Board Practices Quarterly: The Outspoken Corporation

Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on a Deloitte/Society for Corporate Governance memorandum by Ms. Cooper, Mr. Lamm, Ms. Morrison, Debbie McCormack, Carey Oven, and Darla C. Stuckey.

Corporate leaders are increasingly speaking out on potentially controversial social, political, and environmental issues as a matter of principle and/or in response to changing stakeholder pressures and expectations that corporate America can influence the dialogue on these issues. As is the case with many other corporate practices, taking a stance publicly on controversial or sensitive topics poses both risks and opportunities, including alienating or appealing to key stakeholders; enhancing or damaging the corporate culture; and eroding or building trust and brand reputation. As a result of these dynamics, many corporate leaders and boards of directors are considering—in many cases, for the first time—whether and how their companies should approach public engagement on these issues.

This post looks at how companies approach public engagement on social, political, environmental, or public policy issues and the related role of the board. It presents findings from a July 2021 survey of in-house members of the Society for Corporate Governance that addressed, among other matters, designation of a company spokesperson; governing documentation; the role of management; board oversight and practices; and stakeholder engagement.


ESG in 2021 So Far: An Update

Marc S. Gerber, Greg Norman and Simon Toms are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Gerber, Mr. Norman, Mr. Toms, Louise Batty, Adam M. Howard and Caroline S. Kim. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

The rapidly growing focus on environmental, social and governance (ESG) matters that marked 2020 continued to shape events for companies operating or based in the U.K. and Europe in 2021. Discussions of ESG are occurring at all levels, from the boardroom to investors to employees, and governments, regulators and companies are all being encouraged to take these matters into consideration. In our 1 February 2021 article (“ESG: Key Trends in 2020 and Expectations for 2021”), we set out what we thought would be the key ESG trends to watch this year. In this article, we take stock of those predictions, discuss new issues that have emerged over the year and identify the trends we think will be prominent during the remainder of 2021.

Looking Back: Correct Predictions

A number of our key expectations at the outset of the year have been borne out.

ESG Funds [1]

In the first quarter of 2021, inflows into European “sustainable” funds totalled €120 billion, 18% more than the first quarter of 2020, according to Morningstar, and that comprised slightly more than half of all fund inflows for the first time. Of that, €36.5 billion went to passive index and exchange-traded funds (ETFs). Despite the latter growth, there is concern that passive funds will struggle to match the service provided by active managers due to (i) the subjectivity involved in determining appropriate ESG credentials until there is a standardisation of ESG data and reporting and (ii) the ease with which active managers can react to controversy compared to passive ETFs, which must wait for an index committee review before changing investments.


Vermont’s Fossil Fuel Suit Underscores Climate-Change Pressures Faced by U.S. Companies

John F. Savarese, David M. Silk, and Jeffrey M. Wintner are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Savarese, Mr. Silk, Mr. Wintner, William Savitt, David B. Anders, and Sabastian V. Niles. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

Companies in the United States and elsewhere continue to face extreme pressure to respond to climate change, with respect to both business operations and disclosures. In the most recent U.S. development on this front, the State of Vermont yesterday brought civil claims against a series of energy companies under its state consumer protection statute, alleging deceptive acts and unfair practices in connection with their marketing, sales and other operations in and outside of the state. Stopping short of seeking restitution for environmental degradation or a ban on the sale of fossil fuels, the suit seeks disgorgement of funds obtained as a result of the alleged violation of Vermont’s consumer protection law as well as substantial civil penalties. These suits are yet another reminder that regulators continue to take aggressive positions on issues related to climate change, making it all the more important that companies carefully consider how best to address those issues.

The core allegation of the suit is that the defendants misled the public about the impact of fossil fuels by advertising that their products are better for the environment than others, while omitting to disclose that their products continue to contribute to greenhouse gas emissions and climate change. With an explicit reference to the language of cigarette marketing, the suit also alleges that the defendants mislead consumers by using “green,” “clean” and similar terminology. Vermont alleges that recent “greenwashing” campaigns by these companies falsely portray the companies as responsible stewards of the environment. Notably, the state alleges that at least one of these companies admits in a sustainability report that its publicly disclosed net-zero emissions targets are not reflected in its operating plans and budgets.


Why CEO Option Compensation Can be a Bad Option for Shareholders: Evidence from Major Customer Relationships

Claire Liu is Assistant Professor of Finance at the University of Sydney; Ronald Masulis is Scientia Professor of Finance at the University of New South Wales; and Jared Stanfield is Assistant Professor of Finance at the University of Oklahoma. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Option compensation is an important component of executive pay in the United States. By providing convex payoffs, option-based compensation is viewed as a standard mechanism to reduce manager risk aversion and align manager and shareholder interests by encouraging value-enhancing risk taking. In aligning manager-shareholder interests, chief executive officer (CEO) stock option compensation can also intensify conflicts of interests with other key stakeholders by encouraging potentially excessive firm risk taking (see, e.g., John and John, 1993; Opler and Titman, 1994; Kuang and Qin, 2013; Akins et al., 2019). In this study, we take a novel approach to further our understanding of the effects of these conflicts of interest by studying the impact of competitive shocks to important product market relationships and executive option compensation.

Generating sales and preserving valuable product market relationships, such as with major customers, is arguably one of the most crucial factors for a firm’s success. In the United States, nearly half of public firms depend on at least one large customer for a substantial portion of their sales, i.e., representing at least 10% of sales (Ellis, Fee, and Thomas, 2012). It is also common for firms to make relationship-specific investments (RSI) in their major customer relationships, and the health of these valuable trading relationships can significantly affect firm value. As a result, suppliers that depend on an important customer commonly state that the loss of a major customer would negatively impact their firm. For example, Scientific Atlanta Inc., a cable and telecommunications equipment manufacturer, states in its 2005 Form 10-K filing: “A failure to maintain our relationships with customers that make significant purchases of our products and services could harm our business and results of operations. A decline in revenue from one of our key customers or the loss of a key customer could have a material adverse effect on our business and results of operations.” Networking server and storage manufacturer Qlogic Corp. states in its 2005 10-K filing: “Any such reduction, delay or loss of [major customer] purchases could have a material adverse effect on our business, financial condition or results of operations.”


Weekly Roundup: September 10–16, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 10–16, 2021.

Financial Reporting and Moral Sentiments

NYSE Restores Thresholds for Related Party Transactions

SEC Continues to Scrutinize Earnings Management Through Its EPS Initiative

Boards Need to Become More Diverse. Here’s How to Do It

Boeing’s MAX Woes Reach the Boardroom

Discharging the Discharge for Value Defense

The FCA and SEC Annual Reports—A Statistical Comparison

Beyond “Market Transparency”: Investor Disclosure and Corporate Governance

ESG Disclosures in Proxy Statements: Benchmarking the Fortune 50

Uptick in Clients Seeking to Discuss ESG Investing

Going Public Report: First Half 2021

SEC Charges Kraft Heinz with Improper Expense Management Scheme

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.

On Friday, the SEC announced settled charges against Kraft Heinz Company, its Chief Operating Officer and Chief Procurement Officer for “engaging in a long-running expense management scheme that resulted in the restatement of several years of financial reporting.” According to the SEC’s Order regarding the company and the COO, as well as the SEC’s complaint against the CPO, the company employed a number of expense management strategies that “misrepresented the true nature of transactions,” including recognizing unearned discounts from suppliers, maintaining false and misleading supplier contracts and engaging in other accounting misconduct, all of which resulted in accounting errors and misstatements. The misconduct, the SEC contended, was designed to allow the company to report sham cost savings consistent with the operational efficiencies it had touted would result from the 2015 merger of Kraft and Heinz, as well as to inflate EBITDA—a critical earnings measure for the market—and to achieve certain performance targets. And, once again, charges of failure to design and implement effective internal controls played a prominent role. After the SEC began its investigation, KHC restated its financials, reversing “$208 million in improperly-recognized cost savings arising out of nearly 300 transactions.” According to Anita B. Bandy, Associate Director of Enforcement, “Kraft and its former executives are charged with engaging in improper expense management practices that spanned many years and involved numerous misleading transactions, millions in bogus cost savings, and a pervasive breakdown in accounting controls. The violations harmed investors who ultimately bore the costs and burdens of a restatement and delayed financial reporting….Kraft and its former executives are being held accountable for placing the pursuit of cost savings above compliance with the law.” KHC agreed to pay a civil penalty of $62 million. Interestingly, this case comes on the heels of an earnings management case brought by the SEC against Healthcare Services Group, Inc. for alleged failures to properly accrue and disclose litigation loss contingencies.


The Real Effects of Mandatory CSR Disclosure on Emissions: Evidence from the Greenhouse Gas Reporting Program

Lavender Yang is a PhD candidate in Accounting, Nicholas Z. Muller is the Lester and Judith Lave Professor of Economics, Engineering, and Public Policy, and Pierre Jinghong Liang is Professor of Accounting, all at Carnegie Mellon University Tepper School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

As economist John Kenneth Galbraith remarked in a 1994 interview, knowing someone is watching can make a difference in the behavior of the watched.  It is not surprising, then, that societies seek to use monitoring and disclosure as tools to encourage desirable business practices, especially in the area of social responsibility such as businesses’ environmental impacts. Large-scale, mandatory Corporate Social Responsibility (CSR) reporting has been gaining momentum in recent policy debates. Back in 2020, a Commissioner of the Securities and Exchange Commission (SEC)  argued for a move toward standardized Environmental, Social, and Governance (ESG) disclosures. As discussed in this forum, the Biden administration issued an executive order in January 2021 arguing for climate change-related disclosure in all economic sectors of the United States economy.

In a recent paper, we offer causal evidence regarding the impact of mandatory CSR-relevant disclosure on firms’ emission behavior. Specifically, we investigate whether a nation-wide mandatory reporting and disclosure requirement, the Greenhouse Gas Reporting Program (GHGRP), for plant level carbon dioxide (CO2) emissions, a principal greenhouse gas (GHG), affects subsequent emissions. To answer this research question, we exploit differential disclosure requirements under the GHGRP. This regulation requires all facilities in the U.S. that emit more than 25,000 tons of CO2 per year to report their CO2 emissions to EPA who, in turn, release the data to the public in a comprehensive and accessible manner under GHGRP. Our research design exploits a unique data opportunity. For the U.S. utility sector, both pre- and post-GHGRP emissions data are available for all power plants (including those emitting less than the 25,000 ton threshold). This context facilitates the use of quasi-experimental econometric designs to assess the causal effect of the GHGRP disclosure on firm behavior. Our specifications determine whether plants whose CO2 emission reports are required to be publicly disclosed through the GHGRP behave differently than those not subjected to the program.  We hypothesize a reduction in the emission rates for plants covered by the GHGRP relative to those not covered.


Going Public Report: First Half 2021

Robert Freedman, Amanda Rose and Ran Ben-Tzur are partners at Fenwick & West LLP. This post is based on a Fenwick memorandum by Mr. Freedman, Ms. Rose, Mr. Ben-Tzur, and James D. Evans.

A Record-Breaking First Half of 2021

Technology and life sciences companies continued to go public at an extraordinary rate in the first half of 2021 via initial public offerings, de-SPAC mergers and direct listings.


IPOs outpaced the second half of 2020, which was previously the most active six months for the space since we began tracking in 2012. In H1 2021, there were 76 technology and 66 life sciencescompany IPOs in the U.S., compared to 48 and 65 in the second half of 2020, respectively.

With 32 IPOs in Q1 and 44 in Q2, technology IPO momentum built throughout the first half of the year. Life sciences offerings increased slightly throughout the first half of the year, with 31 IPOs in Q1 and 35 in Q2, still by far exceeding H1 2020 and several prior years’ offerings.

Mega offerings marked the first half of the year, with 17 companies raising proceeds of more than $1 billion, including one life sciences IPO. Technology IPOs saw deal sizes increase generally. Approximately 93% of IPOs raised more than $100 million in the first half of 2021, versus only 83% in
the second half of 2020. Almost 21% of tech IPOs raised more than $1 billion in H1, the same as the second half of 2020.


Testimony By Chair Gensler Before the United States Senate Committee on Banking, Housing, and Urban Affairs

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Good morning, Chairman Brown, Ranking Member Toomey, and members of the Committee. I’m honored to appear before you today for the first time as Chair of the Securities and Exchange Commission. I’d like to thank you for your support in my confirmation this spring. As is customary, I will note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe’s capital markets. [1] This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share. [2]

Furthermore, companies and investors use our capital markets more than market participants in other economies do. For example, debt capital markets account for 80 percent of financing for non-financial corporations in the U.S. In the rest of the world, by contrast, nearly 80 percent of lending to such firms comes from banks. [3]

Our capital markets continue to support American competitiveness on the world stage because of the strong investor protections we offer.


Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze

Angel Tengulov is an assistant professor of finance at the University of Kansas School of Business. This post is based on a recent paper, forthcoming in the Journal of Financial Economics, by Mr. Tengulov; Franklin Allen, professor of finance and economics at Imperial College Business School; Eric Nowak, professor of financial management and accounting at Università della Svizzera italiana (USI) and Swiss Finance Institute (SFI); and independent researcher Marlene Haas PhD.

On October 26, 2008, Porsche announced a largely unexpected takeover plan for Volkswagen (VW). The resulting short squeeze in VW’s stock briefly made it the most valuable listed company in the world. In our paper, forthcoming in the Journal of Financial Economics, we argue that this was a manipulation designed to save Porsche from insolvency and the German laws against this kind of abuse were not effectively enforced. Using hand-collected data, our paper provides the first rigorous study of the Porsche-VW squeeze and shows that it significantly impeded market efficiency. Preventing this kind of manipulation in the European Union is important because without efficient securities markets, the EU’s major project of the Capital Markets Union cannot be successful.

At the height of the financial crisis on Monday, October 27, 2008, VW’s stock price rose dramatically and surged past EUR 1,005 per share on Tuesday, October 28, 2008, from a close the previous Friday of EUR 211 per share. This briefly made VW the most valuable listed company globally in terms of market capitalization. Our paper explores the degree to which this price increase was the result of an unexpected press release that Porsche Automobil Holding SE (Porsche SE or Porsche) made on Sunday, October 26, 2008. On the evening of this Sunday, Porsche announced a domination plan for VW. The rise in VW’s stock price caused a short squeeze and turned out to be very advantageous to Porsche. Using hand-collected data and information from court proceedings in Germany, the paper estimates that the rise in VW’s stock price resulted in a profit of at least EUR 6 billion and allowed Porsche to avoid bankruptcy.


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