On Friday, the SEC approved Nasdaq’s proposal for new listing rules regarding board diversity and disclosure, along with a proposal to provide free access to a board recruiting service. The new listing rules adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards in a matrix format. (See this PubCo post.) Nasdaq has now posted a three-page summary of its new board diversity rule, What Nasdaq-listed Companies Should Know.
You probably remember that, late last year, Nasdaq filed with the SEC a proposal for new listing rules regarding board diversity and disclosure, accompanied by a proposal to provide free access to a board recruiting service. The new listing rules would adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. In March, after Nasdaq amended its proposal, and in June, the Division of Trading and Markets, pursuant to delegated authority, took actions that had the effect of postponing a decision on the proposal—until now. On Friday afternoon, the SEC approved the two proposals.
It’s worth noting that the minibus budget package passed by the House last week includes a provision intended to put the kibosh on the proxy advisory firm rules that were adopted by the SEC in July 2020. Specifically, the bill provides that “[n]one of the funds made available by this Act may be used to implement the amendments to sections 240.14a-1(l), 240.14a–2, or 240.14a-9 of title 17, Code of Federal Regulations, that were adopted by the Securities and Exchange Commission on July 22, 2020.” Of course, Corp Fin had already put a temporary halt on enforcement of those rules. And unlike prior years, there is no provision in the House bill—yet—that would prohibit the SEC from using any of the funds to finalize rules requiring disclosure of corporate political spending. The bill next goes to the Senate, where, of course, there could be substantial changes.
Alliance Advisors has just released its 2021 proxy season review, a season they characterize as “dynamic,” as investors stepped forward to express their views on a variety of environmental and social topics. At least 34 E&S shareholder proposals won majority support, compared to 21 proposals last year. And over a dozen shareholder proposals on diversity, climate change and political spending won with votes in excess of 80%. There were also some new entries among the shareholder proposals—such as requests for racial audits, access to COVID-19 medicines and say on climate—that received support averaging around 30%, a level that Alliance characterizes as “remarkably” good for first timers. Alliance acknowledges that these results did not come entirely out of the blue, as large asset managers such as BlackRock and Vanguard had previously signaled that they might take steps this season to more closely align their proxy voting records with their advocacy positions.
In remarks yesterday on a webinar, “Climate and Global Financial Markets,” from Principles for Responsible Investment, SEC Chair Gary Gensler offered us some clues about what to expect from the SEC’s anticipated climate disclosure requirements by analogizing to the Olympics: there are rules to measure performance and the “scoring system is both quantitative and qualitative,” which “brings comparability to evaluating” performance among athletes and over time. In addition, as with the components of public company reporting generally, the types of sports included in the Olympics change over time—there was no Olympic women’s surfing competition 100 years ago, but interests and demand have changed. So with disclosure requirements, which have gradually expanded to include disclosure about management, MD&A, compensation and risk factors, some hotly debated topics in their time. Now, investors are demanding disclosure about climate risk, and it’s time for the SEC to “take the baton.” To that end, Gensler has asked the SEC staff to “develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year.” In his remarks, he outlines some of the concepts that are being considered for inclusion in that proposal.
Although BlackRock, which manages assets valued at over $9 trillion, and its CEO, Laurence Fink, have long played an outsized role in promoting corporate sustainability and social responsibility, BlackRock has also long been a target for protests by activists. As reported by Bloomberg, “[e]nvironmental advocates in cities including New York, Miami, San Francisco, London and Zurich targeted BlackRock for a wave of protests in mid-April, holding up images of giant eyeballs to signal that ‘all eyes’ were on BlackRock’s voting decisions.” Of course, protests by climate activists outside of the company’s offices are nothing new. There’s even a global network of NGOs, social movements, grassroots groups and financial advocates called “BlackRock’s Big Problem,” which pressures BlackRock to “rapidly align [its] business practices with a climate-safe world.” Why this singular outrage at BlackRock? Perhaps because, as reflected in press reports like this one in the NYT, activists have reacted to the appearance of stark inconsistencies between the company’s advocacy positions and its proxy voting record: BlackRock has historically conducted extensive engagement with companies but, in the end, voted with management much more often than activists preferred. For example, in the first quarter of 2020, the company supported less than 10% of environmental and social shareholder proposals and opposed three environmental proposals. BlackRock has just released its Investment Stewardship Report for the 2020-2021 proxy voting year (July 1, 2020 to June 30, 2021). What a difference a year makes.
On Tuesday, the Brookings Institution held a panel discussion regarding the role that the SEC should play in ESG investing. In describing the event, Brookings said that ESG issues “continue to climb in importance for many investors and policy makers. What role should public policy and financial regulation play in response to ESG concerns? These questions are of particular importance for the [SEC] tasked with protecting America’s capital markets and American investors.” You might have assumed that Brookings would have invited as the speaker one of the SEC’s fervent advocates for more prescriptive ESG disclosure regulation, such as Commissioner Allison Herren Lee. But instead, Brookings invited the contrarian Commissioner Hester Peirce as the SEC representative. As an opponent of the SEC’s venturing into the mandatory ESG metrics disclosure business, Peirce came prepared to engage, armed with a voluminous speech consisting of 10 theses, footnoted to the hilt. Recognizing that “whether and how we will move toward a more prescriptive ESG disclosure framework” is now front and center on the SEC’s current agenda, Peirce offered ten theses “without much sugar-coating” in the hopes of catalyzing “a textured conversation about the complexities and consequences of a potential ESG rulemaking.”
Most everyone knows that trading on the basis of material non-public inside information is likely to get you in trouble with the law, but charitable giving on the basis of MNPI—maybe not so much. As reported in this article in the WSJ, a new study from a group of business and law school professors looked at “insider giving,” or, as the study authors describe it, “opportunism posing as, or at least muddled with, ordinary philanthropy.” In essence, according to the WSJ, with insider giving, the donor “tim[es] the donation of a stock to a charity around inside information about the stock. That way, you take a tax deduction before bad news sends the share price tumbling or after good news sends the price higher—and the gift delivers a bigger deduction than you would have gotten otherwise.” The donation is not only tax deductible, it’s also exempt from capital gains tax that would be due on the appreciation in value upon the sale. One of the authors characterized these donations to the WSJ as “suggest[ing] more than chance….The fact that large shareholders can determine or choose—with pinpoint accuracy—the average maximum price over a two-year period when they give gifts is surprising.’” The study authors argue that the practice is “far more widespread than previously believed,” and relied on by insiders, including large investors. Insider giving, they conclude, “is a potent substitute for insider trading.” It’s worth remembering that it was a study reported in the WSJ about stock option backdating that kicked off the option backdating scandal of the mid-2000s (see, e.g., this news brief, this news brief and this news brief). Could “insider giving” be the new option backdating scandal?
According to Law 360 reporting on a webcast panel last week, Acting Director of Enforcement Melissa Hodgman, warned that, in addition to “increased scrutiny” of “funds touting green investments,” we may well see more ESG disclosure-related enforcement actions in general. In March, then-Acting SEC Chair Allison Herren Lee announced the creation of a new climate and ESG task force in the Division of Enforcement. The moderator of the panel, a former co-Director of Enforcement, observed that “usually you don’t stand up a task force unless you’re pretty sure that task force is going to produce something.” So what should we expect?