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Tone at the Top Matters: Corporate Governance Attorney Ning Chiu on Board Directors’ Crucial Role in SEC Reporting

At CDF, we equip board directors, executives, and governance professionals with the insights they need to guide their organizations in an increasingly uncertain future. So, we’re thrilled to share this exclusive article series, showcasing the wisdom of prominent business leaders from our CDF community. From adapting to changing market conditions to creating diverse and inclusive cultures that drive innovation, their real-life advice and insights will offer a fresh look at the managerial challenges facing organizations today. 

Tone at the Top Matters

Recent proposals by the SEC require public companies to disclose significantly more information on sustainability, climate-related risks, and human capital than ever before—a shift that’s prompted many corporate leaders to assess how to adapt their reporting procedures while minimizing disruptions to their core business. 

While board directors may not be involved in day-to-day operations and reporting, they do have a key role to play in helping their companies navigate these regulatory changes, says Ning Chiu, a capital markets attorney and partner at Davis Polk who counsels companies and their boards on corporate governance, securities regulation, and emerging trends like ESG issues.

Crucially, Chiu notes that the current proposals aren’t the end of the road—and in the coming years and decades, we can expect demands imposed by external stakeholders and regulatory requirements to continue to evolve. So, while board directors should take care to understand the recent changes, it’s even more important to learn how to best support their companies through a constantly shifting regulatory landscape. 

Chiu shared her wisdom at CDF’s recent Directors Forum Annual Conference, and in the conversation below, she offers some of those insights on how board directors can prepare for the SEC’s proposed changes and meaningfully lead their companies with an eye toward the future. 

CDF: What are public companies most concerned about when it comes to the new reporting requirements? 

Ning Chiu: Companies are concerned about the extremely detailed level of reporting requirements coupled with the ambiguity that will impose compliance challenges. There will be a need to establish strong controls and procedures for disclosures that are outside the regular SEC framework. They are also focused on how to execute the new reporting requirements while operationally minimizing the burdens imposed upon the organization, but maintaining the prudent level of due diligence to support the reporting. All of these

demands must be properly balanced.

CDF: What are some of the key challenges that boards will face in overseeing ESG disclosures and sustainability reporting?

Chiu: As an initial matter for companies that are already reporting on ESG, boards should be mindful that ESG can cover so many topics, and their organizations need to be sharp about refining their attention on the material issues that most impact their companies. It’s important for a board to understand what the company intends when they talk about “ESG”, and only then can the board oversee it properly. While this may contradict an initial desire to really embrace sustainability broadly, a narrower and more tailored approach that concentrates on being deep rather than broad may be more meaningful in terms of impact.  

Going forward, there will be significant challenges to continue to meet the evolving demands imposed by external stakeholders and regulatory requirements. The challenges will vary by company, but at minimum it will mean companies and boards need to be on top of emerging expectations and proposed rulemaking, rather than wait until that becomes a mandate.

CDF: What steps should boards be taking now to prepare for these regulatory changes?

Chiu: Boards should make sure that they have a good sense of those potential changes at a high level, and more importantly, how they could impact the company. This does not mean that boards must know every requirement, but directors should have a general understanding of the regulatory environment and overview of any pending changes that could meaningfully affect the company. Recently, the SEC rulemaking has also ventured into areas of disclosure about board oversight of specific ESG topics, including a fair amount of potential detail regarding processes and accountability. That raises the imperative for board awareness and involvement.

CDF: What steps can boards take to promote transparency, accountability, and stakeholder engagement with respect to their company’s ESG disclosures and sustainability reporting?

Chiu: It’s a bit of a cliche at this point, but tone at the top matters. That’s not to suggest that boards should actively manage, as their role is one of oversight, but if boards believe that ESG disclosure objectives are important, then they should encourage and support management in these efforts. This includes not only showing clear indications of interest, staying informed, and asking questions, but also an element that isn’t talked about as much but just as crucial, which is to recognize and appreciate the complexity involved.  

Boards should respect and support management when they believe management is making their best efforts. Too often management may think that boards expect them to always have the “right” answers, even in areas where there are multiple possibilities rather than binary approaches. Boards should want to encourage not only external, but also internal, transparency—the areas of ESG disclosures changes rapidly, so yesterday’s response may no longer be sufficient, either because of regulatory requirements or investor expectations. The willingness to adapt should be encouraged and understood by boards, rather than viewed as indicative that the initial response was not sufficient in the first place. 

Note: This article should not be considered legal advice—as always, when it comes to matters of the law and public company reporting, contact an attorney for specific guidance. 

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