Yearly Archives: 2020

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.


“Bump-Up Exclusion” Bars Coverage of Settlement of Deal Litigation Claims

William Savitt and Ian Boczko are partners and Corey J. Banks is an associate at Wachtell, Lipton, Rosen & Katz LLP. This post is based on their Wachtell memorandum.

A California court has held that a D&O insurance policy’s “bump-up” exclusion permitted the carrier to disclaim coverage for sums paid to settle a class action against target-side directors arising from a corporate sale. Onyx Pharmaceuticals Inc. v. Old Republic Insurance Co., Case No. CIV 538248 (Cal. Super. Ct., San Mateo Cty. Oct. 1, 2020).

The decision centered on Amgen’s 2013 acquisition of Onyx Pharmaceuticals. A class of Onyx stockholders sued, alleging that the Onyx board breached its fiduciary duties by agreeing to an unacceptably low sale price. That case settled, with Onyx agreeing to pay the class $26 million. The primary carrier insurer paid its full $10 million policy limit, but the excess carriers refused coverage, invoking a “bump-up” exclusion in the policy for claims “alleging that the price or consideration paid or proposed to be paid for the acquisition . . . of an entity is inadequate.”


Investing Responsibly: Company Interaction

Carine Smith Ihenacho is the Chief Corporate Governance Officer, Jonas Jølle is Head of Governance, and Dyveke Rogan is a Senior Sustainability Analyst at Norges Bank Investment Management. This post is based on their NBIM memorandum. A related video is available here: NBIM Talk: Investing responsibly.

We have 3500 company meetings every year. Our starting point is to support the company while being clear about our expectations.

The fund’s approach to company interaction has developed over the years. However, some premises have been in place from the outset. First, we have maintained that company dialogue contributes to the protection of shareholder interests and supports the fund’s objective of achieving the highest possible return. Second, we have sought to be principled and transparent about the matters that we discuss with companies. Third, we have preferred to interact with a number of companies within a sector on the same issues rather than engage in individual company dialogue. Fourth, we have been mindful about the fund’s characteristics when interacting with companies, considering our ownership share, our global presence and our nature as a sovereign investor.

We integrate corporate governance and responsible business conduct into our investment decisions to support the fund’s objective of achieving the highest possible return with moderate risk. We have integrated governance expertise into the management of the fund, making sure that corporate governance analysts and equity analysts work together.


The Persistence of Fee Dispersion among Mutual Funds

Michael J. Cooper is Professor of Finance at the University of Utah David Eccles School of Business; Michael Halling is Associate Professor of Finance at the Stockholm School of Economics and a Research Fellow at the Swedish House of Finance; and Wenhao Yang is Assistant Professor of Finance at the Chinese University of Hong Kong School of Management and Economics. This post is based on their recent paper, forthcoming in the Review of Finance.Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

Almost 15 years ago, Elton, Gruber, and Busse (2004) and Hortacsu and Syverson (2004), documented substantial price dispersion for essentially identical S&P 500 index funds. These results were surprising because in competitive markets, prices for close to identical products should have similar prices. In the case of mutual funds, however, substantial deviations in fees might arise because of (i) the inability to arbitrage away such differences (i.e., one cannot short sell open-ended mutual funds whose fees are too high), (ii) investors that do not pay attention to fees, (iii) search frictions, as the number of mutual funds is large, and (iv) nonfinancial fund differentiation. The conclusion of this earlier literature focusing on index funds is that mutual fund markets are not perfectly competitive and that fees do matter to investors.

At the same time, Berk and Green (2004) proposed a partial-equilibrium model of the mutual fund industry that became very influential and was labelled the neoclassical model of mutual funds. This framework argues that percentage fees are irrelevant, as fund size will adjust in equilibrium such that net alphas (i.e., abnormal fund performance after fees) are equal to zero. The apparent conflict between the model’s predictions and the evidence on index funds has usually been attributed to measurement problems of abnormal performance and to the focus of the empirical evidence on a specific subset of funds, namely passive, index funds.


Weekly Roundup: October 9–15, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 9–15, 2020.

2020 Proxy Season Review

New Law Requires Diversity on Boards of California-Based Companies

Reclaiming “Value” in the True Purpose of the Corporation

Board Diversity: No Longer Optional

Short-Termism Revisited

SEC Increases Rule 14a-8 Thresholds

Treasury Issues Final Rule Updating CFIUS Regulations

Why and How Capitalism Needs to Be Reformed

Virtual Shareholder Meetings in the 2021 Proxy Season

The Impact of the Pandemic on Executive Compensation

The New SEC Regulation S-K Rules

Reporting Threshold for Institutional Investment Managers

2021 Proxy and Annual Report Season

Investing Responsibly: Voting

Does Shareholder Activism Split the Pie or Grow the Pie?

Alex Edmans is professor of finance at London Business School. This post is based on his recently published book Grow the Pie. 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); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); and Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

Activist investors are often seen as the epitome of all that’s wrong with capitalism. They cut investment, fire employees, and break contracts to boost the short-term stock price—and cash out before the long-term value destruction comes to light.

The basis of this concern is sound. Investors wish to maximize shareholder value; many of them are mandated by clients, such as pension funds, with financial obligations that need to be satisfied. One way—indeed, arguably the simplest way—to do so is to extract value from other stakeholders. However, this implicitly assumes that the value that a company creates is a fixed pie, so the only way to increase shareholder value is to take from society. In a recent post, I summarized the pie-growing mentality that’s the subject of a new book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit. Investors might instead increase shareholder value by growing the pie—improving productivity, innovation, and focus—thus benefiting society as well.

Which is it? We need to turn to the evidence. It’s certainly possible to find examples of pie-splitting. Renowned activist Bill Ackman—through his hedge fund Pershing Square—took a stake in retailer JC Penney, which then laid off workers and ended its famous customer discounts. This actually ended up harming long-term value for investors, including Pershing Square itself.


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