Category: Corporate Governance
What happened with proxy votes in 2023?
Starting off the new year, consultant Semler Brossy’s latest report analyzes proxy results for 2023 among the S&P 500 and the Russell 3000, including votes on say on pay, environmental and social shareholder proposals, director elections and equity plans. According to SB, last year saw improvements in say-on-pay vote results and a decline in approval rates for E&S shareholder proposals. There was little change in the rate of favorable votes for director nominees, while there was an increase in vote failures for equity plan proposals. And SB shows that unfavorable vote recommendations from ISS apparently do make a difference.
Exxon employs “direct-to-court” strategy for shareholder proposal. Will others do the same?
Back in 2014, a few companies, facing shareholder proposals from the prolific shareholder-proposal activist, John Chevedden, and his associates, adopted a “direct-to-court” strategy, bypassing the standard SEC no-action process for exclusion of shareholder proposals. In each of these cases, the court handed a victory of sorts to Mr. Chevedden, refusing to issue declaratory judgments that the companies could exclude his proposals. (At the end of the day, one proposal was defeated, one succeeded and one was ultimately permitted to be excluded by the SEC. See this PubCo post, and these News Briefs of 3/18/14, 3/13/14 and 3/3/14.) Now, ten years later, ExxonMobil has picked up the baton, having just filed a complaint against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. In summary, the proposal asks Exxon to accelerate the reduction of GHG emissions in the medium term and to disclose new plans, targets and timetables for these reductions. Will Exxon meet the same fate as the companies in 2014? Perhaps more significantly, Exxon took this action in part because it viewed the SEC’s shareholder proposal process as a “flawed” system “that does not serve investors’ interests and has become ripe for abuse by activists with minimal shares and no interest in growing long-term shareholder value.” If Exxon is successful in its litigation, will more companies, likewise faced with environmental or social proposals and perhaps perceiving themselves beset by the same flawed process, follow suit (so to speak) and sidestep the SEC?
NYSE’s proposed listing standards for Natural Asset Companies bite the dust
Last year, the NYSE proposed to adopt new listing standards for the common equity securities of a “Natural Asset Company,” a new type of public company defined by the NYSE as “a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services.” Although existing regulatory and listing requirements would continue to apply to NACs, the proposal contemplated, in addition, a fairly elaborate new NAC governance and reporting ecosystem involving specific provisions in corporate charters, new mandatory policies (environmental and social, biodiversity, human rights, equitable benefit sharing), new prescribed responsibilities for audit committees and a new reporting framework, including mandatory “Ecological Performance Reports.” (See this PubCo post.) Why did the NYSE introduce this proposal? Notwithstanding all of the developments in ESG disclosure and investing (such as ESG funds), the NYSE contended that “investors still express an unmet need for efficient, pure-play exposure to nature and climate.” According to the Intrinsic Exchange Group, which pioneered the NAC concept and advises public sector and private landowners on the creation of NACs, “[b]y taking a NAC public through an IPO, the market transaction will succeed in converting the long-understood—but to-date unpriced—value of nature into financial capital. This monetization event will generate the funding needed to manage, restore, and grow healthy ecosystems around the world and bring us closer to achieving a truly sustainable, circular economy.” At the time of the proposal, I asked whether this proposal would be a game changer to rescue our environment or merely a chimera? The answer, at least for now, seems to be chimera. In December, the SEC instituted proceedings to determine whether to approve or disapprove the proposal, asking for comment on a number of questions that were based broadly on concerns raised by commenters, such as issues regarding the licensing arrangements for NACs and the relationship between NYSE and IEG. Then, on January 17, 2024, the NYSE withdrew its proposal. Why?
Atlantic herring get their day in court—does it spell the end of Chevron deference?
On Wednesday, SCOTUS heard oral argument—for over three and a half hours—in two very important cases, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Dept of Commerce, about whether the National Marine Fisheries Service (NMFS) has the authority to require Atlantic herring fishing vessels to pay some of the costs for onboard federal observers who are required to monitor regulatory compliance. And they’re important because… why? Because one of the questions presented to SCOTUS was whether the Court should continue the decades-long deference of courts, under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, to the reasonable interpretations of statutes by agencies. The doctrine of Chevron deference mandates that, if a statute does not directly address the “precise question at issue” or if there is ambiguity in how to interpret the statute, courts must accept an agency’s permissible interpretation of a law unless it is arbitrary or manifestly contrary to the statute. Of course, the conservative members of the Court have long signaled their desire to rein in the dreaded “administrative state,” especially when agencies are advancing regulations that conservative judges perceive as too “nanny state.” And overruling Chevron is one way to do just that. (See, for example, the dissent of Chief Justice John Roberts in City of Arlington v. FCC back in 2013, where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed,” not to mention the concurring opinion of Justice Neil Gorsuch in the 2016 case, Gutierrez-Brizuela v. Lynch, where he referred to Chevron as an “elephant in the room” that permits “executive bureaucracies to swallow huge amounts of core judicial and legislative power.” And then there’s Justice Brett Kavanaugh’s 2016 article, Fixing Statutory Interpretation, in which he argues that Chevron is a “judicially orchestrated shift of power from Congress to the Executive Branch.” See the SideBars below.) But, in recent past cases, SCOTUS has resolved issues without addressing Chevron, looking instead to theories such as the “major questions” doctrine. (See this PubCo post.) The two cases now before the Court, however, may well present that long-sought opportunity. Depending on the outcome, their impact could be felt far beyond the Marine Fisheries Service at many other agencies, including the SEC and the FDA. Will we soon be seeing a dramatically different sort of administrative state? To me, it seemed pretty clear from the oral argument that SCOTUS is likely to jettison or significantly erode Chevron. Among the most conservative justices at least, there didn’t seem to be a lot of interest in half-measures—been there, done that. (The concept of the Court’s limiting its decision to whether statutory silence should be treated as ambiguity, as some had hoped, did not even come up for serious discussion.) But what approach the Court might take—overrule Chevron with no alternative framework suggested, adopt a version of “weak deference” as outlined in a 1944 case, Skidmore v. Swift & Co., or possibly even “Kisorize” (as they termed it) Chevron by imposing some serious limitations, as in Kisor v. Wilkie—that remains to be seen.
What’s new in best practices for board governance in 2024?
In this brand new report, The Conference Board looked at several of the less glitzy areas of board governance to identify some evolving best practices for attaining board excellence, such as board continuing education. From AI to ESG, corporate boards are bombarded by new and important issues about which they must attain some level of understanding and fluency. But how? Is there anything new in best practices for continuing education? Other areas of focus in the report are board self-evaluations, director overboarding and committee rotation. Are there any developments in best practices in those areas? TCB has some data and some advice, discussed below.
Is ESG backlash triggering a change in policies or just a change in terminology?
As discussed in this article from the WSJ, The Latest Dirty Word in Corporate America: ESG, ESG backlash is driving many company executives to drop any reference to “ESG” and instead use terms like “sustainability” or “responsible business,” or opt for “green hushing” altogether. Citing an analysis from FactSet, the WSJ reported that, on “earnings calls, mentions of ESG rose steadily until 2021 and have declined since…. In the fourth quarter of 2021, 155 companies in the S&P 500 mentioned ESG initiatives; by the second quarter of 2023, that had fallen to 61 mentions.” But are companies just turning down the volume while still pursuing the same aspirations or have they trimmed their objectives too?
Are there best practices for linking executive compensation to climate goals?
In this new paper, Feet to the Fire: How Should Companies Tie Executive Compensation to Climate Targets?, from the Rock Center for Corporate Governance at Stanford, the authors looked at how some companies bolstered their commitments to climate action—the authors refer to it as “institutionalizing” their climate goals and commitments—by including climate-related metrics in executive compensation plans and agreements. The authors observed that, increasingly, even in the absence of regulation, companies have made voluntary pledges to reduce their carbon emissions. Citing MSCI, the authors report that about “half of large, publicly traded companies have established carbon emissions targets, and a third have pledged to achieve net zero emissions by 2030 or 2050.” But is there anything to these promises? Have any of these carbon reduction objectives been fully integrated into the company’s strategy, operations or corporate culture? One way that some companies have sought to realize their climate goals is by tethering them to a measure of compensation. These climate metrics can function as both a signal of seriousness to the public and a mechanism for bringing accountability. In employing climate metrics as performance conditions in compensation programs, are there best practices to effectively achieve the kind of “institutionalization” that the authors advance?
Center for Political Accountability provides guidance on challenges of corporate political spending
As we begin this new year—a highly charged election year—it might be helpful to check out the Guide to Corporate Political Spending produced by the non-partisan Center for Political Accountability. The Guide, released last year, is designed to help companies through the thicket of decision-making about political spending, especially given the increasingly fractious political environment and the heightened scrutiny that companies face when they engage in political spending—especially where that spending may conflict with publicly espoused corporate values. The Guide addresses “the risks and challenges that management and boards face in establishing political spending policies, making spending decisions, conducting due diligence, and meeting the expectations of stakeholders.” The Guide identifies five challenges and then recommends various actions that companies should take in anticipation of or in response to those challenges. They are summarized below, but reading the Guide itself in full is always recommended.
Senators urge SEC to propose human capital disclosure regulations “without further delay”
In August 2020, as part of an overhaul of Reg S-K, the SEC adopted a new requirement to discuss human capital, taking a principles-based approach. (See this PubCo post.) For the most part, the initial response to the new requirement was underwhelming; early subsequent reporting suggested that companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand.” (See this PubCo post.) However, recent studies have shown some expansion of disclosure, with one study showing that the number of companies disclosing their EEO-1 workforce diversity data “has more than tripled between 2021 and 2022, from 11% to 34%” and that nearly three-quarters of companies in the Russell 1000 disclose some form of race and ethnicity data. Headway, but apparently not enough to deter Corp Fin from moving forward with a proposal to enhance company disclosures regarding human capital management. Or is it? The SEC’s most recent reg-flex agenda shows a target date for a proposal of April 2024, but that date represents a delay from previous target dates of October 2022, April 2023 and October 2023. In February 2022, Senators Sherrod Brown and Mark Warner, the Chair and a member, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs, submitted a letter to SEC Chair Gary Gensler, calling on the SEC to include in its proposal a requirement that companies report about—not just employees—but also the number of workers who are not classified as full-time employees, including “gig” workers and other independent contractors. (See this PubCo post.) Now, perhaps triggered by the latest SEC agenda, the pair have once again submitted a letter to Gensler, this time to make known that they “were disappointed to see that the SEC’s recently released fall 2023 regulatory agenda suggests the release of a proposed rule on ‘Human Capital Management Disclosure’ is likely to be delayed.” In this second attempt, they pressed the SEC “to act expeditiously to bring an improved human capital management disclosure proposal to a vote before the full Commission.” Will this letter goad the SEC into taking action on this rulemaking?
Happy holidays!
Corp Fin adds one more new CDI on Form 8-Ks for material cybersecurity incidents
A few days ago, Corp Fin issued three new CDIs relating to delays in reporting material cybersecurity incidents on Form 8-K. Those CDIs, together with the Department of Justice Material Cybersecurity Incident Delay Determinations, addressed questions related to the Attorney General’s determination—or not—that disclosure of the incident on Form 8-K would pose a substantial risk to national security or public safety. (See this PubCo post.) Yesterday afternoon, Corp Fin added a new CDI on a closely related topic—the impact of a DOJ consultation on a determination, for reporting purposes, about the materiality of the incident itself. As Corp Fin Director Erik Gerding observed in a speech yesterday on cybersecurity disclosure, the CDI was intended to ensure that companies are not deterred from consulting with the DOJ or other national security agencies. The new CDI can be found under the caption Exchange Act Forms, in Section 104B, Item 1.05 Material Cybersecurity Incidents. A summary is below, but the CDI number is linked to the CDI on the SEC website, so you can easily read the version in full.
You must be logged in to post a comment.