Center for Political Accountability introduces Guide to Model Code
In 2020, the Center for Political Accountability introduced the CPA-Zicklin Model Code of Conduct for Corporate Political Spending, designed to provide a “thorough and ethical framework” for corporate political spending. The preamble states that the Code is a “public commitment to employees, shareholders and the public to transparency and accountability. It not only mitigates risk but also demonstrates the company’s understanding that its participation in politics must reflect its core values, its respect for the law and its responsibilities as a member of the body politic.” The goal is to help companies adopting this code to avoid the reputational and financial harm that might result from a failure to align corporate values and political spending. Ultimately, the CPA observes, “directors and officers are responsible and accountable for the political choices and broader impact that may result from their company’s election-related spending, no matter how financially immaterial it may seem.” Now, the CPA has developed a Guide to Becoming a Model Code Company, designed to help companies and their boards understand the Model Code and how it can help them manage election-related political spending in high-risk environments—think the 2024 election cycle now upon us. According to the President of the CPA, the Guide was developed based in part on questions raised by companies at a recent roundtable on corporate political spending at NYU’s Stern School.
Gensler won’t rush SEC’s agenda
As reported by Bloomberglaw.com, during an interview on “Balance of Power” on Bloomberg Television, SEC Chair Gary Gensler said that he does not intend to “rush” the SEC’s agenda “to get ahead of possible political changes in Washington,” that is, in anticipation of the November elections. According to Bloomberg, he insisted that he’s “‘not doing this against the clock….It’s about getting it right and allowing staff to work their part.’” As the article reminds us, if Republicans win all three branches in November, they could repeal regulations adopted shortly before the turnover in party control. In addition, a number of the SEC’s rules are being challenged in court and “those court battles could bleed into next year.”
Gensler talks about AI (and a bit about climate)
Yesterday, in remarks at Yale Law School, SEC Chair Gary Gensler talked about the opportunities and challenges of AI. According to Gensler, while AI “opens up tremendous opportunities for humanity,” it “also raises a host of issues that aren’t new but are accentuated by it. First, AI models’ decisions and outcomes are often unexplainable. Second, AI also may make biased decisions because the outcomes of its algorithms may be based on data reflecting historical biases. Third, the ability of these predictive models to predict doesn’t mean they are always accurate. If you’ve used it to draft a paper or find citations, beware, because it can hallucinate.” In his remarks, Gensler also addressed the potential for systemic risk and fraud. But, in the end, he struck a more positive note, concluding that the role of the SEC involves both “allowing for issuers and investors to benefit from the great potential of AI while also ensuring that we guard against the inherent risks.”
Does shareholder primacy mean just maximizing profits—and what does Exxon have to do with it?
As you know, the shareholder primacy theory is widely attributed to the Chicago school of economists, beginning in the 1970s, with economist Milton Friedman famously arguing that the only “social responsibility of business is to increase its profits.” Subsequently, two other economists published a paper characterizing shareholders as “‘principals’ who hired executives and board members as ‘agents.’ In other words, when you are an executive or corporate director, you work for the shareholders.” The idea, in effect, is that, as owners, shareholders may legitimately require that the company conduct its business in accordance with their desires. Of course, this idea has been subject to criticism by many as improperly ignoring the interests of other stakeholders, such as employees, customers and the community—so-called “stakeholder capitalism.” Under Friedman’s version of shareholder primacy, the desire of shareholders has long been presumed to be to maximize value and increase profits. But is it? The author of this article in Fortune makes the argument that the ongoing Exxon litigation against Arjuna and Follow This, two proponents of a climate-related shareholder proposal, throws into sharp relief a schism that has formed among adherents to the idea of shareholder primacy. The question posed is “what do shareholders really want, and are companies ever allowed to ignore them? Arjuna and Follow This own Exxon stock and are trying to dictate how the energy giant behaves. However, they are demanding more than dividends: They want Exxon to commit to more ambitious emissions reductions, and to some, that’s just as bad as companies admitting an obligation to workers or the community.” Does shareholder primacy necessarily mean just maximizing profits?
SEC Chief Accountant urges focus on professional skepticism and audit quality
SEC Chief Accountant Paul Munter has posted a new Statement. What’s on his mind? Apparently, he is disturbed that, in recent inspections of audits, the PCAOB has reported a “troubling” increase in deficiency rates—meaning the PCAOB found that there was insufficient audit evidence obtained to support the auditor’s opinion. Deficiency rates went from 29% in the PCAOB’s 2020 inspections to 34% in its 2021 inspections, up now to 40% in its 2022 audit inspections. This, he warned, was a “troubling trendline in PCAOB inspections results”—emphasis again on “troubling.” What does he prescribe? A “commitment to high-quality audits,” which, “in turn, calls for the auditor to exercise objective, impartial judgment and rigorous professional skepticism in gathering and evaluating evidence throughout the audit to support the audit opinions provided.” To be sure, both auditors and audit committees “should pay particularly close attention to areas that have been frequently identified as causes of deficiencies in PCAOB inspections.” In addition, he advises that “auditors should conduct engagements with a mindset that the investors, rather than management, are the audit client.” This commitment to high-quality audits, he contends, is the only way for auditors to protect the investing public. He offers advice for both auditors and audit committees.
Temperature drops on Exxon litigation over shareholder climate proposal—or does it?
You remember that, in January, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, two proponents of a climate-related shareholder proposal submitted to Exxon, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement? On February 1, Exxon filed a notice of withdrawal of its request for an expedited briefing schedule for its summary judgment motion in the case. Why? Because the two proponents had notified Exxon that they had withdrawn their proposal. End of story? Not necessarily. Exxon told Reuters that it would not withdraw the complaint, maintaining that there were still critical issues for the Court. And in a Court filing yesterday, Exxon explained why it believed that there was still a live controversy for the Court to resolve. How the Court responds remains to be seen. But regardless of what the Court decides, the withdrawal of the proposal in response to the litigation may well encourage other companies, similarly faced with unwelcome proposals, to bypass the SEC’s standard shareholder proposal process and follow the go straight-to-court strategy.
What happened with proxy votes in 2023?
Starting off the new year, consultant Semler Brossy’s latest report analyzes proxy results for 2023 among the S&P 500 and the Russell 3000, including votes on say on pay, environmental and social shareholder proposals, director elections and equity plans. According to SB, last year saw improvements in say-on-pay vote results and a decline in approval rates for E&S shareholder proposals. There was little change in the rate of favorable votes for director nominees, while there was an increase in vote failures for equity plan proposals. And SB shows that unfavorable vote recommendations from ISS apparently do make a difference.
What’s happening with critical audit matters?
Ideagen AuditAnalytics has just released its 2024 Report on Critical Audit Matters, a 3-Year Review, covering the years 2020 to 2022. Under the auditing standard for the auditor’s report (AS 3101), adopted in 2017, CAMs are defined as “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria. AS 3101 was initially adopted in 2017 and phased in beginning in 2019 according to the status of the filer. (See this PubCo post.) The Report provides data on the prevalence of CAMs and the most common topics for CAMs, and takes a deeper dive on matters such as valuation of assets in the merger context and going concerns.
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