Alliance Advisors, a proxy solicitation and corporate advisory firm, has just posted its 2021 Proxy Season Preview, a useful introduction into the major themes of this season—well worth a read. First, and most obviously, there is COVID-19 and its direct and indirect impact. The pandemic is having a significant direct impact this year—not just in necessitating recourse to virtual-only annual meetings again this season—but also in focusing the attention of investors and proxy advisors on “how well corporate leaders navigated the crisis and protected business operations, liquidity and the health and welfare of employees.” But the pandemic has also had a somewhat surprising broader indirect impact. While it was widely anticipated that the challenges of COVID-19 would overwhelm any other concerns, the impact appears to be otherwise, as the pandemic has highlighted our increasingly precarious condition, including the effects of climate change, and intensified our social and economic inequality—all issues that are front and center this season. The Preview predicts that environmental and social proposals “are likely to see stronger levels of support in view of last year’s record 21 majority votes… and more assertive investor policies on diversity, climate change and political spending.”
Corp Fin staff updates guidance regarding presentation of shareholder proposals in light of COVID-19
On Friday, the Corp Fin staff announced that it has updated its Guidance for Conducting Shareholder Meetings in Light of COVID-19 Concerns originally published on March 13, 2020 and updated on April 7, 2020 (see this PubCo post and this PubCo post). The updated guidance posted on Friday tweaks the advice related to presentation of shareholder proposals, extending its application to the 2021 proxy season.
In its first action against a public company for misleading investors about the financial effects of the pandemic, the SEC has announced settled charges against The Cheesecake Factory. In mid-March, the company, which operates a chain of restaurants, was compelled as a result of COVID-19 to temporarily change its business model from dine-in restaurants to “an ‘off-premise model’ (i.e., to-go and delivery).” The company then issued two press releases (furnished to the SEC on Form 8-K) advising of the transition and indicating that the new model was “enabling the Company’s restaurants to operate sustainably at present under this current model,” but failed to disclose that the claim of sustainable operations excluded expenses attributable to corporate operations as well as the weekly loss of $6 million in cash. Those statements, the SEC concluded, were “materially false and misleading.” According to SEC Chair Jay Clayton, “[a]s our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable.”
Today, the SEC staff issued a revised Statement regarding the extension, for an indeterminate period, of temporary relief related to authentication document retention requirements under Rule 302(b) of Reg S-T in light of light of public health and safety concerns regarding COVID-19. This staff Statement is temporary and remains in effect until the staff provides public notice that it no longer will be in effect; that notice will be published at least two weeks before the announced termination date. Nothing new there. But what is new is that the Statement indicates that the staff will not recommend enforcement action if filers take advantage of the new electronic signature rules even before the effective date of those rules.
ISS has provided some early guidance regarding how it will view pandemic-related changes to executive compensation as part of its pay-for-performance qualitative evaluation. According to ISS, the guidance was informed by direct discussions with investors as well as the results of its annual policy survey. The guidance is summarized below.
Don’t forget to vote!
NYSE again extends temporary waiver of shareholder approval requirements for certain equity issuances
In early April, the SEC approved and declared immediately effective an NYSE rule change to waive, through June 30, 2020 and subject to compliance with conditions, application of certain of the shareholder approval requirements in Section 312.03 of the NYSE Listed Company Manual. That waiver was extended through September 30. Now, the SEC has proposed to extend the waiver through December 31, 2020, and the SEC has declared the proposal immediately effective.
In this new study, Equilar and the Rock Center for Corporate Governance at Stanford examine how COVID-19 has affected CEO compensation. Are boards focused more on making sure that CEOs have the right incentives to continue their jobs under trying circumstances? After all, in the case of the pandemic, the trying circumstances are not of their own making. Or are boards more inclined to focus on showing the public and other stakeholders, especially employees, that CEOs are “sharing the pain”? CEO pay attracts a lot of attention in ordinary times, but in times of severe economic distress when corporate performance and stock prices plummet and companies engage in substantial layoffs, furloughs and pay cuts for employees—who likewise are not responsible for the economic crisis—CEO pay can attract intense scrutiny. In those circumstances, paying the same or greater levels of CEO comp can seem unfair to the employees and invite shareholder and public criticism. How have boards addressed this issue?
In a recent survey of over 70 nominating/governance committee chairs of S&P 500 and Fortune 500 companies, consultant SpencerStuart asked respondents about how their boards responded to COVID-19 and the nature of any long-term governance changes they anticipated post-pandemic. Somewhat surprisingly, given the issues COVID-19 has created or highlighted for companies, committee chairs do not appear to be in any kind of rush to institute changes—in fact, quite the opposite seems to be the prevailing perspective. Is it just too soon to be thinking about structural or other adjustments to the board? Or, does “stay at home” also mean “stay the course”?
Temporary secure file transfer process for electronic submission of supplemental materials and Rule 83 CTRs
In light of ongoing health and safety concerns arising out of the COVID-19 pandemic, Corp Fin has issued a statement regarding implementation of a new temporary secure file transfer process for the electronic submission of supplemental materials under Rule 418 and Rule 12b-4 and of information subject to Rule 83 confidential treatment requests.
In December 2019, as part of its strategy of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB conducted conversations with almost 400 audit committee chairs, focused on audit committee perspectives on topics such as audit quality assessment and improvement and auditor communications, and reported on those conversations. (See this PubCo post.) As noted by PCAOB Chair William Duhnke in this PCAOB webinar for audit committees, the PCAOB prioritized this engagement, viewing informed and engaged audit committees as “force multipliers.” In addition, he noted, the PCAOB had heard criticism early in the process that the PCAOB did not play well with others and was not receptive to feedback—the conversations also represented an effort to address that problem. The PCAOB has continued this same outreach to audit committee chairs during 2020, focused this time on the unprecedented challenges created by COVID-19 and its effect on the chairs’ oversight of financial reporting and the audit. The responses regarding the impact of the pandemic varied widely, depending on the industry and company. The chairs identified a number of new or increased risks, including cybersecurity, employee safety and mental health, going concern, accounting estimates, impairments, international operations and accounting implications of the CARES Act. The PCAOB’s recent report summarizes two of the common themes the PCAOB regularly heard from audit committee chairs across industries and highlights some of the helpful questions and considerations that the chairs identified.