The Credit Suisse Collapse and the Regulation of Banking

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School.

Related research from the Program on Corporate Governance includes Self-Fulfilling Credit Market Freezes by Lucian Bebchuk and Itay Goldstein.   

Credit Suisse, one of the world’s largest 30 banks with assets exceeding $500 billion, melted down earlier this month. How this collapse quickly unfolded raises serious questions about the regulatory actions preceding it and the future of banking regulation.

On the afternoon of Wednesday March 15, the Swiss National Bank (SNB) and the Swiss banking regulator (FINMA) issued a joint statement expressing unambiguous confidence about the stability of Credit Suisse. SNB and FINMA unequivocally stated that Credit Suisse “meets the higher capital and liquidity requirements applicable to systemically important banks.” SNB also pledged to provide CS with liquidity if necessary.

Four days later, however, with CS facing significant withdrawals, SNB chose not to provide additional liquidity but instead forced CS to sell itself on Sunday March 19 to UBS for less than half of the market capitalization CS had just several days ago. And whereas shareholders at least got some value, the Swiss authorities chose to wipe out completely CS bondholders owed about $17 billion.

The actions that Swiss authorities took on Wednesday and on Sunday cannot be both right. If the SNB’s Wednesday March 15 statement about Credit Suisse’s situation was justified, then the assets of CS substantially exceeded its liabilities to enable CS to have the capital of dozens of billions of dollars that was required for a systematically important bank to be well-capitalized. If this were indeed the case, then SNB’s subsequent choices were highly problematic.


The SEC Sets Its Sights on ESG

Isaac Mamaysky is a Partner at Potomac Law Group PLLC. This post is based on his Potomac Law piece. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales.

As more investors seek to align their portfolios with their values, asset managers and financial advisers are increasingly offering environmental, social, and governance (ESG) products and strategies. While investors certainly gravitate towards ESG options, the resulting market demand has created a financial incentive for advisers to brand strategies and investments as ESG even when the categorization may be a stretch.

The SEC has thus been focused on the issue of false ESG claims. For example, at the end of November it announced a $4 million settlement with Goldman Sachs for alleged failures to follow its own ESG policies and procedures when choosing investments for two mutual funds and one separately managed account strategy.

“In response to investor demand,” the SEC explained, “[advisers] are increasingly branding and marketing their funds and strategies as ESG.” [1] But when they do so, “they must establish reasonable policies and procedures governing how the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.” [2]


Emerging trends in ESG governance for 2023

Maureen Bujno is a Managing Director, and Kristen Sullivan is a Partner and leads Sustainability and ESG at Deloitte & Touche LLP. This post is based on their Deloitte memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

There’s no one-size-fits-all solution to overseeing environmental, social, and governance (ESG) matters—and for good reason. Each company must navigate its own uniqueness related to its organizational structure, global reach, environmental impact, business circumstances, and industry requirements. Further, the broad constellation of topics comprising ESG often doesn’t fit neatly into any one board committee’s charge. As a result, companies increasingly are opting for ESG governance frameworks that allocate responsibilities to various combinations of board committees and the full board.

Amid this variability, many are focused on the regulatory landscape. Given the proposed SEC rule on climate risk disclosure, reporting could transition quickly from voluntary to required. In anticipation, companies should get prepared to formally disclose, and ultimately obtain assurance on, their impact on climate as part of their 10-K financial filings.

While the proposed rule focuses on the “E” in ESG, companies should be thinking about the governance framework for their overall ESG strategy, as well as for each defined component, amid increasing political, regulatory, and stakeholder expectations. And given the major impact the proposed rule likely will have on financial reporting, audit committees should understand trends that are rapidly emerging in climate reporting and the broader ESG governance


5 Common Shareholder Proposal Mistakes in an Uncommon Year

Pat Tucker is a Senior Managing Director and Garrett Muzikowski is a Director at FTI Consulting. This post is based on their FTI Consulting piece. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

Shareholder proposal season is upon us, with companies in the full swing of the SEC no action process and beginning to think about their response strategies. This year will be unlike any other. 2023 is poised to be the most unique, and, quite frankly, weirdest year for shareholder proposals we have ever seen:

  • (anti) ESG’s Impact: Companies are no longer just being pressed for more disclosure and action on ESG topics. Now, they are facing questions on whether their ESG efforts are truly in the best interest of shareholder value. Meanwhile, large asset managers and proxy advisors continue to be the targets of loud anti-ESG pressure. Understanding if, and how, stewardship engagement and voting behavior changes will be crucial in 2023.
  • ESG’s First Recession: The potential for an economic downturn will challenge how the investor community prioritizes ESG and governance engagement. While large passive funds are expected to remain committed to their stewardship programs, actively managed funds may refocus recent investment in these teams.
  • Giving Up the Vote: Large institutional investors rolling out voting choice for their clients is in its early days in terms of scale and adoption. Still, the net result is marginally lessening their impact, enhancing the impact of proxy advisors, and raising questions for issuers trying to understand who is actually voting at their annual meeting.
  • Emboldened Proponents: Despite a general decrease in support for proposals last year, shareholder proponents remain emboldened going into 2023. Many of these funds view themselves as the protectors or originators of the ESG movement itself. For the first time ever, they feel their work in promoting ESG is under threat [1]. In our view, this has imbued them with a new energy as they refile proposals that previously saw high support and expand their target universe beyond the typical mega-caps to target companies who may have never faced a proposal before.


Internalizing Externalities: Disclosure Regulation for Hydraulic Fracturing, Drilling Activity and Water Quality

Pietro Bonetti is an Assistant Professor of Accounting and Control at IESE Business School, Christian Leuz is the Charles F. Pohl Distinguished Service Professor of Accounting and Finance at the University of Chicago, and Giovanna Michelon is a Professor of Accounting at the University of Bristol. This post is based on their recent paper.

Disclosure mandates is becoming more popular as a key policy tool to regulate environmental externalities and wider corporate impacts. In the US, the Dodd-Frank Act introduced (among others) disclosure requirements on so-called conflict minerals and mine-safety. More recently, the SEC has proposed a rule requiring companies to report climate related disclosures in their filings. In Europe, the mandatory disclosure of material social and environmental issues has been introduced by the Directive 2014/95/EU (Non-Financial Reporting Directive) for all companies listed on regulated EU markets. The Corporate Sustainability Reporting Directive envisages the adoption of sustainability reporting standards that the European Financial Reporting Advisory Group is currently drafting.

Although targeting corporate environmental impacts with disclosure is not a novel policy tool, (e.g., U.S. 1986 Emergency Planning and Community Right-to-Know Act), we still have relatively little evidence on whether mandated disclosure works for behaviors with dispersed negative externalities as well as how it produces the intended effects.

In our paper, we exploit the staggered implementation of a disclosure mandate to investigate the effectiveness of targeted transparency in addressing environmental externalities and the role that public pressure, spurred by disclosure regulation, plays in driving the changes in firm behavior. Our study examines the role of disclosure mandates in the context of unconventional oil and gas (O&G) development, which combines horizontal drilling with hydraulic fracturing (HF) to extract shale gas and tight oil in deep formations. HF is a highly controversial practice. Although HF has dramatically increased U.S. energy production and lowered energy prices for consumers, it has also triggered several concerns about the use of potentially highly toxic chemicals in the HF fluids, and the related production of large amounts of wastewaters, with negative implications for water quality. Recent evidence finds such surface water impact.


Weekly Roundup: March 17-23, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 17-23, 2023.

ESG Litigation and Regulatory Enforcement Action

Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies

United States v. Blaszczak Continues to Reshape Insider Trading Law

Rodman Ward, Jr.

Communicating Your Company’s ESG Strategy in 2023

Private Equity—2023 Outlook

The Value of M&A Drafting

DOJ New Corporate Self-Disclosure Policy

DOJ New Corporate Self-Disclosure Policy

Sarah E. Walters and Edward B. Diskant are Partners and Jennifer Levengood is an Associate at McDermott Will & Emery. This post is based on an MWE memorandum by Ms. Walters, Mr, Diskant, Ms. Levengood, Justin P. Murphy, and Julian L. André.

On February 24, 2023, the US Department of Justice (DOJ) rolled out a corporate self-disclosure policy (the Policy) to be applied by all 93 US Attorneys’ Offices throughout the country. The details of the Policy—which formalizes and defines what will be required for companies seeking credit for a “voluntary self-disclosure”—have been drawn from existing policies within other components of DOJ, including, notably, the Foreign Corrupt Practices Act Unit and Antitrust Division. The new Policy ensures for the first time that uniform standards will be applied at the local level by all US Attorneys’ Offices nationwide.

In short, the Policy heavily encourages timely self-disclosure and cooperation by promising the prospect of more lenient resolutions (including declinations) and reduced penalties for companies that promptly self-report misconduct. Consistent with prior recent statements from DOJ leadership, the Policy puts particular emphasis on the timeliness of self-reporting and provides details on how US Attorneys’ Offices will evaluate certain potentially aggravating factors, including the involvement of senior leadership in the alleged misconduct and the company’s history of regulatory, civil or criminal misconduct. (Seee.g.Remarks from Assistant Attorney General Kenneth A. Polite, Jr., on Revisions to the Criminal Division’s Corporate Enforcement Policy, Jan. 17, 2023; Memorandum from Deputy Attorney General Lisa O. Monaco, “Further Revisions to Corporate Criminal Enforcement Policies Following Discussions with Corporate Crime Advisory Group,” Sept. 15, 2022; Memorandum from Deputy Attorney General Lisa O. Monaco, “Corporate Crime Advisory Group and Initial Revisions to Corporate Criminal Enforcement Policies,” Oct. 28, 2021.) While certain aspects of the Policy may thus be familiar, it nonetheless provides important guidance to those engaging with local US Attorneys’ Offices on corporate investigations and prosecutions, while setting consistent standards for engaging with federal prosecutors nationwide.


The Value of M&A Drafting

Adam Badawi is a Professor of Law at UC Berkeley, Elisabeth de Fontenay is a Professor of Law at Duke University, and Julian Nyarko is an Associate Professor of Law at Stanford University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Bidder and Target Shareholders? (discussed on the Forum here) by John C. Coates, Darius Palia and Ge Wu; Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) by John C. Coates; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

What terms matter in merger agreements? M&A lawyers share a strong sense that merger agreement terms matter for deal outcomes and for the parties’ payoffs. In theory, the specific deal terms reached by the parties affect the likelihood of closing and the various deal risks borne by each party, which should in turn translate to real dollars. Scholars have made little progress mapping specific deal terms to expected payoffs, however. Empirical challenges abound, such as the difficulty of isolating the impact on deal outcomes of deal terms versus deal characteristics. Similarly, scholars have not been able to resolve the debate over whether lawyers tend to draft merger agreements optimally, or whether they tailor deal terms either too much or too little.

In The Value of M&A Drafting, we approach these questions indirectly, by asking what terms M&A lawyers themselves deem most important during the drafting process.  Specifically, we use textual analysis tools to measure how much lawyers choose to tailor different deal terms, when they are under severe time pressure versus when they are not.  We do this by comparing the degree of tailoring in “leaked” deals—those where information about the deal negotiations became public prior to signing—to the degree of tailoring in all other deals. Leaks typically motivate parties to sign the merger agreement as quickly as possible, which puts the lawyers drafting the merger agreement under significant time pressure.  Using a sample of 2,141 public-company M&A agreements signed between 2000 and 2020, we find evidence that time pressure leads lawyers to prioritize negotiating and tailoring certain terms over others, which suggests which deal terms the lawyers believe are most important.


Private Equity—2023 Outlook

Karessa L. Cain and Victor Goldfeld are Partners, and Charles C. See is an Associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Ms. Cain, Mr. Goldfeld, Mr. See, Andrew Nussbaum, Steven Cohen, and John Sobolewski.

Despite the challenges the year presented for investors (rising interest rates, tumultuous financial markets, geopolitical upheaval, etc.), private equity showed resilience in 2022. Deal activity declined from 2021, but finished the year above pre-pandemic levels. Although fundraising similarly slowed, sponsors still closed 2022 with approximately $2 trillion in dry powder. And while private equity continues to face headwinds in 2023, market dislocations often provide compelling opportunities for the most thoughtful and sophisticated investors. Now more than ever, creative financing and careful transaction planning are essential.

We review below some of the key themes that drove private equity deal activity in 2022 and our expectations for 2023.

Acquisitions and Exits

Deal Activity Down From 2021, But Above Pre-Pandemic Levels. As we described in our recent memo, Mergers and Acquisitions—2023, after a record-shattering year for M&A in 2021, last year represented a reversion to the mean.

  • Deal volumes down. Announced global private equity M&A deal volume declined from $2.1 trillion in 2021 to $1.4 trillion in 2022, with dealmaking tapering in the second half of the year as credit markets weakened and became more volatile. Private equity’s share of overall M&A volume was steady year-over-year (approximately 36%), and deal volume in 2022 exceeded the pre-pandemic level of $1 trillion in 2019.
  • Public buyout boom continues. While aggregate deal volume shrank, sponsors were active in public company buyouts in 2022, supported by the significant decline in public company market valuations and sponsors’ desire to deploy large amounts of capital. 2022 capped a two-year take-private boom, with 2021 and 2022 each, by both deal count and value, marking the highest levels of public company buyout activity since the 2008 financial crisis.


Communicating Your Company’s ESG Strategy in 2023

Martha Carter is Vice Chair & Head of Governance Advisory, Matt Filosa and Orson Porter are Senior Managing Directors at Teneo. This post is based on a Teneo memorandum by Ms. Carter, Mr. Filosa, Mr. Porter, Andrea Calise, Jeff Sindone and Andy Fitch. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaDoes Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.

U.S. companies are facing a new challenge in 2023 – communicating their ESG strategies in the middle of an intense anti-ESG political campaign. To help companies navigate this landscape, we have provided the below key considerations for communicating strategies within 2023 ESG reports, websites, press releases, social media, proxy statements and annual reports.

The Anti-ESG Political Campaign

Certain U.S. politicians have attacked companies, investors and proxy advisors for their focus on environmental, social and governance (ESG) issues at the expense of financial performance. Despite consistent assertions from both companies and investors that ESG initiatives are driven by financial performance, the anti-ESG political campaign claims that ESG initiatives that focus on climate and diversity are a veiled attempt to move the U.S. towards a more liberal culture at the expense of financial returns. While not directly related to ESG, public statements from companies against certain regulatory initiatives (e.g., voting rights) have also been targeted. As a result, many state and federal regulations banning ESG have been proposed and enacted.

Despite the anti-ESG political campaign’s allegations, both company and investor ESG initiatives have consistently focused on managing business risks and opportunities. That has not changed. Stakeholders have also not de-prioritized their ESG expectations, including investors like BlackRock – which recently reiterated its focus on company’s ESG initiatives. And with global regulators moving forward with ESG disclosure mandates for companies that operate internationally, many U.S. companies will need to disclose their ESG strategy regardless of how the anti-ESG political campaign plays out in the U.S. As such, we expect the pressure on companies for more ESG disclosure to increase, not decrease, in the coming years.


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