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. 8, 2020 | Vol 25, Issue 38
In This Issue
  • CII Urges SEC to Scrap Nasdaq’s Direct Listing Proposal
  • Chamber Survey Shows Conflicting Results on New Proxy Advice Rules
  • SEC’s Advisory Committee Discusses Covid Effects on Bond Market
Register for Upcoming Events
News from CII
CII Urges SEC to Scrap Nasdaq’s Direct Listing Proposal
CII sent a letter October 8 asking the SEC to reject Nasdaq’s proposal 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.

On September 25, the SEC ruled that it would keep a stay in place on, and conduct a review of, a similar proposal by the New York Stock Exchange (NYSE). The ruling came after CII sent a petition to the SEC September 8 requesting a review by all five commissioners and a brief in opposition to lifting the stay. 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’s October 8 letter says Nasdaq’s proposed rule change is not consistent with provisions in the Securities and Exchange Act of 1934 which require that stock exchange rules prevent fraudulent and manipulative acts and protect investors and the public interest. The proposal falls short on these because it would expand listings without first addressing the byzantine and costly system of share ownership (i.e., proxy plumbing). As a result, share ownership would be difficult to trace and a directly listed company could use untraceable shares as a legal defense in certain securities fraud actions. CII also argues that direct listings may degrade corporate governance practices since direct listings allow companies to sidestep governance checks that usually precede an IPO.
Chamber Survey Shows Conflicting Results on New Proxy Advice Rules
The Chamber of Commerce October 5 published its annual proxy season survey, which the group says it uses “to help policymakers and the general public understand the relationship between public companies and proxy advisory firms.” The chamber was a major lobbying force behind the proxy advisor rules that the SEC adopted recently and, unsurprisingly, the survey results show strong support for those rules. But, some of the findings actually cast doubt on the need for the new rules. For instance, fewer companies are alerting proxy advisors about stale or inaccurate information or asking for a preview of proxy advisors’ vote recommendations, the survey shows.

This is the sixth year that the Chamber’s Center for Capital Markets Competitiveness (CCMC) and Nasdaq have partnered to conduct the survey. This year, 182 companies participated during the months of July and August and participants included public companies of all sizes from all sectors.

Highlights of the survey include:

  • More than 80% of the companies believe that the review-and-comment mechanism in the SEC rulemaking will result in better informed voting decisions by SEC-registered investment advisors
  • 97% of the companies reported that they would avail themselves of the review-and-comment mechanism included in the SEC rule
  • 85% said that such a mechanism would not create any unnecessary delays or confusion in the proxy voting process
  • 85% of the companies surveyed had a proxy advisory firm make a recommendation regarding an issue included in their proxy statement, a level slightly lower than in 2019 (87%) and 2018 (92%)
  • 7% of the companies formally requested that proxy advisory firms provide them with a preview of vote recommendations, continuing a declining trend from 2019 (17%), 2018 (21%), and 2017 (30%)
  • 24% of companies asked proxy advisory firms for the opportunity to provide input before a vote recommendation is finalized, down from 30% in 2019 and 38% in 2018
  • 24% of the companies pursued opportunities to meet with proxy advisory firms on issues subject to shareholder votes, up from 21% in 2019 but down from 29% in 2018. (For companies that asked for a meeting, that request was denied 69% of the time, up from 60% in 2019, 57% in 2018, and 38% in 2017.)
  • 44% of the companies responding believe that proxy advisory firms carefully research and consider all relevant aspects of a particular issue on which they provids advice, higher than in both 2019 and 2018 (39% both years).
  • 73% of the companies reported that they have in place a year-round regular communications program with institutional investors, less than in 2019 (82%) and 2018 (78%)
  • If a company encountered a vote recommendation it believed was based on inaccurate or stale data, it alerted the proxy advisory firm, institutional investors, and/or the SEC staff 25% of the time, down from 41% in 2019 and 46% in 2018
  • 25% of the companies advised proxy advisory firms and their clients if a recommendation did not advance the best economic interests of shareholders, down from 29% in 2019
  • 54% of the companies reported that they were approached by a representative of ISS Corporate Solutions during the same year in which they received a negative vote recommendation from ISS
SEC’s Advisory Committee Discusses Covid Effects on Bond Market
The SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) met October 5 to discuss lessons learned from Covid-19-related volatility in the fixed income markets in March.

Committee members were overall optimistic, saying that bond markets generally functioned and proved resilient with significant help from the Federal Reserve. Liquidity intervention in the corporate bond market also calmed volatility in other fixed income markets, such as municipal securities markets, participants indicated. Bond ETF markets, which have grown significantly since the financial crisis, also were said to have helped stability, and continued to trade at record volumes even when liquidity was challenged in the underlying bond markets.

The committee also approved a recommendation to the SEC asking it to create a clear definition of “electronic trading” and consistent standards for electronic trading volume reporting. Sonali Theisen, head of fixed income market structure at Bank of America Merrill Lynch, said the recommendation was more important than ever, given that electronic trading accelerated during the pandemic. Fellow FIMSAC member Gilbert Garcia of Garcia Hamilton & Associates said electronic trading “emerged as a hero.”

Committee members also discussed challenges for fixed income markets in the future, including uncertainty surrounding future stimulus packages, vaccine developments and the upcoming election. Given that the Fed’s intervention was unprecedented, committee members expressed concern that this may not be the norm in future crises. Colorado PERA CIO Amy McGarrity cautioned that the Fed’s stabilizing intervention limits conclusions about the stability of the fixed income markets that can be drawn from this crisis. Committee members also suggested the SEC consider ways to encourage liquidity from sources other than traditional dealers.
Big Three Push Back on Friends of the Earth Deforestation Report
In a new report, Friends of the Earth (FOE) says the largest U.S. asset managers are undermining efforts to halt deforestation by voting against measures to protect forests. The asset managers—BlackRock, Vanguard and State Street—rebut the charge, citing their large-scale considerations on climate change and the recent progress that they have made in addressing related issues.

From 2014 to 2019, global tree cover loss increased by 43% and annual CO2 emissions from tropical deforestation are now equal the annual emissions from the European Union, the report says. Although the ‘Big Three’ asset managers recognize that deforestation, and climate risk more broadly, are material concerns, they lack risk frameworks or explicit policies to measure, manage and mitigate deforestation, native ecosystem conversion and peatland destruction, the report says. FOE also takes issue with the Big Three’s proxy voting records, reporting that since 2012 they voted against or abstained from 16 shareholder resolutions calling for action on deforestation.

Specifically, FOE faults the asset managers for failing to do:

  • Have policies to manage and mitigate the deforestation crisis.
  • Vote their shares to stem deforestation and related human rights abuses.
  • Hold companies accountable to reduce Scope 3 emissions.
  • Engage with companies to shift their practices.

“Financial institutions can address deforestation in companies they own or finance in many ways: through direct engagement with companies, proxy voting, introducing criteria for loans and underwriting of debt and equity securities, or by excluding companies entirely from their lending and investment portfolios,” argues the report. DOE recommends that BlackRock, Vanguard and State Street take several steps to strengthen their responses to deforestation, including:

  • Establishing an independent accountability body to guide policy implementation and engagement. Any such body must include strong representation of Indigenous and forest-dwelling peoples and civil society experts.
  • Making corporate engagement transparent, timebound and attached to meaningful consequences.
  • Voting for resolutions that strengthen corporate compliance with No-deforestation, No-peat and No-exploitation (NDPE) principles, and vote against directors of companies that consistently drive deforestation and human rights violations, including attacks on land and environmental defenders.
  • Adopingt high-level policies and due diligence frameworks to address both the environmental and human rights risks associated with investments in agribusiness.
  • Require agribusinesses to track, disclose, and set targets for reductions of Scope 1, 2, and 3 greenhouse gas emissions.
  • Proactively seeking data on land use and forest cover to integrate into investment decisions. (While financial data providers increasingly provide data related to climate risk, none of the major financial database providers, including Bloomberg, Refinitiv and Morningstar, cover land use data in their reporting.)

Vanguard reports that its investment stewardship team regularly engages with portfolio companies on their strategy and oversight of material risks, including environmental risks, that could adversely affect their business and its clients’ investments. The asset manager points out that voting, while important, is just one way it advocates for change. “Vanguard believes engaging with portfolio companies on these issues is equally as important, particularly as there is no ‘one size fits all’ solution in addressing these risks,” said Alyssa Thornton, spokesperson for Vanguard. She explained that shareholder proposals are evaluated on a “case-by-case and fund-by-fund basis,” with a goal of maximizing long-term value. Vanguard’s annual report contains several case studies on its engagements and subsequent voting strategy with portfolio companies on some environmental issues.

“Deforestation is an issue that is concerning to BlackRock,” said Michelle Edkins, managing director of BlackRock Investment Stewardship. “We view improper land use and management that contributes to deforestation as an environmental, social, and governance risk for many companies in which we invest on behalf of our clients,” she explained.

BlackRock expects companies to disclose how the material E&S risks and opportunities in their business models might affect their long-term strategy, capital expenditure and operations and to explain how relevant risks are assessed, mitigated and managed. Specifically, on deforestation, the asset manager asks companies to disclose any initiatives and externally developed codes of conduct to which they adhere and to report on outcomes. BlackRock also requests that companies disclose medium-and long-term targets relevant to their business practices to enable shareholders and others to assess operational standards monitor progress and inform engagements. The asset manager has published commentaries on Agribusiness and Palm Oil – two industries that have been implicated in deforestation.

State Street points to its 2020 Proxy Season Review published October 5, which details the asset manager’s voting and engagement record this proxy season, and provides an overview of key focus areas for the asset stewardship program, including environmental issues. The review was supplemented by an
inaugural Climate Report, to be published annually, which provides further granularity on the stewardship team’s voting and engagement activities related to climate. That report reveals that since 2014, State Street has engaged with more than 600 companies across multiple industries on climate-related issues and supported 34% of the 53 proposals that went to a vote in the first half of 2020. Furthermore, it voted for 61% of shareholder proposals requesting companies to report on the financial and physical risks of climate change on their business as well as their plans to reduce greenhouse gas emissions.
News from CII
Two New Podcast Episodes:
  • Oct 5 - The 2020-2021 SCOTUS Term with Robert K. Kry
  • CII's Monthly Financial Regulation & Corporate Governance Update with Jeff Mahoney for September 3 - October 2

News Clips for October 1-8

JPMorgan Unveils $30 Billion Push to Bridge Racial Wealth Gap - The Wall Street Journal

California Ushers In A Bold New Era Of Board Diversity - Forbes

A 28-Year-Old SPAC Billionaire Can't Splash the Cash - Bloomberg

State Treasurer Races to Determine Future of Retirement Offerings - Pensions & Investments

From Investing to ESG, Election a Show of Dramatic Contrasts - Pensions & Investments

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.