Monthly Archives: October 2020

Preparing to Survive and Thrive Amidst the Next Crisis

Jonathan Ocker and Amanda Halter are partners at Pillsbury Winthrop Shaw Pittman LLP. This post is based on their Pillsbury memorandum.

This checklist will help boards enable their companies to anticipate, manage, and survive the next crisis, even as the novel coronavirus pandemic continues to cause unprecedented disruption and uncertainty.


  • Learning from the Covid-19 pandemic and the overall heightened turbulence of 2020, boards can take crisis management to the next level and oversee “foresight” or “look-around-the-corner” management teams that develop response strategies for multiple contingent scenarios.
  • Based on this planning, and to stay ahead of the next normal, boards should consistently reevaluate and update the company’s strategic and social relevance and purpose.
  • Boards should consider recalibrating their agendas and time commitment to these increased oversight responsibilities and persistent “war-like” conditions and establish a special or new contingency planning committee with additional compensation.

A novel coronavirus (COVID-19) pandemic, wildfires of unprecedented scope, numerous hurricane threats, heightened social and geopolitical unrest, increased cybersecurity breaches, asteroids, etc.—what a year! If 2020 has taught us anything, it is not “if” but “when” the next crisis will hit. It is the responsibility of the board of directors to ensure that the company is well positioned to navigate the turbulence of crisis conditions by contingency planning—proactively—at a heightened level. To that end, this post identifies 5 high-level items that can serve as a framework for sound contingency planning.


Survey Analysis: ESG Investing Pre- and Post-Pandemic

Subodh Mishra is Managing Director at Institutional Shareholder Services, Inc. This post is based on an ISS paper by Maura Souders, Associate at ISS ESG, the responsible investment arm of Institutional Shareholder Services. 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); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

Key Takeaways

  • A considerable proportion of respondents to the survey (62.5%) report that the Social domain of the Environmental, Social and Governance (ESG) spectrum is attracting more of their attention since the beginning of the COVID-19 pandemic.
  • Governance remains the most important ESG factor in the investment analysis and stewardship activities of 86% of respondents.
  • Respondents whose ESG engagements have grown since the outbreak of the pandemic report that the primary drivers of growth include client and stakeholder demand, racial inequality and diversity, and regulatory changes.
  • A significant share of respondents (44.1%) expect future ESG ratings to place a greater weight on workplace safety, treatment of employees, diversity and inclusion, as well as supply chain labor dynamics.
  • All these changes necessitate an increased workload, and 37.5% of respondents have either already added or intend to add new staff to manage ESG-related issues, following the onset of the pandemic.


Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices

Ana M. Albuquerque is Associate Professor of Accounting at Boston University Questrom School of Business; Mary Ellen Carter is Associate Professor of Accounting at Boston College Carroll School of Management; and Susanna Gallani is Assistant Professor of Business Administration at Harvard Business School. This post is based on their recent paper.

Proxy advisors recommend to institutional investors how they should vote on the nomination of board members and other corporate governance issues, including executive compensation. The advisor with the largest US market share is Institutional Shareholder Services (ISS). ISS and other advisors do not own equity in the companies about which they provide voting advice, nor do they have any fiduciary duty to the shareholders of those companies; they don’t, in short, have skin in the game. Thus a key question is whether ISS’s voting recommendations really do inform investors and—of particular interest to us—whether ISS can identify, with its “against” recommendations, low quality compensation practices.

In a recent paper, we find it can. Specifically, we show that ISS’s “against” recommendations are associated with worse future industry-adjusted performance. However, we also find that the quality of ISS’s recommendations appears to be hurt by its workload. That is, we find that the firm’s ability to identify poor compensation practices relates only to companies with non-December fiscal year-ends. Resource constraints faced by ISS during its busy season, when it is analyzing the many firms with December fiscal year-ends, appears to influence the quality of its recommendations.


ISS Supports Delaware Choice of Forum Provisions

Theodore N. Mirvis, William Savitt, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Mirvis, Mr. Savitt, Mr. Niles, S. Christopher Szczerban and Anitha Reddy, and is part of the Delaware law series; links to other posts in the series are available here. The post discusses the growing acceptance of exclusive forum bylaws, which were put forward by Wachtell Lipton partner Theodore N. Mirvis and discussed on the Forum by him herehere and here.

Institutional Shareholder Services (ISS) has released its proposed 2021 voting policy updates and, for the first time, proposes expressly recognizing the benefits of Delaware choice of forum provisions for Delaware corporations and generally recommending in favor of management-sponsored proposals seeking shareholder approval of such charter or bylaw provisions. Under the new ISS policy, ISS would:

  1. generally vote for charter or bylaw provisions that specify Delaware, or the Delaware Court of Chancery, as the exclusive forum for corporate law matters for Delaware corporations, “in the absence of serious concerns about corporate governance or board responsiveness to shareholders” (and continue to decline to vote against the directors of Delaware companies who adopt such bylaw provisions “unilaterally”);
  2. continue to take a case-by-case approach with respect to votes regarding exclusive forum provisions specifying states other than Delaware; and
  3. generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters or a specific local court within the state (and apply withhold vote recommendations to a board’s “unilateral” adoption of such a provision).


The Fiduciary Duties of Bank Boards

Abbott Cooper is founder and managing member of Driver Management Company LLC. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

Even Bank Directors Are Not “Platonic Masters”: The fiduciary duties of bank boards extend to efforts to exploit banking regulations and manipulate bank regulators

When a board of directors takes action for the primary purpose of thwarting the effectiveness of shareholders’ election of directors, that board violates its duty of loyalty. The rationale for this rule is simple: as between shareholders and directors, shareholders are the principals and directors the agents. In a principal/agent relationship, the principal has the authority to choose the agent and in the context of directors and shareholders, it is fundamentally disloyal for the director/agent to usurp the principal/shareholders’ authority to elect directors. [1] Among non-banking, commercial corporations, this is a matter of settled law and boards are largely loathe (whether to avoid liability or predictable repercussions) to take any corporate action that would thwart the effectiveness of a shareholder vote, such as attempting to prevent a contested election of directors. Yet boards of banking organizations—almost as a matter of course when confronted with an activist investor—will shamelessly take actions with the obvious “purpose of obstructing the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management.” [2]


Private Equity and COVID-19

Paul A. Gompers is Eugene Holman Professor of Business Administration at Harvard Business School; Steven N. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business; and Vladimir Mukharlyamov is Assistant Professor of Finance at the McDonough School of Business at Georgetown University. This post is based on their recent paper.

Private equity (PE) managers have significant incentives to maximize value. As such, their actions during the COVID-19 pandemic should indicate what they perceive as being important for both the preservation and creation of value.

In July–August 2020, we surveyed PE managers about their portfolio performance, decision-making, and activities during the global coronavirus outbreak. More than 200 PE managers from firms with total assets under management (AUM) of $1.9 trillion—about half of global AUM in PE—answered the survey. We report and elaborate on the findings in our new article, Private Equity and COVID-19.


How Executives Can Help Sustain Value Creation for the Long Term

Kevin Sneader is the global managing partner of McKinsey & Company; Sarah Keohane Williamson is the CEO of FCLTGlobal; and Tim Koller is a partner with McKinsey & Company. This post is based on a recent McKinsey article by Mr. Sneader, Ms. Williamson, Mr. Koller, Victoria Potter, and Ariel Babcock.

Ample evidence shows that when executives consistently make decisions and investments with long-term objectives in mind, their companies generate more shareholder value, create more jobs, and contribute more to economic growth than do peer companies that focus on the short term. Addressing the interests of employees, customers, and other stakeholders also brings about better long-term performance. The future, it seems, should belong to leaders who have a long-term orientation and accept the importance of treating various stakeholders fairly.

Nevertheless, our research shows that behavior geared toward short-term benefits has risen in recent years. In a recent survey conducted by FCLTGlobal and McKinsey, executives say they continue to feel pressure from shareholders and directors to meet their near-term earnings targets at the expense of strategies designed for the long term. Managers say they believe their CEOs would redirect capital and other resources, such as talent, away from strategic initiatives just to meet short-term financial goals.


Acquisition of Majority Ownership May Constitute a “Benefit”

Gail Weinstein is senior counsel and Steven Epstein and Mark H. Lucas are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Lucas, Matthew V. Soran, Andrea Gede-Lange, and Bret T. Chrisope, and is part of the Delaware law series; links to other posts in the series are available here.

In re Coty Stockholder Litigation (Aug. 17, 2020) involved the acquisition, by JAB Holding Company S.a.r.l., of shares in Coty, Inc. through a partial tender offer. Prior to the tender offer, JAB owned 40% of Coty’s outstanding shares and had effective control of the company. After the tender offer, JAB owned 60% of Coty’s outstanding shares and continued to control the company. Minority stockholders of Coty remaining after the offer was completed (the ”Remaining Stockholders”) brought suit in the Court of Chancery, alleging that JAB and the Coty directors had breached their fiduciary duties by effecting the tender offer at an unfair price and through an unfair process. Many of the claims were resolved prior to the defendants bringing their motion to dismiss before the court. Thus, in this decision, the claims the court addressed related only to the shares still held by the Remaining Stockholders after the tender offer closed (either because the shares were not tendered or due to proration because the shares tendered exceed the cap on shares that would be purchased in the offer). The defendants conceded that the entire fairness standard of review applied to the offer. However, they argued that, even if the offer had not been entirely fair, with respect to the shares the Remaining Stockholders continued to hold after the offer closed, they had not been harmed by JAB’s acquisition of majority control in the tender offer because JAB controlled Coty both before and after the tender offer. Chancellor Bouchard denied the defendants’ motions to dismiss the case at the pleading stage.


Corporate Board Practices in the Russell 3000 and S&P 500

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to Corporate Board Practices in the Russell 3000 and S&P 500: 2020 Edition, an annual benchmarking study and online dashboard published by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and The John L. Weinberg Center for Corporate Governance at the University of Delaware.

Corporate Board Practices in the Russell 3000 and S&P 500: 2020 Edition documents corporate governance trends and developments at US publicly traded companies—including information on board composition and diversity, the profile and skill sets of directors, and policies on their election, removal, and retirement. The analysis is based on recently filed proxy statements and complemented by the review of organizational documents (including articles of incorporation, bylaws, corporate governance principles, board committee charters, and other corporate policies made available in the Investor Relations section of companies’ websites). When relevant, the complete report highlights practices across business sectors and company size groups.

While progress continues to be made, hundreds of US public companies continue to have an all-male board of directors. While proxy statements may include photographs of directors, only about 10 percent of S&P 500 companies explicitly disclose individual directors’ ethnicity, and 8 out of 10 of those board members are white.


Key Takeaways from the New WEF/IBC ESG Disclosure Framework

Martha Carter is Vice Chairman and Head of Governance Advisory, and Matt Filosa and Sean Quinn are Managing Directors at Teneo Governance. This post is based on a Teneo memorandum by Ms. Carter, Mr. Filosa, Mr. Quinn, Sydney Carlock, Radina Russell, and Andrea Calise.

The rise of ESG investing has resulted in an evolving and sometimes confusing set of ESG acronyms. Companies often struggle to make sense of the hundreds of ESG ratings, rankings, indexes and disclosure frameworks in the marketplace.

On September 22nd, the World Economic Forum, the International Business Council and the Big 4 accounting firms announced a new initiative that seeks to synthesize at least one aspect of that ESG ecosystem: company sustainability reporting. The group’s Towards Common Metrics and Consistent Reporting of Sustainable Value Creation goal was to “form the building blocks of a single, coherent, global ESG reporting system.” What types of disclosure does this initiative recommend? What does it mean for companies and their current sustainability reporting strategy? How is this initiative likely to evolve moving forward?

The Big Idea 

The project is a collaboration between the World Economic Forum (WEF), the International Business Council (IBC), Deloitte, KPMG, EY and PWC (collectively, the “IBC Disclosure Project”). It is a follow-up to the IBC’s 2017 initiative to align company corporate values and strategies with the UN Sustainable Development Goals (UN SDGs). The IBC Disclosure Project stated goal is to bring greater consistency and comparability to sustainability reporting by establishing common metrics for company disclosure.


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