Monthly Archives: March 2021

House of Representatives Testimony on Climate Change and Social Responsibility

James Andrus is Investment Manager for the Board Governance and Sustainability at the California Public Employees’ Retirement System (CalPERS). This post is based on Mr. Andrus’ testimony before the U.S. House of Representatives Subcommittee on Investor Protection, Entrepreneurship and Capital Markets Hearing on Climate Change and Social Responsibility.

Thank you for the opportunity to testify at today’s hearing. My name is James Andrus, and I am an Investment Manager for the Board Governance and Sustainability program for the California Public Employees’ Retirement System (“CalPERS”). I am pleased to appear before you today on behalf of CalPERS. We applaud and support the Subcommittee’s focus on building a sustainable and competitive economy.

I will provide an overview of CalPERS, discuss our governing principles, and discuss critical areas in which more disclosures by public issuers are necessary: climate risk, charitable and political expenditures, human capital management, and board diversity. My testimony discusses how a system that ensures effective, accountable and transparent corporate governance is critical to capital formation with the objective of achieving the best returns and value for shareowners over the long-term. Ultimately, CalPERS’s primary responsibility is to our beneficiaries, so our long- term investment returns are central to our views on what information we need to make the right investment choices.


CalPERS is the largest public pension fund in the United States (“U.S.”), with approximately $450 billion in global assets and equity holdings in over 10,000 public companies globally. CalPERS is a fiduciary that provides nearly $25.8 billion annually in retirement benefits to more than 2 million members. Delivering investment returns is our investment office’s number one job. Nearly 55 cents of every dollar paid in those benefits comes from investment returns. Moreover, achieving good investment returns helps us avoid increasing the contributions required from California’s communities. Increasing contributions takes away budget resources otherwise available for those communities to provide public services. This means that our members depend upon safety and soundness in the capital markets for their retirement security. For these reasons, we are focused on sustainability issues that drive risk and return to our portfolio.


Validation Capital

Edward B. Rock is the Martin Lipton Professor of Law at New York University School of Law; Alon Brav is Peterjohn-Richards Professor of Finance at Duke University Fuqua School of Business; and Dorothy S. Lund is Assistant Professor of Law at the University of Southern California Gould School of Law. This post is based on their recent paper. 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).

Although it is well understood that activist shareholders challenge management, they can also serve as a shield. In our new paper, we describe “validation capital,” which occurs when a bloc holder’s—and generally an activist hedge fund’s—presence protects management from shareholder interference and allows management’s pre-existing strategy to proceed uninterrupted. In other words, sometimes an activist shareholder can serve as a “shark repellant” or a modern-day “white squire.”

And as is true of much shareholder intervention in governance, the provision of validation capital can represent a positive or negative for firm performance and shareholder value, depending on the circumstances. In the “happy story,” validation capital addresses information asymmetries between management and outside investors that may cause outsiders to misjudge management’s quality and vision for future successful performance. When a sophisticated bloc holder with a large investment and the ability to threaten management’s control chooses to vouch for management’s strategy after vetting it, this can send a credible signal to the market that protects management from disruption. More specifically, the validation capital signal affects other investors in two ways: first, it builds support for management among the general shareholder population; second, because of this support, activists will be less likely to prevail in a challenge to management’s strategy, and, as a result, less likely to attempt to do so. This protection ultimately benefits all of the shareholders, including the bloc holder, whose shares will increase in value.


Key Considerations for Fiscal Year 2020 Form 10-K and 20-F Filings

Waldo D. Jones is partner and Clinton M. Eastman and Rami Marinean are associates at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Jones, Mr. Eastman, Mr. Marinean, Catherine M. Clarkin, Robert W. Downes and John Horsfield-Bradbury.

As issuers prepare their Form 10-K and 20-F filings for fiscal year 2020, they should consider recent and upcoming changes to the disclosure rules of the Securities and Exchange Commission (“SEC”) and trending disclosure topics. This post summarizes several of those disclosure considerations and highlights the key changes to SEC rules that will affect Form 10-K and 20-F filings this upcoming reporting season.

General Disclosure Trends

As issuers prepare their annual SEC reports, they should consider a number of disclosure topics that continued to receive SEC and investor attention over the past year. Although some issuers may not need to make changes at this time, all issuers should evaluate whether their disclosures adequately address these topics. Issuers should also consider whether other issues that have received increasing attention present material risks that should be discussed, such as the misuse of customer data or exposure to government investigations and related liabilities.

COVID-19 Disclosure. In March and June 2020, the SEC issued guidance for reporting on the impact of the COVID-19 pandemic and related business and market disruptions. The guidance encourages companies to address the impact of COVID-19 on their business and financial condition, including liquidity and capital resources, and include questions that issuers should consider when assessing the effects of COVID-19. Importantly, the SEC staff indicated that disclosures should enable an investor to understand how management and the board of directors are analyzing the current and expected impacts of COVID-19 and be updated as facts and circumstances change. In preparing Form 10-K or 20-F filings, issuers should consider such topics as:


Human Capital Management Proxy Disclosures

Avi Sheldon is a consultant at Semler Brossy Consulting Group LLC. This post is based on a Semler Brossy memorandum by Mr. Sheldon, Blair Jones, Andrew Friedlander, and Matthew Mazzoni.

Given growing stakeholder focus on Human Capital Management (HCM), we sought to understand how companies would approach the HCM disclosure within proxy statements this year. Our study of a sample of proxies filed in December 2020 and January 2021 offers an early proxy season preview of HCM disclosure practices.


In 2020 the Securities and Exchange Commission (SEC) amended certain Regulation S-K rules as part of its ongoing initiative to modernize non-financial disclosure. The rules include a new principles-based requirement that companies address HCM details within the 10-K’s description of the business, to the extent such details are material to understanding the business. The new 10-K disclosure has pushed companies to develop and refine their strategy for communicating HCM actions, processes, and metrics. The requirement arrives when companies are engaging with stakeholders on social topics like HCM more than ever before, with Covid-19 accelerating the trend. Such engagement typically relies on a range of communications channels to deliver a holistic and harmonic narrative, especially given the conservative approach to disclosure that is appropriate for the 10-K. We speculate that 2021 will be an inflection point for the communication of HCM details, including in filings beyond the 10-K such as the proxy statement.

Key Findings

Given the tailwinds behind HCM disclosure, we were not surprised to find that recent proxy statements reflect a surge in the degree and prevalence of HCM details relative to prior years. Specifically, we found:

  1. 62% of recent proxy statements we analyzed included specific HCM-related details that extend beyond “boilerplate” claims; more than 2x the rate of prior-year proxies
  2. The companies that provided HCM details in prior proxies materially expanded such disclosures this year
  3. HCM disclosures covered a range of topics and degrees of detail, and appeared in a variety of locations within the proxy; no one-size-fits-all approach


The Strategic Audit Committee: Navigating 2021

Maureen Bujno is Managing Director and Audit & Assurance Governance Leader 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.


It’s been said a lot: 2020 was a difficult year. The effects of the COVID-19 pandemic have led to unprecedented economic conditions and continued uncertainty in the business environment. This has resulted in increased complexities and risks that may have long- term implications. Seemingly overnight, employees began working virtually, and boards and audit committees had to find new ways to engage with management and their auditors in order to effectively execute their oversight responsibilities.

As companies continue dealing with the impact of the pandemic, the audit committee’s agenda and its processes will need to remain flexible to address issues and challenges as they arise. To provide effective oversight and help management navigate these challenging times, audit committees need to ask direct, targeted questions to understand management’s processes and decisions, as well as alternatives that were considered when addressing key issues.

We’ve been operating in this environment for three quarters and have learned much. Audit committees will continue to face an expanding agenda, and prioritization will be critical. While the role of the audit committee is vast, this publication focuses on two areas of oversight that may be critical for audit committees in the upcoming year: financial reporting and internal controls, and risk. Our focus is on providing a set of topics and additional resources for audit committees to consider as they manage their 2021 activities.


2021 Proxy Season Preview: U.S.

Kern McPherson is Vice President of Research & Engagement; Courteney Keatinge is Senior Director of ESG Research; and Julian Hamud is Senior Director of Executive Compensation Research at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

Environmental, Social & Governance (ESG)

Climate Change

Issues of climate change have been among the most prominent issues facing investors and companies in recent years. Emissions-intensive companies are under increasing regulatory pressure from governments seeking to curb climate impacts and mitigate climate-related risks. Moreover, with 2020 bringing an unprecedented number of storms as well as devastating fires in Australia and the West Coast of the United States, it is becoming very challenging for companies and investors to ignore the significant risks posed by the physical impacts of a changing climate.

Investors have traditionally targeted companies with the greatest exposure to issues of climate risk, such as those in the energy, materials or other extractives industries. However, we are seeing this focus grow to encompass companies that may be outside of these industries. These companies are increasingly being asked to provide, and shareholders are increasingly supporting, enhanced disclosure concerning their climate impacts and risks.

However, this has not alleviated the pressure on companies in more extractive industries, which are increasingly being asked to set Scope 3 emissions reductions targets and are facing coordinated engagements from groups like the Climate Action 100+. Accordingly, we anticipate seeing the submission of and strong investor support for resolutions on this topic.


Statement by Commissioners Peirce and Roisman on the SEC’s Enhanced Climate Change Efforts

Hester M. Peirce and Elad L. Roisman are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in this post are those of Ms. Peirce and Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Over the past two weeks, we and the public have seen a steady flow of SEC “climate” statements and press releases. [1] Our Divisions of Corporation Finance, Examinations, and Enforcement all have announced climate- or ESG-related initiatives. What does this “enhanced focus” on climate-related matters mean? The short answer is: it’s not yet clear. Do these announcements represent a change from current Commission practices or a continuation of the status quo with a new public relations twist? Time will tell. In the meantime, it is important to contextualize the recent announcements by providing some historical and procedural background.

The Division of Corporation Finance, per a recent statement by the Acting Chair, will enhance its focus on climate-related disclosure in public company filings and embark on the task of updating the Commission’s guidance in this area. [2] The staff of our Corporation Finance Division has been reviewing companies’ disclosures, assessing their compliance with disclosure requirements under the federal securities laws, and engaging with them on climate change and a variety of issues that fall under the ESG umbrella, for decades. For example, the Commission approved the 2010 Commission Guidance Regarding Disclosure Related to Climate Change, [3] and Division staff regularly assesses whether climate-related disclosures comply with our rules. [4] Indeed, even before the Commission issued its 2010 guidance, our disclosure regime encompassed climate-related issues. [5] All of the Division’s work has been rooted in materiality, the touchstone we use in assessing issuer disclosure on all topics, including climate.


A Survey of Sustainability Disclosures by Small and Mid-Cap Companies

Granville J. Martin is General Counsel at the Society for Corporate Governance, and Maia Gez and Dov Gottlieb are partners at White & Case LLP. This post is based on a memorandum by White & Case and The Society for Corporate Governance by Mr. Martin, Ms. Gez, Mr. Gottlieb, Danielle Herrick, Colin Diamond, and Era Anagnosti. 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); 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 light of the continued focus on improving sustainability reporting, White & Case conducted its second annual survey and in-depth review of ESG website disclosures of 80 small- and mid-cap US public reporting companies:

  • Overall, more than half of the surveyed companies (approximately 51 percent, or 41 out of 80 companies) provided some form of voluntary sustainability disclosure on their websites. This represents a 16 percent increase from 2019, in which 35 percent of small- and mid-cap companies surveyed had website sustainability
  • Of the 41 companies that provided ESG website disclosure in 2020, at least 13 (or 32 percent) did not engage in any ESG website disclosure in 2019, suggesting a quickening trend of voluntary ESG website
  • Website sustainability disclosures ranged in length from a paragraph to multiple website pages or a stand-alone sustainability report.

Key trends and takeaways from our survey, which are set forth below, explain important factors driving the pace of sustainability disclosure journeys for US public companies, as described in the following sections of this post:

  • Industry Trends
  • Market Cap Trends
  • Disclosure Trends: Length of Time Since IPO
  • Use of Reporting Standards
  • Inclusion of Disclaimer Language
  • Sustainability Topics Discussed
  • Considerations and Key Takeaways


Weekly Roundup: February 26-March 4, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 26-March 4, 2021.

New Tactics and ESG Themes Change the Direction of Shareholder Activism

How Boards Can Prepare for Activism’s Next Wave

Recent Proxies Highlight COVID-Related Incentive Actions for FYE Companies

Intelligently Evolving Your Corporate Compliance Program

An Introduction to Activist Stewardship

SEC Division of Corporation Finance Directed to Focus on Climate-Related Disclosures

Biden’s “Money Cop” to Shine a Light on ESG Disclosure

Climate Risk and the Transition to a Low-Carbon Economy

SEC Acknowledges that Disgorgement Principles Apply to Administrative Proceedings

Gender Quotas and Support for Women in Board Elections

2021 Global and Regional Trends in Corporate Governance

2021 Compensation Committee

Duty and Diversity

Duty and Diversity

Chris Brummer is Professor at Georgetown Law; and Leo E. Strine, Jr., the former Chief Justice of the Delaware Supreme Court, is a Senior Fellow at the Harvard Law School Program on Corporate Governance; Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School; Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; and Of Counsel at Wachtell, Lipton, Rosen & Katz. 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).

Fifty years ago, Milton Friedman told corporate fiduciaries that they should narrowly focus on generating profits for stockholders. Less focused upon, but explicit, was his view that corporations should not have a “social conscience” and take action to “eliminat[e] discrimination,” which he trivialized as a “watchword[] of the contemporary crop of reformers.” [1] Since then, Friedman and his adherents have espoused this cramped vision of fiduciary duty within the debate over corporate purpose. Even worse, while arguing that issues like DEI should be left to external law to address, they have simultaneously sought to erode the external laws promoting equality and inclusion.

In 2021, the problem Milton Friedman trivialized remains central. The inequality gap between Black and white Americans has grown since 1980, the period in which Friedman’s views became influential with directors and policymakers. And the ongoing pandemic’s unequal impact on minorities has underscored the persistence of profound inequality. So has ongoing violence against Black people like the killing of George Floyd. Likewise, economic inequality continues to adversely affect women.


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