Yearly Archives: 2020

CFTC Identifies Climate-Related Financial Risks and Urges Action

Posted by Betty Moy Huber, Michael Comstock and Alexandra Munson, Davis Polk & Wardwell LLP, on
Thursday, October 8, 2020
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Betty Moy Huber is Counsel and Michael Comstock and Alexandra Munson are associates at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum

On September 9, 2020, the Climate-Related Market Risk Subcommittee of the U.S. Commodity Futures Trading Commission published a report, Managing Climate Risk in the U.S. Financial System, describing the links between climate change and the U.S. financial system. The Report was largely the product of efforts from its sponsor, CFTC Commissioner Rostin Benham, but was prepared with input from the Subcommittee, comprised of over 30 stakeholders, including banks; investment firms and advisors; oil and gas companies; and public interest and non-profit organizations.

The Report makes two key arguments. First, climate change poses major risks to the stability of the U.S. financial system and its institutions. Second, U.S. financial regulators must move swiftly to understand, measure and address those risks. To that end, the Report makes 53 recommendations for federal and state regulators, legislators, and financial and business leaders to manage climate change and mitigate its impacts.

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Some Thoughts on the Business Roundtable’s Statement of Corporate Purpose

Posted by John F. Cogan (Hoover Institution), on
Wednesday, October 7, 2020
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John F. Cogan is the Leonard and Shirley Ely Senior Fellow at the Hoover Institution. This post was authored by Mr. Cogan; George P. Shultz, Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution; Michael J. Boskin, the Tully M. Friedman Professor of Economics and Senior Fellow at the Hoover Institution; and John B. Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University. 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).

From time to time in the last 150 years, a socialist impulse has taken hold among a significant segment of the U.S. population. This impulse was a primary driver behind the 1880s populists’ movement and among progressives in the 1910s. It was dominant ideology among socialists in the 1930s and among young radicals and intellectuals in the 1960s. Today, there is a similar collectivist sentiment running through America. Although most Americans do not favor government control over the means of production, a significant portion of the population appears to prefer that government, rather than the private sector, be given primary control over the U.S. economy or important parts of it. In a recent poll, 44% favored government control over health care, 35% favored government control over wages of workers, and 33% favored economy-wide government controls.

Today, as in the past, the collectivist sentiment is fueled by resentment against a system that they see as having treated them unfairly, distrust of public and private institutions, and a utopian belief that human nature can be changed to make the world a better place. The American left has developed a strong anti-business sentiment and progressive politicians are calling for extensive regulation of business activities, confiscatory taxes on the wealthy, and a general redistribution of income.

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The Department of Justice as a Gatekeeper in Whistleblower-Initiated Corporate Fraud Enforcement: Drivers and Consequences

Posted by Jonas Heese (Harvard University), Ranjani Krishnan (Michigan State University), and Hari Ramasubramanian (Michigan State University), on
Wednesday, October 7, 2020
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Jonas Heese is Assistant Professor of Business Administration in the Accounting & Management Unit at Harvard Business School; Ranjani Krishnan is the Ernest W. & Robert W. Schaberg Endowed Chair in Accounting at Michigan State University; and Hari Ramasubramanian is a Doctoral Student at Michigan State University. This post is based on their recent paper, forthcoming in the Journal of Accounting and Economics.

Regulatory agencies in the United States rely on the assistance of whistleblowers to detect corporate fraud. The Department of Justice (DOJ) acts as a gatekeeper, evaluating whistleblower allegations to separate legitimate from frivolous cases. Despite its pivotal role in corporate fraud enforcement, there is sparse evidence on how the DOJ exercises its gatekeeping authority. Also, little research examines the consequences of DOJ oversight in such whistleblower cases. In our paper, we examine the DOJ’s gatekeeping role in the context of whistleblowing lawsuits against firms that are alleged to have defrauded the government.

Public and Private Enforcement

A growing debate around fraud enforcement involves the efficacy of public versus private enforcement mechanisms. At one end of the spectrum is a total private enforcement mechanism where whistleblowers provide fraud control with minimal participation from public agencies. At the other end of the spectrum is a public enforcement mechanism that vests all oversight with agencies. In the middle of the continuum is a mixed regime of a private-public partnership, such as whistleblower-initiated lawsuits under the False Claims Act (FCA) against firms that defraud the U.S. government. These mixed regimes have become prevalent in a range of contexts including securities regulations. Our study sheds light on the debate regarding the efficacy of public versus private enforcement mechanisms.

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Board Practices Quarterly: Diversity, Equity, and Inclusion

Posted by Natalie Cooper and Robert Lamm (Deloitte LLP), and Randi Val Morrison (Society for Corporate Governance), on
Wednesday, October 7, 2020
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Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on their Deloitte 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).

The landmark events of 2020 surrounding systemic racism and racial equality have led many companies and their boards to consider their practices related to diversity, equity, and inclusion (DEI). For some, the events present an opportunity to reevaluate and enhance current practices; for others, they may prompt the exploration and implementation of actions and practices to advance DEI, within and outside of their organizations, for the first time.

This post explores some ways in which companies and boards have responded to these recent events and other management- and board-focused practices pertaining to DEI. It presents findings based on an August 2020 survey of members, representing more than 200 companies, of the Society for Corporate Governance. We would expect the findings to evolve over time, particularly as they pertain not only to corporate governance, but also to a societal matter, where calls for action and change appear to be ongoing and growing.

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Proposed Rules Relating to the Reporting Threshold for Institutional Investment Managers

Posted by Andrew R. Brownstein, David A. Katz, and Oluwatomi O. Williams, Wachtell, Lipton, Rosen & Katz, on
Tuesday, October 6, 2020
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Andrew R. Brownstein and David A. Katz are partners and Oluwatomi O. Williams is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a comment letter of Wachtell, Lipton to the U.S. Securities and Exchange Commission. Additional contributors to the law firm’s comment letter included Theodore N. Mirvis, David M. Silk, and Sabastian V. Niles. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

On July 10, 2020, the U.S. Securities and Exchange Commission (the “Commission”) proposed an amendment to Form 13F that would increase the reporting threshold from $100 million to $3.5 billion (the “Proposed Amendment”). We respectfully submit this letter in response to the solicitation by the Commission for comments on the Proposed Amendment.

As discussed in more detail below, we believe that the Proposed Amendment would decrease market transparency, increase the potential for covert activist behavior and market manipulation, reduce the ability of U.S. public companies to engage with investors in a meaningful and efficient manner, and deprive investors, companies and the Commission itself of valuable, decision-useful information. The justification advanced by the Commission for the Proposed Amendment—purported savings of $15,000—$30,000 annually by the “smaller” institutions that would no longer be subject to filing requirements under Section 13(f) of the Securities Exchange Act of 1934, as amended (“Section 13(f)”)—underestimates the market influence of such institutions, likely overestimates the potential savings to those institutions, ignores other costs of the Proposed Amendment and in any event is insufficient to justify the adverse effects of the Proposed Amendment. The Proposed Amendment cuts the information currently available from Form 13Fs by 90%, rendering investors, regulators and the American public blind to important developments affecting the future of major American companies on whom our nation depends for job creation and overall prosperity.

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On the SEC’s 2010 Enforcement Cooperation Program

Posted by Andrew J. Leone (Northwestern University), Edward X. Li (CUNY), and Michelle Liu (CUNY), on
Tuesday, October 6, 2020
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Andrew J. Leone is Keith I. DeLashmutt Professor of Accounting Information & Management at Northwestern University Kellogg School of Management; Edward X. Li and Michelle Liu are Associate Professors of Accounting at CUNY Baruch College Zicklin School of Business. This post is based on their recent paper, forthcoming in the Journal of Accounting & Economics.

Leniency programs can be powerful enforcement tools. For example, the Department of Justice’s Antitrust Leniency Program has been successful in cracking down on cartel activities since 1993. By encouraging violators’ self-reporting and voluntary remediation, regulators can conserve valuable resources and rectify more misconduct than they otherwise would. However, the Securities and Exchange Commission’s (SEC’s) leniency program, which began with the 2001 Seaboard Report, long illustrated a different reality. Files (2012) finds that cooperating with the SEC can leave firms worse off. The press also harshly criticized the SEC for failing to detect egregious frauds during the Financial Crisis, despite a budget surge since 2001. To address these concerns, the SEC issued a new initiative in 2010 and, for the first time, formalized a multitude of new cooperation polices in the SEC Enforcement Manual. In our forthcoming paper in the Journal of Accounting & Economics, we investigate the effects of these policy changes.

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Maintaining Investor Trust: Independent Oversight in the System of Quality Control

Posted by J. Robert Brown, Jr., Public Company Accounting Oversight Board, on
Tuesday, October 6, 2020
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J. Robert Brown, Jr. is a Board Member at the Public Company Accounting Oversight Board. This post is based on his recent remarks at the Massachusetts Public Employee Retirement Administration Commission.

“You can’t really know where you are going until you know where you have been.”

Thank you, John [Parsons], for the kind introduction.

It is a pleasure to have an opportunity to speak to a group of professionals dedicated to protecting the well-being of our teachers, firefighters, policemen, and other local and state workers. It’s also a pleasure to be in Massachusetts, albeit virtually. The Commonwealth of Massachusetts is one of significant achievement, including the first subway in the U.S., the first college in North America, and, perhaps most important for me, the fig newton cookie. I look forward to a time when I can be back in Massachusetts in person.

Before I go on, I want to note that the views I share today are my own and do not necessarily reflect the views of the Public Company Accounting Oversight Board (“PCAOB”), my fellow Board members, or the staff of the PCAOB.

I want to talk today about the vital importance of quality control.

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2020 Aggregate Share-Based Compensation

Posted by James Garriga, Alex Yu, and Steven Knotz, FW Cook, on
Monday, October 5, 2020
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James Garriga and Alex Yu are Consultants and Steven Knotz is a Principal at FW Cook. This post is based on their FW Cook report. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Introduction

Fair Value Transfer

Best measure of a company’s aggregate annual long-term incentive grant levels because it adjusts for differences in cost between LTI grant types

Grant Date Fair Value of All Long-Term Incentive Awards Made During Year

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Company Market Capitalization at Grant

Inversely proportional to company size…

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Cross-Border Venture Capital, Technology Flows, and National Security

Posted by Josh Lerner (Harvard Business School), on
Monday, October 5, 2020
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Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School. This post is based on a recent paper by Professor Lerner; Ufuk Akcigit, the Arnold C. Harberger Professor in Economics at the University of Chicago; Sina Ates, Economist at the Federal Reserve Board of Governors; Yulia Zhestkova, a Ph.D. Candidate in Economics at the University of Chicago; and Richard Townsend, Associate Professor of Finance at the UCSD Rady School of Management. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here) and Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley by Jesse Fried and Brian Broughman (discussed on the Forum here).

One of the most contentious issues in public policy regarding U.S. entrepreneurship over the past four years has been the treatment of foreign investors. The military community has highlighted the extent of foreign venture investments in Silicon Valley, particularly from Chinese corporations, individuals, and financial institutions. These analysts have also emphasized that these investments are often in critical areas, such as artificial intelligence, fintech, robotics, and virtual reality, and expressed the fear that these activities may be leading to technology flows that, while legal, are nonetheless detrimental to U.S. economic and military interests. A particular concern is corporate venture investments, since these investors well-suited to gain insights from their interactions with the companies in their portfolios and to exploit these discoveries. Brown and Singh (2018) highlight, for instance, Alibaba’s and Enjoyor’s investment in Magic Leap, Baidu’s purchase of shares in Velodyne, and Lenovo and Tencent’s investments in Meta, companies that specialized in areas such as augmented reality, active remote sensing, and artificial intelligence.

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SEC Amends Rules for Whistleblower Program

Posted by Cydney Posner, Cooley LLP, on
Monday, October 5, 2020
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

On September 23, 2020, the SEC voted (by a vote of three to two) to adopt amendments to the rules related to its whistleblower program. The program provides for awards in an amount between 10% and 30% of the monetary sanctions collected in the SEC action based on the whistleblower’s original information. It is widely acknowledged that the program, which has been in place for about ten years, has been a resounding success. According to the press release, since inception, the SEC has obtained over $2.5 billion in financial remedies based on whistleblower tips. Most of those funds have been, or are scheduled to be, returned to affected investors. In addition, since inception, the SEC has awarded approximately $523 million to 97 individuals in whistleblower awards, with the five largest awards—two at $50 million, and one each at $39 million, $37 million and $33 million—made in the past three and a half years. So why mess with success? The press release indicates that the amendments “are intended to provide greater transparency, efficiency and clarity, and to strengthen and bolster the program in several ways. The rule amendments increase efficiencies around the review and processing of whistleblower award claims, and provide the Commission with additional tools to appropriately reward meritorious whistleblowers for their efforts and contributions to a successful matter.” The SEC also adopted interpretive guidance regarding the meaning of “independent analysis” as used in the definition of “original information,” and the SEC’s whistleblower office released guidance for award determinations. Although the final amendments may sound anodyne, the discussion at the SEC’s open meeting was quite contentious. The amendments to the whistleblower rules become effective 30 days after publication in the Federal Register.

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