Once again, it is time to prepare for the proxy season. There are many issues to consider when crafting required disclosures in a manner that conveys messages effectively to the company’s investors. We believe that this proxy season will be defined by a focus first on the new virtual age’s impact on shareholder engagement, on Environmental, Social and Governance (ESG) and human capital management matters, and lastly, on board diversity and other matters of concern.
The use of virtual annual shareholder meetings increased in 2021, and we believe that it will continue to be popular and remain regular practice for many companies. Virtual meetings may add efficiency to the flow of meetings, reduce travel expenses for both the company and investors and also lower the environmental impact of shareholder meetings.
If using a virtual meeting format, a company should ensure that the proxy statement disclosure contains all relevant and necessary information for shareholders to attend and vote their shares, including differences in procedures for record shareholders and beneficial shareholders to participate. It is helpful to indicate whether there will be a telephone number, email address or chat feature available to report and resolve technical problems. As a note, Regulation FD applies to the virtual meeting context – if there is a glitch, it is important to assess whether material, non-public information was involved, in which case a press release or Form 8-K would be necessary to comply with Regulation FD.
Integrating ESG into strategy, risk management, human capital initiatives, governance, and communicating ESG performance, have become a business imperative for many companies. Support for ESG shareholder proposals has gone up significantly in recent years – for meetings through June 30, 2021, 20% of ESG shareholder proposals that went to vote received greater than 50% support, up from 12% in 2020 and just 3% five years ago. Many organizations that rate companies are separately rating companies based on their ESG initiatives and commitments. Investors also want to know how companies are addressing these issues from a profitability and risk management perspective.
The top ESG shareholder proposals in 2021 included diversity, equity and inclusion (DEI) matters and proposals involving climate risk. As noted in a recent Ernst & Young report, board diversity was among the top engagement priorities for investors, and institutional investors are starting to incorporate related disclosure expectations and diversity thresholds into their proxy voting policies.
Movement toward ESG goals is a work in process for most companies. Consider describing policies and commitments as goals rather than indicating what specific progress you intend to make, lest that disclosure expose the company to liability if named metrics are not achieved. Also, make sure that the company’s ongoing disclosures in its 1934 Act filings otherwise reflect consistency with your goals and policies. Today, none of this disclosure is required by the SEC, so the substantive legal risk is in bad disclosure, not no disclosure.
The impact of COVID-19 will again find its way into several sections of the proxy statement.
COVID-19 Adjustments to Compensation
To the extent that compensation for executive officers was adjusted due to impacts from the COVID-19 pandemic, that should be addressed in the compensation discussion and analysis. If multi-year performance measures were addressed in light of the pandemic, adjustments should be explained and the rationale for such changes should be disclosed. It is likely that proxy advisory firms and investors will pay close attention to these disclosures, so these disclosures should be carefully crafted.
Human Capital Management
Recent amendments to Regulation S-K explicitly require a discussion of human capital resources, including the number of employees, as well as any human capital measures or objectives that the company focuses on in managing its business in the business section of an annual report on Form 10-K.
There were some common themes for human capital disclosures in 2021, but companies varied widely in the presentation and level of detailed included in their human capital disclosures in annual reports filed in 2021. Some common topics covered in human capital disclosures included diversity, equity and inclusion, employee recruitment, turnover, retention and training, as well as labor relations.
When formulating human capital disclosures this year, companies should recognize that institutional investors have made human capital management disclosures a priority. Accordingly, companies should begin preparing this section of their annual report and any related proxy statement disclosure well in advance of the filing deadline to ensure review from multiple internal departments and outside advisors.
As we noted last year, proxy statement disclosure of board diversity details has been expanding over the past few years. In August 2021, the SEC approved Nasdaq’s board diversity rule, requiring Nasdaq-listed companies to comply with the disclosure rules by the later of (i) August 8, 2022, or (2) the date the company files its proxy statement or information statement for its annual meeting of shareholders (or, if it does not file a proxy or information statement, the date it files its Form 10-K or 20-F) during the 2022 calendar year). Even before the approval of the Nasdaq board diversity rule, the EY Center for Board Governance found that 86 percent of Fortune 100 companies voluntarily disclosed the board’s racial/ethnic diversity in 2021.
In addition to the Nasdaq rule, additional rules concerning board diversity may be forthcoming. At least one underwriter has established minimum board diversity requirements for the clients it assists with initial public offerings, and a number of states are considering board diversity legislation. The SEC’s spring 2021 agenda targets the fall of 2021 for proposed rule amendments to enhance company disclosures about the diversity of board members and nominees. Taken altogether, these developments suggest that companies should consider enhancing board diversity disclosure in their 2022 proxy statements.
 Item 101(c) of Regulation S-K.
For further information, or for assistance with updating your company’s D&O questionnaire, contact your CFDB lawyer or: