Monthly Archives: February 2020

Reforms to Board Composition and Independence and Climate Competent Governance

Eli Kasargod-Staub is Executive Director and Lisa Lindsley is Director of Investor Engagement at Majority Action and the Climate Majority Project. This post is based on their Majority Action report. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Executive Summary

Climate change poses systemic risks to the global financial system and specific risks to financial institutions with exposure to the fossil fuel sector. JPMorgan Chase (“JPM”), the largest US bank, is by far the largest global lender and underwriter to the fossil fuel sector, providing nearly $196 billion in lending and underwriting in the three years (2016-2018) since the Paris Agreement was adopted in 2015. JPM is also a leading funder within many of the riskiest and most potentially harmful fossil fuel sectors, including Arctic oil and gas, tar sands, and coal mining. JPM will need to enhance its governance and management, as well as disclose and reduce its risks and financed emissions in order to protect long-term shareholder value. Thus far the company has not acted with the urgency and scale that the climate crisis requires.

JPM CEO Jamie Dimon is also the Chair of the company’s board of directors, which places the onus on the Lead Independent Director to provide the oversight and guidance that long-term shareholders require as the climate crisis escalates. However, this role is held by Lee Raymond, who is uniquely poorly qualified to provide the oversight needed to protect long-term shareholder value in the face of these risks:


Tax and ESG

Deborah L. Paul and T. Eiko Stange are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Proponents of enhanced environmental, social and governance (“ESG”) disclosure have identified corporate income tax as a relevant metric. While it is premature to predict how ESG standards in this regard will evolve, a key area of focus is tax arbitrage, including profit-shifting among jurisdictions. Boards should be aware of the possibility of detailed country-by-country public disclosure intended to reveal scenarios involving high profits in jurisdictions with little economic activity and low profits in jurisdictions where a company has a significant presence.

Inspired by the Action Plan on Base Erosion and Profit Shifting of the Organisation for Economic Co-operation and Development, the standards put forth by the Global Reporting Initiative (“GRI”) in 2019 (GRI 207: Tax 2019) and the Consultation Draft of the World Economic Forum in 2020 would require (effective January 1, 2021, in the case of the GRI standards) public disclosure, by jurisdiction, of, among other things, third-party sales revenue, number of employees, profit or loss, corporate income tax paid on a cash basis and revenue from intercompany transactions. ESG initiatives also contemplate disclosure of a company’s tax policy or “approach” to tax, as well as governance and risk management processes relating to tax.


Corporate Purpose and Culture

John C. Wilcox is Chairman of Morrow Sodali. This post is based on a Morrow Sodali memorandum by Mr. Wilcox. Related research from the Program on Corporate Governance includes Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr. (discussed on the Forum here).

By the end of 2019 a number of extraordinary pronouncements signaled that corporate governance had reached an inflection point. In the U.K., the British Academy published Principles for Purposeful Business. In the U.S., the Business Roundtable issued its Statement on the Purpose of a Corporation. In Switzerland, the World Economic Forum published The Davos Manifesto 2020.

These statements gave voice to evolving trends and assumptions that had been transforming corporate governance over the course of the last decade.

  1. Recognition that environmental, social and corporate governance policies (ESG) represent material risks and opportunities directly impacting financial performance;
  2. Reassessment of the shareholder primacy doctrine and the narrow view of corporations as nothing more than profit machines;
  3. Adoption of “sustainability” as both a strategic goal for companies, an antidote to short-termism and a path to strengthen public trust in business and the capital markets;
  4. Acknowledgement that companies must serve the interests of their “stakeholders” as well as their shareholders;
  5. Reassertion of the principle that corporations must be accountable for the human, social and public policy implications of their activities, with an urgent focus on climate change;
  6. Understanding that a corporation’s “culture” is reflective of its integrity, its internal well-being, its sustainability and its reputation.
  7. Acceptance of expanded board accountability for ESG issues, sustainability, purpose and culture and working with the CEO to integrate these factors into business strategy;
  8. Emergence of the integrated reporting movement [www.integrated] with its program of integrated thinking and integrated management as the basis for corporate reporting.


Proxy Season Trends: Make Sure You’re Ready for 2020

David A. Bell is partner at Fenwick & West LLP. This post is based on his Fenwick memorandum.

With the 2020 proxy season around the corner, we have prepared a brief review of key corporate governance trends that can inform how you frame your company’s prior-year performance and objectives for the coming year. We focus on the top five trends gleaned from 2019 proxy statements to ensure our clients and other company leaders have the tools they need to successfully navigate this important regulatory terrain.

The picture emerging from the filings as well as recent news reports indicate that the ground is shifting and near‑term shareholder value is no longer the only consideration for the C-Suite. Nearly 200 leading chief executives signed a groundbreaking Business Roundtable statement in August saying that companies “must also invest in their employees, protect the environment and deal fairly and ethically with their suppliers.” Institutions in the United Kingdom followed the Roundtable’s lead a few months later, and in December the World Economic Forum released a Davos Manifesto outlining ethical principles for corporations to follow.


Weekly Roundup: February 14–20, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 14–20, 2020.

Unprecedented Enforcement Actions Against Eight Former Wells Fargo Executives

Shareholder Governance, “Wall Street” and the View from Canada

Delaware’s Position on Director Independence: a Change in Approach?

Financial Institution Developments

Stewardship and Collective Action: The Australian Experience

The Strategic Audit Committee: a 2020 Preview

The Activist Investing Annual Review 2020

Considerations for 2020 Proxy Statement Preparations

The Coming Impact of ESG on M&A

The Coming Impact of ESG on M&A

Andrew R. Brownstein, David M. Silk. and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Brownstein, Mr. Silk, Mr. Niles, Steven A. Rosenblum, Mark F. Veblen, and Carmen X. W. Lu. 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); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Recent months have seen institutional investors and other stakeholders, notably BlackRock and State Street, stressing the importance of comparable and decision-useful ESG disclosures by their portfolio companies. Such calls follow in the wake of growing interest among investors and other stakeholders in understanding and assessing the performance of companies based on ESG metrics. While the exact system by which companies will report on ESG issues remains to be determined by the market, it is clear that beginning in 2020, and in the years to follow, companies will be disclosing significant amounts of quantifiable information on a basis that will permit comparisons within and across industries. This information will be used by companies, investors, asset managers and other stakeholders in making real-world business decisions, including decisions relating to M&A.

The impact of the growth in ESG disclosures on M&A cannot be underestimated. In the near-term, ESG performance will be incorporated into company valuations and risk assessments, and acquirers and targets will be expected to factor in ESG performance when evaluating the impact of potential transactions. All aspects of M&A will be affected; a few are highlighted below:


Considerations for 2020 Proxy Statement Preparations

Elizabeth A. Ising is a partner and Gillian McPhee is of counsel at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum.

As a companion to our recent alert on considerations for preparing your 2019 Form 10-K (available here), below we offer our observations on new developments and recommended practices to consider in preparing the 2020 Proxy Statement. In particular, there are a number of important substantive and technical considerations that public companies should keep in mind in light of changes to U.S. Securities and Exchange Commission (“SEC”) rules, developments relating to institutional investor and proxy advisory firm policies, and the continuing evolution of corporate governance best practices.

1. Address New Hedging Disclosures and Consider in Advance the Need to Revise Related Policies

Many companies already provide proxy statement disclosure about their hedging policies, particularly as applicable to directors and executive officers, but these disclosures may need to be expanded in light of the new SEC rule requiring hedging policy disclosures. Companies also should review their policies and determine whether any changes are appropriate.


2019 Year in Review: Securities Litigation and Enforcement

Jason Halper and Kyle DeYoung are partners and Adam Magid is special counsel at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. DeYoung, Mr. Magid, Lex Urban, Victor Bieger and Hyungjoo Han.

There was abundant federal securities litigation activity in 2019. Plaintiffs not only continued to file securities lawsuits at record numbers, but repeatedly secured victories in cases on significant issues of law. The tone was set at the top with the Supreme Court’s landmark decision in Lorenzo v. SEC. There, the Supreme Court clarified, in contrast to its 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders, that a person who does not “make” a fraudulent misstatement can nonetheless be held primarily liable for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder for his or her role in disseminating the misstatement. In so ruling, the Supreme Court effectively eviscerated a popular defense in fraud lawsuits since Janus and reaffirmed that the antifraud provisions of the securities laws cover a “wide range of conduct.”

In multiple other cases, federal courts ruled in favor of plaintiffs and established expanded theories of liability for defendants. For example, in North Sound Capital LLC v. Merck & Co., the Third Circuit held that plaintiffs who opt out of a securities class action are not precluded under the Securities Litigation Uniform Standards Act of 1998 (SLUSA) from bringing state law fraud claims in follow-on individual actions, even if federal claims are time-barred. This opens a potentially significant new avenue for plaintiffs to evade heightened federal pleading standards and limitations periods. The Tenth Circuit, in SEC v. Scoville, clarified that the SEC and DOJ may avail themselves of the expansive “conduct and effects” test under the Dodd-Frank Act to reach securities fraud defendants whose U.S.-based conduct affects foreign defendants or who commit frauds abroad that affect U.S. investors. Courts also adopted expansive views of a “security” subject to federal antifraud rules and registration requirements, applying the concept to an internet traffic exchange service (Scoville) and a new digital “coin” (Balestra v. ATBCOIN LLC).


The Activist Investing Annual Review 2020

Josh Black is Managing Editor, and John Reetun and Eleanor O’Donnell are Financial Journalists at Activist Insight Ltd. This post is based on an Activist Insight memorandum by Mr. Black, Mr. Reetun, Ms. O’Donnell, Jason Booth, Iuri Struta, and Dan Davis. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System.

2019: An Overview

By some measures the slowest year since 2015, 2019 might look like the end of that boomlet. Although not the first down year in recent memory (2017 was too), the 839 companies publicly subjected to activist demands worldwide and the 666 investors making those demands were both four-year lows.

Yet the type of activist involved belies that impression. In 2015, 32% of investors making public demands had a primary or partial focus on activism. In 2019, the comparable figure was 23%. Concerned shareholder groups have taken up a lot of the slack but the activist toolkit has become frequently used by institutional investors and occasional activists too. In these pages, we make the case that private equity firms are increasingly being drawn into competition with activists that requires them to ape some of their strategies.

For years, onlookers have debated how much room activism has to grow. On the one hand, there will always be laggards—relative underperformers. On the other hand, many speculated that the “low-hanging fruit” was mostly picked over, forcing activists to adopt more operational strategies.


Accelerated Diversity—A New Paradigm for Addressing Short-Term Obstacles to Board Membership

Bill Poutsiaka is a Financial Services Consultant and Founder of Enterprise Driven Investing, LLC.


Goldman Sachs recently announced a new policy stating they will not underwrite the IPO’s of firms having only white male board members. This policy is a natural, but different, follow-on to SSGA’s initiative a few years ago requiring at least one female on the boards of companies in which they invest. Various measures have been taken in recent years to improve board diversity [1], especially by more visible companies such as those included in the S&P 500. Goldman’s action expands this visibility by adding firms at earlier stages in the evolution of their capital strategy. Good governance is no less applicable to companies at these moments, nor well before them.

While select measures, including some related to gender, have shown meaningful gains, overall progress in achieving diversity more widely has been slow. [2] Although helpful, many actions taken do not alter the root causes of small percentage gains. Promising programs, such as customized management training initiatives, do address root causes and have yielded results, but they require extended lead times.

There is a complementary strategy that would address near-term obstacles, accelerate diversity and, therefore, improve governance quality for organizations of all sizes and with various missions. This approach recognizes the value of all groups, and the interests of all entity stakeholders. Implementation has two steps, neither of which reduce standards: (1) Revising specific board membership policies and the selection process to increase their relevance; and (2) Critically assessing how, why, where, and when all groups add value in today’s governance ecosystem.

I have summarized the five components of this call to action below:


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