Yearly Archives: 2020


Hao Liang is Associate Professor of Finance at Singapore Management University; Lin Sun is Assistant Professor at the Fanhai International School of Finance and School of Economics at Fudan University; and Melvyn Teo is Lee Kong Chian Professor of Finance at Singapore Management University. This post is based on their recent paper. 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).

Responsible investment is an approach to managing assets that sees investors include environmental, social, and governance (ESG) factors in their decisions about what to invest and the role they play as owners and creditors. For investment managers, a popular way to publicly signal one’s commitment to responsible investment is to endorse the United Nations Principles for Responsible Investment (henceforth PRI). Attesting to the spectacular growth in investor interest in responsible investment, the assets under management of PRI signatories have ballooned from US$6.5 trillion in 2006 to US$86.3 trillion in 2019.

Given the unprecedented interest in responsible investment by asset owners, one concern is that some fund managers may deceptively endorse the PRI to attract flows from responsible investors while not honoring their promise of incorporating ESG into their investment decisions. According to a recent KPMG report, hedge fund managers may greenwash due to inadequate expertise, shortage of data, or skepticism about the value of ESG. Such managers could subsequently underperform given their focus on asset gathering as opposed to generating alpha. In that case, greenwashing could be symptomatic of agency problems since such fund managers clearly fall short on their dual mandate of delivering both investment performance and ESG exposure, thereby failing to maximize investor welfare. Despite the concerns voiced by practitioners and regulators about greenwashing, and its potential implications for investor welfare and asset prices, we know little about greenwashing. In this study, we fill this gap by studying greenwashing among hedge fund management companies that endorse the PRI.


Financial Reporting and the Financial Reporting Regulators

Lynn E. Turner is former Chief Accountant at the U.S. Securities and Exchange Commission and currently senior advisor at Hemming Morse LLP. This post is based on a letter to the U.S. Securities and Exchange Commission from the Alliance Of Concerned Investors.

We are a collection of individuals who have worked in the capital markets for multiple decades. Most of us were original members of the Investors Technical Advisory Committee of the Financial Accounting Standards Board. Our functional roles have been as buy-side and sell-side research analysts, accounting standard-setters and regulators, or accounting academics. All of us have one experience in common: we are fundamental investors who believe that all investors are empowered to make useful investment decisions only when they are provided with robust and timely financial information. We joined together because our common beliefs and interests in financial reporting and market regulation led us to bring voice to concerns we share about the current state of financial reporting and the financial reporting regulators.

We support the SEC in its role of protecting investors and maintaining the integrity of the securities markets. The encouragement of capital formation, maintaining orderly and efficient markets, and the promotion of a market that will ensure the public’s trust are all key elements of the SEC’s mission. We support its mission and the premise that all investors should have access to meaningful financial and other information to assess the merit of an investment.


Racial Equity on the Board Agenda

Seymour Burchman and Barry Sullivan are Managing Directors and Julia Thorner, is an associate at Semler Brossy Consulting Group. This post is based on their Semler Brossy 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Calls for racial equity are moving beyond street protests and into corporate boardrooms. Many directors are looking for their companies to do more to support racial equity. This is a complex issue, but here are some different approaches that boards and management teams might pursue.

Weighing a Variety of ESG Goals

Racial justice is now top of mind, but corporations are also expected to address a range of other ESG issues, such as climate change and poverty. Since businesses have finite resources, how should boards of directors proceed, and how might racial justice initiatives fit? Some companies will find these worthy goals more imperative than others.

Directors can employ three criteria in deciding among these environmental, social, and governance aims. First, can the company make a material contribution toward addressing the problem beyond its own walls? This is largely a function of whether the solution fits within the company’s mission or purpose, and whether the company has the competencies to meaningfully address it.


Corporations in 100 Pages

Holger Spamann is the Lawrence R. Grove Professor of Law at Harvard Law School; Scott Hirst is Associate Professor of Law at Boston University; and Gabriel Rauterberg is Assistant Professor of Law at the University of Michigan. This post relates to their recently-published book, Corporations in 100 Pages.

We have just published Corporations in 100 Pages—an introduction to corporate law for students and anyone else interested in the foundations of corporate law. The book provides an accessible, self-contained presentation of the field’s essentials: what corporations are, how they are governed, their interactions with their investors, and other stakeholders, major transactions (M&A), and parallels with other legal entities, including partnerships. Optional background chapters cover the investor ecosystem, contemporary corporate governance, and corporate finance. The book’s exposition of doctrine and policy is nuanced and sophisticated, yet short and simple enough for a quick read.

We hope it will help the struggling student or young professional, but just as importantly, we hope it will allow teachers to spend less time on the basics and more with more complex topics. For those interested, it could be assigned alongside a casebook or simply suggested as a source for those finding difficulty with the material. We provide more information about the book below.


Financial Institution Regulation Under President Biden

Katherine Mooney Carroll is partner and Lauren Gilbert and Zachary Baum are associates at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Carroll, Ms. Gilbert, Mr. Baum, Derek Bush, Colin Lloyd, and Hugh C. Conroy.

Following Vice President Joe Biden’s apparent victory last weekend, attention has now turned to the transition and implications of a change in administration.

The pandemic and related economic downturn will guide the Biden Administration’s immediate priorities for the financial sector, resulting in a focus on economic relief and stimulus, consumer protection and attention to any signs of financial instability. Given these and other priorities, and the relatively modest changes in financial regulation under the Trump Administration, regulatory reform is not likely to be a major area of focus in the early period of the administration. Gridlock in Congress also means that the existing regulatory architecture will remain intact in the short term. The most significant policymaking is likely to occur at the agencies.

A Republican-controlled Senate may result in moderate appointees to lead the Treasury Department and the financial regulatory agencies, although progressives will push hard for nominees reflecting the views of Senators Warren and Sanders. President Biden is also likely to minimize appointees with ties to Wall Street. Achieving racial and gender diversity, including in the key financial posts, is an announced goal of his administration.


ESG Management and Board Accountability

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 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 world of corporate governance and proxy voting, 2020 has been a remarkable year, not only because annual general meetings took place in the midst of a global pandemic that forced the abrupt transition to a virtual proxy season, but also because this year marked the beginning of the new decade at a time when companies and investors experience a major shift in how they engage on the topic of corporate governance. The scope of corporate governance activities is no longer limited to issues directly linked to routine meeting agenda items, such as director elections, shareholder rights, executive compensation, and audit quality. The definition of governance is expanding to include the management of environmental and social risks and opportunities.

Many investors begin to recognize ESG issues as part of their fiduciary responsibility, and several have committed to using their votes to hold boards and management teams accountable for the potential mismanagement or lack of oversight of material issues. Climate change, employee health and safety, data privacy, and human rights are only a few of the many factors where investor expectations are changing, requiring companies to demonstrate robust management systems, oversight mechanisms, and measurable performance in addressing potential risks and opportunities.


Shareholders’ Rights & Shareholder Activism 2020

Eleazer Klein is a partner at Schulte Roth & Zabel LLP. This post is based on a Chambers Global Practice Guides publication by Mr. Klein, Aneliya CrawfordJohn MahonMichael Swartz and Brandon Gold.

COVID-19’s Impact on Shareholder Rights

As life dramatically changed in 2020, so did shareholder rights. In the United States, we witnessed a dramatic and substantial change to how companies conduct annual meetings, a reignited debate on the purpose of the corporation, new defensive strategies for companies, as well as a reshaping of the shareholder activist model, as some activists adopted tactics historically associated with private equity. Below we note some of the major developments that took place over the past year.

The coronavirus (COVID-19) pandemic that brought much of the world’s economy to a standstill in 2020 also presented new challenges for publicly held companies and shareholders seeking to exercise their rights. Some of the effects of the pandemic were immediate and visible, such as the widespread switch from in-person to virtual annual shareholder meetings. We expect the pandemic will also impact the debate over the purpose of a corporation and the role of shareholders, and provide activist shareholders with new opportunities to campaign for change to unlock shareholder value.

Switch to Virtual Shareholder Meetings and Negative Impact on Shareholder Participation

The premier forum for shareholders to exercise their rights, hold a board of directors and management accountable, and make their voices heard is the annual shareholder meeting. Public companies in the United States are required to hold an annual meeting of shareholders every year to elect directors and conduct other shareholder business. Traditionally, these meetings have been held in person (and often broadcast online) and included opportunities for shareholders to question management and the board. As every voting shareholder, whether holding ten shares or ten million shares, has the right to attend annual shareholder meetings, these meetings provided all types of shareholders the opportunity to participate meaningfully.


Statement of Commissioners Peirce and Roisman on Andeavor LLC

Hester M. Peirce and Elad L. Roisman are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in this post are those of Ms. Peirce and Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

We write to explain why we voted against the Commission’s settled action in the matter of Andeavor LLC. [1] A majority of the Commission found that Andeavor violated Exchange Act Section 13(b)(2)(B), which requires reporting companies to devise and maintain a system of “internal accounting controls,” when Andeavor repurchased its stock from shareholders after its legal department concluded that it did not possess material nonpublic information about a merger. [2] Because we believe the Commission’s finding entails an unduly broad view of Section 13(b)(2)(B), we respectfully dissent.

Make no mistake: Insider trading by public companies engaged in share repurchases is unacceptable, and we support all appropriate actions—including charges under Rule 10b-5—when companies use material nonpublic information to take advantage of their shareholders. We also support all appropriate actions under Section 13(b)(2)(B) when companies have inadequate internal accounting controls that threaten to erode confidence in their financial statements. In short, we have supported, and will continue to support, vigorous enforcement of the antifraud, disclosure, and other securities laws against corporate wrongdoers whenever appropriate. But the tools we use must be fit for the task. And in this case, we believe Section 13(b)(2)(B) is not the appropriate tool.


The Limits of Corwin in the Sale of a Company to a PE Buyer

Gail Weinstein is senior counsel, and Steven J. Steinman and Brian T. Mangino are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Mark H. Lucas, Andrea Gede-Lange, and Shant P. Manoukian. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In In re MINDBODY, Inc. Stockholders Litigation, the plaintiffs challenged the merger (the “Merger”) pursuant to which private equity firm Vista Equity Partners acquired MINDBODY, Inc. (the “Company”). The key allegations were that the Company’s CEO-founder-director (“RS”), due to his self-interest in obtaining liquidity and lucrative post-sale employment, “tilted” the sale process in favor of Vista rather than seeking to maximize the price on behalf of all the stockholders. The transaction was approved by a majority-independent board and the stockholders. However, the court ruled, at the pleading stage of litigation, that it was reasonably conceivable that RS may have breached his fiduciary duties to the stockholders; and, because his potential conflicts of interest were not disclosed, the alleged breaches were not “cleansed” under Corwin. The court also found it reasonably conceivable that the Company’s CFO (who was not a director) (“BW”) breached his fiduciary duties by following RS’s lead in the process.

We would observe that it is relatively common, especially when a sale process involves private equity bidders, for a CEO engaged in a sale process to want to obtain liquidity and post-closing employment. Mindbody underscores that the particular facts and circumstances will be critical to the court’s determination whether those desires constitute a disabling conflict of interest.


Delaware Reaffirms Director Independence Principle in Founder-Led Company

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

The Delaware Court of Chancery yesterday [October 26, 2020] dismissed a derivative lawsuit against the directors of Facebook. United Food & Commercial Workers Union v. Zuckerberg, C.A. No. 2018-0671-JTL (Del. Ch. Oct. 26, 2020). The decision is a notable application of Delaware’s presumption of director independence.

In 2016, Facebook’s board decided not to pursue a stock reclassification proposal that had been negotiated between a special committee of the board and the company’s founder and majority stockholder. A class action challenging the proposal on behalf of minority stockholders was dismissed as moot, and the Court awarded a negotiated fee to the plaintiffs’ lawyers. A stockholder then filed this follow-on derivative lawsuit against the company’s directors, alleging that they had wrongfully caused the company to incur expenses—by considering the proposal and defending themselves in the ensuing litigation. The directors moved to dismiss the complaint on the ground that a majority of the board was capable of independently determining whether the company should bring the claims asserted.


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