Diversifying the Boardroom: 2022 Disclosures

Posted by David A. Bell, Dawn Belt and Ron C. Llewellyn, Fenwick & West LLP, on
Thursday, May 11, 2023
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David A. Bell and Dawn Belt are partners and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

The intense focus on board diversity from a variety of stakeholders over the last several years has spurred many companies to examine the composition of their boards and to take action to diversify their boardrooms. While the boards of U.S. companies have slowly diversified over time, the pace of diversification has accelerated since 2018 as a result of legislation and other initiatives, particularly following the calls for racial justice in 2020.

In this post we examine these recent trends in board diversity and other developments in 2022, with a particular focus on efforts to increase racial and ethnic board diversity. In doing so, we examine the board racial/ethnic diversity disclosure practices and resulting demographic data gleaned from the companies in the Standard & Poor’s 100 Index (S&P 100) and the technology and life sciences companies included in the 2022 Fenwick-Bloomberg Law Silicon Valley 150 List (SV 150). For the 2022 proxy season, which generally ran from July 1, 2021 through June 30, 2022, 146 of the SV 150 companies filed proxy statements.

Key Takeaways Include:

  • All of the S&P 100 and 83% of the SV 150 companies provided racial/ethnic board diversity
    data in their proxy statements for the 2022 proxy season.
  • The majority of companies in each group disclosed the racial/ethnic composition of their
    boards by specific racial/ethnic categories.
  • Racial and ethnic minorities have experienced recent gains in board representation, but still
    face many of the same challenges encountered by women.
  • One can extrapolate even from the limited number of companies that disclose racial and
    ethnic diversity information that both the S&P 100 and the SV 150 are significantly far from
    proportional board representation for racial and ethnic minorities compared to the national
    workforce at-large.
  • The demand for greater diversity on U.S. corporate boards and related disclosure of such
    information will likely continue until equitable gender, racial and ethnic representation is
    achieved.

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Racism and Systemic Risk

Posted by Cary Martin Shelby (Washington and Lee University), on
Thursday, May 11, 2023
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Cary Martin Shelby is a Professor of Law at Washington and Lee University School of Law. This post is based on her recent paper, forthcoming in the Northwestern University Law Review.

News of colossal bank failures have threatened economic stability once again. In March 2023, Silicon Valley Bank (“SVB”) failed after a myriad of factors facilitated a large-scale bank run of its underlying deposits. While SVB’s failure does not seem to have risen to the level of a systemic disruption, it has certainly called into question the Financial Stability Oversight Council’s (“FSOC”) ability to continually effectuate its mission to identify and assess emerging threats to U.S. financial stability. FSOC is comprised of the chairpersons of major U.S. regulators. It was created by Congress shortly following the financial crisis of 2007-09 (the “Great Recession”) to protect against the ever-expanding categories of activities and institutions that could generate and transmit systemic risk. Such risk generally encompasses “the risk of a breakdown of an entire system rather than simply the failure of individual parts.” Even still, a recent report found that FSOC failed to act within their regulatory power to subject SVB to additional oversight despite its knowledge that the bank held excessive levels of uninsured deposits.

I have recently authored an article entitled Racism and Systemic Risk (forthcoming in Northwestern University Law Review), which urges FSOC to recognize yet an additional threat to financial stability that has repeatedly aggravated notable systemic risk disruptions—the insidious virus of racism. Scholars have previously insisted that the private sector acknowledge its contribution to systemic racism, which encompasses deeply entrenched inequities that are intertwined within institutional structures. This article extends these analyses by demonstrating the interconnectedness between racism and systemic risk that has consistently floated past the radar of regulators. It does so through my novel “Systemic Risk and Racism Model” provided below, which examines how racism has exacerbated recent systemic risk disruptions across every stage of their life cycle continuums. The Great Recession as well as climate change, provide quintessential case studies of recent disruptions to filter through this model, particularly since FSOC has officially recognized climate change as a threat to financial stability in 2021. While this post focuses on the Great Recession, my full article provides a robust analysis of how climate change could similarly be filtered through this model.

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Q4 2022 Stewardship Activity Report

Posted by Benjamin Colton and Michael Younis, State Street Global Advisors, on
Wednesday, May 10, 2023
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Benjamin Colton is Global Head of Asset Stewardship, and Michael Younis is Vice President of Asset Stewardship at State Street Global Advisors. This post is based on their SSGA memorandum.

This post reviews State Street Global Advisors’ stewardship activities, including related efforts in the Asia Pacific region with a focus on the Australian proxy voting season, case studies of our social stewardship activities, and an overview of executive remuneration and succession planning. It also outlines thematic stewardship priorities for 2023.

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Financing Sustainable Change: What Does Good Governance Look Like?

Posted by Robert G. Eccles (Oxford University) and Vanessa Havard-Williams (Linklaters LLP), on
Wednesday, May 10, 2023
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Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School and Vanessa Havard-Williams is partner and Global Head of Environment & Climate Change at Linklaters LLP. This post is based on their FCA 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 Value to All Stakeholders? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and 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.

In February 2023 the UK Financial Conduct Authority (FCA) published “Discussion Paper DP23/1: Finance for positive sustainable change: governance, incentives and competence in regulated firms.” The purpose of the DP is “to encourage an industry‑wide dialogue on firms’ sustainability‑related governance, incentives, and competencies. In a field where there are many initiatives taking place, our aim is to help narrow this field and help with highlighting good, evolving practices if finance is to deliver on its potential to drive positive sustainable change.” The focus of the DP is “regulated firms” (i.e., financial institutions of various kinds) in the UK and comments are due by May 10, 2023.

It is our view that the ideas and recommendations made in this paper have broader applicability than simply UK-based financial institutions and their regulators. Addressing climate change and integrating sustainability more generally into corporate strategy is a challenge facing companies and financial institutions all over the world. Thus, it is useful to put this DP into a broader context by acknowledging a multitude of incipient sustainability reporting standards. It is also important to acknowledge the increasingly politicized nature of sustainability, especially in the U.S. Without the appropriate governance structures and processes, incentives, and the necessary competencies from the board down to middle management, it will be impossible for any organization to deal with the complex field of sustainability reporting standards while simultaneously being caught between opposing political forces.

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Board Actions to Boost Corporate Sustainability

Posted by Laura Sanderson, Sarah Galloway and Kurt Harrison, Russell Reynolds Associates, on
Tuesday, May 9, 2023
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Laura Sanderson co-leads the Board and CEO Advisory Partners in Europe and Sarah Galloway and Kurt Harrison are co-heads of Global Sustainability Practice at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita.

How can boards boost corporate sustainability? Often, when boards decide to increase their focus on sustainability, they struggle to agree on what steps to take and how much effort to put into those first actions.

To help guide these decisions, we’ve examined our research into sustainable leadership and defined 10 actions for boards. They show how boards can build the culture, purpose, strategy, risk alignment, structure, and processes to enhance corporate sustainability.

What’s more, we’ve also found that quickly going all-in on these efforts results in stronger long-term performance.

When assessing how organizations developed their diversity, equity, and inclusion (DE&I) efforts—a critical element of corporate sustainability—we learned that most companies take a linear approach over five to 10 years. But a small group invested heavily upfront. These fast-track companies quickly outpaced traditional ones, reaching maturity in about half the time.

The lesson for boards? Be bold.

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Racial Diversity Exposure and Firm Responses Following the Murder of George Floyd

Posted by Rafael Copat (University of Texas at Dallas) , on
Tuesday, May 9, 2023
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Rafael Copat is an Assistant Professor of Accounting at the University of Texas at Dallas. This post is based on a recent paper forthcoming in the Journal of Accounting Research by Professor Copat, K. Ramesh, Herbert S. Autrey Professor of Accounting at Rice University; Karthik Balakrishnan, Vernon S. Mackey, Jr. & Verne F. Simons Distinguished Associate Professor of Accounting at Rice University; and Daniela De la Parra, Assistant Professor of Accounting at the University of North Carolina Chapel Hill. 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; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and 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.

Diversity, equity and inclusion (DEI) is a highly debated topic in the corporate world these days. Although research has provided only a limited understanding of the impact of DEI on firm value, particularly with regards to race and ethnicity, both firms and regulators have taken actions to expand corporate DEI initiatives. For example, 46% of S&P 500 firms include some DEI metric in their incentive plans (Semler Brossy, 2022). In addition, ISS currently recommends a vote against the chair of the nominating committee for Russell 3000 firms that have no racial diversity on their board. Furthermore, NASDAQ now requires most listed companies to have at least one board member identified as belonging to an “underrepresented minority” or explain why they failed to do so.

In our study, forthcoming at the Journal of Accounting Research and available on SSRN, we examine the valuation effects of a firm’s exposure to race-related diversity issues. We refer to such exposure as “diversity exposure.” We also explore how firms respond to social pressure for racial justice, and what the economic consequences of these responses are.

Our analyses are centered around the murder of George Floyd, a crime that triggered social unrest across the United States. After George Floyd’s murder, many firms revealed their exposure to racial diversity issues in prominent disclosure channels. We employ a novel text-based methodology to extract a measure of corporate diversity exposure from transcripts of conference calls. We find that roughly 29% of all firms in our sample have a diversity-related discussion in at least one conference call following the murder of George Floyd. More importantly, as shown in Figure 1 below, we observe a significant increase in the percentage of sentences that contain diversity terms immediately after the murder.

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North America Proxy Voting and Engagement Guidelines

Posted by Benjamin Colton, State Street Global Advisors, on
Monday, May 8, 2023
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Benjamin Colton is Global Head of Asset Stewardship at State Street Global Advisors. This post is based on his SSGA memorandum.

State Street Global Advisors’ Proxy Voting and Engagement Guidelines [1] for North America outline our approach to voting and engaging with companies listed on stock exchanges in the United States and Canada. These Guidelines complement and should be read in conjunction with State Street Global Advisors’ Global Proxy Voting and Engagement Principles, which outline our overall approach to voting and engaging with companies, and State Street Global Advisors’ Conflicts Mitigation Guidelines, which provide information about managing the conflicts of interests that may arise through State Street Global Advisors’ proxy voting and engagement activities.

State Street Global Advisors’ Proxy Voting and Engagement Guidelines for North America (United States [“US”] and Canada) address our market-specific approaches to topics including directors and boards, accounting and audit related issues, capital structure, reorganization and mergers, compensation, and other governance-related issues.

When voting and engaging with companies in global markets, we consider market-specific nuances in the manner that we believe will most likely protect and promote the long-term economic value of client investments. We expect companies to observe the relevant laws and regulations of their respective markets, as well as country specific best practice guidelines and corporate governance codes. We may hold companies in some markets to our global standards when we feel that a country’s regulatory requirements do not address some of the key philosophical principles that we believe are fundamental to our global voting principles.

In our analysis and research into corporate governance issues in North America, we expect all companies to act in a transparent manner and to provide detailed disclosure on board profiles, related-party transactions, executive compensation, and other governance issues that impact shareholders’ long-term interests. Further, as a founding member of the Investor Stewardship Group (“ISG”), we proactively monitor companies’ adherence to the Corporate Governance Principles for US listed companies (the “Principles”). Consistent with the “comply-or-explain” expectations established by the Principles, we encourage companies to proactively disclose their level of compliance with the Principles. In instances of non-compliance, and when companies cannot explain the nuances of their governance structure effectively, either publicly or through engagement, we may vote against the independent board leader.

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Superstar CEOs and Corporate Law

Posted by Assaf Hamdani and Kobi Kastiel (Tel Aviv University) , on
Monday, May 8, 2023
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Assaf Hamdani is Professor of Law at Tel Aviv University; Kobi Kastiel is Professor of Law at Tel Aviv University, and Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on their recent article, forthcoming in the Washington University Law Review. Related research from the Program on Corporate Governance includes How Twitter Pushed Stakeholders Under The Bus (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo.

Larger-than-life corporate leaders, who can move fast and disrupt entrenched players, are often perceived as having the vision, superior leadership, or other exceptional qualities that make them uniquely valuable to their corporation. While the business press, management experts, and financial economists have long studied these “superstar” CEOs, the legal literature has largely overlooked this phenomenon. In our article, Superstar CEOs and Corporate Law (forthcoming in Washington University Law Review), we develop a framework to explore the challenges that superstar CEOs pose for corporate law doctrine and scholarship.

Elon Musk is often described as a visionary, leading Tesla in its disruption of the car industry to become the world’s most valuable car manufacturer.  He has also repeatedly pushed the boundaries of corporate law, being the direct target of multiple derivative lawsuits. One lawsuit attacks Tesla’s 2016 acquisition of SolarCity—a public company in which Musk and his brother were the largest shareholders.  Another challenges Musk’s unprecedented pay arrangement which, according to some estimates, could provide him with up to $56 billion.  The third lawsuit accuses Tesla’s directors of abdicating their responsibility to monitor Musk’s use of his Twitter account, which prompted the SEC to intervene.

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Delaware M&A: Spring 2023

Posted by Andre G. Bouchard, Kyle T. Seifried, Laura C. Turano, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Sunday, May 7, 2023
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Andre Bouchard, Kyle Seifried, and Laura C. Turano are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on their Paul Weiss 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

Claims That SPAC Directors, Sponsors Breached Fiduciary Duties Survive Motions to Dismiss in Pair of Opinions

In two opinions by Vice Chancellor Will, Delman v. GigAcquisitions3, LLC and Laidlaw v. GigAcquistions2, LLC., the Delaware Court of Chancery held on motions to dismiss that it was reasonably conceivable that the directors of the respective special purpose acquisition company (SPAC) and their sponsors breached their fiduciary duties by disloyally depriving the SPAC public stockholders of information material to their decision on whether to redeem their shares in connection with the applicable deSPAC transaction. In both opinions, the court evaluated the claims under the stringent entire fairness standard. The SPAC’s sponsor qualified as a controlling stockholder due to its control and influence over the SPAC, even though it held a minority interest, and, in both opinions, the court concluded that the SPAC directors lacked independence from the sponsor. In addition, in both opinions, entire fairness review was warranted based on the divergent interests between the sponsor and public stockholders that are inherent in the SPAC structure, including the sponsor’s unique incentive to take a “bad deal” over a liquidation of the SPAC and returning the public stockholders’ investment. The opinions provide important key takeaways for sponsors, directors and investors in Delaware SPACs. For more on the Delman opinion, see here.

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Diversity and Inclusion—an Investor’s Handbook

Posted by Diana Lee, AllianceBernstein, on
Saturday, May 6, 2023
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Diana Lee is Director of Corporate Governance and an ESG Analyst for Responsible Investment team at AllianceBernstein. This post is based on her AllianceBernstein memorandum.

Managing a workforce has always been vital for business success. In today’s increasingly diverse society, successful people management is critical for companies seeking to retain talent and cultivate positive customer relationships.

In recent years, diversity, equity and inclusion (DEI) policies have taken on added importance in modern work environments. However, DEI is sometimes viewed as a “softer” policy topic that doesn’t factor into investor outcomes.

We think that’s a mistake.

Strong DEI policies can provide companies with a competitive edge, especially in a tight labor market where the fight for talent is fierce and a favorable corporate culture can make a difference in overcoming business hurdles.

Based on our engagement with investment management companies and former DEI executives across many sectors, we’ve mapped out key criteria that investors should look for when evaluating a company’s DEI program. The research presented here is US-centric and should be viewed with an awareness of regional nuance.

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