Monthly Archives: December 2022

The Top 15 Anticipated ESG-Related Considerations That Will Influence Strategy in 2023

Dan Romito is Consulting Partner at Pickering Energy Partners. This post is based on his Pickering Energy Partners memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and For Whom Corporate Leaders Bargain (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto TallaritaRestoration: 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 Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.

1. Blackrock’s voting “democratization” will gain popularity & eventual adoption by State Street & Vanguard, thereby adding yet another drain on management’s investor engagement resources

Larry Fink’s 2022 letter to CEOs outlines an unprecedented systematic change to proxy voting and marks a potentially disruptive inflection point within the conventional proxy voting process.[1] According to Blackrock, “this option gives institutional clients in separately managed accounts (SMAs) the ability to exercise their voting decisions on the topics or at the companies that matter most to them.” In other words, Blackrock has opened the door to an entirely new roster of complex stakeholders.

Blackrock’s client base now possesses the ability to directly vote on climate-related and human-capital-related issues. Mr. Finks’ letter specifically reinforces that “this new ecosystem will also pose challenges for CEOs and their companies. Those of us who lead public companies will have a broader set of shareholders with whom to engage. Companies may need to develop new models of engaging with asset owners on their most important voting matters. This may take time to evolve.”

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SEC Press Release provides Compliance Checklist for Corporations

Anita B. Bandy and Raquel Fox and are partners and Andrew Hanson is associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Bandy, Ms. Fox, Mr. Hanson, and Leo W. Chomiak.

Takeaways

  • The SEC collected a record $4.2 billion in penalties in enforcement actions in 2022, nearly three times the figure in 2021.
  • Recent enforcement actions involving ESG issues, 10b5-1 plans and cybersecurity align with the SEC’s rulemaking initiatives on those topics.
  • Increasingly, as part of settlements, the commission has insisted that companies retain an independent compliance consultant who will report back to the staff of the SEC’s Division of Enforcement on compliance-related undertakings.
  • Accounting and disclosure issues, including earnings manipulation, sales practices that impact revenue disclosures and non-GAAP metrics, remain a high priority for enforcement.

The Enforcement Division of the U.S. Securities & Exchange Commission (SEC) recently reported a robust enforcement year with record-breaking results. The summary is an indicator of where the division is concentrating efforts, and thus a forward indicator of areas where companies need be sure they do not run afoul of securities laws.

In the fiscal year ended September 30, 2022, the division initiated 462 new enforcement actions, and 760 actions in total (including follow-on actions and cases involving missing and delinquent filings) and imposed $6.4 billion in penalties and disgorgement, according to the November 15, 2022, press release summarizing the results.

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Weekly Roundup: December 23-29, 2022


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This roundup contains a collection of the posts published on the Forum during the week of December 23-29, 2022.

ISS Issues Benchmark Policy Updates for 2023


Enhanced Proxy Voting Disclosure Requirements for Investment Funds


Trust, Risk, and Opportunity: Overseeing a Comprehensive Data and Privacy Strategy


US SEC Enforcement 2022 Year in Review


Be Careful What You Wish For


Being prepared for the next crisis: The board’s role


Being prepared for the next crisis: The board’s role

Maria Castañón Moats is Leader at the Governance Insights Center, David Stainback is a Territory Crisis Leader, and Brain Schwartz is a Partner in Cyber, Risk & Regulatory, at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

The past few years have tested companies and their crisis and resilience capabilities in new and various ways. A global pandemic had far-reaching implications, and many companies also experienced a ransomware attack, major supply chain disruption, environmental disaster, major geopolitical event, or another crisis.

How did some companies seem to weather these storms more easily than others? It comes down to crisis planning. Companies with a robust, fluid, and well-rehearsed crisis plan were able to respond more quickly and do so more effectively.

Boards play a key role in this crisis preparedness. A director’s role is to ensure management makes the right decisions to support the long-term success and viability of a company. Earlier identification of potential crisis events and a better crisis response can have real benefits to the company’s brand and reputation, which in turn can translate to long-term shareholder value.

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Be Careful What You Wish For

Martha Carter is Vice Chair & Head of Governance Advisory, Matt Filosa and Sean Quinn are Senior Managing Directors at Teneo. This post is based on a Teneo memorandum by Ms. Carter, Mr. Filosa, Mr. Quinn, and Sydney Carlock. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, and Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the Forum here) by Lucian Bebchuk and Scott Hirst; The Specter of the Giant Three (discussed on the Forum here) by Lucian Bebchuk and Scott Hirst; and The Limits of Portfolio Primacy (discussed on the Forum here) by Roberto Tallarita.

Earlier this year, Republican Senators introduced the “INDEX” Act that would require passively managed funds to vote proxies in accordance with the instructions from their clients. The proposed bill followed the announcement of BlackRock’s “Voting Choice” initiative that provides clients the option to vote proxies themselves. Vanguard and SSGA have announced similar initiatives that provide clients with more voting choices, and Institutional Shareholder Services (ISS) has launched a service to help other asset managers do the same. While the INDEX Act is intended to lessen the influence of large asset managers over corporate affairs, these investor proxy voting initiatives are meant to promote greater shareholder democracy. We can expect more asset managers to implement similar voting options for their clients to keep up with their peers. These initiatives are likely to have a significant impact on companies – from shareholder engagement strategies and voting outcomes to other stakeholders such as the media.

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US SEC Enforcement 2022 Year in Review

Robin Bergen and Matthew C. Solomon are partners and Tom Bednar is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Bergen, Mr. Solomon, Mr. Bednar, Alexander Janghorbani, Meghan Leibold, and Nora Vallerini.

On November 15, 2022 the Securities and Exchange Commission announced the Division of Enforcement’s results for fiscal year 2022,[1] which ended on September 30, and was the first full year for the Division under the leadership of both Chair Gary Gensler and Director of Enforcement Gurbir Grewal. Results were up from the year before, with a record $4.2 billion in civil penalties. The high penalty number was due not just to a number of blockbuster settlements, but also to a drive by the agency to see that penalties are “recalibrated” upward across the board. While the SEC’s results showed a continued emphasis on traditional areas such as investment advisers, broker-dealers, and issuer accounting and disclosure, the SEC’s Enforcement results also show the agency’s renewed emphasis on individual accountability and suits against “gatekeepers” such as accountants and lawyers. The past year has also been notable for the SEC’s willingness to impose third-party compliance consultants, often with broad mandates, to oversee entity-level improvements. Our below analysis of the SEC’s enforcement results provides indications of where the agency may focus in the year to come.

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Trust, Risk, and Opportunity: Overseeing a Comprehensive Data and Privacy Strategy

Maria Castañón Moats is Leader and Barbara Berlin is Managing Director at the Governance Insights Center at PricewaterhouseCoopers LLP. Joseph Nocera is a Partner in Cyber, Risk and Regulatory Marketing at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

In today’s world, data is power. The ability to collect and use vast amounts of data can give companies a competitive advantage. But with that opportunity comes risk and the duty to protect data privacy. Here’s where boards come in.

Data is changing the competitive landscape. The volume of data now available to companies means they can find efficiencies, develop and target new products, gain customer insights, optimize operations, and tailor business strategies in ways they never could before, with a speed never thought possible. But collecting and using data also brings risk that it could be misused or accessed by threat actors. Converting data into value, securely and ethically, is the business imperative for the next decade.

The companies that most effectively take charge of their data throughout the data “lifecycle” will have the greatest opportunities for success. Given the opportunity and risk involved, it’s essential that boards play a key role in the process.

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Enhanced Proxy Voting Disclosure Requirements for Investment Funds

Eric DiamondDonald Crawshaw, and Sarah P. Payne are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Diamond, Mr. Crawshaw, Ms. Payne, and Marc Treviño.

SUMMARY

On November 2, 2022, the SEC voted 3 to 2 (Commissioners Hester Peirce and Mark Uyeda dissenting) to adopt amendments to Form N-PX to enhance the information mutual funds, exchange-traded funds and certain other registered funds (“funds”) report about their proxy votes (together, the “final rules”).[1] In addition, the final rules will require disclosure on Form N-PX of how institutional investment managers (“managers”) voted on “say-on-pay” matters.[2] The final rules will be effective on July 1, 2024, covering votes occurring on or after July 1, 2023.

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ISS Issues Benchmark Policy Updates for 2023

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

At the end of last week, ISS announced its benchmark policy updates for 2023. The policy changes will apply to shareholder meetings held on or after February 1, 2023, except for those with one-year transition periods.  The changes for U.S. companies relate to policies regarding, among other things, unequal voting rights, problematic governance structures, board gender diversity, exculpation of officers, poison pills, quorum requirements, racial equity audits, shareholder proposals on alignment between public commitments and political spending and board accountability for climate among the Climate Action 100+. The results are based in part on the results of ISS’s global benchmark surveys (see this PubCo post) as well as a series of roundtables.

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Weekly Roundup: December 16-22, 2022


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This roundup contains a collection of the posts published on the Forum during the week of December 16-22, 2022.

Corporate Governance Evolves Amid Increasing Sustainability Awareness


Statement by Chair Gensler on PCAOB’s Determinations Regarding Public Accounting Firms in China


The Coming Wave of “Natural Capital” and Biodiversity Shareholder Activism and Stewardship Pressure on Boards


Investment Management Regulatory Update




Dual Class Share Structures: Is the Sun Setting Too Slowly?


Exculpation of Personal Liability Expanded to Include Certain Corporate Officers


What Do Outside CEOs Really Do? Evidence from Plant-Level Data


The Activism Vulnerability Report – Q3 2022


Audit committee effectiveness: practical tips for the chair


(Claw) Back to the Future



Overseeing internal investigations


Proxy Advisors Update Voting Guidelines for 2023


New DOL Guidance on ESG and Proxy Voting


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