Yearly Archives: 2020

Weekly Roundup: December 11–17, 2020

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, December 18, 2020

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This roundup contains a collection of the posts published on the Forum during the week of December 11–17, 2020

SEC Adopts Amendments to Permit the Use of Electronic Signatures

Posted by Kenneth M. Silverman and Zachary E. Freedman, Olshan Frome Wolosky LLP, on Friday, December 11, 2020
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Board Considerations for an Uncertain 2021

Posted by Holly J. Gregory, Sidley Austin LLP, on Friday, December 11, 2020
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New Executive Order Bans Investment in 31 Chinese Companies

Posted by Ama Adams, Brendan Hanifin, and Emerson Siegle, Ropes & Gray LLP, on Saturday, December 12, 2020
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Realizable Pay Disclosures

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Saturday, December 12, 2020
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Variety of Approaches to New Human Capital Resources Disclosure in 10-K Filings

Posted by David Gordon, Dina Bernstein, and Andrew Lash, FW Cook, on Sunday, December 13, 2020
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Nasdaq Proposes New Listing Rules Related to Board Diversity

Posted by Ron S. Berenblat and Elizabeth Gonzalez-Sussman, Olshan Frome Wolosky LLP, on Sunday, December 13, 2020
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From Managers to Markets: Valuation and the Shareholder Wealth Paradigm

Posted by James Park (UCLA), on Monday, December 14, 2020
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Leading Digital and Cybersecurity Risk Factor Disclosures for SEC Registrants

Posted by Paul Ferrillo (McDermott Will & Emery LLP), Bob Zukis (USC Marshall School of Business), and Christophe Veltsos (Minnesota State University), on Monday, December 14, 2020
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Section 220 as Pre-Complaint Discovery—Recent Developments

Posted by William Savitt, Sarah K. Eddy, and Cynthia Fernandez Lumermann, Wachtell, Lipton, Rosen & Katz, on Tuesday, December 15, 2020
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Is Conflicted Investment Advice Better than No Advice?

Posted by John Chalmers (University of Oregon) and Jonathan Reuter (Boston College), on Tuesday, December 15, 2020
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BlackRock Investment Stewardship Global Principles

Posted by Sandra Boss, Michelle Edkins, and Shinbo Won, BlackRock, Inc., on Tuesday, December 15, 2020
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Demand for Better ESG Oversight and Disclosure in Canada

Posted by Stephen Erlichman, Fasken Martineau DuMoulin LLP, on Wednesday, December 16, 2020
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The Big Three and Corporate Carbon Emissions Around the World

Posted by Jose Azar, Miguel Duro, Igor Kadach, and Gaizka Ormazabal (University of Navarra IESE Business School), on Wednesday, December 16, 2020
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Applying Discretion to Outstanding Incentive Awards in the COVID-19 Era

Posted by Tara Tays, Abby Dunleavy and Bob Lamm, Deloitte LLP, on Wednesday, December 16, 2020
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China and the Rise of Law-Proof Insiders

Posted by Jesse Fried (Harvard Law School) and Ehud Kamar (Tel Aviv University), on Thursday, December 17, 2020
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Statement by Commissioner Crenshaw on Resource Extraction

Posted by Caroline Crenshaw, U.S. Securities and Exchange Commission, on Thursday, December 17, 2020
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Statement on Adoption of Resource Extraction Disclosure Rules

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Thursday, December 17, 2020
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Statement on Adoption of Resource Extraction Disclosure Rules

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Thursday, December 17, 2020
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Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. The views expressed in this post are those of Chairman Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on December 16, 2020, under the Government in the Sunshine Act.

Today, we take another step in a winding, resource-consuming, decade-long journey to implement Section 1504 of the Dodd-Frank Act. In 2010, Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, which directed the Commission to issue rules, commonly known as the “resource extraction rules,” requiring resource extraction issuers—in essence, certain companies publicly traded on U.S. exchanges—to disclose information about payments made to a foreign government or the Federal government for the purpose of the commercial development of oil, natural gas, or minerals.

The Commission has finalized these rules twice already. Yes, that’s correct. Two prior Commissions have gone through the Administrative Procedure Act, or APA, process of developing proposals, publishing those proposals for comment, and then adopting final rules implementing Section 13(q). The first time the Commission went through the APA process and promulgated final rules in 2012, those final rules were vacated by the U.S. District Court for the District of Columbia. The second time the Commission went through the APA process and promulgated final rules in 2016 (the “2016 Rules”), those final rules were disapproved by a joint resolution of Congress pursuant to the Congressional Review Act, or the CRA, in 2017.

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Statement by Commissioner Crenshaw on Resource Extraction

Posted by Caroline Crenshaw, U.S. Securities and Exchange Commission, on
Thursday, December 17, 2020
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Caroline Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today we find ourselves in a difficult situation. On one hand, we have a clear congressional mandate to promulgate a rule directing issuers to disclose certain resource extraction payments. On the other hand, we are bound by the requirements of the Congressional Review Act (“CRA”), which states that any rule we adopt today may not be “substantially the same” as the rule Congress invalidated. We are now faced with novel questions of law: what does “substantially the same” mean in this context and how do we reconcile these congressional directives? [1]

The Commission has tried for nearly a decade to implement the congressional mandate from Section 1504 of the Dodd-Frank Act, without success. In 2012, we approved a rule that was vacated by a federal district court. [2] Then in 2016, the last time a resource extraction disclosure rule was enacted at the end of an administration, the rule was later disapproved by a joint-resolution from Congress under the CRA. [3] It is with this history in mind that we try a third time.

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China and the Rise of Law-Proof Insiders

Posted by Jesse Fried (Harvard Law School) and Ehud Kamar (Tel Aviv University), on
Thursday, December 17, 2020
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Jesse M. Fried is Dane Professor of Law at Harvard Law School and Ehud Kamar is Professor of Law at Tel Aviv University Buchmann Faculty of Law. This post is based on their recent paper.

Alibaba Group Holding Limited (Alibaba), which in 2014 conducted a record-breaking initial public offering (IPO) on the New York Stock Exchange and in mid-2020 was valued at over $500 billion, is based in China but is subject to U.S. securities law and to Cayman Islands corporate law. It is one of hundreds of U.S.-listed firms that are based in China but subject only to the securities and corporate laws of other jurisdictions. In a paper recently posted on SSRN, China and the Rise of Law-Proof Insiders, we show that this arrangement renders the insiders of these firms law-proof. As a result, the law cannot prevent or deter them from expropriating substantial value from U.S. investors.

The main problem, we show, is that almost every person or thing required to enforce the law—the insiders, the insiders’ assets, the firms’ records, and the firms’ assets—is behind China’s “Great Legal Wall” and out of reach both for private plaintiffs and for public prosecutors in the United States. China cannot be expected to extradite defendants, enforce foreign judgments, allow foreigners to file claims in its courts, or even permit litigation-critical information to be shared with foreign authorities or plaintiffs’ lawyers. Enforcement is even harder when, as is typically the case for large Chinese technology companies like Alibaba, the firm domiciles in the Cayman Islands rather than in the United States. And the problem is not merely hypothetical. China-based insiders of China-based firms have expropriated billions of dollars from U.S. investors, making clear both the imperviousness of China’s Great Legal Wall and insiders’ willingness to exploit it.

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Applying Discretion to Outstanding Incentive Awards in the COVID-19 Era

Posted by Tara Tays, Abby Dunleavy and Bob Lamm, Deloitte LLP, on
Wednesday, December 16, 2020
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Tara Tays is a managing director in Deloitte Consulting LLP’s National Compensation Strategies Practice; Abby Dunleavy is a manager at Deloitte Consulting LLP; and Robert Lamm is an independent senior advisor at the Center for Board Effectiveness, Deloitte LLP. This post is based on their Deloitte memorandum. 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).

When COVID-19 first began impacting the US economy, many companies faced unclear financial forecasts and uncertainty on whether incentive plans would appropriately reward executives and employees for their contributions, pre– and post–COVID-19. Rather than overhaul in-flight incentive plans at a time of great uncertainty, many companies decided to take a “discuss now, act later” approach. Now, companies nearing their fiscal year-ends must “act” by determining whether incentive plan designs and performance targets established before the pandemic will reasonably reward executives and employees for their contributions, especially given the many challenges posed by COVID-19.

A quick look at companies’ actions

Many companies significantly impacted by the COVID-19 pandemic took swift steps to reduce compensation expense in response to economic conditions while also prioritizing the safety of employees and customers and stabilizing their businesses. Other challenges faced by management and compensation committees included retaining and engaging employees despite unknown or unattainable performance goals in annual incentive plans and performance-based long-term incentive awards, out-of-the-money stock options, depreciated full value equity awards and declines in retirement account balances.

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The Big Three and Corporate Carbon Emissions Around the World

Posted by Jose Azar, Miguel Duro, Igor Kadach, and Gaizka Ormazabal (University of Navarra IESE Business School), on
Wednesday, December 16, 2020
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Jose Azar is Visiting Professor of Economics, Miguel Duro is Assistant Professor of Accounting and Control, Igor Kadach is Assistant Professor of Accounting and Control, and Gaizka Ormazabal is Associate Professor of Accounting and Control, all at the University of Navarra IESE Business School. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. 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); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In our study The Big Three and Corporate Carbon Emissions Around the World, forthcoming at Journal of Financial Economics, we analyze the role of the three largest asset managers in the world—BlackRock, Vanguard and State Street Global Advisors—in reducing companies’ carbon emissions.

The current interest in the Big Three responds to the unique combination of characteristics of these investors. The first of these characteristics is their size; they manage an enormous (and growing) amount of investments. The second distinctive characteristic of the Big Three is that most of the investment vehicles sponsored by these investors are passively-managed.

The role of large passive investors in the economy is a subject of ongoing debate. While acknowledging the advantages of index fund investing in terms of diversification and lower management fees, some commentators have raised some concerns about the Big Three, including issues related to pricing efficiency and trading behavior, anti-competitive effects, and underinvestment in stewardship. In contrast to these issues, it is also argued that fund sponsors compete not only on fees but also on returns. Moreover, recent research suggests that passive investors have meaningful monitoring incentives when it comes to cross-cutting issues such as sustainability and certain aspects of corporate governance in which large investors can exploit economies of scale.

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Demand for Better ESG Oversight and Disclosure in Canada

Posted by Stephen Erlichman, Fasken Martineau DuMoulin LLP, on
Wednesday, December 16, 2020
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Stephen Erlichman is a partner at Fasken Martineau DuMoulin LLP. This post is based on his Fasken 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).

Two Notable ESG Developments in Canada

Many Canadian public companies have been accused of being slow to disclose environmental, social and governance (“ESG”) factors that are material for their companies’ long term sustainability. In November, two notable developments occurred which should focus Canadian boards of directors and management on how directors oversee material ESG factors at their company and how their company discloses those material ESG factors to its shareholders.

Joint Statement of Leading Canadian Pension Fund CEOs

 On November 25, the CEOs of eight leading Canadian pension plan investment managers, representing approximately $1.6 trillion of assets under management (namely AIMCo, BCI, Caisse de depot et placement du Quebec, CPP Investments, HOOPP, OMERS, Ontario Teachers’ Pension Plan, and PSP Investments), joined forces to issue a joint statement calling on companies and investors to provide “consistent and complete” ESG information in order to “strengthen investment decision-making and better assess and manage their collective ESG risk exposures”. These eight CEO’s stated that they “believe companies demonstrating ESG-astute practices and disclosure will outperform over the long-term” and that the pension plans they manage will “allocate capital to investments best placed to deliver long-term sustainable value creation”.

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BlackRock Investment Stewardship Global Principles

Posted by Sandra Boss, Michelle Edkins, and Shinbo Won, BlackRock, Inc., on
Tuesday, December 15, 2020
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Sandra Boss is Global Head of Investment Stewardship; Michelle Edkins is Managing Director of Investment Stewardship; and Shinbo Won is Director of Investment Stewardship at BlackRock, Inc. This post is based on a BlackRock memorandum, by Ms. Boss, Ms. Edkins, Mr. Won, Richard Whitaker, Tanya Levy-Odom, and Jessica McDougall.

The purpose of this post is to provide an overarching explanation of BlackRock’s approach globally to our responsibilities as a shareholder on behalf of our clients, our expectations of companies, and our commitments to clients in terms of our own governance and transparency.

Introduction to BlackRock

BlackRock’s purpose is to help more and more people experience financial well-being. We manage assets on behalf of institutional and individual clients, across a full spectrum of investment strategies, asset classes, and regions. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers, and other financial institutions, as well as individuals around the world. As part of our fiduciary duty to our clients, we have determined that it is generally in the best long-term interest of our clients to promote sound corporate governance through voting as an informed, engaged shareholder. This is the responsibility of the Investment Stewardship Team.

Philosophy on investment stewardship

Companies are responsible for ensuring they have appropriate governance structures to serve the interests of shareholders and other key stakeholders. We believe that there are certain fundamental rights attached to shareholding. Companies and their boards should be accountable to shareholders and structured with appropriate checks and balances to ensure that they operate in shareholders’ best interests to create sustainable value. Shareholders should have the right to vote to elect, remove, and nominate directors, approve the appointment of the auditor, and amend the corporate charter or by-laws. Shareholders should be able to vote on matters that are material to the protection of their investment, including but not limited to, changes to the purpose of the business, dilution levels and pre-emptive rights, and the distribution of income and capital structure. In order to make informed decisions, we believe that shareholders have the right to sufficient and timely information. In addition, shareholder voting rights should be proportionate to their economic ownership—the principle of “one share, one vote” helps achieve this balance.

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Is Conflicted Investment Advice Better than No Advice?

Posted by John Chalmers (University of Oregon) and Jonathan Reuter (Boston College), on
Tuesday, December 15, 2020
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John Chalmers is Abbott Keller Professor of Finance at the University of Oregon Lundquist College of Business, and Jonathan Reuter is associate professor of finance at Boston College Carroll School of Management. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

Studies of financial services industries have consistently found evidence of conflicted advice. Financial advisors, in a variety of settings, including mutual funds, insurance, and brokerage accounts, have been found to recommend higher-commission products. One implication is that the quality of financial advice that investors receive has room for improvement, perhaps through increased standards of care. In our paper, we ask a different question: when are investors better off, even if they bought a relatively expensive product, than they would have been otherwise? Answering this question requires us to determine what an advice-seeking investor would have purchased in the absence of conflicted advice. While this counterfactual investment is inherently difficult to identify, we show that the institutional setting is likely to play an important role in determining the relevant comparator.

The counterfactual investment is critical to understanding the value of advice. In Gennaioli, Shleifer, and Vishny’s (2015) model, trusted financial advisors (“money doctors”) increase clients’ equity allocations above counterfactual levels of zero, thereby allowing clients to earn the equity risk premium. Because the fees charged by financial advisors are set to split the gains from trade, each party benefits. When the relevant counterfactual portfolio is a money market fund, potential gains from trade are large and advice seekers are likely to benefit, even if the recommendation is to invest in high-commission equity funds. In contrast, if the counterfactual investment also provides considerable allocations to equities, the value of the conflicted advice must be higher to provide benefit to the investor.

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Section 220 as Pre-Complaint Discovery—Recent Developments

Posted by William Savitt, Sarah K. Eddy, and Cynthia Fernandez Lumermann, Wachtell, Lipton, Rosen & Katz, on
Tuesday, December 15, 2020
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William Savitt and Sarah K. Eddy are partners and Cynthia Fernandez Lumermann is an associate 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.

Two recent decisions of the Delaware courts confirm that Section 220 of the Delaware General Corporation Law will be consistently interpreted to grant pre-complaint discovery to stockholders seeking to prepare fiduciary-breach litigation.

In Pettry v. Gilead Sciences, Inc., a group of Gilead stockholders sought to inspect corporate documents for the purpose of investigating wrongdoing in the development and marketing of HIV drugs. C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020). Gilead opposed the demand, principally on the ground that the stockholders’ basis to suspect such wrongdoing—unproven allegations in other lawsuits—was inadequate to justify inspection. The court disagreed, finding that allegations forming the basis of other lawsuits may well constitute a credible basis for inspection. The court went on to criticize the defendant for an “overly aggressive defense strategy” which the court found “epitomizes a trend” to “obstruct [demanding stockholders] from employing [Section 220] as a quick and easy pre-filing discovery tool.” To disincentivize such conduct, the court granted the plaintiffs leave to file a motion to recover their litigation fees and costs.

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