Investor Advisory Committee recommends human capital management disclosure
On Thursday last week, the SEC’s Investor Advisory Committee voted to approve, with two abstentions, a subcommittee recommendation regarding human capital management disclosure. You probably remember that, in 2020, during the tenure of then-SEC Chair Jay Clayton, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K that applied a “principles-based” approach. The new rule limited the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” (See this PubCo post.) With workforce having grown in importance as a value driver, many viewed the amendment as a step in the right direction, but one that fell short. Subsequent reporting suggested that companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand” (although more recent studies have shown some expansion of disclosure). (See this PubCo post.) As you know, Corp Fin is currently working on a proposal to mandate enhanced company disclosures regarding HCM, and, according to the most recent Reg-Flex agenda, October is the target for issuance of the proposal. (See this PubCo post.) Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners. Will the IAC recommendations have any impact?
SEC charges CBRE for violation of whistleblower protections
One area where SEC Enforcement appears to have focused its attention recently is whistleblower protections. In this Order against CBRE, Inc., the SEC brought settled charges against the commercial real estate services and investment firm for using an employee release form that the SEC alleged violated Exchange Act Rule 21F-17, the SEC’s whistleblower protection rule. The purpose of the whistleblower provisions in the Exchange Act, added in 2010 as part of Dodd-Frank, was to “encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections.” To prevent obstruction of that reporting, the SEC adopted Rule 21F-17, which provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” The SEC’s order found that, “by conditioning separation pay on employees’ signing the release, CBRE took action to impede potential whistleblowers from reporting complaints to the Commission.” According to an SEC Regional Director, it “is critical that employees are able to communicate with SEC staff about potential violations of the federal securities laws without compromising their financial interests or the confidentiality protections of the SEC’s whistleblower program….We commend CBRE for its swift and far-reaching remediation and for its high level of cooperation with our staff, which is reflected in the terms of the resolution.” Is it time to take another look at your employee separation agreements and release forms?
Time for EDGAR Next?
Last week, the SEC proposed changes to the EDGAR system designed primarily to enhance EDGAR security, specifically related to EDGAR filer access and account management. In his Statement, SEC Chair Gary Gensler observed that a “lot has changed in the three decades since the Commission first required mandatory EDGAR filings in 1993.” While the SEC has updated EDGAR several times, it’s been over ten years since the SEC updated EDGAR login, password and other account access protocols in any significant way. Currently, Gensler reminded us, “registrants have one login per company. This is like having a family passing around one shared login and password for a movie streaming app. You know where that can lead. That’s simply not the most secure system—for filers and the Commission alike—when it comes to information relating to financial disclosure. By contrast, today’s actions would further secure login protocols by requiring every person filing something into EDGAR to login with individual credentials and to use multi-factor authentication.” Will the proposed new system, if finalized, put the kibosh on fake SEC Form 4s, fake Forms 8-K, fake Schedules 13D, fake SEC correspondence and other fake SEC filings? The proposal is open for comment for 60 days after publication in the Federal Register.
Alliance Advisors wraps up the 2023 proxy season
Alliance Advisors, a proxy solicitation and corporate advisory firm, has posted its 2023 Proxy Season Review, an analysis of trends from the 2023 proxy season. Its principal message: ESG proposals saw sagging results again this year, “continuing a downward trend” from 2021. Although the number of shareholder proposals submitted to U.S. public companies was substantial (958 as of June 30, 2023, compared with 987 for all of 2022), Alliance Advisors reports that there was a dramatic decline from last year in “average support across all categories of shareholder proposals,” and “the number of majority votes plunged from 80 in 2022 to 28 in the first half of 2023.” More specifically, according to Alliance, average support on governance proposals fell to 29.9% in 2023 from 37.4% in 2022 and 38.4% in 2021, and there was a bit of a roller-coaster effect on compensation-related proposals, where average support declined to 23.7% in 2023 from 31.4% in 2022 but increased from 21% in 2021. Most pronounced was the change in average support for environmental and social (E&S) proposals, which declined to 18.3% in 2023 from 27.3% in 2022 and 37.2% in 2021. Will it turn out that 2021 was the “high-water mark” for shareholder proposals on ESG? The report explores trends in shareholder proposals and examines what may account for the flagging voting results.
Starbucks decision to adopt DEI initiative within Board’s business judgment
In August last year, the National Center for Public Policy Research filed a complaint against Starbucks and its officers and directors, National Center for Public Policy Research v. Schultz, alleging that they caused Starbucks to adopt a group of policies that discriminate based on race in violation of a “wide array of state and federal civil rights laws.” Starbucks characterized the policies as designed to “realize its ‘commitment to Inclusion, Diversity, and Equity[.]’” Starbucks, its officers and directors moved to dismiss, and a hearing on the motion was held on August 11, 2023. At the hearing, the Federal District Court for the Eastern District of Washington granted the motion to dismiss with prejudice and closed the case. A month on, the Court’s Order has now been released. While the Order discusses the various legal bases for the dismissal, the Court’s sentiment was perhaps best summed up by its statement in the Order that “[t]his Complaint has no business being before this Court and resembles nothing more than a political platform.” Much like the recent decision of the Delaware Chancery Court in Simeone v. The Walt Disney Company, the Court concluded that “[c]ourts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations.” Are we starting to see a trend with regard to board business decisions about corporate social policy?
SEC charges Fluor with improper accounting and inadequate internal accounting controls
In this Order, the SEC brought settled charges against Fluor Corporation, a global engineering, procurement and construction company listed on the NYSE, in connection with alleged improper accounting on two large-scale, fixed-price construction projects. Five current and former Fluor officers and employees were also charged. (The press release includes links to the orders for the five individuals.) Fixed-price contracts mean that cost overruns are the contractor’s problem, not the customer’s, and Fluor’s bids on the two projects were based on “overly optimistic cost and timing estimates.” When Fluor experienced cost overruns, the SEC alleged, Fluor’s internal accounting controls failed, with the result that Fluor used improper accounting for these projects that did not comply with the percentage-of-completion accounting method under GAAP, leading Fluor to materially overstate its net earnings for several annual and quarterly periods. A restatement ultimately followed. Fluor agreed to pay a civil penalty of $14.5 million and the officers to pay civil penalties between $15,000 and $25,000. According to the Associate Director in the Division of Enforcement, “[d]ependable estimates and the internal accounting controls that facilitate them are the backbone of percentage of completion accounting and are critical to the accuracy of the financial statements that investors rely on….We will continue to hold companies and individuals accountable for serious controls failures and resulting recordkeeping and reporting violations.”
Corp Fin posts sample comment letter on XBRL
Corp Fin has posted a sample comment letter to companies about their XBRL disclosures. I don’t pretend to know or understand a thing about XBRL, much less Inline XBRL, so I won’t even try to elaborate but, for your reading pleasure, here are the comments.
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