Yearly Archives: 2020

Weekly Roundup: January 10-16, 2020

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This roundup contains a collection of the posts published on the Forum during the week of January 10-16, 2020.

Debt-Equity Conflict and the Incidence of Secured Credit

CalSTRS Green Initiative Task Force Annual Report

Delaware Appraisal Decisions

Into the Mainstream: ESG at the Tipping Point

Eight Priorities for Boards in 2020

Startup Governance

ESG Matters

Corporate Law for Good People

A Fundamental Reshaping of Finance

Barbara Novick is Vice Chairman and co-founder at BlackRock, Inc. This post is the text of an annual letter to CEOs by Mr. Larry Fink, Founder, Chairman, and CEO of BlackRock, Inc.

Dear CEO,

As an asset manager, BlackRock invests on behalf of others, and I am writing to you as an advisor and fiduciary to these clients. The money we manage is not our own. It belongs to people in dozens of countries trying to finance long-term goals like retirement. And we have a deep responsibility to these institutions and individuals—who are shareholders in your company and thousands of others—to promote long-term value.

Climate change has become a defining factor in companies’ long-term prospects. Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity—a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.


Embracing the New Paradigm

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. RosenblumKaressa L. Cain, Sabastian V. Niles, Amanda S. Blackett, and Kathleen Iannone Tatum.

For the past decade, the debate about the purpose of the corporation and the role of companies and investors in the capital markets has been growing in intensity. What is their role in solving—or contributing to—the problems of short-termism, burgeoning income inequality, environmental degradation and other challenges, and how do governance principles play a role in solving or exacerbating these problems? How can we incentivize them to make the investments that are necessary for sustainable profitability and long-term growth in value? Will a focus on maximizing shareholder value lead to the most efficient allocation of capital, or is a corporation and its stakeholders (including shareholders) best served by articulating a broader sense of the corporation’s purpose?

More recently, there have been a number of actions by or on behalf of companies, asset managers and investors that have embraced the principles of The New Paradigm, which we developed for the World Economic Forum and was issued by it in September 2016. This momentum accelerated last year, with a number of significant developments that suggest the essential thesis and animating purpose of this new paradigm is now being espoused by numerous major companies as well as the most influential asset managers and investors. In 2019 alone, this group included the three major index fund managers—BlackRock, State Street and Vanguard—as well as Hermes Investment Management, the Investor Stewardship Group, the Business Roundtable, the British Academy, the World Economic Forum and the UK Financial Reporting Council. As to economists and other academics, the case for the new paradigm is persuasively made in a Financial Times article by famed economics commentator Martin Wolf, “How to Reform Today’s Rigged Capitalism,” in which Wolf’s suggestions to preserve our capitalist society are yet another validation of the new paradigm.


Opening Remarks by Chairman Clayton at the Inaugural Meeting of the Asset Management Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public remarks at the Inaugural Meeting of the Asset Management Advisory Committee. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I am delighted to welcome you in this new year to the inaugural meeting of the Commission’s newest advisory committee—the Asset Management Advisory Committee, or the “AMAC.” [1] I apologize that I am not there to speak to you in person. I am in Europe for meetings with my international counterparts on matters that relate directly to the evolution and globalization of the asset management industry, including (1) whether there is a mismatch in investor expectations and market realities regarding liquidity depth in various equity, fixed income and alternative asset markets, and (2) issues raised by the reference rate transition and the discontinuation of LIBOR.

I am pleased, however, that my fellow Commissioners are joining you this morning. I thank them for their support of the AMAC. I believe we have all benefited from the insight, perspective, and experience that advisory committees have brought to the Commission in recent years.


Corporate Law for Good People

Adi Libson is a lecturer at Bar-Ilan University Faculty of Law; Yuval Feldman is the Mori Lazarof professor of legal research at Bar-Ilan University Faculty of Law; and Gideon Parchomovsky is Robert G. Fuller, Jr. Professor of Law at University of Pennsylvania Law School. This post is based on their recent paper.

Our paper offers a novel analysis of the field of corporate governance by viewing it through the lens of behavioral ethics. It calls for both shifting the focus of corporate governance to a new set of loci of potential corporate wrongdoing and adding new tools to the corporate governance arsenal. In the legal domain, corporate law provides the most fertile ground for the application of behavioral ethics since it encapsulates many of the features that the behavioral ethics literature found to confound the ethical judgment of good people, such as agency, group decisions, victim remoteness, omissions of gate-keepers, vague directives and duties and subtle conflict of interests.

The behavioral ethics scholarship emphasizes the large share of wrongdoing generated by those who view themselves as “good people” whose intention is to act ethically. Their wrongdoing stems from “bounded ethicality”—various cognitive and motivational processes that lead to biased decisions that they view as either legitimate or justified. Through a combination of deliberate and non-deliberate processes, people may end up behaving unethically with limited awareness of the true ethicality of their own behavior.


Compensation and Separation Arrangements for WeWork CEO

Joseph Bachelder is special counsel at McCarter & English, LLP. This post is based on an article by Mr. Bachelder published in the New York Law Journal. Howard Berkower, a partner with the firm, and Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of the article. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer; and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation by Lucian Bebchuk and Jesse Fried.

Today’s post examines the extraordinary compensation and separation arrangements entered into in 2019 with Adam Neumann by The We Company (better known as WeWork) and SoftBank Group (SoftBank), the latter being a Japanese-based multinational conglomerate investing in a wide variety of businesses including WeWork.

Mr. Neumann co-founded WeWork in 2010, serving as its CEO until September 2019 and as Chairman of the Board until October 2019. The principal business of the WeWork enterprise has been to acquire, by leasing, space in office buildings, outfit the space and then rent it to individuals and enterprises in need of commercial space.

According to the S-1 Filing, noted in the next paragraph, WeWork’s revenue grew from $436 million in 2016 to $1.822 billion in 2018, a 318% increase. However, WeWork posted a loss in each of the years in the three-year period 2016-2018—and, in fact, its loss grew from $430 million in 2016 to $1.611 billion in 2018, a 275% increase. For the six months ending June 30, 2019, WeWork reported a revenue of $1.535 billion and a loss of $690 million.


ESG Matters

Subodh Mishra is Managing Director at Institutional Shareholder Services, Inc, G. Kevin Spellman is a Senior Advisor, and Anthony Campagna is Global Director of Fundamental Research at ISS EVA. This post is based on their ISS memorandum. 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); Social Responsibility Resolutions by Scott Hirst (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).


  • High/favorable ISS ESG Corporate Rating performance is Generally Positively Related to Valuation and Profitability and Negatively Correlated with Volatility
  • High/favorable ISS ESG Corporate Rating firms are Good Allocators of Capital
  • High/favorable ISS ESG Corporate Rating Performance / High-EVA Margin Stocks tend to Outperform
  • High/favorable ISS ESG Corporate Rating Firms Tend to be Less Cyclical and are More Likely to be in the Technology, Health Care, and Consumer Non-Durables Sectors

There appears to be a link between ESG—Environment, Social, and Governance—and financial performance (figure 1). While one can argue that the relationship between ESG and financial performance is perhaps due to the fact that more profitable firms have the resources to invest in areas that positively influence ESG, it could also be that profitability rises as a result of a company better managing its material ESG risks, or it could be a little bit of both. If it is a little bit of both, then this means that good-ESG initiatives drive up financial performance, which then provides the monetary resources to invest to be an even better-ESG firm, which then drives up performance again, and so on.


Startup Governance

Elizabeth Pollman is Professor of Law at University of Pennsylvania Law School. This post is based on her article, recently published in the University of Pennsylvania Law Review. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups (discussed on the Forum here); Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley (discussed on the Forum here); and Do Founders Control Start-Up Firms that Go Public? by (discussed on the Forum here), all by Jesse Fried and Brian Broughman.

In the past year, we have seen many “unicorns”—startups described as having private valuations over one billion dollars—hit the ten-year mark and reach important inflection points. They have defied existing corporate theory by growing to a large size with ownership shared between founders, investors, and employees. Record-breaking amounts of capital have flowed into these and thousands of other startups.

With their focus on technology and innovation, and correspondingly high levels of risk and emphasis on growth, startups generally have a different style of governance from both public corporations and traditional closely-held corporations. In a forthcoming article, I aim to provide a comprehensive framework for understanding the unique combination of governance issues in venture-backed startups over their life cycles.


Eight Priorities for Boards in 2020

Steve W. Klemash is Americas Leader; Jamie C. Smith is Associate Director; and Rani Doyle is Executive Director, all at the EY Center for Board Matters. This post is based on their EY memorandum.

Boards will continue to be tested in 2020 as their work demands more diverse competencies, innovative thinking, complex problem-solving and stronger governance. Boards will need

to allocate additional time to understand and address factors that contribute to sustainable long-term value creation while meeting urgent challenges stemming from economic, geopolitical, technology and social developments.

To support boards as they enter the new decade, the EY Center for Board Matters has identified the following board priorities for 2020.

  • Strategically prepare for growth amid increased uncertainty
  • Accelerate the talent agenda and activate culture as a strategic asset
  • Evolve enterprise risk management
  • Prioritize cybersecurity and data privacy
  • Address geopolitics from a strategic perspective
  • Embrace ESG as a business imperative
  • and better communicate long-term value
  • Take a continuous improvement approach to board effectiveness
  • Strategically prepare for growth amid increased uncertainty

Strategically prepare for growth amid increased uncertainty

Questions for the board to consider

  • Is the board effectively monitoring megatrends, new technologies and economic signals to gather early insights on potential impacts on the business?
  • Is the board taking steps to continue bringing an outside-in perspective to the boardroom and keeping a pulse on disruptive technologies and innovation drivers?
  • What methods is the board using to stay well-informed about key stakeholder demands, interests and preferences that can affect future strategic direction?
  • Is the board allocating enough time for discussion of and planning for different economic scenarios and outcomes in a range of time frames?
  • Amid ongoing uncertainty, is the board overseeing allocation of capital and other resources in a way that protects assets, optimizes operations and executes on long-term strategies for growth—both playing it safe and doubling down?


Into the Mainstream: ESG at the Tipping Point

Rakhi Kumar is Head of ESG Investments and Asset Stewardship, Nathalie Wallace is of Global Head ESG Investment Strategy, and Carlo Funk is EMEA Head ESG Investment Strategy at State Street Global Advisors. This post is based on a publication prepared by State Street Global Advisors. 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) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).


In 2017, we conducted a major global survey to give deeper insight into the increasingly important Environmental, Social and Governance (ESG) market. Performing for the Future revealed a picture of ESG investment driven by performance beliefs, coupled with challenges and evolving pathways to adoption.

Fast-forward two years and ESG investing had grown by more than a third to $30+ trillion, over a quarter of the world’s professionally managed assets.

ESG may well be becoming a mainstream trend, but every institutional investor—from pension funds to endowments to sovereign wealth funds—faces a unique mix of forces pushing them towards, or pulling them away from, ESG investing.

As institutions try to respond to these competing forces—without compromising their risk–return requirements—they must chart their own course. This means finding a best-fit approach to incorporating ESG factors into their investment process and balancing cost pressures with the need to build up specialist knowledge.

Our latest research uncovers the views of more than 300 institutional investors and world-leading institutions, revealing what is driving organizations to adopt ESG, how this is influencing adoption, and the barriers that must be overcome to deliver the best outcomes.


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