Editor’s note: This excerpt is pulled from the January/February 2021 issue of Directorship magazine, launched this week. For more key regulatory themes to keep an eye on, as well as further insights into the themes listed below, read the full article here.
“Regulators are in a strong position to drive change. What is more powerful is for the change to come from the top down within business organizations.” So said Laura Cha, chair of the Hong Kong Exchanges and Clearing at a January World Economic Forum conference. In her speech to business leaders, Cha challenged directors to “step up in driving the ESG agenda of their companies.”
Her words were prescient, and US-based directors would be wise to heed them now. As the Joseph R. Biden Jr. administration begins its work, boards that have not been Washington-minded may experience culture shock. The White House under President Donald J. Trump and Vice President Michael Pence focused on deregulation. By contrast, an administration led by President Biden and Vice President Kamala Harris will likely focus on restoring regulations. This is especially true now that both chambers of Congress are controlled by a Democratic majority, albeit by slim margins, after twin victories in Georgia Senate runoff elections. Democrats will control committees and the legislation and nominations brought to the floor, with Vice President Harris casting the deciding vote in the event of a tie. Directors can expect many additional regulations and bills—if not laws—increasing regulatory requirements for companies and the boards that govern them.
A renewed focus on regulation would have two distinct implications for boards. First, board oversight of regulatory compliance must sharpen because companies will have to deal with new or restored regulations. Second, boards themselves are likely to contend with new requirements stemming from the Dodd-Frank Act that were put on ice under the Trump administration. The following key themes should help boards gain an advantage as we enter a new year with a new presidential administration.
In light of the current national emphasis on civil rights issues, we may see Congress revive diversity bills under renewed or new sponsorship. For example, the Improving Corporate Governance Through Diversity Act, if reintroduced by its original sponsor Rep. Gregory Meeks (D-NY), would ask the US Securities and Exchange Commission (SEC) to “require the submission of data relating to diversity.” A similar bill could be reintroduced in the Senate by Sen. Robert Menendez (D-NJ). Rep. Carolyn Maloney (D-NY) is likely to bring back the Diversity in Corporate Leadership Act, which would require the SEC to “establish a Diversity Advisory Group to study and make recommendations on strategies to increase gender, racial, and ethnic diversity on the boards of issuers, and to “amend the Exchange Act of 1934 to require issuers to make disclosures to shareholders with respect to gender, racial, and ethnic diversity.”
In parallel with congressional initiatives to increase disclosure requirements, the SEC under a new chair will likely focus on company disclosures on board diversity. The SEC’s scrutiny may extend to compliance and disclosure interpretations (C&DIs) about board diversity. C&DIs—likely more familiar to general counsel and corporate secretaries than to most directors—are interpretations by the SEC’s Division of Corporation Finance intended to provide guidance on rules. It is possible that at some point this year the SEC will expand further the guidance it offered last year. One example: in a Feb. 6, 2020, update on Regulation S-K, the SEC added a question and answer about Item 401(e) that requires discussion of what led to the conclusion that a person should serve as a director, as well as a related provision under Item 407(c) requiring a description of how a board implements policies on nominee diversity “such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background.”
The Biden administration will almost certainly strengthen laws affecting working conditions and pay equity, and Congress will likely reintroduce legislation on this topic. In a November fundraising message to Democrats, Robert Reich, former labor secretary under President Bill Clinton, called for an “FDR moment.” Reich, using language that some may find hyperbolic, wants to “reverse Trump’s efforts to take away workers’ health care” and “protect all workers against wage theft.” He also wants to bolster workplace safety inspections to make it easier for businesses to classify workers as independent contractors, and “ensure millions of workers receive the overtime pay they deserve.” In Congress, among the bills likely to be revived is the Corporate Freeloader Fee Act that was introduced by Sen. Sherrod Brown (D-OH) to “impose an excise tax on employers with low-wage employees.”
The new year will also be a time to remember the Dodd-Frank Act. The long-pending pay-for-performance rule proposed in 2015 may be finalized. Section 953 of Dodd-Frank mandated that the SEC pass a rule requiring public companies to disclose “the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions.” Legislators who passed the law were concerned that some executives were being overpaid in relation to their performance. The rule defines pay as the total reported in the compensation tables of the proxy, with some modifications, and it defines performance as total shareholder return (TSR) over each of the company’s five most recently completed fiscal years compared to peers.
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