Monthly Archives: February 2021

Atomic Trading

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the George Washington University Law School Regulating the Digital Economy Conference. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Reni [Saula] for that introduction. It is a pleasure to be with all of you today. I will start with the usual disclaimer that my views are my own and not necessarily those of the Securities and Exchange Commission or my fellow Commissioners. The momentous market events of several weeks ago are relevant to the theme of this year’s conference—regulating the digital economy—and thus motivate my remarks.

The market events to which I am referring are, of course, the Reddit-threaded run-up in the prices of a number of meme stocks, the subsequent run-down in prices, and the many attendant colorful stories. At the top of the non-financial news feed were the market volatility, trading volumes, regular Joe-to-riches stories, hedge fund losses, short squeezes, gamma squeezes, glee at sticking it to the “suits,” anger at trading limitations, a jumble of emotions as stock prices fell from their highs, and debates about the intricacies of market structure. Movies to elucidate these events are on their way. [1]

The Securities and Exchange Commission, along with other regulators and market watchers, is still sorting through the many layers of those events, so I cannot give you a definitive assessment of what took place, let alone whether any significant regulatory changes or enforcement actions will result. Instead, I will offer some musings on the challenges that lie before the Commission as we decide whether and how to react to these events with new or modified regulations and, more generally, as we think about stepping up our game as a regulator of the digital economy.


Volatile Transitions: Navigating ESG in 2021

Anthony Campagna is Managing 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

  • The forecast recession and “long ascent” of global economic recovery after COVID-19 will require a strong commitment and decisive action from financial markets.
  • While the global economic downturn has been a time of significant stress for all investors, the willingness of international governments to couple stimulus programs with sustainability objectives offers a clear opportunity for responsible investors to play a leading role in the recovery.
  • Regulatory pressure will be a key driver for responsible investment practices in 2021, with significant initiatives in the European Union coming into force, and governments in Asia making strong commitments to Net Zero targets.
  • While the term ESG is broadly accepted in responsible investment markets, the range of issues that responsible investors are called upon to consider daily continues to expand. The topics covered in this paper are framed in three broad conceptual groupings: Planetary Boundaries, Inclusion and Stewardship.
  • ISS ESG has identified 10 of the key global trends that we believe responsible investors will be focusing on through 2021, both in terms of impacts on portfolio risk/returns, and in terms of time spent managing policies and stakeholder relationships.
  • This year we have also prepared a regionally-focused paper for each of the Americas, EMEA, Asia and Australia/New Zealand, highlighting risks about which the local teams in each region are speaking with their own networks.


As the world seeks to reconcile the impacts of the first, second and subsequent waves of COVID-19, investors and market participants usher in 2021 with equal measures of optimism and consternation. While working with uncertainty has been a modus operandi of the industry since its inception, 2020 tested the resolve of even the most seasoned Environmental, Social and Governance (ESG) investor: the oft-prophesied Black Swan event collided with already intensifying ecological, economic and socio-political pressures, paralyzing companies, cities and democracies across the world. In this climate, the role of the responsible investor emerges with renewed purpose.


Crisis-Resilient Boards: Lessons from Vale

Stephen Davis is a Senior Fellow at the Harvard Program on Corporate Governance, and Sandra Guerra is a board member of Vale. This post is based on an interview conducted by Dr. Davis with Ms. Guerra.

Ever since the onset of the pandemic, corporate directors, their advisors, and investors have sought to identify board characteristics and practices that might be associated with superior management of epic disruption. Might any of the board features commonly rated by market analysts as governance-positive have helped companies navigate economic challenges posed by COVID? What lessons may be learned to make boards more crisis-resilient? Research is beginning to shed light on answers. But insights meanwhile may be drawn from the recent experience of boards facing comparable catastrophic risk.

One rare, insider perspective on such a case comes from Vale, the Brazil-based global mining giant. On January 25 2019, a tailings dam at the iron ore mine just east of Brumadinho, in the Brazilian state of Minas Gerais, suffered a devastating collapse. The resulting mudflow killed some 270 people, most of them Vale employees and family members. The disaster was, like the pandemic for others, an existential one for the company. Vale confronted sudden, daunting, regulatory, reputational, financial, and operational consequences that threatened the firm’s survival. Executives still face homicide and corruption charges, and this month the company agreed to a USD 7 billion settlement, the largest in Brazil’s history.


Board Effectiveness: A Survey of the C-Suite

Maria Castañón Moats is a Leader and Paul DeNicola is a Principal at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Key Findings

  • Executives say that directors have a deep understanding of the company. Roughly 9 out of 10 executives say their board understands the company’s strategy, key business risks, competitive landscape, culture, shareholders, and talent development and pipeline.
  • Yet almost half of executives think the board falls short in overall effectiveness. 40% say their boards are doing a fair or poor job overall.
  • But views are not consistent across the C-suite. 74% of IT executives view board performance as fair or poor, compared to just 25% of CEOs and CFOs.
  • Executives want director turnover. 82% of executives think that at least one member of their company’s board should be replaced. 43% think two or more directors should go.
  • Director preparedness falls short. Only 37% of executives say their board comes to meetings fully prepared.
  • The COVID-19 pandemic put a special spotlight on issues with crisis management oversight. Only 30% of executives say their board is able to respond well in a crisis.
  • Management wants boards to be more engaged, not less. Only 9% of executives say the board oversteps its oversight authority, while many more think the board should be more willing to challenge management in areas like crisis preparedness (48%) and risk management (37%).

Introduction: Executives Want More from Their Boards

For almost two decades, PwC’s Annual Corporate Directors Survey has compiled board members’ views on governance, their own performance, the performance of their peers, and the performance of their management teams. For 2020, PwC has joined with The Conference Board to turn the spotlight on management’s views. We surveyed over 550 public company C-suite executives to gather their opinions about the performance of their company’s board of directors. And the results surprised us.


Robinhood and GameStop: Essential Issues and Next Steps for Regulators and Investors

Lawrence Goodman is president and founder, and Steven Lofchie, and Robin L. Lumsdaine are senior fellows at the Center for Financial Stability. This post is based on a CFS memorandum by Mr. Goodman, Mr. Lofchie, Ms. Lumsdaine, John D. Feldmann, Diane Glossman, and Yubo Wang.

The hullabaloo surrounding the run up in the price of GameStop (GME) and the activities of Robinhood have generated front page news, calls for action, and allegations of wrongdoing. However, lost in the headlines and struggles between good and bad or big and little is the issue that should be of greatest concern—financial stability.

Critical issues for regulators and investors fall into two broad related categories. They are 1) macro risk management and crisis prevention and 2) micro regulatory issues. Macro financial conditions pave the way for micro actions and distortions. [1] For instance, many view the housing and mortgage sector as the cause of the Global Financial Crisis in 2008 rather than acknowledging the extended period of ease monetary policy fueling the financial flames. [2]

  • As to risk management and crisis prevention, events surrounding Robinhood and GameStop may be the first shot across the bow regarding deeper and more systemic financial market risks. Seemingly idiosyncratic risks in early 2007 unveiled fault-lines that ultimately unleashed the Global Financial Crisis in 2008. In retrospect, HSBC’s subprime mortgage unit problems on February 8, 2007 and Bear Stearns’ bailout of two troubled hedge funds on June 22, 2007 were meaningful early warning signs of stress.

For a long time, the Center for Financial Stability (CFS) has been clear regarding the role of monetary policy in growing financial excess and distortions. [3]


Guidance on Enhancing Racial & Ethnic Diversity Disclosures

Benjamin Colton and Robert Walker are Global Co-Heads of Asset Stewardship at State Street Global Advisors. This post is based on their SSgA memorandum.

At State Street Global Advisors, we believe that companies have a responsibility to effectively manage and disclose risks and opportunities related to racial and ethnic diversity. A growing body of research [1] suggests that diversity can drive returns, and that boards that neglect this topic face risks to their reputation, productivity, and overall performance. We have expanded our firm’s longstanding focus on gender diversity to include race and ethnicity, and this essential dimension of ESG risk management will be a priority for our Asset Stewardship team in 2021. What follows is an overview of what to expect from us on this topic.

Our Expectations For Enhanced Racial & Ethnic Diversity Disclosures

Investors would benefit from increased publicly-available data on diversity and inclusion at portfolio companies. As such, we are focused on increasing the availability of relevant information in the market. As articulated in our August 2020 letter to Board Chairs, we expect all companies in our portfolio to offer public disclosures in five key areas:


Activism In Context: Where We’ve Been, Where We’re Going

Arthur B. Crozier is Chairman and Gabrielle Wolf is a Director at Innisfree M&A, Inc. This post is based on their Innisfree 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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and 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).

Activism In Context: Where We’ve Been, Where We’re Going [1]

Depressed Activism in H1 2020 Comes Rearing Back in Q4

COVID depressed activism campaigns in H1 of 2020 to the lowest level since 2014, as many activists recognized that proxy contests would distract issuers from focusing on the urgent task of adapting their businesses to a volatile market and changing world. Activists were also surely wary of appearing to take advantage of unanticipated market dislocation, due to concerns that such efforts would not be favorably viewed by institutional investors in particular, whose votes are crucial to winning proxy contests. That said, as the pandemic and resulting lockdown lasted longer than first anticipated and businesses successfully adapted, activists arose from hibernation and launched 30 new campaigns in Q4 2020. [2] According to Lazard, the number of U.S.-based activist campaigns in Q4 2020 represented a 200% increase from Q3 2020 campaign numbers and 34% of all 2020 campaigns. Of particular interest, one-fifth of the dramatic Q4 uptick was focused on targets with a market capitalization of at least $25B, [3] including Comcast, Disney, Public Storage, Intel and ExxonMobil.

Despite its slowdown in 2020, several developments, particularly in the last half of 2020, are likely to continue and to define the state of activism in 2021.


The Next Shoe to Drop

Richard Edelman is President and CEO of Edelman. This post is based on his 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); 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).

Larry Fink, CEO of BlackRock, said [in January] in his annual letter to CEOs that companies need to disclose how they will get to a net-zero greenhouse gas emissions business model. This is further recognition that ESG (environment, social and governance) factors are now the basis on which institutional investors are putting money into the market.

But Fink didn’t stop there. He took climate risk to a systems-level by observing that “In the past year, people have seen the mounting physical toll of climate change…They are also increasingly focused on the significant economic opportunity that the transition will create, as well as how to execute it in a just and fair manner…the transition will inevitably be complex and difficult, it is essential to building a more resilient economy that benefits more people.” Bottom line? If business fails to include equity in its calculation, there won’t be a low-carbon economy to invest in. The hammer wielded by Fink is his own strategy for making sustainability BlackRock’s “new standard for investing.” In 2020, the firm achieved its goal of having 100 percent of its active and advisory portfolios ESG-integrated.


Recent Trends in Officer Liability

Edward Micheletti is partner and Bonnie David and Andrew Kinsey are associates at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

More than a decade ago in the seminal case Gantler v. Stephens, the Delaware Supreme Court clarified that officers of Delaware corporations owe the same fiduciary duties of care and loyalty that directors owe to the corporation and its stockholders.

While directors and officers owe the same fiduciary duties, they are not entitled to the same defenses. Section 102(b)(7) of the Delaware General Corporation Law (DGCL) permits a corporation to adopt a provision in its certificate of incorporation exculpating directors from money damages for breaches of the duty of care. Those provisions, which are routinely adopted by Delaware corporations, do not apply to corporate officers.

To adequately plead a breach of the duty of loyalty, a plaintiff must show that fiduciaries acted in a self-interested manner or in bad faith, which is a high bar to meet. By contrast, to plead a breach of the duty of care, a plaintiff must allege only that the fiduciaries acted in a grossly negligent manner, a far lower bar that makes care claims a prime target for stockholder plaintiffs. Even so, until recently, officer liability cases were still few and far between. The rare officer liability claim was typically brought in derivative litigation and involved either allegations of disloyal conduct for which neither a director nor an officer could be exculpated or conduct by an individual serving in both an officer and director role. Claims against an officer for breach of the duty of care—particularly in class action merger litigation—were exceedingly rare.


The Corporate Governance Machine

Dorothy S. Lund is Assistant Professor of Law at the University of Southern California Gould School of Law; and Elizabeth Pollman is Professor of Law and Co-Director of the Institute for Law and Economics at the University of Pennsylvania Carey Law School. 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).

In a time of climate change, racial and economic inequality, and crisis stemming from the global pandemic, corporations are alternately maligned for their conduct and embraced as a solution for change. Observers have increasingly excoriated the traditional view of corporate purpose—that corporations should be managed for the benefit of shareholders, and specifically, to maximize their wealth—as contributing to societal problems. As a result, only two decades after prominent scholars announced “the end of history” in favor of shareholder primacy, luminaries in the field are again asking: For whom is the corporation managed? Do fiduciaries owe a duty to maximize shareholder value or may they prioritize the interests of other stakeholders?

In a new paper, we contribute to this important debate by enlarging the aperture. Specifically, we provide an original account of the “corporate governance machine”—a complex system of corporate governance in the United States composed of law, markets, and culture. We describe each of these components and show how the machine powerfully drives corporate behavior and solidifies corporate purpose as promoting shareholder interests.

Although legal academics have generally focused on corporate law as a key determinant of purpose, our analysis reveals that this element may well be the least important: a vast array of institutional players—proxy advisors, stock exchanges, ratings agencies, institutional investors and associations—enshrine shareholder primacy in public markets. Indeed, we show the very concept of corporate governance promoted by these players developed alongside the principal-agent model of the corporation, such that “good governance” is often equated with minimizing agency costs in the pursuit of shareholder value. Professional education, the media, and politics further reinforce this cultural understanding.


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