Monthly Archives: April 2021

Lazard’s Q1 2021 Review of Shareholder Activism

Jim Rossman is Managing Director and Head of Shareholder Advisory; Mary Ann Deignan is Managing Director; and Christopher Couvelier is Director at Lazard. This post is based on their Lazard 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); Don’t Let the Short-Termism Bogeyman Scare You by Lucian Bebchuk (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).


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Weekly Roundup: April 23–29, 2021


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This roundup contains a collection of the posts published on the Forum during the week of April 23–29, 2021.

Recent SPAC Shareholder Suits in New York State Courts: The Beginning Wave of SPAC Litigation




New SEC Risk Alert Focuses on ESG-Related Disclosures and Policies


Investors’ Attention to Corporate Governance


Introducing the Debevoise & Plimpton Special Committee Report


Shareholder Perks and Firm Value


SEC Staff Risk Alert Lays a Marker for Advisers on ESG Focus Areas


Investor Due Diligence On Modern Slavery



CEO Stress, Aging, and Death

CEO Stress, Aging, and Death

Ulrike M. Malmendier is Edward J. and Mollie Arnold Professor of Finance at University of California Berkeley Haas School of Business, and Professor of Economics at the University of California Berkeley. This post is based on a recent paper authored by Prof. Malmendier; Mark Borgschulte, Assistant Professor of Economics at the University of Illinois Urbana-Champaign;  Marius Guenzel, Assistant Professor of Finance at the Wharton School of the University of Pennsylvania; and Canyao Liu, PhD student at Yale School of Management.

CEOs work long hours, frequently make high-stakes decisions, such as layoffs and plant closures, and face uncertainty in times of crisis (Bandiera et al. 2020, Porter and Nohria 2018). They are closely monitored and criticized when their firm is underperforming, and the notion that CEOs are “overworked [and] overstressed” is prominently discussed in the media (cf. CNN’s Route to the Top segment from 3/12/2010).

In this paper, we estimate the long-term effects of experiencing high levels of job demands on the mortality and aging of CEOs. Despite the fact that job demands and work-related stress are increasingly recognized to be key determinants of health (see, e.g., Marmot 2005 and Ganster and Rosen 2013), there is little quasi-experimental evidence that links job demands and stressors at work directly to health outcomes in the general population, let alone in the CEO context. We use new data on the lifespan of CEOs and recent machine learning (ML) apparent-age estimation techniques, combined with photographs of CEOs’ faces, to provide evidence on how varying levels of job demands shorten managers’ lifespan and induce visible signs of aging.

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TCFD Reporting in the UK: A review of 2017-2020

Peter Reilly is Senior Director of Corporate Governance at FTI Consulting. This post is based on his FTI 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) 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).

Background

Over the past decade, there has been growing pressure on management and Boards from stakeholders to pursue a longer-term orientation in decision-making. The COVID-19 pandemic has laid bare the fact that companies ill-prepared to address significant external risks are unlikely to have the resilience and ability to deliver returns to stakeholders over the long-term. That, together with the broad guidance provided by the Paris Agreement has resulted in a heightened focus on whether companies are effectively overseeing, managing and, ultimately, mitigating climate-related risks in their business models. One outcome of these developments has been the rise in references to the Task Force on Climate-related Financial Disclosures (‘TCFD’), a voluntary reporting framework that has acted as a guide in a space where there remains an absence of common international climate-related reporting standards.

Late in 2020, the UK’s Financial Conduct Authority (FCA) announced [1] it would become the first economy in the world to make the TCFD mandatory, following on from New Zealand’s announcement [2] that the TCFD recommendations would apply to the financial services sector. Initially, the rules apply to premium listed companies on the London Stock Exchange—of which there are 465 excluding investment funds—from 1 January 2021, with an outline timeline that most other companies will be reporting against TCFD by 2023. Shortly thereafter, the Financial Reporting Council (FRC), author of the UK Corporate Governance Code (the “UK Code”), published its review of climate disclosure at UK companies, [3] concluding that “corporate reporting needs to improve to meet the expectations of investors and other users on the urgent issue of climate change”. The FCA’s CEO said the introduction of the TCFD recommendations “must be complemented by more detailed climate and sustainability reporting standards that promote consistency and comparability.” [4] Likewise, the FRC said it supports “the introduction of global standards on non-financial reporting”. [5] However, until that happens, it recommended reporting “against the Task Force on Climate-related Financial Disclosures’ recommended disclosures and the Sustainability Accounting Standards Board (SASB) metrics for their sector.” While the International Financial Reporting Standards (“IFRS”) Foundation’s consultation on sustainable reporting closed at the end of 2020, confirmation and implementation of such standards is unlikely over the short-term.

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Investor Due Diligence On Modern Slavery

This post is based on an ISS memorandum by Clare Bartram, Associate, Norm-Based Research; Lisa Häuser, Associate Vice President, Corporate Ratings; Valentina Boltze, Associate Vice President, Corporate Ratings; Gregory Richards, Senior Associate, Stewardship and Engagement for ISS ESG, the responsible investment arm of Institutional Shareholder Services; and Chris Miller, Vice President for ISS Governance Research.

Assessing Preparedness to Address Modern Slavery with the ISS ESG Corporate Rating

The ISS ESG Corporate Rating assesses the degree to which companies are prepared to identify and act upon potential and actual human and labour rights risks and impacts across their value chain. This also includes Modern Slavery, which is part of the standard set of universal ESG topics assessed across all industries and companies. At the same time, the ESG Corporate Rating accounts for the highly varying risk exposure of industries and companies by adjusting indicator weights and applicability. Factors considered to determine the sector- and company-specific materiality include, among others, the degree of outsourcing in an industry, the specific business model of a company, the geographic distribution of its supplier base as well as the dependence on high-risk raw materials.

Supplier standard on forced labour

The ISS ESG Corporate Rating assesses whether companies have implemented a supplier standard which articulates clear and binding expectations to their suppliers and contractors regarding labour rights and working conditions in line with internationally recognised minimum standards such as the ILO Declaration on Fundamental Principles and Rights at Work. The use of modern slavery and its different forms such as forced or compulsory labour, prison labour and debt bondage should clearly be prohibited in a company’s supplier standards to receive the highest grade.

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SEC Staff Risk Alert Lays a Marker for Advisers on ESG Focus Areas

Robin Bergen and Elizabeth Lenas are partners and Zachary Baum is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb 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); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

On April 9, 2021, the U.S. Securities and Exchange Commission (“SEC”) Division of Examinations (the “Division”) issued a risk alert (the “Risk Alert”) describing observations from recent examinations of investment advisers that manage and offer environmental, social and governance (“ESG”) investment options. The Risk Alert highlights observed deficiencies in several key areas that we expected the SEC staff to scrutinize using its traditional regulatory arsenal: advisers’ practices inconsistent with ESG disclosures and unsubstantiated or potentially misleading ESG claims; inadequate controls governing implementation and monitoring of advisers’ disclosed ESG practices and clients’ ESG-related directives; proxy voting practices inconsistent with ESG disclosures; and inadequate compliance programs or policies in the ESG area, including compliance personnel with only limited knowledge of an adviser’s ESG practices. Notably, the Risk Alert also identifies three observed “effective practices”: disclosures that were clear, precise and tailored to advisers’ specific ESG approaches; detailed compliance policies addressing advisers’ ESG investing approaches and practices; and compliance personnel knowledgeable about advisers’ ESG practices.

The Risk Alert provides the clearest roadmap to date of the areas the Division staff will focus on when reviewing ESG investing and the ways the staff will use current regulatory tools and requirements to remind advisers of the SEC’s expectations and shape their behavior. It also appears to raise the bar for advisers’ compliance personnel, whom the staff expects to be knowledgeable about advisers’ ESG investment analyses, practices, approaches and disclosures, as well as to be integrated and play an active role in overseeing advisers’ ESG-related processes.

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Shareholder Perks and Firm Value

Jonathan M. Karpoff is Professor of Finance at University of Washington Foster School of Business; Robert Schonlau is Associate Professor of Finance and Real Estate at Colorado State University College of Business; and Katsushi Suzuki is Professor of Business Administration at Hitotsubashi University. This post is based on their recent paper, forthcoming in Review of Financial Studies. Related research from the Program on Corporate Governance includes Learning and the Disappearing Association between Governance and Returns, by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang (discussed on the Forum here); and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Shareholder perks are in-kind gifts or purchase discounts made available to shareholders that do not scale proportionately with the number of shares held. Shareholders of Ford Motor Company, for example, receive “friends and neighbors” purchase discounts on the purchase of Ford automobiles, and Willamette Valley Vineyards shareholders receive discounts on wine. In our sample of Japanese firms, Sony Corporation sends discount coupons for its products to shareholders with 100 or more shares, Yamaha Corporation offers shareholders a choice of a discount on a purchase or a gift item every year, and Suzuki Motor Corporation annually sends shareholders with 100 or more shares an assortment of premium honey and rock salt.

Theoretical arguments can be made that shareholder perks increase firm value, decrease firm value, or are inconsequential. We articulate and test these competing views using data from Japanese firms. We begin by documenting that the initiation of a perk program is associated with an increase in firm value. The announcement that a firm will initiate a perk program is associated with a 3-day average abnormal stock return of 2.06%. In longer-horizon difference-in-difference (DiD) tests, perk-initiating firms experience positive and significant increases in their market value of equity after the perk program begins. These results indicate that perks are consequential for firm value.

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Introducing the Debevoise & Plimpton Special Committee Report

Jeffrey J. Rosen, Gregory V. Gooding, and William D. Regner are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Rosen, Mr. Gooding, Mr. Regner, Michael Diz, Jonathan E. Levitsky and Maeve O’Connor, and is part of the Delaware law series; links to other posts in the series are available here.

Special committees of boards of directors play an essential role in many corporate transactions. Nevertheless, they are often imperfectly understood. Special committees are both underutilized—not deployed in circumstances where their use could have protected conflicted parties from liability—and over-utilized—formed in circumstances where no obvious conflict exists or where their use provides no meaningful legal benefit. Moreover, the case law is replete with examples of special committees being formed in a manner that undermines their purpose, not being given the authority necessary to provide their intended benefit, or behaving in a manner that results in potential liability both to the members of the committee and to other affiliates of the company.

The Debevoise & Plimpton Special Committee Report is intended to assist controlled companies, corporate boards, financial advisors and other transaction participants to better understand how and when special committees are used and how to ensure that they function as intended. The Report will—on a periodic basis—catalog recent transactions involving special committees and summarize recent judicial decisions concerning special committees. We expect to identify trends involving the use of special committees and comment on issues relevant to the use (and misuse) of special committees.

Although future editions of this Report will cover special committee activity and cases in the prior period, this post covers the entirety of 2020.

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Investors’ Attention to Corporate Governance

Peter Iliev is Associate Professor of Finance at Pennsylvania State University Smeal College of Business; Jonathan Kalodimos is Assistant Professor of Finance at the Oregon State University College of Business; and Michelle Lowry is TD Bank Endowed Professor at Drexel University LeBow College of Business. This post is based on their recent paper, forthcoming in the Review of Financial Studies. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Investors will have strong incentives to pay attention to the corporate governance structures of their portfolio companies if this attention contributes to better portfolio performance. However, because monitoring firms’ governance is costly, it is possible that investors will find it optimal to limit or even fully delegate such oversight to others. Broadly, the objective of this paper is to examine the extent to which mutual fund investors pay attention to the governance structures of companies in their portfolios, and the ways in which this oversight (or lack thereof) affects the underlying companies.

We focus on three specific questions. First, do investors research the governance structures of companies in their portfolios? This would include, for example, research related to the composition of the board of directors, compensation plans, and generally to the balance of power between management and external shareholders. Second, how does investors’ research affect their monitoring behavior, for example via shareholder voting or divestments? Third, does investors’ attention to corporate governance discipline the management at the underlying companies?

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New SEC Risk Alert Focuses on ESG-Related Disclosures and Policies

Meaghan Kelly is partner, Carolyn Houston is counsel, and May Mansour is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Ms. Kelly, Ms. Houston, Ms. Mansour, Michael Osnato, David Blass, and Manny Halberstam. 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 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).

The Division of Examinations (the “Exam Division”) of the U.S. Securities and Exchange Commission (“SEC”) recently published a Risk Alert (the “Risk Alert”) [1] highlighting deficiencies, internal control weaknesses and effective practices identified during recent examinations of investment advisers, registered investment companies and private funds (collectively referred to as “firms”) related to environmental, social, and governance (“ESG”) [2] investing. While the Exam Division’s focus on ESG is nothing new, [3] the “rapid growth in [investor] demand [for ESG investing], increasing number of ESG products and services, and lack of standardized and precise ESG definitions” have prompted the Exam Division to sharpen its focus on firms’ ESG-related policies, procedures, practices and disclosures.

The Risk Alert cautions firms that engage in ESG investing against the use of imprecise and inconsistent ESG definitions and terms that can lead to investor confusion and urges these firms to: (i) ensure that disclosure of ESG investment strategies, policies and practices align with actual practices; and (ii) implement appropriate ESG-related policies and procedures. Below is a summary of the deficiencies and effective practices identified in the Risk Alert and some key takeaways for firms engaged in ESG investing.

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