Category: ESG
SEC adopts amendments to modernize Reg S-K requirements for business, legal proceedings and risk factor disclosures (UPDATED)
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
By a vote of three to two, on Wednesday, the SEC voted to adopt amendments, substantially as proposed with some modifications, to modernize the Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors. As Chair Jay Clayton observed in his Statement, these Reg S-K disclosure items “essentially have not changed in over 30 years,” but much has changed in our economy since that time, making these updates well warranted. The changes are a component of the SEC’s Disclosure Effectiveness Initiative and reflect public comments on the SEC’s 2016 Concept Release (see this PubCo post) and the 2019 Reg S-K proposal (see this PubCo post), as well as experience from the staff’s disclosure review process. In devising the final amendments, the SEC considered the “many changes that have occurred in our capital markets and the domestic and global economy” since the requirements were adopted. The amendments largely reflect the SEC’s historic “commitment to a principles-based, registrant-specific approach to disclosure” that, although “prescriptive in some respects,” is “rooted in materiality” and designed to provide an understanding of a company’s business through the lens that management and the board apply in managing and assessing the company’s performance. While there are changes throughout, the most significant change is the enhancement of the disclosure requirement for human capital, a topic that has been front-burnered by the impact of COVID-19 on the workforce. How substantially disclosure changes as a result of these amendments remains to be seen. The amendments will become effective 30 days after publication in the Federal Register.
World Economic Forum offers framework for valuing human capital—will it catch on?
With the SEC presumably about to adopt enhanced disclosure requirements for human capital next week (see this PubCo post), this new report from the World Economic Forum in Davos, prepared in collaboration with consultant Willis Towers Watson, offers a timely new framework for valuing human capital. While the COVID-19 pandemic has increased our focus on the value of the workforce as an asset, this shift in perspective is not entirely new: SEC Chair Jay Clayton has long recognized that, while, historically, companies’ most valuable assets were plant, property and equipment, and human capital was primarily a cost, now, human capital often represents “an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.” But he also recognized that developing a metric around this issue was not so easy. (See this PubCo post.) The pandemic, however, serves as a springboard: the new WEF report contends that, as “companies look to reset for the new world of work that emerges from the pandemic, they would benefit from an approach that values talent as a key asset that contributes to an organization’s sustained value creation. This calls for the development of a new human capital accounting framework, which would enable a company’s board and management to track how their investment in people is augmenting the firm’s human capital, and support the delivery of better outcomes for the business, the workforce and the wider community.” The report seeks to offer that framework. Whether it actually catches on is another question.
Does workplace sexual harassment predict poor stock price performance?
We’ve certainly seen any number of examples of companies taking a big hit when sexual harassment of employees by key executives comes to light—sometimes someone even makes a pretty good movie about it. But what about your everyday non-CEO harasser? Does workplace sexual harassment affect the value of the company? Some might argue that it’s just a case of correlation, not causation, but in this study, the authors found that a high incidence of workplace sexual harassment has a powerful adverse impact on company value. Toxic culture, it turns out, matters when it comes to shareholder value.
GAO finds lack of consistency in ESG disclosure—how will the SEC respond?
In 2018, in recognition of the increasing expectation of shareholders to see disclosure regarding material environmental, social and governance issues that affect financial performance and communities, Senator Mark Warner asked the GAO to prepare a report on public company disclosure regarding ESG. That report has now been issued. According to Warner, “[m]ost institutional investors find current company financial disclosures limited in their usefulness, and augment company disclosures through burdensome engagement with the company, purchasing third party compilation data, or initiating shareholder proposals. It is time for the SEC to establish a task force to establish a robust set of quantifiable and comparable ESG metrics that all public companies can adhere to.” Although SEC Chair Jay Clayton has acknowledged “the growing drumbeat for ESG reporting standards,” he has made clear his lack of enthusiasm for imposing a prescriptive sustainability disclosure requirement that goes beyond principles-based materiality. (See, e.g., this PubCo post and this PubCo post.) Will the SEC address the drumbeat?
Corporate political spending and its potential consequences
Has all of the current political unrest and social upheaval had any impact on the drive for political spending disclosure? Apparently so, according to the nonpartisan Center for Political Accountability, which reports in its June newsletter that support for shareholder proposals in favor of political spending disclosure hit record highs this past proxy season. But one risk potentially arising out of political spending is reputational, which could fracture a company’s relationship with its employees, customers and shareholders. As companies and CEOs increasingly offer welcome statements on important social issues such as climate change, healthcare crises and racial injustice, the current heated political climate has heightened sensitivity to any dissonance or conflict between those public statements and the company’s political contributions. When a conflict between action in the form of political spending and publicly announced core values is brought to light, will companies be perceived to be merely virtue-signaling or even hypocritical? To borrow a phrase from asset manager BlackRock, if the public perceives that these companies are not actually doing “the right thing”—even as they may be saying the right thing—will they lose their “social license” to operate? (See this PubCo post.) CPA’s brand new report on Conflicted Consequences explores just such risks.
Will companies accede to calls for actions to improve racial and ethnic diversity in hiring and promotion? California considers a new mandate for racial/ethnic board diversity
In this excellent NYT article from early June, the author painfully explores the view of many African-American executives that, notwithstanding the public condemnations of racism by many public companies and the “multimillion-dollar pledges to anti-discrimination efforts and programs to support black businesses,” still, many of these companies “have contributed to systemic inequality, targeted the black community with unhealthy products and services, and failed to hire, promote and fairly compensate black men and women. ‘Corporate America has failed black America,” said [the African-American president of the Ford Foundation]. ‘Even after a generation of Ivy League educations and extraordinary talented African-Americans going into corporate America, we seem to have hit a wall.’” In the article, a number of Black executives offer recommendations for actions companies should take to begin to implement the needed systemic transformation. And now, third parties—from proxy advisors to institutional investors to legislators—are taking steps to induce companies to take some of these actions. Will they make a difference?
Petition requests SEC mandate disclosure to help assess climate risk
As you know, there has been a fairly sustained clamor for the SEC to impose a requirement for climate change and sustainability disclosure. For example, in May, the SEC’s Investor Advisory Committee recommended that the SEC “set the framework” for issuers to report on material environmental, social and governance information, concluding that “the time has come for the SEC to address this issue.” (See this PubCo post.) However, SEC Chair Jay Clayton and others at the SEC have been fairly vocal about their reluctance to impose a prescriptive sustainability disclosure requirement beyond principles-based materiality. But what about a narrower request? A mandate for just a single piece of information? This rulemaking petition filed by Impax Asset Management LLC, investment adviser to Pax World Funds, a “specialist asset manager investing in the transition to a more sustainable economy,” requests that the SEC “require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.”
Is it time for a reimagined compensation committee?
Perhaps during the shutdown, when you’re watching more TV than you might like to admit, you’ve seen some new commercials a bit like this: a happy face-masked employee on the line or in a lab displaying all the sanitizing and other pandemic-related safety precautions that the company is taking to protect the employee’s work environment. Cut to the employee at home with giggling youngsters, illustrating the importance of safety measures at work to protect family at home. Or a company emphasizing the value of its employees in keeping the country moving forward or its employees in lab coats that persevere to find a cure no matter what. Or a shot of employees performing the essential service of implementing safety measures for customers. What’s the point? To drive home that a company that recognizes the value of its employees and manifests such concern for their safety and welfare is a company worth buying from. This new emphasis on employee welfare as a corporate selling point may have been sparked by COVID-19 but, at another level, it may well reflect broader concerns that have been marinating for a while—about the essential value of previously overlooked elements of the workforce, about physical risk allocation, about economic inequity and, to some extent, even about social justice.
How to address some of these concerns related to the workforce—particularly economic inequity—is the subject of a new paper co-authored by former Delaware Chief Justice Leo Strine, “Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism.” The goal is to reimagine the compensation committee so that it becomes the board committee “most deeply engaged in all aspects of the company’s relationship with its workforce,” from retaining and motivating the workforce to achieve the company’s business objectives, to overseeing that the company fulfills its obligations as a responsible employer and, most of all, to positioning the company to “restore fair gainsharing.”
Tips for sustainability reporting
In his annual letter to CEOs in January, CEO Laurence Fink announced that BlackRock was putting “sustainability at the center of [its] investment approach,” and made clear that companies needed to step up their games when it comes to sustainability disclosure. (See this PubCo post.) Even in the aftermath of the COVID-19 outbreak, both BlackRock and State Street have issued statements indicating their intention to continue to center their stewardship on the demand for additional disclosure on key ESG and sustainability issues such as climate change risk and human capital management. For those seeking to improve their ESG reporting, a managing director of consultant Protiviti offers a number of recommendations in this Forbes article.
Companies divided on impact of COVID-19 on sustainability efforts
What has been the impact of the COVID-19 pandemic on companies’ sustainability efforts? On the one hand, as discussed in this article from the WSJ, C-suite occupants have been “trying to figure out what they’re willing to throw overboard as the economic storm spawned by the pandemic is swamping their ships. Businesses that were planning to help save the world are now simply saving themselves….History suggests this new [sustainability] paradigm is probably on the back burner.” Even BlackRock, which had previously announced that it was putting “sustainability at the center of [its] investment approach,” acknowledged in April, that “certain non-financial projects like sustainability reports had been ‘de-prioritized’ due to COVID-19. ‘We recognize that in the near-term companies may need to reallocate resources to address immediate priorities in these uncertain times.’ BlackRock’s report stated. BlackRock said it would ‘expect a return to companies focusing on material sustainability management and reporting in due course.’”
On the other hand, however, as this article from Financial Executives International observed, the COVID-19 pandemic has highlighted “the very issues that have been driving ESG concerns—managing resources, sustainability, community impact and employee well-being.” While it might have been “easy to assume the current crisis may permanently shift attention away from environmental, social and governance (ESG) concerns as management teams grapple with existential issues,” it turned out that “the very actions companies are taking will likely bring them closer to the multi-stakeholder, long-term value principles that lie at the heart of ESG.” How are companies viewing the effects?
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