The Activism Vulnerability Report

Posted by Jason Frankl, and Brian Kushner, FTI Consulting, on

Wednesday, September 27, 2023

Activism, ETF, M&A, Universal Proxy Card
More from: Brian Kushner, Jason Frankl, FTI Consulting

Jason Frankl and Brian G. Kushner are Senior Managing Directors at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Frankl and Kushner Leo E. Strine, Jr.

Introduction

R-E-S-P-E-C-T … One year down in UPC!

UPC, also known as Universal Proxy Card, has surely garnered “respect” from both issuers and activists alike. FTI Consulting’s Activism and M&A Solutions team touches on this, as well as how a culture change in Japan is igniting a surge of activism, in our September 2023 Activism Vulnerability Report. This iteration presents our 2Q23 Activism Vulnerability Screener results, as well as our commentary on notable trends in the world of shareholder activism.

activism vulnerability report industry movers sep 23

During the first half of 2023, financial institutions faced their most challenging period in more than a decade, even calling into question the viability of the regional banking model. At the same time, activist campaigns targeting financial institutions increased by more than 60% year-over-year during the first half of the year. By the end of 2Q23, fundamental concerns for the sector waned with the Regional Banks and Savings Banks industries appearing substantially less vulnerable in our rankings. By contrast, Utilities’ vulnerability increased dramatically, moving from number 14 last quarter (out of 36 industries) to the industry most vulnerable to activism. Additionally, industries in the Healthcare Services sector, including the Life Sciences, Pharmaceuticals and Health Services industries, all increased in vulnerability during 2Q23.

Regulatory Intensity and Firm-Specific Exposure

Posted by Joseph Kalmenovitz (University of Rochester), on

Wednesday, September 27, 2023

political economy, RegIn, regulation, SGA
More from: Joseph Kalmenovitz

Joseph Kalmenovitz is an Assistant Professor of Finance at the Simon Business School, University of Rochester. This post is based on his recent paper forthcoming in the Review of Financial Studies.

Summary

Regulation is a fundamental economic concept. It triggers heated political debates, and it is also constantly on the minds of business owners, who cite regulation as a major factor that affects capital structure, employment, and innovation. Despite its importance, there is surprisingly little research on the economics of regulation. Of course, many studies focus on cost-benefit analyses of specific rules. But little is known on how regulation as a whole impacts business decisions. In particular, missing is a rigorous measure that consistently quantifies the costs of a wide range of regulations. Consequently, it is difficult to evaluate different theories of regulation and explore empirically how regulation affects economic decisions. In this paper, I take one step in that direction. I measure the cost of compliance with all federal paperwork regulations, using machine-learning techniques and a novel administrative data set, and then study the impact of regulatory burden on key economic outcomes. The new measures I created, labelled RegIn, are posted on my website, and I invite scholars to use them for subsequent academic research.

Potentially Unfinished Leadership Business from the McDonald’s Decisions

Posted by Michael W. Peregrine (McDermott Will & Emery) and Charles W. Elson (University of Delaware), on

Tuesday, September 26, 2023

Michael W. Peregrine is a Partner at McDermott Will & Emery LLP, and Charles W. Elson is the Founding Director of the Weinberg Center for Corporate Governance and Woolard Chair in Corporate Governance (ret.) at the University of Delaware. This post is part of the Delaware law series; links to other posts in the series are available here.

With the benefit of a half-year of hindsight, it is worthwhile to confirm the compliance and risk-related lessons arising from the two recent. Delaware decisions addressing the McDonald’s workforce culture controversy.[1] For notwithstanding their technical Caremark guidance,[2] it has become clear over time that these decisions offer very practical lessons for corporate leadership as to their oversight and decision-making duties

Implementing major fiduciary duty lessons often comes slowly to organizations, especially when they have compliance and risk overtones. But as to McDonald’s, it’s not too late to put those lessons into practice.

Institutional Investors, Climate Disclosure, and Carbon Emissions

Posted by Shira Cohen (San Diego State University), Igor Kadach (University of Navarra, IESE Business School), and Gaizka Ormazabal (University of Navarra, IESE Business School), on

Tuesday, September 26, 2023

CDP, Climate Disclosure, ESG, SEC
More from: Gaizka Ormazabal, Igor Kadach, Shira Cohen

Shira Cohen is an Assistant Professor of Business at Fowler College of Business, San Diego State University. Igor Kadach is an Assistant Professor of Accounting and Control, and Gaizka Ormazabal is an Associate Professor of Accounting and Control, both at the University of Navarra IESE Business School. This post is based on their recent paper forthcoming in Journal of Accounting & Economics. 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; and Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita.

Institutional Investors, climate disclosure, and carbon emissions

There is an ongoing debate over the role institutional investors play in the global effort to control climate risk. While some contend that asset managers can contribute significantly in pushing companies to reduce their carbon footprint, others are more skeptical and recommend that authorities focus on traditional regulatory tools. This skepticism is fueled by the perception that a substantial number of institutional investors engage in “greenwashing” (i.e., “window-dressing” actions that have little real impact on the reduction of actual emissions).

Our paper contributes to this debate by exploring two specific interrelated questions: Does institutional investor request for climate-related data pressure firms to disclose this information? And is such firm disclosure followed by a decrease in carbon emissions?

2023 Corporate Governance developments

Posted by Melissa Sawyer, Lauren S. Boehmke and Marc Treviño, Sullivan & Cromwell LLP, on

Monday, September 25, 2023

Audits, Diversity, ESG, Universal Proxies
More from: Lauren Boehmke, Marc Treviño, Melissa Sawyer, Sullivan & Cromwell

Melissa Sawyer, Lauren Boehmke, and Marc Treviño are Partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Sawyer, Ms. Boehmke, Mr. Treviño, Susan M. Lindsay, June Hu, and H. Rodgin Cohen.

Hot Topics for Boards and Committees

Board Agenda Topics

Addressing the Use of Artificial Intelligence

Many boards are seeking a general understanding of AI, how their companies and peers are using it, and potential risks and concerns arising from the use of AI, including any cybersecurity, privacy and other liability issues, as well as employee and ethical implications. Although there is not one correct approach for overseeing AI risks, boards of companies that rely on AI for material products, services or operations (or relevant committee members) may want to consider receiving training on AI and associated risks, as well as management reports on the company’s use of AI.

Assessing the Business Impact of Macro Trends

As political, social, economic, climate and health conditions continue to fluctuate, challenging some companies’ ability to manage risks, some boards are asking management to sensitize the assumptions underlying the company’s strategic plan to take account of different potential scenarios. Some boards will also receive periodic updates from outside advisors on conditions in the various markets in which the company operates, with a particular focus on China.

Preparing for Heightened Antitrust Scrutiny

With antitrust scrutiny intensifying in the U.S. and internationally, some boards are obtaining briefings on the competitive landscape, potential regulatory risks and opportunities, and the increased time and cost required to engage in M&A transactions.

‘Killer Acquisitions’ Reexamined: Economic Hyperbole in the Age of Populist Antitrust

Posted by Jonathan Barnett (USC Gould School of Law), on

Monday, September 25, 2023

Antitrust, FTC, Google, M&A
More from: Jonathan Barnett

Jonathan Barnett is a Professor of Law at USC Gould School of Law. This post is based on his recent paper forthcoming in the University of Chicago Business Law Review. 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, Darius Palia, and Ge Wu; The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian; and Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk.

Antitrust and competition regulators in the United States, the European Union, the United Kingdom, and other prominent jurisdictions have recently emphasized the risk posed to competitive markets by so-called “killer acquisitions.” According to this assertion, which has been adopted by much of the policy and scholarly literature, leading technology platforms—commonly known as “Big Tech”—regularly engage in serial acquisitions of startups to suppress competitive threats posed by small innovators.

These claims have already had palpable effects on the merger review process.

Policymakers in the US and the EU have advocated lowering or shifting the burden of proof in merger review, or lowering or eliminating the reporting threshold, to challenge more easily acquisitions of startups by large technology platforms. In May 2023, the European Union’s Digital Markets Act went into force, which requires the largest technology platforms to report all acquisitions of firms in digital markets. In June 2023, the FTC (with the “concurrence” of the Department of Justice) released proposed revised pre-merger notification requirements, which require notifying firms to disclose all acquisitions during the preceding 10 years in markets where the merging parties had “horizontal overlaps” (regardless of firm size). In August 2023, the FTC and the DOJ released proposed revised merger guidelines, which raise concerns about the competitive risks posed by incumbent acquisitions of “nascent” competitors.

SEC Adopts Substantive Requirements for Advisers to Private Funds

Posted by David N. Solander, McDermott Will & Emery LLP, on

Sunday, September 24, 2023

Advisers Act, Clawbacks, Restricted Activities, SEC
More from: David Solander, Rule 211(h)(1)-2, McDermott Will & Emery

David N. Solander is a Partner at McDermott Will & Emery LLP. This post is based on his MWE memorandum.

On August 23, 2023, the US Securities & Exchange Commission (SEC) adopted new and amended rules (the New Rules) under the Investment Advisers Act of 1940 (Advisers Act) that focus on the SEC’s desire to address what it views to be “risks and harms that are common in an adviser’s relationship with private funds and their investors.” Throughout this article, we will summarize the New Rules, explore their effect on investment advisers to private funds and highlight some of the SEC’s stated views in the adopting release.

Our discussion of the New Rules has been separated into five parts:

The Restricted Activities prohibit some practices unless certain consent or disclosure obligations are met (walking back many outright prohibitions sought in the rule proposal).
Preferential Treatment restrictions and disclosure obligations, which are generally designed to address side letter arrangements favoring certain private fund investors.
The obligations of advisers to send Quarterly Statements to investors.
Requirements for advisers when undertaking Adviser-Led Secondaries.
The Mandatory Audits provision for private funds and the Written Annual Review requirement to document annual compliance reviews under Rule 206(4)-7.

The New Rules also add books and records requirements to document compliance.

The EU’s New ESG Disclosure Rules Could Spark Securities Litigation in the US

Posted by Raquel Fox, Simon Toms, and Jeongu Gim, Skadden, Arps, Slate, Meagher & Flom LLP, on

Saturday, September 23, 2023

CSRD, ESG, EU, SEC
More from: Jeongu Gim, Raquel Fox, Simon Toms, Skadden

Raquel Fox and Simon Toms are Partners and Jeongu Gim is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Fox, Mr. Toms, Mr. Gim and Tansy Woan. 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, and 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.

Key Points

The EU’s comprehensive new ESG disclosure requirements will force many multinationals with operations in Europe to decide how much information to disclose where, and to take measures to ensure their disclosures are consistent.
The granular information required by the EU could feed litigation in the U.S. if the disclosures appear false or misleading, or are inconsistent with disclosures in other jurisdictions.
With a new U.K. disclosure mandate and expected additional SEC disclosure rules, companies could face conflicting demands for ESG information from the EU, U.K. and U.S.

Who are the new directors?

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on

Friday, September 22, 2023

board diversity, Board of Directors, CEOs, Corporate governance
More from: Subodh Mishra, Institutional Shareholder Services Inc.

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an ISS Corporate Solutions memorandum by Sandra Herrera Lopez, Ph.D., Vice President, ESG Content & Data Analytics, & Veronica Nikitas, Senior Associate, Compensation & Governance Advisory at ISS Corporate Solutions.

A look at the demographic makeup of the latest independent board directors

Bringing on new board members presents a valuable opportunity for companies to benefit from fresh insights and expertise. In the following analysis, ISS Corporate Solutions examined the current directors across Russell 3000 companies to understand the diverse composition of the most recent group of independent directors.

KEY FINDINGS:

Underrepresented groups including women, Asians, and African Americans are gaining ground
The average age of new directors is 58, which is higher than the average age for tenured directors when they joined a board
28% of new directors participate in another Russell 3000 board

Weekly Roundup: September 15-21, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on

Friday, September 22, 2023

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of September 15-21, 2023

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The Activism Vulnerability Report

Introduction

Regulatory Intensity and Firm-Specific Exposure

Potentially Unfinished Leadership Business from the McDonald’s Decisions

Institutional Investors, Climate Disclosure, and Carbon Emissions

2023 Corporate Governance developments

Hot Topics for Boards and Committees

Board Agenda Topics

‘Killer Acquisitions’ Reexamined: Economic Hyperbole in the Age of Populist Antitrust

SEC Adopts Substantive Requirements for Advisers to Private Funds

The EU’s New ESG Disclosure Rules Could Spark Securities Litigation in the US

Who are the new directors?

A look at the demographic makeup of the latest independent board directors

Weekly Roundup: September 15-21, 2023

Financial Implications of Rising Political Risk in the US

In 2022, Corporate Time Horizons Shorten, Investors’ Lengthen

The EU Corporate Sustainability Reporting Directive -what non-EU companies should know

Discretionary Investing by ‘Passive’ S&P 500 Funds

2023 Proxy Season Digest

Guarding Against a Short Attack

CEO Succession Practices in the Russell 3000 and S&P 500

Supply Chains: From Out of Sight To Front and Center on the Board Agenda

Wildest Campaigns of 2023

Statement by Commissioner Uyeda on Updates to the Names Rule

Statement by Chair Gensler on Updates to the Names Rule

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