Category: ESG
SEC’s Investor Advisory Committee discusses audit committee overload and disclosure
In May, SEC Chief Accountant Paul Munter, quoted here, cautioned his conference audience about the potential for audit committee overload. “More demands are being put on audit committees, sometimes on topics outside their core responsibility,” he said. “Audit committees need to be continually vigilant that they have enough time to focus on their core mission—protecting investors—and don’t let other topics cloud that out.” While the AC’s primary responsibilities are generally thought to be oversight of financial reporting, including the audit of a company’s financial statements and internal control over financial reporting, these days, the AC often becomes the default committee of choice for oversight of other emerging risks, such as cybersecurity and even ESG. With ACs now perhaps the “kitchen sink of the board,” are its members stretched too thin to carry out fundamental responsibilities? Are members being asked to operate outside of their core skillsets? What is the impact? These concerns appear to have prompted the panel at last week’s meeting of the SEC’s Investor Advisory Committee discussing AC workload and transparency.
Commissioner Uyeda addresses shareholder proposal overload—is “private ordering” the answer?
On Wednesday, SEC Commissioner Mark Uyeda spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under rule 14a-8, a topic on which, historically, the commissioners’ energetic back-and-forth has been reflected in Corp Fin interpretations that have literally shifted back and forth. You might think these reversals are a new thing, but Uyeda reminds us about the goings-on in 2015, when Whole Foods was first permitted to exclude, as a conflicting proposal under Rule 14a-8(i)(9), a proxy access proposal, only to have the staff reverse course shortly thereafter. (See this PubCo post, this PubCo post and this PubCo post.) “Relying on the Commission’s rules, or its staff’s positions,” he later observes, “in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.” However, Uyeda finds the reversals over the course of the last few years particularly problematic. In his view, the recent interpretative changes in SLB 14L have led to a surfeit of proposals the aggregate effect of which he finds to be “value-eroding.” He suggests some approaches to address the problem. Are we looking at a fundamental—some might say radical— reimagining of the shareholder proposal process?
SEC posts Spring 2023 Reg-Flex Agenda—not much new but lots left to do
The SEC’s Spring 2023 Reg-Flex Agenda—according to the preamble, compiled as of April 10, 2023, reflecting “only the priorities of the Chair”—has now been posted. Here is the short-term agenda, which shows most Corp Fin agenda items targeted for action by October 2023, potentially making the next four months an especially frenetic period, with only a few proposal-stage items targeted for April 2024. And here is the long-term (maybe never) agenda. Describing the new agenda, SEC Chair Gary Gensler observed that “[t]echnology, markets, and business models constantly change. Thus, the nature of the SEC’s work must evolve as the markets we oversee evolve. In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour. Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition.”
The short-term agenda includes a half dozen or so potential proposals that were on the Fall 2022 agenda, but didn’t quite make it out of the starting gate, such as plans for disclosure regarding corporate board diversity and human capital. Similarly, issues related to the private markets are still awaiting proposals. The question of why and how to address the decline in the number of public companies has, in the recent past, been a point of contention among the commissioners: is excessive regulation of public companies a deterrent to going public or has deregulation of the private markets juiced their appeal, but sacrificed investor protection in the bargain? That debate may play out in the coming months with two new proposals targeted for October this year: a plan to amend the definition of “holders of record” and a proposal to amend Reg D, including updates to the accredited investor definition. And the behemoth proposal regarding climate change disclosure—identified on the last agenda as targeted for final action but not considered for adoption on the schedule as planned—reappears on the current calendar with a later target date. Will that new target be met? Notably, political spending disclosure is, once again, not identified on the agenda. That’s because Section 633 of the Appropriations Act once again prohibits the SEC from using any of the funds appropriated “to finalize, issue, or implement any rule, regulation, or order regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.”
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.
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