Monthly Archives: August 2019

The Governance Implications of the Equifax and Facebook Settlements

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on his McDermott Will & Emery memorandum.

Corporate boards across industry sectors should give close attention to the impact the recent privacy settlements entered into by Equifax and Facebook will have on governance.

Read together, the settlements send an important message regarding regulatory expectations of board oversight of consumer privacy concerns. They also provide useful suggestions to corporate boards on how to structure meaningful governance interaction with existing information security programs.

The Equifax Settlement

On July 22, the consumer credit reporting agency Equifax Inc. (“Equifax”) entered into a global settlement with the Federal Trade Commission, the Consumer Financial Protection Bureau, and 50 U.S. states and territories (the “Equifax Settlement”) to resolve allegations that its failure to take reasonable steps to secure its network led to a 2017 data breach that exposed the personal information of 147 million people.


Bebchuk & Hirst Article on Index Funds Wins Fernández de Araoz Award on Corporate Finance

Tami Groswald Ozery is a co-Editor of the Forum and Fellow at the Harvard Law School Program on Corporate Governance.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here);  Index Fund and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); and The Specter of the Giant Three (discussed on the Forum here).

The jury of the 2019 Jaime Fernández de Araoz Award on Corporate Finance voted recently to grant the award to a forthcoming article by Lucian Bebchuk and Scott Hirst, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy. Awarded every other year, the award carries with it a cash prize of 10,000 EUR as well as a sculpture by the late Spanish sculptor Martín Chirino. The award ceremony is expected to take place in Madrid this fall, with the participation of his Majesty King Felipe VI of Spain.

According to the announcement of the award, the award’s purpose is “to contribute to developing the economy and corporate finance through acknowledging an applied research work in this field.” The jury selecting the award winner included 41 distinguished individuals (listed here) from the academic and business communities, and it reached its decision after considering 32 papers from 83 authors.

According to the award announcement, ”[t]he results presented in the article are key to understanding “the mechanisms of index fund management decisions and how policy design can contribute to the improvement of index funds”, and the article presents “detailed and comprehensive evidence … covering the full range of actions undertaken by those responsible for the management of index funds, as well as those that they fail to undertake.”

The Jaime Fernández de Araoz Award is the third prominent prize won by the Bebchuk & Hirst article. The article won earlier the 2018 IRRC Institute prize, which carried with it a cash award of $10,000, and the 2019 European Corporate Governance Institute’s Cleary Gottlieb Steen Hamilton Prize, which carries with it a cash award of EUR 5,000 (see announcements here, and here). The Bebchuk & Hirst article will be published in the December 2019 issue of the Columbia Law Review.

The Bebchuk & Hirst article is part of a larger ongoing project on stewardship by index funds and other institutional investors. The article builds on an analytical framework for understanding the monitoring and engagement decisions made by index funds put forward in a 2017 study, The Agency Problems of Institutional Investors, by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here). The analysis in the article is supplemented by a recent empirical study by Lucian Bebchuk and Scott Hirst, The Specter of the Giant Three (discussed on the Forum here), which examines the substantial and continuing growth of the so-called Big Three index fund managers.

More information about the Jaime Fernández de Araoz Award is available here. The Bebchuk & Hirst article for which the prize was awarded is available here, and is discussed on the Forum here.

Modernization of Regulation S-K

William H. Hinman is Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. This post is based on a SEC Regulation Amendment proposal, released for public comments.

We are proposing amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosure requirements in Regulation S-K. We are proposing amendments to these items to improve these disclosures for investors and to simplify compliance for registrants. [1]

Pursuant to Section 108 of the Jumpstart Our Business Startups Act (“JOBS Act”), [2] the Commission staff prepared the Report on Review of Disclosure Requirements in Regulation S-K (“S-K Study”), [3] which recommended that the Commission conduct a comprehensive evaluation of its disclosure requirements. Based on the S-K Study’s recommendation, the staff initiated an evaluation of the information our rules require registrants to disclose, how this information is presented, where this information is disclosed, and how we can better leverage technology as part of these efforts (collectively, the “Disclosure Effectiveness Initiative”). [4] The overall objective of the Disclosure Effectiveness Initiative is to improve our disclosure regime for both investors and registrants.


Female Board Power and Delaware Law

Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post was prepared with the assistance and insights of Amy SimmermanRyan Greecher, Lisa Stimmell, and Jose Macias. This post is part of the Delaware law series; links to other posts in the series are available here.

Gender diversity in the corporate boardroom is receiving significant belated attention. Much of that attention has revolved around prescriptive legislation, academic research, and business results—and one point of focus is an increase in the number of female directors. This article, however, outlines options under Delaware corporate law for jumpstarting an increase in the influence of female directors on board decision making—i.e., female board power. [1] That is, while female board perspectives may remain outnumbered at least in the near term, these corporate mechanisms may leverage existing female board power to prevent the female board perspective from being outweighed. In footnotes to this article, there are illustrative form provisions related to these concepts of Delaware corporate law. [2]


Best Practice Principles for Shareholder Voting, Research & Analysis

Dr. Danielle A.M. Melis is an Independent Board Member in the Dutch financial sector. This post is based on a report prepared by Chair Dr. Danielle A.M. Melis and the Members of the BPPG Committee.

The 2019 Best Practice Principles for Shareholder Voting Research & Analysis were launched this week, as an update to the original Principles formulated in 2014. The original 2014 Principles were developed in response to the ESMA Final Report and Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry in February 2013, which came out in favour of a self-regulatory approach over mandatory regulation of the industry.

The 2019 Principles launch is the culmination of a two-year Independent Review process, resulting in a new formal governance and oversight structure for the BPPG, updated Principles and Guidance, and an Independent Review Chair Report detailing the topics discussed in the Review Process and the rationale for the changes made to the original 2014 Principles. The updated 2019 Principles were developed within the framework of a structured Independent Review Process which referred to the ESMA 2015 Follow-Up Report on the Development of the Best Practice Principles for Providers of shareholder voting research and analysis (“2015 ESMA Follow-Up Report”), the requirements of the revised EU Shareholder Rights Directive II (“SRD II”) and the latest updated stewardship codes globally. The Independent Review Process also referred to the important input of regulators, investors, issuers and other stakeholders received through a Public Consultation by the BPPG (completed in December 2017), 2017 and 2019 Stakeholder Advisory Panels and a June 2019 BPPG Stakeholder Preview Event.

The following is the Best Practice Principles for Providers of Shareholder Voting Research & Analysis, 2019.


Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review

Hans Bonde Christensen is Professor of Accounting at the University of Chicago Booth School of Business; Luzi Hail is Professor of Accounting at the Wharton School of the University of Pennsylvania; and Christian Leuz is the Joseph Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago Booth School of Business. This post is based on their recent paper.

Sustainability and Corporate Social Responsibility (CSR) have become important to many corporations and the majority of large firms today voluntarily provide reports on their CSR initiatives, risks, and activities. However, because there are no commonly agreed upon (or mandatory) CSR reporting standards there is substantial heterogeneity in CSR disclosures. This heterogeneity makes it difficult for the various stakeholders to use and compare CSR information and may prevent firms from reaping the full benefits of their CSR activities. In the paper Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review, we draw on a broad set of literatures to analyze and evaluate the likely consequences of a mandate that would require U.S. publicly listed firms to adopt a common set of CSR reporting standards.

Specifically, the paper (i) discusses insights from extant literature in accounting, finance, management, and economics that are relevant for an assessment of the economic effects of CSR reporting; (ii) reviews the key determinants and the current state of CSR reporting; (iii) discusses potential effects of mandatory CSR reporting standards for important stakeholders such as investors, lenders, analysts and the media, consumers, employees, but also for society at large; (iv) outlines firm responses and real effects from mandatory CSR reporting standards; and (v) considers important implementation issues for an effective CSR reporting mandate. Considering that CSR and CSR reporting have become hot topics for many practitioners and academics, we also outline important questions and unresolved issues, and point to avenues for future research based on our review of the literature.


Managing Legal Risks from ESG Disclosures

David R. Woodcock and Amisha S. Kotte are partners and Jonathan D. Guynn is an associate at Jones Day. This post is based on their Jones Day memorandum. 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).

Whether on their own initiative or in response to pressure from regulators, consumers, or activist shareholders, many issuers are disclosing more and more about their environmental, social, and governance (“ESG”) practices. Issuers are publishing information about their accomplishments, current efforts, and future commitments in each of these areas, including in the U.S. Securities and Exchange Commission (“SEC”) filings, webpages, printed materials, presentations to investors, etc. There is, as of now, no U.S. law compelling issuers to make ESG statements when they are not material. But recent U.S. case law underscores that ESG disclosures may be actionable if found to be materially false or misleading.

In this post, we suggest some steps companies should consider as they seek to minimize the litigation risks that may arise from their increasing ESG disclosures.

ESG Disclosures are Voluntary Under U.S. Law

At the moment, issuers are generally not required to make ESG disclosures in securities filings with the SEC unless the issuer determines such information would be material to investors. Materiality under U.S. securities laws is judged by whether the ESG disclosure would be viewed by a “reasonable investor” “as having significantly altered the ‘total mix’ of information made available.” The current disclosure requirement for ESG issues under the U.S. securities laws thus hinges on whether the information would be material to a reasonable investor, such as whether it presents material risks to an issuer’s business. [1] This raises two questions. Does an issuer make an item material by disclosing it in its SEC filings? And does disclosing the adoption of voluntary commitments that may have significant impacts on the business make them material? The answer to the first question is probably no, but the second question becomes much more difficult. Regardless, materiality is often a difficult standard to assess, and there is growing dissatisfaction in some quarters with the current SEC requirements.


Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social, and Governance Disclosures

Paul S. Atkins is chief executive of Patomak Global Partners, LLC. This post is based on his testimony before the United States House of Representatives Subcommittee on Investor Protection, Entrepreneurship and Capital Market of the Committee on Financial Services on Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures.

Chairwoman Maloney, Ranking Member Huizenga, and Members of the Subcommittee: Thank you for inviting me to appear here today to discuss Environmental, Social, and Governance, or “ESG” disclosures, and the Securities and Exchange Commission (“SEC”) disclosure regime more generally. From 2002 to 2008, I served as a Commissioner of the SEC, and before that I served on the staff of two former SEC Chairmen, in addition to roles in private practice. In 2009, I founded Patomak Global Partners, a Washington, DC based consultancy, and have served as the Chief Executive Officer since that time.

Background on SEC Disclosure

History and Purpose

For more than 85 years, the securities laws of the United States, and in particular the Securities Act of 1933, have been based primarily on the principle of disclosure. This was a conscious decision of the drafters of the statutes. The SEC’s statutory mission is to maintain fair, orderly, and efficient markets, facilitate capital formation, and to protect investors. It carries out the last part by ensuring market participants have accurate material information about the securities in which they invest. As described on the Commission’s website, “The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.” Various competing and special interests have from time to time attempted to control the type of disclosures required by the SEC. However, over the years, the Commission has generally focused on disclosure of “material” information.


Net-Zero By 2050: Investor Risks in the Context of Deep Decarbonization of Electricity Generation

Eli Kasargod-Staub is Executive Director and Kimberly Gladman is a Senior Sustainability Fellow at Majority Action. This post is based on their Majority Action report. 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) and  Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

In recent years, institutional investors worldwide have won substantial advances in corporate disclosures and engagement on climate change. Companies across a range of industries have set emissions reductions targets, undertaken scenario planning, and made meaningful disclosures of climate-related risks. Moreover, despite the Trump Administration’s announced plan to withdraw from the 2015 Paris Agreement, investors joined with mayors, governors, and business leaders across the United States in the “We Are Still In” coalition, re-doubling their commitment to meeting the agreement’s goals of keeping warming to well below 2°C above pre-industrial levels, and pursuing efforts to limit warming to 1.5°C.


Finalized Volcker Rule Amendments

V. Gerard Comizio is partner and Nathan S. Brownback is associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Comizio and Mr. Brownback.

In 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Growth Act”) into law. The Growth Act significantly amended two aspects of the Volcker Rule: [1] (1) creating an exemption for community banks, and (2) increasing opportunities to have funds and their investment advisers co-brand by sharing names. [2]

On Tuesday, July 9, 2019, five federal agencies, [3] (the “Agencies”), adopted new final rules to implement the Growth Act’s changes to the Volcker Rule by conforming each agency’s version of the Volcker Rule regulations to the Growth Act. [4] The Agencies proposed the new rules on February 8, 2019 and received industry comments, as per the Administrative Procedure Act, before being finalized. [5] The rules were ultimately adopted as proposed, without any changes.


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