Monthly Archives: July 2021

2021 ESG & Incentives Report

John Borneman is Managing Director, Tatyana Day is Senior Consultant, and Olivia Voorhis is a Consultant at Semler Brossy Consulting Group LLC. This post is based on a Semler Brossy memorandum by Mr. Borneman, Ms. Day, Ms. Voorhis, Kevin Masini, Matthew Mazzoni, and Jennifer Teefey. 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).

“I cannot recall a time where it has been more important for companies to respond to the needs of their stakeholders. We are at a moment of tremendous economic pain. We are also at a historic crossroads on the path to racial justice—one that cannot be solved without leadership from companies.”
— Larry Fink, 2021 Letter to CEOs

At the start of the new decade, corporate engagement with environmental, social, and governance (“ESG”) issues was already accelerating—part of a large large-scale shift in corporate purpose toward responsibility to a broad group of stakeholders. 2020 had a profound impact on corporate governance and responsibility, with the pandemic shining a spotlight on health and safety and the national focus on racial justice drawing sharp attention to diversity and inclusion in corporate America.

As a result, ESG has become one of the most prominent set of issues discussed in boardrooms across the country over the past year. As stakeholder and investor focus on these issues continues to increase, corporate leadership has worked to demonstrate their commitment to progress. Inclusion of ESG metrics in incentive compensation is often seen as a key part in publicly demonstrating this commitment. As a result, ESG metrics have proliferated throughout incentive plans.


Indirect Investor Protection

Holger Spamann is the Lawrence R. Grove Professor of Law at Harvard Law School. This post is based on his recent paper.

In a paper just posted on SSRN, I argue that the central mechanisms protecting most investors in public securities markets—beyond deterring theft, fraud, and fees—are indirect. They do not rely on actions by the investors or by any private actor directly charged with looking after investors’ interests, such as their fund managers. Rather, investors’ main protections are provided as a byproduct of the (mostly) self-interested but mutually and legally constrained behavior of (mostly) sophisticated third parties without a mandate to help the investors, such as speculators, activists, and plaintiff lawyers. This elucidates key rules, resolves the mandatory vs. enabling tension in corporate/securities law, and exposes passive investing’s fragile reliance on others’ trading.

My argument that the key protective mechanisms are indirect contrasts with the standard view in most policy discourse. According to the standard view, investors are protected directly by the governance rights and information that companies provide them, and by the investment professionals—particularly fund managers—that they may employ to digest this information and exercise their rights. But retail investors cannot possibly digest the necessary information themselves. Their fund managers might, but theory and empirics suggest they will be at most partially effective. Passive (index) funds eschew selection of investments by definition and, competing on costs, have low incentives, if any, to exercise governance rights. Actively managed funds have better but, barred from charging performance fees, still weak incentives, and in any event have historically been mostly inactive in governance and notoriously underperformed the market, at least net of fees. Some other institutional investors are more able, but many struggle as much as retail funds, or more.


CEO Succession Practices in the Russell 3000 and S&P 500 2021 Edition

Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc., Jason D. Schloetzer is Associate Professor of Business Administration at the McDonough School of Business at Georgetown University, and Francine McKenna is an independent journalist and Adjunct Professor of international business in the MBA program at American University’s Kogod School of Business. This post is based on CEO Succession Practices in the Russell 3000 and S&P 500: 2021 Edition, published by The Conference Board, Heidrick & Struggles, and ESGAUGE.

CEO Succession Practices in the Russell 3000 and S&P 500: 2021 Edition reviews succession event announcements about chief executive officers made at Russell 3000 and S&P 500 companies in 2020 and, for the S&P 500, the previous 19 years. The project is a collaboration among The Conference Board, executive search firm Heidrick & Struggles, and ESG data analytics firm ESGAUGE.

Data from CEO Succession Practices in the Russell 3000 and S&P 500: 2021 Edition can be accessed and visualized through an interactive online dashboard. The dashboard is organized into five parts.

Part I: CEO Succession Rates illustrates year-by-year succession rates and examines the effects on those rates of firm performance and CEO age—two critical determinants of top leadership changes. The section also includes details on forced versus voluntary CEO successions.

Part II: CEO Profile provides demographic statistics on CEOs currently serving in the Russell 3000 and S&P 500 indexes—including their age, age diversity, gender, tenure, and tenure diversity.

Part III: Departing CEOs and Part IV: Incoming CEOs are similarly structured, with the demographic profile of departing and incoming CEOs, the balance between incoming and departing female CEOs, and a review of the reasons (where stated) for CEO departures.

Part V: Placement Type and Other Practices complements the information of the previous sections with data on CEO placement type (whether an inside promotion or an outside hire), the tenure-in-company of inside CEO appointments, the inside appointment of “seasoned executives” who have been with the company for 20 years or longer, and the appointments as CEO of non-executive directors. The section ends with data on other succession practices, such as the joint election of incoming CEOs as board chairs, the choice of interim CEOs during phases of leadership transition, and the quarterly distribution of CEO succession announcement and effectiveness dates.


Supreme Court Gives More Tools for Defendants to Challenge Class Certification in Securities Fraud Cases

Stephen L. Ascher and Ali M. Arain are partners and Reanne Zheng is an associate at Jenner & Block LLP. This post is based on a Jenner memorandum by Mr. Ascher, Mr. Arain, Ms. Zheng, and Howard S. Suskin. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).


On June 21, 2021, the US Supreme Court issued its decision in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, [1] providing guidance to lower courts regarding class certification in securities fraud class actions. On balance, the opinion favors defendants, and potentially signals a backlash against the tide of securities fraud class actions based on vague and generic misstatements. Importantly, the Court instructed that all relevant evidence should be considered when making the class certification decision, sending a message that lower courts must grapple with and cannot ignore relevant evidence at the class certification stage simply because it overlaps with the merits-related evidence. The Court also stressed that the generic nature of a misrepresentation is often important evidence of lack of price impact, which lower courts should consider when deciding whether to grant or deny a class certification motion.

Although the Supreme Court’s decision was not as sweeping as the defendants wanted, it does signal the Supreme Court’s concern that companies are too frequently held liable for securities fraud as a result of adverse legal or business developments, even where the company had never made any specific statements about the matters in question.


Q2 2021 Quarterly Outlook

Angie Storm is Partner and Robin Van Voorhies is a Director at KPMG. This post is based on a KPMG memorandum by Ms. Storm, Ms. Van Voorhies, and Carol Clarke.

The latest on SPACs

Although special purpose acquisition companies (SPACs) have been around for decades, they have recently exploded in popularity. While SPACs can offer certain advantages over IPOs, such as quicker access to the capital markets, their use can also raise challenges. The SEC and others are monitoring the SPAC boom and responding as needed.

Warrants issued by SPACs (April 2021). The Office of the Chief Accountant and the Division of Corporation Finance issued a joint statement on two accounting considerations for warrants issued by SPACs.

  • Indexation. An equity-linked financial instrument (or embedded feature) must be considered indexed to an entity’s own stock to qualify for equity classification. Provisions that change the settlement amount of the warrants based on the characteristics of the holder preclude equity classification. Warrants with these provisions are classified as liabilities and measured at fair value.
  • Tender offer provisions. Certain cash tender offer provisions that require the SPAC to settle its warrants for cash preclude equity classification. Warrants with these provisions are classified as liabilities and measured at fair value.

The joint statement also discusses filing and other considerations if the registrant and auditor determine that there is an error in previously filed financial statements related to these warrants.


Shareholder Liability and Bank Failure

Felipe Aldunate is Assistant Professor of Finance at the Pontifical Catholic University of Chile. This post is based on a recent paper authored by Mr. Aldunate; Dirk Jenter, Associate Professor of Finance at the London School of Economics; Arthur G. Korteweg, Associate Professor of Finance and Business Economics at the University of Southern California Marshall School of Business; and Peter Koudijs, Professor of Finance and History at Erasmus University Rotterdam.

Because of limited liability, bank shareholders often prefer banks to take high risk, to the detriment of depositors and the stability of the banking system. Using data on the performance of U.S. banks during the Great Depression, we find strong evidence that increasing shareholder liability can be an effective tool to reduce bank risk taking and distress. Our results are relevant for current initiatives to increase bank stability.

Since the beginning of modern banking in the early 19th century, policy makers and regulators have tried to rein in bank risk. One often-used tool was to force bank shareholders to face some form of additional liability. From 1817 onwards, shareholders in most U.S. banks had so-called “double liability.” Double liability stipulates that, in case of bank failure, the banking supervisor levies a penalty on shareholders (up to the par or paid-in value of their shares) that is used to satisfy the bank’s depositors and other creditors. This system remained the norm until 1933, when the American banking system was restructured. All else equal, double liability should reduce shareholders’ risk taking preferences, potentially reducing bank failures.


Supreme Court Confirms that “All” Evidence Rebutting Price Impact Must Be Considered on Motions to Certify Securities-Fraud Classes

John F. Savarese and Kevin S. Schwartz are partners, and Noah B. Yavitz is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

Over the past decade, as we have noted, the Supreme Court has guided lower courts on how they should evaluate defense challenges to efforts by shareholder plaintiffs to certify putative classes in federal securities-fraud claims against corporate issuers. On Monday, the Court waded back into these troubled waters, emphasizing that lower courts must consider “all probative evidence” in evaluating whether alleged corporate misstatements were so “generic” that they could not have had an impact on a stock’s market price and hence that a proposed class should not be certified, and thus remanding the case to the Second Circuit Court of Appeals to reconsider the defendants’ arguments in light of all such evidence. See Goldman Sachs Grp., Inc. v. Arkansas Teacher Ret. Sys., No. 20‑222 (U.S. June 21, 2021).

Shareholder plaintiffs had alleged that defendant Goldman Sachs maintained an improperly inflated stock price by making broad assertions about how carefully it managed potential conflicts of interest among its banking clients. Seeking to invoke the Basic v. Levinson “fraud-on-the-market” presumption that shareholders rely upon, and the stock price necessarily incorporates, all corporate statements, 485 U.S. 224 (1988), plaintiffs argued that such rosy statements must have been false because certain conflicts later came to light, causing a price decline. In opposing class certification, Goldman Sachs argued—unsuccessfully in the courts below—that its alleged misrepresentations (e.g., “[o]ur clients’ interests always come first”) were too generic to have affected its share price.


A Critique of the Insider Trading Prohibition Act of 2021

Stephen M. Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA School of Law. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

The Insider Trading Prohibition Act (“Act”) passed the U.S. House of Representatives by a wide bipartisan margin on May 18, 2021, and is now awaiting Senate action. The Act’s proponents claim that the bill makes only modest changes in the definition of insider trading as it has been developed in the courts, while at the same time creating “a clear definition of insider trading . . . so that there is a codified, consistent standard for courts and market participants.” Unfortunately, the Act neither codifies nor clarifies.

The Act Likely Will Expand the Current Prohibition

At present, insider trading liability is premised on a breach of a duty of disclosure arising out of a fiduciary relationship or some similar relationship of trust and confidence. The Act changes the focus to whether information was wrongfully used or communicated, which is defined as using or communicating information obtained through such means as “theft, bribery, misrepresentation, . . . misappropriation, or other unauthorized and deceptive taking of such information,” or “a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, a breach of any code of conduct or ethics policy, or a breach of any other personal or other relationship of trust and confidence for a direct or indirect personal benefit (including pecuniary gain, reputational benefit, or a gift of confidential information to a trading relative or friend).”


Early Insights to 2021 Annual General Meetings Annual Corporate Governance Review

Hannah Orowitz is Senior Managing Director of Corporate Governance; Talon Torressen is Director of Research; and Michael Maiolo is a Senior Institutional Analyst at Georgeson. This post is based on their Georgeson memorandum.


With only one month remaining in the 2021 proxy season, an examination of early voting statistics [1] among Russell 3000 companies reveals that investors’ heightened focus on environmental, social and governance (ESG) risks and opportunities are having a meaningful impact on the 2021 season.

This is not surprising, given the continued focus paid to this topic by a range of major institutional investors. The rapid shift in investor voting both with respect to shareholder proposals and director elections year over year has resulted in several groundbreaking results:

  • A total of 30 environmental and social proposals have already passed, the highest number on record and a 50% increase compared to the total number of such proposals receiving majority support during the 2020 proxy season
  • More than one third of environmental shareholder proposals voted on to date have passed
  • The election of three dissident directors occurred, on the basis of investors’ climate concerns, including support from BlackRock, Vanguard and State Street
  • Record-breaking support for shareholder proposals focused on plastic pollution, political contributions and board diversity
  • A sizeable increase in negotiated settlements of shareholder proposals as compared to the 2020 and 2019 proxy seasons


Why ExxonMobil’s Proxy Contest Loss is a Wakeup Call for all Boards

Rusty O’Kelley is a co-leader and Andrew Droste is a Board Specialist at the of the Russell Reynolds Associates Board & CEO Advisory Partners for the Americas. This post is based on their Russell Reynolds 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); 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).

Over the past five years, the largest institutional investors have been increasingly vocal and specific about their expectations of boards and directors regarding board composition and ESG. Despite this, they have rarely acted on those concerns when it comes to director voting. However, the ExxonMobil proxy fight may be a sign things have changed. Twenty twenty-one will go down as the year that large institutional investors aligned their voting with market communications and voted out three sitting board members at ExxonMobil. The world’s largest shareholders have now demonstrated that they are willing to act and that they expect executives to take action on ESG and climate change. Importantly, this is a lesson that board composition matters and director skills need to align with a company’s strategy.

At the end of May, the US proxy season reached its apex and the long-awaited contest between ExxonMobil and Engine No. 1 came to a vote. Engine No. 1, an activist hedge fund with just .02% ownership in the company, argued throughout the contest that there were shortcomings in oil and gas experience on ExxonMobil’s board, slow strategic transitioning to a low carbon economy, and historic underperformance and overleverage relative to peers. The fund proffered four board director candidates to ExxonMobil investors, three of whom were ultimately elected to the 12-member board—and as a result, three sitting board members were ousted.


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