Monthly Archives: September 2020

Remarks by Commissioner Lee at the Council of Institutional Investors Fall 2020 Conference

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the Council of Institutional Investors Fall 2020 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, Amy [Borrus], for the introduction and for the invitation to speak at your conference. I’m pleased to be here with you all today [Sept. 22, 2020], and want to take this opportunity to thank you and your members for your engagement in our rulemaking process. Your comment letters are unfailingly thorough, analytical, and insightful. They provide a critically important investor perspective on our policies. I’m very grateful for your efforts.

Today I want to talk you about a topic that has dominated my thoughts recently, and I’m sure many of yours as well: diversity and inclusion. I know that many of you have long advocated for greater diversity on corporate boards and elsewhere. Recent events have triggered an unprecedented national conversation on racial injustice that also highlights the urgency of ensuring diverse perspectives and representation at all levels of decision-making in our country. At the SEC, a number of recent rulemakings have also pushed this issue to forefront. Our recent adoption of amendments to Regulation S-K, for example, took a step forward by adding human capital as a broad topic for possible disclosure, but declined to require, among other things, disclosure of diversity data—even data that most companies are already required to keep under Equal Employment Opportunity Commission (EEOC) rules. Our pending proposal under Rule 14a-8 also has implications for promoting diversity and inclusion because it affects shareholder proposals which often cover this topic. The topic has also been prominent on the agenda of recent SEC advisory committee meetings, including last week’s Asset Management Advisory Committee meeting during which participants urged the SEC to require diversity disclosure for public companies and registered entities. [1] And I’m pleased to see that the topics of diversity and inequality are on your agenda for this conference as well.


The Seven Sins of ESG Management

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 an article published in Drilling Contractor Magazine. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

These poor practices can result in superficial approaches to risk management, leading to missed opportunities as companies seek to adopt robust ESG strategy

A growing number of companies are recognizing the opportunity for long-term success that results from an effective environmental, social and governance (ESG) strategy. Rising expectations from stakeholders, including investors, customers, employees and communities, indicate that high ESG performance may translate to better access to capital, talent and business opportunities.

While companies are eager to improve their ESG position, some find it difficult to create a plan of action. The term “ESG” may appear somewhat nebulous, and it is sometimes interchanged with other similar, yet varied, terms like sustainability and corporate social responsibility. Further, ESG issues cover a wide variety of topics, making it challenging for companies to understand and prioritize key issues. Some companies are not able to take decisive action and may try to address ESG issues through incremental steps, which leaves them lagging behind their peers. Other companies may fail to see results or recognition despite significant efforts.

To successfully navigate the complex and evolving ESG landscape, companies must avoid approaches that may lead to missed opportunities. This post discusses a few such misguided approaches, the seven sins of ESG management. These are common mistakes companies make when attempting to deal with ESG issues. At best, they can result in failure to receive credit for their efforts and, at worst, can leave the company exposed to significant risks.


Federal Forum Provisions May Be Permitted

David A. Bell and Dean Kristy are partners and Soo Hwang is a senior attorney at Fenwick & West LLP. This post is based on their Fenwick memorandum.

In a first-of-its-kind ruling in California that came down on September 1, 2020, San Mateo County Superior Court Judge Marie Weiner declined jurisdiction over securities claims against Restoration Robotics by holding that the federal forum provision in the company’s amended and restated certificate of incorporation is not “unenforceable, unconscionable, unjust or unreasonable.” Although Judge Weiner’s rationale in Wong v. Restoration Robotics differs from that provided in the Delaware Supreme Court’s recent ruling in Salzberg v. Blue Apron Holdings (the appeal of the Sciabacucchi case that we discussed here), her decision is consistent with the result in the Delaware Supreme Court’s ruling that corporations may require stockholders to litigate claims under the Securities Act of 1933 (Securities Act) in federal court, holding that such forum provisions in corporate charter documents and bylaws are facially valid. In its March 2020 decision, the Delaware Supreme Court overturned the Delaware Court of Chancery’s ruling from December 2018 in Sciabacucchi v. Salzberg that we discussed here, in which the Court of Chancery had held that such federal forum provisions were unenforceable.

The enforceability of federal forum provisions has received increased attention since the U.S. Supreme Court ruled in March 2018 in Cyan v. Beaver County Employees’ Retirement Fund that plaintiffs were allowed to bring their Securities Act claims in either state or federal court.


A Brief Response Regarding Stakeholder Governance

Peter A. Atkins, Marc S. Gerber, and Kenton J. King are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Atkins, Mr. Gerber, Mr. King, and Edward B. Micheletti. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

The recently published Forum post “The Friedman Essay and the True Purpose of the Business Corporation” defends a view of stakeholder governance that reflects the following two basic flaws:

  1. It misstates to whom the fiduciary duties of directors of Delaware corporations (and of corporations organized in other states that follow Delaware law) are owed and, accordingly, the assured scope of protection of the business judgment rule for directors.
  2. It ignores the reality that the interests of nonshareholder stakeholders can be—and increasingly are being—taken into account by corporations governed by Delaware law.

We have addressed each of these points at length in our prior Forum posts on the subject. (See our posts “Stockholders Versus Stakeholders—Cutting the Gordian Knot” (Aug. 2020); “An Alternative Paradigm to ‘On the Purpose of the Corporation’” (June 2020); “Directors’ Fiduciary Duties: Back to Delaware Law Basics” (Feb. 2020); and “Putting to Rest the Debate Between CSR and Current Corporate Law” (Sept. 2019). Our focus in this and prior posts on stating what Delaware director fiduciary duty law is currently for business corporations, rather than on alternative approaches, is necessary for purposes of advising directors today.) And we have offered in those posts guidance to directors regarding how to navigate legitimate and permissible efforts to consider nonshareholder stakeholder interests. We will not repeat that.

However, because of its central importance to the fiduciary duty and protection of directors, we address the following statement in the post to which we are responding:


Six Ways Boards are Enhancing Their Evaluations and Related Disclosures

Steve W. Klemash is Americas Leader; Rani Doyle is Executive Director; and Jamie C. Smith is Investor Outreach and Corporate Governance Specialist, all at the EY Center for Board Matters. This post is based on their EY memorandum.

Boards can enhance a culture of continuous improvement by routinely having board members share and receive candid feedback from each other, as well as from senior executives and external parties with whom they regularly interact. This feedback can bring about important adjustments to board dynamics, agendas, processes, meeting materials and resources, and board and committee composition.

Additionally, investors and other stakeholders remain keenly interested in how boards are enhancing their performance and composition through regular assessments. Disclosures about a board’s evaluation process and results can enhance investor understanding and trust in the board’s oversight.

Annually since 2018, the EY Center for Board Matters (CBM) has reviewed proxy statements filed by Fortune 100 companies to identify trends in board evaluation practices. We find that companies continue to evolve their evaluation practices and related disclosures. A vast majority (95%) of 2020 Fortune 100 proxy filers provide at least some disclosure about their evaluation process, up slightly from 2019 and 2018. While the scope and details of the disclosures continue to vary, we offer the following six observations and emerging trends.


Proposed Amendments to Shareholder Proposal Rules

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

The SEC may have postponed until next week the open meeting originally scheduled for yesterday to consider adoption of revisions to the shareholder proposal rules, but Reuters has the inside scoop on the outcome of at least one controversial provision: according to Reuters, say farewell to the “momentum” provision. The expected deletion of the provision, Reuters observed, “marks a critical reprieve for supporters of social and environmental motions, which can take years on the ballot to gain traction.” Reuters reports that investors have continued to press the SEC in letters and meetings with SEC staff, hoping to put the kibosh on the proposed amendments altogether. They appear to be having some impact. Will the SEC move ahead in the face of this strong opposition?

Another contributing factor in the delay—well, maybe—could have been the letter submitted on September 4 by a group that included the Council of Institutional Investors, the Shareholder Rights Group, Ceres and the AFL-CIO, among others, which characterized themselves as “deeply involved in the proxy process because we file shareholder proposals.” These groups were “troubled by the 11th-hour submission” from the Division of Economic and Risk Analysis “on August 14, long after the February 3, 2020, public comment deadline, of the staff’s analysis of previously undisclosed data that is material to the public’s understanding of [the proposed amendments’] predicted impact.” According to the group, the SEC has had the data from DERA for over a year, but did not include the data or the staff’s analysis in the proposing release, but held the data until the vote was announced by the SEC, “without an opportunity for public comment.” The group asked the SEC to re-open the comment period so that the public could comment on the new data. The request was important, the group said, “because the data reveals that the impact of the proposed amendments would be much broader than the Commission’s Release asserted, effectively depriving most retail shareholders of the rights and ability to use the shareholder proposal process to protect and advance their interests as investors.”


ESG Disclosures: Frameworks and Standards Developed by Intergovernmental and Non-Governmental Organizations

Mark S. Bergman, Brad S. Karp, and Richard A. Rosen, are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a recent Paul Weiss memorandum by Mr. Bergman, Mr. Karp, Mr. Rosen, Ariel J. DeckelbaumJeh Charles Johnson, and Loretta E. LynchRelated 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

Key Takeaways

  • As ESG matters have increasingly become the focus of investors and regulators, standards of disclosure created by intergovernmental and non-governmental organizations, as well as industry participants, have gained market prominence. The number of ESG disclosure standards and frameworks continues to grow.
  • Investors increasingly demand disclosures within established ESG frameworks. For example, CDP Global reports that in 2020, 515 investors with $106 trillion in assets and over 147 large purchasers with over $4 trillion in procurement spend have requested companies disclose their environmental data through CDP.
  • While most ESG disclosure is made on a voluntary basis, that is beginning to change, particularly in Europe, as regulators are becoming increasing proactive.


Not long ago, ESG issues occupied a narrow niche among investment professionals and NGOs. Today, ESG topics figure prominently throughout society, and ESG themes increasingly influence the agendas of asset managers, banks, insurance companies, boards of directors of companies, rating agencies, proxy advisors, regulators and activists. ESG issues affect the full spectrum of business organizations, large and small. As the prominence of ESG has grown, so too has the focus on disclosure in its many forms. Companies are increasingly seeking to burnish their ESG credentials and to respond to pressure from stakeholders to describe how ESG affects strategy, performance, governance, compensation, their impact on their communities, and so on. These disclosures are increasingly discussed in third-party analyses of ESG track records, as well.


Expanding Opportunities for Investors and Retirees: Private Equity

Hal S. Scott is the Emeritus Nomura Professor of International Financial Systems at Harvard Law School and John Gulliver is the Kenneth C. Griffin Executive Director of the Program on International Financial Systems. This post is based on their Committee on Capital Markets Regulation report.

In recent years, U.S. companies have raised more equity through private offerings available only to institutional and high-net-worth investors than through initial public offerings available to the general public. In addition, the number of U.S. public companies has been steadily declining, and private start-up companies are frequently reaching billion-dollar valuations without opening up to the public for investment.

In our report, Expanding Opportunities for U.S. Investors and Retirees: Private Equity, we examine whether U.S. policymakers should expand access to investments in private companies through private equity funds – investment vehicles that invest in the securities of private companies and that are not registered as investment companies with the Securities and Exchange Commission (“SEC”). Private equity funds include buyout funds that acquire controlling stakes in businesses and venture capital funds that invest in young private companies with high growth opportunities.


Direct Listings 2.0—Primary Direct Listings

David Lopez and Jeffrey D. Karpf are partners, and Helena Grannis is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Lopez, Mr. Karpf, Ms. Grannis, Adam Fleisher, Nicolas Grabar, and David Parish.

In 2018, Spotify’s direct listing of its shares for trading on the New York Stock Exchange without a traditional IPO turned decades-old market practice on its head. To take full advantage of this development, financial advisors and interested companies immediately began looking for further enhancements and flexibility. Efforts focused particularly on creating a process that would allow a so-called “primary direct listing,” where a company could skip the traditional underwritten IPO and list not only shares for sale by existing stockholders, as Spotify did, but also new shares to be issued and sold directly to investors without the intermediation of an underwriter.

Recent developments at NYSE, Nasdaq and the SEC suggest that a primary direct listing may be closer to happening, although not without a fight over investor protection and liability concerns. This note revisits the process and regulatory changes implemented in the Spotify direct listing, considers Securities Act liability related to direct listings, including a decision of first impression from the Northern District of California, and discusses recent rule amendment proposals at NYSE and Nasdaq to change listing requirements and create opening trade pricing mechanisms to facilitate primary direct listings. Last we consider the SEC process and concerns around direct listings and recent investor efforts to force the SEC to reconsider the implementation of exchange rules changes related to primary direct listings.


How Boards Can Prepare for Unplanned Catastrophic Events

Seymour Burchman and Blair Jones are Managing Directors at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy memorandum.

Corporate boards have a fiduciary responsibility to manage risk, especially against major events that could overwhelm an organization and devastate shareholders’ investments. The Covid-19 pandemic has forced new attention on board’s responsibilities.

It’s tempting to call this pandemic a black swan, a calamity so unexpected that companies could not have prepared for it. But experts have been predicting global pandemics for years, and in January 2020, the World Economic Forum’s Global Risks Report cited infectious diseases as a potential threat. And few companies included a global pandemic in their high risk categories.

Indeed, it’s better to see the pandemic as a “black elephant”—a term derived from a cross between a black swan and the “elephant in the room.” Coined by the investor and environmentalist Adam Sweidan, it describes a looming disaster that’s clearly visible, yet no one wants to address it.


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