Monthly Archives: March 2020

Professor Bebchuk’s Errant Attack on Stakeholder Governance

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, David M. Silk, William Savitt, Sabastian V. Niles, and Carmen X. W. Lu. This post relates to a recent study issued by the Program on Corporate Governance, The Illusory Promise of Stakeholder Governance, by Lucian Bebchuk and Roberto Tallarita (discussed on the Forum here).

In an article posted on the Harvard Law School Forum on Corporate Governance blog, Professor Lucian Bebchuk rejects stakeholder governance and, in so doing, attacks the committed positions of influential institutions as varied as the Business Roundtable, the World Economic Forum, BlackRock, State Street, Vanguard, the UK Financial Reporting Council, and the European Union High-Level Expert Group on Sustainable Finance.

Professor Bebchuk summarizes his article as follows:

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“Operation Codebreaker” and the Culture of Compliance

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

The latest revelations in baseball’s sign-stealing scandal confirm more explicitly than ever its relevance to corporate governance across industry sectors, particularly the board’s critical obligation to preserve a culture of compliance within the organization.

Moreover, the new revelations serve to refocus attention on compliance and ethics at a time when organizational interest and budgetary support for these functions may be waning. The documented conduct of the Houston Astros provides a unique, if unlikely, connection between America’s pastime and corporate ethics, to which an exceptionally broad audience may relate. This is an opportunity for board compliance committees to strengthen leadership and organizational awareness of ethical expectations.

The Fiduciary Duty

Fiduciary obligations relating to the oversight of an organizational culture of compliance have long been embodied in corporate law, enforcement guidelines, governance principles and other standards. They are grounded in part by the seminal Delaware Chancery decision in in re Caremark Derivative Action and its progeny. [1] Another foundational piece is the description in the Federal Sentencing Guidelines of the elements of an “Effective Compliance Program.” This description requires boards to (i) be knowledgeable about the content and operation of the compliance and ethics program and (ii) exercise reasonable oversight with respect to the implementation and effectiveness of that program (i.e., to promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law). [2]

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The Federal Reserve’s New “Control” Framework—Greater Opportunities for Minority Investments

Matthew L. Biben and Arthur S. Long are partners and James O. Springer is an associate at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum.

On January 30, 2020, the Board of Governors of the Federal Reserve System issued a final rule that would update and revise, to some degree, its framework for finding “control” under the Bank Holding Company Act of 1956, as amended (BHC Act).

The new control rule (Control Rule) expands the relationships that an investor can have with a target institution and still be deemed to be non-controlling under the BHC Act. This is relevant both for investments in banking organizations, such as by private equity investors, and for investments by banking organizations, such as in fintech companies.

The Control Rule has the most benefits for investors below 10 percent voting share ownership, as will be described more fully below. In addition to benefiting from broader consent rights and greater business relationships than previously, such investors also have greater power as shareholders to make use of proxy solicitation to challenge management. At the same time, certain aspects of the Control Rule, such as its approach to calculating total equity of a target company, were not expanded from the original proposal and may hinder new investments.

This post describes the most significant aspects of the Control Rule, which will be effective on April 1, 2020.

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ESG Disclosures—Considerations for Companies

David M. Silk and Sabastian V. Niles are partners and Carmen X. W. Lu is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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).

Recent months have seen institutional investors, multinational organizations and the private sector emphasize the lack of (and importance of) comparable and decision-useful ESG disclosures. Some of the key issues in considering ESG disclosures are:

Choice of Framework and Content. Despite the growing recognition of the need for standardized reporting metrics, companies continue to face a myriad of choices as to how and where to present ESG disclosures. To date, the largest US public companies that disclose this information often report against some portion or combination of the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TCFD) standards. Other significant frameworks include those developed by the International Integrated Reporting Council (IIRC), the UN Global Compact and related Reporting on the Sustainable Development Goals (SDGs), the CDP (formerly the Carbon Disclosure Project) and the Climate Disclosure Standards Board. Some or all of the common metrics proposed in the World Economic Forum’s (WEF) consultation draft will also likely become part of this landscape.

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CII Comment Letter on Proposed Proxy Rules for Proxy Voting Advice

Kenneth A. Bertsch is Executive Director and Jeffrey P. Mahoney is General Counsel at the Council of Institutional Investors. This post is based on a CII letter to the SEC in response to request for comments on the proposed rule regarding proxy advisors (discussed in posts here and here).

The Council of Institutional Investors (CII), appreciates the opportunity to provide comments to the United States (U.S.) Securities and Exchange Commission (SEC or Commission) in response to proposed amendments to the federal proxy rules published on December 4, 2019, in SEC Release No. 34–87457, Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice (Release).

CII is a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families, including public pension funds with more than 15 million participants—true “Main Street” investors through their pension funds. Our associate members include non-U.S. asset owners with about $4 trillion in assets, and a range of asset managers with more than $35 trillion in assets under management.

CII strongly opposes the Release in its entirety. We present a general summary of key issues in the Release, and then responses to the specific questions the SEC poses in the Release (page 6 of the complete letter).

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CII Comment Letter on Proposed Amendments to Rule 14a-8

Kenneth A. Bertsch is Executive Director and Jeffrey P. Mahoney is General Counsel at the Council of Institutional Investors. This post is based on a CII letter to the SEC in response to request for comments on the proposed rule regarding the submission and resubmission of shareholder proposals (discussed in posts here and here).

The Council of Institutional Investors (CII), appreciates the opportunity to provide comments to the United States (U.S.) Securities and Exchange Commission (SEC or Commission) in response to proposed amendments to Rule 14a-8 (the “Rule”) in Release No. 34–87458, Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8 (the “Release”).

CII is a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families, including public pension funds with more than 15 million participants—true “Main Street” investors through their pension funds. Our associate members include non-U.S. asset owners with about $4 trillion in assets, and a range of asset managers with more than $35 trillion in assets under management.

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The Illusory Promise of Stakeholder Governance

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance and Roberto Tallarita is Associate Director of the Program on Corporate Governance, as well as Terrence C. Considine Fellow in Law and Economics, both at Harvard Law School. This post is based on their new paper.

Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “stakeholder capitalism.” In a new study, The Illusory Promise of Stakeholder Governance, we critically examine the increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies. We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders.

Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off.

Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously.

Below is a more detailed overview of the analysis of our paper:

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Investment Company Institute Comment Letter to SEC on Proposed Rules for Proxy Voting Advice and Shareholder Proposals

Paul Schott Stevens is president and CEO of the Investment Company Institute (ICI). This post is based on ICI’s comment letter to the SEC on its proposed amendments to exemptions from the proxy rules for proxy voting advice and on the proposed rule regarding the submission and resubmission of shareholder proposals (discussed in posts here and here).

The letter was co-authored by Susan M. Olson, general counsel; Dorothy M. Donohue, deputy general counsel, securities regulation; and J. Matthew Thornton, assistant general counsel, securities regulation.

The Investment Company Institute supports the Commission’s examinations of proxy advice and the shareholder proposal rule. The Commission’s proposals would affect registered investment companies (“funds”) as both investors and issuers. As investors, funds may retain proxy advisory firms for administrative or research services. As issuers, funds receive proposals from their own shareholders; as investors, funds evaluate and vote on proposals that their fellow shareholders submit to their portfolio companies. Our comments seek to assist the Commission in striking the right balance between the interests of companies and shareholders. Funds’ multi-faceted participation in the proxy system provides us with a unique vantage point to do so.

Proxy advice should be accurate, transparent, and complete, but we do not support the proxy advice proposal’s set of provisions that would grant companies the right to review and comment on proxy advisory firms’ draft advice before fund complexes and other clients receive it. This proposed framework would affect substantially and adversely the timeliness and cost of proxy advisory firms’ advice, and thus its overall value to funds and their shareholders. We recommend an alternative whereby funds and other clients would receive proxy reports concurrent with their release to companies for review and comment.

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Top 10 ESG Trends for the New Decade

Kosmas Papadopoulos is Senior Director at the Corporate Governance & Activism practice and Rodolfo Araujo is Senior Managing Director and Head of the Corporate Governance & Activism Practice at FTI Consulting. This post is based on their FTI 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); 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); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

If the 2010s laid the groundwork for ESG corporate practices through debate and policy development, the 2020s will be about putting ESG into action. Our new decade is expected to see widespread adoption of ESG-related practices as the norm.

The 2010s: Building Momentum

To fully appreciate the shift from debate to action in ESG practices, it helps to look back at ESG developments during the past decade. While ESG efforts have existed for many decades—with considerable efforts dating as far back as the ’50s—it was around the 2010s that ESG became a mantra for most companies. At the start of the 2010s, market participants embraced corporate governance reform, focusing on restoring trust in the capital markets following the aftermath of the 2008 financial crisis. Laws, codes of best practice, investment stewardship efforts and company initiatives that were concentrated on board oversight and accountability firmly took root. These efforts included “say on pay,” which became standard practice in most major jurisdictions, as well as several regulatory and investor-led initiatives focused on board quality. Among these initiatives were board diversity, independence, refreshment and responsiveness to shareholders.

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U.S. Chamber of Commerce Comment Letter on the Shareholder Political Transparency Act & Workforce Investment Disclosure Act

Neil Bradley is Executive Vice President and Chief Policy Officer at the U.S. Chamber of Commerce. This post is based on a comment letter submitted by the U.S. Chamber of Commerce to the House Committee on Financial Services. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).

The U.S. Chamber of Commerce opposes the following bills that the Committee is expected to mark up on February 27.

H.R. 5930, the Workforce Investment Disclosure Act (Rep. Cynthia Axne)

The Workforce Investment Disclosure Act would require specific line-item disclosures in Securities and Exchange Commission (“SEC”) mandated reports on information that in many cases is not material to a reasonable investor, and would preempt the SEC’s flexible, principles-based approach on human capital disclosures.

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