Monthly Archives: June 2021

Institutional Investor Survey 2021

Kiran Vasantham is Director of Investor Engagement, Jana Jevcakova is Managing Director of Corporate Governance APAC, and Mandy Offel is Manager of Corporate Governance at Morrow Sodali. This post is based on a Morrow Sodali memorandum by Mr. Vasantham, Ms. Jevcakova, Ms. Offel, and Patrick Wightman. 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

We are delighted to publish Morrow Sodali’s sixth annual Institutional Investor Survey (IIS), which canvasses the views and opinions of more than a quarter of the world’s assets under management [1] at a globally significant point in time.

Against the backdrop of the COVID-19 pandemic, Environmental, Social and Governance (ESG) impacts at listed public companies have been propelled to the forefront of investors’ minds as they assess the management of risks and opportunities, operational resilience, and shareholder value creation through a period of unprecedented market uncertainty and turbulence.

As is widely reported, the trend of capital inflows into ESG-oriented investing has exploded reaching a record high of USD 1.65 trillion in 4Q2020, up almost 29% from the third quarter. [2] The COVID-19 pandemic has contributed to the acceleration of ESG investing. Importantly, the pace of investment in sustainable funds is expected to continue to increase in the race towards a net zero carbon economy by 2050.

For this reason and following a global health crisis, the interest and appetite of investors, especially asset owners, to hold boards and companies accountable for their performance against “nonfinancial” ESG criteria is set to match, and in some cases exceed, performance against traditional financial measures.


Speech by Commissioner Roisman on Addressing Inevitable Costs of a New ESG Disclosure Regime

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent remarks at the Corporate Board Member ESG Board Forum. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Putting the Electric Cart before the Horse: [1] Addressing Inevitable Costs of a New ESG Disclosure Regime

I. Introduction

Thank you to Dan [Bigman] and the Corporate Board Member for inviting me to participate in today’s ESG Board Forum. Of course, the views I express here are my own and do not necessarily represent those of my fellow Commissioners.

As the topic of this event indicates, ESG is on everyone’s mind this year. There have been several calls for the SEC to require public issuers to include granular disclosure on ESG topics in their SEC filings. As you have probably heard me say before, [2] I have reservations about the SEC issuing prescriptive, line-item disclosure requirements in this space, particularly in the areas typically designated as environmental (“E”) or social (“S”) disclosure, although I know people’s categorization of ESG information can vary. [3] As someone recently put it to me, the reason that there is not standardized “E” data from companies yet is that standardization is very hard to do. Investors and fund managers have an insatiable desire for columns in spreadsheets, but some of the data that has been requested is inherently imprecise, relies on underlying assumptions that continually evolve, and can be reasonably calculated in different ways. And ultimately, unless this information can meaningfully inform an investment decision, it is at best not useful and at worst misleading.


Commissioner Peirce and Commissioner Roisman’s Response to Chair Gensler’s and the Division of Corporation Finance’s Statements Regarding the Application of the Proxy Rules to Proxy Voting Advice

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.

Today [June 1, 2021], Chair Gensler announced that he has directed the SEC staff to consider whether to recommend that the Commission revisit its recent regulatory actions taken with respect to proxy voting advice businesses and its longstanding interpretation of proxy solicitation. [1] Additionally, the staff announced that it will not recommend an enforcement action against a proxy voting advice business that fails to comply with the Commission’s existing requirements for proxy voting advice. [2]

As background, last July, the Commission adopted requirements that proxy voting advice businesses, in order to rely on exemptions from the information and filing requirements of the proxy rules, must: (1) provide clients with tailored and comprehensive disclosure about their conflicts of interest; and (2) establish policies and procedures designed to ensure companies that are the subject of their voting advice are able to see and respond to such advice in a timely manner. [3] The Commission also underscored its view that proxy voting advice generally constitutes a solicitation under the proxy rules, so the failure to disclose material information about proxy voting advice may constitute a potential violation of the antifraud provision of the proxy rules. [4]


Recent Claims SPAC Board Structures are a “Conflict-Laden” Invitation to Fiduciary Misconduct

Frank M. Placenti is senior partner at Squire Patton Boggs LLP. This post is based on his Squire Patton Boggs memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Without a doubt, the trendiest transactions on Wall Street during 2020 and the first half of 2021 were the formation of special purpose acquisition corporations (SPACs) and the follow-on mergers (known as “De-SPAC” transactions) that enable private companies to achieve public company status without the rigors, risks and expenses associated with traditional IPOs.

Standard & Poor’s Capital IQ reported that there were 294 SPACs formed in 2020, up from 51 in the prior year, and more than double the number of SPACs formed in the prior three years. Equally impressive was the long list of prominent individuals associated with SPACs. Their credentials (or at least notoriety) conferred an aura of respectability upon this asset class which it had not previously enjoyed.

The sheer volume of recent SPAC transactions, coupled with the impressive pedigrees of some SPAC sponsors, suggest that they have made real progress toward overcoming the taint associated with their ancestors—the much-maligned reverse shell mergers of the early 2000’s and discredited “blank check” public companies of the 1980’s—and have moved more into the mainstream of the U.S. capital markets.

Yet, amidst this swelling acceptance, a recently-filed Delaware class action complaint contends that the typical SPAC governance structure is so “conflict-laden” that it “practically invites fiduciary misconduct.”


Weekly Roundup: May 28–June 3, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 28–June 3, 2021.

SEC Regulation of ESG Disclosures

Getting Schooled: The Role of Universities in Attracting Immigrant Entrepreneurs

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

Carbon, Caremark, and Corporate Governance

Corwin Doctrine Remains Powerful Antidote to Post-Closing Stockholder Deal Litigation

Surviving the Fintech Disruption

Lazard’s Q1 2021 13F Filings Report

Silicon Valley Venture Capital Survey – First Quarter 2021

Determinants of Insider Trading Windows

ESG Matters II

Statement by SEC Chair Gensler on the Application of the Proxy Rules to Proxy Voting Advice

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. 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.

In September 2019, the Commission issued an interpretation and guidance addressing the application of the proxy rules to proxy voting advice businesses. [1] Last July, the Commission adopted amendments to Rules 14a-1(l), 14a-2(b), and 14a-9 concerning proxy voting advice. [2]

I am now directing the staff to consider whether to recommend further regulatory action regarding proxy voting advice. In particular, the staff should consider whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.


Corporate Governance of Banks and Financial Institutions: Economic Theory, Supervisory Practice, Evidence and Policy

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, forthcoming in the European Business Organization Law Review.

Corporate governance was first developed as a concept and field of research for private listed corporations. The idea of developing corporate governance standards spread quickly to other sectors, in particular to banks, insurance companies and other financial institutions. Yet after the financial crisis it turned out that not only banks are special, but so is the corporate governance of banks and other financial institutions as compared with the general corporate governance of non-banks. The corporate governance of banks and other financial institutions has gained much attention after the financial crisis. From 270 economic and legal submissions from 2012 to 2016 in the ECGI Working Paper Series of the European Corporate Governance Institute (ECGI), roughly half address corporate governance questions, and more than a quarter of these look at the regulation and corporate governance of banks (in the broad sense). Empirical evidence confirms this. Banks practicing good corporate governance in the traditional, shareholder-oriented style fared less well than banks having less shareholder-prone boards and less shareholder influence. Apparently bank boards charted a course more aligned with the preferences of shareholders, who—if sufficiently diversified in their holdings—embrace risk more readily than, for instance, a bank’s creditors. Banks that were controlled by shareholders saw higher profits before the crisis as compared to banks that were controlled by directors. Enterprises in which institutional investors held stocks correspondingly fared worse. Banks with independent boards were run more poorly. At least for banks, director independence can carry negative effects whereas expertise and experience are of much greater value, at least when obvious conflicts of interest are avoided.


Delaware Court of Chancery Green Lights Claims Alleging Loyalty Breaches Tainting Company Sales Process

Jason Halper and Jared Stanisci are partners and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Stanisci, Ms. Bussiere, Matthew Karlan, and Audrey Curtis, and is part of the Delaware law series; links to other posts in the series are available here.

On May 6, 2021, Vice Chancellor Zurn of the Delaware Court of Chancery issued a 200-page decision denying a motion to dismiss in In re Pattern Energy Group Inc. Stockholders Litigation, a class action challenging the $6.1 billion go-private, all-cash sale of Pattern Energy Group Inc. (“Pattern Energy” or the “Company”) to Canada Pension Plan Investment Board (“Canada Pension”) [1]. The transaction was narrowly approved by 52% of the Pattern Energy stockholders on March 10, 2020, with both ISS and Glass Lewis recommending stockholders vote against the sale. The sale closed on March 16, 2020.

Despite having many of the traditional hallmarks of a sound sales process—a disinterested and independent special committee authorized to conduct the process, non-conflicted legal and financial advisors counseling the special committee, and multiple viable potential buyers submitting offers—the Court denied a motion to dismiss in light of allegations that the special committee and certain officers running the sales process improperly tilted the playing field in favor of Canada Pension as the preferred choice of Riverstone Pattern Energy Holdings, L.P. (“Riverstone”), a private equity fund that formed Pattern Energy and controlled its upstream supplier of energy projects (“Supplier”). Specifically, Plaintiff alleged that the special committee, Riverstone, Supplier, and certain conflicted Pattern Energy directors and officers breached their fiduciary duties (or aided and abetted such breaches) by prioritizing Riverstone’s interests over the stockholders’, tortiously interfered with stockholders’ prospective economic advantage, and conspired to favor a deal beneficial to Riverstone at the expense of the stockholders. Additionally, the Court found that Corwin cleansing was not available because majority shareholder approval was obtained in part through the affirmative vote of a significant shareholder that was contractually bound, pre-disclosure, to vote in favor of the transaction.


ESG Matters II

This post is based on an ISS EVA memorandum by Anthony Campagna, Global Director of Fundamental Research for Institutional Shareholder Services ISS EVA; and Dr. G. Kevin Spellman, Senior Advisor at ISS EVA and David O. Nicholas Director of Investment Management & Senior Lecturer at the University of Wisconsin-Milwaukee and Adjunct Professor at IE Business School. 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).

ESG has been buzzing around the investing lexicon for the better part of two decades now, and for good reason, because ESG Matters. In our most recent white paper we highlight just how important ESG is in financial analysis by showing is that High-ESG + High-EVA firms add Alpha.

ESG—Environment, Social, and Governance—has gone mainstream. According to the ISS Market Intelligence Asset Management Industry Market Sizing Report ESG Funds were among the largest winners in 2020, taking in a record $60 billion in net flows, nearly triple their 2019 total. The CFA Institute’s position on ESG integration states that one should consider all material information, which includes material ESG factors. Governments and regulations are also pushing this effort. The EU Taxonomy Regulation entered into force in July 2020 and establishes the conditions that an economic activity has to meet to be qualified as environmentally sustainable.

ESG metrics measure how a firm is taking care of the planet (E and S) and shareholders (G), and EVA Margin measures a firm’s true profitability (see Don’t Be Fooled by Earnings, Trust EVA(EVA) Profitability Drives Value, and How EVA Can Enhance DCF and PE Analysis).


Determinants of Insider Trading Windows

Wayne R. Guay is Yageo Professor of Accounting at the The Wharton School of the University of Pennsylvania; Shawn Kim is a Ph.D. Student in Accounting at The Wharton School; and David Tsui is Assistant Professor of Accounting at the University of Southern California Marshall School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

At most publicly traded firms, an insider trading policy (ITP) establishes a pre-specified open trading window each quarter when insiders are allowed to trade, which dictates a corresponding “blackout” period in which they are prohibited from doing so. The typical trading window begins 2-3 trading days after the previous quarter’s earnings release and ends approximately 2-3 weeks prior to the end of the next fiscal quarter, resulting in an allowed trading window of about six weeks. These restrictions on insider trading activity potentially provide both protection from legal or regulatory action as well as liquidity and cost of capital benefits (e.g., Fishman and Hagerty, 1992). Although there is substantial variation in the length and timing of these trading windows, little is known about the factors boards consider when determining these constraints. Furthermore, in addition to these pre-specified trading windows and corresponding blackout periods, firms may impose event-specific trading restrictions on insiders (e.g., due to ongoing merger or acquisition negotiations). These “ad hoc blackout windows,” which are undisclosed to the public, are largely unexplored in prior literature.

In this paper, we provide a deeper understanding of the determinants of firms’ insider trading restrictions. Specifically, we explore the determinants of the following three corporate policy decisions: 1) How soon after each quarterly earnings announcement should insiders be allowed to trade; 2) Once trading is allowed to commence after the earnings announcement, how long should insiders be allowed to trade before the window is again closed, and 3) For what types of firm-specific events will an ad hoc blackout window be imposed on insider trading. Regarding this last question, we additionally explore whether an abnormal absence of trading in a given quarter contains information about material future corporate events and/or results in capital market responses.


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