Monthly Archives: March 2021

Trusting What You Can’t See: Audit Oversight and the PCAOB

J. Robert Brown is a former Board Member of the Public Company Accounting Oversight Board. This post is based on his keynote speech given at “What Investors Need to Know about Audits,” CFA Society New York.

I thought about a number of possible topics for the discussion today.

I considered talking about the relationship between the SEC and the PCAOB. There’s also the role, if any, of the auditor in providing assurance on non-GAAP and ESG metrics and the possible role of the PCAOB in leading the discussion.

I think it would be interesting to talk about the use of academic research in driving the regulatory mission of the PCAOB, particularly insights gleaned from the non-public data that the PCAOB receives from audit firms. And then there’s the issue of audit firms in China.

But instead of those topics, I thought today I would talk about trust.

Audits are about trust. Trust in the audit raises investor and public confidence in the company’s financial disclosure. Confidence in the financial disclosure in turn drives the capital markets.

The PCAOB’s mission, to put it succinctly, is to ensure trust in the audit.


Weekly Roundup: March 5–11, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 5–11, 2021.

A Survey of Sustainability Disclosures by Small and Mid-Cap Companies

Statement by Commissioners Peirce and Roisman on the SEC’s Enhanced Climate Change Efforts

2021 Proxy Season Preview: U.S.

The Strategic Audit Committee: Navigating 2021

Human Capital Management Proxy Disclosures

Key Considerations for Fiscal Year 2020 Form 10-K and 20-F Filings

Validation Capital

Call to Action on Sustainable Corporate Governance

SEC Brings Regulation FD Enforcement Action

Board Practices Quarterly: 2021 Boardroom Agenda

Recent Trends In Securities Class Action Litigation

Top Governance & Stewardship Issues in 2021

Top Governance & Stewardship Issues in 2021

This post is based on an article by the ISS Global Governance Research Team, Institutional Shareholder Services, Inc.

Key Takeaways

Protests in 2020 that swept across the US have cast a spotlight on levels of racial and ethnic diversity of corporate directors, C-suite executives and corporate workforces. Progress on racial and ethnic diversity on US corporate boards has been slow, and there is even less diversity in C-suites from which many director candidates are drawn. Shareholders, politicians, stock exchanges, activists, and rank-and-file employees are expected to apply pressure for increased diversity and inclusion. A variety of shareholder proposals addressing D&I concerns have been submitted at US companies. Similarly, there is a focus in the Canadian market to improve BIPOC diversity in both the public and private domains, while disclosure and regulatory challenges hamper measuring progress in Europe. Meanwhile, in many global markets, efforts to boost gender diversity levels in boardrooms and C-suites are expected to continue.

The continuing COVID-19 pandemic will necessitate holding many shareholder meetings via electronic means. Given ongoing health and safety concerns, a majority of US and a significant number of other companies around the world are expected to continue to hold virtual-only meetings for at least the first half of 2021. The pandemic outbreak on the eve of most 2020 proxy seasons created challenges for many companies as they scrambled to switch from traditional in-person AGMs to virtual-only formats via the Internet or other electronic means. The significant short-notice changes needed left many companies ill-prepared to provide shareholders with meaningful levels of participation on a variety of technology platforms, or even in meetings held behind closed doors. Some shareholders expressed concerns regarding the inability to ask questions or to vote at virtual meetings. While a number of industry participants appear to have addressed problems in providing access to meetings, shareholders may not be as forgiving as last season if companies experience technical mishaps or hold bare-bones, audio-only meetings with limited opportunities for shareholders’ questions and dialogue.


SEC Will Aggressively Scrutinize Issuer’s Climate Change Disclosure

Jason Saltsberg is partner at Olshan Frome Wolosky LLP. This post is based on his Olshan memorandum.

On February 24, 2021, SEC acting chair Allison Herren Lee announced that she has directed the Division of Corporation Finance to enhance its focus on climate-related disclosures in its reviews of corporate filings. This follows the SEC’s announcement on February 1, 2021 of the appointment of its first-ever senior policy advisor for ESG issues.

Acting chair Lee has asked the staff to review the extent to which public companies are following the interpretive guidance concerning climate change disclosure issued on February 2, 2010 and to begin updating the guidance based on its findings. More specifically, she directed the staff to “assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.” Currently, there is no standardized disclosure required pursuant to Regulation S-K regarding climate change risk. It remains to be seen whether the SEC will adopt new rules to address climate change risk.


Recent Trends In Securities Class Action Litigation

Janeen McIntosh and Svetlana Starykh are Senior Consultants at NERA Economic Consulting. This post is based on a NERA memorandum by Ms. McIntosh, Ms. Starykh, Dr. David Tabak, and Zhenyu Wang.

In this year’s update to NERA’s annual study, “Recent Trends in Securities Class Action Litigation”, we analyze trends in securities class action filings and resolutions based on activity through 2020.

Highlights from this year’s report include:

  • Since the first COVID-19-related lawsuit in March 2020, 32 additional filings have included COVID-19-related claims in their complaints.
  • There were 326 federal securities class actions filed in 2020. This marks a 22% decline from 2019, primarily driven by fewer merger objection cases filed.
  • The percentage of new filings that were Rule 10b-5, Section 11, and/or Section 12 cases increased from 58% in 2019 to 64% in 2020. Other types of cases declined.
  • Continuing a 2019 trend, defendants the electronic technology and technology services sector faced the most securities class action filings at 23% of 2020’s total.
  • For the first time in five years, complaints including an allegation related to misled future performance outnumbered claims related to accounting issues, regulatory issues, or missed earnings guidance.
  • In 2020, 320 cases were resolved, marking a slight increase from the total number of cases resolved in 2019, but remaining below the number of cases resolved in 2017 and 2018.
  • Aggregate resolutions returned to a level relatively in line with 2017 and 2018 levels, but settlement declined while dismissals increased to outside the historical 10-year ranges.
  • The average settlement value in 2020 was $44 million, more than a 50% increase over the 2019 average of $28 million but still below the 2018 value.


Speech by Commissioner Crenshaw on Moving Forward Together – Enforcement for Everyone

Caroline Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent speech to the Council of Institutional Investors. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I want to thank the Council of Institutional Investors for inviting me today [March 9, 2021]. You are tireless advocates for investors and staunch proponents of good corporate governance. The agenda for this year’s meeting covers a number of timely topics that are top of mind for me as well—from the impact of COVID-19 on members, to drivers behind the SPAC boom, to diversity and inclusion at U.S. companies. I’m pleased you are also talking about sustainable finance, proxy voting issues and ESG ratings. Further, I share CII’s prioritization of clawbacks and transparency as to executive pay, stock trades and share buybacks. Today I have been asked to speak about what’s next for the SEC. Before I do that, I will make the usual disclaimer that the views I express today are my own, and do not necessarily reflect those of staff, my fellow commissioners, or the agency.

In thinking about what I wanted to discuss today, of course I considered policy matters that I would like to see the Commission prioritize in the near term: Regulation Best Interest, the improvements needed in the proxy process, the need to finish implementing Dodd-Frank, and continuing updates to our market infrastructure. But I kept coming back to something even more foundational: our enforcement program. I want to talk about the central role enforcement plays in fulfilling our mission, how investors and markets benefit, and how a decision made 15 years ago has taken us off course. And I’ll explain how changing tack now will yield better outcomes in all these areas.


Board Practices Quarterly: 2021 Boardroom Agenda

Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on a Deloitte/Society for Corporate Governance memorandum by Ms. Cooper, Mr. Lamm, Ms. Morrison, Debbie McCormack, Carey Oven, and Darla C. Stuckey.

This post identifies some of the key areas and trends expected to be on boardroom agendas this year, according to a December 2020 survey of in-house members of the Society for Corporate Governance. These areas look beyond perennial agenda items, such as strategy and risk, and instead focus on new and emerging topics as many companies continue to respond to unanticipated events that unfolded during 2020. The survey explored two specific topics in detail, pandemic response and recovery and human capital management, to obtain greater insight on shareholder engagement, meeting agendas, and disclosures.


Respondents, primarily corporate secretaries, in-house counsel, and other in-house governance professionals, represent public companies (91%) and private companies (9%) of varying sizes and industries. [1] The findings pertain to all companies; public and private. Where applicable, commentary has been included to highlight differences among respondent demographics. The actual number of responses for each question is provided.


SEC Brings Regulation FD Enforcement Action

John F. Savarese and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

On Friday, the SEC brought an enforcement action charging a public company and three of its investor relations personnel with violations of Regulation FD, alleging that the company’s IR personnel had fed non-public information to sell-side research analysts in order to bring their consensus revenue views more into line with the company’s own internal estimates. The defendants are all contesting the charges, and the case will be litigated in federal court. While some commentators may see this as an instance of the SEC pushing the Regulation FD envelope, our view is this: if the SEC is ultimately able to substantiate its allegations at trial, the case will fall within what is generally understood to be the proper scope of Regulation FD. We explain below the reasons for this view.


Call to Action on Sustainable Corporate Governance

Professor Mervyn King S.C. is IIRC Chair Emeritus and author of King corporate governance codes; Paul Polman is Co-Founder & Chair of IMAGINE and former CEO of Unilever; Kerrie Waring is CEO of the International Corporate Governance Network; Bob Moritz is Global Chairman at PricewaterhouseCoopers LLP; and Gilbert Van Hassel is CEO of Robeco. This post is based on their open letter. 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); Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

As leaders in business, investment and financial institutions, and academia we welcome and encourage efforts in jurisdictions around the world to take action to embed the concept of sustainable development in corporate governance law, codes and initiatives.

Business sustainability, sustainable finance, corporate purpose and long-term value creation must begin with company boards and the systems of governance under which companies operate.

Director organisations have recognised the urgency of the climate crisis and the need to accelerate progress towards Paris and Sustainable Development Goals. To be able to do so, it is crucial that directors positively orientate towards long-term value creation rather than short-term profit maximisation for the company.

Business organisations have committed to move away from the concept of shareholder primacy towards fully addressing sustainability and ensuring that no stakeholders are significantly harmed.  Although the law already provides Board members with wide discretion when making decisions on behalf of the company on sustainability issues, incentives within existing corporate governance models too often prevent them from taking concrete steps to act on these intentions.


House of Representatives Testimony on Climate Change and Social Responsibility

Veena Ramani is Senior Program Director of Capital Market Systems at Ceres. This post is based on her testimony before the U.S. House of Representatives Subcommittee on Investor Protection, Entrepreneurship and Capital Markets Hearing on Climate Change and Social Responsibility.

Thank you for the invitation and opportunity to appear before you today. I represent Ceres, a nonprofit organization working with investors and companies to build sustainability leadership within their own enterprises and to drive sector and policy solutions throughout the economy. Through our membership networks of more than 100 companies and almost 200 investors with over $30 trillion of assets under management, we work with private sector leaders to tackle the world’s biggest sustainability challenges, including climate change, water scarcity and pollution, and deforestation.

I am Senior Program Director for Capital Market Systems in the Ceres Accelerator for Sustainable Capital Markets. The Accelerator works to transform the practices and policies that govern capital markets in order to reduce the worst financial impacts of the climate crisis. It spurs capital market influencers to act on climate change as a systemic financial risk—driving the large-scale behavior and systems change needed to achieve a just and sustainable future and a net-zero emissions economy. Ceres has a 30 year history of working on climate change and ESG disclosures. This includes founding the Global Reporting Initiative, which is currently the de facto sustainability reporting standard used by over 13,000 companies worldwide.

In 2019, our President and CEO Mindy Lubber testified before this committee on this topic. My testimony will update and complement the evidence she provided, which I have submitted by reference into the record. My testimony today also draws from past and current Ceres research and engagement with companies, investors and policymakers on climate change. It also draws from a report I authored last year entitled “Addressing Climate as a Systemic Risk: A call to action for U.S. financial regulators,” which outlines how and why U.S. financial regulators, who are responsible for protecting the stability and competitiveness of the U.S. economy, need to recognize and act on climate change as a systemic risk.


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