Davis Polk Client Alert: Chamber of Commerce Releases Best Practices for Voluntary ESG Disclosure

The U.S. Chamber of Commerce released this month a set of ESG voluntary reporting best practices. By releasing its best practice guide, the Chamber makes clear that it believes further regulatory requirements mandating ESG disclosures are not warranted. A departure from a one-size-fits-all approach, the best practices guide asserts that each company should have the discretion to determine which ESG factors and related metrics are relevant to it without necessarily being tied to the various third-party frameworks and standards currently in existence. Finally, the best practices guide emphasizes that ESG reports need not be incorporated into filings with the SEC, nor should ESG information be required as part of an SEC filing if it is not “material”.
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ISS Releases Final Changes to Its Voting Policies for 2020 Proxy Season – Newly Public Companies, Independent Chair and Share Buyback Proposals, Board Gender Diversity, EVA and More

Today, Institutional Shareholder Services Inc. (ISS) released its 2020 global proxy voting policy updates, which will generally be applicable for shareholder meetings on or after February 1, 2020. Consistent with the preview offered in its proposed 2020 voting policy changes (covered on our blog here), the updates to ISS’ U.S. proxy voting policies apply primarily to the proxy advisory firm’s treatment of (1) certain governance structures at newly public companies, including multi-class shares; and (2) annual meeting proposals calling for independent board chairs and share buybacks.

The updates released today confirm that ISS will include Economic Value Added (or EVA) metrics in its pay-for-performance model’s secondary Financial Performance Assessment (or FPA) screen.
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SEC Investor Advisory Committee Panel on ESG – Data, Disclosure and Materiality

Last Thursday, the SEC’s Investor Advisory Committee (IAC) held an open meeting, which included a session to discuss investor use of environmental, social and governance (ESG) data in their investment and capital allocation decisions. During this session, the IAC heard insights from and asked questions of a panel consisting primarily of ESG-focused investors, as well as one academic. The panelists represented investment management firms Neuberger Berman, AllianceBerstein, State Street Global Advisors and Calvert Research and Management, as well as Columbia University’s program in sustainability management.

SEC Chairman’s Written Comments

SEC Chairman Clayton was not in attendance, though he submitted written remarks to the IAC, expressing his views on the matters to be considered at the meeting.
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Glass Lewis 2020 Guidelines Include Director Negative Recommendations Depending on SEC Staff’s Response Under Recently Updated Staff Shareholder Proposal No-Action Letter Policy

Glass Lewis (GL) has recently released its 2020 U.S. proxy season voting guidelines, which contain a few notable developments to consider in preparation for the upcoming proxy season.  These updates include changes related to the exclusion of shareholder proposals and company responsiveness to say-on-pay opposition, among other amendments, all of which are described in the sections that follow.

Exclusion of Shareholder Proposals

In September 2019, the SEC staff announced that it may sometimes respond orally, rather than in writing, to company requests to exclude a shareholder proposal from a proxy statement, and may also decline to state a view altogether (discussed in a Davis Polk Client Alert).
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Spencer Stuart Shows How Boards Are Transforming

The 2019 U.S. Spencer Stuart Board Index (Index) reflects the board practices and trends of S&P 500 companies. According to the Index, boards are responding to investors’ increasing calls for greater diversity of “gender, age, race/ethnicity and professional backgrounds.” Spencer Stuart found that “boards are accelerating the addition of women and minority directors,” which in turn is driving notable changes in board composition. Spencer Stuart predicts that the biggest drivers of board refreshment will be replacing retiring directors and adding new skills to the board.

The Index covers public companies in the S&P 500 as of May 15, 2019 and the proxy statements released between May 30, 2018 and May 15, 2019.
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Next SEC Investor Advisory Group Meeting–How Are Investors Using ESG Data?

Earlier this week, the Securities and Exchange Commission (SEC) announced that its Investor Advisory Committee (IAC) will be holding a meeting on Thursday, November 7, 2019, at 9:30 a.m. E.T. The agenda includes a morning discussion on whether and how investors use environmental, social and governance (ESG) data in their investment and capital allocation decisions. The agenda and press release provide no further details on the session topic other than the panelist list provided below.

Brief Backdrop

SEC Chairman Clayton has raised a similar question at prior IAC meetings on human capital management (HCM) as the one posed for the November 7, 2019 meeting.
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NYC Comptroller Stringer Suggests “Rooney Rule” to Boost More Women and People of Color in Corporate Leadership

The New York City Retirement Systems (NYCRS) continues its effort to foster diversity in the leadership of the companies in which it invests. NYCRS is a collection of pension funds that together have over $200 billion in assets under management, and Comptroller Stringer serves as the investment advisor and custodian/trustee.

Boardroom Accountability Project 3.0

Last week, Comptroller Stringer announced the launch of the latest phase of the NYCRS’ shareholder engagement initiative, Boardroom Accountability Project 3.0.  With each phase, the NYCRS designates one or more themes on which to engage with its portfolio companies.  Project 3.0’s theme is increasing the accessibility of director and CEO positions for women and persons of color by encouraging companies to adopt a “Rooney Rule” policy, resembling the one employed by the National Football League. 
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Delaware Chancery Court Declines to Dismiss Caremark Claim Against Directors for Insufficient Monitoring of Experimental Drug

On October 1, 2019, in In re Clovis Oncology Inc. Derivative Litig., a Delaware Chancery Court denied a motion to dismiss the plaintiffs’ Caremark claim alleging that individual directors should be held financially liable for failing to monitor the development of the biotech firm’s only promising experimental drug and for allowing the firm to publish inflated performance results. Clovis is significant because it marks the second opinion issued by the Delaware courts in recent months that allowed a Caremark claim to withstand a motion to dismiss, even though a Caremark claim is one of the most difficult to plead and prove.
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ISS Calls for Feedback on Proposed 2020 Voting Policies: Multi-Class Structures, Independent Board Chair and Share Buybacks

Yesterday, Institutional Shareholder Services Inc. (ISS) announced proposed voting policies for 2020 affecting proposals related to three areas: (1) multi-class structures for newly public companies; (2) independent board chair; and (3) share buybacks. ISS states that the proposed changes either clarify an existing policy or largely codify an existing practice.

ISS requests feedback on the proposed rules, and market participants can submit comments until 5:00 PM ET on Friday, October 18, 2019. ISS expects to release its final policies in the first half of November 2019.

Over the summer, ISS administered its annual benchmarking survey to market participants, and two of the three topics covered by the proposed rules (multi-class structures and independent chair) were included in the survey.
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SEC Commissioners Testify Before House Financial Services Committee on ESG, Proxy and Other Topics

On Tuesday, September 24, 2019, SEC Chairman Jay Clayton, along with Commissioners Jackson, Lee, Peirce and Roisman, testified before the House Financial Services Committee (Committee) in a hearing titled “Oversight of the Securities and Exchange Commission, Wall Street’s Cop on the Block.” Chairwoman Maxine Waters observed that the last time all the SEC Commissioners had been before the Committee was over a decade ago, in 2007.

The SEC submitted written remarks that begin with the agency’s “tripartite mission—to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation . . . .” The remarks describe the agency’s strategic plan and highlight the 2019 initiatives in the following areas: (1) enforcement and compliance; (2) market developments and risks; (3) regulatory and policy agenda; and (4) investor education.
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