Yearly Archives: 2022

Statement by Commissioner Crenshaw on Proposed Mandatory Climate Risk Disclosures

Posted by Caroline Crenshaw, U.S. Securities and Exchange Commission, on
Tuesday, March 22, 2022
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Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. 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.

Today marks an important and long-awaited step forward for the Securities and Exchange Commission. While other jurisdictions and independent bodies have made significant strides to provide investors and companies with a basic framework for climate-related disclosures, [1] for too long we have left the U.S. markets to rely solely on outdated and outmoded guidance. [2]

In that vacuum, companies and investors fend for themselves. Companies do not know which regime to follow, what information to disclose, and how best to disclose it. Investors try to figure out how to compare different regimes, how to use discordant information, and how to discern whether it’s even accurate. All the while, these data have become more important than ever to investors as they make their investment and voting decisions. [3] The result has been frustration — with companies making disparate climate disclosures that vary in scope, specificity, location, and reliability; [4] and investors who do not have accurate, reliable, and comparable information.

As a Commissioner, it is not my job to decide for millions of investors what information is material to them. [5] Rather, it is my job to listen and engage with investors and the markets. It’s to protect investors and to help ensure the fair and efficient allocation of resources. It’s to help provide ground-rules for disclosures so the market and investors can operate effectively. [6] And, what is abundantly clear after reviewing the comment file for months, and listening to investors and companies for years, is that it’s time to modernize and standardize. [7]

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Corporate Governance Lessons from New Chief Legal Officer Surveys

Posted by Michael W. Peregrine (McDermott Will & Emery) and Charles W. Elson (University of Delaware), on
Tuesday, March 22, 2022
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Michael W. Peregrine is partner at McDermott Will & Emery LLP, and Charles W. Elson is Founding Director of the Weinberg Center for Corporate Governance and Woolard Chair in Corporate Governance (ret.) at the University of Delaware.

Two prominent new surveys on the role and function of the Chief Legal Officer (“CLO”) contribute to “best practices” expectations that the corporate legal function assumes a significant hierarchical position within the organization. This is a particularly important development, given the upcoming 20th anniversary of the Sarbanes-Oxley Act and renewed interest in the degree of board oversight of legal affairs.

One of these documents is the “Chief Legal Officer Survey” published annually by the Association of Corporate Counsel (“ACC”). The other document is the survey, “General Counsel in the Boardroom”, from a partnership of Diligent Corporation and Corporate Counsel.

Collectively, the two surveys provide boards of directors with a strong sense of standards and guidelines they should consider when monitoring the effectiveness of their company’s legal function. They also identify significant areas for improvement in terms of CLO authority, responsibility and access to leadership. For these and other reasons this survey should be closely considered by the board of directors and any committee with delegated responsibility over the corporate legal affairs function.

It is critical that the board exercise informed oversight in connection with this responsibility, and not simply rely on the CEO’s judgment with respect to the structure, operation and stature of the corporate legal affairs department.

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Statement by Chair Gensler on Proposed Mandatory Climate Risk Disclosures

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Monday, March 21, 2022
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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 a proposal to mandate climate-risk disclosures by public companies. I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.

Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. That principle applies equally to our environmental-related disclosures, which date back to the 1970s.

Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. For example, investors with $130 trillion in assets under management have requested that companies disclose their climate risks. [1] Further, the 4,000-plus signatories to the UN Principles for Responsible Investment—a group with a core goal of helping investors protect their portfolios from climate-related risks—manage more than $120 trillion as of July 2021. [2]

Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. One report found that nearly two-thirds of companies in the Russell 1000 Index, and 90 percent of the 500 largest companies in that index, published sustainability reports in 2019 using various third-party standards, which include information about climate risks. [3] SEC staff, in reviewing nearly 7,000 annual reports submitted in 2019 and 2020, found that a third included some disclosure related to climate change.

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Statement by Commissioner Peirce on Proposed Mandatory Climate Risk Disclosures

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Monday, March 21, 2022
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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. Many people have awaited this day with eager anticipation. I am not one of them. Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures. The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency. For that reason, I cannot support the proposal.

The proposal turns the disclosure regime on its head. Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company’s present and prospective performance through managers’ own eyes. How are they thinking about the company? What opportunities and risks do the board and managers see? What are the material determinants of the company’s financial value? The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies. [1] It identifies a set of risks and opportunities—some perhaps real, others clearly theoretical—that managers should be considering and even suggests specific ways to mitigate those risks. It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.

As you have already heard, the proposal covers a lot of territory. It establishes a disclosure framework based, in large part, on the Task Force on Climate-Related Financial Disclosures (“TCFD”) Framework and the Greenhouse Gas Protocol. It requires disclosure of: climate-related risks; climate-related effects on strategy, business model, and outlook; board and management oversight of climate-related issues; processes for identifying, assessing, and managing climate risks; plans for transition; financial statement metrics related to climate; greenhouse gas (“GHG”) emissions; and climate targets and goals. It establishes a safe harbor for Scope 3 disclosures and an attestation requirement for large companies’ Scope 1 and 2 disclosures.

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Statement by Commissioner Lee on Proposed Mandatory Climate Risk Disclosures

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on
Monday, March 21, 2022
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Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Shelter from the Storm: Helping Investors Navigate Climate Change Risk [1]

This is a watershed moment for investors and financial markets as the Commission today addresses disclosure of climate change risk—one of the most momentous risks to face capital markets since the inception of this agency. The science is clear and alarming, [2] and the links to capital markets are direct and evident. [3]

Thus, I’m very pleased to support today’s proposal and I want to extend my sincere thanks to staff across the agency for their hard work in crafting the proposing release. [4] I also want to thank Chair Gensler for his focus and commitment to this issue, and his counsel, Mika Morse, whose talents have been integral to finalizing this proposal. Today’s proposal is extremely well done, skillfully leverages widely-accepted market-driven solutions including those created by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol, and responds to longstanding demand for Commission action to enhance climate-related disclosures for investors and markets.

* * *

Maintaining an effective disclosure regime for public companies is among the most important and foundational roles of the Commission. We have broad authority to prescribe disclosure requirements as necessary or appropriate in the public interest or for the protection of investors. [5] Importantly, with that authority comes responsibility. We have a responsibility to help ensure that investors have the information they need to accurately price risk and allocate capital as they see fit. We have a responsibility to millions of families with retirement savings and college funds whose economic well-being is linked to our financial markets. And we have a responsibility to stay firmly focused on facts and science and their implications for financial markets.

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Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information

Posted by Anat Alon-Beck (Case Western Reserve University), on
Monday, March 21, 2022
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Anat Alon-Beck is Assistant Professor at Case Western Reserve University School of Law. This post is based on her recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Unicorn valuations are notoriously inaccurate and well-documented in the finance literature. Silicon Valley’s dirty little secret is that a company can achieve a unicorn valuation by providing extensive downside protections to late-stage investors. Employees of these large, privately held companies do not have access to fair market valuation or financial statements and, in many cases, are denied access to such reports, even when requested.

Unicorn employees are granted equity as a substantial part of their compensation, however due to the inferior position of employees in comparison to the start-up founders and other investors, information shedding light on the value of their equity grants is often withheld.

Start-up founders, investors, and their lawyers sometimes systematically abuse equity award information asymmetry to their benefit. My paper, Bargaining Inequality: Employee Golden Handcuffs and Asymmetric Information, forthcoming in Maryland Law Review sheds light on the latest practice that compels employees, who are not yet stockholders, to waive their stockholder inspection rights under Delaware General Corporation Law (“DGCL”) Section 220 as a condition to receiving stock options from the company.

Perhaps the clearest indication of this new practice is the recent amendment to the National Venture Capital Association legal forms, which is intended to standardize a contractual “waiver of statutory inspection rights.” This waiver is designed to contract around stockholder inspection rights and prevent employees from accessing information about the value of their stock.

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Investors Expect Climate Action in 2022

Posted by Rodolfo Araujo, Marie Clara Buellingen, and Garrett Muzikowski, FTI Consulting, on
Monday, March 21, 2022
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Rodolfo Araujo is Senior Managing Director, Marie Clara Buellingen is Senior Director, and Garrett Muzikowski is Director at FTI Consulting. This post is based on their FTI 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).

In 2021, we saw investors scaling up to hold boards accountable for ESG oversight. Now, simple reporting isn’t enough — investors demand action.

From an investor’s perspective, a company’s directors are expected to proactively handle the governance of the corporation as well as govern risks and opportunities related to environmental and social (E&S) issues. In 2021, we saw the scales tip on holding boards accountable for oversight when it came to environmental, social and governance issues, known collectively as ESG. Such a perspective explains why directors are facing investor pressure on E&S, in particular.

This year might bring another shift of similar scale. While climate change has been a major focus since the 2016 Paris Agreement, our analysis below of shareholder proposals filed to date for 2022 indicates that investors are moving beyond climate change reporting to demanding companies set challenging, realistic, and science-based targets to reduce their greenhouse gas (GHG) emissions.

For companies, the message from investors is clear: If you simply track your emissions but do not have a credible and detailed strategy on climate risk mitigation, you are at risk of shareholder activism.

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ESG Disclosure in Silicon Valley

Posted by David Bell, Julia Forbess and Ron C. Llewellyn, Fenwick & West LLP, on
Sunday, March 20, 2022
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David A. Bell and Julia Forbess are partners and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick 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).

Throughout the last few years, investors, proxy advisors, governance professionals and a number of stakeholders have expressed a keen interest in how companies are managing their environmental, social and governance (ESG) associated risks and opportunities. Given the broad nature of ESG and the general dearth of reporting mandates, ESG disclosure practices can vary significantly. This report examines how technology companies in particular are responding to the growing interest in this space and the demands for more ESG-related disclosure by looking at the ESG reporting practices of the technology and life science companies included in the Fenwick – Bloomberg Law Silicon Valley 150 List (SV 150), which can serve as a proxy for technology companies more generally.

Key Takeaways

Our analysis of the public disclosures of the SV 150 companies shows the following:

  • Approximately 90% of SV 150 companies provide some level of ESG disclosure, with the vast majority of such companies (83%) choosing to disclose throughout multiple channels (e.g., sustainability reports, websites and/or proxy statements).
  • The amount and quality of ESG disclosure varied by size of company, with the larger SV 150 companies generally providing more comprehensive disclosure, including quantitative metrics.
  • ESG disclosures addressed a variety of topics, including carbon emissions and related reduction efforts, human capital management programs and initiatives, board and employee diversity, data protection and privacy. A significant majority provided disclosures related to human capital management, while smaller majorities included community impact and carbon emissions.
  • Approximately half of the SV 150 companies reported using a third-party standard or framework to guide their disclosure.
  • Only 17% of SV 150 companies provided independent assurance for their quantitative ESG metrics, such as GHG emissions.
  • The vast majority of SV 150 companies delegated primary oversight of ESG to the nominating and corporate governance committee or its equivalent.

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Delaware Court Limits Discovery in Appraisal Action

Posted by Yolanda C. Garcia and Annabeth L. Reeb, Sidley Austin LLP, on
Sunday, March 20, 2022
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Yolanda C. Garcia is partner and Annabeth L. Reeb is an associate at Sidley Austin LLP. This post is based on their Sidley 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here); and Appraisal After Dell by Guhan Subramanian.

The Delaware Court of Chancery recently issued an opinion making a narrow but key distinction in appraisal proceedings: the petitioners’ underlying intent in filing a Section 262 action matters. The court held that petitioners should not be allowed to obtain full discovery where the sole purpose in bringing the appraisal proceeding is to investigate potential wrongdoing. In this case, such intent was determined from Petitioners’ de minimis financial stake in the company.

Key Factual Background

Two investors of Zoox, Inc., an autonomous ride-hailing venture, petitioned the Delaware Chancery Court for an appraisal of their shares pursuant to Section 262 of the Delaware Code. The Petitioners had previously served inspection demands pursuant to Section 220, but the merger in question closed prior to the completion of the five-day waiting period imposed under the statute, at which time Petitioners lost their standing to demand access to books and records. After the merger, Petitioners filed—but later withdrew—a complaint to enforce their Section 220 inspection rights prior to filing the underlying appraisal action. In voluntarily dismissing their Section 220 Action, the Petitioners noted their belief that, through the appraisal action, they “would be entitled, at a minimum, to discovery of the same material” previously sought in their books and records demand.

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The Evolving Role of ESG Metrics in Executive Compensation Plans

Posted by Maria Castañón Moats, Leah Malone, and Christopher Hamilton, PricewaterhouseCoopers LLP, on
Saturday, March 19, 2022
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Maria Castañón Moats is Leader of the Governance Insights Center, Leah Malone is Director of the Governance Insights Center, and Christopher Hamilton is Principal in Workforce Transformation at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. 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), and The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

The broad area of environmental, social, and governance (ESG) issues is undeniably making its way onto corporate boardroom agendas today. Many large institutional shareholders are asking companies to focus more, do more, and disclose more about ESG efforts. In fact, ESG is now the topic most often covered during shareholder engagements that include company directors.

As boards work to integrate ESG concerns into discussions of company strategy, many are also considering how to create the right incentives for achievement of ESG-related goals. Incentive plans have long been driven primarily by objective financial goals. That often means quantitative goals related to things like revenue, cash flow, units sold, EBITDA, earnings per share, or total shareholder return. But at many companies, a shift is underway as non- financial goals become more common. As of March 2021, more than half of companies in the S&P 500 (57%) used at least one ESG metric in their plans.

Many investors support—or are even urging—these changes. The 2021 Global Benchmark Policy Survey published by Institutional Shareholder Services (ISS) found that 86% of investors (and 73% of non-investors) think non-financial ESG metrics are an appropriate measure to incentivize executives. But investors are also clear—if ESG metrics are to be used, it needs to be done right. Metrics should be carefully chosen and should align with a company’s strategy and business model.

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