term Stock Exchange. The concept has been in the works for a couple of years now and is backed by some heavy-hitting investors. According to the LTSE’s founder and CEO, the “IPO is like a wedding. The IPO process is, what kind of wedding planner do you hire? What kind of wedding do you want to have? But being a public company is you’re now married to the public markets for the rest of your life. People have mostly focused on the IPO process — it’s like making the wedding more efficient….That’s not the problem. The problem is we have to live like this forever.” How will the new Exchange seek to improve this “married life” going forward?
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