Monthly Archives: February 2021

Corporate Social Responsibility and Imperfect Regulatory Oversight: Theory and Evidence from Greenhouse Gas Emissions Disclosures

Jean-Etienne de Bettignies is Professor, and Distinguished Professor of Business Economics, at Queen’s University Smith School of Business; Hua Fang Liu Assistant Professor of Business Administration at Brandon University; and David T. Robinson is James and Gail Vander Weide Distinguished Professor at Duke University’s Fuqua School of Business. 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); 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).

September 2020 marked the 50th anniversary of Milton Friedman’s famous New York Times Magazine article, in which he summarized and expanded on an earlier argument that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game” (Milton Friedman, Capitalism and Freedom, p.133). This argument was controversial then and remains so today. In his view, it is the regulator’s job to ensure the appropriate behavior of profit-maximizing firms by setting proper rules and regulations, rather than firms’ responsibility to determine and implement their notion of socially responsible behavior. Implicit in this argument is the assumption that the government or regulatory body is able to ensure appropriate behavior by firms. But what happens if the regulator is unable to monitor firm behavior effectively? What if the regulator doesn’t know whether the firm is staying within the rules of the game?

To put the question slightly differently, would a self-interested, profit-maximizing entrepreneur ever find it optimal to engage in corporate social responsibility (CSR) when regulatory oversight was imperfect? More generally, how is the quality of oversight connected to the prevalence of CSR? How does this change how we view Friedman’s admonition?


The 2021 Boardroom Agenda

Debbie McCormack is a managing director and Robert Lamm is an independent senior advisor at the Center for Board Effectiveness, Deloitte LLP. This post is based on their Deloitte memorandum.

Introduction: A year of consequence

It seems likely that 2020 will be viewed as one of the most consequential years in recent memory. In addition to dealing with an ongoing global pandemic and the massive economic and social dislocations it caused, the United States has had to address natural disasters such as major hurricanes and wildfires, racial unrest, and a lengthy and challenging political campaign, among other things.

While the challenges of any year often influence boardroom agendas for the following year, the impact of 2020 on 2021 board agendas will almost certainly be extraordinary. At the same time, boards will need to deal with many perennial areas of board oversight, including strategy, financial reporting, compliance, and culture.

This post discusses some of the many issues, old and new, that boards will likely have to contend with in the coming year.

Risk: Crisis management, disruption, and business continuity

Crisis management, disruption, and business continuity have long been key elements of risk management and related board oversight. However, the meanings of these terms and the severity of the challenges they posed in 2020 entail a much broader range of considerations. For example, the issues contemplated by the term “crisis management” have often been short-term and/or relatively limited in scope, such as the sudden death or incapacity of an executive or damage to a production facility.


The Domains of Loyalty: Relationships Between Fiduciary Obligation and Intrinsic Motivation

Deborah A. DeMott is David F. Cavers Professor of Law at Duke University School of Law. This post is based on her recent paper, forthcoming in the William & Mary Law Review.

By imposing obligations of loyalty, does fiduciary law “crowd out” the force of intrinsic motivations to act loyally? Or does fiduciary law reinforce (and thereby “crowd in”) intrinsic motivations to trust and to act in a trustworthy fashion? This paper examines relationships between the formal domain of fiduciary law and other factors that shape conduct, including intrinsic motivation and markets for professional services, as well as the force of reputation in  a market or an industry. The paper demonstrates that looking across domains—from the legal to the extra-legal and back to the legal—places the distinctiveness of fiduciary law into sharp relief. The relationships to which this body of law applies are ones that necessarily make one party vulnerable to the other to some degree; the prospectively vulnerable party “has to trust” that the other will prove trustworthy. Fiduciary law undergirds intrinsic motivations to repose trust by addressing the risk of betrayal intrinsic to relationships in which one party must to some degree trust the other; the law also addresses the risk of aversion to the prospect of being duped or made a chump by reposing trust in another. Surveying relevant behavioral research, the paper examines its significance for fiduciary law, which the paper argues is invulnerable to critique on crowding-out grounds.


Leadership Change at the SEC: What Activists Could Expect

Sebastian Alsheimer is an associate and Andrew Freedman is partner at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The Biden administration confirmed this week that Gary Gensler, who led the Commodity Futures Trading Commission (the “CFTC”) from 2009 to 2014, will be nominated to head the Securities and Exchange Commission (the “SEC”). A veteran regulator and former Goldman Sachs partner, Mr. Gensler is expected to toughen the previous administration’s approach to regulation and enforcement, much like he did during his prolific and sometimes controversial tenure at the CFTC. As we expect that Mr. Gensler’s upcoming nomination hearings will put a spotlight on his philosophy and the priorities of the new administration, we highlight three areas to which shareholder activists should pay particular attention:

  1. Proxy Advisor Regulation. Under its previous Chair Jay Clayton, the SEC promulgated a sweeping set of new rules governing proxy advisory firms. Among other things, the new rules conditioned the availability of certain existing exemptions from information and filing requirements of the proxy rules upon compliance with additional disclosure and procedural requirements, forcing proxy advisors to disclose conflicts of interest to their clients and give simultaneous notice to issuers and clients of their voting recommendations. Unimpeded, these rules would impact the important role that proxy advisory firms have historically played as neutral arbiters in proxy contests, transactions subject to shareholder approval and the annual meeting process, potentially to the detriment of shareholder activists. Furthermore, the new rules clarified the SEC’s view that proxy voting advice is generally considered to be a solicitation under Rule 14a-1(l) of the Securities Exchange Act of 1934 (the “Exchange Act”) and thus subject to federal proxy rules. Institutional Shareholder Services (“ISS”) has sued the SEC in federal court to block the implementation of the new rules.


The Short-Termism Debate

Nicolas Grabar is partner and Fernando A. Martinez is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. This post is based on their Cleary memorandum. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

A curious feature of the past three years has been the intertwined controversies over earnings guidance, corporate “short-termism” and the quarterly disclosure system. The discussion has been illuminating, and, while further regulatory attention now seems unlikely, the perils of neglecting the long-term will likely continue to color how analysts, regulators and investors view public companies and their disclosures.

Back in 2018, prominent voices were heard lamenting the short-term focus of public company management, arguing that earnings guidance creates a vicious cycle in which public company strategy focuses on short-term earnings targets rather than long-term, sustainable growth. Among these, Jamie Dimon, Warren Buffet and the Business Roundtable called for public companies to reconsider the practice of quarterly EPS guidance, with its “unhealthy” consequences for long-term growth.

Around the same time, discontent over the SEC’s quarterly disclosure regime also started to make headlines. Inspired by a conversation with former PepsiCo CEO Indra Nooyi, President Trump surprisingly expressed (on Twitter) an interest in quarterly disclosure practices and asked the SEC to look into shifting from a quarterly to a semi-annual disclosure regime.


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