Yearly Archives: 2020

Audit Committee Reporting to Shareholders

Steve W. Klemash is Americas Leader at the EY Center for Board Matters, Jennifer Lee is Audit and Risk Specialist at the EY Center for Board Matters, and Bridget M. Neill is Americas Vice Chair, Public Policy at EY. This post is based on their EY memorandum.

For the ninth consecutive year, the EY Center for Board Matters has reviewed voluntary proxy statement disclosures by Fortune 100 companies relating to audit committees, including their oversight of the audit.

These disclosures are an important tool for investors and other stakeholders to gain insight into the activities of audit committees, whose role in promoting high-quality and reliable financial reporting is widely acknowledged. The Securities and Exchange Commission (SEC), for example, has affirmed that independent audit committees have proved to be one of the most effective financial reporting enhancements included in the Sarbanes-Oxley Act. [1] The transparency provided by these disclosures can help strengthen investor confidence in financial reporting and US capital markets.

This post provides data on the types of audit committee-related disclosures that the largest public companies are providing on a voluntary basis, above what is required by US securities laws and regulations. It also includes some samples of the disclosures we examined to illustrate the information being provided to investors.


Promoting Consistency in Corporate Sustainability Reporting

Katherine Brennan is Deputy General Counsel, Corporate Secretary & Chief Compliance Officer and Connor Kuratek is Chief Corporate Counsel and Assistant Corporate Secretary at Marsh & McLennan Companies; and Betty Moy Huber is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Brennan, Mr. Kuratek, Ms. Huber, and Paula H. Simpkins. 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).

Five framework- and standard-setting institutions announced a joint statement on September 11, 2020 reflecting their collaborative vision to develop a comprehensive global corporate reporting system for disclosing sustainability topics such as climate change, biodiversity, wages and skills. The participants include the Global Reporting Initiative (GRI), CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB).

Relevance to Companies.  The overarching purpose of the new system is to reduce the reporting burden on companies while improving the completeness, consistency and comparability of sustainability data available for decision-making. The participants’ plan is that companies who choose to disclose sustainability topics need to collect data only once. The companies then can choose the appropriate communication channel, such as an integrated report, a sustainability report or a website posting, depending on the applicable disclosure standard. This statement comes at a time when European Union regulators and market participants are considering how to strengthen the EU’s Non-Financial Reporting Directive, and whether companies should be required to disclose against some of the frameworks already issued by certain of the participants.


SEC Amends Disclosure Requirements for Business Sections, Legal Proceedings and Risk Factors

Mark S. Bergman and Raphael M. Russo are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on their Paul Weiss memorandum.

On August 26, 2020, the SEC adopted amendments to Regulation S-K that update disclosure requirements in Item 101(a) (description of the general development of the business), Item 101(c) (narrative description of the business), Item 103 (legal proceedings) and Item 105 (risk factors). The SEC believes the changes will result in a more principles-based, registrant-specific and cost efficient approach to disclosure that will facilitate an understanding of the performance of a registrant’s business, its financial position and prospects through the eyes of its management and board of directors.

Since Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (e.g., Form F-1, F-3 or F-4) specifically refers to Regulation S-K, the amendments to Items 101 and 103 apply only to domestic registrants and foreign private issuers that have elected to file on domestic forms. The amendments to Item 105 apply to both domestic and foreign private issuers.

The amendments become effective 30 days after the date of the publication of the adopting release (“Adopting Release”) (available here) in the Federal Register.


Stockholder Claims Dismissed Even After Corwin Defense Fails

is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In a recent decision, the Delaware Court of Chancery found that the board omitted material information from its proxy statement recommending stockholders vote in favor of an all-cash acquisition of the company, and thus “Corwin cleansing” [1] did not apply. Nonetheless, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision. See In re USG Corp. S’holder Litig., Consol. C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020).

This decision provides helpful guidance regarding the kind of information that should be included in a merger proxy statement. It also provides a reminder that Corwin is not the only defense available to directors at the motion to dismiss stage. In particular, Section 102(b)(7) remains a powerful tool to support dismissal of stockholder claims against directors, even in cases where the proxy omits material information and/or the transaction is subject to “Revlon duties.” [2]


USG Corporation (“USG”) was a public building materials company best known for manufacturing and selling Sheetrock brand drywall and wall products. Gebr. Knauf KG and certain of its affiliates (“Knauf”) owned 10.6% of USG’s common stock. In March 2017, Knauf (through its financial advisor) reached out to Berkshire Hathaway Inc. (“Berkshire Hathaway”), which owned 31.1% of USG’s common stock, regarding a potential acquisition of USG. Following discussions, Knauf and Berkshire Hathaway agreed in principle to a price of $40 per share.


SASB’s Proposed Revisions to Its Conceptual Framework and Rules of Procedure

Jeffrey Hales is a professor of accounting at the University of Texas at Austin and Chair of the SASB Standards Board and Tom Riesenberg is SASB’s Director of Legal and Regulatory Policy.

Lawyers don’t typically use conceptual frameworks in their work, but accountants, social scientists, and many other professionals do. For example, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) both have well-established conceptual frameworks. Standard setters develop conceptual frameworks for two reasons: first, they provide an intellectual grounding in core principles and objectives that guide standard-setting efforts; and, second, they provide a common language that improves the ability of a standard setter to communicate ideas and intentions with key stakeholders.

Indeed, it has been argued that FASB’s conceptual framework has been key to the “FASB’s institutional success by disavowing a neutral posture towards its constituents’ conflicting interests and explicitly privileging the user interest over the preparer interest.” [1] The IASB has taken a similar position. Following these precedents, the Sustainability Accounting Standards Board (SASB) also has a conceptual framework in place that, among other things, establishes that the SASB Standards are designed primarily to facilitate disclosure of sustainability information that is useful to investors, lenders, and other creditors.


Weekly Roundup: September 25–October 1, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 25–October 1, 2020.

Letter to House Subcommittee by SEC Chairman Jay Clayton

Statement by Commissioner Caroline Crenshaw on Whistleblower Program Rule Amendments

Statement by Chairman Clayton on Strengthening the SEC’s Whistleblower Program

Sharing the Pain: How Did Boards Adjust CEO Pay in Response to COVID-19

Shareholder Proposal No-Action Requests in the 2020 Proxy Season

Taming the Corporate Leviathan: Codetermination and the Democratic State

The Broadening Basis for Business Judgment

No Damages in Dispute Over Failed Anthem/Cigna Merger

2020 AGM Season Review

The Enduring Wisdom of Milton Friedman

Investment Stewardship 2020 Annual Report

Managing Climate Risk in the U.S. Financial System

2020 Annual Corporate Governance Review

How Great Companies Deliver Both Purpose and Profit

Alex Edmans is professor of finance at London Business School. This post is based on his recently published book Grow the Pie. 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); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Capitalism is in crisis. The consensus among politicians, citizens, and even executives themselves—on both sides of the political spectrum and throughout the world—is that business just isn’t working for ordinary people. It enriches the elites, playing scant attention to worker wages, customer welfare, or climate change.

Citizens, and the politicians that represent them, are fighting back. The precise reaction varies—Occupy movements, Brexit, electing populist leaders, restricting trade and immigration, and revolting against CEO pay. But the sentiment’s the same. “They” are benefiting at the expense of “us”.

In turn, companies were responding—or at least appearing to. Sustainability became the corporate buzzword of the day. It was the theme of this year’s World Economic Forum in Davos. Last August, the US Business Roundtable radically redefined its statement of the “purpose of a corporation” to include stakeholders, rather than just shareholders. BlackRock chief Larry Fink, in his annual letter to CEOs the last few Januarys, has stressed that their companies must serve wider society.


2020 Annual Corporate Governance Review

Donald W. Cassidy is executive vice president of business development and corporate strategy; Hannah Orowitz is managing director of corporate governance; and Brigid Rosati is director of business development at Georgeson. This post is based on their Georgeson memorandum.

The Impact of COVID-19 on the 2020 Proxy Season

The COVID-19 global pandemic fundamentally altered the 2020 U.S. proxy season by changing the logistics of annual meetings, introducing regulatory changes, influencing voting decisions and shaping future shareholder proposal trends.

Changing Meeting Logistics and Investor Perceptions

Restriction on travel and large gatherings combined with growing global health and safety concerns forced companies worldwide to quickly modify meeting logistics late in the planning stages of their 2020 annual shareholder meetings. In the U.S., while COVID-19 caused some companies to postpone or cancel their meetings, the majority of companies shifted to a virtual-only or hybrid format.

Most U.S. companies with mid-March 2020 and later meeting dates quickly opted to transition to a virtual meeting format—over 1,900 companies in the Russell 3000, which includes the S&P 1500, as of July 2020 according to ISS. Recognizing the need to prioritize health and safety, most investors were understanding of a company’s choice to hold a virtual meeting in 2020.


Managing Climate Risk in the U.S. Financial System

Bob Litterman is Chairman of the Climate-Related Market Risk Subcommittee of the Commodity Futures Trading Commission (CFTC). This post is based on his CFTC report.

Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy. Climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labor productivity. Over time, if significant action is not taken to check rising global average temperatures, climate change impacts could impair the productive capacity of the economy and undermine its ability to generate employment, income, and opportunity. Even under optimistic emissions-reduction scenarios, the United States, along with countries around the world, will have to continue to cope with some measure of climate change-related impacts.

This reality poses complex risks for the U.S. financial system. Risks include disorderly price adjustments in various asset classes, with possible spillovers into different parts of the financial system, as well as potential disruption of the proper functioning of financial markets. In addition, the process of combating climate change itself—which demands a large-scale transition to a net-zero emissions economy—will pose risks to the financial system if markets and market participants prove unable to adapt to rapid changes in policy, technology, and consumer preferences. Financial system stress, in turn, may further exacerbate disruptions in economic activity, for example, by limiting the availability of credit or reducing access to certain financial products, such as hedging instruments and insurance.


Investment Stewardship 2020 Annual Report

Michelle Edkins is Managing Director, Hilary Novik-Sandberg is an Associate and Victoria Gaytan is a Vice President at BlackRock Investment Stewardship. This post is based on a BlackRock memorandum by Ms. Edkins, Ms. Novik-Sandberg, Ms. Gaytan, and Sandra Boss.

Our fiduciary responsibility

BlackRock Investment Stewardship’s (BIS) activities are a crucial component of our fiduciary duty to our clients. Investment stewardship is how we use our voice as an investor to promote sound corporate governance and business practices to help maximize long-term shareholder value for our clients, the vast majority of whom are investing for long-term goals such as retirement. In addition to direct dialogue with the companies in which our clients invest, we help shape norms in corporate governance, sustainability, and stewardship through active participation in private sector initiatives and the public policy debate. In the reporting year from July 1, 2019 to July 30, 2020, we responded formally to seven policy consultations and spoke at more than 180 events to advance sound governance and sustainable business practices.

Promoting sound corporate governance is at the heart of our stewardship program. We believe that high-quality leadership and business management is essential to delivering sustainable financial performance. That is why we focus on board quality, effectiveness, and accountability across the broad universe of companies globally that our clients are invested in. Engagement and voting are the two most frequently used instruments in BIS’ stewardship toolkit.


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