The 2020 proxy season shareholder proposals were already submitted before the COVID-19 shadow loomed large over the season; however, such shadow likely impacted how shareholders voted on the proposals themselves, impacted business throughout 2020, and continues to jolt 2021 and the forthcoming 2021 proxy season. COVID-19 impacted proxy statement disclosures so much so that the SEC released guidance regarding COVID-19 and relating disclosures, and impacted, likely in the long term, the platform on which shareholder meetings are held. As has come to be the case, environmental, social, and governance issues comprised two-thirds of the shareholder resolutions filed during the 2020 proxy season, focusing primarily on political spending, climate change, and fair treatment for women on boards and in the workplace.
There continues to be proxy disclosures implemented in 2019 that are not properly applied by companies, such companies forgetting to add Exhibit 4(v) which requires the description of securities to be filed as an exhibit four with Form 10-K. In terms of securities laws developments, the SEC adopted a plethora of principles-based rules, such as a rule that impacts the disclosure and procedural requirements of proxy voting advice businesses. More notably, the SEC adopted amendments to modernize its rules requiring disclosures about a company’s description of business, legal proceedings, and risk factors.
Looking forward to the 2021 proxy season, we should not expect a top-down regulatory scheme regarding ESG issues anytime soon; however, as investors and other jurisdictions increase their focus on sustainability issues, and ESG reporting standards continue to converge, it would behoove public companies to reassess their current ESG business and disclosure practices. COVID-19 will likely increase the awareness and actions necessary to tackle high impact/high probability risks such as those related to climate change and biodiversity losses. Moreover, companies will likely face an onslaught of proposals related to prominent 2020 events and COVID-19, such as diversity and inclusion, racial justice, socioeconomic inequality, economic resiliency, and climate change.
Companies must consider COVID-19 and its impact on disclosures in their annual reports filed on Form 10-K. Overall companies should consider the following:
- Review CF Disclosure Guidance Topic No. 9 and Topic No. 9A, which provides guidance on disclosure considerations that companies should consider with respect to COVID-19 related disruptions.
- Ensure that compensation disclosures have not been impacted by isolated circumstances related to COVID-19, such as an executive officer forgoing any salary or bonus and instead receiving equity or other non-cash compensation. Moreover, consider the following questions when analyzing whether benefits/items provided to executive officers is a perquisite or personal benefit:
- Has the officer agreed to forgo salary, bonus or perquisites? Do officers gain technological assistance to work from home or benefits which do not apply evenly across the board?
- Have any of these amounts been adjusted? Or has compensation been paid in stock?
- Has the company repriced options?
- Has the company changed the metrics used to evaluate performance, eligibility for bonuses, or other aspects of compensation?
- Provide as much information as is practicable regarding the current status and plans of the company for addressing the effects of COVID-19 and how the board handled its oversight of the challenges posed by, and management’s response to, the pandemic.
- Consider statements made by the SEC’s Chief Accountant, in which he addressed in two public statements the significance of high quality financial information, such as significant judgments and estimates, the effects of the pandemic on disclosure controls, financial reporting and internal control over financial reporting, going concern assessments, and the importance of the audit committee’s oversight role.
- In terms of pay ratio disclosures, consider the need for a new determination of the median employee given any COVID-19 related impacts.
- Consider updating risk factors to include any impact on business relationship due to restrictions on travel and otherwise, and ensure risk disclosures move from a generic pandemic related risk disclosure to more specific, tailored risks.
Companies choosing to provide ESG disclosures, or who are adopting a framework for ESG should carefully consider the feasibility of such standards and commitments adopted to ensure they are able to meet such standards. Whatever the format, and as with any public disclosure, companies should ensure their ESG disclosures are subject to robust controls, procedures, and oversight, because ESG-related disclosures are subject to federal securities laws to the extent they are materially inaccurate or misleading, and consequently could have legal, regulatory, and reputational consequences to the extent such disclosures are inconsistent with company actions or industry standards.
Finally, it’s expected that companies will continue to host virtual meetings in 2021 and beyond. Ensure that, to the extent there was a reliance on executive orders or temporary rules for the conduct of virtual meetings during 2020, there were no changes to such orders or rules. Shareholders should also be provided a “meaningful opportunity” to participate fully in the meeting, which could be helped by implementing telephonic or internet-based help lines for shareholder support during the meetings and explaining how to handle technical glitches that may occur during the meeting.