Monthly Archives: October 2020

The PCAOB’s Revised Research and Standard-Setting Agendas

J. Robert Brown, Jr. is a Board Member at the Public Company Accounting Oversight Board. This post is based on his recent public statement.

In late 2017, the U.S. Securities and Exchange Commission (“SEC”) appointed an entirely new Board, giving the five new members the collective opportunity to develop a PCAOB 2.0. In 2018, we issued a Strategic Plan that promised innovative oversight, including with respect to our approach to writing auditing standards. Consistent with our statutory mission, we explicitly committed, in doing so, to consider the expectations of investors.

Last month, the PCAOB published its updated research and standard-setting agendas that will be its focus of attention and resources for the next 12 to 18 months. The agendas do not, however, reflect the promises made in the Strategic Plan.

With respect to investor expectations, the revised agendas mostly disregard them. The agendas removed matters repeatedly identified by investors as important—matters that have only grown in significance in a COVID-19 environment. What remains largely overlaps with the priorities of an international standard setter. While these priorities may be good ones, the goal of global alignment and coordination should not take precedence over the expressed interests of U.S. investors.


Incorporating Human Capital Management Disclosures into a Company’s Annual Report

Maj Vaseghi and Pamela Marcogliese are partners and Elizabeth Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Vaseghi, Ms. Marcogliese, Ms. Bieber, Sarah Ghulamhussain, Lori Goodman, and Doru Gavril.

On August 26, 2020, the United States Securities and Exchange Commission (SEC) adopted final amendments under Regulation S-K as part of a Disclosure Effectiveness Initiative to modernize and improve corporate disclosures which will become effective on November 9, 2020. One of the key revisions is the addition of a new disclosure topic that will require SEC reporting companies to provide a description of their human capital resources to the extent such disclosures would be material to an understanding of the company’s business. This topic is required disclosure in annual reports on Form 10-K and certain registration statements. The final rules should be addressed with a carefully planned disclosure strategy for upcoming annual reports.

HCM and broader ESG proposals have continued to gain increased stakeholder attention in the past several years and concerns around oversight of these issues have only been amplified by COVID-19, making HCM a priority among corporate boards. We expect this trend to continue as companies develop their HCM disclosure strategies.

Institutional investor demand for attention

For the past several years, there has been heightened scrutiny by investors, proxy advisory firms, and other stakeholders calling for enhanced disclosures by companies of their HCM practices. Large institutional investors have been at the forefront of the trend in their communication, voting guidelines and stewardship principles.


Politics and Purpose in Corporate America

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Political engagement traditionally has been viewed as a no-win situation for a public company or a public company chief executive officer. In a sharply divided nation, taking sides on a controversial topic can instantly alienate half of a company’s stakeholders, from investors and customers to suppliers and employees. These days, however, silence can also be viewed as a political statement, which places public companies in a difficult position. While the incursion of sociopolitical issues into the business world has slowly gained momentum over the last decade, it has recently accelerated due to major societal upheavals, high-profile foreign affairs and trade issues, and an election cycle like no other, all in the unrelenting spotlight of 24/7 news and social media. At the moment, corporate America is under pressure from many directions and is widely viewed as a potentially powerful—albeit reluctant—agent of sociopolitical change.

The answer to the question of how a corporation can successfully handle political pressures may be found through a focus on corporate purpose. It is incumbent upon each company’s board of directors and management team to understand the company’s own raison d’être, to have a clear sense of the solutions it proposes for the problems of the world. A corporate purpose can inform and guide decisions as to which political issues are relevant and how they should be addressed. A clearly expressed statement of purpose can also unify leadership, employees, investors and other stakeholders behind initiatives that are aligned with the company’s role in society. The lack of such unity could undermine the effectiveness of company leadership and render political action and engagement ill-considered and self-defeating.


Proposed HSR Rule Change Would Benefit Activists

Steve Wolosky, Andrew Freedman, and Kenneth M. Silverman are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Wolosky, Mr. Freedman, Mr. Silverman, and Ron S. Berenblat. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

On September 21, 2020, the U.S. Federal Trade Commission (the “FTC”) published a notice of proposed rulemaking that would, among other things, create a new de minimis exemption under the Hart-Scott-Rodino Antitrust Improvements Act of 1986 (the “HSR Act”), which subjects proposed acquirers of an issuer’s voting securities to notification, filing and waiting period requirements. Significantly, the new exemption would make it possible for activist investors intending to influence an issuer’s business decisions to purchase up to 10% of the issuer’s voting securities without being subject to these requirements. The FTC is currently seeking comments to the proposed rule changes.


SEC Brings Enforcement Action Against Fund Manager for Single 13D Violation

Eleazer Klein is partner, and Adriana Schwartz and Clara Zylberg are special counsel at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

The SEC brought charges against a fund manager for 13D violations, in yet another reminder that it will pursue enforcement actions against filers for Schedule 13D violations even without a pattern of repeat violations.

On Sept. 17, 2020, the SEC announced the settlement of charges brought against an investment manager of certain private funds (“IM”) for failure to timely amend a statement of beneficial ownership report on Schedule 13D (Administrative Proceeding File No. 3-20020). [1]

The 13D Requirements

Section 13(d) of the Securities Exchange Act of 1934 requires a “beneficial owner”:

  • That acquires more than 5%;
  • Of a class of any voting, equity securities registered under Section 12 of the Exchange Act;
  • To file with the SEC within ten days of any such acquisition; and
  • A statement on Schedule 13D describing such acquisition and containing certain other information, including a description of any plans or proposals that the beneficial owner may have with respect to certain enumerated matters regarding the issuer.

After the initial filing of a Schedule 13D, Rule 13d-2(a) requires the Schedule 13D to be amended “promptly” in the event of any “material change” in the information set forth therein. “Promptly” is not defined under the rules but is generally understood to be within two business days. Under Rule 13d-2(a), an increase or decrease in beneficial ownership of 1% or more is deemed to be “material,” but Schedule 13D filers must keep in mind that an amendment must also be filed promptly upon any material change to any of the other information disclosed in the Schedule 13D, including, without limitation, the filer’s plans or proposals.


Weekly Roundup: October 23–29, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 23–29, 2020.

The Power of the Narrative in Corporate Lawmaking

The Dangers of Buybacks: Mitigating Common Pitfalls

COVID-19 and Inequality: A Test of Corporate Purpose

The Next Frontier for Representations and Warranties Insurance: Public M&A Deals?

Time to Unlock the Hidden Value in Your Board

The Economics of Soft Dollars: A Review of the Literature and New Evidence from the Implementation of MiFID II

From Shareholder Primacy to Stakeholder Capitalism

NYSE Extends Waiver of “Related Party” and “20%” Stockholder Approval Rules

Short-Termism, Shareholder Payouts, and Investment in the EU

Statement by Chairman Clayton on Regulation Best Interest and Form CRS

Changes to Shareholder Proposal Eligibility Rules

Disclosures in Shareholder Lawsuits

U.S. Compensation Policies and the COVID-19 Pandemic

Engaging with Wellington Management Company

Krystal Berrini is a partner at PJT Camberview. This post is based on a PJT Camberview memorandum that features an interview with Carolina San Martin, Hillary Flynn and Chris Goolgasian, members of the ESG Research and Climate Research teams at Wellington Management Company. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

Krystal: How is the ESG Research team structured within Wellington? 

Carolina: At Wellington, we see ESG research as an investment research capability that can support better investment decisions and help us deliver on our firm’s mission to exceed our clients’ investment expectations. To do this, our ESG analysts work closely with our equity and credit analysts to bring the ESG issues we think matter most to bear on investment decisions and drive better outcomes. All of us sit together within our central Investment Research team, and we believe that collaboration across equity, credit, and ESG research can lead to a deeper understanding of the investment mosaic through expertise in each dimension. Our ESG Research team currently has 8 sector ESG experts focused on both research and stewardship—engagement and proxy voting—across public and private markets. We also have a dedicated Climate Research team that focuses on the potential impacts of climate change across the capital markets and on our clients’ portfolios across sectors.

Krystal: How is ESG integrated into the investment process at Wellington?

Carolina: Our ESG integration philosophy comes down to two core beliefs that act as our North Star. First is a belief that material E, S, and G issues are strategic business issues that can impact performance. This is why we have a dedicated team of experts to identify them, analyze them, and bring insights to our portfolio managers (PMs) so they can be taken into account in investment decisions. Second is a belief that it doesn’t stop at the research—as our clients’ fiduciaries, we have a responsibility to give feedback to companies when they can improve, using the tools of voting and engagement, because when they perform better on ESG issues that are most relevant to financial outcomes, our clients should benefit.


U.S. Compensation Policies and the COVID-19 Pandemic

Subodh Mishra is Managing Director at Institutional Shareholder Services, Inc. This post is based on an ISS memorandum by Institutional Shareholder Services’ Global Policy Board. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried; and Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried.

1. How should this FAQ document be referenced?

This FAQ post serves as general guidance as to how ISS U.S. Benchmark Research may approach COVID-related pay decisions in the context of ISS’ pay-for-performance qualitative evaluation (as applicable to meetings covered under U.S. Benchmark Research policy). As discussed further below, ISS’ qualitative evaluation will take into consideration the impact on company operations as a result of the pandemic. As in the past, an elevated concern from the quantitative screen will continue to result in a more in-depth qualitative review of the company’s pay programs and practices.

ISS endeavored to provide this preliminary FAQ ahead of the regular annual FAQ update expected to be published in December, in order to sooner inform investors, companies, and their advisors on these issues. The guidance laid out in this FAQ has been shaped by feedback from direct discussions with investors in various roundtables as well as the annual policy survey. However, nothing in this post should be construed as a guarantee as to how ISS Research may recommend on a given proposal. If you have questions about this post, please contact the ISS Help Center.


Disclosures in Shareholder Lawsuits

Boris Feldman and Doru Gavril are partners and Elise Lopez is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Feldman, Mr. Gavril, Ms. Lopez, and Drew Liming.

On October 8, 2020, a new Ninth Circuit ruling deepened a circuit split over whether allegations in another civil lawsuit could constitute a corrective disclosure in a securities fraud class action. See In re BofI Holding, Inc. Sec. Litig., 2020 U.S. App. LEXIS 31938 (9th Cir. Oct. 8, 2020) (the panel was comprised of Judges Paul J. Watford, Market J. Bennett, and Kenneth K. Lee, with Lee concurring in part and dissenting in part). The Ninth Circuit joins the Sixth Circuit in declining to adhere to a categorical rule that allegations in a civil suit can never constitute corrective disclosures. Id. at *20 (citing Norfolk Cty. Ret. Sys. v. Cmty. Health Sys., 877 F.3d 687, 696 (6th Cir. 2017)). The Eleventh Circuit remains at the other end of the spectrum, holding that, as a matter of law, allegations from civil suits cannot constitute corrective disclosures, even partial. See Sapssov v. Health Mgmt. Assocs., 608 F. App’x 855, 863 (11th Cir. 2015) (noting that “a civil suit is not proof of liability”). As a reminder, a corrective disclosure occurs when “information correcting the misstatement or omission that is the basis for the action is disseminated to the market.” 15 U.S.C. § 78u-4(e)(1).


ESG & The 2020 U.S. Presidential Election

Heidi DuBois is Executive Vice President of ESG, Alex Heath is Executive Vice President of Purpose, and Jill Fisher is Senior Account Supervisor of Reputation at Edelman. This post is based on their Edelman memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

How we got here.

For years, the investment community has been increasingly focused on the impact that Environmental, Social and Governance (ESG) issues, like environmental stewardship, labor practices and anti-corruption can have on a company’s ability to generate long-term value.

In 2016, the United Nations introduced its Sustainable Development Goals (SDGs)—goals for the long-term interest of society, guiding both mandatory and voluntary disclosure requirements for business leaders and corporate reporting.

In 2019, the Business Roundtable made waves by declaring that the era of shareholder primacy is over—meaning that CEOs must lead their companies for the benefit of all stakeholders, including customers, employees, suppliers and communities.


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