In May, SEC Chief Accountant Paul Munter, quoted here, cautioned his conference audience about the potential for audit committee overload. “More demands are being put on audit committees, sometimes on topics outside their core responsibility,” he said. “Audit committees need to be continually vigilant that they have enough time to focus on their core mission—protecting investors—and don’t let other topics cloud that out.” While the AC’s primary responsibilities are generally thought to be oversight of financial reporting, including the audit of a company’s financial statements and internal control over financial reporting, these days, the AC often becomes the default committee of choice for oversight of other emerging risks, such as cybersecurity and even ESG. With ACs now perhaps the “kitchen sink of the board,” are its members stretched too thin to carry out fundamental responsibilities? Are members being asked to operate outside of their core skillsets? What is the impact? These concerns appear to have prompted the panel at last week’s meeting of the SEC’s Investor Advisory Committee discussing AC workload and transparency.
SEC’s Investor Advisory Committee hears about non-traditional financial information and climate disclosure
Last week, at a meeting of the SEC’s Investor Advisory Committee, the Committee heard from experts on two topics: accounting for non-traditional financial information and climate disclosure. Interestingly, two of the speakers on the first panel are among the eight new members just joining the Committee. In his opening remarks, with regard to non-traditional financial information, SEC Chair Gary Gensler characterized the discussion as “an important conversation as we continue to evaluate types of information relevant to investors’ decisions. Whether the information in question is traditional financial statement information, like components in an income statement, balance sheet, or cash flow statement, or non-traditional information, like expenditures related to human capital or cybersecurity, it’s important that issuers disclose material information and that disclosures are accurate, not misleading, consistently applied, and tied to traditional financial information.” With regard to climate disclosure, Gensler returned to his theme that the SEC’s new climate disclosure proposal is simply part of a long tradition of expanded disclosures, addressing the topic of “a conversation that investors and issuers are having right now. Today, hundreds of issuers are disclosing climate-related information, and investors representing tens of trillions of dollars are making decisions based on that information. Companies, however, are disclosing different information, in different places, and at different times. This proposal would help investors receive consistent, comparable, and decision-useful information, and would provide issuers with clear and consistent reporting obligations.” In her opening remarks, SEC Commissioner Hester Peirce asked the Committee to “consider whether our proposed climate disclosure mandate would change fundamentally this agency’s role in the economy, and whether such a change would benefit investors. Are these disclosure rules designed to elicit disclosure or to change behavior in a departure from the neutrality of our core disclosure rules?”
Tomorrow, in addition to Rule 10b5-1 plan recommendations (see this PubCo post), the SEC’s Investor Advisory Committee is slated to take up draft subcommittee recommendations regarding SPACs. The new SPAC recommendations address SPAC regulatory and investor protection issues that have been under scrutiny as a result of the proliferation of SPACs in 2020 and 2021. The IAC subcommittee observes that the SEC and its staff have addressed many issues related to SPACs in staff guidance, and the topic’s appearance on the SEC’s most recent agenda signals that it may be headed for further regulatory action. With that in mind, the recommendations are focused “on the practical challenges SPAC investors face in fully assessing the risks and opportunities associated with these investment vehicles.” In light of the dynamic nature of the SPAC market in recent months, however, the subcommittee frames its recommendations as “preliminary,” and indicates an intent “to revisit the issue of SPAC governance” in the future as more data becomes available. [Update: this recommendation was approved by the Committee for submission to the SEC.]
At a meeting of the SEC’s Investor Advisory Committee last week, the Committee voted to make recommendations to the SEC on three topics: accounting and financial disclosure; ESG (environmental, social and governance) disclosure; and disclosure effectiveness. The ESG recommendation concluded that “the time has come for the SEC to address this issue,” and it should be no surprise that there was some controversy—including some dissenting votes—surrounding that recommendation. While recommendations from SEC advisory committees often hold some sway with the commissioners, given the long-held views of the current commissioners, it seems highly unlikely that the ESG recommendation will have much traction—at least not in the near term. The recommendations come as the membership of the committee undergoes a substantial shift as many members time out on their appointments. The recommendations are discussed below.
At a meeting today of the SEC’s Investor Advisory Committee, the committee discussed disclosure considerations arising in the context of COVID-19. In addition to relentlessly complimenting the SEC for its efforts during the pandemic, the committee members offered a number of valuable insights, particularly related to human capital disclosure (which one committee member characterized as “as important a mission as the SEC has ever faced”) and other stakeholder disclosures, as well as accounting, controls and liability issues. Many of the committee also seemed to be pleased with nature of the disclosure that companies were providing, even offering in-quarter information in some cases. There was also a brief discussion of virtual shareholder meetings.
Last week, the SEC’s Investor Advisory Committee held a meeting focused in part on the use of environmental, social and governance information in the capital allocation process—how do investors use ESG information in making investment decisions? The panelists—an academic and several representatives of asset managers—all viewed ESG data as important to decision-making, particularly in relation to potential financial impact, even for investment portfolios that were not dedicated to sustainability.
Yesterday morning, at a telephonic meeting of the SEC’s Investor Advisory Committee, the Committee voted to adopt revised recommendations addressing “proxy plumbing”—the panoply of problems associated with the infrastructure supporting the proxy voting system. (See this PubCo post.) The recommendations were originally presented at a meeting of the Committee in late July, but the Committee elected to study the proposal further and offer revisions before voting. The changes are fairly nuanced, now also including some minority views. For the most part, the recommendations would not “reinvent” the proxy voting system, instead targeting improvements that are considered essentially “low-hanging fruit.” However, there appeared to be a consensus that eventually more would need to be done. The recommendations were adopted by a majority of the Committee with two dissents. Will the SEC pay attention?
At a meeting on Thursday of the SEC’s Investor Advisory Committee, a subcommittee reported on its recommendations addressing the “proxy plumbing” conundrum—not the Roto Rooter variety, but rather the panoply of problems associated with the infrastructure supporting the proxy voting system. Shareholder voting is viewed as fundamental to keeping boards and managements accountable, and according to the recommendations, every year, over 600 billion shares are voted at more than 13,000 shareholder meetings. However, there is broad agreement that the current system of proxy plumbing is inefficient, opaque and, all too often, inaccurate. As the recommendations observe, under the current system, shareholders “cannot determine if their votes were cast as they intended; issuers cannot rapidly determine the outcome of close votes; and the legitimacy of corporate elections, which depend on accurate, reliable, and transparent vote counts, is routinely called into doubt.” In 2010, the SEC issued a concept release soliciting public comment on whether the SEC should propose revisions to its proxy rules to address these issues, but to no avail. (See this Cooley News Brief.) However, in the last year or so, proxy plumbing has reemerged as a serious problem to be addressed. The Committee took up this issue almost a year ago and, at the SEC’s proxy process roundtable last year, proxy voting mechanics was actually a hot topic—described by one panelist as “the most boring, least partisan and, honestly, the most important” of the roundtable topics.
Even though, in the wake of recent events, cybersecurity is a very hot topic, only 38% of U.S. public companies cite cybersecurity as a risk factor in their annual and quarterly SEC filings, according to a recent study from Intelligize. The study showed that, while only 426 public companies cited cybersecurity as a risk in 2012, that number grew to 1,662 in 2016. However, so far in 2017, the number has been relatively flat at 1,680. But the question remains, how long will that continue?