Yearly Archives: 2021

Weekly Roundup: February 4-11, 2021

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, February 12, 2021

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This roundup contains a collection of the posts published on the Forum during the week of February 4-11, 2021.

SEC Adopts Revised Investment Adviser Marketing Rule

Posted by Jessica Forbes, Stacey Song, and Joanna D. Rosenberg, Fried, Frank, Harris, Shriver & Jacobson LLP, on Friday, February 5, 2021
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Incentive Design Changes in Response to COVID-19: Russell 3000

Posted by Justin Beck and Felipe Rubio, Semler Brossy Consulting Group LLC, on Friday, February 5, 2021
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Private Equity – Year in Review and 2021 Outlook

Posted by Andrew J. Nussbaum, Steven A. Cohen, and Katherine L. Chasmar, Wachtell, Lipton, Rosen & Katz, on Saturday, February 6, 2021
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New Human Capital Disclosure Requirements

Posted by Margaret Engel, Compensation Advisory Partners, on Saturday, February 6, 2021
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SEC Issues Guidance in Light of Ongoing Surge in SPAC IPOs

Posted by William B. Brentani, Mark A. Brod, and Daniel N. Webb, Simpson Thacher & Bartlett LLP, on Sunday, February 7, 2021
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ESG Disclosures

Posted by David M. Silk, Sabastian V. Niles, and Carmen X. W. Lu, Wachtell, Lipton, Rosen & Katz, on Sunday, February 7, 2021
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The Future of the Virtual Board Room

Posted by Andrew Lepczyk and Barton Edgerton, National Association of Corporate Directors, on Monday, February 8, 2021
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Corporations Should Reconsider the Value of Their Political Action Committees

Posted by Douglas Chia, Soundboard Governance, on Monday, February 8, 2021
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HLS Forum Sets Several New Records in 2020

Posted by Leeor Ofer (Harvard Law School), on Monday, February 8, 2021
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Uptick in Restructurings May Outlast COVID-19 Pandemic

Posted by Paul Leake and Mark A. McDermott, Skadden, Arps, Slate, Meagher & Flom LLP, on Tuesday, February 9, 2021
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ESG: The S Is Not for Short

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Tuesday, February 9, 2021
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Does Media Coverage Cause Meritorious Shareholder Litigation? Evidence from the Stock Option Backdating Scandal

Posted by Dain C. Donelson (University of Iowa), Antonis Kartapanis (Texas A&M University), and Christopher G. Yust (Texas A&M University)., on Tuesday, February 9, 2021
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Future-Ready Boards

Posted by Byron Loflin, Nasdaq, Inc., on Wednesday, February 10, 2021
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Making “Stakeholder Capitalism” Work: Contributions from Business & Human Rights

Posted by John Ruggie, Caroline Rees, and Rachel Davis (Harvard University), on Wednesday, February 10, 2021
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2021 Proxy Season Preview

Posted by Jamie C. Smith, EY Center for Board Matters, on Wednesday, February 10, 2021
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Biden Administration Signals Intention To Be Tougher on Corporate Crime

Posted by David Meister and Jocelyn E. Strauber, Skadden, Arps, Slate, Meagher & Flom LLP, on Thursday, February 11, 2021
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Responsible Institutional Investing Around the World

Posted by Pedro Matos (University of Virginia), on Thursday, February 11, 2021
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2021 Proxy Season Preview and Shareholder Voting Trends (2017-2020)

Posted by Matteo Tonello, The Conference Board, Inc., on Thursday, February 11, 2021
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2021 Proxy Season Preview and Shareholder Voting Trends (2017-2020)

Posted by Matteo Tonello, The Conference Board, Inc., on
Thursday, February 11, 2021
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Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post relates to 2021 Proxy Season Preview and Shareholder Voting Trends (2017-2020), an annual benchmarking study and online dashboard published by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with leadership advisory and search firm Russell Reynolds Associates and Rutgers Law School Center for Corporate Law and Governance.

2021 Proxy Season Preview and Shareholder Voting Trends (2017-2020) builds on a comprehensive review of resolutions submitted by investors at Russell 3000 companies to provide insights into the new season of annual general meetings (AGMs). The data and analysis include trends in the number and topics of shareholder proposals, the level of support received by those proposals when put to a vote, and the types of proposal sponsors.

In particular, this post provides insights for what’s ahead in four key areas that promise to be the focus of investor attention in 2021: virtual shareholder meetings, environmental issues, human capital management, and board diversity.

The historical analysis across a large index of companies such as the Russell 3000 helps to plot the trajectory of shareholder demands and to gain helpful insights into the voting season ahead.

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Responsible Institutional Investing Around the World

Posted by Pedro Matos (University of Virginia), on
Thursday, February 11, 2021
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Pedro Matos is John G. Macfarlane Family Chair and Professor of Business Administration and Academic Director of the Richard A. Mayo Center for Asset Management at the University of Virginia Darden School of Business. This post is based on a recent paper by Professor Matos; Rajna Gibson Brandon, Professor of Finance at the University of Geneva; Simon Glossner, Post-doctoral research associate, UVA Darden School of Business and Richard A. Mayo Center for Asset Management; and Philipp Krueger, Associate Professor of Finance at the University of Geneva and Senior Chair at the Swiss Finance Institute. 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (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).

The practice of responsible investing, whereby institutional investors incorporate environmental, social, and governance (ESG) issues into their investment processes, is becoming increasingly important as evidenced by the growth of the Principles for Responsible Investment (PRI) network. Despite the prevalence of PRI signatories in global equity markets (which now manage half of the assets held by institutional investors), there is limited academic evidence on the motivations and portfolio consequences of signing up to the PRI’s Principles and on how those may vary at the international level.

In our paper, Responsible Institutional Investing Around the World, we examine whether PRI signatories walk their (ESG) talk. Our research is the first to use the data from PRI Reporting & Assessment Framework that PRI signatories use to report annually on their responsible investment activities. We match the signatories’ publicly available reporting data with archival data on institutional investors’ global equity portfolio holdings. To measure how serious PRI signatories are about taking ESG issues into account, we calculate a value-weighted ESG score for each institutional investor’s stock portfolio based on the scores from Refinitiv, MSCI, and Sustainalytics. We call these portfolio scores ESG footprints.

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Biden Administration Signals Intention To Be Tougher on Corporate Crime

Posted by David Meister and Jocelyn E. Strauber, Skadden, Arps, Slate, Meagher & Flom LLP, on
Thursday, February 11, 2021
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David Meister and Jocelyn E. Strauber are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Meister, Ms. Strauber, Ernie E. Butner IV, and Andrew C. Stavish.

Biden

Forecasting the enforcement priorities of the Department of Justice (DOJ) under a new administration is difficult at best. However, the Biden administration is widely expected to be tougher on corporate crime than its predecessor, consistent with the approach of prior Democratic administrations. If that is the case, the DOJ’s policies and priorities over the past four years that have emphasized individual culpability while incentivizing robust corporate compliance programs presumably will continue unchanged. However, Trump administration policies that arguably reflect a more business-friendly approach to corporate prosecutions will likely be revised or abandoned by the new administration, which is expected to more closely scrutinize and aggressively pursue corporate misconduct, including on the part of financial institutions. In addition, Foreign Corrupt Practices Act (FCPA) investigations, a key enforcement area in the Obama and Trump administrations, are expected to remain a focus, while changing economic realities—including the aftermath of the COVID-19 pandemic—are likely to shape the DOJ’s enforcement priorities, at least for the next year.

Emphasis on Individual Culpability

The DOJ’s focus on individual culpability in corporate prosecutions was formally announced in September 2015 in the so-called Yates Memorandum, issued by then-Deputy Attorney General Sally Yates. Rod Rosenstein, Yates’ successor, stated in late 2018 that pursuing culpable individuals remained a “top priority in every corporate investigation,” a claim supported by the annual reports of the DOJ’s Fraud Section, which principally prosecutes FCPA, health care fraud and securities fraud cases. The reports show an increase in the number of individuals charged during each year of the Trump administration, from 300 in 2016, the year before he took office, to 478 in 2019. Although 2020 tallies are not yet available, there is no indication that the DOJ’s priorities shifted over the past year; for example, the DOJ announced charges against 345 individuals for health care fraud offenses in September 2020. (See “Biden Administration’s Expected Impact on Health Care and Life Sciences Enforcement.”) There is every reason to believe that the DOJ will continue to prioritize charging individual actors, including culpable corporate officers and employees, in the coming year.

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2021 Proxy Season Preview

Posted by Jamie C. Smith, EY Center for Board Matters, on
Wednesday, February 10, 2021
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Jamie C. Smith is Investor Outreach and Corporate Governance Specialist at the EY Center for Board Matters. This post is based on an EY memorandum by Ms. Smith and Stephen W. Klemash.

As we mark a decade of engaging with investors with this year’s proxy season preview, much has changed in the investor landscape, particularly over the past year of the pandemic. Investors want boards to help companies adapt their strategies for a future in which prioritizing stakeholders and considering environmental and social impacts will be critical to building resilience and creating long‑term value.

Investors view workforce diversity as a key component in driving innovation and performance. This is of particular importance in a dynamic environment marked by ongoing business model disruption, changing stakeholder demands and accelerating sustainability risks. These are some of the key themes of our conversations with governance specialists from more than 60 institutional investors representing over US$38 trillion in assets under management, including asset managers (62% of all participants), public funds (20%), labor funds (13%) and faith-based investors (2%), as well as investor consultants and associations (3%).

In this post we focus on:

  • Factors investors cite as the top strategic drivers and threats for companies
  • Top investor engagement priorities for 2021
  • Six ways companies can enhance their ESG reporting
  • Steps investors want boards to take to strengthen their effectiveness

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Making “Stakeholder Capitalism” Work: Contributions from Business & Human Rights

Posted by John Ruggie, Caroline Rees, and Rachel Davis (Harvard University), on
Wednesday, February 10, 2021
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John Ruggie is the Berthold Beitz Research Professor in Human Rights and International Affairs at Harvard University Kennedy School of Government, and Caroline Rees and Rachel Davis are Senior Fellows at the Kennedy School Corporate Responsibility Initiative, and are President and Vice President of Shift, a nonprofit focused on the UN Guiding Principles on Business and Human Rights. This post is based on their recent paper. 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); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

For the first time in nearly a half-century, leading business associations, corporations, and the corporate law and governance community are seriously proclaiming that maximizing shareholder value is no longer adequate as the primary let alone sole purpose of the listed corporation—that the corporation must also benefit and be accountable to its workers, suppliers, consumers, and society at large. The new paradigm is variously called stakeholder governance, stakeholder capitalism, or corporate repurposing.

But the question of how this is to be achieved unveils significant differences of opinion and practical difficulties. Some advocates place their bet on enlightened voluntary cooperation between corporations, large institutional investors, and other stakeholders. Yet considering the financial incentives the current system affords corporate executives and directors, especially in the Anglo-American system heavily driven by equity-based compensation, voluntarism by itself is unlikely to move the needle far enough. Others provide long and detailed lists of laws and regulations that would need to be changed or newly adopted to ensure that accountability to wider stakeholder groups is established. But that inevitably involves political contestation, which is an inherently slow process and has a high risk of generating unanticipated consequences.

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Future-Ready Boards

Posted by Byron Loflin, Nasdaq, Inc., on
Wednesday, February 10, 2021
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Byron Loflin is Global Head of Board Engagement at Nasdaq. This post is based on his Nasdaq memorandum.

The competitive landscape in nearly every sector is changing rapidly. You are likely looking for ways to remain relevant and drive your company’s mission while making changes to reflect shifts in society. A future-ready board adds value by augmenting opportunity identification and maintaining its duties to investors and stakeholders.

Leadership teams are expected to lead well and reflect respectful, strong stakeholder values. For example, diversity and inclusion measures are a core value for leading companies today. Those that communicate authentic care for ESG and stakeholder impact demand transparency, corporate responsibility, and more ethical business processes from within and from outside vendors.

Investors and stakeholders look to work with companies committed to investing in innovative products and technologies that benefit a broad stakeholder community. They want to know that companies are taking security precautions to protect unique intellectual property from social malfeasance and bad actors.

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Does Media Coverage Cause Meritorious Shareholder Litigation? Evidence from the Stock Option Backdating Scandal

Posted by Dain C. Donelson (University of Iowa), Antonis Kartapanis (Texas A&M University), and Christopher G. Yust (Texas A&M University)., on
Tuesday, February 9, 2021
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Dain C. Donelson is Henry B. Tippie Excellence Chair in Accounting at University of Iowa Tippie College of Business; Antonis Kartapanis is Assistant Professor of Accounting at Texas A&M University Mays Business School; and Christopher G. Yust is Assistant Professor of Accounting at Texas A&M University Mays Business School. This post is based on their recent paper, forthcoming in the Journal of Law and Economics. Related research from the Program on Corporate Governance includes Lucky CEOs and Lucky Directors by Lucian Bebchuk, Yaniv Grinstein, and Urs Peyer (discussed on the Forum here).

Our recent paper uses the Wall Street Journal’s coverage of the stock option backdating scandal to examine whether media coverage causes meritorious shareholder litigation. While the media has a prominent role in covering corporate scandals, it is unclear whether the media coverage itself causes any subsequent litigation because the underlying corporate misconduct and firm characteristics may cause both the litigation and attract media coverage. Thus, meritorious litigation may have eventually occurred even in the absence of media coverage. Evidence on the causal relation between media coverage and meritorious litigation is timely due to growing concerns about the precipitous decline in newspapers nationwide and whether it will result in a significant decrease in corporate accountability (Grieco 2020; Knight Foundation 2019). The findings further have a number of important implications for the media, firms, and others.

We predict that media coverage will increase the likelihood of meritorious litigation because such coverage may increase the expected payoff of such litigation to plaintiffs’ lawyers. Specifically, the expected payoff is a function of the settlement probability, expected settlement amount, and expected litigation costs, and media coverage may affect each of these components. That is, media coverage can provide new “expert witness” information or increase the credibility of existing information, increasing both the probability of settlement and expected settlement amount. Additionally, negative media coverage may contribute to an abnormal price decrease, which may increase the settlement probability by establishing loss causation and increase settlement amounts by increasing shareholder damages. Finally, media coverage may lower investigation costs. That is, plaintiffs’ lawyers may rely on experts cited by the media, and coordination costs may be lowered by making it easier to assemble a class of affected plaintiffs.

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ESG: The S Is Not for Short

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Tuesday, February 9, 2021
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Anthony Campagna is Executive Director and Duncan Paterson is Associate Director at ISS ESG, the responsible investment arm of Institutional Shareholder Services. This post is based on their ISS ESG 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (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).

Key Takeaways

  • GameStop is a key example of the risks of short selling.
  • Responsible investors take different approaches to the practice.
  • Some avoid taking part, due to concerns related to values and to market integrity.
  • Some have taken advantage of the tool to further their ESG aims.
  • Increased access for retail investors to sophisticated financial tools will continue to influence market dynamics, with likely regulatory and investor implications.

How We Got Here

In the first four weeks of 2021 a select few stocks have experienced extreme levels of price movement and volatility. The most famous of these is GameStop (GME), which opened the year trading slightly below $20 per share, and amidst the frenzy and hysteria reached nearly $500 a share the morning of January 28th. The machinery behind this move is of one of the largest short squeeze plays observed in recent history. This saga has played out very publicly with a David vs Goliath feel, with the role of Goliath being played by large financial institutions and hedge funds, and David by a plucky army of retail investors using online and FinTech platforms like Reddit & Robinhood to communicate and coordinate as well as execute their trades.

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Uptick in Restructurings May Outlast COVID-19 Pandemic

Posted by Paul Leake and Mark A. McDermott, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, February 9, 2021
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Paul Leake and Mark A. McDermott are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

The COVID-19 pandemic has caused massive disruption across the globe, resulting in a significant uptick in U.S. restructuring activity. According to AACER, a database of U.S. bankruptcy statistics, an estimated 7,128 business bankruptcies were filed in 2020, representing a 29% increase over the same period last year. Although Chapter 11 filings increased in 2020, many experts believe we have yet to see the full extent of the surge in filings that will occur in the aftermath of the COVID-19 crisis.

Business bankruptcies peaked at 13,683 in 2009 at the height of the financial crisis and steadily declined in the years thereafter before leveling off to approximately 6,000 filings per year from 2014 to 2019. Although Chapter 11 filings rose in 2020, we did not see the same volume of filings as occurred in 2009. This is in large part due to the unprecedented support provided by the federal government, which allowed many companies that otherwise would have had to file for bankruptcy to weather the economic effects of the pandemic. Looking ahead, while COVID-19 vaccines are now being distributed, uncertainty remains as to when they will be widely available, whether the second stimulus package—including $284 billion in additional loans under the Paycheck Protection Program (PPP)—will be sufficient support for small businesses in the interim, whether certain consumer trends (e.g., business travel) will return to pre-pandemic levels, and how quickly the economy and troubled companies can rebound. These and other factors will affect the volume of Chapter 11 filings in 2021 and beyond.

The chart below depicts corporate Chapter 11 filing volume over time.

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