Yearly Archives: 2020

What Companies are Disclosing About Cybersecurity Risk and Oversight

Posted by Steve W. Klemash, Jamie C. Smith, and Chuck Seets, EY, on
Tuesday, August 25, 2020
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Steve W. Klemash is Americas Leader at the EY Center for Board Matters; Jamie C. Smith is Investor Outreach and Corporate Governance Specialist at the EY Center for Board Matters; and Chuck Seets is Americas Assurance Cybersecurity Leader at EY. This post is based on their EY memorandum.

Cybersecurity risk is intensifying, particularly with widespread remote working and increased online interactions amid the pandemic. The rapid adaptation of multiple business processes and protocols to enable this virtual environment has exponentially increased the corporate attack surface and introduced new risks to the confidentiality, integrity and availability of critical company data and supporting systems.

The return of some workers to a physical workplace is also raising new data security risks and privacy questions, with companies collecting data related to employee, contractor and customer health such as COVID-19 testing, temperature checks and contact tracing. At the same time, harnessing new and disruptive technologies—and enabling the trust of stakeholders and the marketplace in doing so—is key to helping organizations lead, innovate and differentiate.

In this environment, remaining cyber-resilient and building stakeholder trust in the company’s data security and privacy practices is a strategic imperative. Public disclosures can help build trust by providing transparency and assurance around how boards are fulfilling their cybersecurity risk oversight responsibilities.

For the third consecutive year, EY researchers have analyzed cybersecurity-related disclosures in the proxy statements and Form 10-K filings of Fortune 100 companies to identify emerging trends and developments and help companies identify opportunities for enhanced communication. We looked at 76 Fortune 100 companies that filed those documents from 2018 through May 31, 2020. We focused on the areas of cybersecurity board oversight (including board-level committee oversight and director qualifications), statements on cybersecurity and data privacy risks, and risk management (including cybersecurity risk mitigation and response efforts and engagement with external security consultants). We also examined the current regulatory and US public policy landscape as it relates to cybersecurity, as well as perspectives from investors, directors and EY cybersecurity professionals.

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Funding the Future: Investing in Long-Horizon Innovation

Posted by Sarah Keohane Williamson, Ariel Babcock, and Allen He, FCLTGlobal, on
Tuesday, August 25, 2020
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Sarah Keohane Williamson is CEO, Ariel Babcock is Head of Research, and Allen He is Associate Director at FCLTGlobal. This post is based on their FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes The Uneasy Case for Favoring Long-term Shareholders by Jesse M. Fried (discussed on the Forum here).

Executive Summary

Effective long-term capital allocation is fundamental for innovating and creating value; investment in research and development (R&D) fuels this growth. Successful R&D can be transformational for an organization and for broader society. But while worldwide spending on R&D has slowly increased, R&D returns have been declining. What’s driving this decline? Emerging evidence suggests a short-term mindset lies at the heart of this puzzle.

R&D spending, especially long-horizon R&D project spending, faces a unique set of short-term pressures relative to other types of long-term investment. When facing short-term financial pressures, behavioral biases including manager risk aversion and uncertainty around forecasting potential future returns (among other things) lead to a tendency among management teams to cut long-horizon projects first. The declining tenure of managers, the lack of innovation-linked metrics in incentive compensation plans, the typically asymmetric return profile of long-horizon projects, and an investment community that often ignores the potential impact of long-horizon innovation spending in a company’s valuation analysis all contribute to this problem.

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Stockholders Versus Stakeholders—Cutting the Gordian Knot

Posted by Peter Atkins, Kenton King, and Marc Gerber, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, August 24, 2020
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Peter A. Atkins, Marc S. Gerber, and Kenton J. King are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Atkins, Mr. Gerber, Mr. King, and Edward B. Micheletti. 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) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Directors of most for-profit U.S. corporations have long considered the corporation’s relationships with customers, employees, suppliers and the communities in which they operate—sometimes referred to as “stakeholders” [1]—in the course of overseeing the building, operating and growing of the corporations’ businesses. In more recent years, the concepts of “stakeholders” and “stakeholder interests” have greatly expanded, with the interests generally falling under the umbrella of environmental, social and governance (ESG) matters. [2] Now current and ongoing events, including the COVID-19 pandemic and the increased attention to systemic racism following the killing of George Floyd, add new and increasing complexity for boards of directors as they consider stakeholder interests in the context of navigating their businesses through economic headwinds. Calls from some quarters for boards to focus on these stakeholder interests, while distinguishing them from stockholder interests, have sown confusion and misunderstanding. This article, through stating a series of guiding principles, attempts to “cut through it all” like the Gordian Knot, bring clarity to the discussion and provide real-world guidance for director decision-making.

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TikTok: Familiar Issues, Unfamiliar Responses

Posted by Paul Marquardt, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, August 24, 2020
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Paul Marquardt is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on his Cleary memorandum.

Initial press reports last November that the Committee on Foreign Investment in the United States (CFIUS) had commenced a review of ByteDance’s acquisition of Musical.ly, the service that was merged into ByteDance’s video-sharing site TikTok and helped fuel its expansion, were not particularly surprising to those familiar with CFIUS and its concerns. However, recent departures from established CFIUS processes in the TikTok matter are striking and concerning for persons engaging in cross-border transactions involving the United States, calling into question the scope, apolitical nature, confidentiality, and security focus of the CFIUS process.

CFIUS’s concerns regarding the protection of personal information of U.S. citizens stretch back to the Obama Administration, and while TikTok may not appear to be a particularly sensitive platform, it has had significant privacy issues in the past, including well-publicized security concerns, allegations of censorship, and an FTC fine for illegally collecting the personal information of children. It is not particularly surprising that these concerns would attract CFIUS review.

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20 Imperatives for Fall 2020 Shareholder Engagement

Posted by Matt Filosa, Sean Quinn, and Sydney Carlock, Teneo, on
Monday, August 24, 2020
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Matt Filosa is Managing Director, Sean Quinn is Managing Director, and Sydney Carlock is Senior Vice President at Governance Advisory at Teneo. This post is based on a Teneo memorandum by Mr. Filosa, Mr. Quinn, Ms. Carlock, and Martha Carter.

Overview

The once-in-a-hundred years global pandemic and once-in-a-generation global protests have created a seminal moment for companies and their leaders to reestablish and reinforce the basic tenets by which they run their businesses. The expansiveness of the role of the CEO and the board, as demonstrated by environmental, social, and governance (ESG) issues, will continue. Many changes are underway with the expanded attitude of stakeholder capitalism, the broader mandate of running a business, and positioning its governance. These changes will need to be communicated effectively to all stakeholders. One of the first opportunities for companies to rearticulate their values, strategy, board roles, and management actions is in the cycle of fall shareholder engagement. For this pivotal year of 2020, the traditional fall shareholder engagement season takes on heightened significance. In that regard, how should companies prepare for those engagement discussions with investors, and what will be asked of them and their leaders?

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Four ESG Highlights from the 2020 Proxy Season

Posted by Steve W. Klemash, Rani Doyle, and Jamie C. Smith, EY Center for Board Matters, on
Sunday, August 23, 2020
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Steve W. Klemash is Americas Leader; Jamie C. Smith is Investor Outreach and Corporate Governance Specialist, and Rani Doyle is Executive Director, all at the EY Center for Board Matters. This post is based on their EY 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) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The 2020 proxy season saw companies and investors navigating a rapidly evolving business environment, including new virtual modes of communication and working.

The COVID-19 pandemic, including its widespread, multidimensional impacts and acceleration of changes and risks, is casting a spotlight on corporate resiliency. It is also challenging recent company commitments to stakeholder capitalism, driving attention to environmental, social and governance (ESG) matters, and reshaping areas of corporate and investor focus.

To help boards navigate this new normal and meet evolving stakeholder expectations, this report examines four ESG developments from the 2020 season and considers how investor and corporate perspectives and priorities are changing in the wake of the pandemic, the growing push to eradicate systemic racism, and other macro developments. [1]

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2020 Proxy Season: A Look Back, and A Look Forward

Posted by Jessica Strine, Robert Main, and Marc Lindsay, Sustainable Governance Partners LLC, on
Sunday, August 23, 2020
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Jessica Strine is CEO, Robert Main is COO, and  Marc Lindsay is Director of Research at Sustainable Governance Partners LLC. This post is based on a SGP memorandum by Ms. Strine, Mr. Main, Mr. Lindsay, and Amy Hernandez.

For many, the 2020 proxy season required channeling of Winston Churchill for needed encouragement: “If you’re going through hell, keep going.” With companies, investors, and the public focused on the COVID-19 pandemic and racial equality movement, many spring discussions between companies and their shareholders had little to do with the ballot items at the upcoming shareholder meetings. Yet these meetings proceeded apace—albeit in a virtual format that presented its own challenges—and several noteworthy environmental, social, and governance issues (ESG) trends emerged from the final tallies.

Outside of the 2020 annual meetings, it was equally clear that investors’ attention to ESG is accelerating. While some wondered, early in the pandemic, whether ESG was a luxury good that would cease to matter in a market downturn, facts on the ground suggest the opposite: early studies found that ESG-oriented investment strategies have outperformed the market during recent months, [1] and calls for a stakeholder-centric “Great Reset” have become mainstream within the business world. Importantly, like the companies in which they invest, asset managers find themselves subject to increased scrutiny to ‘build back better’ by their clients, employees, investors, regulators and communities. With this backdrop, it is not surprising that ESG has become many top asset managers’ “new standard for investing.” [2]

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An Inflection Point for Stakeholder Capitalism

Posted by Seymour Burchman and Seamus O’Toole, Semler Brossy Consulting Group, LLC, on
Saturday, August 22, 2020
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Seymour Burchman and Seamus O’Toole are managing directors at Semler Brossy Consulting Group, LLC. 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) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

From the Business Roundtable to BlackRock, there’s growing pressure on companies to respect all major stakeholders—employees, customers, suppliers and local communities, as well as investors. Meanwhile, a variety of innovations are effectively making these stakeholders central to long-term company success. Digital technologies, new ways of organizing work and transactions, and the shift to the service economy have forced businesses to prioritize the interests of all stakeholders—adding significant opportunities and risks.

As a result, unless the company’s survival is in question, stakeholder-centricity is becoming essential to its overall management. Even under short-term pressures such as pandemics, executives and directors will need to view the company as operating within an integrated ecosystem. Only by supporting all major stakeholders, through calibrated and balanced incentives, will companies achieve sustained success.

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The Resurgence of SPACs: Observations and Considerations

Posted by Andrew R. Brownstein, Andrew J. Nussbaum, and Igor Kirman, Wachtell, Lipton, Rosen & Katz, on
Saturday, August 22, 2020
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Andrew R. Brownstein, Andrew J. Nussbaum, and Igor Kirman are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum co-authored by Mr. Brownstein, Mr. Nussbaum, Mr. Kirman, and other members of the firm, including Matthew M. Guest, David K. Lam, and DongJu Song.

The special purpose acquisition company (“SPAC”) is on the rise. A surge of offerings by a series of high-profile SPACs in the last several months has led to record levels of capital being raised by SPACs in 2020. As SPACs become a routine part of M&A processes, private company sellers and their shareholders are being presented with new opportunities that require informed and creative navigation.

I. Background

A SPAC is a company formed to raise capital in an initial public offering (“IPO”) to finance a subsequent merger or acquisition within a time frame specified in its charter, typically two years. The target firm, which must not yet be identified at the time of the SPAC’s IPO, becomes public as a result of the transaction (often referred to as a “business combination” or a “de-SPAC transaction”). So far this year, a total of $30.4 billion of capital has been raised by SPACs in over 75 IPOs, a marked increase from the previous record, set in 2019, of $13.6 billion raised in 59 IPOs. The average size of SPAC IPOs has also grown from approximately $230 million in 2019 to more than $400 million so far in 2020.

Along with larger offering sizes, a greater number of SPACs are being established by prominent former public company executives with the goal of acquiring a target in the executive’s industry or a related industry. A number of large, well-regarded financial institutions and private equity firms are also sponsoring SPACs. Not coincidentally, a growing number of deal announcements by SPACs have been well received by investors, and many companies that have gone public through a de-SPAC transaction have maintained stock prices well above the SPAC’s IPO price. These trends have helped SPACs become a fixture of the current M&A environment and reduced their historical associations with financial underperformance and risk.

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The Pandemic and Executive Pay

Posted by Aniel Mahabier, Iris Gushi, and Thao Nguyen, CGLytics, on
Friday, August 21, 2020
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Aniel Mahabier is CEO and Founder, Iris Gushi is Research Operations Lead, and Thao Nguyen is a Research Analyst at CGLytics. This post is based on their CGLytics memorandum.

Introduction

The COVID-19 pandemic has had a major impact on the US economy. Businesses that have seen financial impact have laid off or furloughed employees, cut salaries, and in some cases, received state aid in order to preserve cash and stay afloat. In addition to these measures, some businesses have taken an additional step and adjusted the compensation practices for their Executives and Board Members (mainly in form of reduced base salaries and cash fees). So far in 2020 we have seen 634 companies listed on the Russell 3000 (114 of which are listed on the S&P 500 index) issue some type of pay adjustments to Executives, and to their Board of Directors. As a result, the total amount of base salary reductions for CEOs of these companies are expected to approximately equate to USD 180 million in 2020. For this study, CGLytics looked at the 554 companies that had issued pay adjustments to Executives and their Board as of May 31, 2020. The study examines how companies have reduced CEO, NEO and Director pay, and questions if enough is being done in light of the pandemic. READ MORE »

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