CII's Weekly Governance Alert is a members-only e-newsletter that keeps members up-to-date on news and trends in corporate governance, financial regulation, CII events and activities, member proxy proposals and other initiatives to advance corporate governance and shareholder rights. This is a reminder that you're receiving this email because you are a member of The Council of Institutional Investors. Don't forget to add us to your "Safe Senders" list so we always land in your inbox!
Weekly Governance Alert
Editor: Rosemary Lally | Oct. 1, 2020 | Vol 25, Issue 37
In This Issue
  • CII Petition Prompts SEC to Take Another Look at NYSE’s Plans for Primary Direct Listings 
  • CII Weighs in on SEC’s Regulatory Priorities 
  • CII Reiterates Views on Nasdaq’s Proposed Rules for Companies in Restricted Markets
  • CII Members Invited to Sign Amicus Supporting ISS Challenge to SEC’s Interpretation of Proxy Solicitation
  • CII Policies Committee Invites Members' Input on Defined Benefit Statement Update
  • SEC’s OIG Investigation Finds No Issues with Comment Letters On Proxy Advisors
  • LGIM Raises the Bar on Ethnic Diversity at Companies
  • Broad Diversity Quotas for Boards Become Law in California 
  • CFA Institute Takes Another Look at Long Termism 
  • Big Four Accounting Firms Release Set of ESG Metrics
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  • SURS of Illinois Seeks Chief Diversity Officer, Ceres Seeks Manager, NYS Comptroller’s Office Looking for Corporate Governance Officer
CII Petition Prompts SEC to Take Another Look at NYSE’s Plans for Primary Direct Listings
Thanks to a petition filed by CII, the SEC ruled September 25 that it would keep a stay in place on, and conduct a review of, the New York Stock Exchange’s (NYSE) plans to allow NYSE-listed companies to conduct primary direct listings.

The SEC August 26 approved the NYSE’s plan to allow companies to raise capital by conducting “primary direct floor listings.” Unlike previous direct listings, which allowed only existing investors to sell shares, these listings permit companies to issue new shares and sell them to public investors in a single, large transaction on the first day of trading. Under the plan approved by the SEC, companies could conduct both traditional direct listings as well as primary direct floor listings.

CII had urged the SEC repeatedly not to approve the NYSE’s plan to expand direct listings, and on September 8 sent a petition requesting a review by all five commissioners and a brief in opposition to lifting the stay. Letters sent July 16, April 16 and January 16 also expressed strong opposition to the proposal. CII’s correspondence said by expanding these listings without first addressing the byzantine and costly system of share ownership (i.e., proxy plumbing), the SEC would give investors fewer legal protections because the lack of traceable shares may be used as legal defense by a direct listing company in certain securities fraud actions.

The commission’s ruling cited CII’s argument in the petition that the proposed rule would alter the IPO market so significantly that the SEC should maintain the stay while it considers “the adequacy of investor protections” and other policy issues under the proposed rule change. “We do not believe that NYSE has identified a compelling reason that lifting the automatic stay furthers the public interest, particularly in light of the policy considerations CII has identified,” said the SEC ruling. In the ruling, the SEC also invited comments on the NYSE’s proposed plans by October 16. CII encourages members to consider submitting a comment letter in response to the invitation. Please contact CII General Counsel Jeff Mahoney ( with any questions.
CII Weighs in on SEC’s Regulatory Priorities
CII sent a letter September 25 to the SEC commenting on the commission’s semiannual regulatory agenda, thanking the agency for including items that CII supports and suggesting others that it believes should have been included.

The letter thanked the SEC for including on its agenda as priorities:

  1. Universal proxies that would allow the opposing sides engaged in a contested election to utilize a proxy card naming all management nominees and all shareholder-proponent nominees, providing every nominee equal prominence on the proxy card.
  2. Section 954 of the Dodd-Frank Act, which would require companies to have clawback policies that ensure their boards can refuse to pay and/or recover previously paid executive incentive compensation in the event of acts or omissions resulting in fraud, financial restatement or some other cause the board believes warrants recovery. (That legislation was passed in 2010 and the SEC issued proposed rules to implement these provisions in 2015.) 
  3. Proxy plumbing, which should include requiring end-to-end vote confirmations; cooperation by all parties involved in the system in reconciling ownership and voting information; and requiring or permitting public company adoption of a system of traceable shares.

CII urged the SEC to add to its list of priorities amendments to:

  • Rule 10b5-1 trading plans, which currently allow trades that should have resulted in insider trading liability to escape scrutiny; and 
  • Item 402(b) of Regulation S-K to begin requiring public companies to explain in the Compensation Discussion & Analysis (CD&A) section of the proxy statement why and how they use non-standard metrics to determine CEO pay.
CII Reiterates Views on Nasdaq’s Proposed Rules for Companies in Restricted Markets
CII sent a letter September 30 to the SEC reiterating comments it previously made on three Nasdaq’s proposals aimed at companies that operate principally in jurisdictions, including China, that have secrecy, national security laws, or other laws that restrict U.S. regulators' access to information concerning U.S.-listed companies. Nasdaq's rule proposals provide for more stringent listing standards for companies in these markets and, notably, clarify Nasdaq's authority to deny initial or continued listing to companies with auditors who have not been subjected to Public Company Accounting Oversight Board (PCAOB) oversight.

Previously, CII submitted written comments to the commission on July 8, June 25 and June 18 providing its views on the initial SEC releases relating to Nasdaq’s three proposals.

In those letters, CII commended the proposed rules, but also recommended that Nasdaq incorporate a number of changes to strengthen the proposals, including the following related to the PCAOB-related proposal:

  • require that listing applicants and listed companies from restrictive markets be prohibited from having an auditor or an accounting firm engaged to assist with their company audit that is located in a jurisdiction that limits the PCAOB's ability to inspect the auditor;
  • issue denial or delisting letters to companies informing them of the factual basis for Nasdaq's determination and its right for review when Nasdaq staff denies the initial or continued listing of a company for lack of compliance with the proposed rules; and 
  • provide the Nasdaq Hearings Panel the discretion to grant a listed company an exception from the proposed rules for up to 540 days after receiving a delisting letter. 
CII Members Invited to Sign Amicus Supporting ISS Challenge to SEC’s Interpretation of Proxy Solicitation
CII plans to file an amicus brief in support of ISS’s lawsuit, which asks the U.S. District Court for the District of Columbia to invalidate and enjoin rules issued by the SEC on July 22 that codify the commission’s belief that the provision of proxy advice constitutes a solicitation. Those CII members who are interested in co-signing the brief should contact CII General Counsel Jeff Mahoney at
CII Policies Committee Invites Members' Input on Defined Benefit Statement Update
All CII members are invited to provide input through October 26 regarding an update to CII's statement supporting defined benefit plans. Proposed changes refresh and amend certain supporting references. They do not, however, represent a substantive pivot from support for defined benefit plans. Details are available through the Comment Opportunity Tracker (login required). CII’s Policies Committee will consider all comments at its November meeting before voting on whether to amend and/or send the language to the full board for consideration.
SEC’s OIG Investigation Finds No Issues with Comment Letters On Proxy Advisors
The SEC’s Office of Inspector General issued a statement September 25 indicating it did not find any wrong doing when it investigated claims that comment letters on the commission’s proposed proxy advisor rules were filed without the knowledge of the authors.

Bloomberg reported November 19 on a fake-letter campaign supporting SEC action to rein in proxy advisory firms. The article revealed that letters sent to the SEC by supposedly ordinary individual investors were ginned up by the 60 Plus Association, an advocacy group funded by corporate supporters of tighter curbs on proxy advisors. Seven of these letters were cited by SEC Chair Jay Clayton in his remarks after a public roundtable about proposed rule changes to the proxy voting process. He said they were submitted by “long-term Main Street investors…all of whom expressed concerns about the current proxy process.” The article claimed, however, that, when contacted, many of the investors cited by Clayton told the reporters that 1) they did not author any such letters and 2) they had ties to 60 Plus.

During the investigation, the OIG said it reviewed the seven letters as well as 21 more with a similar profile. Additionally, the OIG interviewed 19 of the 28 authors of the letters. (The remaining nine individuals did not respond or did not consent to be interviewed.) Each person interviewed said they willingly submitted a letter to the SEC and did not receive any compensation or benefit from anyone for doing so, the OIG reported. Further, the investigation determined that an advocacy association for seniors solicited its members, current and former employees, and friends of the association’s employees to submit comment letters in response to the proxy rulemaking proposals. The investigation also determined that a public affairs company working on behalf of another advocacy group solicited individuals to submit letters to the SEC about the proposed rule change. “The investigation did not identify any author who did not in fact submit a letter to the SEC or who disagreed with the content in the letter they submitted to the SEC,” concluded the OIG’s statement, which also noted it was closing the investigation.
LGIM Raises the Bar on Ethnic Diversity at Companies
Legal and General is shifting from requesting more disclosure on ethnic diversity of boards at its portfolio companies to voting against board chairs at companies that have not added more ethnically diverse directors. 

In a new publication, Ethnic Diversity: Financially Materially, Socially Imperative, LGIM acknowledges that until now its focus on ethnicity has been to push for more consistent and reliable disclosure. Now, however, in light of “recent societal tragedies,” the asset manager says waiting for the perfect data on this is not an option and over the coming months it will be “engaging more forcefully on companies’ commitments to ethnic diversity and demanding transparent reporting through strengthened proxy voting policies and a focused outreach campaign regarding diverse board member representation.”

LGIM has initiated a new engagement campaign targeting FTSE 100 and S&P 500 companies that do not have any ethnically diverse directors on their boards. It will write to each company setting out the importance of capturing and reporting data on ethnicity and describing LGIM’s new proxy voting guidelines on this topic. Beginning in 2022, the asset manager will vote against the nominating committee chairs or board chairs if they fail to meet LGIM’s expectations on ethnic diversity. “Our expectation is that companies set ambitions related to the ethnic composition of their organization, throughout the workforce, with a particular emphasis at the board level, which generally sets the tone from the top. For companies that fail to meet our transparent and rules-based minimum expectations, there will be voting and investment consequences, LGIM explains. 
Broad Diversity Quotas for Boards Become Law in California
In related news, California Gov. Gavin Newsom signed legislation September 30 that will require the boards of publicly traded companies based in the state to have at least one racially, ethnically or otherwise diverse director by 2021. Under the new law, individuals who identify as Black, African-American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who identify as gay, lesbian, bisexual or transgender, would be considered eligible for meeting the requirement. In 2022, corporate boards with four or more members would have to include two people from underrepresented groups; boards with at least nine directors would have to include a minimum of three diverse directors.

Two years ago, California enacted similar legislation that mandated female directors on all boards of the state’s public companies.
CFA Institute Takes Another Look at Long Termism
The CFA Institute just updated “Breaking the Short-Term Cycle", a report it published in 2006 with the help of a panel of experts that it had convened. That publication contained recommendations to help investors and companies act, invest and manage for the long term. Somewhat diverging from prevalent commentary espousing a blanket principle of managing for the long-term, the update argues that short-term focus is not always detrimental; in fact in some circumstances such as 2020, short-termism should take precedence.

In its recent publication, Short-Termism Revisited: Improvements Made and Challenges in Investing for the Long-Term, a similar group of experts makes four new recommendations for market participants:

  • Companies and investors should focus their engagement on long-term strategy and agreed-upon metrics that drive strategic success.
  • Companies and investors should work to simplify executive compensation plans so that incentives better align with those of shareowners and are more easily understood.
  • Companies and investors should engage meaningfully on long-term issues, especially those related to company strategy.
  • Companies and investors should establish better standards around ESG data so that it is consistent, comparable and auditable as well as material.

While the experts agreed that executive compensation has improved, investors that CFA Institute consulted complained that too often executive compensation is overly complicated.. “In the worst instances, compensation seems reverse engineered to arrive at a predetermined outcome,” the report says. 

CFA Institute reports that the biggest difference between its analysis of short-termism in 2006 and the state of short-termism in the markets today is the emergence of ESG or sustainable investing. “The emergence of ESG analysis and the inclusion of sustainability key performance indicators in the investment process has forced investors and companies to focus more on the material ESG metrics that drive long-term value,” CFA Institute says in the report. The panelists agreed ESG integration is still in the early stages. The experts regarded this development as promising since most ESG issues require a long-term focus. 
Big Four Accounting Firms Release Set of ESG Metrics
Deloitte, EY, KPMG and PwC, the ‘Big Four’ accounting firms, last week announced that they have developed a set of metrics for companies to use for ESG reporting internationally.

The World Economic Forum and the International Business Council (IBC) partnered with the Big Four on the initiative. The move aims to encourage the roughly 130 large global companies in the IBC to adopt the ESG standards for their 2021 reporting. 

The new metrics can be used by companies “to align their mainstream reporting on performance against ESG indicators and track their contributions towards the United Nation’s Sustainable Development Goals on a consistent basis,” the World Economic Forum explains in a press release. It adds that the metrics are based on existing standards, “with the near-term objectives of accelerating convergence among the leading private standard-setters and bringing greater comparability and consistency to the reporting of ESG disclosures.”

"Reporting on ESG factors like carbon emissions and human rights and other key metrics will not only help inform investors while helping companies control their full corporate value, it has the power to realign capitalism for the benefit of broader society," Bill Thomas, global chairman and CEO of KPMG International, said in the press release

Some observers question whether organizations fundamentally representing a management point of view are the ideal body to drive ESG reporting standards. As previously reported in Alert, as an alternative to management-driven standard setting on ESG performance, the parent organization of the International Accounting Standards Board recently announced a desire to create an independent standard setter governing ESG standards, while independent frameworks including SASB and GRI recently announced intention to work more closely together to potentially streamline their work.
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New CII Webinar on Tax Transparency from the Investor’s Perspective
On October 14 at 12 noon ET, CII will host a webinar to explore the investor case for more granular disclosure on what companies pay in taxes and to whom. Click here for speaker details and registration information.
SURS of Illinois Seeks Chief Diversity Officer, Ceres Seeks Manager, NYS Comptroller’s Office Looking for Corporate Governance Officer

SURS of Illinois is looking for a chief diversity officer, Ceres is looking for a manager of investment engagement and the New York State Comptroller’s Office is seeking a junior corporate governance officer. Descriptions of the positions and information about how to apply can be found on CII’s Member Job Board.
News Clips for September 25 - October 1
CII is a nonprofit, nonpartisan association of U.S. asset owners, primarily pension funds, state and local entities charged with investing public assets and endowments and foundations, with combined assets of $4 trillion. Our associate members include non-U.S. asset owners with more than $4 trillion in assets, and a range of asset managers with more than $35 trillion in assets under management. CII members share a commitment to healthy public capital markets and strong corporate governance.