Yearly Archives: 2019

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]

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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.

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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.

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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.

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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.

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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.

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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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Cleveland, Kondo, and Capital: Remarks before the American Chamber of Commerce

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the American Chamber of Commerce, 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.

It is an honor to be with you today [August 7, 2019]. I have long wanted to visit Japan. Indeed, one of the options I explored following college was coming to Japan to teach English. Instead I ended up in Austria—not teaching English. My would-have-been students are certainly better off for it, but I am pleased to finally have the chance to be here in a learning, rather than teaching, capacity. Before I begin, I must give a standard disclaimer: the views I express today are my own views and not necessarily those of the United States Securities and Exchange Commission or my fellow Commissioners.

One of the reasons I wanted to become a Commissioner was because I believe in the transformative power of the capital markets. Capital markets bring people together in joint endeavors to improve society. The capital markets match people who have new ideas with people who have money to invest, and the combination can produce products and services that improve everyone’s well-being. In the process, the lives of the entrepreneur and the investor can markedly improve as each enjoys the fruits of her contributions to the project. Employees of the enterprise and local communities may also benefit.

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5 Steps for Tying Executive Compensation to Sustainability

Blair Jones and Seymour Burchman are Managing Directors at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy 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) and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The final link in the chain of improving corporate accountability for sustainability is to tie improvements to pay. In a November 2018 article, we explained that companies should use incentives to motivate executives to tap big strategic opportunities related to environmental, social, and governance (ESG) goals.

Now we want to describe how these incentives should be designed. What implementation steps do you take? And how can you overcome the challenges that deter executives and directors from changing how company incentives have traditionally been designed?

The challenges are easy enough to identify. For one, the number of possible sustainability improvement goals grows by the day, which makes it increasingly hard to know which to pursue: sourcing resources more wisely, managing waste and CO2 emissions responsibly, acting as a good citizen, celebrating diversity among workers, and so on. For another, the years-long efforts to realize payoffs from most ESG initiatives rarely fit typical annual or three-year incentive timeframes. That’s particularly true when you’re working to achieve indirect or intangible payoffs such as burnishing your brand and reputation. Results can build over decades.

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Weekly Roundup: August 2–8, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of August 2–8, 2019.

A Catch 22 for Asset Managers



Weeds & Words: A Quantitative Analysis of Cannabis Disclosure




Upcoming Amendments to the DGCL



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



A Roadmap for President Trump’s Crypto-Crackdown


The Bond Villains of Green Investment


Appraisal Update: Unaffected Market Price Makes a Comeback



California Dreaming?


Diversified Portfolios Do Not Reduce Competition


Spotlight on Boards


Employer Losses and Deferred Compensation


Five Takeaways From the 2019 Proxy Season

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