Monthly Archives: October 2020

2020 Climate in the Boardroom

Eli Kasargod-Staub is co-founder and executive director and Jessie Giles is research director at Majority Action. This post is based on their Majority Action report. 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).

In the face of a global pandemic, climate-driven hurricanes, wildfires, and other extreme weather events, and the subsequent economic crisis destroying lives, livelihoods, and property, it is clear that systemic risks are the greatest threat to global economic and financial stability. To investors’ portfolios, the systemic risk of climate change is large, material, and undiversifiable–as well as undeniable. Investors and companies have been on notice since 2018 that the global economy must nearly halve carbon emissions in the next decade and reach net-zero emissions by 2050 to have just a 50% chance of limiting global warming to 1.5°C and avoiding the worst effects of a climate catastrophe.

In order to manage these systemic portfolio risks, investors must move beyond disclosure and company-specific climate risk management frameworks, and focus on holding accountable the relatively small number of large companies whose actions are a significant driver of climate change. Unfortunately, despite some recent progress, the largest systemically important carbon emitters and enablers in the U.S.–the energy, utility, automotive, and financial services sectors–remain far behind in the urgent business transformation needed to achieve a net-zero carbon future.


Virtual Shareholder Meetings in the 2021 Proxy Season

Marc S. Gerber and Richard J. Grossman are partners and Khadija Lalani is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

The COVID-19 pandemic has impacted U.S. public companies in myriad ways. The fact that the traditional proxy season—the period from April through June when a substantial number of public companies hold their annual meetings—took place at all is a credit to the collaborative efforts and flexibility of many different participants in the proxy ecosystem, including companies, boards of directors, corporate secretaries, state governments, the Securities and Exchange Commission (SEC), various service providers, proxy advisory firms and investors. The outcome was a monumental shift from a proxy season of traditional in-person annual meetings of shareholders to one largely of virtual shareholder meetings.

Considering the lack of planning time and the haste with which this systemic pivot occurred, the virtual meeting proxy season should be considered a resounding success. Companies were able to conduct their annual meetings mostly on schedule while observing the necessary restrictions and guidelines on public gatherings, thereby protecting the health of shareholders, employees, directors and other annual meeting participants. Investors were able to attend and participate in annual meetings without traveling or gathering in large groups and could even attend multiple meetings in a single day, resulting in greater shareholder attendance. That said, at least some investors remain concerned about a lack of transparency surrounding virtual shareholder meetings—particularly due to the fact that only the company was able to see the questions shareholders asked during Q&A sessions—and have called virtual meetings a “poor substitute” for in-person meetings.


Why and How Capitalism Needs to Be Reformed

Ray Dalio is co-chief investment officer and co-chairman of Bridgewater Associates.

Before I explain why I believe that capitalism needs to be reformed, I will explain where I’m coming from, which has shaped my perspective. I will then show the indicators that make it clear to me that the outcomes capitalism is producing are inconsistent with what I believe our goals are. Then I will give my diagnosis of why capitalism is producing these inadequate outcomes and conclude by offering some thoughts about how it can be reformed to produce better outcomes. As there is a lot in this, I will present it in two parts.

Part 1: Where I’m Coming From

I was lucky enough to grow up in a middle-class family raised by parents who cared for me, to be educated in a good public school, and to be able to go into a job market that offered me equal opportunity. One might say that I lived the American Dream. At the time, I and most everyone around me believed that we as a society had to strive to provide these basic things (especially equal education and equal job opportunity) to everyone. That was the concept of equal opportunity, which most people believed to be both fair and productive.


The Business Roundtable’s Purpose Statement, One Year On

Alex Heath is Executive Vice President of Social Purpose; Sara Dal Lago is Account Supervisor of Business & Social Purpose; and Meghan Laarman is Senior Account Executive of Financial Communications & Capital Markets at Edelman. This post is based on an Edelman memorandum by Mr. Heath, Ms. Dal Lago, Ms. Laarman, and Lex Suvanto. 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).

It’s been just over a year since over 180 CEOs signed on to the Business Roundtable’s (BRT) statement on the purpose of a corporation, committing to lead their companies for the benefit of all stakeholders, not just shareholders.

This statement formally set a new vision for corporate action and drew a lot of attention from media, businesses, and nonprofits alike; many wondered if this was simply an empty promise, or if it would actually spark meaningful change and concrete action. Twelve months later, how has this multi-stakeholder commitment evolved?

In the wake of the global pandemic and societal outcry against racial injustice, the spotlight is now more than ever on the business community to act in-line with multi-stakeholder principles.

The call for business action on societal issues isn’t new. From the humble beginnings of Corporate Social Responsibility through the shared value movement and up to the newly embraced stakeholder capitalism, companies have been adding value and making a positive impact on their communities and society for a long time, while external and internal expectations have evolved and shaped their ongoing actions.

So what role has the BRT’s statement of purpose played, if any?


Treasury Issues Final Rule Updating CFIUS Regulations

Malcolm “Mick” Tuesley, George Wang, and Abram Ellis are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Tuesley, Mr. Wang, Mr. Ellis, Mark Skerry, Daniel Levien, and Jennifer Ho.

On September 15, 2020, the Office of Investment Security of the U.S. Department of the Treasury (“Treasury”) published a final rule modifying the Committee on Foreign Investment in the United States’ (“CFIUS” or the “Committee”) regulations relating to its mandatory declaration provisions. The most significant amendments pertain to the mandatory filing requirements for certain foreign investments in U.S. businesses that engage in activities relating to critical technologies, a regime referred to previously as the “Pilot Program.” Under prior iterations of the regulations, a mandatory declaration for an investment in a U.S. business engaged in activities concerning critical technologies was only triggered when those activities were related to one of 27 sensitive industries specified by North American Industry Classification System (“NAICS”) code. The final rule abandons the industry-specific inquiry entirely, and instead adopts a new threshold analysis that focuses on the particular export controls that may be applicable to the critical technology utilized by the U.S. business. The rule does not, however, modify the definition of “critical technologies,” which is defined by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) and is, in part, subject to a separate ongoing rulemaking process by the Department of Commerce as explained in further detail below. [1]


SEC Increases Rule 14a-8 Thresholds

Eleazer Klein is a partner and Daniel A. Goldstein and David M. Rothenberg are associates at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

The U.S. Securities and Exchange Commission (“Commission”) has adopted amendments to the proxy rules to increase the threshold requirements for shareholders to access a company’s proxy materials. These new rules will make it more difficult for certain shareholders seeking to submit shareholder proposals for inclusion at a company’s special or annual meeting of shareholders.

Previously, Rule 14a-8 of the Securities Exchange Act of 1934 provided that for a shareholder to submit a proposal for inclusion in a company’s proxy materials, the shareholder must have continuously held at least $2,000 in market value, or 1%, of the company’s securities entitled to vote on the proposal for at least one year by the date the proposal is submitted. Under the new rules, such test is replaced with the following three alternative thresholds that will require a shareholder to demonstrate continuous ownership of at least:

  1. $2,000 of the company’s securities for at least three years;
  2. $15,000 of the company’s securities for at least two years; or
  3. $25,000 of the company’s securities for at least one year.


Short-Termism Revisited

Matt Orsagh is a director, Jim Allen is head of Americas capital markets policy, and Kurt Schacht is managing director of the Standards and Financial Market Integrity division at CFA Institute. This post is based on their CFA report. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); and The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here).

Improving fundamental analysis by considering agency problems

Since at least the 1980s, economists have discussed agency problems: when agents such as managers at a company act in their own interest rather than in the interests of their principals, the shareholders. CFA Institute is interested in learning how to address agency problems through better fundamental analysis that measures the costs of these problems (agency costs) and incentivizing managers to pursue an approach that is more fully aligned with the interests of their principals.

CFA Institute first focused on including agency problems in fundamental analysis in 2005 when the issue of “short-termism” was identified. Since that time, other opportunities to improve fundamental analysis have been identified, with environmental, social, and governance (ESG) issues coming to the fore most recently.

2005–2006: Short-termism identified and recommendations issued

In 2005, according to a survey of more than 400 financial executives, 80% of the respondents indicated that they would decrease discretionary spending on such areas as research and development, advertising, maintenance, and hiring to meet short-term earnings targets and more than 50% said they would delay new projects, even if it meant making sacrifices in value creation. [1] This admission that managers were willing to sacrifice long-term investment in favor of short-term gain was alarming.


Board Diversity: No Longer Optional

Richa Joshi is an ESG Data Analyst at Truvalue Labs. This post is based on her Truvalue memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

Research finds correlation between board diversity and company’s financial performance

Several studies have established that there is a correlation between diversity and companies’ financial performance. In 2018, McKinsey’s report stated: “Diverse companies are 33% more likely to have greater financial returns than their less-diverse industry peers.” In another study, BCG reported that companies with above-average diversity at the management level generate 19% higher innovation revenues than companies with below-average diversity.

New laws and institutional investors put pressure on companies

In September 2018, California became the first U.S. state to pass a law like Senate Bill 826, mandating all public companies with executive offices in the state to have at least one woman on their boards by December 2019. Following the announcement, California companies added 68 new women on their boards, the highest among the 26 U.S. states analyzed by 2020 Women on Boards. Other U.S. states such as Massachusetts, Washington and others are following California’s lead on diversity (details on page 6). Along with the new laws, companies face pressure from institutional investors like Blackrock and State Street to improve the board diversity.


Reclaiming “Value” in the True Purpose of the Corporation

Martin Lipton is a founding partner specializing in mergers and acquisitions and matters affecting corporate policy and strategy, and Kevin S. Schwartz is a partner Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum. 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).

As corporate boards have increasingly embraced broad stakeholder governance and sustainable value creation in confronting today’s urgent environmental and social challenges, some critics have sown confusion by claiming that stakeholder governance stands at odds with a duty to promote shareholder value. Remarkably, some now even argue that those directors who view their fiduciary duty as owed to the corporation—to grow its value over the long-term using their business judgment, based on regular engagement with shareholders—run afoul of Delaware law’s purportedly exclusive solicitude for shareholder value, triggering loss of the business judgment rule’s protection. Delaware law says nothing of the sort, and directors must not let such warnings deter their full commitment to sustainable long-term growth, innovation, and corporate social responsibility.


New Law Requires Diversity on Boards of California-Based Companies

David A. Bell and Dawn Belt are partners and Jennifer J. Hitchcock is an associate at Fenwick & West LLP. This post is based on their Fenwick memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

In a move that continues California’s push for increased diversity on corporate boards, Governor Gavin Newsom on September 30, 2020 signed into law a bill that requires publicly held companies headquartered in the state to include board members from underrepresented communities. The action follows passage of a similar law in 2018 mandating that public companies headquartered in the state have at least one woman on their boards of directors by the end of 2019 (SB 826), with further future increases required depending on board size.

The law significantly expands on the diversity categories included in the legislation as originally proposed (see our prior coverage of the draft legislation here).

Companies that do not comply with the new law, AB 979, will face similar penalties as those noncompliant with SB 826, the gender diversity law: fines in the six figures, in addition to ramifications to their brand and reputation. As with SB 826, the new law contains some open questions and ambiguities that may affect implementation.


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