Monthly Archives: August 2020

A Look Back at Shareholder Activism During the 2020 Proxy Season

David Whissel is Executive Vice President and Director of Corporate Governance at MacKenzie Partners, Inc. This post is based on his MacKenzie Partners memorandum. 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 past four months have brought unprecedented change to the capital markets and the world at large. As the global COVID-19 pandemic spread throughout the world, the economic disruption was significant, and a decade-long bull market was transformed almost overnight. The proxy season that has followed has been unlike almost any other, but also reassuringly familiar. Despite predictions to the contrary, activism in the United States remained persistent; many large activists were limited in their activity, but the occasional and first-time activists that picked up the slack found considerable success in achieving their objectives. Further, an increase in overall market volatility saw the return of poison pills as a viable defense mechanism (at least temporarily) but has also created new opportunities for activists in what had previously been somewhat of a stagnant market.

Market Volatility Creates New Opportunities

As we have written previously, the outbreak of the coronavirus pandemic in the US in March 2020 led to an immediate and dramatic increase in market volatility at levels that had not been seen since the previous major financial crises of 2008, 1987, and 1929. The spike in volatility persisted well into April before settling down to a more normalized (but still elevated) level. Relative to the pre- COVID market, in which valuations were stretched and true “value” opportunities were limited, this new paradigm created attractive new entry points for many activists—not just in distressed sectors, but also in high-quality, resilient businesses where there was a temporary value dislocation.

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Assessing Your Company’s Response to COVID-19

Paula Loop is Governance Insights Center Leader at PricewaterhouseCoopers LLP. This post is based on a PwC memorandum authored by Ms. Loop and David Stainback.

The COVID-19 pandemic has led to the biggest crisis many companies have had to face in their corporate lifetime. Few companies anticipated that something of this scope and size could happen, and most were not prepared for it.

Companies reacted to the outbreak either by adapting whatever crisis or continuity plans they had in place, or by starting from scratch, trying not to get caught too far behind their peers. Many companies have been granted a bit of leeway for their response by the public, media and stakeholders, highlighting the “we’re all in this together” sentiment. But no company should expect that to last forever.

Preparing to do better, next time

In a prolonged crisis, as this is proving to be, we often see waves of activity separated by a period of calm—like flying through a hurricane. Many companies are currently in the eye of the storm, but stakeholders—employees, consumers and investors—will expect them to do better in the next wave and beyond.

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Comment Letter on Control Shares Statutes and Registered Investment Companies

Phillip Goldstein is the co-founder of Bulldog Investors. This post is based on his letter to the SEC Division of Investment Management. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

“You’re supposed to stand for somethin’! You’re supposed to protect people!” [1]

Once upon a time, investment companies (“funds”) were only subject to the laws of the state in which they were registered. In a report to Congress, the SEC identified a number of abuses and evils, including funds taking advantage of lax state laws to issue securities with inequitable or discriminatory provisions.

After extensive hearings, Congress concluded that the individual states had failed to protect investors from the sort of abuses the SEC had documented. (Section 1(a)(5).) Consequently, Congress adopted the Investment Company Act of 1940 (the “ICA”). Unlike other federal securities laws that focused on disclosure and fraud, the ICA required funds to adopt certain governance practices and prohibited others. Commissioner Robert E. Healy and Chief Counsel David Schenker [2] were the primary architects of what was to become the ICA. In a prepared statement to the Senate Subcommittee on Banking and Currency on April 2, 1940, Commissioner Healy said this:

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Initial Perspectives and Implications of SEC Proxy Advisory Reform

Today [July 22, 2020], the U.S. Securities and Exchange Commission adopted amendments to the proxy rules governing proxy advisors (e.g., Institutional Shareholder Services (“ISS”) and Glass Lewis), which SEC Chairman Jay Clayton noted are part of the SEC’s on-going efforts to “modernize and enhance the accuracy, transparency and effectiveness of [the] proxy voting system.” He added that the new rules reflect the importance of ensuring that institutional investors act “in a manner consistent with their fiduciary obligations” and, especially when using third parties like proxy advisors, “have access to transparent, accurate and materially complete information on which to make their voting decisions.”

As we previously discussed, the SEC’s initial proposed rules met with a mix of supportive and dissenting views from investors, stiff resistance from the proxy advisory firms and the Council of Institutional Investors, and clear support from public companies and other market participants who share the concern that proxy advisory firms wield undue power and influence in the proxy voting process. Importantly, the SEC’s adopting release also includes several warning shots that may restrain, at least in part, a few of the more controversial and abusive tactics that enable activist hedge funds and other market participants to unduly influence proxy advisory firm recommendations or evade Schedule 13(d)/(g) reporting requirements.

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Statement by Commissioner Lee on Proposed Summary Shareholder Report

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. 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.

More and more, America’s families save for their children’s education, for their own retirement, and for a host of other purposes by investing their money in mutual funds and relying on the asset management industry to put their money to work. That’s what I have done for my family just as many folks on this call have as well. We know that it is vital for investors to understand exactly how their money is managed and how their investments perform over time. To that end, although there are a couple of items in the proposal that I hope will improve, I’m pleased to support it because it would make a number of helpful changes to fund disclosure requirements to provide investors with information that is more digestible, user-friendly, relevant, and engaging. [1]

For example, the proposal would simplify the presentation of fees and expenses, in both the prospectus and the new summary shareholder report, by adopting plain English headings and requiring that funds include illustrative dollar amounts for each expense rather than only percentages. The changes would also tailor the disclosure requirements to provide investors with the information that is more directly relevant to them at the time. New purchasers will get a prospectus as before, but existing shareholders will get a summary shareholder report that has more detailed information about the fund’s performance, investments, and expenses over the past year. [2]

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Board Structure, Director Expertise, and Advisory Role of Outside Directors

Jun-Koo Kang is Canon Professor at Nanyang Technological University. This post is based on a paper forthcoming in the Journal of Financial Economics by Professor Kang; Sheng‐Syan Chen, University Chair Professor at National Chengchi University; Yan-Shing Chen, Associate Professor at National Taiwan University, and Shu-Cing Peng, Assistant Professor at National Central University.

Despite the fact that the effects of board structure and director expertise on firm performance and policies are central questions in the literature on boards of directors, evidence on these questions is mixed, due largely to the endogenous nature of board structure. We also have limited evidence about the channels through which director expertise affects firm value and the circumstances under which firms can benefit from the advisory role of directors with relevant expertise without losing monitoring efficiency.

In this paper, we use a trade policy shock that affects corporate demand for qualified directors as an exogenous source of variation in board structure to provide new evidence on these important questions. Specifically, we use U.S. Congress’ grant of Permanent Normal Trade Relations (PNTR) status to China in 2000 as a quasi-policy shock to corporate demand for outside directors with China-related experience (hereafter “directors with China experience”) and investigate how such a shock affects U.S. firms’ board structure, board advisory role in investment decisions involving Chinese firms, and the assessment of directors with China experience in the stock market and the director labor market.

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Weekly Roundup: July 31–August 6, 2020


More from:

This roundup contains a collection of the posts published on the Forum during the week of July 31–August 6, 2020.

The Market for CEOs



2020 Activist Investor Report


Introduction to ESG


SEC Proposes Increase in Form 13F Reporting Threshold


The Dutch Stakeholder Experience


Legal Liability for ESG Disclosures


Corporate Culture as a Theory of the Firm



Disclosure Regarding Director’s Conflict During Merger Negotiations


The Origins and Real Effects of the Gender Gap: Evidence from CEOs’ Formative Years


Comment Letter to DOL




On the Purpose and Objective of the Corporation



ESG Shareholder Engagement and Downside Risk


Statement Chairman Clayton on Transparency for Investors and at the Commission

Statement Chairman Clayton on Transparency for Investors and at the Commission

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. 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, under the Government in the Sunshine Act. Today we have two items on the agenda, both examples of our continued work to enhance transparency for investors and at the Commission. [1] Today’s agenda items illustrate that the Commission’s transformative work in the area of modernizing our disclosure framework and Commission transparency need not pause while the Commission is also monitoring, and responding to, the effects of COVID-19 on our markets, our registrants and our investors.

Tailored Shareholder Reports, Treatment of Annual Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements

I will now turn to the first item. Over the past few years, our staff—across Divisions and Offices—have worked tirelessly to modernize and improve our disclosure system. [2] Today’s proposal would transform, for the benefit of investors, our disclosure framework for mutual funds and exchange-traded funds (“ETFs”), increasing accessibility, readability and transparency. As I discussed at our last Open Commission Meeting a few weeks ago, mutual funds and ETFs have become the primary way in which many Main Street investors access our capital markets. To put in perspective the importance of these investment products, and, as a result, the importance of clear, concise fund disclosure, we should look at the number of Americans this proposal would impact. Over 101 million individuals—representing almost 45 percent of U.S. households—own shares in registered investment companies, while almost 100 million individuals own shares in mutual funds in particular. If recent trends persist, these numbers will continue to increase in the coming years.

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ESG Shareholder Engagement and Downside Risk

Andreas Hoepner is Professor of Operational Risk, Banking & Finance at the University College Dublin Smurfit Graduate Business School. This post is based on a recent paper by Professor Hoepner; Ioannis Oikonomou, Associate Professor in Finance at the University of Reading ICMA Centre; Zacharias Sautner, Professor of Finance at Frankfurt School of Finance & Management; Laura T. Starks, the Charles E. and Sarah M. Seay Regents Chair in Finance at the University of Texas at Austin McCombs School of Business; and Xiaoyan Zhou, Postdoctoral Research Associate at the University of Oxford-Smith School of Enterprise and the Environment. 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).

Direct institutional investor engagement on aspects of corporate environmental, social and governance (ESG) performance has become increasingly prevalent in financial markets worldwide. Given the frequency of recent tail risk events such as the Deepwater Horizon Oil Spill, the Equifax Hack or the Covid-19 pandemic among others, it is not surprising that many institutional investors actively engage with their portfolio firms to reduce ESG risk exposures. Specifically, the goal is to achieve higher standards of ESG practices because these practices are believed to serve as an insurance mechanism against value-destroying tail risk events. Often the engaging shareholders are large institutional investors, also called “universal owners” due to their highly diversified, long-term portfolios. These portfolios, which reflect global financial markets, are exposed to ESG risk because of externalities from economy-wide factors, such as climate change, as well as externalities from individual portfolio firms (that also affect other firms in their portfolios).

In our research we analyze whether ESG engagements result in subsequent reductions in downside risk at portfolio firms. We employ proprietary engagement data provided by a large institutional investor, who is considered to be (one of) the most influential activists when it comes to promoting and developing firms’ ESG standards. While this institutional investor invests its own money in the engaged firm, the unique business model is to speak on behalf of other large investors in its ESG engagement activities, with currently more than $1 trillion in assets under advice (as of Q1 2020). In our study, we analyze 1,712 engagements across 573 targeted firms worldwide, covering the years 2005 through 2018. The institutional investor provided us with full access to the engagement database, including engagement activities, action reports, and the investor’s measures of engagement success. We find that over this period corporate governance engagements are the most common, accounting for 43% of all engagements. These engagements frequently center on executive pay and board structure. Engagements focusing on environmental issues, especially climate change, constitute 22% of the sample, while engagements on social (20%) and strategy (16%) are a little less common.

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Statement by Commissioner Roisman on Proposal to Improve Information Available to Fund Investors

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent public statement. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you to Director [Dalia] Blass and her excellent team in the Division of Investment Management for your several years of work developing today’s proposal to improve the information available to fund investors. Thanks also to the team in our Division of Economic and Risk Analysis, who worked hard to evaluate the costs and benefits of the many variables in this proposal, as well as all of the other SEC staff, past and present, who worked on this project.

The recommendation before us is the latest step in an enormous effort to holistically evaluate existing disclosure rules to assess how they are meeting the needs of Main Street investors. [1] The proposed rule changes reflect feedback from investors as well as research on retail investor preferences and an acknowledgement of technological advancements that have developed since our existing disclosure rules were put in place. There is a lot for the public to comment on in the proposal, and I am very interested to review the feedback.

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