Monthly Archives: December 2021

Glass Lewis’ 2022 Policy Guidelines: Important Updates

Posted by Shaun Bisman and Han Wen Zhang, Compensation Advisory Partners, on
Monday, December 20, 2021
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Shaun Bisman is a Principal and Han Wen Zhang is an Analyst at Compensation Advisory Partners LLC. This post is based on their CAP memorandum.

Glass Lewis recently released its 2022 policy guidelines, with new amendments on compensation, board diversity, and environmental and social areas. The key changes for 2022 focus on diversity and SPAC governance. This post discusses key compensation and Environmental, Social and Governance (ESG) updates.

Executive Compensation-Related Updates

Linking Executive Pay to Environmental and Social Criteria

Glass Lewis does not maintain a policy on the inclusion of environmental and social (E&S) metrics in a company’s short- or long-term incentive program. However, if a company includes E&S metrics in its variable incentive program, Glass Lewis expects robust disclosure on the metrics selected, the rigor of performance targets, and the determination of corresponding payout opportunities. For qualitative E&S metrics, it expects the company to provide shareholders with a thorough understanding of how these metrics will be or were assessed.

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ESG and 2021 Year-End Financial Reporting Season

Posted by Maria Castañón Moats and Stephen G. Parker, PricewaterhouseCoopers LLP, on
Sunday, December 19, 2021
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Maria Castañón Moats is Leader and Stephen G. Parker is Partner at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and 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).

ESG’s impact on financial statements

Partially in response to stakeholder pressure to integrate ESG into company strategy, many companies are doing more to address ESG risks and opportunities. Common initiatives include making net zero commitments, tying ESG KPIs to executive compensation, improving diversity in the workforce, and addressing data privacy concerns. In addition to being included in the company’s voluntary ESG reporting, these actions may have material effects on the company’s financial statements. For example, as traditional car manufacturers move away from the production of fossil fuel-powered vehicles, they may need to develop new or transform existing manufacturing plants to build electric vehicles. Initiatives of that size would certainly require the approval of the full board. But once the board has signed off on the strategic shift, it’s the audit committee that needs to pay close attention to the potential impacts such a strategy change may have on the company’s financial statements. Determining the need for enhanced disclosure and the recognition and measurement of financial statement impacts may be straightforward in some cases, while in other cases they may be more complex.

One area that requires management judgment relates to pledges like net zero commitments. Companies are facing challenges on how to account for programs, such as buying carbon offsets, that help companies meet their goals, but may not fit easily into current US GAAP.

Another area that may present some complexities is “sustainability-linked financing.” Some companies are pursuing this type of financing, in which interest rates are linked to metrics that incentivize certain ESG goals. These features may also be included in other financial instruments such as derivatives, and the features may make valuation more complex.

As companies start to integrate ESG into their strategy, they should also consider the potential impacts on their existing assets, including valuation and useful life estimates. For those companies overhauling their business models, legacy assets may even need to be assessed for impairment.

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The SEC Backs Off on Proxy Advisory Firms

Posted by Nicolas Grabar and Shuangjun Wang, Cleary Gottlieb Steen & Hamilton LLP, on
Sunday, December 19, 2021
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Nicolas Grabar is partner and Shuangjun Wang is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Grabar, Taewan Roh and Mary Alcock.

Last week saw a new twist in the SEC’s nearly 20-year struggle to develop a stable regulatory approach to the activities of the proxy advisory firms—principally ISS and Glass Lewis—that have come to play such an important role in shareholder voting at U.S. public companies.

Proxy advisory firms are principally in the business of advising institutional investors about upcoming shareholder votes. In July 2020, the SEC under Chair Jay Clayton amended the federal proxy rules to regulate proxy advisory firms, but that did not end the triangular controversy among the proxy advisory firms, their critics among public companies and their supporters among institutional investors.

The SEC under Chair Gary Gensler has now moved closer to the camp of the supporters, and on November 17, the SEC proposed new rule amendments that would eliminate the core elements of the new requirements imposed on proxy advisory firms in July 2020. [1] There will be a comment period on the proposal, and skirmishing in the courts, but the proposal seems destined to be adopted.

When that happens—and as a practical matter even before that—proxy advisory firms will not be legally required to provide the subject company with the guidance they provide to clients or to make the subject company’s response available to their clients. Other aspects of the 2020 rules will survive, but, going forward, the process between proxy advisory firms and subject companies will be primarily a matter for private ordering, much as it was before the 2020 rules.

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BlackRock Investment Stewardship Global Principles

Posted by John McKinley, BlackRock Investment Stewardship, on
Saturday, December 18, 2021
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John McKinley is Managing Director at BlackRock Investment Stewardship. This post is based on his BlackRock memorandum.

BlackRock’s purpose is to help more and more people experience financial well-being. We manage assets on behalf of institutional and individual clients, across a full spectrum of investment strategies, asset classes, and regions. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers, and other financial institutions, as well as individuals around the world. As part of our fiduciary duty to our clients, we have determined that it is generally in the best long-term interest of our clients to promote sound corporate governance as an informed, engaged shareholder. At BlackRock, this is the responsibility of the Investment Stewardship team.

Philosophy on investment stewardship

Companies are responsible for ensuring they have appropriate governance structures to serve the interests of shareholders and other key stakeholders. We believe that there are certain fundamental rights attached to shareholding. Companies and their boards should be accountable to shareholders and structured with appropriate checks and balances to ensure that they operate in shareholders’ best interests to create sustainable value. Shareholders should have the right to vote to elect, remove, and nominate directors, approve the appointment of the auditor, and amend the corporate charter or by-laws. Shareholders should be able to vote on key board decisions that are material to the protection of their investment, including but not limited to, changes to the purpose of the business, dilution levels and pre-emptive rights, and the distribution of income and capital structure. In order to make informed decisions, we believe that shareholders have the right to sufficient and timely information. In addition, shareholder voting rights should be proportionate to their economic ownership—the principle of “one share, one vote” helps achieve this balance.

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2021 CPA-Zicklin Index of Corporate Political Disclosure and Accountability

Posted by Bruce F. Freed, Dan Carroll, and Karl J. Sandstrom, Center for Political Accountability, on
Saturday, December 18, 2021
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Bruce F. Freed is President of the Center for Political Accountability, Dan Carroll is Vice President for Programs and Counsel, and Karl J. Sandstrom is strategic advisor to the Center and senior counsel with Perkins Coie. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here) and The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here).

In a two-year period marked by political polarization, civil unrest, and the January 6, 2021 attack on the U.S. Capitol, more U.S. companies have adapted by expanding board oversight of potentially controversial political spending. This increased engagement by boards of publicly held companies was revealed in the 2021 CPA-Wharton Zicklin Index of Corporate Political Disclosure and Accountability, a nonpartisan benchmarking of S&P 500 companies released November 29.

The heightened board and committee involvement came as the annual Index also showed continuing increases for other measures of corporate political spending sunlight and accountability over recent years.

Issued annually since 2011 by the Center for Political Accountability and the Carol and Lawrence Zicklin Center for Business Ethics Research at The Wharton School of the University of Pennsylvania, the Index started with the S&P 100 before expanding to cover the S&P 500 in 2015.

In a statement on the Index, Wharton Professor and Zicklin Center Director William S. Laufer said, “With the looming possibility of a Securities and Exchange Commission rulemaking over corporate political disclosure, corporations can cross the threshold of accountability before being required to do so as a matter of law. And embracing accountability should not only be a matter of legal risk mitigation and even code compliance. Ultimately, corporate political accountability is a reflection of a firm’s integrity, culture, and leadership. This, I believe, explains the significant progress made by S&P 500 companies on the 2021 Index.”

Here are major findings from the 2021 Index:

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Statement by Chair Gensler on Rule 10b5-1 and Insider Trading

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Friday, December 17, 2021
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

First, the Commission is considering proposed amendments to Rule 10b5-1, as well as proposed new disclosure requirements. I support these amendments because, if adopted, they would help close potential gaps in our insider trading regime.

Today’s proposal addresses the means by which companies and company insiders—chief executive officers, chief financial officers, other executives, directors, and senior officers—trade in company shares.

The core issue is that these insiders regularly have material information that the public doesn’t have. So how can they sell and buy stock in a way that’s fair to the marketplace?

About 20 years ago, Exchange Act Rule 10b5-1 was established. This rule provided affirmative defenses for corporate insiders and companies to buy and sell company stock as long as they adopted their trading plans in good faith—before becoming aware of material nonpublic information.

Over the past two decades, we’ve heard concerns about and seen gaps in Rule 10b5-1—gaps that today’s proposals would help fill.

Today’s proposals would add new conditions to the existing affirmative defense under Rule 10b5-1(c)(1), to help address concerns about potentially abusive practices associated with the use of that defense.

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Statement by Commissioner Peirce on Rule 10b5-1 and Insider Trading

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Friday, December 17, 2021
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Chair Gensler. Given our many policy disagreements and—spoiler alert—my resulting dissents on various matters today, I was beginning to feel a bit like the Grinch this holiday season. Singing in Whoville on Christmas morning caused the Grinch’s heart to grow three sizes that day, [1] but it was my fellow Commissioners’ willingness to collaborate and engage on this release with the help of Renee Jones and her staff and Corey Klemmer on the Chair’s staff that won me over and led me to support this proposal.

I support today’s proposal to address potential abuses of Rule 10b5-1(c) trading arrangements. The proposed cooling-off periods of 120 days for officers and directors and 30 days for issuers, and restrictions on multiple overlapping plans strike me as reasonable changes designed to ward off abuses in this context. The proposed limitation of one single-trade plan during any twelve-month period also seems narrowly tailored to address problematic behavior while preserving the need of insiders to seek liquidity in an emergency or one-off situation.

At the risk of sounding like a seasick crocodile, [2] other aspects of the proposal raise concerns for me and I am eager to hear commenters’ views on these matters. First, the proposed certification requirement would require a director or officer to certify at the time of the adoption of a plan that she is not aware of material nonpublic information about the issuer and that she is adopting the plan in good faith. The director or officer would be expected to retain this certification for ten years. Is the minimal benefit of reinforcing existing obligations under Rule 10b5-1 outweighed by the burdens associated with this requirement? The release notes that the proposed certification would not be an independent basis for liability, but should we specify that in the text of the rule itself?

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Boards Face Backlash as ESG Tips the Scales During 2021 Proxy Season

Posted by Rodolfo Araujo and Garrett Muzikowski, FTI Consulting, Inc., on
Friday, December 17, 2021
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Rodolfo Araujo is a Senior Managing Director and Garrett Muzikowski is a Director in the Strategic Communications segment at FTI Consulting, Inc. This post is based on their FTI Consulting 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and 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).

Against a backdrop of pandemic- and climate-related concerns, ESG emerged as a top concern for today’s investors—and boards are being held accountable.

A tectonic shift in the focus toward environmental and social topics occurred during the 2021 proxy season, reflecting the importance for organizations to successfully manage environmental, social and governance (ESG) risks and opportunities. Large institutional investors not only backed environmental and social shareholder proposals like never before, but they also voted against the reelection of directors at portfolio companies where ESG management was perceived as ineffective. As a result, companies are beginning to feel a sense of urgency in developing sound ESG programs that meet shareholders’ evolving expectations.

Investors Leading the Charge

ESG’s prominence among stakeholders is nothing new. Companies and their investors, employees, suppliers, customers, communities—along with nongovernmental organizations (NGOs) and regulators—have been analyzing ESG topics in some capacity for years. However, for many stakeholders, the past year served as a catalyst to hyper-focus on ESG-related topics. Organizations navigated a lot of uncharted territory since the onset of COVID-19: pandemic-related health concerns, civil unrest from social injustice, economic inequalities and climate change all amplified the importance of a well-run ESG program.

Out of all stakeholder groups, investors were arguably the ones to shift their attention most drastically toward ESG—applying significantly more pressure for change at their portfolio companies than in years past. This change is noticeable when looking at trends of environmental and social (E&S) shareholder proposals and the largest asset managers’ voting behavior. For example, 29 E&S shareholder proposals received majority support in this year’s proxy season, up nearly double from the 16 that received majority support the year prior. The 2021 proxy season saw nine political activity proposals pass; an additional five proposals related to climate lobbying passed. In 2020 only five political activity proposals passed, and a mere one related to climate lobbying. [1]

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Weekly Roundup: December 10–16, 2021

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, December 17, 2021

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This roundup contains a collection of the posts published on the Forum during the week of December 10–16, 2021.

No More Old Boys’ Club: Institutional Investors’ Fiduciary Duty to Advance Board Gender Diversity

Posted by Anat Alon-Beck (Case Western Reserve Universty), Michal Agmon-Gonnen (Tel Aviv University) and Darren Rosenblum (McGill University), on Friday, December 10, 2021
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Remarks by Chair Gensler Before the Healthy Markets Association Conference

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Friday, December 10, 2021
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SPACs Face Legislative Scrutiny

Posted by Carlos Juarez, Mayer Brown LLP, on Saturday, December 11, 2021
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Damages Awards Based on Controller’s Reliance on Outside Counsel’s Legal Opinion

Posted by Gail Weinstein, Mark H. Lucas, David L. Shaw, Fried, Frank, Harris, Shriver & Jacobson LLP, on Saturday, December 11, 2021
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Silicon Valley and S&P 100: A Comparison of 2021 Proxy Season Results

Posted by David A. Bell and Ron C. Llewellyn, Fenwick & West LLP, on Sunday, December 12, 2021
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Directors Challenged to Respond to New DOJ Corporate Fraud Initiative

Posted by Michael W. Peregrine, McDermott Will & Emery LLP, on Monday, December 13, 2021
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Stocks for the Long Run? Evidence from a Broad Sample of Developed Markets

Posted by Aizhan Anarkulova (University of Arizona), Scott Cederburg (University of Arizona), and Michael S. O’Doherty (University of Missouri), on Monday, December 13, 2021
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DOL Proposed Investment/Proxy ERISA Regulations

Posted by Andrew L. Oringer, Steven W. Rabitz, and Naina G. Kamath, Dechert LLP, on Monday, December 13, 2021
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Keeping Pace with the Climate Transition

Posted by Carlo M. Funk, State Street Global Advisors, on Tuesday, December 14, 2021
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ESG: Hyperboles and Reality

Posted by George Serafeim (Harvard Business School), on Tuesday, December 14, 2021
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Statement by Commissioners Peirce and Roisman on Chair Gensler’s Regulatory Agenda

Posted by Hester M. Peirce and Elad L. Roisman, U.S. Securities and Exchange Commission, on Tuesday, December 14, 2021
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SEC Adopts Mandatory Universal Proxy in Contested Elections

Posted by Cydney Posner, Cooley LLP, on Wednesday, December 15, 2021
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The Corporate Director’s Guide to ESG

Posted by Maria Castañón Moats and Paul DeNicola, PricewaterhouseCoopers LLP, on Wednesday, December 15, 2021
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Remarks by Commissioner Crenshaw on Climate Pledges

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on Wednesday, December 15, 2021
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Statement by Commissioner Roisman on Buybacks Disclosure Proposal

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on Thursday, December 16, 2021
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Statement by Commissioner Peirce on Buybacks Disclosure Proposal

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Thursday, December 16, 2021
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Statement by Chair Gensler on Buybacks Disclosure Proposal

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Thursday, December 16, 2021
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Statement by Chair Gensler on Buybacks Disclosure Proposal

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Thursday, December 16, 2021
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Today, the Commission is considering enhancing the disclosures around share buybacks. I support these amendments because, if adopted, they would increase transparency into the market.

Share buybacks have become a significant component of how public issuers return capital to shareholders. I think we can lessen the information asymmetries between issuers and investors through the timeliness of the disclosures.

Today’s proposed amendments would require an issuer to provide more timely information on their share repurchases—one business day after a trade is executed. This is in contrast to the current reporting requirements, which provide only quarterly disclosure of aggregated monthly data.

I think investors would benefit from the timeliness and granularity that today’s proposal would provide. The amendments also would enhance existing buyback disclosure requirements, including on Form 10-K and Form 10-Q.

Other countries, such as Australia and the United Kingdom, have long required more timely share buyback disclosures next day for certain disclosures. [1] I believe freshening up our own share buyback disclosures would help the U.S. capital markets remain the most competitive in the world.

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