Yearly Archives: 2020

ESG Performance and Disclosure: A Cross-Country Analysis

Florencio Lopez-de-Silanes is Professor of Finance at SKEMA Business School; Joseph McCahery is Professor of International Economic Law at Tilburg University; and Paul C. Pudschedl is Research Associate in Finance and Applied Economics at the University Wiener Neustadt. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Over the last few years, there have been growing interest in the influence of environmental, social and governance (ESG) factors in the investment decisions of institutional investors and future portfolio performance. This coincides with major changes in the market for sustainable investment. In our paper, ESG Performance and Disclosure: A Cross-Country Analysis, we use a unique dataset to examine the relation between ESG disclosure and quality through a cross-country comparison of disclosure requirements and stewardship codes.

Largely in response to the rapid increase in ESG investments, there has been a debate whether corporate reporting on sustainability issues should be mandatory. On the one hand, various voluntary comply-or-explain measures were introduced in Asia and Europe. For some of these new reporting measures, such as in France, the main aim has been to enhance awareness of ESG issues and to elaborate best practices for institutional investors. The effectiveness of comply-or-explain reporting of ESG investments, on the other hand, is limited or not directly comparable across jurisdictions.


Delaware Supreme Court and Exclusive Federal Forum Provisions for ’33 Act Claims

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner, Peter Adams, and Koji Fukumura. This post is part of the Delaware law series; links to other posts in the series are available here.

[On January 8, 2020], the Delaware Supreme Court heard the appeal in Sciabacucchi v. Salzberg (pronounced Shabacookie!) in which the Chancery Court held invalid exclusive federal forum provisions for ’33 Act litigation in the charters of three Delaware companies. Few of the justices revealed their inclinations, so it’s difficult to predict the outcome. We’ll have to wait for the Court’s final decision.

You might recall that this case took on a heightened significance when, in March 2018, SCOTUS held, in Cyan Inc. v. Beaver County Employees Retirement Fund, that state courts continue to have concurrent jurisdiction over class actions alleging only ’33 Act violations and that defendants cannot remove these actions filed in state court to federal court. (See this PubCo post.) Both before and especially after Cyan, to avoid state court litigation of ’33 Act claims (and forum shopping by plaintiffs for the most favorable state court forum), many companies adopted “exclusive federal forum” provisions in their charters or bylaws that designated the federal courts as the exclusive forum for litigation under the ’33 Act (FFPs). Delaware law expressly permits the adoption of charter or bylaw provisions that designate Delaware as the exclusive forum for adjudicating “internal corporate claims,” defined as claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery. However, federal securities class actions are not expressly included. (See this PubCo post.)


Sustainability in the Spotlight

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Sustainability is back in the headlines in the corporate world in the wake of BlackRock’s recent communications to CEOs and clients. In founder Lawrence D. Fink’s 2020 letter to chief executives, Mr. Fink predicts that the long-term, structural effects of climate change are likely to transform the financial markets, leading to “a fundamental reshaping of finance” and “a significant reallocation of capital.” And in its 2020 letter to clients, BlackRock announces: “Because sustainable investment options have the potential to offer clients better outcomes, we are making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products, and engages with companies. We believe that sustainability should be our new standard for investing.

Accordingly, BlackRock is requesting that companies produce significant ESG disclosures by the end of 2020. Specifically, while acknowledging that no framework is perfect, Mr. Fink calls for sustainability disclosures in conformance with the industry-specific guidelines issued by the Sustainability Accounting Standards Board (SASB) and climate-related risk disclosures that follow the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). Mr. Fink’s letter warns—in bold type—that noncompliance may result in BlackRock’s voting against or withholding votes from management and board members.


The Decline in Secured Debt

Efraim Benmelech is the Harold L. Stuart Professor of Finance at the Kellogg School of Management at Northwestern University; Nitish Kumar is an Assistant Professor of Finance at the University of Florida Warrington College of Business; and Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. This post is based on their recent paper.

What role does collateral play in corporate borrowing? At one level, the answer is straightforward. Collateral consists of hard assets, which are not subject to asymmetric valuations in markets and which the borrower cannot alter easily. Collateral gives comfort to a lender that even if she does little to monitor the borrower’s activity, and even if a borrower’s cash flow proves inadequate to service the debt, the lender’s claim is protected by underlying value. An extensive theoretical literature spanning law, economics, and finance shows that collateral protects the lender’s claim against strategic default by the borrower and alleviates financial frictions stemming from borrower moral hazard and adverse selection. In addition, some have suggested that collateral is an effective way of protecting debt against subsequent dilution by the debtor. When an effective system of seniority of claims is not available, creditors who register the collateral backing their debt with a collateral registry effectively establish the seniority of their debt claim, at least up to the value of that collateral.


Female Directors in California-Headquartered Public Companies

Richard Blake is a partner and Courtney O. Mathes is a practice support lawyer at Wilson Sonsini Goodrich & Rosati. This post is based on their Wilson Sonsini memorandum

As we previously discussed, on September 30, 2018, former California Governor Jerry Brown signed legislation intended to ensure that public companies headquartered in California have at least one female director. This law, known as SB 826, went into effect on January 1, 2019 and requires companies subject to this law to have at least one female director by December 31, 2019. Accordingly, we have updated our previous FAQs on SB 826 below.

What is SB 826 and what does it do?

SB 826 created a new Section 301.3 of the California Corporations Code, which provides that no later than December 31, 2019, each publicly held corporation—regardless of its jurisdiction of incorporation—with its principal executive offices in California (as disclosed in its Form 10-K) must have at least one female director serve during a portion of the calendar year or be subject to a fine. A “publicly held corporation” is one whose outstanding shares are listed on a major United States stock exchange, interpreted by the California secretary of state’s office as the New York Stock Exchange (NYSE), the Nasdaq Stock Market (Nasdaq), and the NYSE American.


S&P 1500 2019 Bonus Expectations and a Look to 2020

Steve Kline is a director and Chris Kozlowski is a senior principal consultant at Willis Towers Watson. This post is based on their Willis Towers Watson 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).

The new year provides the chance to look back at where we’ve been. Our post summarizes financial performance in 2019 and how those results are expected to drive annual incentives for 2019. It’s also a time for looking ahead. So we consider how performance results are expected to rebound in 2020.

First, we consider median results for the S&P 1500 through the first three quarters of 2019. Figure 1 shows how financial performance has deteriorated from the same three-quarter period in 2018. Growth in revenue, earnings before interest and taxes (EBIT) and cash flow have been well below the trend in 2018. Returns on the balance sheet are down slightly. Interestingly, investors have remained optimistic despite volatility and persistent global risks.


Companies’ Anti-Fraternization Policies: Key Considerations

Arthur H. Kohn and Jennifer Kennedy Park are partners, and Armine Sanamyan is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

In recent years, numerous senior executives have resigned or been terminated for engaging in undisclosed consensual relationships with subordinates. [1] Such relationships are gaining particular attention in the wake of the heightened scrutiny around workplace behavior, because they raise concerns relating to, among other things, potential power imbalances and conflicts of interest in the workplace. Thus, it is increasingly important for companies to consider whether to institute policies governing close personal relationships, and what those policies might look like. We address a few key considerations to guide those decisions.

Should My Company Have an Anti-Fraternization Policy?

The percentage of companies that have instituted policies regarding close personal relationships in the workplace is decidedly on the rise. [2] Some companies have policies governing close personal relationships between all employees, while others’ policies are limited to relationships between supervisors and subordinates. These latter types of policies are the focus of this posting (and we will refer to them, in short, as “anti-fraternization” policies). As of last year, over half of surveyed HR executives reported that their companies have formal, written policies regarding close personal relationships between employees, and 78% reported that their companies discourage such relationships between subordinates and supervisors. [3]


SEC Year-End Guidance

Laura D. Richman is counsel and Michael L. Hermsen is partner at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Hermsen, Ryan Castillo, Robert F. Gray, Jr., and Brian D. Hirshberg.

During the last two weeks of 2019, the US Securities and Exchange Commission (SEC) offered guidance and reminders relating to:

  • The Role of Audit Committees;
  • International Intellectual Property and Technology Risks; and
  • Confidential Treatment

Public companies should take these pronouncements into account as the new year begins.

Role of Audit Committees

On December 30, 2019, the SEC’s chairman, chief accountant and director of the division of corporation finance (Division) issued a joint public statement (Audit Committee Statement) on the role of audit committees in financial reporting, including key reminders regarding oversight responsibilities. [1] The Audit Committee Statement included five general observations regarding the audit committee’s role in financial reporting and auditing, followed by three more specific observations.


Making Corporate Social Responsibility Pay

Dorothy S. Lund is Assistant Professor of Law at the University of Southern California Gould School of Law. This post is based on her recent paper. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

The world is clamoring for corporations to serve society. With the recognition that adequate externality regulation is unlikely to manifest, scholars, politicians, major shareholders, and other corporate stakeholders have joined in urging companies to practice corporate citizenship. But this advocacy is unlikely to alter corporate decisionmaking to the desired extent. In particular, proponents of stakeholder governance ask fiduciaries to operate against a deeply-ingrained incentive structure that pushes them to maximize shareholder wealth as a first priority.

Is there any way to encourage companies to benefit the broader public in a world that remains tethered to wealth maximization? In the past few years, there has been ample financial innovation in this space. Today, investors can fund green bonds or impact bonds, to take two examples. But these instruments merely support profit-maximizing corporate projects that align with investors’ prosocial goals; they do not encourage corporations to make profit-sacrificing prosocial decisions.


Shareholder Activism in 2020: New Risks and Opportunities for Boards

James E. Langston is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on his Cleary memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

The era of stakeholder governance and corporations with a purpose beyond profits is taking hold, with corporate directors expected to answer to more constituencies and shoulder a greater burden than ever before. At the same time, investors—both in the US and abroad—continue to expect corporations to deliver superior financial performance over both the short and long term.

This convergence of purpose and performance will not only shape discussions in the boardroom, but also the complexion of shareholder activism. As the nature of the activist threat has evolved it has created additional obstacles for directors to navigate. But at the same time, this environment has created additional opportunities for boards to level the activist playing field and lead investors and other stakeholders into this new era.


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