Monthly Archives: June 2021

How to Accelerate Board Effectiveness Through Insight and Ongoing Education

Steve Klemash is EY Americas Center for Board Matters Leader and Jamie Smith is EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist. This post is based on their EY memorandum.

Today’s business environment is continuously resetting the bar for effective board oversight. New business models, impacted by new technologies and consumer behaviors, are emerging, while industry boundaries disappear. At the same time, sustainability risks and social awareness are increasing, driving a reprioritization of stakeholder and corporate values. These developments underscore the need for boards to evolve and learn by incorporating the appropriate external perspectives into their agendas to stay ahead of the curve and position the board as a strategic asset.

How can the board of the future keep pace? To help boards stay agile and relevant, board education practices should adapt to reflect the rapidly evolving external developments and strategy, risks and talent oversight needs. We frequently hear from boards who have a growing interest in tailored education and onboarding sessions for individual directors, committees and boards. We offer the following considerations for boards as they challenge how to strengthen their effectiveness in this area.

Tailor board education to company and individual needs

A robust, future-focused board education plan that is codeveloped by board and committee leaders and informed by the views of management and external advisors is key to advancing board effectiveness. Annually, board leadership in consultation with the CEO and other members of management should consider establishing a formal and customized learning plan for the board, its committees and individual directors. Such learning plans should have qualitative and quantitative goals and objectives. They should flex and adapt to changing market dynamics and regulatory developments, with a focus on meeting the unique learning needs of individual directors, committees and the board. While board and committee sessions should address current and future-focused topics, individual directors may need more baseline learning to bring them up to speed. Individual directors should play a proactive role in communicating their education needs to board leaders.


Competition Laws, Governance, and Firm Value

Ross Levine is the Willis H. Booth Chair in Banking and Finance at University California Berkeley Haas School of Business; Chen Lin is the Stelux Professor in Finance at the University of Hong Kong; and Wensi Xie is Assistant Professor in Finance at the Chinese University of Hong Kong Business School. This post is based on their recent paper.

Policymakers increasingly call for strengthening antitrust laws. For example, the U.S. House Judiciary Committee’s Antitrust Subcommittee concluded a 16-month investigation in October 2020 by stressing the need to bolster antitrust laws, policies, and enforcement. In recent months, authorities in China, the European Union, Japan, and the United Kingdom have also signaled their intent to strengthen antitrust laws. The push for more stringent antitrust laws raises questions about the impact of such reforms on firms. In a recent paper, we provide what we believe is the first analysis of how changes in antitrust laws shape corporate valuations.

Economic theory offers conflicting predictions about the impact of antitrust laws that intensify competition on firm value. The agency view holds that because competition tends to force inefficient firms out of business, intensifying competition spurs firms to reduce inefficiencies. In particular, competition can induce firms to address inefficiencies associated with agency problems that allow managers to shirk, empire-build, tunnel, and engage in other actions that extract private benefits from the firms at the expense of shareholder value. Similarly, competition can generate information about managerial performance that shareholders use to mitigate agency problems. In contrast, other theories highlight how competition can reduce firm value. Intensifying competition tends to reduce market power, squeeze cash flows, and lower profits, putting downward pressure on valuations. Furthermore, by squeezing cash flows, competition lowers firm value by constraining firms from exploring long-run growth opportunities. These conflicting theoretical predictions about the impact of competition laws on firm value help motivate our empirical examination.


General Solicitation and General Advertising

Bradley Berman is counsel and Gonzalo Go and Nicole Cors are associates at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Berman, Mr. Go, Ms. Cors, and Anna T. Pinedo.


Rule 502(c) (“Rule 502(c)”) of the Securities Act of 1933, as amended (the “Securities Act”), prohibits an issuer from offering or selling securities by any form of general solicitation or general advertising when conducting certain offerings exempt from registration under the safe harbors provided under Regulation D of the Securities Act. Many have felt that, over the years, this prohibition has impaired capital formation and that it would be more appropriate to regulate actual sales rather than offers. In order to address this, Congress passed the Jumpstart Our Business Startups Act (the “JOBS Act”) directing the Securities and Exchange Commission (the “SEC”) to relax the prohibition against general solicitation and general advertising for certain offerings made in reliance on Rule 506 of the Securities Act (“Rule 506”). The amendments to Rule 506 adopted by the SEC became effective in July 2013. The amendments implemented a bifurcated approach, allowing for private placements to be conducted in reliance on Rule 506(b) without general solicitation and general advertising and for certain exempt offerings to be conducted using general solicitation or general advertising in reliance on Rule 506(c). However, as an additional investor protection measure, an issuer relying on the Rule 506(c) exemption and using general solicitation must limit sales to accredited investors and must take reasonable steps to verify that all purchasers of the securities are accredited investors. [1]


Introducing the “Technergy” ESG Reporting Strategy

Dan Romito is Consulting Partner, ESG Strategy & Integration, at Pickering Energy Partners. This post is based on a Pickering Energy Partners memorandum by Mr. Romito and Addison Holmes. 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).

Across the existing spectrum of ESG ratings, guidelines, and frameworks, higher quality environmental scores are commonly associated with technology companies while lower relative scores are typically linked to energy companies. This is not necessarily a novel statement, but it does highlight a critical inefficiency. We feel ESG-ratings agencies and, in some cases, reporting frameworks, currently miss the mark in their respective evaluation environmental impact for both sectors. Digitalization, artificial intelligence, and big data are evolutionary trends affecting every sector; however, these trends mean something inherently different for energy. Long-term success for the energy space is contingent upon developing greener technologies and adopting advanced data analytics, yet ratings agencies provide less of an opportunity for energy companies to showcase these explicit talents.

As a result, the narrative conveyed by ESG ratings data fails to outline the longer-term economic reality for most capital-intensive businesses, particularly energy. Empirically speaking, the data indicates environmental impact metrics for the energy and technology sectors are actually converging, but existing ratings data does not reflect this. As paradigm shifts within the global economy materialize, technology and energy are becoming increasingly interlaced. As big data and technological advances continue to represent a greater proportion of the overall global economy, think about the respective “inputs” the technology world will require just to keep the lights on.


2021 Say on Pay Failures Partly Due to Covid-19 Related Pay Actions

Todd Sirras is Managing Director, Justin Beck is Consultant, and Austin Vanbastelaer is Senior Consultant at Semler Brossy LLP. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Beck, Mr. Vanbastelaer, Alexandria AgeeSarah Hartman, and Kyle McCarthy. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, and Executive Compensation as an Agency Problem, both by Lucian Bebchuk and Jesse Fried.

2021 Say On Pay Results

37 Russell 3000 companies (3.1%) failed Say on Pay thus far in 2021, 14 of which are in the S&P 500. 15 companies failed since our last report and are highlighted in bold later in this post. Our evaluation of the likely reasons for failure indicates that ten of the thirty-seven failed Say on Pay votes are due in part to Covid-19 related actions.


Do UK and EU Companies Lead US Companies in ESG Measurements in Incentive Compensation Plans?

John Ellerman and Mike Kesner are partners, and Lane Ringlee is managing partner at Pay Governance LLC. This post is based on their Pay Governance 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); 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).

In January 2021, Pay Governance conducted a comprehensive survey of the use of Environmental, Social, and Governance (ESG) metrics in incentive compensation as reported by 95 participating US companies. The survey documented the prevalence of this emerging trend and explored the types of metrics used, the ways in which they were measured, the types of incentive plans incorporating such metrics, and other important incentive design details. The survey revealed that only 22% of the US companies included ESG metrics in their 2020 incentive plans, whereas 29% of the same companies reported they were planning on including ESG measurements in their 2021 incentive plans. In summarizing the data and citing our conclusions about the survey results, Pay Governance stated that there appeared to be significant hesitancy among US companies to adopt such metrics, as companies considered which metrics and goals would be the most meaningful and consistent with their business objectives. Despite the reluctance on the part of many US companies in moving forward on this issue, we noted that “the inclusion of ESG in incentive plans is perhaps one of the most significant changes in executive compensation in over a decade.” [1]

In our desire to further study this issue, Pay Governance examined the use of ESG metrics in the incentive compensation plans of a select sample of companies in the United Kingdom (UK) and European Union (EU). Our research confirmed that UK and EU companies are well ahead of the US in the inclusion of ESG metrics in incentive plans, and their approach to measuring and rewarding ESG achievements could be a harbinger of strategies used by US companies over the next several years.


Sidley Sends Formal Comment Letter on the SEC’s Universal Proxy Proposal

Kai H.E. Liekefett, Derek Zaba, and Beth E. Berg are partners at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Liekefett, Mr. Zaba, Ms. Berg, Holly J. Gregory, and Leonard Wood. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here); The Case for Shareholder Access to the Ballot by Lucian Bebchuk (discussed on the Forum here); and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

On June 7, 2021, we sent a formal comment letter regarding the recent proposal of the U.S. Securities and Exchange Commission (SEC) to adopt a universal proxy (File No. S7-24-16) under the Securities Exchange Act of 1934 (as amended, the Exchange Act) (the Proposed Rule). We summarize our comments in this post (our full 20-page comment letter, including citations, can be reviewed here.

Since proxy contests are the context in which universal proxy cards would be used, we believe that our experience affords us with relevant perspectives on legal, procedural, and practical considerations. We have been involved in over 85 proxy contests in the past five years, more than any other law firm representing companies. In 2020, Sidley was ranked as the No. 1 legal advisor to companies in proxy contests by number of representations in the league tables maintained by Bloomberg, FactSet, Refinitiv (formerly Thomson Reuters), and Activist Insight.


Weekly Roundup: June 11–17, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 11–June 17, 2021.

President Biden Signs Executive Order on Addressing Climate Change Risk through Financial Regulation

The Director’s Guide to Shareholder Activism

Second Circuit Reaffirms that Confidentiality Agreements Can Create a Relationship of Trust for Insider Trading Purposes

New York Appellate Division, First Department Gives Green Light to First Post-Cyan Case

Wachtell Lipton’s Spin-Off Guide

Statement by Commissioner Peirce and Commissioner Roisman on Chair Gensler’s Regulatory Agenda

Opportunities for Postdoctoral and Doctoral Corporate Governance Fellows

NYSE Amends Related Party Transaction Approval Requirements

Federal Corporate Law and the Business of Banking

Director Compensation Practices in the Russell 3000 and S&P 500

Trust: A Critical Asset

Trust: A Critical Asset

Don Fancher is Principal of Risk & Financial Advisory, Jennifer Lee is Canadian Managing Partner, and Debbie McCormack is Managing Director at Deloitte. This post is based on a Deloitte memorandum by Mr. Fancher, Ms. Lee, Ms. McCormack, and Bob Lamm.


The responsibilities of boards of directors continue to evolve and increase, particularly given the events of the past year. In addition to perennial topics such as strategy, succession, financial reporting, compliance, and culture, boards are experiencing broader demands on their oversight from expanding stakeholder and shareholder considerations; continuing challenges of the ongoing global pandemic and its aftermath; and addressing the changing role of the corporation in society at large on matters such as racial justice and climate. The growth in the number and complexity of board responsibilities is taking place in an environment of growing skepticism towards our various institutions.

Against that background, companies and their boards can help to address these multiple challenges by considering one of the most critical assets not on their balance sheets―trust.

What is trust?

Trust has been defined as “our willingness to be vulnerable to the actions of others because we believe they have good intentions and will behave well toward us.” [1] However, particularly for a business enterprise, trust is not an ephemeral quality or attitude. Rather, it is a critical asset, albeit one that is not reported on the balance sheet or otherwise in the financial statements, as it has no intrinsic value.


Repairing the US Financial Reporting System

Lynn E. Turner is Former SEC Chief Accountant and Senior Advisor to Hemming Morse LLP. This post is based on an open letter to SEC Chairman Gary Gensler, authored by Mr. Turner and 33 other individuals.

The under-signed individuals and organizations share a deep concern about the present state of the financial reporting infrastructure in the United States. Two decades after a wave of major accounting scandals swept U.S. markets and Congress responded with passage of the Sarbanes-Oxley Act (SOX), many of the root causes of that crisis—deeply flawed and outdated accounting standards, weak and ineffective auditor oversight, and auditors who lack both independence and professional skepticism—have reemerged as pressing issues. For too many years, the Commission itself has been either complicit or passive in the face of these developments. We are writing to urge you to take bold action to restore the financial reporting infrastructure on which investor protection, the fair and orderly functioning of our markets, and the efficiency of the capital formation process all depend.

The original federal securities laws are based on a principle that is elegant in its simplicity—that “all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.” [1] As the Alliance of Concerned Investors (AOCI) stated in their April letter, “investors are empowered to make useful investment decisions only when they are provided with robust and timely financial information.” [2] Increasingly, there is a growing demand for that information to include applicable disclosures regarding environmental, social and governance (ESG) issues. It’s not just investors, however, but effective market oversight and capital formation, that benefit from the transparency needed to ensure that capital flows efficiently to its best uses. For that system to work, the information that companies report must be complete and accurate. When financial reporting fails to provide the information that investors are demanding, or when investors lose faith in financial reports’ reliability, our markets suffer, as we saw to devastating effect two decades ago.


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