Monthly Archives: January 2020

Into the Mainstream: ESG at the Tipping Point

Rakhi Kumar is Head of ESG Investments and Asset Stewardship, Nathalie Wallace is of Global Head ESG Investment Strategy, and Carlo Funk is EMEA Head ESG Investment Strategy at State Street Global Advisors. This post is based on a publication prepared by 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) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).


In 2017, we conducted a major global survey to give deeper insight into the increasingly important Environmental, Social and Governance (ESG) market. Performing for the Future revealed a picture of ESG investment driven by performance beliefs, coupled with challenges and evolving pathways to adoption.

Fast-forward two years and ESG investing had grown by more than a third to $30+ trillion, over a quarter of the world’s professionally managed assets.

ESG may well be becoming a mainstream trend, but every institutional investor—from pension funds to endowments to sovereign wealth funds—faces a unique mix of forces pushing them towards, or pulling them away from, ESG investing.

As institutions try to respond to these competing forces—without compromising their risk–return requirements—they must chart their own course. This means finding a best-fit approach to incorporating ESG factors into their investment process and balancing cost pressures with the need to build up specialist knowledge.

Our latest research uncovers the views of more than 300 institutional investors and world-leading institutions, revealing what is driving organizations to adopt ESG, how this is influencing adoption, and the barriers that must be overcome to deliver the best outcomes.


Corporate Culture: Evidence from the Field

Jillian Grennan is Assistant Professor of Finance at the Duke University Fuqua School of Business. This post is based on a recent paper by Professor Grennan; John R. Graham, D. Richard Mead, Jr. Family Professor at the Fuqua School of Business at Duke University; Campbell R. Harvey is Professor of Finance at the Fuqua School of Business at Duke University; and Shiva Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School.

While there is a lot of talk about corporate culture, there is very little empirical work—because culture is very difficult to measure. In our paper, Corporate Culture: Evidence from the Field, we use a novel interview/survey method that is ideally suited to explore the questions: ‘what is culture and how do you measure it?’, ‘does culture matter?’, ‘can we attach a value to culture?’, ‘what are the implications of an ineffective culture?’, and ‘how can a more effective culture be established within the firm?’ Our paper is based on a very large sample of 1,348 executives from North American firms in the survey part and 20% of the U.S. market capitalization in the interviews. Essentially, our study creates the first large scale database of corporate culture.

The results are striking. 92% believe that improving culture will lead to increased value at their firm. Yet 84% of CEO/CFOs believe they need to improve their firm’s culture. A notable 85% believe that a poorly implemented culture increases the chances that an employee would act unethically or even illegally. While executives share a near-unanimous belief that corporate culture matters, a prerequisite to improving culture is to determine how and why culture matters.


Delaware Appraisal Decisions

Gilbert E. Matthews is Chairman Emeritus and Senior Managing Director at Sutter Securities, Inc. This post is based on his recent Sutter Securities memorandum. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian. This post is part of the Delaware law series; links to other posts in the series are available here.

The year 2019 was been another active period for Delaware valuation cases, not only in the Court of Chancery but also in the Supreme Court. In arm’s-length transactions, Delaware continues to rely primarily on the transaction price as a measure of appraisal value. Adjustments to eliminate the amount paid for synergies are highly dependent on expert testimony. DCF remains the principal valuation method in related party transactions. The Court of Chancery has been critical of experts on either side whose opinion it deems to be overreaching.


The year 2019 was been another active period for valuation cases in the Delaware courts. The Supreme Court reversed one 2018 Court of Chancery decision and affirmed another, and four valuation cases were decided by the Court of Chancery; the decisions are discussed below, focusing on the point of view of expert witnesses. The predominant theme is that Delaware is that, in arm’s-length transactions, appraisal value continues to be based primarily on the transaction price rather than on discounted cash flow.


Bernie Ebbers and Board Oversight of the Office of Legal Affairs

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

It was a small blurb in the December 19 issue of The Wall Street Journal, easily missed by the casual reader. [1] A federal judge authorized the release of former WorldCom chief executive officer Bernard “Bernie” Ebbers from prison after more than 13 years due to deteriorating health. Mr. Ebbers had been serving a 25-year prison term for participating in what was at the time (the early 2000s) one of the largest accounting frauds in history.

This was a so-called “compassionate release” of an individual who had already been incarcerated for a lengthy period for actions that occurred over 20 years ago. There was a judicial perspective that Mr. Ebbers had already been punished enough. So why was this newsworthy? Why should anyone, especially corporate board members and their general counsel, care? Isn’t this ancient history?

From a governance perspective, not at all. Not by a longshot. In many ways, it is the most timely of reminders as to the scope of the board’s risk oversight responsibilities.


CalSTRS Green Initiative Task Force Annual Report

Kirsty Jenkinson is Director, Sustainable Investment & Stewardship Strategies at the California State Teachers’ Retirement System (CalSTRS). This post is based on a recent CalSTRS publication by Ms. Jenkinson, Travis Antoniono, Brian Rice, Renee Evarts, and Baotran Bui. 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); 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).



The CalSTRS Green Initiative Task Force, the Green Team, is focused on managing sustainability-related risks, including climate risks, and taking advantage of appropriate sustainability-themed investments, including those that support the transition to a low-carbon economy, while providing robust disclosure around our efforts and initiatives to members and strategic partners.

Content and Format Update

CalSTRS continuously looks to improve disclosure around our sustainability-related investment activities that support long-term value creation. We also seek to integrate reporting frameworks that align with our efforts around important strategic issues such as climate change. This edition of the Green Initiative Task Force report reflects the desire to be responsive to those who are interested in our investment-related sustainability efforts and to provide data in the most appropriate format.
In response to the request of the California Legislature as described in SB 964 (Allen), we have included additional content that more deeply analyzes our climate risk exposure and describes how we support California’s climate goals. The discussion of California’s climate goals can be found in the Strategy section and the climate risk exposure analysis can be found in the Risk Management section of the complete publication (available here).


Debt-Equity Conflict and the Incidence of Secured Credit

Barry E. Adler is the Bernard Petrie Professor of Law and Business at New York University School of Law and Vedran Capkun is Associate Professor at HEC Paris. This post is based on their recent paper, forthcoming in the Journal of Law and Economics.

Classic finance theory—from the framework created by Jensen and Meckling—observes that while debt can mitigate the conflict between equity and management, the issuance of credit creates a conflict between debt and equity. To explore the latter conflict, we take advantage of the insight that once a firm creates a debt-equity conflict through the issuance of debt, if the firm’s management, on behalf of equity, is to exploit the firm’s creditors, the optimal vehicle for such exploitation is additional debt, senior debt in particular. Despite recent conjecture that risk averse managers eschew the exploitation of credit, we predict, and find, that the debt-equity conflict, fueled by distressed firms’ issuance of secured credit, is a live problem for firms, one worthy of consideration.

Consistent with our hypothesis, critics of secured finance, argue that financially vulnerable firms use priority credit to externalize (at least in an ex post sense) the risk of failure. On this view, the winners are a coalition of a debtor’s shareholders and secured creditors, which share investment’s upside, at the expense of the debtor’s unsecured creditors, who bear the downside. And because the debtor may be more interested in enhanced risk that favors junior interests than expected return to the firm, the expected loss may well exceed the expected gain. The threat of such inefficient overinvestment has led some to call for a reduction in secured credit’s priority.


Weekly Roundup: January 3-9, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 3-9, 2020.

Automating Securities Class Action Settlements

The Group Pleading Doctrine Following Janus

Undressing the No-Vote Fee

Mutual Fund Borrowing Poses Risk to Investors

A Five-Year Review of Discretionary Compensation

The Value Killers

Best Practices for Disclosing Executive Health Issues

Statement by SEC Commissioner Robert Jackson on Reforming Stock Exchange Governance

Statement by SEC Chairman Jay Clayton on Proposed Order Concerning Equity Market Data

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement at an Open Meeting of the SEC, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on January 8, 2020, under the Government in the Sunshine Act. The Commission today will consider a staff recommendation to issue for public comment a Proposed Order that would require self-regulatory organizations to propose a new national market system plan to govern the public dissemination of real-time, consolidated market data for NMS stocks.

In July of 2017, in my first public remarks as SEC Chairman, I identified market structure as an area where the Commission and its staff should focus our analytical resources. [1] The U.S. equity markets have changed substantially in the last decade, and as technology, market structure, business and trading practices and other aspects of our trading ecosystem evolve, we must analyze and update our regulatory framework as may be necessary or appropriate to meet our statutory mission, including promoting fair and efficient markets. Over the last few years, the Commission and the Division of Trading and Markets have undertaken a number of initiatives designed to modernize and improve the structure of our equity markets. [2] These actions reflect a holistic approach to market structure reform, [3] and our work in this area will continue in the coming months.


Statement by SEC Commissioner Elad Roisman on Proposed Order Concerning Equity Market Data

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent statement at an Open Meeting of the SEC, available here. The views expressed in the post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today, the Commission considers steps to change the governance of equity market data plans under Regulation National Market System (“NMS”) (the “Proposed Order”). The Proposed Order seeks to modernize governance of the Securities Information Processors, or “SIPs,” by providing a proposed framework for how the Commission preliminarily believes governance should be conducted in a new consolidated equity market data NMS plan.

I would like to thank Director Brett Redfearn of the Division Trading and Markets and all the staff who worked on this recommendation. I also thank Robert Stebbins and the staff of Office of General Counsel and our Chief Economist S.P. Kothari and the staff of our Division of Economic and Risk Analysis.

I also appreciate Chairman Clayton’s and Director Redfearn’s continued focus on tackling difficult equity market structure issues. It is clear that they will leave no stone unturned with respect to exploring possible improvements to our equity market structure regime. And, this agency has covered a lot of ground in this area under their leadership.


Statement by SEC Commissioner Robert Jackson on Reforming Stock Exchange Governance

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent statement at an Open Meeting of the SEC, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you as always to our dedicated Staff, especially Christian Sabella, David Shillman, Deborah Flynn, John Roeser, and Jennifer Colihan, for their extensive work on today’s proposed order. I’m also deeply grateful to Division Director Brett Redfearn, whose leadership in this area—and so many others—continues to reflect the very best in public service.

As today’s release explains, America’s stock markets are riven by a fundamental conflict of interest: exchanges both operate public data feeds and profit from selling superior private ones. [1] Because exchanges have no economic reason to produce robust public data on stock prices, investors have long demanded a vote on how the public feeds are run. [2] Rather than give investors a real say over the data that drives our markets, today’s release merely invites for-profit exchanges to draft their own rules on these questions. Because that approach has failed investors before, and there’s no reason to expect it to succeed now, I respectfully dissent.


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