Location/Format of Annual Meeting. Given the continuing uncertainty surrounding the constantly evolving COVID-19 pandemic situation, an important decision for companies as we head into the proxy season will be the format of the annual shareholder meeting—that is, whether to hold a physical in-person, virtual or hybrid (i.e., attending either in-person or virtually) shareholder meeting. According to data from Broadridge, 1,929 meetings were held online using their virtual shareholder meeting platform in 2021 compared to 1,494 in 2020 and 248 in 2019.⁷ With the emergence of new variants of COVID-19, such as the recent Omicron variant, the trend towards increased virtual shareholder meetings could continue in 2022.

For those companies that are considering holding their 2022 annual shareholder meeting virtually, we refer you to last Winter's Corporate Communicator, which discusses several considerations and best practices for holding virtual meetings. Key considerations include reviewing whether state law and the company’s corporate governance documents permit the company to conduct a virtual or hybrid shareholder meeting; determining the meeting format; monitoring changes to policies from proxy advisory firms and institutional investors; and deciding on a virtual meeting service provider.

Environmental, Social, and Governance Trends and Development. The global COVID-19 pandemic accelerated consumer and investor consciousness of corporate impact on ESG matters. Many businesses promoted their ESG goals and policies in response, yet the public remained skeptical of what was occurring behind the corporate curtain. In 2021, the push for consistent disclosure of ESG activity continued to gain traction with each passing month, causing governmental bodies to take notice and respond accordingly. The following is a brief summary of a selection of the corporate ESG trends we have seen this year:

Environmental. The prevalence of natural disasters and awareness of the adverse impacts of industrial pollution caused government regulators to strengthen their focus on climate change.

The Division of Corporation Finance of the SEC (the “Division”) has also shown support for climate initiatives in its latest bulletin outlining the Division’s views on companies’ bases for excluding shareholder proposals from their proxy statements, as enumerated in Rule 14a-8.⁸ Under the ordinary business exception in Rule 14a-8(i)(7), a company may exclude a shareholder proposal when such proposal “deals with a matter relating to the company’s ordinary business operations.” The Division is abandoning its previously stated position, which evaluated a shareholder proposal based on the significance of the policy to the particular company. After internal review, the Division found this position to be cumbersome and not tailored to the policy objectives underlying the ordinary business exception. In lieu, it is realigning with positions initially taken in 1976 – focusing on whether the shareholder proposal “raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” Thus, proposals relating to climate change and other societal considerations that may have been excludable under the Division’s prior position may likely no longer be so under the Division’s current position.

Further, under the ordinary business exception, the Division also considers the extent a proposal micromanages the company. In contrast to previous guidance, the Division will not automatically allow exclusion for “proposals seeking detail or seeking to promote timeframes or methods . . .” Rather, the Division will focus on the extent the proposal inappropriately limits the discretion of the company’s board or management. This case-specific rule is anticipated to allow for more proposals that relate to climate change and other social goals. For example, the Division did not find proper exclusion of a proposal which requested the company set emission reduction targets, as it did not specify methods for doing so and therefore did not limit the company’s discretion for how to achieve emission reductions.

Finally, the Division announced it will forbid exclusion of proposals that raise issues of broad social or ethical concern, even if the proposal would qualify for the exclusion under Rule 14a-8(i)(5), the “economic relevance” exception. The economic relevance exception allows exclusion of proposals that pertain to “operations which account for less than 5 percent of the company’s total assets . . . and for less than 5 percent of its net earnings and gross sales . . . and is not otherwise significantly related to the company’s business.” The Division’s current position realigns with its past policy, articulated in the 1985 case of Lovenheim v. Iroquois Brands, Ltd., where the court enjoined exclusion of a shareholder proposal concerning animal abuse in foie gras production, even when the company’s foie gras business accounted for far less than 5 percent of revenue.⁹ This new policy is expected to open the door for many environmental and other socially motivated shareholder proposals, even if they do not relate directly to a company’s “significant” economic activity.

Diversity Requirements. In last Winter’s Corporate Communicator, we highlighted the growing emphasis on diverse representation on corporate boards, demonstrated through California SB-826 and AB-979, requiring diverse boards.

The legal push for diversity on corporate boards is not without criticism. The Alliance for Fair Board Recruitment, an organization spearheaded by conservative legal activist Edward Blum, is challenging the California board diversity law.¹⁰ Critics argue the board diversity rules require companies to unfairly discriminate on the basis of sex and race, ultimately violating the equal protection clauses of the U.S. and California constitutions. Further, the California laws are challenged as violating the internal affairs doctrine, as the law provides for applicability to corporations headquartered in California, even if incorporated in other state.

Despite these court challenges, public companies should seriously consider compliance with the applicable board diversity rules. Violations of the California law risk fines of $100,000 to $300,000, and violations of the Nasdaq disclosure rules risk being delisted from the exchange. By December 31, 2021, publicly traded corporations headquartered in California must have at least one to three female directors, depending on board size, and at least one director from an underrepresented community on a company’s board. This deadline is quickly approaching, and the legal challenges against the board diversity laws are not expected to be resolved before then.

Diversity Disclosures. Disclosures relating to board diversity continue to be an important focus for the upcoming proxy season. In recent years, shareholder support for board diversity proposals have increased significantly, and an increasing number of companies have begun to voluntarily provide board diversity disclosures. For example, the EY Center for Board Matters reported that 86% of Fortune 100 companies provided board diversity disclosures in 2021 compared to 54% in 2020.¹¹

Additionally, on August 6, 2021, the SEC adopted Nasdaq’s proposed board diversity rule. Nasdaq’s diversity rule generally requires Nasdaq-listed companies, subject to certain subjections, to:

• Diversity Objective and Related Disclosure: have, or explain why they do not have, at least two “Diverse” members on their board, including at least one member who self-identifies as “Female” and at least one member who self-identifies as an “Underrepresented Minority” or as “LGBTQ+”; and
• Board Diversity Matrix Disclosure: publicly disclose on an annual basis specified diversity statistics relating to each director’s voluntary self-identified characteristics using a “Board Diversity Matrix”.

For the disclosure requirements regarding compliance with the diversity objectives (i.e., the comply or explain disclosure), Nasdaq has provided for a phased approach beginning in 2023 based on a company’s Nasdaq market tier. On the other hand, the required Board Diversity Matrix must generally be provided by the later of: (i) August 8, 2022 or (ii) the date the company files its proxy or information statement for its 2022 annual meeting of shareholders (or, if it does not file a proxy or information statement, the date it files its Form 10-K). As a result, we expect many Nasdaq-listed companies to begin including the Board Diversity Matrix in their upcoming proxy statements.

For domestic companies listed on Nasdaq, the Board Diversity Matrix must be presented in the template included in Nasdaq Listing Rule 5606 (reproduced below) or in a substantially similar format.

In preparing the annual Board Diversity Matrix, companies should keep in mind the following:

• The disclosure must be titled “Board Diversity Matrix” and include the date the information was collected as the “As of Date”.
• Following the first year of disclosure, companies must disclose the current year and immediately prior year diversity statistics using the Board Diversity Matrix.
• The Board Diversity Matrix should be completed by entering the number of directors that self-identify in each category. If a director self-identifies in the “Two or More Races or Ethnicities” category, the director must also self-identify in each individual category, as appropriate.
• The information in the Board Diversity Matrix must be included in a searchable format. If a company uses a graphic or image format, the company must also include the same information as searchable text or in a searchable table (e.g., together with the related graphic or in an appendix).
• Companies are not allowed to include additional categories within the Board Diversity Matrix table itself. However, a company may supplement its disclosure by providing additional information related to its directors below the matrix, in a narrative that accompanies the matrix or in a separate graphic.

For companies that are not listed on Nasdaq, consideration should be given as to whether to provide similar board diversity disclosures in light of the growing focus on board diversity related matters, including by the SEC, state legislatures, proxy advisory firms and institutional investors. All companies should also continue to be mindful of existing Regulation S-K disclosure obligations relating to board diversity, including pursuant to Item 401(e), which requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director, and Item 407(c)(2)(vi), which requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees.

In terms of gathering the relevant data to prepare the Board Diversity Matrix or similar board diversity disclosures, companies should consider updating their director and officer questionnaires to include relevant questions to allow directors to voluntarily provide their self-identified characteristics. Nasdaq has provided sample questions in this regard, and our annual form of director and officer questionnaires include similar questions as well.

Political Spending / Lobbying. The politically tense climate of 2020 carried over into 2021. With spotlights shining on the potential improper influence over elections, more companies have implemented policies concerning their political spending than ever before. The 2021 CPA-Zicklin Index of Corporate Political Disclosure and Accountability found 255 companies with board committee review of direct political contributions and 228 companies that also review “dark money” contributions to tax-exempt organizations not required to disclose their donors, representing a 12.3 % and 14.6 % increase from 2020, respectively.¹²

While these changes represent primarily business-driven choices, the legal landscape of political spending transparency may change in the coming year. On October 18, 2021, the Senate Appropriations Committee released the current-year budget for financial regulators, removing legacy riders that prevented the SEC from requiring publicly traded companies to disclose their political spending.¹³

⁷See Broadridge Financial Solutions, 2021 Proxy Season Key Statistics and Performance Rating; and Broadridge Financial Solutions and PwC, ProxyPulse—2020 Proxy Season Review.

⁸Division of Corporation Finance, U.S. Securities and Exchange Commission, Shareholder Proposals: Staff Legal Bulletin No. 14L (CF) (November 3, 2021) https://www.sec.gov/corpfin/staff-legal-bulletin-14l-shareholder-proposals.

⁹Lovenheim v. Iroquois Brands, Ltd., 618 F. Supp. 554 (1985).

¹⁰Alliance for Fair Board Recruitment v. Shirley N. Weber, 2:21-cv-05644, U.S. District Court for the Central District of California (Western Division).

¹¹See EY Center for Board Matters, What boards should know about ESG developments in the 2021 proxy season (August 3, 2021).

¹²Center for Political Accountability and the Wharton University of Pennsylvania, 2021 CPA-Zicklin Index of Corporate Political Disclosure andn Accountability (November 29, 2021) https://www.politicalaccountability.net/wp-content/uploads/2021/11/2021-CPA-Zicklin-Index.pdf.

¹³Chairman Patrick Leahy, Committee on Appropriations, Summary: Financial Services and General Government Fiscal Year 2022 Appropriations Bill (October 18, 2021) https://www.appropriations.senate.gov/imo/media/doc/FSGG.pdf.