Results for: board racial diversity
ISS releases new benchmark policies for 2021
Yesterday, ISS released its new benchmark policies, effective for shareholder meetings on or after February 1, 2021. In addition to anticipated policy changes (see this PubCo post) regarding board racial and ethnic diversity, shareholder litigation rights (such as exclusive federal forum provisions) and director accountability for governance failures related to environmental or social issues, ISS also made a number of other policy changes and clarifications, not previewed during the comment period, that generally relate to changing market practices, certain shareholder proposals and policies that were announced previously but subject to a transition period.
ISS proposes voting policy changes for 2021
Last week, ISS released for public comment a number of proposed voting policy changes to be applied for shareholder meetings taking place on or after February 1, 2021. The proposed changes for U.S. companies relate to board racial/ethnic diversity, director accountability for governance failures related to environmental or social issues and shareholder litigation rights, i.e., exclusive forum provisions. Comments may be submitted on the proposals through October 26, 2020.
Proposed amendments to shareholder proposal rules—bruised but unbowed?
The SEC may have postponed until next week the open meeting originally scheduled for yesterday to consider adoption of revisions to the shareholder proposal rules, but Reuters has the inside scoop on the outcome of at least one controversial provision: according to Reuters, say farewell to the “momentum” provision. The expected deletion of the provision, Reuters observed, “marks a critical reprieve for supporters of social and environmental motions, which can take years on the ballot to gain traction.” Reuters reports that investors have continued to press the SEC in letters and meetings with SEC staff, hoping to put the kibosh on the proposed amendments altogether. They appear to be having some impact. Will the SEC move ahead in the face of this strong opposition?
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.
SEC votes to modernize Reg S-K requirements for business, legal proceedings and risk factor disclosures
At an open meeting this morning, the SEC voted (three to two) to adopt amendments, substantially as proposed, 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 proposal (see this PubCo post)—although the extent to which those comments were taken into account was subject to some debate, as discussed below—as well as learning from the staff’s disclosure review process. As described in the press release, the amendments mainly adopt a “principles-based, registrant-specific approach to disclosure” that is intended to elicit information “on a basis consistent with the lens that management and the board of directors use to manage and assess the registrant’s performance.” The amendments are also intended to discourage repetition, reduce disclosure of information that is not material and simplify compliance. 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. The amendments will become effective 30 days after publication in the Federal Register.
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.
BlackRock reports on investment stewardship activities in connection with climate change
Although it may seem like the last millennium, it was only in January of this year that the CEO of BlackRock, Laurence Fink, in his annual letter to CEOs, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post.) According to Fink’s letter, “[c]limate change has become a defining factor in companies’ long-term prospects.” Although he had seen many financial crises over the course of his long career, in the broad scheme of things, they were all ultimately relatively short-term in nature. Not so with climate change: “Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis.” And investors are now “recognizing that climate risk is investment risk,” making climate change the topic that clients raised most often with BlackRock. To that end, BlackRock announced a number of new initiatives, among them “strengthening our commitment to sustainability and transparency in our investment stewardship activities.” As part of that initiative, BlackRock said that it would hold companies accountable if they failed to make sufficient progress. That position came in the face of press reports, like this one in the NYT, highlighting what appeared to be stark inconsistencies between the BlackRock’s advocacy positions and its proxy voting record, protests outside of its offices by climate activists, letters from Senators and charges of greenwashing. So what has been the result? BlackRock has just published a report describing its investment stewardship actions taken during 2020 in connection with climate and other sustainability issues. Given that BlackRock is the largest asset manager, companies may want to take note.
What’s on the SEC’s Spring 2020 RegFlex Agenda?
With so much going on in connection with COVID-19 and its impact, it would be easy to overlook the rest of the SEC’s agenda. And it’s a lengthy one. The new Spring Regulatory Flexibility Act Agenda was published at the end of June, so it’s time to look at what’s on deck for the SEC in the coming year or so. (That reference to “on deck” may be the only sports anyone gets this year….) SEC Chair Jay Clayton has repeatedly made clear his intent to make the RegFlex Agenda more realistic, streamlining it to show what the SEC actually expects to take up in the subsequent period. (Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually planned to pursue in the following 12 months. See this PubCo post and this PubCo post.) The SEC’s Spring 2020 short-term and long-term agendas reflect the Chair’s priorities as of March 31, when the agenda was compiled. What stands out here are the matters that have, somewhat surprisingly, moved up onto the final-rule-stage agenda—think universal proxy—from perpetual residence on the long-term (i.e., the maybe never) agenda.
What do investors want to see in COVID-19 disclosure?
Tuesday afternoon, SEC Chair Jay Clayton moderated a virtual roundtable, with Corp Fin Director Bill Hinman alongside, to hear how investors viewed current disclosure in connection with COVID-19 and, given that Q2 reporting is around the corner, what they would like to see. Participants on the panel included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chair of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chair and Co-Founder of BlackRock. While it was entirely predictable that forward-looking information about liquidity would be a key concern, the call by all the participating investors for disclosure about social issues—particularly human capital and diversity—was something of a revelation.
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.”
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