Monthly Archives: May 2021

Internal Investigations, Whistleblowing and External Monitoring

Klaus J. Hopt is former director at the Max Planck Institute for Comparative and International Private Law, Hamburg, Germany. This post is based on his recent paper.

The establishment and use of internal investigations, whistleblowing and external monitoring is a topic of current importance for scholarship, legislation and corporate practice. Internal investigations into (suspected) legal violations by companies, sometimes triggered by whistleblowing and, of late, sometimes tracked by external monitoring are components of corporate compliance. These three information and enforcement channels relate to the core area of corporate management and they are a task of the management and/or the board. The Board must investigate suspected legal violations in the company, but it has broad discretion as to the manner in which the specific violation of law should be addressed and as to the necessary scope of the inquiry. In practice, a typical sequence of a stages and steps has been established in practice for internal investigations: (1) Indication of an incident: plausibility assessment, preparation, possible ad hoc measures, investigation; (2) Legal assessment of the interim result based on the facts at hand, data analysis and interviews; (3) Result and reporting: measures, tracking, follow-up and identification of lessons learned. There is a broad and detailed body of comparative legal experiences from the USA, the United Kingdom, Switzerland and other European countries on internal investigations, whistleblowing and external monitoring. These experiences are reported in detail in the corresponding article in the European Company and Financial Law Review (ECFR) 2021, October issue.


Carbon, Caremark, and Corporate Governance

William Savitt, Sabastian V. Niles, and Sarah K. Eddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Developments this week highlight the urgent imperative for boards and management teams to address climate-related challenges as part of their regular risk assessment practices:

  • A Dutch court held Royal Dutch Shell partially responsible for global warming and ordered the company to reduce its carbon emissions.
  • Engine No. 1, an activist investor laser-focused on climate change, won at least two seats on ExxonMobil’s 12-person board in a proxy fight.
  • Likewise bucking management’s recommendation, Chevron stockholders approved an investor-backed resolution calling for cuts in carbon emissions, focusing on the challenging area of “Scope 3” emissions.

These developments come on the heels of a federal executive order and related statement from the Secretary of the Treasury announcing that “financial regulators, financial institutions and investors need to have the best information and data to measure climate related financial risk” and declaring a policy to “act to mitigate [climate] risk and its drivers” (emphasis added) and support “science-based [carbon] reduction targets.”


Memo to Corporate Directors: Three Lessons from the Exxon-Mobil Activist Victory

Nell Minow is Vice Chair of ValueEdge Advisors. 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).

Exxon-Mobil spent $35 million, added new directors, and made promises to do better, all in an effort to defeat the dissident slate nominated by activist fund Engine No. 1. It failed, and, at this writing, Exxon-Mobil has lost at least two seats on the board of directors and votes for two others were still being calculated. The challengers, who spent $30 million, making this the most expensive proxy fight ever, are really the little Engine that could; with only a tiny .002 percent of the stock, they were able to succeed by making an incontrovertible business case for change, helped, no doubt, by Exxon-Mobil’s poor performance, with losses last year of $22 billion, its worst performance in forty years, and by nominating four highly qualified candidates. With the support of the major proxy advisory firms and institutional investors like BlackRock, CalPERS, and CalSTRS, Engine No. 1 candidates defeated those nominated by the board.

This David and Goliath victory reflects investor concerns about the viability of fossil fuel companies. But it also reflects broader investor frustration with inadequate oversight by boards of directors. The most important lesson for corporate boards and executives is that this is not a singular event; it is the beginning of a fundamental change in the way that investors push back on portfolio companies. From now on, activist investors do not have to be Carl Icahn-types with major stakes in order to succeed.


Testimony by SEC Chair Gensler Before the Subcommittee on Financial Services and General Government

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his Testimony Before the Subcommittee on Financial Services and General Government, U.S. House Appropriations Committee. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Good afternoon, Chairman Quigley, Ranking Member Womack, and members of the Subcommittee. I’m honored to appear before you today for the first time as Chair of the Securities and Exchange Commission. Thank you for inviting me to testify on the agency today. Before I begin, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

Having started at the SEC last month, I have been struck by the sheer breadth and scope of the capital markets and the agency’s work. The SEC oversees the nearly $100-trillion capital markets, or measured another way, about $110 trillion in assets under management. Our responsibilities include 28,000 registered entities, more than 3,700 broker-dealers, 24 national securities exchanges, seven clearing agencies, and more than 2,300 filings from self-regulatory organizations. [1]

Those $100-trillion capital markets affect nearly every American. The $50-trillion debt markets are how local governments raise funds, how corporations borrow money, or how construction of the hospital down the street gets financed. They also fund our mortgages and auto loans. Our $45-trillion public equity markets, which get most of the attention, connect Americans looking to invest with public companies seeking to grow, innovate, and hire employees. Our multi-trillion-dollar private equity and venture capital markets also play a significant role.


Shareholder Activism and ESG: What Comes Next, and How to Prepare

Kai H.E. Liekefett and Holly J. Gregory are partners and Leonard Wood is an associate at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Liekefett, Ms. Gregory, Mr. Wood, Derek Zaba, Beth E. Berg, and Rebecca Grapsas. 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).

The recent successes of shareholder activists against Big Oil [1] this proxy season are one of many signs of mounting and effective pressure from investors on public companies to enhance their performance and disclosures on environmental, social, and governance (ESG) criteria. As ESG rises in prominence among investors, activist shareholders have at their fingertips new and potent themes from ESG’s repertoire of concepts and criteria to use in campaigns to change control and strategy at companies. By integrating criticisms of ESG failures into campaign narratives, activists may gain additional traction with institutional investors at the ballot box. This article provides background on the potential for increased integration of ESG in shareholder activism campaigns and offers practical guidance for companies to preempt ESG-themed shareholder activism.

The Promise of ESG

Investors increasingly view corporate attention to ESG criteria as closely linked with business resilience, competitive strength, and financial performance. The world’s largest institutional investors and pension funds have stated their faith in the potential of ESG to unlock shareholder value and to make companies and markets more sustainable. Their support has afforded ESG investing and operating principles added legitimacy and credibility.


Getting Schooled: The Role of Universities in Attracting Immigrant Entrepreneurs

Natee Amornsiripanitch is a PhD candidate in Financial Economics at Yale School of Management; Paul A. Gompers is Eugene Holman Professor of Business Administration at Harvard Business School; and Kaushik Vasudevan is a PhD candidate in Financial Economics at Yale School of Management. This post is based on recent paper authored by Mr. Amornsiripanitch, Mr. Gompers, Mr. Vasudevan, and George Hu.

Immigrants play a vital role in innovation activities and entrepreneurship. Given the substantial contribution of immigrants in these areas, a set of natural questions arise: what are the pathways that high-skilled immigrants take to arrive in the United States and how has the importance of these pathways changed over time? What are important institutions that serve as gatekeepers for high-skilled immigrants and does it affect the types of immigrant founders that come to the United States? Do certain parts of the United States benefit disproportionately from high-skilled immigration, and if so, what are some factors that contribute to these benefits? The answers to these questions have important implications for designing immigration policy and regulation which have become increasingly acrimonious topics in public discourse. They also have important implications for firms and universities which recruit talent from abroad and the communities that hope to promote vibrant entrepreneurial ecosystems.

In this paper, we seek to address the questions that we raise by leveraging a combination of unique datasets that allows us to identify immigrant entrepreneurs and to more closely study their backgrounds. Particularly, we combine a dataset from Infutor, which enables us to proxy for the immigration status of individuals in the United States, with VentureSource, a workhorse dataset for the study of VC ecosystem, which contains detailed information on the near universe of venture capital-backed startups in the United States. We supplement these data with hand-collected information on the education and fields of study and prior work experience for entrepreneurs in our sample. Combined, these data provide a detailed source of information that we take advantage of to understand the pathways that high-skilled immigrants take towards entrepreneurship.


SEC Regulation of ESG Disclosures

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. 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 U.S. Securities and Exchange Commission has indicated that ESG disclosure regulation will be a central focus of recently confirmed SEC Chair Gary Gensler’s tenure. At the top of the agenda is climate change disclosure, and the Commission is taking steps toward broader reform. Then-Acting Chair Allison Herren Lee announced in March that the SEC will be “working toward a comprehensive ESG disclosure framework” and pursuing initiatives such as “offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity, and considering more specific guidance or rule making on board diversity.” Acting Chair Lee also appointed Satyam Khanna as senior policy advisor for climate and ESG to oversee and coordinate the SEC’s efforts: “Having a dedicated advisor on these issues will allow us to look broadly at how they intersect with our regulatory framework across our offices and divisions.” And earlier this month, Bloomberg reported that John Coates, the SEC’s Acting Director of the Division of Corporation Finance, indicated that new disclosure requirements would focus on three areas: diversity, equity and inclusion; climate change; and human capital management. The SEC appears to view its invitation for public input on climate change disclosure, which remains open until the middle of June, as the beginning of a potentially significant reconfiguration of corporate reporting on ESG matters in the near future.

While the SEC traditionally has required disclosure of financially material information, its new leaders are clearly considering requiring reporting of ESG-related information whether or not it is financially material. In Acting Chair Lee’s statement requesting public input, she did not use the terms “financial” or “material” as qualifiers in describing the objective of possible new climate change disclosure requirements: “to provide more consistent, comparable, and reliable information for investors.” This notable omission has led observers to speculate as to the SEC’s goal in overhauling ESG disclosure, which has raised important questions: Should the SEC use ESG reporting requirements to drive societal or environmental reform or, more narrowly, to help investors create value in a rapidly evolving landscape of ESG risks and opportunities?


Weekly Roundup: May 21–27, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 21–27, 2021.

Does Common Ownership Really Increase Firm Coordination?

SEC Signals Need for Better Disclosures About Delayed Filings

The WeWork Decision and its Implications for Director Email Accounts

Human Capital Disclosures Findings From 2020 10-Ks

Diversity and Performance in Entrepreneurial Teams

2021 Say on Pay & Proxy Results

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis

Speech by Commissioner Lee on Myths and Misconceptions about “Materiality”

Delaware Court Orders Up Prevention Doctrine to Require Reluctant Buyer to Close

From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses

Proxy Advisors And Market Power: A Review of Institutional Investor Robovoting

Paul Rose is the Robert J. Watkins/Procter & Gamble Professor of Law at Moritz College of Law at The Ohio State University. This post is based on his Manhattan Institute report. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Executive Summary

In July 2020, the Securities and Exchange Commission (SEC) adopted a final Proxy Advisor Rule, establishing principles governing the conduct of proxy advisory firms, which help institutional investors execute voting on shareholder matters and advise them on how to vote their shares. The commission acted in response to growing concerns that two relatively small proxy advisory firms—Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis), each owned by private equity firms and together controlling more than 90% of the proxy advisory market—have assumed outsize influence over corporate voting matters. The commission’s new rule is intended to ensure that investment advisors are acting in the best interest of shareholders.

Among the issues implicated by the SEC’s Proxy Advisor Rule and concurrent Guidance Supplement is “robovoting,” whereby institutional investors mechanically follow a proxy advisor’s voting guidance without any independent review. In effect, an institutional investor transfers its fiduciary voting authority to a third party. Robovoting is a principal mechanism through which proxy advisory firms have assumed substantial influence over corporate shareholder voting outcomes.

This post is the first empirical assessment of robovoting in 2020, which, owing to the timing of the annual corporate “proxy season,” fell wholly after the SEC announced its proxy-advisor rulemaking process in November 2019 but mostly before the SEC released its final rule in July 2020. Because institutional investors are forward-looking, we can expect that at least some of these investors adjusted shareholder voting policies and disclosures in light of the commission’s rulemaking procedure.


From Man vs. Machine to Man + Machine: The Art and AI of Stock Analyses

S. Sean Cao is Assistant Professor of Accountancy at Georgia State University J. Mack Robinson College of Business; Junbo L. Wang is Assistant Professor of Finance at Louisiana State University E. J. Ourso College of Business; and Baozhong Yang is the H. Talmage Dobbs Jr. Associate Professor of Finance at Georgia State University J. Mack Robinson College of Business. This post is based on a recent paper authored by Mr. Cao, Mr. Wang, Mr. Yang, and Wei Jiang, Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School.

Since its inception and as it rises, artificial intelligence (AI) constantly makes human beings rethink their own roles. Concerns abound that AI could replace human tasks and increasingly skilled ones, and thus displace jobs by those currently performed by the better-paid and better-educated workers. The existing literature has mostly focused on characterizing the type of jobs that are vulnerable to disruption by, as well as those that could be created due to, AI evolution. In other words, the sentiment of the existent studies mostly involves a theme of “man-versus-machine,” i.e., to characterize the contest between human and AI, to explore ways human adapts, and to predict the resulting job redeployment. There has been relatively little research devoted to prescribing how skilled human workers could tap into a higher potential with enhancement from AI technology, presumably the primary goal for human beings to design and develop AI in the first place. In this study, we aim to connect the contest of “man-versus-machine” (“man v. machine” hereafter) to a potential equilibrium of “man-plus-machine” (“man + machine” hereafter) into the profession of stock analysis. The choice of the setting is primarily motivated by data availability and well-defined performance metrics. However, the inferences from this study apply broadly to many high-skilled professions.


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