With the 2021 proxy season well under way, public companies across America are filing key disclosures pertaining to the most critical topics in governance. Of course, annual meetings are also right around the corner. Companies will prepare to face shareholders and address the many issues that they are currently reporting.
Recently, Equilar hosted a web presentation with representatives from Skadden, BlackRock, DFIN and Intel to discuss these issues. The panel of experts provided key considerations companies should take into account as they plan to report on these issues and engage with their shareholders. This segment highlights some key takeaways and quotes from the conversation.
In August 2020, the SEC voted 3–2 to adopt a new disclosure rule on how public companies manage their workforce—most commonly called Human Capital Management (HCM). The new rules, which are part of the SEC’s broader project to modernize Regulation S-K, became effective Nov. 9, 2020. Under these new rules, in certain SEC filings, a public company is now required to disclose 1) the number of employees and a description of human capital resources if material to the business as a whole and 2) any human capital measures or objectives, if material, that the registrant focuses on in managing its business. Of course, the HCM movement was further advanced in 2020 due to the COVID-19 pandemic, making this a significant development.
Another critical change made by the SEC was an update to material development in regard to a company’s business strategy. “Not that you have to describe your business strategy each year, but to the extent that it was material and you disclosed it in the past, you have to provide updates to the business strategy,” said Brian Breheny, Partner at Skadden. “There was no definition of what business strategy means, so that is open to interpretation.”
Over the last year, several companies were faced with many difficult decisions due to the COVID-19 pandemic. Among those decisions were changes to executive pay programs, particularly as they sought to conserve cash during economic hardships. More than half of companies took action in relation to COVID-19 impacts. These actions included reduction of executive salaries, adjustments to incentive metrics, adjustments to performance goals, reduction of payouts and more. Of course, during these times, companies had to consider many factors. “In making these decisions, companies need to be very cognizant of how they’ll be described and disclosed in the proxy, and what investor reactions may be,” said Joseph Yaffe, Partner at Skadden.
There is no question investors will pay close attention to this topic and the rationale behind each decision. “It is very critical to understand how the compensation committee arrived at the decision and how this will play into the bigger picture for the company,” said Jessica McDougall, VP, Investment Stewardship and Corporate Governance at BlackRock. “This year, more than ever, disclosure will be very important. Something that we’ve seen over the last five years that is increasing is this idea of the quantum of pay, especially what is going on in the context of the broader labor market. This year, that will come into the picture as we consider the state of the economy and the way in which people were affected by unemployment by this pandemic.”
“Something that we’ve seen over the last five years that is increasing is this idea of the quantum of pay, especially what is going on in the context of the broader labor market.”
– Jessica McDougall, VP, Investment Stewardship and Corporate Governance at BlackRock
Among the most talked-about topics in governance going into 2021 was arguably diversity. In December 2020, Nasdaq filed a proposal1 with the SEC to adopt new listing rules related to board diversity and disclosure. If approved by the SEC, the rules would require all companies listed on Nasdaq’s U.S. exchange to publicly disclose diversity statistics regarding their boards of directors. The rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors. The announcement could be the next big step in the advancement of diversity.
Additionally, on the proxy advisory perspective, new rules have gone into effect in 2021. For instance, beginning this year, with respect to companies in either the Russell 3000 or S&P 1500 indices, ISS will flag2 in its reports those company boards with no apparent racial or ethnic diversity. In a similar vein, in addition to Glass Lewis’ current policy of generally voting against nominating committee chairs of all-male boards, the firm will note as a concern boards having only one woman board member. Glass Lewis also will generally make voting recommendations in accordance with board diversity requirements under applicable state laws, such as in California.
“Over the last few years, we have had a policy where we’re looking for boards to be diverse and to be increasing their diversity, and historically, we’ve used the precedence of two women as a litmus test to understand how that has been working in practice,” said McDougall. “For this additional layer of disclosure, we ask companies to help us assess where the boardroom is today and what progress that the company will make in the future. Hopefully by focusing on these efforts throughout 2021, we’ll have a little more information to better evaluate boards and directors when it comes time to vote on boards and directors in 2022.”
As companies plan to disclose such topics in 2021 and beyond, they must consider key attributes of good disclosure. “In terms of disclosure, board photos are very effective and can tell a good story,” said Ron Schneider, Director, Corporate Governance Services at DFIN. “You’re seeing more companies disclose human capital or ESG in skills matrices over the last few years, and you’ll continue to see so. Overall, we’re finding that a combination of narrative and visuals can help, because it’s a process, and you have many different players.”
1. www.nasdaq.com/press-release/nasdaq-to-advance-diversity-through-new-proposed-listing-requirements-2020-12-01
2. www.skadden.com/insights/publications/2020/12/iss-and-glass-lewis-release