NAM seeks to challenge Rule 14a-8 regulatory process for shareholder proposals
You might recall that this past proxy season witnessed a significant number of shareholder proposals related to ESG—from both sides of the aisle. (See this PubCo post.) One of those proposals was submitted by the National Center for Public Policy Research 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, the NCPPR petitioned the Fifth Circuit for review. Now, the National Association of Manufacturers has requested, and been granted, leave to intervene in the case, claiming that neither the federal securities laws nor the First Amendment allows the SEC to use Rule 14a-8 to compel companies to speak about contentious political or social issues, such as abortion, climate change, diversity or gun control, that are “unrelated to its core business or the creation of shareholder value.” That is, NAM isn’t just arguing about Corp Fin’s greenlighting of the exclusion of NCPPR’s proposal—in fact, NAM agrees that “Kroger should not be forced to include petitioners’ policy proposal in Kroger’s proxy statement.” Rather, NAM is upping the ante considerably by challenging whether the SEC has any business “dictat[ing] the content of public company proxy ballots and the topics on which shareholders are required to cast votes.” According to NAM’s Chief Legal Officer, “[m]anufacturers are facing an onslaught of activists seeking to hijack the proxy ballot to advance narrow political agendas, and the SEC has become a willing partner in the effort. The corporate proxy ballot is not the appropriate venue for policy decisions better made by America’s elected representatives, and manufacturers are regularly caught in the middle as activists on the left and the right bring fights from the political arena into the boardroom.”
Federal court holds unconstitutional California’s board diversity statute regarding “underrepresented communities”
There have been a number of challenges to California’s board diversity legislation, SB 826, the board gender diversity statute, and AB 979, the board diversity statute regarding “underrepresented communities.” In two cases, Crest v. Padilla I and II, filed in state court, the plaintiffs notched wins and the court issued injunctions against implementation and enforcement of these two statutes. Both of these cases are currently on appeal, and the injunctions remain in place. But there were also cases filed in federal court, and, in one of those cases, Alliance for Fair Board Recruitment v. Weber, the U.S. District Court for the Eastern District of California has just granted the Plaintiff’s motion for summary judgment, concluding that AB 979 is unconstitutional on its face. The federal court decision could have reverberations in other states and potentially influence the ongoing state court appeals (as could an earlier decision on SB 826 by the Court going the other way. See the third SideBar below.)
SEC’s climate disclosure rules probably pushed back until fall
Here’s a scoop from S&P Global Market Intelligence : apparently, the climate disclosure rulemaking that was targeted for adoption in April 2023 has now been pushed back to the fall. At least that’s the information that former SEC Commissioner Robert Jackson has learned and revealed on a recent webinar. But given the thousands of comment letters and all the controversy over the climate disclosure rules, including pushback from politicians claiming the SEC had no authority to adopt climate disclosure rules, are you really surprised?
How are companies reacting to anti-ESG efforts?
It’s not just Mickey Mouse that’s feeling the heat from anti-ESG efforts lately. Reuters reports that, so far this year, legislators have filed about 99 so-called “ESG backlash” bills compared with only 39 in 2022; as of April 3, they report, “seven of the bills had been enacted into law, 20 were effectively dead, and 72 were still pending.” What are they about? A number of them are designed to protect fossil fuel companies from climate-related demands of various investment funds, while others relate to “hot-button environmental, social and governance (ESG) topics like abortion rights and firearms.” Not to mention the 68 anti-ESG proposals submitted this year to date (compared to 45 in 2022) as reported by Axios, citing data from the nonprofit Sustainable Investments Institute. According to the article, about a third of these proposals relate to corporate diversity endeavors, requesting that companies “report on the ‘risks’ that their anti-discrimination or racial justice efforts pose to their business.” Several others request that companies “avoid public policy positions unless there’s a business justification” or report on the risks arising out of their attempts to “achieve net zero” or other “decarbonization goals.” What is the fallout from these anti-ESG attempts? How can companies address the growing investor demands for ESG disclosure without—or perhaps despite—creating the impression among ESG opponents that they are just pursuing “an agenda”—or “Satan’s plan” according to Utah’s State Treasurer (as quoted in Reuters)?
What we need to know about corporate governance—but don’t
In this paper, Seven Gaping Holes in Our Knowledge of Corporate Governance, from the Rock Center for Corporate Governance at Stanford, the authors observe that it “is extremely difficult to produce high-quality, fundamental insights into corporate governance.” Why is that? Well there are lots of reasons. According to the authors, instead of the theory, measurement and analysis that you might expect—given that corporate governance is a social science—the “dialogue about corporate governance is dominated by rhetoric, assertions, and opinions that—while strongly held—are not necessarily supported by either applicable theory or empirical evidence.” And even empirical work from academics has serious shortcomings, often detecting a pattern that is not amenable to specific application or making findings that are too specific to generalize. Or, studies might find correlation but not permit attribution of causation; or it may be hard to suss out key variables that may not be publicly observable. As a result, there remain “central issues where insufficient or inadequate study has left us unable to answer basic questions, and where key assumptions relied upon by experts have not been verified or validated.” The paper attempts to identify some of them and home in on potential further areas of study.
Edelman Trust Barometer depicts business as a trusted, potentially stabilizing, force
Are there any institutions that we trust? According to an article from Edelman, which has just published the firm’s 23rd annual trust and credibility survey, while, as a society, we are still polarized and deeply distrustful, business was viewed as “the only trusted institution” at 62%. It’s sure not the ‘60s anymore! As the article recognizes, “[s]ome might have a hard time believing that today’s corporate leaders now stand as a stabilizing power in a fragile world.” As detailed in the new 2023 Edelman Trust Barometer, “business is now the sole institution seen as competent and ethical; government is viewed as unethical and incompetent. Business is under pressure to step into the void left by government.” From 2020 to 2023, international survey participants increased the ethics grade for business by 19 points. Edelman attributes the stunning increase to business’s response “to the social and economic consequences of COVID-19 and Russia’s attack on Ukraine—among other pressing issues,” during which many “corporate leaders put self-interest aside.” In the survey, government and media were viewed as neither competent nor ethical, driving a “cycle of distrust” as “sources of “misleading information,” particularly social media. To what does the barometer attribute these poor outcomes? In large part, to a sense of entrenched division and polarization that both arises out of a loss of faith in institutions and also generates it. Economic anxiety and income inequality are also seen as major forces in fueling polarization. “Given the unsettled state of the world,” Edelman asks, “can business remain a stabilizing force”?
Lots of shareholder proposals on ESG this proxy season—and quite a few anti-ESG proposals too
Notwithstanding legislative and executive action by several states in opposition to the supposed “woke” stances of some businesses on ESG and ESG investing—or perhaps because of it—this proxy season will see a significant number of shareholder proposals related to ESG. (See this PubCo post and this PubCo post.) As described in the 100+-page Proxy Preview 2023 from the Sustainable Investments Institute, As You Sow and Proxy Impact, there have been 542 ESG-related proposals as of mid-February and the number is “on track to match or exceed last year’s unprecedented final total of 627.” Of course, proponents of shareholder proposals don’t often expect to gain a majority vote—even if they did, the proposals are rarely binding. Rather, the goal is frequently to raise the issue for management and shareholders and hope to secure a substantial enough vote in favor to convince management to take action or, as the WSJ reports, to “create pressure for companies to change [or] to take a position on hot-button issues.” The Preview identified as the two biggest changes for the 2023 proxy season a continued increase in climate change-related proposals and, post-Dobbs, a significant number of proposals related to reproductive health. There has also been an increase in proposals identified as “anti-ESG,” and the Preview expects these proposals to increase, despite “the cool reception they receive.” According to a co-author of the report, “[c]omplex environmental and social challenges are not going away just because they prompt controversy….Proxy season will give companies feedback on reform ideas, but there’s no indication attacks on ESG investing are going to dampen investor appetite for facts and disclosure, which make the capital markets work better.”
COSO introduces “internal control over sustainability reporting”
Under the pressure of institutional investors, environmental groups, employees, consumers and other stakeholders, many companies have sought to demonstrate their bona fides when it comes to ESG through disclosure about their sustainability efforts, goals and achievements, whether in periodic reports or in separate sustainability reports. But, as reporting increases, so do concerns by some about potential greenwashing. How can companies assure the quality of their sustainability reporting and create more trust and confidence among stakeholders? One way might be through effective internal controls. So far, however, according to a new report from Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, ”[f]ew best practices have been established. While some larger institutions have progressed in building controls around environmental, social, and governance (ESG) reporting, many organizations have designed ad hoc controls around certain key sustainable business metrics. Many also perform internal verification and assurance procedures to ensure management comfort with this information. Yet few of them seem to have developed effective, integrated systems of internal control over their material or decision-useful sustainable business information.” Now, leveraging insights gleaned from development of the most widely used internal control framework—the COSO Internal Control-Integrated Framework—COSO has developed the concept of ”internal control over sustainability reporting” (ICSR). In its new report, which weighs in at 114 pages, COSO provides supplemental guidance that explains and interprets how each of the 17 principles in the 2013 version of the COSO ICIF applies to sustainable business activities and sustainable business information. According to the authors, “[i]nternal controls have value beyond compliance and external financial reporting. Effective internal controls can help an organization articulate its purpose, set its objectives and strategy, and grow on a sustained basis with confidence and integrity in all types of information.” As companies seek to “generate sustained value—ethically and responsibly—over the longer term,” with an emphasis on sustainability and ESG, both companies and their stakeholders need effective controls and oversight to provide the reliable and high-quality data needed for “decision making in this changing world.”
Sustainability reports—not a liability-free zone
In April of last year, as described in this press release, the SEC filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. In discussing the charges, the press release made reference to the SEC’s Climate and ESG Task Force formed in 2021 in the Division of Enforcement “with a mandate to identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by Vale.” On Tuesday, the SEC announced that Vale had agreed to pay $55.9 million to settle the SEC charges. According to the Associate Director of Enforcement, the SEC’s “action against Vale illustrates the interplay between the company’s sustainability reports and its obligations under the federal securities law….The terms of today’s settlement, if approved by the court, will levy a significant financial penalty against Vale and demonstrate that public companies can and should be held accountable for material misrepresentations in their ESG-related disclosures, just as they would for any other material misrepresentations.”
You must be logged in to post a comment.