Monthly Archives: August 2019

The Bond Villains of Green Investment

Cristina Banahan is a Sustainability Advisor. This post is based on her recent article, forthcoming in the Vermont Law Review. 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).

Green bonds are critical to addressing climate change. The most recent Intergovernmental Panel on Climate Change report shows that unless dramatic corrective action is taken in the next decade, humanity could see mass migrations, food scarcity, and instability as early as 2040. To mitigate greenhouse gas emissions and prevent the most serious harms requires unprecedented levels of investment from the private sector and regulatory agility from government entities. Green bonds from public, private, and multilateral organizations are critical because they can serve to finance the large-scale infrastructure changes needed to transition to a zero-emissions economy. Government regulation of the green bond sector is critical to its success because regulations provide stakeholders with certainty as to the applicable legal standards and investor expectations. Furthermore, government regulation could help implement the lessons learned from past financial faux pas in the investment and issuer arenas. To apply the lessons of the past and ensure the prosperity of the green bond market in the future, governments should consider implementing a green standards committee as a simple and efficient way of meeting the financing challenges posed by climate change.


A Roadmap for President Trump’s Crypto-Crackdown

John Reed Stark is President at John Reed Stark Consulting LLC. This post is based on his memorandum.

Last week, at 8:15 PM EST on July 11th, 2019, in a thunderous tweet-storm, President Donald Trump officially lambasted Bitcoin and all other cryptocurrencies:

Not surprisingly, the cryptocurrency market, which tends to feed on attention, celebrated President Trump’s tweets. In fact, many in the cryptocurrency community brazenly spun President Trump’s tweets as validation that cryptocurrencies have finally arrived as a staple of global finance. Coinbase CEO Brian Armstrong tweeted to his 300K+ followers:


The Case for Quarterly and Environmental, Social, and Governance Reporting

Sandra Peters is head of the Financial Reporting Policy Group at CFA Institute. This post is based on a publication prepared by the CFA Institute Financial Reporting Group.

Debate has been ongoing for some time now over whether reducing the periodic reporting requirements for companies from quarterly to semiannually could save them time and money. Some people have suggested that reducing the frequency of financial reporting would dissuade short-termism, as companies would no longer focus on meeting analysts’ expectations on a quarterly basis at the expense of long-term performance. This issue has also been debated in many regions of the world. More recently, the US Securities and Exchange Commission (SEC) requested public comment on this topic. For this reason, CFA Institute conducted a survey of its global membership on the topic as well as a roundtable discussion. This report contains our key findings.

Investors Strongly Support Quarterly Reporting

The majority of survey respondents state that investors heavily rely on earnings releases because they are generally issued before quarterly financial reports. Respondents, however, indicate that quarterly reports remain more important to investors than earnings releases. These quarterly reports provide a structured information set that follows accounting standards and regulatory guidelines and include incremental financial statement disclosures and management discussion and analysis. In addition, quarterly reports offer greater investor protections as they are certified by the officers of the company, subject companies to greater legal liability, and are reviewed by company auditors.


Working Hard or Making Work? Plaintiffs’ Attorneys Fees in Securities Fraud Class Actions

Stephen Choi is the Murray and Kathleen Bring Professor of Law at NYU Law School; Jessica M. Erickson is Professor of Law at the University of Richmond School of Law; and Adam C. Pritchard is the Frances and George Skestos Professor of Law at University of Michigan Law School. This post is based on their recent paper.

Concerns about securities class actions typically focus on the low-value cases. These cases settle for relatively small amounts of money, raising concerns that they are motivated by the potential for a nuisance settlement, rather than a desire to target actual fraud. The cases at the other end of the spectrum with settlements of hundreds of millions of dollars look like success stories and therefore do not receive the same empirical scrutiny. These cases, however, pose risks of their own. In our paper Working Hard or Making Work? Plaintiffs’ Attorneys Fees in Securities Fraud Class Actions, we examine these mega-settlements, focusing specifically on the fees awarded to plaintiffs’ attorneys in these suits.

Mega-settlements stand apart as a distinct category of settlements in securities class actions. The bottom 90% of settlements—i.e., the settlements in the first nine deciles—average $11 million, with settlements in the ninth decile averaging $41.8 million. The settlements in the top decile, by contrast, average $295.5 million, more than seven times larger than the settlements in the decile below. Predictably, these settlements lead to significant fees for the plaintiffs’ attorneys—a mean of $39.5 million compared to a mean of $2.7 in the other nine deciles.


Director Overboarding: Global Trends, Definitions, and Impact

Kosmas Papadopoulos is Managing Editor at ISS Analytics. This post is based on an ISS Analytics memorandum by Mr. Papadopoulos.

In the 2019 proxy season, “overboarding” became a center-stage issue for many companies and investors. Several large asset managers, including Vanguard, BlackRock, and LGIM, enhanced their voting guidelines to apply stricter criteria, while some directors serving on multiple public company boards faced significant opposition to their elections. The idea that directors should not serve on too many boards has been a key consideration for investors for many years. The main concern for investors and companies focuses on the ability of directors to fulfill their responsibilities given the significant time commitment associated with each directorship; and as corporate governance and investment stewardship standards evolve, so does the definition of an overextended director.

Three primary drivers contribute to the renewed interest in director overboarding:


Upcoming Amendments to the DGCL

Matthew M. Greenberg is a partner and Taylor B. Bartholomew, and Christopher B. Chuff are associates at Pepper Hamilton LLP. This post is based on their Pepper memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Governor John Carney recently signed legislation that will put into effect a variety of amendments to the Delaware General Corporation Law (DGCL), the Delaware Limited Liability Company Act (DLLCA), the Delaware Revised Uniform Limited Partnership Act (DRULPA), and the Delaware Revised Uniform Partnership Act, effective August 1, 2019. While the amendments make several changes to the statutes, the primary change is to expressly permit transactions (such as merger agreements, voting agreements, stockholder agreements, limited liability company agreements and partnership agreements) to be documented, signed and delivered electronically, including through the use of “DocuSign.”

The Safe Harbor Provisions

As noted above, the primary change to the statutes is the adoption of nonexclusive safe harbors that permit transactions to be documented through electronic means. Importantly, the governing documents of a Delaware entity (such as the certificate of incorporation or bylaws of a corporation, or the limited liability agreement of a limited liability company) can override the application of the safe harbor provisions, but the prohibition must be expressly stated. A provision that merely specifies that an act or transaction will be documented in writing, or that a document will be signed or delivered manually, will not prohibit application of the safe harbor provisions. Unless otherwise provided in the governing documents of a Delaware entity or as agreed upon by the sender and recipient, an electronic transmission is deemed delivered to a person when it enters an information processing system that the person has designated for the purpose of receiving the electronic transmission. An electronic transmission is deemed delivered even if no person is aware of its receipt. For instance, if sent by email, a document will be deemed delivered under the safe harbors at the time the email is sent.


Tesla’s Governance Record and ESG Monitoring

Eliot Caroom is Product Manager at Truvalue Labs. This post is based on a Truvalue Labs memorandum by Mr. Caroom.

Tesla’s innovation and drama make it one of the most-discussed cos in Truvalue universe

Tesla is the consummate story stock thanks to its sleek, innovative electric cars, ample stagecraft for product launches, and, of course, outspoken founder and CEO Elon Musk. Tesla is also one of the most controversial companies in the world, thanks to its Autopilot technology’s safety concerns, its difficulties scaling production to meet an unknown demand, and, once again, outspoken founder and CEO Elon Musk. In the chart below, Tesla is a perennial most-discussed company, showing up in the top 10 list of companies for event volume captured by Truvalue Labs year after year. With prolific coverage, how can investors focus on key governance concerns for Tesla?

“Teflon Elon” has resisted oversight, but ESG research demonstrates a range of governance issues for shareholders

In April 2017, investors campaigned for better governance, and Elon Musk tweeted “This investor group should buy Ford stock. Their governance is amazing …” Musk’s Twitter followers ate it up. In the years since, a devoted fanbase among shareholders has insulated Musk from governance proposals.


Building a Climate Change Voting Policy

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Marie Clara Buellingen and Mikayla Kuhns, ISS Custom Research, and Kosmas Papadopoulos, CFA, ISS Analytics. 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).

While many institutional investors place climate change as a priority issue among their investment stewardship initiatives, it can be especially challenging to systematically incorporate climate change into proxy voting and engagement strategies. Companies’ annual meeting agendas rarely include proposals dealing directly with climate change issues. Only a small minority of companies—typically large firms in energy-intensive sectors, mainly in the U.S.—may receive climate-related shareholder proposals. Further, many shareholder proposals dealing with climate issues do not make it to the ballot, as they are either withdrawn by proponents or may be omitted by companies. Voting on climate issues can thus be a reactive exercise largely outside the control of the investor. However, climate change is a systemic risk affecting all sectors of the economy, all markets, and large and small companies alike. Investors who view climate change as a risk and look to incorporate climate-related considerations in their engagement and proxy voting need to conduct a review of their portfolio companies and assess the various actions they would like to take in relation to climate risk or impact.


Weeds & Words: A Quantitative Analysis of Cannabis Disclosure

Krista Bennatti-Roberts is a Data Scientist, Carol Hansell is Senior Partner, and Harlan Tufford is a Senior Governance Consultant at Hansell LLP. This post is based on their Hansell memorandum.

Over the past two years Canadian investors have given a hearty welcome to the cannabis industry. Although only a few cannabis companies booked a profit in 2018, stock valuations have been high. The industry has also attracted naysayers and short-sellers, of course. As debates about the state of the cannabis industry continue, we wondered what cannabis companies have to say about themselves; and if they are saying it any differently than the Canadian industries with which investors are more familiar.

We looked at the question by programmatically analyzing the text of the Management Discussion & Analysis (MD&A) of 35 Canadian-listed cannabis companies. We compared the results with the results of the same analysis of small and large-cap TSX-listed companies in more established industries [1] (we refer to companies from these more established industries as “veteran” companies).

This post is part of an ongoing series exploring the application of a variety of data science disciplines to the field of governance. Our first piece in the series explored the CEO letters of Warren Buffett and others. This series seeks to examine the ways machine learning and other new technologies can augment analysis and uncover insight.


Opportunities for Cross Border Cooperation in Regulation of Digital Assets

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the SUSS Convergence Forum, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Robby [Greene] , for that kind intro. I am delighted to see that Robby, once my research assistant, has clearly gone on to bigger and better things. I also am delighted to be here in Singapore, by some accounts the global crypto-hub, [1] and appreciate the hospitality of the Singapore University of Social Sciences. I am particularly grateful for the opportunity to learn about the developments in crypto in Asia, which, as I do not need to tell this audience, is home to a very active part of the crypto community. Before I get too far along in my remarks, I should note that the views I express are my own and not necessarily those of the United States Securities and Exchange Commission or my fellow Commissioners.

One view in which I am undoubtedly alone is my perspective on pandas. Black-and-white pandas are all the rage in the United States. They do look adorable, but I find them a bit pedestrian. Red pandas, the so-called lesser pandas, are much more interesting. Being in Asia brings me closer to red pandas’ natural habitat than I have ever been before, although I believe that the only red pandas in Singapore are residents of River Safari Wildlife Park. We also have red pandas back in Washington, DC at the zoo, and it was one of these red pandas that first sparked my interest in the species. Several years ago, one of our local red pandas, “Rusty,” made a daring break for freedom by climbing up a tree and out of his cage into the wide world beyond the zoo. [2] During his days of freedom, the renegade red panda developed quite a following, particularly after a Twitter account appeared in his name. As it turns out, Rusty was not alone among his brethren in his quest for freedom. A Google search for red panda escapes reveals something of a trend: red pandas have escaped from zoos in Virginia, Washington state, North Dakota, Australia, and Ireland, just to name a few. A few of these red pandas have been on the loose for quite some time. What a contrast red pandas offer to black and white pandas who sit comfortably within the view of the PandaCam [3] looking cute and munching on bamboo. Although I am not advocating zoo breaks, red pandas’ seemingly innate desire to explore the world outside the fences has an inherent appeal as a symbol of human innovation.


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