Monthly Archives: June 2022

The SEC’s Climate Proposal: Top Ten Points for Comment

Nick Grabar is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Grabar, David LopezFrancesca Odell, Lillian Tsu, and Helena Grannis.

We think that moderating the proposal in key respects will—far from weakening it—make it more likely to achieve the Commission’s long-term purposes of eliciting useful and consistent disclosures. Ideally the SEC’s rules would contribute to developing coherent climate disclosure practices around the world—not just for U.S. reporting companies and not just under SEC rules.

With that in mind, a month ago we published a list of points for potential comment. Since then we’ve had a number of interesting conversations with clients and colleagues, as everyone has had a chance to dig into the proposal and to compare it to existing practices. Today we have ten points we commend to your attention. We are focusing on items where the SEC seems to have ventured beyond what investors and other frameworks have called for, or where the SEC seems to have misjudged the challenges of compliance.

A common element among many of the points below is that the SEC’s proposing release states that they were supported by commenters in response to the SEC’s March 2021 request for comment. We would urge the Commission to distinguish between types of commenters. The views of advocates and activists—while they are undoubtedly important—are not of the same kind as the view of investors and their representatives, and they do not bear equally on the Commission’s statutory mandate for the protection of investors.

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Remarks by Chair Gensler Before the Investor Advisory Committee

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the Investor Advisory Committee. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you for that introduction, Christopher. Good morning. It is great to join the Investor Advisory Committee (IAC) today. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or Securities and Exchange Commission staff.

I would like to welcome the new members of this Committee. The eight of you bring a wide-ranging set of experiences to this group, coming from government, academia, funds, non-profits, and the U.S. Navy. Thank you for volunteering your time and energy on behalf of investors.

Today’s meeting marks a year since I first had the opportunity to meet with this group. The work the IAC does matters, and my team and I follow your recommendations closely. Since January of last year, you have issued five recommendations: on Self-Directed Individual Retirement Accounts (IRAs), Special Purpose Acquisition Companies (SPACs), Rule 10b5-1 plans, Credit Rating Agencies, and Minority and Underserved Inclusion in Investment and Financial Services. I have asked the staff to review your recommendations and explore all of these areas. Indeed, the SEC has proposed rules on SPACs and 10b5-1 plans. I look forward to further recommendations from this committee.

Today’s meeting features panel discussions on the accounting of non-traditional financial information as well as climate-related disclosures. Disclosures have been at the heart of our securities laws since we were founded 88 years ago this week.

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Practical Stake

Bruce F. Freed is President of the Center for Political Accountability, 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 Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert Jackson, James David Nelson and Roberto Tallarita (discussed on the Forum here); and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).

Companies today face a moment of reckoning for their political spending. The crisis that confronts U.S. democracy and the inability to address a broad range of issues demanding public action from climate change to women’s reproductive rights, voting and guns has put front and center the role of company political spending in contributing to the breakdown. It has also underscored the need for companies to take a hard look at the consequences of their spending, the immediate and broad risks that it poses and whether or how they should engage in political spending.

The Center for Political Accountability addressed these fundamental issues in a recently issued report on corporations, political spending and democracy entitled Practical Stake. The title was deliberately chosen to emphasize the stake that companies have in a healthy, well-functioning democracy and contrast that with the role their political money has played in enabling the attack on democracy and creating the climate of intimidation that presents a grave threat. The report concluded by laying out what businesses should do to protect themselves and democracy.

Here are the report’s key points:

  • The dynamic capitalism that companies need for growing, competing, and pursuing their interests depends on a healthy democracy. Acceptance of democratic outcomes, respect for judicial decisions and the rejection of baseless claims are the foundation of the rule of law. When these attributes of a democratic society are put at risk by the power seeking, the conditions that businesses rely upon to prosper are lost.

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Weekly Roundup: June 3-9, 2022


More from:

This roundup contains a collection of the posts published on the Forum during the week of June 3-9, 2022.

The SEC’s Cyber Disclosures


CEO Pay Proposals Face Growing Investor Disapproval


Decentralized Governance and the Lessons of Corporate Governance


When It Comes to Board Diversity, Regulation Helps But Is No “Silver Bullet”


Fortune 500 General Counsel Report


What is the Law’s Role in a Recession?


“Defense Stocks” Highlight Challenges in Navigating Sustainability Taxonomies




An Early Look at the 2022 Proxy Season


Four Traps Boards Should Avoid


The Quest for Legitimacy in Corporate Law



Ninth Circuit Enforces Exclusive Forum Bylaw, Creating Split with Seventh Circuit


Inaugural Report on the Health of Democratic Capitalism


Remarks by Chair Gensler Before the Piper Sandler Global Exchange Conference

Remarks by Chair Gensler Before the Piper Sandler Global Exchange Conference

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the Piper Sandler Global Exchange Conference. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you, Rich (Repetto), for that kind introduction. It is good to be with you again. As is customary, I’d like to note my views are my own, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

Rich, at last year’s conference, you and I spoke about how technology has transformed and continues to transform our equity markets. [1]

This has led to some good things. For example, retail investors have greater access to markets than any time in the past.

This technological transformation, though, also has led to challenges, including market segmentation, concentration, and potential inefficiencies.

Right now, there isn’t a level playing field among different parts of the market: wholesalers, dark pools, and lit exchanges. Further, the markets have become increasingly hidden from view. In 2009, off-exchange trading accounted for a quarter of U.S. equity volume. Last year, during the meme stock events, that share swelled to a peak of 47 percent. [2] What’s more, 90-plus percent of retail marketable orders are routed to a small, concentrated group of wholesalers that pay for this retail market order flow. [3]

It’s not clear, with such market segmentation and concentration, and with an uneven playing field, that our current national market system is as fair and competitive as possible for investors.

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Inaugural Report on the Health of Democratic Capitalism

James Feinerman is James and Catherine Denny Chair in Democratic Capitalism, Kelsey Harrison is Program Coordinator for the Denny Center for Democratic Capitalism, and Bruce Shaw is Executive Director of the Denny Center for Democratic Capitalism at Georgetown Law. This post is based on a report from the Denny Center for Democratic Capitalism authored by Mr. Feinerman, Ms. Harrison, Mr. Shaw, Duncan Hobbs, Jay Shambaugh, and Michael Strain.

The goal of the Denny Center Inaugural Report on the Health of Democratic Capitalism is to evaluate how well the benefits of free market capitalism are balanced with the needs and expectations of a democratic society, focusing primarily on the United States.

While almost everyone agrees that free market capitalism is the most efficient wealth creation system, reconciling the benefits of capitalism with broader societal needs and aspirations is a perennial tug of war. The Denny Center was founded on the belief that maintaining balance between the two is critical to the future of both capitalism and a flourishing democratic society

Context

Since the Industrial Revolution, people around the world are better off in a number of ways. Over the last 200 years, annual gross domestic product (GDP) per capita in western economies has grown by a multiple of almost 50 times—from $1,100 to $50,000; the average global life expectancy has more than doubled from 29 to 72 years old; and the percentage of the world’s population living in extreme poverty has shrunk from 84% to less than 10%. [1]

Despite a long-run track record of success, free market capitalism is under pressure on multiple fronts, motivating some to argue that the system has run its course—and that it’s time to consider alternatives. However, based on the Denny Center’s core research, (conducted with support from leading economists [2]) we believe that democratic capitalism is still the world’s best option, though there are real problems that need to be addressed. In the complete publication we have used a clinical approach to study objective data that sheds light on democratic capitalism’s overall health, confirming where the system continues to perform well, and also identifying where it’s falling short. The report then summarizes critical questions to focus future research and potential paths forward.

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Ninth Circuit Enforces Exclusive Forum Bylaw, Creating Split with Seventh Circuit

Peter Morrison and Virginia Milstead are partners, and Raza Rasheed is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

On May 13, 2022, the U.S. Court of Appeals for the Ninth Circuit held that a corporate bylaw requiring stockholders to bring derivative claims in the Delaware Court of Chancery could be applied to claims brought derivatively under Section 14(a) of the Securities Exchange Act of 1934 (Exchange Act). The Ninth Circuit’s decision creates a split with the U.S. Court of Appeals for the Seventh Circuit on the issue. Lee v. Fisher, No. 21-15923 (9th Cir. May 13, 2022).

The Gap, Inc.’s bylaws contain a forum selection clause requiring stockholders to bring “any derivative action or proceeding brought on behalf of the Corporation” in the Delaware Court of Chancery. Notwithstanding this forum bylaw, Gap stockholder Noelle Lee brought a putative derivative action against the company’s directors in the U.S. District Court for the Northern District of California, alleging that the board had permitted the company to violate Section 14(a) of the Exchange Act by making false statements in proxy statements filed with the SEC about the level of diversity the company had achieved.

Ms. Lee argued that the forum bylaw requiring adjudication in Delaware state court could not be enforced against her because federal courts have exclusive jurisdiction over Section 14(a) claims under the Exchange Act. Therefore, enforcing the bylaw would prevent her from bringing a derivative Section 14(a) claim in any court. The district court rejected this argument and dismissed Ms. Lee’s suit.

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Policy Insights: Say on Climate

John Galloway is Global Head of Investment Stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship.

Executive summary

  • At this time, Vanguard does not proactively encourage companies to hold a “Say on Climate” vote given the lack of established standards or widely accepted market norms that govern these votes.
  • When a company chooses to hold a “Say on Climate” vote, Vanguard expects the board to provide clear disclosure of the rationale for the vote, to articulate the oversight mechanisms and implications of the vote, and to produce robust reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework.
  • Vanguard does not seek to direct company strategy. We view “Say on Climate” votes as a signal on the coherence and comprehensiveness of the reporting and disclosures a company provides to explain its climate plan to the market, rather than an endorsement of, or an expression of lack of confidence in, the plan itself.

Developments in Say on Climate votes

Last year we outlined our approach to evaluating Say on Climate proposals that encouraged companies to disclose climate transition plans.

We have since observed a significant increase in management-proposed climate plans that are put to an advisory shareholder vote, primarily among European and Australian companies. The specific forms and governance mechanisms of these votes remain heterogeneous, as some companies mirror the framework of “Say on Pay” (a vote on the plan every three years, and an annual vote on a progress report) while others opt for “test and learn” or “one and done” approaches. The various choices boards make amid the lack of consensus or convergence of frameworks and standards on these votes creates some confusion and complexities that investors and other stakeholders are working to navigate.

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The Quest for Legitimacy in Corporate Law

Stavros Gadinis is Professor of Law at the University of California at Berkeley School of Law and Christopher Havsay is Climenko Fellow at Harvard Law School and a Ph.D. Candidate at Harvard University in the Government Department. This post is based on their recent paper. 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? (discussed on the Forum here), both by Lucian A. Bebchuk and Roberto Tallarita; 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); and Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

The waves of politics, culture, and identity are crashing over corporate headquarters. Disney’s recent criticism of Florida’s “Don’t Say Gay” law resulted in the company losing its tax status with the state following a political backlash. Tech giants like Amazon, Google, and Microsoft, have been repeatedly rocked by employee walkouts. Corporations’ social choices are attracting criticism from a wide variety of stakeholders across the ideological spectrum. Progressives denounce corporate initiatives as mere facades aimed to deflect from the lack of desired social, political, and economic progress, illustrated by their familiar “greenwashing” critique of corporate actions on climate change. Meanwhile, conservatives bemoan companies’ newfound enthusiasm for social causes as out-of-bounds for a profit-making entity and castigate managers as mouthpieces of “woke” elites who are imposing their values on an unwilling public.

Rather than simply rebuking corporate choices, these attacks are increasingly focusing on managers’ competence to decide controversial social issues, questioning their accountability and representativeness, and portraying managers’ motivations as suspicious and biased. Critics left and right are united in their perceptions that managers wield seemingly arbitrary powers over their subordinates, control vast economic resources, and influence our wider society in untold ways through political lobbying. Should corporate managers possess such authority to spearhead broad societal change?

This question may sound bewildering to corporate governance specialists, but it is easily recognizable to experts on administrative agencies as a challenge on the legitimacy of managerial authority. It echoes doubts long raised against policymaking by administrative agencies: lack of democratic authorization, concerns about overpowerful rule-setters, unease at the delegation of important policy choices to unaccountable and unrepresentative officials, and opaqueness of decision-making processes. To contend with these fears, administrative law has honed a toolbox of institutional design and policy mechanisms to bolster the legitimacy of agency decision-making by offering substantive and procedural justifications for the exercise of authority. These processes, such as the development of notice-and-comment procedures, increased disclosure and transparency requirements, and agency emphasis on developing policy through predictable rulemaking procedures rather than other ad hoc mechanisms, provide the foundation of why agencies hold such important powers in our democratic society.

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Four Traps Boards Should Avoid

David Brown is managing director of Alvarez & Marsal. This post is based on a NACD BoardTalk publication.

The COVID-19 pandemic required directors to immerse themselves in the weeds of day-to-day decision-making. Small decisions, such as who came into the office and how often, became big decisions as the disruption’s massive shock waves impacted almost every aspect of operations. Now that we find ourselves in a different phase of the pandemic, there seem to be a few disturbing holdover trends from the height of COVID-19 impacting many corporate boards. Here are four of them and what directors can do to maximize their boards’ effectiveness in this time of market turmoil.

1. Too many are involved in the day-to-day operations of the company. Pandemic-related or not, some boards seem to have forgotten their strategic role, inserting themselves into areas squarely owned (and for good reason) by the C-suite. This is especially apparent in cases where an executive retires and takes a seat on the board but can’t leave their former duties alone.

How can you recognize if your board is slipping into management territory? Look for instances of micromanagement, such as board members directly calling on staff to have meetings or to weigh in on issues, or cases where the board sets spending approval bars too low for capital or other expenses. I’ve seen boards require spending approval for as little as $100,000. This added layer of approval will slow speed to value, and, in extreme cases, may disincentivize executives from making smart investments in the business.

The Fix: Hold your executives accountable for decisions about operations and spending. Eliminate non-board meeting communications with them unless there’s a crisis or unexpected event. And then only do so during a called board meeting.

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