Todd Sirras is a Managing Director; Austin Vanbastelaer is a Senior Consultant and Justin Beck is a Consultant at Semler Brossy. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Vanbastelaer, Mr. Beck, Alexandria Agee, Sarah Hartman, and Kyle McCarthy.
Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) and The Illusory Promise of Stakeholder Governance (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; and Does Enlightened Shareholder Value add Value (discuss on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel and Roberto Tallarita.
Large companies are receiving lower shareholder support for Say on Pay proposals than ever before. Average Say on Pay vote support for S&P 500 companies declined for a fifth consecutive year in 2022. Meanwhile, the average vote for Russell 3000 companies not in the S&P 500 (“R3000x”) stayed constant over the same five-year period. The 2.6 percentage point gap between average vote support in the S&P 500 (87.5%) and the R3000x (90.1%) in 2022 is the widest since Say on Pay voting began in 2011.
Importantly, this observation is driven by lower support more broadly across the index rather than just a materially higher failure rate or a few isolated cases that drag the average down. A third of S&P 500 companies received lower than 90% support thus far in 2022, compared to an average of 24% over the prior five years.
Vote results between the two indices have diverged due to a fractured governance landscape and differentiated expectations for “good” governance at large- and small-cap companies. Institutional investors and proxy advisors are signaling increased expectations through policy expansion. Their company evaluations now consider a broader set of financial metrics beyond total shareholder return, and their stewardship priorities now focus heavily on environmental, social, and governance (ESG) topics. These are often introduced and applied most firmly to large companies. In some cases, investors have added proxy voting policies on ESG topics that apply only to companies in the S&P 500.
This evolving landscape makes it more difficult to anticipate an individual shareholder’s vote, which creates ambiguous expectations for large-cap companies, given the number of diverse institutional investors that hold stakes in the largest US companies. A combination of the pandemic, dynamic sociopolitical environment, and common large non-annual CEO awards in the tech and IPO space have impacted how investors interpret the appropriateness of CEO pay magnitude relative to performance and the broader stakeholder experience.
The Proposed SEC Climate Disclosure Rule: A Comment from Bernard Sharfman and James Copland
More from: Bernard Sharfman, Jim Copland
James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy and Bernard S. Sharfman is Senior Corporate Governance Fellow at the RealClearFoundation. This post is based on their comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule.
Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.
This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by James R. Copland and Bernard S. Sharfman. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.
We respectfully submit this letter as a means to bring to the Commission’s attention deficiencies that we have found in its proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors (“the Proposed Rule”). In our view, the Proposed Rule fails to comply with Congress’s demand that agency actions not be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” as interpreted by the Supreme Court to require an agency to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choices made.” Nor does the Proposed Rule comport with the “unique obligation” Congress has given the SEC to “to consider or determine whether an action . . . will promote efficiency, competition, and capital formation.” The Proposed Rule also runs afoul of the Constitution’s commitment to federalism and separation of powers, both by substantially interfering with corporate governance, a creature of state law, without an express Congressional mandate, and by resolving a “major question” of policy clearly within the province of the legislative branch. Because the Proposed Rule’s disclosure requirements are not “purely factual and uncontroversial,” they also implicate the First Amendment’s prohibition against government-compelled speech. Although our analysis can apply more broadly to much of the Proposed Rule, we are providing comments clarifying this critique in significant detail as to two Sections of Part II of the Proposed Rule: Section G: GHG Emissions Metrics Disclosure (“Section G”) and Section D: Governance Disclosure (“Section D”).
I. Section G: GHG Emissions Metrics Disclosure
Our analysis of Section G focuses on how the Proposed Rule fits within the statutory requirements laid down by Congress in the Administrative Procedures Act (“APA”) and the securities laws. We divide our analysis into three Parts. Part A focuses on the Proposed Rule’s required disclosures for Scope 1 and 2 emissions, which are not limited by a materiality standard. Part B focuses on the required disclosures for Scope 3 emissions, which purportedly do face a materiality requirement. Part C focuses on deficiencies in the Proposed Rule’s articulation of “investor demand” purporting to justify the need for Section G disclosures.
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