Yearly Archives: 2020

Response Letter to Statement Announcing SEC Staff Roundtable on Emerging Markets

Posted by Jeffrey P. Mahoney, Council of Institutional Investors, on
Wednesday, July 15, 2020
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Jeffrey P. Mahoney is General Counsel at the Council of Institutional Investors. This post is based on a CII letter to the U.S. Securities and Exchange Commission.

Via Email
July 8, 2020

The Honorable Jay Clayton
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549-1090

Re: July 9 Roundtable on Emerging Markets

Dear Mr. Chairman:

I am writing in response to the May 4 “Statement Announcing SEC Staff Roundtable on Emerging Markets” soliciting “views on the risks of investing in emerging markets, including China.”

The Council of Institutional Investors (CII) is a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families, including public pension funds with more than 15 million participants—true “Main Street” investors through their pension funds. Our associate members include non-U.S. asset owners with about $4 trillion in assets, and a range of asset managers with more than $35 trillion in assets under management.

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CEO Summit

Posted by Jeffrey A. Sonnenfeld (Yale School of Management), on
Wednesday, July 15, 2020
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Jeffrey A. Sonnenfeld is the Lester Crown Professor in the Practice of Management at the Yale School of Management. This post is based on Key Takeaways by the Yale School of Management CEO Summit. 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).

Overview

CEO Summit participants were in strong agreement: CEOs must speak up about racism and companies must take concrete actions to become more inclusive. Even companies that are already taking action must do more. The starting point, in the view of many CEOs, is to initiate conversations, which can be difficult. This involves communicating with employees, giving them a voice, and listening carefully and with empathy.

Then, companies need to go beyond listening by focusing on jobs and opportunities. The specifics may differ for each company based on its industry but may include focusing on K-12 education, increasing hiring for individuals with less than a four-year degree, and providing greater access to capital.

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COVID-19: Audit Committee Financial Reporting Guidebook

Posted by Paula Loop, Paul DeNicola, and Stephen G. Parker, PricewaterhouseCoopers LLP, on
Wednesday, July 15, 2020
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Paula Loop is Leader, Paul DeNicola is Principal, and Stephen G. Parker is Partner at the PricewaterhouseCoopers LLP Governance Insights Center. This post is based on their PwC memorandum.

The global economy and business community are still feeling the profound impacts of COVID-19, and will for sometime in the future. Given the current business and market conditions amid the pandemic, companies and audit committees continue to face accounting and reporting challenges as they meet regulatory requirements and respond to investor expectations.

Audit committees need to be mindful of the impact of working virtually. In addition to considering the impact on internal control over financial reporting, they will want to consider any changes in the operation of internal reporting structures (like risk, HR, legal, compliance) or whistleblower systems, the impact on investigations and resolution timeliness, as well as how and when any material issues are reported to the board. In all areas related to internal controls, companies should ensure that risky shortcuts are not being taken and processes still have the appropriate rigor. It is important for the audit committee to set the tone and ensure management is encouraging employees to ask for more time or additional resources if help is needed to make sure things are done the right way.

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Maximizing the Benefits of Board Diversity: Lessons Learned From Activist Investing

Posted by Jared Landaw, Barington Capital Group LP, on
Tuesday, July 14, 2020
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Jared Landaw is COO and General Counsel at Barington Capital Group LP. This post is based on a Conference Board publication. 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).

Introduction

In recent years, publicly traded companies in the United States have faced increasing pressure to improve diversity on their corporate boards. Influenced by state legislation as well as the efforts of institutional investors and other diversity advocates, companies are recruiting more female directors than ever before. Approximately 45 percent of the directors added to the boards of companies in the Russell 3000 during the 2019 proxy season were women, up from 12 percent in 2008. The percentage of new directors who are minorities is also increasing, although at a significantly slower rate, with approximately 15 percent of the directors added to the boards of Russell 3000 companies during the 2019 proxy season belonging to a racial or ethnic minority group.

One of the central arguments cited for improving the diversity of demographic characteristics such as gender, race, and ethnicity on corporate boards is that such diversity is necessary to ensure that boards are able to perform their obligations effectively in today’s competitive business landscape. In calling for an increase in gender diversity on boards, Ronald P. O’Hanley of State Street Global Advisors stated, “In a more complex, innovation-driven environment, embracing a diversity of thinking, competencies, and backgrounds is a business imperative.” David Solomon, CEO of Goldman Sachs, expressed a similar sentiment when announcing that, beginning July 1, 2020, Goldman Sachs will not take a company public unless it has at least one diverse board member: “I come from a position of my own experience where I look at the Goldman Sachs board. We have four women out of eleven. We have a black lead director. And I really value the diverse perspectives I’m getting which are helping me run the company.”

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The Effect of Managers on Systematic Risk

Posted by Antoinette Schoar (MIT), Kelvin Yeung (Cornell University), and Luo Zuo (Cornell University), on
Tuesday, July 14, 2020
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Antoinette Schoar is the Stewart C. Myers-Horn Family Professor of Finance and Entrepreneurship at the MIT Sloan School of Management; Kelvin Yeung is a PhD student at the Cornell University Samuel Curtis Johnson Graduate School of Management; and Luo Zuo is Associate Professor at the Cornell University Samuel Curtis Johnson Graduate School of Management. This post is based on their recent paper.

In the paper The Effect of Managers on Systematic Risk, we ask whether top manager-specific differences account for part of the unexplained variation in traditional asset pricing models. A key principle in asset pricing theory is that investors are compensated for bearing systematic risk, but not idiosyncratic risk. Drawing on this insight, empirical asset pricing models decompose stock return variability into systematic and idiosyncratic components. The systematic risk of a stock is determined by its beta, which measures the sensitivity of the stock’s return to common risk factors such as the market factor. A large literature investigates the determinants of beta, but a general conclusion from these studies is that a large amount of variation in systematic risk cannot be explained by firm-, industry-, or market-level variables.

Tracking the movement of top managers across firms, we document the importance of manager-specific fixed effects in explaining heterogeneity in firm exposures to systematic risk. We show that these differences in systematic risk are partially explained by managers’ corporate strategies, such as their preferences for internal growth and financial conservatism. We follow the approach of Bertrand and Schoar (2003) to document that such person-specific styles explain a significant amount of variation in firms’ capital structures, investment decisions, and organizational structures. The notion that CEOs differ in their styles is reinforced by Bennedsen, Pérez-González, and Wolfenzon (2020) who exploit hospitalizations to examine variation in firms’ exposures to their CEOs. Similarly, a vibrant literature suggests that managers’ personal traits play a role in shaping their management approach. Our results suggest that managerial style explains a substantial fraction of the variation in both idiosyncratic risk and systematic risk.

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Rulemaking Petition on Disclosure to Help Assess Climate Risk

Posted by Joseph F. Keefe and Julie Gorte, Impax Asset Management LLC, on
Tuesday, July 14, 2020
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Joseph F. Keefe is President and Julie Gorte is Senior Vice President for Sustainable Investing at Impax Asset Management LLC. This post is based on their rulemaking petition to the United States Securities and Exchange Commission.

Ms. Vanessa Countryman, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

June 10, 2020

Dear Secretary Countryman,

On behalf Impax Asset Management LLC, Investment Adviser to Pax World Funds, we submit this rulemaking proposal to require that companies identify the specific locations of their significant assets, so that investors, analysts and financial markets can do a better job assessing the physical risks companies face related to climate change.

Scientific research is increasingly showing that severe precipitation, floods, fires, droughts, sea level rise, extreme heat, and the spread of tropical diseases and pests to temperate zones are often not random and or impossible to anticipate, but are linked to a warming climate. These changes pose risks not only to companies, but their investors, financial markets and the global economy.

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Chancery Court Sustains Breach of Fiduciary Duty Claims Against Nonparty to LLC Agreement

Posted by Taylor B. Bartholomew, Matt Greenberg and Joanna Cline, Troutman Pepper Hamilton Sanders LLP, on
Monday, July 13, 2020
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Taylor Bartholomew is an associate and Matthew Greenberg and Joanna Cline are partners at Troutman Pepper Hamilton Sanders LLP. This post is based on a recent Troutman Pepper memorandum by Mr. Bartholomew, Mr. Greenberg, Ms. Cline, and Christopher B. Chuff. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

In 77 Charters, Inc. v. Gould, the Delaware Court of Chancery refused to dismiss breach of fiduciary duty claims against an indirect, “remote controller” of a limited liability company in connection with a series of transactions whereby the controller purchased preferred interests in the limited liability company from a member and subsequently amended the limited liability company’s operating agreement to increase the preferred’s distribution preference to the detriment of the holder of the limited liability company’s common interests. The decision serves as a cautionary reminder to investors that their actions may not be insulated from fiduciary liability—no matter how many intermediaries are involved—unless the applicable operating agreement clearly and expressly disclaims fiduciary duties.

Background

In 2007, as part of an investment in a retail shopping center, Cookeville Retail Holdings, LLC (Cookeville Retail) was formed by its managing member, Stonemar Cookeville Partners, LLC (Stonemar Cookeville), and its preferred member, Kimco Preferred Investor LXXIII, Inc. (Kimco). Around the same time, Stonemar Cookeville was formed by its managing member, Stonemar MM Cookeville, LLC (Stonemar MM), and its nonmanaging members, one of which is 77 Charters, Inc. (plaintiff). Jonathan D. Gould (Gould) is the managing member of Stonemar MM. Under the Limited Liability Company Agreement of Cookeville Retail (the CRA), Kimco was first allocated a 9 percent distribution on its capital contributions, while the excess was distributed to Stonemar Cookeville and its members (including the plaintiff). The following chart depicts the parties’ relationships.

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Protecting Financial Stability: Lessons from the Coronavirus Pandemic

Posted by Howell E. Jackson (Harvard Law School) and Steven L. Schwarcz (Duke University), on
Monday, July 13, 2020
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Howell E. Jackson is the James S. Reid, Jr., Professor of Law at Harvard Law School and Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law. This post is based on their recent paper.

The coronavirus pandemic has produced a public health debacle of the first-order. But, the virus has also propagated the kind of exogenous shock that can precipitate—and to a certain degree has precipitated—a systemic event for our financial system. This still unfolding systemic shock comes a little more than a decade after the last financial crisis. In a recently posted essay, Protecting Financial Stability: Lessons from the Coronavirus Pandemic, we contrast the current pandemic with the last financial crisis and then examine the steps that financial authorities have taken to safeguard financial stability against the effects of COVID-19. Our essay also explores the extent to which financial regulation might be reformed and supplemented in the future to address the emerging lessons of the pandemic crisis.

The last financial crisis is most vividly remembered as a top-down crisis starting with the failure of a series of major financial firms in 2008, culminating in a capital market meltdown in September following the bankruptcy of Lehman Brothers. The coronavirus pandemic, as yet, has not precipitated any similar financial failures, although capital markets did react dramatically in March of this year as the pathology of the virus and its potential implications on global economic activity started to come into focus. This new information produced an exogenous shock, prompting in many quarters a rush to cash and the evaporation of liquidity for many asset classes. The Federal Reserve Board, along with other central banks and financial regulators, responded promptly, drawing self-consciously on the emergency toolkit developed in the last financial crisis, as well as a number of counter-cyclical levers made available as part of regulatory reforms adopted in response to that last crisis. This intervention to stabilize capital markets (and financial firms) appears to have been successful, at least so far.

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COVID-19: Navigating Core Audit Committee Responsibilities

Posted by Paula Loop, Paul DeNicola, and Stephen G. Parker, PricewaterhouseCoopers LLP, on
Monday, July 13, 2020
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Paula Loop is Leader, Paul DeNicola is Principal, and Stephen G. Parker is Partner at the PricewaterhouseCoopers LLP Governance Insights Center. This post is based on their PwC memorandum.

As businesses confront the profound operational, financial and workforce disruption brought on by the COVID-19 pandemic, there’s no such thing as business as usual. That’s as true for corporate boards as it is for frontline workers. In particular, audit committees will have a lot on their plates in the coming months to provide critical oversight of financial reporting in this environment (for a detailed discussion of financial reporting considerations see PwC’s COVID-19: Audit committee financial reporting guidebook). At the same time, audit committees will need to continue to focus on their other core responsibilities in areas like risk oversight, oversight of internal and external audit, and ethics and compliance.

Risk oversight

In its role overseeing risk, audit committees will want to understand how management is evaluating the effects of COVID-19 on the business operations and the way people work, and whether those effects trigger an event-driven reassessment of business risk, control risk and the effectiveness of the related controls. As examples, the company might be entering into new or different business contracts or the operating environment might have dramatically changed due to social distancing and different working practices.

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Accounting and Auditing Enforcement Activity—2019 Review and Analysis

Posted by Elaine M. Harwood and Alison M. Forman, Cornerstone Research, on
Sunday, July 12, 2020
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Elaine M. Harwood is Vice President and Alison M. Forman is a Principal at Cornerstone Research. This post is based on their Cornerstone memorandum.

The SEC and PCAOB publicly disclosed 81 accounting and auditing enforcement actions during 2019. Monetary settlements totaled approximately $628 million, $626 million of which was imposed by the SEC.

Research Sample and Data Sources

This research examines trends in accounting and auditing enforcement actions that were publicly disclosed by the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) between 2014 and 2019. [1]

Accounting and auditing enforcement actions include (1) SEC Accounting and Auditing Enforcement Releases (AAERs) listed in the SEC Division of Enforcement Annual Reports and available on the SEC’s website at https://www.sec.gov (“SEC actions”), and (2) PCAOB settled and adjudicated disciplinary orders available on the PCAOB’s website at https://pcaobus.org (“PCAOB actions”). SEC actions exclude follow-on administrative proceedings. SEC and PCAOB auditing actions exclude actions unrelated to the performance of an audit (e.g., failure to register with the PCAOB or to timely disclose certain reportable events to the PCAOB).

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