Preparing For The 2026 Annual Reporting And Proxy Season

ESG, DEI AND HUMAN CAPITAL DISCLOSURES

The prevalence of public company human capital practices and disclosures ebbs and flows. Over the last two years, DEI-related metrics in incentive plans and references in annual reports and proxy statements receded amid legal headwinds, shifting policies and recalibrated investor voting guidelines.

As the next reporting season approaches, companies should ensure that disclosures reflect any updates to DEI policies and align with current practices, reconcile policies with evolving regulatory and legal guidance, and calibrate to increasingly divergent stakeholder expectations. Nasdaq-listed issuers should consider removing the prescriptive board-diversity table, which is no longer required after the Fifth Circuit's December 2024 ruling. Risk factors in the 2026 annual report should be updated to match current commitments and oversight practices, and companies that revised or omitted DEI metrics in 2025 annual compensation plans should ensure disclosures in their annual report and proxy statement reflect those amendments. Companies should also monitor further developments in proxy advisory firm and institutional investor voting guidelines on DEI matters.

Bottom line: ensure practices, governance documents, and public disclosures are consistent and responsive to investor regulatory and other stakeholder expectations which may not be straightforward to do because of conflicting perspectives. For more information about 2025 trends in the use of DEI metrics in incentive plans and DEI references in human capital and proxy disclosures, see our article, Evolving Trends in Human Capital Practices and Disclosures, published in A&O Shearman's 23rd Annual Corporate Governance & Executive Compensation Survey.

FURTHER DEVELOPMENTS AND PREDICTIONS REGARDING AMENDMENTS TO THE EXECUTIVE COMPENSATION DISCLOSURE RULES

The SEC is considering its first major overhaul of executive compensation disclosure rules in 20 years. In June, 2025, the SEC hosted a roundtable discussion focused on whether current rules effectively balance investor protection and cost-effectiveness. A few key themes emerged:

• the overcomplexity and "patch-work" nature of the current executive compensation disclosure rules
• mandated rules like the CEO pay ratio, pay versus performance and clawback rules, are costly to prepare with limited investor benefit
• the degree to which the existing rules are overly burdensome, increasingly boilerplate but also opaque on areas like the life cycle of equity awards, and
• perquisite disclosure warrants reform. While eliminating disclosure mandated by Dodd-Frank is beyond its authority, SEC Chairman Paul Atkins signaled strong interest in using rule-making authority to streamline these disclosures. This indication is consistent with the SEC's recent agenda , which includes rationalizing disclosures more generally.

Following the round table, the SEC received a deluge of feedback from different constituents—more than 60 substantive and over 1,000 form comment letter submissions. Clearly, stakeholders want change. You can read the comment letter that A&O Shearman submitted to the SEC on executive compensation disclosure reform here.

In a statement by SEC Chairman Paul Atkins on January 13, 2026, he indicated that the executive compensation disclosure rule review was the first step in a broader comprehensive review of Regulation S-K. The SEC's next step will likely be a formal rulemaking proposal in 2026, with new rules not likely to be effective in the 2027 proxy season, although that timeline may be delayed by the recent government shutdown.

SEC AND GOVERNMENT ACTIONS ADD CHALLENGES FOR SHAREHOLDER PROPOSALS

The 2026 proxy season will play out against the background of major changes, both actual and impending, for the Rule 14a-8 shareholder proposal process and the broader system of voting determinations that drive it. First and foremost, in November 2025, the SEC's Division of Corporation Finance announced an unprecedented policy (the "2026 Policy") that it will not respond to requests submitted by companies seeking SEC staff concurrence of their decision to exclude shareholder proposals under Rule 14a-8 during the 2026 proxy season, except in the case of exclusions that are based on the proposal being improper under state law. This policy and its implications are discussed in more detail below.

Adding to the uncertainty of the future of the shareholder proposal process are two other developments. More recently, in December 2025, President Trump signed an Executive Order entitled "Protecting American Investors From Foreign-Owned and Politically-Motivated Proxy Advisors," (the "Executive Order") which, among other things, requires the SEC to consider revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to shareholder proposals, including Rule 14a-8, that are inconsistent with the purpose of the Executive Order. In September 2025, SEC Chairman Paul Atkins released a rulemaking agenda that listed among its objectives a rule proposal described as amendments to Rule 14a-8 to "reduce compliance burdens for registrants".

For the current proxy season, the 2026 Policy leaves companies who face shareholder proposals with the potentially challenging task of navigating potential exclusion on complex ordinary business or economic relevance grounds without the security of SEC staff confirmation. The 2026 Policy reminds companies that they must send a notice to the shareholder proponent and the SEC of the intention to exclude the proposal and goes on to say that if a company wishes to receive a response from the SEC to any such notice, the company or its counsel must include, as part of its required notification to the SEC, an unqualified representation that the company has a reasonable basis to exclude the proposal based on the provisions of Rule 14a-8, prior published guidance and/or judicial decisions. In that case, the company will receive a response from the Division of Corporation Finance indicating that, based solely on the company's or counsel's representation, it will not object if the company omits the proposal from its proxy materials.

We do believe there is merit to companies making the effort to obtain the no-objection confirmation to an excluded shareholder proposal, and that many, if not most, companies that exclude proposals this season will do so. In supporting the unqualified representation, we believe companies should perform and document a rigorous analysis based on Rule 14a-8, SEC staff guidance, precedent no-action letters and court decisions, where applicable, and carefully document the relevant arguments as part of the notice sent to the Division of Corporation Finance and the proponent. Companies should not take the SEC staff's decision to not issue no-action letters as a free pass to exclude any shareholder proposals without careful consideration and a reasonable basis to do so under existing "precedent." Companies should not dispense with the rigor that they brought to analyzing the available bases of exclusion in the past. If anything, this assessment is more critical now than before, as companies will not have the benefit of a substantive SEC review of their rationales. Importantly other constituencies, including serial shareholder proposal proponents, shareholder advocates, the financial media, institutional investors and proxy advisory firms, will be watching how this unique process unfolds and we expect them to call out companies that try to aggressively take advantage of the interpretive vacuum created by the 2026 Policy.

NEW EXECUTIVE ORDER ADDS TO PRESSURE ON PROXY ADVISORY FIRMS AND INSTITUTIONAL INVESTORS

President Trump's Executive Order (discussed earlier) issued in December 2025 specifically targets proxy advisory firms, escalating the traditional rhetoric against them and scapegoating the services as foreign-owned agents of radical political influence in corporate governance who have a particular focus on ESG and diversity, equity and inclusion. The Executive Order creates a number of expectations of the SEC and other agencies, many of which have been discussed or attempted by the SEC in the past. Among other things, the Executive order directs the SEC Chair to:

• review all SEC rules and guidance relating to proxy advisors and consider revising or rescinding them, especially to the extent they implicate DEI and ESG policies
• consider requiring proxy advisors to provide increased transparency regarding recommendations, methodology and conflicts of interest, especially related to DEI and ESG factors, and
• to enforce anti-fraud provisions of the federal securities laws with respect to material misstatements or omissions in proxy voting recommendations.

The SEC Chair is also directed to evaluate:

• whether proxy advisors should be required to be registered under the Investment Advisors Act of 1940;
• whether and under what circumstances proxy advisors may serve as a vehicle for investors to coordinate and augment voting decisions in a manner that constitutes a "group" for purposes of Schedule 130 and 13G filing; and
• whether the practice of registered investment advisors hiring proxy advisors to on non-pecuniary factors, including DEI and ESG factors, is inconsistent with their fiduciary duties.

The Executive Order enhances what has already been a significant assault on proxy advisors from other quarters, including Congressional hearings, state legislation and investigations from state attorneys general, mainly focused on ESG related recommendations. All of this, coupled with the focus on investor behavior and fiduciary duties, is bound to have a chilling effect on investor reliance on proxy advisors, investor capacity for outreach and communication with issuers and the willingness of investors to engage. This, coupled with the change in SEC Staff guidance that has impacted investor engagement behavior, which we discuss in this guide, is expected to lead to a situation where companies have less information and predictability with respect to shareholder voting matters.

RISK FACTOR DISCLOSURES

Over the past year, public companies have navigated the rapid evolution of artificial intelligence (AI), a volatile U.S. trade policy and the persistence of geopolitical conflict and a record-breaking U.S. government shutdown.

Identified below are ways in which companies have updated their risk factors to account for developments in these areas, which companies should consider as they assess potential risk factor updates.

ARTIFICIAL INTELLIGENCE

As AI usage accelerates among consumers and businesses, public companies are increasingly disclosing AI-related risks. Depending on the extent to which a company uses AI in its business and operations, companies should consider including risk factors that address the business, compliance governance and reputational risks presented by their use of AI, as well as potential impacts of AI usage on privacy and cybersecurity matters by the company and third party service providers. Certain companies also disclose AI-related competitive risks, such as the risk that the company will fail to keep pace with the latest developments in AI.

CYBERSECURITY

Companies increasingly reference the sophistication and evolving nature of cybersecurity threats in their risk factor disclosures. Compliance costs and the risks of noncompliance with data protection laws are commonly cited, and companies also note that growing AI usage may exacerbate existing cybersecurity risks. Do not forget to assess what, if any, changes need to be made to reflect incidents or events over the past year.

TRADE POLICY

Companies with material exposure to international trade should review risk factors addressing the imposition of tariffs and the uncertainty surrounding international trade policy. Companies with operations, supply chains, or customers located in countries subject to U.S. tariffs should consider whether the possibility of retaliatory tariffs would have a material impact on their financial condition and results of operations.

GEOPOLITICAL RISKS

The ongoing war between Russia and Ukraine, the conflict between Israel and Hamas, broader instability in the Middle East, and the possibility of conflict between China and Taiwan are commonly cited in risk factor disclosures. Companies with exposure to conflict regions should tailor their geopolitical risk disclosures to specify how such risks are likely to impact the company's financial condition, strategy, and outlook.

GOVERNMENT INTERVENTION

In the past year, the Trump administration signed executive orders focused on DEI as well as ESG matters, and several states and Congress have proposed or enacted "anti-ESG" policies or initiatives. While these actions indicate increased scrutiny of DEI or ESG initiatives by the federal government and certain states, companies may face competing demands by stakeholders who continue to expect greater transparency and action in these areas. Companies should assess their risk factor disclosures to consider whether updates should be made to account for conflicting stakeholder perspectives. Companies have cited the growing momentum of "anti-ESG" sentiment in the U.S. political environment as a business risk, while also noting that a variety of investors and other stakeholders continue to measure the performance of companies based on ESG metrics. Companies have explained these competing demands in their risk factor disclosures and have noted that their actions in response to increased political scrutiny of DEI or ESG practices could impact their reputation, business and financial condition in ways that are difficult to anticipate.

SEC FLOATS BIG CHANGES TO FOREIGN COMPANY REGULATION

Foreign private issuers (FPIs) are back on the SEC's agenda. In June 2025, the SEC published its Concept Release on Foreign Private Issuer Eligibility to solicit feedback on the FPI definition, suggesting something more than extending incremental disclosure mandates to FPIs in favor of an overhaul of the entire FPI regime.

The SEC identified significant changes in the composition of home country jurisdictions of FPIs and a growing cohort of FPIs whose securities trade almost exclusively in the United States without any meaningful foreign disclosure or corporate governance requirements, raising concerns that this evolution may have undermined investor protection and may also have put U.S. domestic companies at a competitive disadvantage.

Potential approaches include:

• revising eligibility criteria
• adding a foreign trading volume or a "major foreign exchange" listing requirement
• imposing a minimum foreign regulatory requirement that relies on mutual regulatory recognition.

Many commenters asserted the regime is not broken, warning a narrowed definition could deter listings and shift liquidity away from U.S. regulatory oversight. Commenters also proposed amending Form 6-K requirements to move it closer to Form 8-K, accelerating the Form 20-F deadline and imposing Regulation FD on FPIs. They also flagged transition and accounting complexities if companies lose FPI status, including the shift from IFRS to U.S. GAAP. Many urged the SEC to focus on the identifiable risks rather than overhaul a framework that has largely struck the right balance between ensuring U.S. investors are protected and encouraging foreign companies to list in the United States.

The next step for the SEC will be to form a rule proposal based on feedback from the Concept Release.

SEC SECTION 16 REPORTING REQUIREMENTS FOR FOREIGN PRIVATE ISSUERS

The U.S. Congress recently enacted the "Holding Foreign Insiders Accountable Act" that will require directors and officers of foreign private issuers (FPIs) with SEC-registered equity securities to publicly report transactions in their companies' securities in same way that directors and officers of U.S. domestic listed companies do under U.S. rules. The new law grants the SEC authority to exempt directors and officers from the new law for transactions that are subject to "substantially similar" reporting requirements under non-U.S. law. We believe it is likely that the SEC will exempt FPIs listed in Canada, the European Union and the United Kingdom, but the scope and timing of any such exemption is currently uncertain.

As a result of this law, directors and executive officers of an FPI must report their initial individual holdings at the time of an IPO and, for FPIs that are already public in the United States, on March 18, 2026. Directors and officers are also obligated to disclose a range of transactions in the public company's equity securities within two business days of the transaction. Transactions include purchases, sales and gifts of equity securities, and when the insider receives equity as compensation. Failure to submit these reports constitutes a violation of the securities laws by the insider and may also create exposure for the FPI. We would expect enforcement of these new requirements will be a focus of the SEC. U.S-listed FPIs and their directors and executive officers will need to establish appropriate systems and controls to:

• identify relevant Section 16 insiders
• identify and collect relevant information about reportable transactions
• ensure timely reporting.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.