Global Corporate Credit ESG Engagement Report

Posted by Jonathan Bailey, Savannah Irving, Neuberger Berman LLC, on
Saturday, February 4, 2023
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Jonathan Bailey is a Managing Director and Head of ESG Investing, and Savannah Irving is an Associate at Neuberger Berman LLC. This post is based on their Neuberger Berman memorandum.

In recent years a variety of market disrupting events have underscored the importance of active ownership and the analysis of material environmental, social and governance (ESG) factors in fundamental credit research as well as investment decision-making. In our view, asset managers who leverage their relationships with issuers are best positioned to manage these ESG risks and take advantage of ESG opportunities. As highlighted in our prior ESG engagement reports, Neuberger Berman views direct issuer engagement as a critical tool to mitigate portfolio risks while generating long-term sustainable returns.

During the past year our established relationships with issuers in developed and emerging markets enabled us to have meaningful engagements with a number of management teams. We engaged on key ESG issues such as climate change, community relations and human capital management. While these ESG issues present varying challenges and complexities, both transparency and accountability are key determinants of the success of our engagements with corporate credit issuers. We encourage issuer alignment with external frameworks such as the United Nations Sustainable Development Goals (UN SDGs), the Task Force on Climate-Related Financial Disclosures (TCFD) and the SASB Standards to improve the transparency of issuers’ credit profiles. We also assess the capability of management teams to set and successfully execute sustainability targets, as evidenced in the emerging practice of linking ESG Key Performance Indicators (KPIs) to executive variable compensation with a focus on enhancing accountability.

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Investing in Influence: Investors, Portfolio Firms, and Political Giving

Posted by Raymond Fisman (Boston University), on
Friday, February 3, 2023
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Raymond Fisman is Slater Family Professor in Behavioral Economics at Boston University. This post is based on a recent paper by Professor Fisman, Marianne Bertrand, Matilde Bombardini, Francesco Trebbi, and Eyub Yegen. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, and Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the Forum here) and The Specter of the Giant Three (discussed on the Forum here) both by Lucian Bebchuk and Scott Hirst; and The Limits of Portfolio Primacy (discussed on the Forum here) by Roberto Tallarita.

Over the past seventy years, institutional investors’ ownership of publicly traded U.S. companies has increased dramatically, from just 6 percent in 1950 to 65 percent in 2017. As a result, a large fraction of the U.S. economy is now in the hands of a relatively small number of asset management companies. The “Big Three” of BlackRock, Vanguard, and State Street Global Investors, for example, held more than 20 percent of S&P 500 shares in 2017 as compared to 5 percent in 1998.

This sea change in the ownership of U.S. corporations has given rise to a discussion among academics and policymakers over its consequences. In “Investing in Influence,” we focus on a particular concern over the rise of institutional shareholders: has the concentration of ownership also led to a concentration of political influence?

Researchers – including ourselves – have traditionally assumed that companies’ political strategies were simply an extension of their profit-maximizing business strategies. Under this view of the world, firms make campaign donations or lobby regulators to secure laws and regulations that are good for company profits. Yet a vast body of research on corporate governance has shown that companies’ goals are driven not by a single-minded focus on corporate profits, but rather a collection of disparate interests of those who wield control over the firm’s resources.

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Weekly Roundup: January 27-February 2, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, February 3, 2023

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This roundup contains a collection of the posts published on the Forum during the week of January 27-February 2, 2023

Preparing for the 2023 Proxy Season

Posted by David M. Lynn, Scott Lesmes, and John Hensley, Morrison & Foerster LLP, on Friday, January 27, 2023
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Update on ESG, Stakeholder Governance, and Corporate Purpose

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Saturday, January 28, 2023
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Delaware Courts Provide Guidance on Incumbent Board Enforcement of Advance Notice Bylaws

Posted by Edward B. Micheletti and Ryan M. Lindsay, Skadden, Arps, Slate, Meagher & Flom LLP, on Sunday, January 29, 2023
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EU Finalizes ESG Reporting Rules with International Impacts

Posted by Thibault Meynier, Sarah H. Mishkin, and Matthew Triggs, Sullivan & Cromwell LLP, on Monday, January 30, 2023
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The controversy over proxy voting: The role of asset managers and proxy advisors

Posted by Jan Krahnen (Goethe-University Frankfurt), Arnoud Boot (University of Amsterdam), Lemma Senbet (University of Maryland), and Chester Spatt (Carnegie Mellon’s Tepper School of Business) , on Monday, January 30, 2023
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Voting Rights in Corporate Governance: History and Political Economy

Posted by Sarah C. Haan (Washington and Lee University School of Law), on Tuesday, January 31, 2023
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​Antitrust and ESG

Posted by Damian G. Didden, Wachtell, Lipton, Rosen & Katz, on Tuesday, January 31, 2023
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Conflicting Fiduciary Duties and Fire Sales of VC-backed Start-ups

Posted by Bo Bian (University of British Columbia, Sauder School of Business), Yingxiang Li (University of British Columbia, Sauder School of Business), and Casimiro A. Nigro (Goethe University, CAS on the Foundations of Law and Finance), on Wednesday, February 1, 2023
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Where is the World Going in 2023 and Beyond?

Posted by Paul Keary, Ursula Burns, and Sparky Zivin, Teneo, on Wednesday, February 1, 2023
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​Delaware M&A Updates

Posted by Andrew G. Gordon, Ross A. Fieldston and Laura C. Turano, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Thursday, February 2, 2023
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ESG Investing After the DOL Rule on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”

Posted by Max M. Schanzenbach (Northwestern Pritzker School of Law), and Robert H. Sitkoff (Harvard Law School), on Thursday, February 2, 2023
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ESG Investing After the DOL Rule on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”

Posted by Max M. Schanzenbach (Northwestern Pritzker School of Law), and Robert H. Sitkoff (Harvard Law School), on
Thursday, February 2, 2023
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Robert H. Sitkoff is Austin Wakeman Scott Professor of Law and John L. Gray Professor of Law at Harvard Law School, and Max M. Schanzenbach is Seigle Family Professor of Law at Northwestern Pritzker School of Law. 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; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Robert H. Sitkoff and Max M. Schanzenbach.

Summary of the Rule

In late 2022, the Department of Labor under President Biden promulgated a new rule on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” superseding the Department’s 2020 rule promulgated under President Trump. Numerous media reports suggested that the 2022 Biden Rule permits or even encourages ESG investing, in contrast to the 2020 Trump Rule, which was reported to be hostile to ESG investing. These reports are wrong. This summary aims clarify the effect of the Biden Rule and what has changed from the Trump Rule.

In brief, the 2022 Biden Rule largely reaffirms the Department of Labor’s longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits. Subject to a few nuanced changes of limited practical import, the Biden Rule is largely consistent with the 2020 Trump Rule and earlier regulatory guidance.

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​Delaware M&A Updates

Posted by Andrew G. Gordon, Ross A. Fieldston and Laura C. Turano, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Thursday, February 2, 2023
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Andrew G. Gordon, Ross A. Fieldston and Laura C. Turano are Partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Gordon, Mr. Fieldston, Ms. Turano, and Jaren Janghorbani. This post is part of the Delaware law series; links to other posts in the series are available here.

Court of Chancery Holds Stockholder Is Not Third-Party Beneficiary Under Merger Agreement and Buyer Was Not Controller

In Crispo v. Musk, the Delaware Court of Chancery, in an opinion by Chancellor McCormick, held that the plaintiff stockholder of Twitter, Inc. was not a third-party beneficiary under the company’s merger agreement with Elon Musk and therefore lacked standing to sue for specific performance ordering Musk to close the merger. In so holding, the court emphasized that Delaware courts are reticent to recognize stockholders as third-party beneficiaries to corporate contracts due to Delaware law’s deference to the board’s authority to manage the corporation and its litigation assets and that other, limited circumstances where the courts have found stockholders to be third-party beneficiaries to merger agreements were clearly distinguishable. In addition, the court dismissed fiduciary duty claims against the buyers, Elon Musk and his affiliates, holding that they did not constitute a control group where Musk individually owned less than 10% of the company’s stock, the alleged group owned 26.8% of the stock, Musk did not exercise his rights under the merger agreement to veto board action and only had an alleged personal relationship with one of the 11 board members.

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Where is the World Going in 2023 and Beyond?

Posted by Paul Keary, Ursula Burns, and Sparky Zivin, Teneo, on
Wednesday, February 1, 2023
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Paul Keary is CEO, Ursula Burns is Chair, and Sparky Zivin is a Senior Managing Director at Teneo. This post is based on their Teneo report.

Foreword

The role of today’s CEO is evolving, paralleling the shifting global financial, geopolitical and social landscapes in which they operate. Teneo is fortunate to work with and advise leading CEOs around the world as they navigate this environment.

As the calendar turns from a tumultuous 2022 to the uncertainties of 2023, we surveyed more than 300 global public company CEOs and institutional investors representing approximately $3 trillion USD of combined company and portfolio value to capture views on key issues for the coming year. From the global macroeconomic outlook to innovation and emerging technologies, deglobalization and its knock-on effects, ESG and talent, perspectives are, in many ways, aligned. For example, 86% of CEOs and investors believe that deglobalization is a reality, with almost half of CEOs acknowledging that this will have a significant impact on their companies.

However, tensions appear in several key—and perhaps unexpected—areas, highlighting possible vulnerabilities and opportunities for business leaders in the year ahead. For instance, CEOs and investors have widely divergent views on the economic outlook for the first half of 2023. While 73% of leading CEOs expect worsening conditions in 2023, 76% of investors expect conditions to improve.

This represents just a sampling of the insights highlighted in this report. We hope that the findings prove useful as you plan your strategy for 2023 and beyond.

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Conflicting Fiduciary Duties and Fire Sales of VC-backed Start-ups

Posted by Bo Bian (University of British Columbia, Sauder School of Business), Yingxiang Li (University of British Columbia, Sauder School of Business), and Casimiro A. Nigro (Goethe University, CAS on the Foundations of Law and Finance), on
Wednesday, February 1, 2023
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Bo Bian is an Assistant Professor in Finance at the University of British Columbia; Yingxiang Li is a PhD Candidate in Finance at the University of British Columbia; and Casimiro A. Nigro is an Assistant Professor in Law and Finance at Goethe University. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.

Introduction

In 2013 the Delaware Court of Chancery’s came to a final decision regarding the by-now-famous Trados case. Trados involved claims against the board of a startup company that was sold in a merger transaction.  Plaintiffs, who held common stock of the company, alleged that board members affiliated with the company’s VC investors were conflicted in approving the transaction.  The VC investors held preferred stock that provided for a “liquidation preference” in the event of a company sale.  Because of that liquidation preference, the VC investors received all the merger consideration while common shareholders received nothing. In an initial opinion, the court denied defendants summary judgment and determined that the claims should be evaluated under the plaintiff-friendly fairness standard. (See In Re Trados Inc. Shareholder Litigation, 2009 WL 2225958 (Del Ch. 2009.)) In a subsequent trial court opinion, the court confirmed the applicability of the fairness standard, but ultimately ruled in favor of the defendants because the common stock were likely to have no value – making zero a fair price. (See In re Trados Incorporated Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013.)

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​Antitrust and ESG

Posted by Damian G. Didden, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 31, 2023
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Damian G. Didden is a Partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Didden, Adam Emmerich, Jonathan Moses, and Sabastian Niles. Related research from the Program on Corporate Governance includes Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

As boards continue to evaluate how environmental, social and governance (“ESG”) considerations factor into corporate operations, some lawmakers and regulators have raised potential antitrust concerns about coordinated efforts.  For example, several U.S. Senators sent letters to law firms admonishing them to advise clients of increased congressional scrutiny of “institutionalized antitrust violations being committed in the name of ESG.”  And, a group of state attorneys general inquired whether an investor-driven initiative on climate risks called Climate Action 100+ implicates antitrust laws.  FTC Chair Lina Khan opined last month in The Wall Street Journal that ESG benefits are no defense for otherwise illegal mergers.

As we have previously explained (most recently here), a board’s decision to take account of ESG factors is neither a corporate charitable activity nor anticompetitive.  Quite the opposite.  It reflects a business judgment that taking account of ESG matters, such as long-term sustainability, can create value and reduce risk for all company stakeholders.  Some regulators in the United States have recognized that ESG considerations and antitrust principles are not in conflict.  For example, a recent letter signed by seventeen state AGs argues that mutual support of climate policies by investment fund managers does not violate the Sherman Act.  Antitrust regulators in the United Kingdom and the European Union, moreover, have offered specific guidance on applying antitrust laws to sustainability agreements and similar multi-firm conduct.  As these regulators correctly recognize, in most circumstances, antitrust principles should not be a serious impediment to incorporating ESG into decision-making that is otherwise in the corporate interest.

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Voting Rights in Corporate Governance: History and Political Economy

Posted by Sarah C. Haan (Washington and Lee University School of Law), on
Tuesday, January 31, 2023
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Sarah C. Haan is Class of 1958 Uncas and Anne McThenia Professor of Law at Washington and Lee University School of Law. This post is based on her recent paper, forthcoming in the Southern California Law Review. 

Voting rights became the subject of sharp legal wrangling in American political elections when the U.S. Supreme Court decided Bush v. Gore in 2000, and again thirteen years later with its decision in Shelby County v. Holder. The result has been legal action, academic debate, and media attention focused on Americans’ voting rights.

Something similar has been happening to shareholder voting rights in the United States, though it has garnered much less attention. Many aspects of shareholder voting rights are now in flux, with major changes involving dual-class structures, ballot access, broker voting, and the universal proxy. Behind the scenes, asset managers are utilizing pass-through and client-directed voting mechanisms to transfer direct voting power back to their clients, a trend that threatens to shift power in companies in close votes.

The current moment has an antecedent in the original Gilded Age—the last major period in which shareholder voting rights experienced transformative change. In a new article, I connect the old Gilded Age to our current New Gilded Age and shed new light on an old mystery in corporate law history—what explains the rise of one-share-one-vote in American corporate law? One-share-one-vote was not the dominant voting rule in the U.S. at the start of the nineteenth century, but had become dominant by that century’s end.

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The controversy over proxy voting: The role of asset managers and proxy advisors

Posted by Jan Krahnen (Goethe-University Frankfurt), Arnoud Boot (University of Amsterdam), Lemma Senbet (University of Maryland), and Chester Spatt (Carnegie Mellon's Tepper School of Business) , on
Monday, January 30, 2023
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Jan Krahnen is Professor of Corporate Finance at the Goethe-University Frankfurt; Arnoud Boot is Professor of Corporate Finance and Financial Markets at the University of Amsterdam; Lemma Senbet is William E. Mayer Chair Professor of Finance at the University of Maryland; and Chester Spatt is Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon’s Tepper School of Business. This post is based on their statement on proxy voting. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here) by Lucian A. Bebchuk and Scott Hirst.

Abstract

In this statement, we assess the role and power of proxy advisors and asset managers in corporate governance, an industry that is characterized by a limited number of voting advisory firms (ISS and Glass-Lewis), accompanied by the growing dominance of index investing in an industry with a few large asset managers, such as BlackRock, Vanguard, and State Street. We discuss the business model of proxy advisory firms and contrast its objectives with those of asset managers in the context of the informational screening/filtering role and voting analysis. This discussion concludes with a set of policy recommendations, such as: (a) requiring disclosure of advisory firms’ other businesses, (b) increasing the transparency of the business model of proxy advisory firms, particularly around the rationale for their general guidelines for voting recommendations, (c) ensuring that the regulatory burden on proxy advisory firms does not discourage entry, and (d) increasing the regulatory oversight of the voting process with a view to incorporating investor preferences in proxy voting.

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