Yearly Archives: 2020

NYSE Persistence Pays Off—SEC Approves Primary Direct Listings

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

Persistence pays off. In June, the NYSE filed Amendment No. 2 to its application for a proposed rule change to allow companies going public to raise capital through a primary direct listing. Yesterday, the SEC approved that rule change. Prior to this new approval, under NYSE rules, only secondary sales were permitted in a direct listing, which meant that companies that had conducted direct listings looked more like well-heeled unicorns, where the company was not necessarily in need of additional capital. The new rule change is likely to be a game changer for the traditional underwritten IPO. So much so, in fact, that Nasdaq has now also submitted an application to permit companies to conduct direct listings with capital raises.

The path to SEC approval was a bit rocky. A little over a week after the NYSE’s initial application was filed, as reported by CNBC and Reuters, the SEC rejected the proposal, and it was removed from the NYSE website, causing a lot of speculation about the nature of the SEC’s objection and whether the proposal could be resurrected. At the time, an NYSE spokesperson confirmed to CNBC that the proposal had been rejected, but said that the NYSE remained “‘committed to evolving the direct listing product…This sort of action is not unusual in the filing process and we will continue to work with the SEC on this initiative.’” (See this PubCo post.) The NYSE did persevere, and the proposal was refiled in December with some clarifications and corrections. But then—silence. In January and February, the NYSE had four meetings with SEC staff, including folks in Chair Clayton’s office, presumably to make the case for the proposal. A number of public comment letters, of divided opinion, were submitted. Apparently, the SEC remained unconvinced, designating a longer period to decide, and then in late March, issued an Order instituting proceedings to determine whether to approve or disapprove the proposed rule change. Undaunted, the NYSE filed Amendment No. 2, which is discussed in more detail in this PubCo post. The NYSE appears to be rather pleased by the positive outcome—as described by NYSE Vice Chair John Tuttle, “Innovation, disruption, and problem-solving are part of the NYSE’s DNA.”


Comment on the Proposed DOL Rule

Brian Tomlinson is Director of Research, CEO Investor Forum at Chief Executives for Corporate Purpose (CECP). This post is based on a CECP comment letter submitted to the Department of Labor. 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and 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).

Summary: The proposed rule is unnecessary and represents a confused understanding of ESG and its role in mainstream investment analysis. The rule overlooks and fails to address the volume of institutional investors (across segments and strategies) that are incorporating analysis of ESG issues into mainstream investment analysis, including buy, sell and hold decisions, upgrade and downgrade recommendations, and portfolio construction. The rule does not address the imperative of long-term value creation and the key insights ESG provides for assessing long-term corporate resilience.

The proposed rule demonstrates little awareness of the scale and seriousness of corporate America’s response to the long-term, ESG imperative, both at the issuer and industry-association level. Leading CEOs of corporate America want the capital markets to understand a corporation’s financial prospects and operational performance and acknowledge that this cannot happen without a meaningful understanding of an issuer’s financially material ESG issues and how those relate to and interact with long-term business strategy.

The proposed rule will impose direct costs on American retirees. The suggested “benefits” identified in the rule are unsubstantiated in the text of the rule and seem to rest on assertion only. At the same time, the rule seems likely to impose huge indirect costs on our capital markets by undermining innovation, discouraging the development of market-based solutions and the informed use of fiduciary discretion.


DOL Proposes Rules Clarifying When ERISA Fiduciaries Need to Vote Proxies

Adam O. Emmerich, David M. Silk, and Trevor S. Norwitz are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Emmerich, Mr. Silk, Mr. Norwitz, Sabastian V. Niles, Elina Tetelbaum, and Ishpuneet K. Chhabra.

On August 31, 2020, the U.S. Department of Labor (the “DOL”) proposed for public comment rules to clarify a misunderstanding that ERISA fiduciaries are required to vote all proxies, which it believes has caused plans to expend assets unnecessarily and without economic benefit to plan beneficiaries. The proposed rules provide that “fiduciaries must not vote in circumstances where plan assets would be expended on shareholder engagement … that [does] not have an economic impact on the plan….” The proposed rules are, in this regard, consistent with the SEC guidance issued last August clarifying that investment advisers are not always required to cast votes on behalf of their clients.


Addressing the Challenge of Board Racial Diversity

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. 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).

After taking up the challenge of increasing board gender diversity, companies are now increasingly facing the challenge of achieving board racial diversity. Recent social unrest over systemic racial injustice has pushed racial inequity into sharp relief, leading many companies to consider actions they could take to implement the needed systemic transformation. Because, as it’s often said, change starts at the top, one approach has been to increase the number of African-Americans represented on boards. This recent paper in the Harvard Business Review asks “Why Do Boards Have So Few Black Directors?” And the “Black Corporate Directors Time Capsule Project,” a survey undertaken by Barry Lawson Williams, a retired director who has served on 14 corporate boards, seeks to “capture the experiences” of 50 seasoned Black directors “for the benefit of the next generation of Black corporate directors.” The survey, which in part addresses the issue of recruitment of Black directors, is also replete with other great observations and advice, too extensive to cover in full here, including advice for aspiring directors.


ESG Didn’t Immunize Stocks Against the Covid-19 Market Crash

Elizabeth Demers is Professor at the University of Waterloo School of Accounting and Finance. This post is based on a recent paper by Professor Demers; Jurian Hendrikse, Master’s student at Tilburg University; Philip Joos, Professor at Tilburg School of Economics and Management; and Baruch Lev, Philip Bardes Professor of Accounting and Finance at the New York University Stern School of Business. 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

From its high on February 19th, 2020, the S&P 500 index lost more than one-third of its value in a little over a month as the potential human and economic consequences of the global pandemic began to be incorporated into share prices. In the wake of this COVID-19-induced stock pummeling, there were widespread claims being made by large investors and fund managers (such as Blackrock, Morningstar), purveyors of ESG data (such as MSCI), as well as by the financial press (including Fortune, the Financial Times, and the Wall Street Journal) that companies with higher environmental, social, and governance (“ESG”) performance scores were immunized against the pandemic-induced value destruction.

The notion that ESG activities contribute to stock price resilience during periods of crisis is premised upon the belief that corporate social responsibility activities help to build social capital and trust in the corporation. These bonds, the story goes, will motivate the company’s stakeholders (employees, customers, suppliers, financiers, government, society, etc.) to help the firm weather the challenges imposed by a crisis. Indeed, several studies of the 2008-2009 global financial crisis (“GFC”) purport to provide evidence of such downside risk protection. An alternative view of corporate social responsibility suggests that executives may choose to improve their company’s ESG scores at the expense of shareholders in order to build their own personal reputation. From this agency theory perspective, ESG investments are at best wasteful, and probably even harmful to shareholders (e.g., by increasing the propensity for management entrenchment). To the extent that investments in corporate social responsibility reflect poor management and/or agency problems, higher ESG scores could be an indication of potential hindrances to the firm’s resilience during challenging times. So which is it? Our study undertakes an extensive set of analyses in order to address this question in the context of U.S. equities during the current global pandemic.


Designing More Durable JV Agreements

Kira Medish is a Summer Business Analyst, Tracy Branding Pyle is a Director, and James Bamford is a Managing Director at Water Street Partners, an Ankura Company. This post is based on their Water Street memorandum.

When Honeywell restructured its highly-successful joint venture in Japan with Yamatake in 1990, the dealmakers included vaguely-defined scope and exclusivity terms—a decision that ultimately contributed to the end of the 40-year partnership. These terms allowed both Honeywell and the JV to compete in “Other Asia,” a geographic market which included China; the parties felt their history and senior-level ties meant any issues would be quickly resolved. Yet as the business grew and markets globalized, Honeywell and the JV found themselves in repeated head-to-head competition, and personal relationships were no match for potential profits. With customers caught in the crossfire and competitors growing stronger, the partners debated for years over structuring a solution that should have been negotiated at the outset, and the relationship never fully recovered; Yamatake ultimately bought out Honeywell in 2002. [1] [2]


Incentive Design Changes in Response to Covid-19

Blair Jones and Greg Arnold are managing directors and Justin Beck is a consultant at Semler Brossy Consulting Group LLC. This post is based on a Semler Brossy memorandum by Ms. Jones, Mr. Arnold, Mr. Beck, and Annie Chen. 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).


  • From June 1st to August 7th, 25 Russell 1000 companies announced changes to their current or go-forward incentive programs to address Covid-19’s impact:
    • Ten companies made changes to current, in-process incentive plans
    • Annual incentive plan: Schlumberger, Adobe, Newell Brands, Darden Restaurants, Hess, Lamb Weston, Lions Gate Entertainment, Sabre, and WEX
    • PSUs: NIKE, Lamb Weston, Sabre, and WEX
    • Consumer Discretionary (28%) and Information Technology (24%) companies make up roughly half the sample
    • Announcements have been made more often in 8-K filings (primarily 12/31 FYE companies with an in-process FY) than proxy filings (primarily 3/31 FYE companies with a recently started FY)
    • About half the sample announced changes to their annual incentive plan only and about one-third announced changes to both the annual and long-term incentive plans
  • 40% of companies in the sample previously announced temporary reductions to executive base salaries as an immediate response to Covid-19


CEO Leadership: Navigating the New Era in Corporate Governance

Thomas A. Cole is senior counsel at Sidley Austin LLP. This post is based on his recently published book, CEO Leadership: Navigating the New Era in Corporate Governance (University of Chicago Press).

At the end of 2019 (which now seems so long ago), my book CEO Leadership: Navigating the New Era in Corporate Governance was published by The University of Chicago Press. My target audience is current and future CEOs and board members, those who advise them and those who teach law and business school students who aspire to those positions. My book is a combination of (i) a summary of the seminar on corporate governance that I teach at The University of Chicago Law School, (ii) a summary of a seminar on leadership that I taught to undergraduates at the University and (iii) what I have observed and learned in more than 40 years of advising the CEOs and boards of public companies.


Cyber Risk and the Corporate Response to COVID-19

Phyllis Sumner is a partner at King & Spalding LLP; Michael Mahoney is a partner at Tapestry Networks; and Kevin Richards is Executive Vice President at Booz Allen Hamilton Inc. This post is based on a joint Booz Allen Hamilton, King & Spalding, Tapestry Networks memorandum authored by Ms. Sumner, Mr. Mahoney, Mr. Richards, and Jonathan Day.

As companies rapidly implemented remote work in response to the COVID-19 pandemic, they faced new security risks. Many will encounter additional threats as they reopen or move to hybrid environments. CRDN members met on July 2, 2020, to discuss how remote work has changed cyber risk and to consider how companies can mitigate those risks. They were joined by Phyllis Sumner, Partner and Chief Privacy Officer, King & Spalding, Kevin Richards, Executive Vice President, Booz Allen Hamilton, and Steven Weber, Professor, University of California at Berkeley.

Discussion centered on three main topics:

  • Noting successes and difficulties in the transition to remote work
  • Reviewing risks that surfaced in the crisis
  • Envisioning a post-pandemic future

Noting successes and difficulties in the transition to remote work

Most CRDN directors felt that the transition to remote work, though carried out rapidly and under intense pressure, had been broadly successful. Leaders and staff showed great resilience; many companies continued or accelerated digital transformation journeys they had launched earlier. Contrary to earlier expectations, productivity did not generally decline, and by some estimates it actually increased. But many security challenges persisted, and the move to distributed work introduced new risks.


The Illusion Of Reasoning

Dina Medland is an independent commentator and Alison Taylor is Executive Director of Ethical Systems. 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 gentlemen do protest too much, we think—with apologies to William Shakespeare for abusing his fine words in Hamlet, Prince of Denmark. Lucian Bebchuk and Roberto Tallarita, both at Harvard, have joined fellow princes in academia (not a princess in sight) and, it seems, the Financial Times in a veritable onslaught on stakeholder capitalism over the last 10 days. Amplifying a message by loud repetition is one way to promote the status quo in corporate governance and also, perhaps, to sell newspapers. But in a world of misinformation, we found our eyebrows rising.

The timing of this onslaught, just as the US presidential election starts to hurtle towards November 3, 2020, is interesting. It comes too in the middle of a pandemic that has seen a decoupling between the real economy and a stock market pushed ever higher by the monopoly power of technology companies. At issue is the historic statement of corporate purpose made by the Business Roundtable last year. The BRT is now composed of 200 CEOs, not the 180 still referred to by many in the media too bored by the concept of corporate purpose to keep track. Given that each of these CEOs on average employs 100,000 people or more, the addition of 20 more is a significant number.


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