Making Sense of the Current ESG Landscape

Peter AtkinsMarc Gerber and Richard Grossman are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Atkins, Mr. Gerber, and Mr. Grossman. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

The question whether a public for-profit company can “do good” and make money at the same time has never been more relevant. Public companies are being bombarded with messages, requests and demands around “ESG”—environmental, social and governance—matters. These come from shareholders, asset managers, special interest groups, activist investors, private equity funds, ESG rating firms, trade groups, politicians, regulators, academics and others. They take a variety of forms, including shareholder proposals, surveys and questionnaires, letter writing campaigns, proxy voting policies, investor stewardship reports, speeches, white papers, academic studies, and legislation. Topics covered (putting aside the “G”—the governance issues with which boards are likely to be familiar) are numerous and varied, including sustainability, climate change, water management, human capital management, gender pay equity, board and workforce diversity, supply chain management, political and lobbying expenditures, the opioid crisis, and gun control. Boards of directors and management of public companies need to understand the increasing importance of this ESG landscape in which the company and investors are operating, including the growing prominence of ESG investing, the company’s environmental and social (E&S) profile and vulnerabilities, and the path forward for the company as it deals with particular E&S issues.


Revealing Corporate Financial Misreporting

Quinn Curtis is the Albert Clark Tate, Jr., Professor of Law at the University of Virginia School of Law; Dain C. Donelson is Associate Professor at the University of Texas at Austin Red McCombs School of Business; and Justin Hopkins is Assistant Professor at the University of Virginia Darden School of Business. This post is based on their recent article, forthcoming in Contemporary Accounting Research.

In our article, we examine how frequently firms restate when they materially misstate their financial statements using stock option backdating as the setting. After identifying firms that materially misstated earnings due to stock option backdating with 95% (99%) probability, we find that only 11.5% (16.1%) of these firms subsequently restated. Restating firms are larger, have greater board independence, higher litigation risk and ROA, a lower market-to-book ratio, less discretionary accruals, and are more likely to have a CFO that was not involved in backdating. Restating firms are also more likely to disclose other adverse news, face securities litigation, and replace their CFO than firms that appear to materially backdate but do not restate. Since nearly nine of ten firms failed to restate, our results should give pause to researchers who use restatements as an indicator of misreporting, and to regulators who levy penalties on those who do self-report.


Mandated Gender Diversity for California Boards

Howard Dicker and Lyuba Goltser are partners and Erika Kaneko is an associate at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill and Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani.

Corporations with a principal executive office in California that have shares listed on a major U.S. stock exchange will be required to have a minimum number of women on their boards of directors, under a bill signed into law on September 30, 2018, by the Governor of California. Although the new law may be subject to challenge in court, affected public companies and those contemplating an initial public offering within the next year should begin to consider board composition and director recruiting, or risk future fines by the State, pressure from institutional investors, or exploitation by activists.

The new law, which had been California Senate Bill 826, requires any corporation (whether or not incorporated in California) with a principal executive office in California that has shares listed on a major U.S. stock exchange, to have at least one female director on its board by December 31, 2019. [1] By December 31, 2021, at least two female directors must sit on any board with five directors, and at least three female directors must sit on any board with six or more directors. Except for this initial phase-in, the new law does not provide any transition period for newly listed companies. [2] Therefore, for example, a corporation headquartered in California with a six person board of directors that undertakes an IPO in 2022 would need at least 50% of its board to be women at the outset.


Additional Lessons from the CBS-NAI Dispute: The Limitations of “Street Name” Ownership in Effectively Exercising Stockholder Rights

Christopher E. Austin and Paul M. Tiger are partners and Max A. Wade is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

The vast majority of public company shares are owned in “street name”—e.g., through a broker. When holding shares in “street name,” a stockholder’s brokerage account reflects his or her ultimate beneficial ownership of such shares, but the records of the issuer (maintained by the issuer’s transfer agent) indicate that the broker (or more often, another intermediary through which the broker holds the shares) is the record holder of such shares. In the typical case of “street name” registration, Cede & Co., as nominee for the Depository Trust Company (“DTC”), is listed on the issuer’s records as the holder of record of most of the issuer’s shares. DTC, in turn, keeps its own account records, which list the DTC participants that hold those shares through DTC, including a number of brokers. Finally, those brokers keep their own account records, listing the ultimate beneficial owners of such shares. Contrast this with direct registration, sometimes referred to as “record ownership,” where the ultimate beneficial holder holds the shares directly and therefore the records of the issuer indicate that such person is also the holder of record of such shares.


Managing Reputation: Evidence from Biographies of Corporate Directors

Ian D. Gow is Professor at the University of Melbourne; Aida Sijamic Wahid is Assistant Professor of Accounting at University of Toronto Rotman School of Management; and Gwen Yu is an associate professor at the Ross School of Business at the University of Michigan. This post is based on their recent article, published in the Journal of Accounting and Economics.

Board of directors play an important role in firms. However, there are many challenges in assessing the quality of directors. Investors may have limited information to judge the qualification of a director. Even if information was available, the required skillset one considers important for a director to be qualified for the job is inherently subjective.

Firms are required to disclose their directors’ backgrounds in proxy filings, otherwise known as Form DEF 14A. Director biographies are a required element of corporate filings in the United States. They are intended to provide investors with information needed to assess directors’ experience and to evaluate whether directors are adequately qualified to monitor and advise their firm (Securities and Exchange Commission, 2009). However, key elements of director biographies (e.g., past directorships) were relatively unregulated before 2010, giving directors and firms substantial discretion over the information disclosed.


Disclosure of the CEO Pay Ratio: Potential Impact on Stakeholders

Joseph Bachelder is special counsel and Andy Tsang is a senior financial analyst at McCarter & English LLP. This post is based on an article by Mr. Bachelder and Mr. Tsang originally published in the New York Law Journal. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

2018 is the first year in which public companies have been required to report the “CEO Pay Ratio.” The CEO Pay Ratio for a reporting company represents the ratio of the total pay of the CEO to the total pay of the “median employee” at that company. This requirement is contained in Item 402(u) of Regulation S-K and applies to fiscal years beginning on or after January 1, 2017. (17 CFR §229.402(u).) It does not apply to emerging growth companies, smaller reporting companies and foreign private issuers.

Following is a description of steps involved in calculating the CEO Pay Ratio as it appears in the proxy statement.


The California Board Diversity Requirement

Thomas Ivey Leif King and Sonia Nijjar are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Ivey, Mr. King, Ms. Nijjar, Josh LaGrange and Christopher Hammond. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill and Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani.

California has become the first state in the nation to require that publicly held corporations headquartered within the state include female directors on their boards. The new law, signed by Gov. Jerry Brown on September 30, 2018, applies to corporations, whether organized in California or elsewhere, “with securities listed on a major United States stock exchange” and principal executive offices located in California, as disclosed on Form 10-K filed with the Securities and Exchange Commission.

Any corporation subject to the law must have at least one female director by the end of 2019. By the end of 2021, subject corporations with five board members must have at least two female directors, while those with six or more board members must have at least three female directors. A corporation may increase the size of its board in order to comply with the new requirements. The law defines “female” as an individual who self-identifies as a woman.


Semi-Public Offerings? Pushing the Boundaries of Securities Law

Usha R. Rodrigues is M.E. Kilpatrick Professor of Law at the University of Georgia School of Law. This post is based on her recent paper.

The 1933 Securities Act struck a simple bargain: the wealthy get to invest in risky private companies, while the general public can invest only in publicly traded securities. For 75 years, that bargain has held. For whatever reason—whether because the wealthy are savvier investors or because their wealth gives them the requisite cushion to absorb the heightened risk private securities pose—we have cordoned off private offerings from the average investor. Reforms like those of the JOBS Act of 2012, which introduced equity crowdfunding and changes to Regulation A loosened the reins, but only marginally. The fact remains that firms seeking to raise over $1 million must take the expensive and lengthy process of registering a public offering with the SEC or else shoehorn their offering into an exemption from registration requirements. But SEC Chair Jay Clayton recently signaled an interest in revisiting the bargain declaring: “We also should consider whether current rules that limit who can invest in certain offerings should be expanded to focus on the sophistication of the investor, the amount of the investment, or other criteria rather than just the wealth of the investor.”


Shedding Light on Diversity-Based Shareholder Proposals

Angelo Martinez is a Senior Research Analyst at Equilar, Inc. This post is based on an Equilar memorandum by Mr. Martinez. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Environmental, social and governance (ESG) proposals voice shareholder concerns about topics including, but not limited to, climate change disclosure, lobbying and political campaign contributions, gender pay equity and employment diversity. According to a recent Equilar study, at least 200 ESG shareholder proposals were voted on each year from 2015 to 2017, combining for a total of 633 shareholder proposals.

One might imagine that if shareholders urged companies to provide more information addressing ESG issues, companies would be more apt to do so. However, the numbers tell a different story. In fact, over the past three years, ESG proposals have received a median approval rating of 20.8% with only 2.5% of all proposals receiving enough votes to pass. While these numbers do not look promising, a deeper dive into more recent data seems to suggest a rather positive outlook regarding two important ESG issues.


Lessons From the CBS-NAI Dispute: The Applicability of Rule 14c-2 and the 20-day Waiting Period to Stockholder Actions by Written Consent

Victor Lewkow and Paul M. Tiger are partners and Gloria B. Ho is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here) and The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here). 


  • National Amusements, Inc. (“NAI”) owns approximately 80% of the voting shares of CBS Corporation and Viacom Inc., and in early 2018, NAI proposed that CBS and Viacom consider a merger. Each of the boards of CBS and Viacom formed a special committee of independent directors unaffiliated with NAI to consider and potentially negotiate such a merger. [1]
  • On Sunday, May 13, 2018, the CBS special committee met and took steps:
    • to call a special meeting of the full CBS board on May 17 to consider and vote on a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting—very substantially—NAI’s voting interest in CBS; and
    • to commence litigation against NAI in the Chancery Court of Delaware seeking approval of the proposed dilutive dividend and moving for a temporary restraining order to block NAI from taking certain steps as the controlling stockholder of CBS, including any actions prior to the special board meeting that would interfere with the proposed dilutive dividend.


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