Category: ESG
UPDATED—en banc Fifth Circuit puts the kibosh on the Nasdaq board diversity rules
(This post updates my post of December 12 to add further discussion of the decision.)
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post.) (Reuters points out that the same pair of challengers “led the successful U.S. Supreme Court challenge against race-conscious college admissions policies.” In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on that panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. In May, the en banc court heard oral argument, with a discussion dominated by rule skeptics. (See this PubCo post.) Last week, the Fifth Circuit, sitting en banc, issued its opinion in Alliance for Fair Board Recruitment v. SEC, vacating the SEC’s order approving Nasdaq’s board diversity proposal. No surprise there—the surprise was that the vote by the Fifth Circuit was nine to eight. The majority of the Court applied a strict interpretation—some might call it pinched—of the purposes of the Exchange Act to hold that the Nasdaq board diversity rules “cannot be squared with the Securities Exchange Act of 1934,” and, therefore, the SEC had no business approving them. Ironically, the dissent also contended that the SEC’s authority was limited—that its statutory authority to disapprove a rule proposed by Nasdaq, cast by the dissent as a “private entity” engaged in private ordering, was constrained by the Exchange Act. In effect, the dissent contended, the majority was advocating that the agency intrude more on this exercise in private ordering. According to Bloomberg Law, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” But if Nasdaq doesn’t appeal, how likely is it that the new Administration would do so?
En banc Fifth Circuit puts the kibosh on the Nasdaq board diversity rules
In August 2021, the SEC approved a Nasdaq proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. In May, the en banc court heard oral argument, with a discussion was dominated by rule skeptics. (See this PubCo post.) Yesterday, the Court issued its opinion in Alliance for Fair Board Recruitment v. SEC. No surprise there—the majority of the Court held that the Nasdaq diversity rules “cannot be squared with the Securities Exchange Act of 1934.” The surprise was that the vote on the Fifth Circuit was nine to eight. According to Bloomberg Law, a “Nasdaq representative said the exchange disagreed with the court’s decision, but doesn’t plan to appeal the ruling. An SEC spokesperson said the agency is ‘reviewing the decision and will determine next steps as appropriate.’” But if Nasdaq doesn’t appeal, how likely is that the new Administration would do so?
Below is a very quick paragraph to alert you to the decision. I plan to write a much longer post on the case (including the dissent) in the next day or so. Stay tuned for the update.
Profs share predictions for securities regulation under next Administration—and their response
In this post on the CLS Blue Sky Blog, two leading authorities on securities law, Professors John C. Coffee, Jr. and Joel Seligman, take a crack at prognosticating about SEC regulation—and even the SEC itself—under the next Administration. They contend that, with a new Republican majority on the Commission, including the new Chair, together with Republican majorities in Congress, the SEC will be in a position to “revise a broad range of statutory, rule, and enforcement policies of the Commission.” What’s more, the new Department of Government Efficiency—which they suggest, may not be entirely, um, open-minded when it comes to the SEC—could certainly put a major crimp in the resources available for the SEC’s budget. (They note the irony “that the SEC makes a large profit for the U.S. government, and in fiscal 2024, it obtained a record-high level of fines and sanctions (approximately $8.2 billion). Shrink its budget and you likely shrink that recovery.”) In their view, the SEC is “probably the most successful and effective of the New Deal administrative agencies, one that has helped preserve the integrity of our capitalist system,” but they fear that it may be handicapped in continuing to do so under the next Administration. With that in mind, they pre-announce their intent to “encourage a more informed debate by forming a ‘Shadow SEC,’ composed of acknowledged experts in securities regulation.” Let’s look at some of the potential legislation and rulemaking changes that they speculate might be in store for the SEC and public company disclosure.
“Outspoken critic” and former SEC Commissioner Paul Atkins to be nominated as SEC Chair
As widely reported, former SEC Commissioner Paul Atkins (2002-2008) is to be nominated to serve as SEC Chair. This WSJ op-ed describes him as the “anti-Gensler”—the “opposite of Mr. Gensler in temperament and regulatory ambition.” According to Politico, “Atkins has been an outspoken critic of everything from the financial reform measures enacted after the 2008 credit crisis to climate-related disclosures.” Further, Politico reports, “Atkins has sharply criticized what he considers heavy-handed policymaking for the last two decades. And he is seen by many in Washington as a well-connected regulator whose understanding of the SEC could allow him to move quickly as he enacts his vision for the regulator.” If he is confirmed, Politico continues, he “would be tasked with steering the SEC as it embarks on what is expected to be a new deregulatory age for Wall Street after nearly four years of aggressive rulemaking by the current chair, Gary Gensler. He would also be thrust into a series of policy fights over the $3 trillion cryptocurrency market, artificial intelligence and the cost of raising capital in the U.S.”
Fifth Circuit dismisses NCPPR appeal of Corp Fin’s Rule 14a-8 no-action relief
You might recall that, in 2023, the National Center for Public Policy Research submitted a shareholder proposal to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, NCPPR petitioned the Fifth Circuit for review. The SEC moved to dismiss the appeal. But after the NCPPR filed its appeal, Kroger filed its proxy materials with the SEC and included the NCPPR proposal in the proxy materials to be submitted for a shareholder vote. The proposal received less than two percent of the vote. Now, a three-judge panel of the Fifth Circuit has issued its opinion, dismissing the case for lack of jurisdiction; Judge Edith Jones dissented.
Court denies Chamber’s motion for summary judgment that California climate disclosure laws violate First Amendment
Given the impending change in Administration in D.C.—and all that portends for regulation—the States may, in many ways, take on much larger significance. Case in point: California’s climate disclosure laws and the ongoing litigation challenges there. In January, the U.S. and California Chambers of Commerce, the American Farm Bureau Federation and others filed a complaint (and in February, an amended complaint) against two executives of the California Air Resources Board and the California Attorney General challenging these two California laws. The lawsuit seeks declaratory relief that the two laws are void because they violate the First Amendment, are precluded under the Supremacy Clause by the Clean Air Act, and are invalid under the Constitution’s limitations on extraterritorial regulation, particularly under the dormant Commerce Clause. The litigation also seeks injunctive relief to prevent CARB from taking any action to enforce these two laws. (See this PubCo post.) California then filed a motion to dismiss the amended complaint for lack of subject matter jurisdiction and failure to state a claim. Interestingly, however, the motion did not seek dismissal of Plaintiffs’ First Amendment claim (except as to the Attorney General, whom the motion seeks to exclude altogether on the basis of sovereign immunity), even though California asserted that Plaintiffs’ First Amendment challenge was “legally flawed.” The Plaintiffs then moved for summary judgment on the First Amendment claim, and California moved to deny that motion or to defer it, enabling the parties to conduct discovery. In this Order, issued on election day, the Federal District Court for the Central District of California denied Plaintiffs’ motion to dismiss and granted California’s motion to deny or defer the motion for summary judgment.
What’s happening with political spending disclosure and accountability?
In this fraught election season and just before tomorrow’s important election day, the Center for Political Accountability has released its annual study, The 2024 CPA-Zicklin Index of Corporate Political Disclosure and Accountability. The report concludes that, overall, leading companies in the S&P 500 have been maintaining “established norms of political disclosure and accountability.” And “companies are not backsliding,” with improvements showing throughout the Index. In 2016, the report discloses, “there were roughly three bottom-tier core companies for every two top-tier core companies. In 2024, over five times as many core companies placed in the top tier as in the bottom.” And keep in mind that those norms have held firm even in the face of “fierce headwinds” against ESG for U.S. companies. In the foreword to the report, former SEC Commissioner Robert Jackson, Jr. writes: “At a moment when our nation is narrowly divided on so much, nearly 90% of Americans agree that corporations should disclose to investors their use of corporate money on politics—even more than the 73% who took that view in 2006. The decades since have seen a financial crisis, a global pandemic and three Presidencies. Those events, and more, have divided voters. Yet the American people have grown even more firm in their conviction that, when corporations participate in the nation’s politics, it is incumbent upon those companies to carefully consider, and explain to investors, how and why they do so.” As Jackson observes, “today, more than 20% of S&P 500 firms scored 90% or above on the Index’s accountability measures, nearly double the number from 2016,” reflecting recognition of “the benefits of independent oversight, careful controls, and transparency.” This information, he maintains, is important for investors to enable them “to decide whether, and how, to invest in American public companies.”
Be sure to VOTE! Election day is tomorrow!
PwC’s 2024 Corporate Directors’ Survey—how are boards addressing the current uncertainty?
The title of PwC’s new 2024 Corporate Directors’ Survey, Uncertainty and transformation in the modern boardroom, might clue you in to one of its themes: uncertainty—anxiety?—arising out of the looming election. According to PwC, the “2024 election matters more than usual. Not only is the American electorate more polarized than anytime in modern history—making corporate leaders’ every statement and decision subject to public criticism—the results could rapidly reshape the business landscape. Which political party emerges victorious in November, in the White House and/or the houses of Congress, may prove enormously consequential for how every industry functions. The impacts could be dramatic.” We may see policy changes on “tariffs, sanctions, treaties and alliances” that might “upend international trade and disrupt supply chains.” We could see revised tax policy and enforcement priorities, transformed attitudes toward DEI and ESG programs, different views on antitrust enforcement, immigration and possibly, “most significant for many industries, the incentives that have fueled recent sustainability investments could grow further—or be diminished.” That makes “a board’s ability to be agile and stay current in the face of uncertainty” more important than ever. To assess the state of current boardrooms, PwC surveyed 500 public company directors, concluding that boards just might be evolving “too slowly to effectively meet the challenges facing companies today and tomorrow, irrespective of potential political disruptions.” PwC attempts to understand what is driving the results and recommends approaches to addressing the issues.
Are ESG performance metrics in comp plans just a layup with little impact?
There’s been a lot of attention lately to the use of ESG metrics as incentives in executive compensation, perhaps because the concept of ESG has become something of a lightning rod in the political landscape—particularly given the fallout from recent court decisions on diversity as well as escalating activity by anti-ESG groups. As discussed below, consultants have found that the use of ESG metrics seems to have levelled out, as some institutional investors have begun to view them cautiously and some academics studies have questioned their rigor and even their benefit. Companies employing ESG metrics as part of their comp plans may want to consider some of the issues raised by these studies, such as level of challenge and transparency, in designing their ESG metrics.
In new GAO report, some distressing news about SEC’s conflict minerals rules and violence in DRC
“Conflict Minerals—Peace and Security in Democratic Republic of the Congo Have Not Improved with SEC Disclosure Rule.” That is the title of the final required report of the U.S. Government Accountability Office, the last of 17 reports provided in response to the statutory mandate of the 2010 Dodd-Frank Act. As you probably know, the SEC’s conflict minerals rules were originally mandated by Congress in Section 1502 of Dodd-Frank in an attempt to limit the use of revenue from the trade in conflict minerals to fund the operations of armed groups that have wreaked violence in the DRC and adjoining countries. Under Dodd-Frank, the GAO is required to assess periodically the effectiveness of the SEC’s conflict minerals rules in promoting peace and security in the DRC region. While the blunt conclusions of this year’s report are, to say the least, very discouraging—even devastating—on so many levels, they should not come as a complete surprise: in 2022, the GAO also reported that the violence in the DRC had not abated: “overall peace and security in the region has not improved since 2014 because of persistent, interdependent factors that fuel violence by non-state armed groups.” (See this PubCo post.) But that assessment was not showcased in the title as it is this year. This time, as Liz Dunshee so aptly phrased it on thecorporatecounsel.net, the report “did not bury the lede.” This year, the GAO found that, not only had the rule not curtailed the level of violence in the DRC, in some areas, the rule was actually associated with a spread of violence. That is, if the report’s findings are accurate, not only are we not helping the problem; in some contexts, such as gold mining, we’re actually exacerbating it. It’s worth noting that, as the GAO reports, the “SEC disagreed with some of GAO’s findings and raised concerns about some of its methodology and analyses. In response, GAO made certain adjustments that did not materially affect its findings.” Will the disturbing conclusions of the report propel Congress to reexamine Section 1502?
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