Monthly Archives: January 2021

Why ESG Can No Longer Be a PR Exercise

Posted by Laurie Hays, Heidi DuBois, and Lex Suvanto, Edelman, on
Wednesday, January 20, 2021
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Laurie Hays is managing director of special situations, Heidi DuBois heads the U.S. ESG practice, and Lex Suvanto is global head of financial communications at Edelman. This post is based on their Edelman 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);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

If any word sums up the year 2020 for corporations, it is accountability.

One of the greatest pandemics ever has put all three letters of the ESG acronym under scrutiny: what it means to really be a company with a mindset of stemming climate change, creating a diverse and inclusive workforce that is paid fairly, acting with social purpose, and dealing properly with myriad governance issues, including taking action against executives for bad workplace conduct.

While companies used to get a pass for writing climate, sustainability and diversity reports that promised but didn’t deliver now activists, ratings agencies, and regulators are demanding real action on ESG goals, not just words.

Increasingly, companies will have to pay a price for failed ESG plans. Shareholder activists are using ESG “puffery” to attack boards of directors, claiming they have misled investors and other stakeholders. Employee activists are filing lawsuits and going public in droves to protest unequal pay and promotions, citing company promises. And the incoming Biden Administration has set an agenda that could change the way companies are regulated and the way they do business, with a close eye on ESG.

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SEC Resource Extraction Payments Final Rule

Posted by Nicolas Grabar, Nina Bell, and Stephen Janda, Cleary Gottlieb Steen & Hamilton LLP, on
Wednesday, January 20, 2021
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Nicolas Grabar is partner and Nina Bell and Stephen Janda are associates at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

On December 16, 2020, a divided SEC adopted a final rule on the disclosure of resource extraction payments. The final rule comes four years after a 2016 iteration of the rule was disapproved by a joint resolution of Congress, seven years after a federal court vacated the 2012 iteration of the rule and a decade after the Dodd-Frank Act first required the SEC to adopt the rule.

The SEC was faced with the daunting task of crafting a rule that (a) meets the detailed directive in the underlying statute, (b) complies with the Congressional Review Act prohibition on reissuing the 2016 rule in substantially the same form and (c) addresses the issues that had caused the court to vacate the 2012 rule. As a result, the new rule is similar in many ways to both prior iterations, but there are some important differences, most of which are favorable to affected companies as they expand available exemptions and attempt to both reduce the risk of competitive harm and ease compliance burdens.

The tortured history of the resource extraction payments rule began over a decade ago, in 2010, with the passage of Section 1504 of the Dodd-Frank Act. Section 1504 added Section 13(q) to the Securities Exchange Act of 1934, requiring the SEC to adopt a rule that any reporting company engaged in the commercial development of oil, natural gas or minerals provide annual disclosures of amounts paid to governments for that purpose, including the type and total amount of such payments for each project. The statute also requires the SEC, to the extent practicable, to make a compilation of this information available to the public. Along with the controversial conflict minerals rule, Section 1504 is one of the “specialized disclosure” requirements included in the Dodd-Frank Act, which use the SEC disclosure system to promote public policy objectives not directly related to the usual purposes of corporate disclosures. Instead, this provision was intended to combat corruption and the “resource curse” by increasing the transparency of payments made by oil, natural gas and mining companies to governments for the purpose of the commercial development of their oil, natural gas and minerals.

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How Boards Can Promote a New Leadership Model for Companies

Posted by Seymour Burchman and Blair Jones, Semler Brossy, on
Tuesday, January 19, 2021
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Seymour Burchman and Blair Jones are Managing Directors at Semler Brossy Consulting Group. This post is based on their Semler Brossy memorandum.

Boards have a lot on their plate right now. Even before Covid-19, institutional investors were challenging directors to consider stakeholders beyond investors. Now, even as directors are busy with the pandemic, investors want boards to promote a more agile, mission-driven executive team. They want leaders ready to handle the expanding complexities of corporate life with distributed decision-making, to respond to a rapidly changing business environment.

Of course, companies have always been complex entities requiring talented leadership. But success in the past depended first and foremost on financial metrics—and boosting total shareholder returns. Corporate governance reflected this priority, shown most clearly in the performance-based compensation programs for executives. Now success increasingly involves multiple dimensions.

Three Trends Shaking Up Corporate Leadership

First, more and more industries are threatened with disruption through digital technology, a challenge to be met only with strategic investments over several years. In most industries, especially with digital technology, the pandemic has now intensified the disruption. Traditional three-year planning horizons aren’t enough to meet this challenge.

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Footloose with Green Shoes: Can Underwriters Profit from IPO Underpricing?

Posted by Patrick M. Corrigan (Notre Dame Law School), on
Tuesday, January 19, 2021
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Patrick M. Corrigan is Associate Professor of Law at Notre Dame Law School. This post is based on his recent paper, forthcoming in the Yale Journal on Regulation.

Initial public offerings (IPOs) are set to rocket out of the gates again in 2021. Recently, we have witnessed some big pops (for example, Airbnb, 113 percent first-day return) and some steep drops (Wish, negative 16 percent).

With all this pricing variability following IPOs, what role is underwriter price stabilization playing? Relatedly, what role do overallotments and green shoe options play?

Overallotments are sales by the underwriting syndicate in excess of the number of shares the syndicate is obligated to purchase to underwrite the offering. A green shoe option is the right of the underwriters to purchase an amount of shares in addition to and at the same price as the base shares in the IPO.

Leading academic theories claim that underwriters use overallotments and green shoe options to help stabilize an issuer’s stock price following an IPO.

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Directors Using Their Employer’s Email Account

Posted by Daniel E. Wolf, Peter Martelli, and Stefan Atkinson, Kirkland & Ellis LLP, on
Tuesday, January 19, 2021
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Daniel E. Wolf, Peter Martelli, and Stefan Atkinson are partners at Kirkland & Ellis LLP. This post is based on their Kirkland & Ellis memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

A recent Delaware decision on a document production issue in the WeWork litigation highlights potential risks from outside directors using external work email accounts in a way that could jeopardize attorney-client privilege on documents they send or receive.

In the case, two Softbank insiders had dual roles at WeWork and Sprint, another Softbank portfolio company. The Softbank insiders asserted privilege on certain WeWork-related documents that were sent to or from their Sprint email accounts (Sprint was not at all involved in this matter). The court—recognizing that issues of privilege must be decided on a case-by-case basis—found that the insiders’ use of Sprint email accounts, rather than Softbank or personal email accounts, resulted in a
waiver of privilege that otherwise may have applied. Because of Sprint’s generally applicable email use policy for employees, among other facts, the Softbank insiders had no “reasonable expectation of privacy” (a prerequisite to assert privilege over “confidential communications”) when using their Sprint accounts for Softbank matters.

The court applied the four-factor test from an earlier Federal case to determine whether there was a reasonable expectation of privacy with respect to a work email account:

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2020 Securities Related Settlements Exceed $5.8 Billion

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Monday, January 18, 2021
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Jeff Lubitz is Executive Director at ISS Securities Class Action Services LLC. This post is based on his ISS memorandum.

In the midst of a global pandemic, securities class action cases continue to provide investors with critical recoveries from companies accused of various fraudulent activities. In fact, the dollar amount of settlements in 2020 totaled $5.84 billion… an increase of 61% over the $3.62 billion in settlements during 2019.

The number of worldwide settlements in 2020 where a monetary amount was agreed to totaled 133… an increase of 13% above the 118 settlements finalized during 2019.

The primary difference between 2019 and 2020 were with the mega settlements… typically considered cases settling for $100 million or greater. While the quantity of these cases were similar during the last two calendar years, the largest settlements in 2020 were incredibly higher in dollar amounts. The two largest settlements in 2019 were Cobalt International Energy at $389.6 million and Alibaba Group Holding at $250 million… while the top 2020 settlements were the following:

  • Valeant Pharmaceuticals – $1,210,000,000
  • American Realty Capital –$1,025,000,000
  • First Solar – $350,000,000
  • Signet Jewelers – $240,000,000
  • SCANA Corporation – $192,500,000

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A New Caremark Era: Causes and Consequences

Posted by Roy Shapira (IDC Herzilya), on
Monday, January 18, 2021
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Roy Shapira is Associate Professor at IDC Herzliya Radzyner Law School. This post is based on his recent paper, forthcoming in the Washington University Law Review, and 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 Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

Compliance has become a key corporate governance issue across the globe. Yet until recently, corporate law played a seemingly very limited role. The prevalent standard for director oversight duties (Caremark duties) was set high, effectively demanding that plaintiffs show scienter without having access to discovery. As a result, derivative actions over directors’ failure of oversight were routinely dismissed at the pleading stage, and many commentators considered Caremark duties largely irrelevant.

Against this background, it was noteworthy when, starting in June 2019, four Caremark claims succeeded in surviving the motion to dismiss (Marchand, Clovis, Hughes, and Chou). Practitioners immediately took notice, and started debating the meaning of the string of successful cases—including on this blog. Does it signify a meaningful trend of a “stricter Caremark era,” or is it merely a coincidence of cases with extremely egregious facts? And if there is, indeed, a resurgence in director oversight duties, why now? What changed around 2019 that sparked the resurgence?

In my recent paper, titled “A New Caremark Era: Causes and Consequences” (forthcoming in Washington University Law Review), I suggest that the answers, are (1) “yes,” and (2) “section 220.” Yes, there is a trend of revamped director oversight duties. And this trend is here to stay, partly because it is driven by a seemingly disparate development in shareholders’ rights to information from the company, nestled in DGCL §220.

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Investors Hold Boards Accountable—When Equipped With the Right Reports

Posted by Theresa Hamacher, Morningstar Funds Trust, on
Monday, January 18, 2021
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Theresa Hamacher is the Chair of the Morningstar Funds Trust Board of Trustees. This post is based on her comment letter submitted to the SEC on behalf of Morningstar independent trustees Barry Benjamin, Linda Davis Taylor, and Enrique Vasquez.

Fund boards have long served as independent watchdogs for shareholders, monitoring investment performance, fund expenditures, risk management and conflicts of interest. But to hold boards accountable for that protection, shareholders first need to be aware that boards exist.

The U.S. Securities and Exchange Commission has proposed updating mutual fund and exchange-traded fund shareholder reports and disclosures to better meet the needs of retail investors. The changes, however, relegate vital information about the board to online documents shareholders are much less likely to read or ever see.

For investors evaluating their assets, this means becoming less informed about the boards charged with protecting their interests. As members of the Morningstar Funds Trust Board of Trustees, we are concerned that less transparency about board governance in shareholder reports could make it more difficult for investors to hold boards accountable.

SEC embraces shorter, plain English reports

The commission has moved to simplify the shareholder reports intended to communicate a fund’s progress to investors. These lengthy documents are often laden with “lawyer-speak” and lack critical context needed to determine whether funds met their goals and held to their strategies.

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Year-End Accounting and Financial Reporting Considerations

Posted by Eric Knachel and Krista Parsons, Deloitte & Touche LLP, on
Sunday, January 17, 2021
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Eric Knachel is Partner at Deloitte & Touche LLP and Krista Parsons is Managing Director and Audit Committee Programs Leader at the Center for Board Effectiveness, Deloitte & Touche LLP. This post is based on their Deloitte memorandum.

The current business and economic landscape is unprecedented. With little to no warning, companies have had to adjust to a variety of challenges, including supply chain disruptions, government-mandated shutdowns, implications of the CARES Act, working remotely, and more. While companies have managed through these challenges for the past several months, this year-end close may be like no other as those issues continue to evolve and new challenges arise. This continued uncertainty in the business environment, combined with increasing the complexities and risk, will require a high degree of judgement as companies approach the year-end reporting cycle. Not surprisingly, audit committee oversight will be critical. In fulfilling their governance role, audit committees may want to discuss management’s approach and conclusions to 10 common topics during the year-end reporting cycle.

1. Forecasts and related impairment analyses

  • Have forecasts and applicable impairment analyses been appropriately updated through year-end?
  • Have multiple recovery scenarios been contemplated, and how are those scenarios utilized for forecasting and impairment testing purposes?
  • How are cumulative historic losses, as well as projected losses (within different jurisdictions), contemplated in the recoverability of deferred tax assets?

2. Going concern

  • Has management reassessed potential liquidity and working capital shortfalls, potential diminished demand for products or services, and contractual obligations?
  • How has management considered potential government assistance?
  • How have management’s current plans and the ability to effectively implement such plans been considered in the going concern analysis?

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A Look at This Year’s Voting Trends Following the US N-PX Disclosures

Posted by Matthew Scott, Proxy Insight, on
Sunday, January 17, 2021
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Matthew Scott is Vice President of Proxy Insight. This post is based on a Proxy Insight memorandum.

Familiar Territory

Across management proposals, there was not much change this year compared to last. There was a 0.4 percentage point move upwards in the average investor’s support for both all proposals and director elections, and a drop of 0.3 points for Say-on-Pay. These are not exactly headline-grabbing changes, perhaps not even meaningful ones.

It is, however, a little interesting to note that pay votes ticked in the opposite direction to the other two. The widening gap between Say-on-Pay support and the average management proposal shows just how contentious executive pay continues to be, particularly in a year when many companies faced criticism for lavish payouts while under pressure as a result of the pandemic. A look at shareholder proposals shows some more dramatic changes. Last year, a typical US asset manager supported more shareholder proposals than they opposed. This year, that support fell by 1.4 percentage points, taking the figure below that 50% mark.

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