Tag: Board diversity
PwC’s 2024 Corporate Directors’ Survey—how are boards addressing the current uncertainty?
The title of PwC’s new 2024 Corporate Directors’ Survey, Uncertainty and transformation in the modern boardroom, might clue you in to one of its themes: uncertainty—anxiety?—arising out of the looming election. According to PwC, the “2024 election matters more than usual. Not only is the American electorate more polarized than anytime in modern history—making corporate leaders’ every statement and decision subject to public criticism—the results could rapidly reshape the business landscape. Which political party emerges victorious in November, in the White House and/or the houses of Congress, may prove enormously consequential for how every industry functions. The impacts could be dramatic.” We may see policy changes on “tariffs, sanctions, treaties and alliances” that might “upend international trade and disrupt supply chains.” We could see revised tax policy and enforcement priorities, transformed attitudes toward DEI and ESG programs, different views on antitrust enforcement, immigration and possibly, “most significant for many industries, the incentives that have fueled recent sustainability investments could grow further—or be diminished.” That makes “a board’s ability to be agile and stay current in the face of uncertainty” more important than ever. To assess the state of current boardrooms, PwC surveyed 500 public company directors, concluding that boards just might be evolving “too slowly to effectively meet the challenges facing companies today and tomorrow, irrespective of potential political disruptions.” PwC attempts to understand what is driving the results and recommends approaches to addressing the issues.
SEC’s Spring 2024 agenda delays most actions until 2025
As reported by Bloomberglaw.com, during an interview in February 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, Gensler insisted that he’s “‘not doing this against the clock….It’s about getting it right and allowing staff to work their part.’” The SEC has just posted the new Spring 2024 Agenda and, looking at the target dates indicated on the agenda, it appears that Gensler is a man true to his word. The only new item (relevant to our interests here) slated for possible adoption this year is a distinctly apolitical proposal about EDGAR Filer Access and Account Management. And, while a few proposals are targeted for launch (or relaunch) this year—two related to financial institutions and, notably, a proposal for human capital disclosure—most are also put off until April next year—post-election, that is, when the agenda might look entirely different. (Of course, the SEC sometimes acts well in advance of the target.) According to the SEC’s preamble, the items listed in the Regulatory Flexibility Agenda for Spring 2024 “reflect only the priorities of the Chair.” In addition, information on the agenda was accurate as of May 1, 2024, the date on which the SEC staff completed compilation of the data. In his statement on the agenda, Gensler said that “[i]n every generation since the SEC’s founding 90 years ago, our Commission has updated rules to meet the markets and technologies of the times. We work to promote the efficiency, integrity, and resiliency of the markets. We do so to ensure the markets work for investors and issuers alike, not the other way around. We benefit in all of our work from robust public input regarding proposed rule changes.”
Dubious en banc Fifth Circuit hears oral argument on Nasdaq board diversity rules
In August 2021, the SEC approved a Nasdaq 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 adopted a “comply or explain” mandate for board diversity for most listed companies and required companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. (See this PubCo post.) It didn’t take long for a court challenge to these rules to materialize: the Alliance for Fair Board Recruitment and, later, the National Center for Public Policy Research petitioned the Fifth Circuit Court of Appeals—the Alliance has its principal place of business in Texas—for review of the SEC’s final order approving the Nasdaq rule. (See this PubCo post and this PubCo post) In October 2023, a three-judge panel of the Fifth Circuit denied those petitions, in effect upholding Nasdaq’s board diversity listing rules. Given that, by repute, the Fifth Circuit is the circuit of choice for advocates of conservative causes, the decision to deny the petition may have taken some by surprise—unless, that is, they were aware, as discussed in the WSJ and Reuters, that the three judges on this panel happened to all be appointed by Democrats. Petitioners then filed a petition requesting a rehearing en banc by the Fifth Circuit, where Republican presidents have appointed 12 of the 16 active judges. (See this PubCo post.) Not that politics has anything to do with it, of course. That petition for rehearing en banc was granted, vacating the opinion of the lower court. Yesterday, oral argument was heard. Let’s just say that, while some points were made in support of the rule, the discussion seemed to be dominated by rule skeptics. But the feud between Drake and Kendrick Lamar did figure in the discussion. Some highlights below.
Is ESG backlash triggering a change in policies or just a change in terminology?
As discussed in this article from the WSJ, The Latest Dirty Word in Corporate America: ESG, ESG backlash is driving many company executives to drop any reference to “ESG” and instead use terms like “sustainability” or “responsible business,” or opt for “green hushing” altogether. Citing an analysis from FactSet, the WSJ reported that, on “earnings calls, mentions of ESG rose steadily until 2021 and have declined since…. In the fourth quarter of 2021, 155 companies in the S&P 500 mentioned ESG initiatives; by the second quarter of 2023, that had fallen to 61 mentions.” But are companies just turning down the volume while still pursuing the same aspirations or have they trimmed their objectives too?
Federal court holds unconstitutional California’s board diversity statute regarding “underrepresented communities”
There have been a number of challenges to California’s board diversity legislation, SB 826, the board gender diversity statute, and AB 979, the board diversity statute regarding “underrepresented communities.” In two cases, Crest v. Padilla I and II, filed in state court, the plaintiffs notched wins and the court issued injunctions against implementation and enforcement of these two statutes. Both of these cases are currently on appeal, and the injunctions remain in place. But there were also cases filed in federal court, and, in one of those cases, Alliance for Fair Board Recruitment v. Weber, the U.S. District Court for the Eastern District of California has just granted the Plaintiff’s motion for summary judgment, concluding that AB 979 is unconstitutional on its face. The federal court decision could have reverberations in other states and potentially influence the ongoing state court appeals (as could an earlier decision on SB 826 by the Court going the other way. See the third SideBar below.)
Has the “internal affairs” doctrine been stretched too thin?
In this paper, Ann Lipton, an Associate Professor at Tulane Law School, contends that the “internal affairs” doctrine has gradually expanded its reach and, perhaps as a result, is now facing new challenges. As applied in Delaware—where it is applied most often—the doctrine, she argues, is “on a collision course with the legitimate regulatory interests of other states (and indeed the federal government).” Of course, many will strongly disagree with her argument, especially given the practical implications. Still, it may be worthwhile to gain some insight into her perspective. Is it time to rethink the internal affairs doctrine? The author suggests that a more balanced, targeted approach would be more appropriate and more effective.
Nasdaq simplifies “confusing” timing requirements for board diversity rules
A new rule change designed to simplify the rules regarding the timing of compliance with the Nasdaq board diversity listing rules has been filed by Nasdaq and declared immediately effective. As you probably remember, on August 6, 2021, 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 listing rules adopted a “comply or explain” mandate for board diversity for most listed companies and required 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.) Now, Nasdaq acknowledges that the formulation of the compliance deadlines, which were tied to the approval date of the proposal by the SEC, is “confusing and unnecessarily complicated.” Not Nasdaq’s fault though—it meant well! At the time of filing of the proposal, “Nasdaq and listed companies could not know when the proposal would be approved,” and Nasdaq “wanted to assure that listed companies had at least one year from the approval of the rules, or until their next annual meeting, to take necessary actions to satisfy the requirements” of the rules. Nasdaq is now making technical changes to several rules to address that problem by eliminating complicated references to the SEC approval date, and instead requiring compliance by December 31st of the applicable year (which, according to Nasdaq, is the fiscal year-end for approximately 80% of Nasdaq-listed companies subject to the rules).
Happy Holidays!
California Appeals Court reinstates injunctions against California Board diversity laws
You may recall that, earlier this year, two Los Angeles Superior Courts struck down as unconstitutional two California laws mandating that boards of public companies achieve specified levels of board diversity and enjoined implementation and enforcement of the legislation. Those injunctions, however, were temporarily lifted as the state appealed. Now, the appeals court has vacated those temporary stays. What does it mean for the diversity legislation?
Diversity for foreign private issuers
Countries outside the U.S. have sometimes been trendsetters when it comes to board diversity. For example, according to the California’s board gender diversity bill, SB 826, signed into law in 2018, “in 2003, Norway was the first country to legislate a mandatory 40 percent quota for female representation on corporate boards.” Under Nasdaq’s board diversity rules (see this PubCo post), board diversity encompasses more than gender diversity—it also includes persons who self-identify as underrepresented minorities or LGBTQ+. Nasdaq’s new diversity rules also apply to foreign private issuers. What does “board diversity” mean for foreign private issuers and non-US companies considering US IPOs? Does it focus solely on women or does it have a broader scope? Who are “underrepresented individuals in home country jurisdiction”? These questions and more are addressed in this fascinating piece, Board Diversity for Foreign Private Issuers: Does Board Diversity Mean the Same Thing Worldwide?, from Cooley’s Singapore office, posted on the Cooley CapitalXchange blog.
Board refreshment: are evaluations preferable to retirement policies?
A new report from The Conference Board (together with ESG data analytics firm ESGAUGE) , Board Refreshment and Evaluations, indicates that, in pursuit of board diversity—in skills, professional experience, gender, race/ethnicity, demography or other background characteristic—companies must overcome one key impediment: relatively low board turnover. One approach is just to increase the size of the board; another is through “board refreshment.” To that end, the report observes, companies are relying less on director retirement policies based on tenure or age—which may sometimes be viewed as misguided and arbitrary—and looking instead to comprehensive board evaluations, sometimes conducted by a facilitator, as a way to achieve board refreshment. The Conference Board advocates that companies foster a “culture of board refreshment” that removes any stigma that could otherwise attach to an early departure from the board. In any event, The Conference Board cautions that “companies should expect continued investor scrutiny in this area. Indeed, while institutional investors may defer to the board on whether to adopt mandatory retirement policies, many are keeping a close eye on average board tenure and the balance of tenures among directors and will generally vote against directors who serve on too many boards.”
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