Monthly Archives: March 2020

Advancing ESG Investing: A Holistic Approach for Investment Management Firms

Sean Collins is a manager at the Deloitte Center for Financial Services, and Kristen Sullivan is an Audit and Assurance partner at Deloitte & Touche LLP. This post is based on their Deloitte publication. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff (discussed on the Forum here).

Key Messages

  • ESG-mandated assets in the United States could grow almost three times as fast as non-ESG-mandated assets to comprise half of all professionally managed investments by 2025.
  • An estimated 200 new funds in the United States with an ESG investment mandate are expected to launch over the next three years, more than doubling the activity from the previous three years.
  • The use of artificial intelligence (AI) and alternative data is giving investment managers greater capabilities to uncover material ESG data and possibly achieve alpha.
  • Investment management firms that act today to transition from siloed ESG product offerings toward enterprise-level implementation will likely capture a greater percentage of future ESG asset flows.

The sustainability movement is growing

Social consciousness has spread throughout many facets of life, and many companies are making a concerted effort to align with these principles. This effort has likely contributed to the steady rise in the media coverage afforded to “sustainable” brands over the past two years. Evidence suggests a similar growth in a desire for what are characterized as “sustainable” or “socially responsible” investments. Globally, the percentage of both retail and institutional investors that apply environmental, social, and governance (ESG) principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019. While directing investments based on one’s values has been around for decades, discussions between advisors and their clients about ESG investing have become commonplace.


Securities Class Action Settlements—2019 Review and Analysis

Laarni T. Bulan is a Principal and Laura Simmons is Senior Advisor at Cornerstone Research. This post is based on their Cornerstone report.


Historically high median settlement amounts persisted in 2019, driven primarily by an increase in the overall percentage of mid-sized cases in the $5 million to $25 million range as well as a decrease in the number of smaller settlements.

  • There were 74 settlements totaling $2 billion in 2019.
  • The median settlement in 2019 of $11.5 million was unchanged from 2018 (adjusted for inflation) and was 34 percent higher than the prior nine-year median.
  • The average settlement amount in 2019 was $27.4 million, which was 43 percent lower than the prior nine-year average.
  • There were four mega settlements (settlements equal to or greater than $100 million) in 2019.
  • The number of small settlements (amounts less than $5 million) declined by 36 percent to 16 cases in 2019, the fewest such settlements in the past decade.
  • The proportion of settlements in 2019 with a public pension plan as lead plaintiff reached its lowest level in the prior 10 years.
  • In 2019, 53 percent of settled cases involved an accompanying derivative action, the second-highest rate over the past decade.
  • Companies that settled cases after a ruling on a motion to dismiss (MTD) were, on average, 50 percent larger (measured by total assets) than companies that settled while the MTD was pending.


BlackRock and the Curious Case of the Poultry Farmer

Paul Rissman is Co-Founder of Rights CoLab. This post is based on his Rights CoLab memorandum. 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 Funds 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 by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

On 13 February 2020, in the little town of Laurel, Mississippi, poultry processing company Sanderson Farms held its annual general meeting. On the proxy statement that day was a shareholder resolution requesting that the company publicly report on climate-related water risks to its business according to Sustainability Accounting Standards Board (SASB) standards. Sanderson’s Board stood against the resolution, urging shareholders to reject it.

The shareholders set to vote included behemoth institutional investor BlackRock, Sanderson’s largest shareholder, holding 10% of the company’s stock. BlackRock has been well known to vote against shareholder resolutions. But this time observers had reason to expect something different. One month before this AGM, BlackRock CEO Larry Fink had released his annual letter to CEOs of virtually all public companies around the world, announcing that BlackRock would elevate climate-related and social investment risk as priorities.


Appraisal and Merger Synergies—Right to a Refund on Prepayments

Gail Weinstein is senior counsel, and Brian T. Mangino and Amber Banks (Meek) are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Mangino, Ms. Banks, David L. Shaw. Randi Lally, and Shant P. Manoukian. This post is part of the Delaware law series; links to other posts in the series are available here. 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.

In In Re Appraisal of Panera Bread Company (Dec. 31, 2019), the Delaware Court of Chancery found that the sale process relating to the $7.5 billion acquisition of Panera Bread Company by JAB Holdings B.V. was sufficient for the court to rely on the deal price to determine appraised fair value. The court also found that JAB provided sufficient evidence for the court to deduct from the deal price the value of certain expected merger synergies (pursuant to the statutory mandate to exclude from fair value any value “arising from the merger itself”). The appraisal result was about 3.7% below the deal price. Finally, in a matter of first impression, the court ruled that JAB–which had prepaid the appraisal claimants based on the full deal price, was not entitled under the appraisal statute to a refund on the prepayment.

Key Points


Directors’ Fiduciary Duties: Back to Delaware Law Basics

Peter A. AtkinsMarc S. Gerber, and Edward B. Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Atkins, Mr. Gerber, Mr. Micheletti, Robert S. Saunders, and Mary T. Reale. This post is part of the Delaware law series; links to other posts in the series are available here.

The dawn of a new decade brings with it the certainty of ongoing challenges to the conduct of public company directors based on alleged breaches of fiduciary duty.

This post is a brief reminder for directors of Delaware corporations (and of corporations organized in states that generally follow Delaware law in this area) of the basic fiduciary duty rules that govern their conduct. If these rules are understood and followed, directors should be able to avoid fiduciary duty breaches and protect themselves from exposure to potential liability. These rules and available protections, discussed below, encompass:

  • the basic fiduciary duties (care and loyalty, including good faith, oversight and disclosure),
  • key director attributes (independence and disinterestedness, and appreciation of “red flags”),
  • the importance of process (including asking the right questions and keeping a good record),
  • the core standard for judging director conduct (the business judgment rule), and
  • key Delaware law protections (including good faith reliance on others and exculpatory charter provisions).


The Age of ESG

Jessica Strine is Managing Partner & CEO, Marc Lindsay is Managing Partner & Director of Research, and Robert Main is Managing Partner & COO at Sustainable Governance Partners. This post is based on a SGP memorandum by Ms. Strine, Mr. Lindsay, Mr. Main, and Amy Hernandez. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

Among the major developments in investment management over the past decade, the dawn of the Age of ESG—environmental, social, and governance factors—represents a true paradigm shift in the relationships between public companies and their investors. It is now common practice for shareholders to look beyond the traditional bottom line and evaluate how companies are performing in their stewardship of stakeholder resources, attention to environmental and social risks, and disclosure of sustainability strategies. This shift has been driven by a few important developments:

Ownership of public companies is increasingly concentrated among a handful of large institutions. Among them, index-based (or passive) investors are now the largest shareholders of most public companies in America. Given that these funds are required to track market indices, they do not have the freedom to increase or decrease position sizes in response to stock performance. As effectively permanent investors in a company, these investors are applying greater scrutiny to the governance and board oversight of companies in their portfolios.


Demonizing Wall Street

William S. Laufer is the Julian Aresty Professor at The Wharton School of the University of Pennsylvania and Matthew Caulfield is a PhD student at The Wharton School of the University of Pennsylvania. This post is based on their article, recently published in the Yale Journal on Regulation. Related research from the Program on Corporate Governance includes Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Progressive rhetoric increasingly equates the business model of Wall Street with fraud, particularly as national elections draw near. The demonization of Wall Street is a common activity of the progressive left, a tactic designed to convince followers that the time has come to tame the id of big business. Indeed, it is difficult to recall a more dramatic crescendo of anti-corporate invectives from progressives in recent history. In Wall Street and Progressivism, we argue that this kind of wholesale dismissal and condemnation of the private sector produces real casualties. We first observe that this rhetoric is, quite remarkably, disconnected from serious reforms to ensure corporate accountability. Proposed legislation is very long on rhetoric though equally short on theoretical and empirical support. This is true in spite of a history of progressivism that embraced legislative reforms that are grounded in science and evidence.

More important, creating a mirage of a progressive political effort not only fails, but displaces genuine efforts to pass reforms. Demonization is not just unhelpful, but likely harmful as it encourages us to think of all capitalistic endeavors as intrinsically or unchangeably evil. With reference to the progressive movement of the 20th century, we argue that this kind of sentiment is in fact anti-progressive—where the complete elimination of sectors like Wall Street is both undesirable and pragmatically impossible, demonization displaces real progressive reforms, those that countenance the possibility that corporate actors can, indeed, become better or even good.


Pervasive Threat of Business Email Compromise Fraud

Jennifer Archie and Serrin Turner are partners at Latham & Watkins LLP. This post is based on a Latham memorandum authored by Ms. Archie, Mr. Turner, Tim Wybitul and Gail Crawford.

Key Points:

  • The FBI has identified BEC fraud as the No. 1 financial threat to businesses in the US.
  • The FBI’s Internet Crime Complaint Center (IC3) estimates that global “exposed dollar losses” to BEC fraud has exceeded US$26 billion in the past three years. [1] In 2019 alone, the IC3 recorded 23,775 complaints about BEC, which resulted in losses worth some US$1.7 billion.
  • All parties to financial transactions must be aware of this fraud risk. Each should put in place not only appropriate security controls for email, but also financial controls for bank account and wiring-instruction verification.

What Is Business Email Compromise?

Business email compromise is a type of Internet-based fraud that typically targets employees with access to company finances—using methods such as social engineering and computer intrusions. The objective of the fraud is to trick the employee into making a wire transfer to a bank account thought to belong to a trusted partner, but that in fact is actually controlled by the fraudster.


Remarks by Commissioner Lee at the Investment Adviser Association Compliance Conference: “Getting Back to Basics: Protecting, Serving, and Empowering Investors”

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the 2020 Investment Adviser Association Compliance Conference. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.


Thank you Karen [Barr] and thank you all for hosting me today. I appreciate IAA’s engagement on the issues important to its members and to the broader markets, and I’m honored to have the opportunity to speak to this audience today.

I want to start by saying that the views I express today are my own and may not represent the views of my fellow Commissioners or the staff. What are those views? Well, I’ve now been on the Commission for approximately eight months, and in nearly every meeting I have, I am asked the same question: What are my priorities for my time as a Commissioner?

Obviously, I’ve thought a great deal about this. In fact, over the past twenty years, in private practice, on the staff of the Commission, as an international instructor in financial regulation, and now as a Commissioner, my career has focused on the SEC and its mission, and I have considered and analyzed our role from each of these vantage points.


Assessment of ISS’s Use of EVA in CEO Pay-for-Performance Model

Ira Kay is a Managing Partner, Marizu Madu is a Principal, and Phil Johnson is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).


In 2017, Institutional Shareholder Services (ISS) introduced their secondary quantitative test, the Financial Performance Assessment (FPA).This was in response to criticisms that their primary pay-for-performance (P4P) tests, which measure the alignment of CEO pay and total shareholder return (TSR) relative to an ISS-developed peer group, only focused on TSR as the primary performance metric.

The FPA test (as used in 2017-2019) compared the company’s financial and operational performance versus the ISS peer group, utilizing three or four GAAP metrics which were selected and weighted based on the company’s industry. The GAAP metrics include return on invested capital (ROIC); return on assets (ROA); return on equity (ROE); EBITDA growth, and cash flow (from operations) growth.

For 2020, ISS has changed its policy on the FPA test. Economic Value Added (EVA) will replace the GAAP metrics for the vast majority of companies. The new FPA test will generally utilize four equally weighted EVA-based metrics as defined by ISS: EVA Margin, EVA Spread, EVA Momentum vs. Sales, and EVA Momentum vs. Capital. See Appendix for definitions.


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