Monthly Archives: June 2019

Climate Change Risk Oversight Framework for Directors

Rakhi Kumar is Senior Managing Director and Head of ESG Investments and Asset Stewardship at State Street Global Advisors. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Key Takeaways

  • The COP21 Paris Climate Accord signals the turning point of a global effort to address climate change. As nations begin to pursue their emission reduction strategies, directors should evaluate the climate-related risks facing their companies.
  • State Street Global Advisors believes that boards should regard climate change as they would any other significant risk to the business and ensure that a company’s assets and its long-term business strategy are resilient to the impacts of climate change.
  • State Street Global Advisors has developed a framework to help directors evaluate potential climate-related risks that may impact companies within a sector.
  • The three primary climate-related risks we have identified are physical risk, regulatory risk and economic risk.
  • Climate change will continue to be a priority for our asset stewardship and company engagement program in 2016 as we seek to promote effective environmental and sustainability practices and better company performance on behalf of our clients and other stakeholders.
  • Our guidance for directors is based on over 160 climate-related engagements we have had with companies over the past three years.


Board Diversity by Term Limits?

Yaron Nili is Assistant Professor of Law at the University of Wisconsin-Madison Law School; and Darren Rosenblum is Professor of Law at Pace University Elisabeth Haub School of Law. This post is based on their recent article, forthcoming in the Alabama Law Review.

Gender diversity in the U.S. corporate world is shockingly low. As The New York Times reported, fewer women run large corporations than CEOs named John. Boardrooms also lack diversity. While 86% of directors participating in PwC’s annual director survey stated they felt that women should comprise between 21% and 50% of the board, only 28% of Russell 3000 boards have more than one-fifth of their board comprised of women. Some U.S. boards do not even try to include women: 76 of the largest 1,500 Russell 3000 companies have not had any female directors in the past decade.

The investor community has made board diversity a recent point of emphasis. State Street, Vanguard, and Blackrock have all voiced their commitment to gender diversity, followed by recent support from proxy advisors. California has ventured even further, passing legislation that mandates specific quotas for women on Californian corporations. New Jersey and Illinois may soon follow suit. Diversity mandates, however, confront substantial legal, economic and societal challenges.


New DOJ Compliance Program Guidance

John Nassikas and John Tan are partners and Lindsey Carson is senior associate at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter memorandum by Mr. Nassikas, Mr. Tan, Ms. Carson, Douglas F. Curtis, Mahnu V. Davar, and Wilson D. Mudge.

On April 30, 2019, the Department of Justice (DOJ) Criminal Division published new guidance for corporate compliance programs. The new guidance (Updated Compliance Guidance) updates a prior guidance document providing factors that prosecutors should consider when evaluating the effectiveness of compliance programs for determining how to prosecute or resolve corporate criminal enforcement actions. Compliance program effectiveness is a key variable DOJ takes into consideration when (1) making charging decisions and exercising prosecutorial discretion; (2) making sentencing recommendations, including calculating recommended fines; and (3) deciding whether to impose reporting requirements or appoint an outside compliance monitor as part of a corporate resolution. The Updated Compliance Guidance provides useful additional insights into prosecutors’ assessment criteria when making such decisions.

Expansion on the 2017 Compliance Guidance

The new guidance, entitled: “Evaluation of Corporate Compliance Programs,” updates and expands a prior version that the Criminal Division’s Fraud Section released in February 2017 (2017 Compliance Guidance).

While the Updated Compliance Guidance incorporates and addresses the same general issues and topics as the 2017 Compliance Guidance, the new document provides additional factors, in the form of questions, that prosecutors may consider when assessing cases, and an overall framework for that evaluation.


Ten Years of Say-on-Pay Data

Terry Newth is a managing director and Dean Chaffee is a consultant at Pearl Meyer & Partners, LLC. This post is based on their Pearl Meyer memorandum.

We researched 10 years of say-on-pay proxy advisory recommendations and results to understand how common it has been for a company to receive an “Against” vote recommendation or low say-on-pay support in a given year. The results are illuminating; more than 40% of Russell 3000 companies have received an “Against” vote recommendation from ISS, and almost half have received low say-on-pay support. The trend also suggests that these percentages will continue to increase each year.

Therefore, we believe companies would be well served to conduct regular, proactive stockholder outreach and engagement to mitigate the impact of a future negative vote recommendation.

The end of 2018 marked the 10-year anniversary of mandatory say-on-pay (SOP). Admittedly, the first two years were limited to financial institutions that received capital under the Troubled Asset Relief Program (TARP), but nonetheless this is an opportune time to evaluate how things have transpired over the past decade.

Say-on-pay first entered corporate America when, in early 2009, Treasury Secretary Timothy Geithner stated that recipient banks of TARP relief must hold SOP votes. By 2011, a vast majority of public companies across all industries became subject to these votes, triggered by President Obama’s signing of The Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010. Today, SOP votes are as routine as the annual meetings in which they take place.


A New Era of Extraterritorial SEC Enforcement Actions

Joshua D. Roth is partner and Alexander R. Weiner is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum and is based on their article, recently published in the Banking Law Journal.

In a recent decision, U.S. Securities and Exchange Commission v. Scoville, the United States Court of Appeals for the Tenth Circuit became the first Circuit Court to opine on the scope of the SEC’s extraterritorial enforcement authority under the Dodd-Frank Act. Departing from the United States Supreme Court’s 2010 opinion in Morrison v. National Australia Bank Ltd., the Tenth Circuit held that Congress, in enacting the Dodd-Frank Act, “affirmatively and unmistakably” expressed its intent to apply the SEC’s enforcement authority under Section 17(a) of the Securities Act of 1933 (“Section 17(a)”) and the antifraud provisions of the Securities and Exchange Act of 1934, including Section 10(b) (“Section 10(b)”), extraterritorially.

SEC v. Scoville expands the scope of the SEC’s enforcement authority beyond the limitations imposed by Morrison, returning to the so-called “conduct-and-effects” test to determine extraterritoriality. This departure creates uncertainty about the scope of the SEC’s enforcement authority and additional risk for foreign entities and individuals.


Will the Long-Term Stock Exchange Make a Difference?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

Many have recently lamented the decline in the number of IPOs and public companies generally (about half the number since the boom in 1996), and numerous reasons have been offered in explanation, from regulatory burden to hedge-fund activism. (See this PubCo post and this PubCo post.) In response, some companies are exploring different approaches to going public, leading to a resurgence in SPACs and the launch of IPOs as “direct listings,” which avoid the underwritten IPO process altogether. At the same time, companies are seeking ways to address some of the perceived drawbacks associated with being public companies—including the pressures of short-termism, the risks of activist attacks and potential loss of control of companies’ fundamental mission—through dual-class structures and other approaches. Even the SEC is currently planning a roundtable to address the causes of and potential solutions to short-termism. (See this PubCo post.) Changing dynamics are not, however, limited to the IPO process itself. And one of the most interesting concepts designed to address these issues on completely different turf was just approved by the SEC this month—a novel concept for a stock exchange located in San Francisco, the Long-Term Stock Exchange. The concept has been in the works for a couple of years now and is backed by some heavy-hitting investors. According to the LTSE’s founder and CEO, the “IPO is like a wedding. The IPO process is, what kind of wedding planner do you hire? What kind of wedding do you want to have? But being a public company is you’re now married to the public markets for the rest of your life. People have mostly focused on the IPO process—it’s like making the wedding more efficient….That’s not the problem. The problem is we have to live like this forever.” How will the new Exchange seek to improve this “married life” going forward?


French Legislation on Corporate Purpose

Jean-Philippe Robé, Bertrand Delaunay, and Benoît Fleury are partners at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum.

The French Civil Code provides as a general principle that every company must have a lawful corporate purpose and be constituted in the common interest of its partners. [1] These provisions, which are applicable to all forms of partnership or public or private corporations, have been supplemented by the so-called “Pacte Statute” on the Development and Transformation of Businesses. Each French company must now be managed “in furtherance of its corporate interest” and “while taking into consideration the social and environmental issues arising from its activity”. [2]

These changes, which affect millions of legal entities from the smallest partnership to the largest public corporation, are a direct consequence of the recommendations of the so-called Notat-Senard Report (“l’entreprise, objet d’intérêt collectif”, available here. Lawyers of Gibson Dunn’s Paris office have been heavily involved in the work having led to this Report.)

The Pacte Statute provides that non-compliance with these new obligations is not sanctioned by the nullity of the company. [3] The intent is to protect companies from the most adverse consequences of a breach of what may appear as a loose obligation.


Board Development and Director Succession Planning in the Age of Shareholder Activism, Engagement and Stewardship

Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on his Wachtell memorandum.

The intensifying spotlight turned on boards of directors and management teams by investors prompts a fresh look at how public companies approach board development, director succession planning and refreshment in advance of an activist attack, shareholder unrest or a crisis that results in heightened scrutiny. As the New Paradigm of corporate governance takes hold, the major index fund asset managers, many actively managed funds and the two largest proxy advisory firms have each formally incorporated questions relating to board quality and practices into their direct engagements with companies, voting policies and how they evaluate a proxy contest to remove or replace existing board members and CEOs. In addition, activist hedge funds will re-frame matters of corporate strategy and performance into referendums on board quality, questioning whether the board had the right skillsets and practices in place to oversee important business decisions. Accordingly, public companies are increasingly being called upon to consider and prioritize the following:


Blurred Lines: Government Involvement in Corporate Internal Investigations and Implications for Individual Accountability

Andrew Bauer and Jonathan Green are partners and Sara D’Amico is an associate at Arnold & Porter Kaye Scholer LLP. This post is based on their Arnold & Porter memorandum.

[In May 2019], Chief Judge Colleen McMahon of the US District Court for the Southern District of New York (SDNY) issued an opinion that could have significant implications for how companies cooperate in Government investigations. Following a trial, Defendant Gavin Black was convicted of wire fraud and conspiracy to commit wire fraud and bank fraud in the well-known LIBOR (London Interbank Offered Rate) manipulation scheme. Black argued that his conviction should be vacated and the indictment dismissed because interview statements he made to attorneys representing his employer, Deutsche Bank were “fairly attributable to the Government” and “compelled,” in violation of his Fifth Amendment right against self-incrimination.


Weekly Roundup: May 31–June 6, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 31–June 6, 2019.

Rulemaking Petition on Non-GAAP Financials in Proxy Statements

Better the Devil You Know? Tipping Liability, Martoma and the Rise of 18 U.S.C. § 1348

Proposed Amendments to Delaware’s LLC and Partnership Acts

Strategic Trading as a Response to Short Sellers

Trulia’s Impact

The Business Case for ESG

Institutional Trading around M&A Announcements

Sustainability Accounting Standards and SEC Filings

Statement on Final Rules Governing Investment Advice

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