Monthly Archives: August 2021

Survey on Perceptions of Stakeholder Governance and Corporate Purpose

Jennifer Tonti is Managing Director of Survey Research & Insights at JUST Capital. This post is based on her JUST Capital memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver Value to All Stakeholders?, both 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).

Since the Business Roundtable redefined the Purpose of a Corporation two years ago, we’ve been tracking how Americans think companies are measuring up to this new stakeholder-focused purpose. The macro perspective is that America’s largest companies are perceived to be doing well promoting an economy that serves all Americans; a sharp increase (16-20 percentage points) from when we first asked this question in August 2019.

Yet when asked specifically about corporations’ impact on individual stakeholders, the perception is that shareholders continue to win out over other stakeholder groups.

  • Pluralities say that in the two years since the BRT’s announcement, corporations have not changed the degree to which they prioritize their stakeholder groups—workers, customers, communities, the environment, and shareholders.
  • While more respondents say that companies have a positive impact on the various stakeholder groups than have a negative or no effect, shareholders continue to get the lion’s share of attention (68% positive impact) over other stakeholders such as workers (48%) or the environment (41%).

Americans continue to be optimistic about capitalism as an economic system, but there is near universal agreement that a more evolved form of capitalism is needed to:

  • Ensure the greater good of society.
  • Produce the kind of society respondents want for the next generation.
  • Work for the average American.


M&A Rumors about Unlisted Firms

Alexander Groh is Professor of Finance at Emlyon Business School. This post is based on a recent paper, forthcoming in the Journal of Financial Economics, by Mr. Groh; Yan Alperovych, Associate Professor of Finance at Emlyon Business School; Douglas J. Cumming, DeSantis Distinguished Professor of Finance and Entrepreneurship at Florida Atlantic University; and Veronika Czellar, Professor of Data Science, Economics and Finance at SKEMA Business School. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

Mergers and acquisitions (M&As) are important events in the life cycle of corporations and have the potential to affect a wide range of stakeholders. They can lead, among many other possibilities, to strategic reorganization, product discontinuation, accelerated growth, geographic expansion, layoffs, or increased competition. The transactions are usually initiated by the acquirer or the seller or, alternatively, by the target or outside managers. Deal negotiations eventually start after direct contact between the future partners or following a limited auction process organized by M&A intermediaries. Regardless of the process used to begin “merger talks”, the participants regularly bind themselves to strict confidentiality using non-disclosure agreements (NDAs). The purpose of these NDAs is to limit the incidence of deal negotiation information leaks, with their potential knock-on effects on deal consummation and value. These effects are caused by the uncertainty regarding the final merger outcome, as revealed in an M&A transaction rumor. In particular, information leaks can create tension in the respective companies, e.g. among employees, customers, and suppliers, or mistrust among the negotiating parties. Rumors are known to damage employee morale and impede organizational communication. They hamper restructuring and layoffs during periods of corporate change and may damage sales. For listed companies, it has been shown that M&A rumors are spread to manipulate stock prices. In general, rumors adversely affect stock prices and thus reduce market efficiency. Merger talks may fail because of rumors, leading deals to collapse or transactions to close at changed deal values.


A Special Board Committee Can Help Drive Corporate and Transformational Success

Ryan McManus is a director of the National Association of Corporate Directors (NACD) New York Chapter, founder and CEO at, managing director at Inflexhn Partners, and a director at Nortech Systems. This post is based on his NACD memorandum.

Finding time to engage on corporate strategy is a regular concern of directors. One aspect of strategy oversight in particular—the emerging and urgent topic of digital transformation—distinguishes itself from traditional operational considerations because of its critical impact on a company’s business model, investments, leadership, and culture. The companies that lead in the digital economy win big, while companies that fall behind face significant threats—competitive, security, and even existential. (For more board-level insights on this, join me at the foundation program of the NACD Digital Transformation Continuous Learning Cohort on Aug. 24 and 25.)

Many organizations and leadership teams, however, continue to struggle with digital transformation despite attempts at new strategies and investments amid urgent competitive and market pressures. Boards looking to enhance governance of digital transformation, or other highly transformative topics (such as sustainability and environmental, social, and governance matters), regularly establish new committees that can improve board oversight and engagement.

For example, with an eye toward new growth, in 2018 Nortech Systems established a science and technology committee accompanied by the unanimous approval and support of the CEO, board chair, and full board. The impact on the organization has been nothing short of extraordinary. Directors interested in reviewing the committee charter can find it on the Nortech website.


Corporate Racial Equality Investments—One Year Later

Robert Schwarz is a Senior Researcher at the Conference Board’s ESG Center. This post is based on his Conference Board report. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver Value to All Stakeholders?, both 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).

Executive Summary

Following the killing of George Floyd in May 2020, many large US companies committed to donating large sums to nonprofits to address racial inequality. [1] These financial commitments were in addition to pledges to address racial inequality through revising company policies, implementing internal education and development programs, increasing diversity and equity in their workforces and management ranks, and increasing their disclosures of racial/ethnic data—all of which also have a financial dimension.

One year later, some in the media and several advocacy organizations are questioning these external financial commitments, asking where the money has gone and what progress has been made. [2] Much of the criticism misses the mark, as it fails to appreciate what it takes for a company to commit to, design, implement, and monitor multimillion-dollar programs to address social problems.

The Conference Board held a roundtable discussion with 55 corporate citizenship executives and conducted a survey with 86 respondents on “Corporate Racial Equality Investments a Year Later.” We found that the hundreds of millions of dollars that companies have committed to nonprofits is just part of their overall effort to address racial inequality. Even more significantly, we found that the pace of spending to date reflects the seriousness with which companies are taking this issue. Companies made long-term financial commitments to address racial inequality, reflecting the fact that this is a long-term challenge. Further, companies have been actively laying the groundwork for a sustained effort: they have focused on deepening their expertise on racial inequality, building internal capacity, and forging external relationships to be able to deliver on their commitments.


Why Do Bank Boards Have Risk Committees?

René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on a recent paper by Mr. Stulz; James Tompkins, Professor of Finance at Kennesaw State University; Rohan Williamson, Professor of Finance at Georgetown University McDonough School of Business; and Zhongxia (Shelly) Ye, Associate Professor of Accounting at the University of Texas at San Antonio Carlos Alvarez College of Business.

Though the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) passed in July 2010 required bank holding companies with more than $10 billion of assets to have a board risk committee, a majority of the banks required to have a risk committee had one before the legislation. The presumption of the legislators apparently was that having a board risk committee would reduce bank risk-taking. As far as we know, there was no scientific evidence at the time suggesting that requiring the establishment of a risk committee for banks that did not have one would be valuable either for the banks’ owners or for the financial system. We develop a model of whether a bank should have a risk committee and show that for a bank that maximizes shareholder wealth there is no expectation that a board risk committee causes bank risk-taking to decrease. Our empirical analysis finds no support for the proposition that the existence of a board risk committee decreases bank risk-taking. We use unique interview data to assess how bank risk committees work and whether they act as expected with our theory. We find that risk committees play a role that is consistent with our theory except that they also seem to be a way for regulators to monitor and influence risk-taking within banks. Though a well-functioning risk committee can be valuable to a bank’s shareholders, it is also possible for the risk committee to worsen the communication and engagement of a bank’s board. Therefore, having a risk committee only makes sense for banks where risk-taking is sufficiently complex that risk metrics have to be monitored by a specialized committee.


2021 Say on Pay and Proxy Results

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.

Breakdown of Say on Pay Vote Results

56 Russell 3000 companies (2.8%) failed Say on Pay thus far in 2021, 15 of which are in the S&P 500. The S&P 500 failure rate is currently 3.7%. No companies have failed since our last report. Our evaluation of the likely reasons for failure indicates that 18 of the 56 failed Say on Pay votes are due in part to Covid-19 related actions.

Say on Pay Observations

  • The current failure rate (2.8%) remains above the failure rate at this time last year (2.2%) and is slightly lower than our June 24th report (2.9%)
  • The percentage of Russell 3000 companies receiving greater than 90% support (76%) is greater than the percentage at this time last year (73%)
  • The current average vote results of 90.5% for the Russell 3000 and 88.7% for the S&P 500 are below the average vote results at this time last year
  • The average Russell 3000 vote result thus far is 180 basis points higher than the average S&P 500 vote result, which is 80 basis points larger than the spread at this time last year


SEC Updates Qualified Client Threshold

Kathryn M. Furman, John Wilson and Doug Elsbeck are partners at King & Spalding LLP. This post is based on a King & Spalding memorandum by Ms. Furman, Mr. Wilson, Mr. Elsbeck, and Rachel Shepardson.

On June 17, 2021, the SEC issued an order (the “Order”) to adjust for inflation the dollar amount thresholds that determine when an investor is a “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Prior to the Order, Rule 205-3 defined a qualified client as (i) a client who either has at least $1,000,000 under the management of an investment adviser immediately after entering into an investment advisory contract with such investment adviser (the “AUM Test”), or (ii) a client who the investment adviser reasonably believes, immediately prior to entering into an investment advisory contract with such investment adviser, has a net worth of more than $2,100,000 (the “Net Worth Test”). The recent Order increased the amount in each clause by $100,000, creating new dollar thresholds of $1,100,000 for the AUM Test and $2,200,000 for the Net Worth Test, respectively. Qualified clients also include persons who are “qualified purchasers” as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), as well as “knowledgeable employees” of the investment adviser.


Statement by Chair Gensler on Broker-Dealer and Investment Adviser Digital Engagement Practices

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.

Today [August 27, 2021], the Commission published a request for public comment on the use of new and emerging technologies by financial industry firms. [1]

While these new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice. These apps use a host of features that have come to be familiar in our increasingly online world. Digital engagement practices (DEPs), including predictive data analytics, differential marketing, and behavioral prompts (such as gamification), are integrated not only into streaming platforms and fitness apps, but also in robo-advising, wealth management platforms, brokerage platforms, and other financial technologies.

Many of these features encourage users to engage more with a digital platform. In the last few years we’ve seen a proliferation of trading apps, wealth management apps, and robo-advisers that use these practices to develop and provide investment advice to retail investors. In many cases, these features may encourage investors to trade more often, invest in different products, or change their investment strategy. Predictive analytics and other DEPs often are designed, in part, with optimization functions to increase platform revenues, data collection, and customer engagement, leading to potential conflicts between the platform and investors.


Delaware and New York Part Ways on Treatment of Future Affiliates Covered by Contract Restrictions

Daniel E. Wolf and Jonathan L. Davis are partners at Kirkland & Ellis LLP. This post is based on their Kirkland memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

In an earlier note, we identified discernable gaps between Delaware and New York law relating to certain recurring issues that come up in transactions.

recent decision from the Delaware Chancery Court highlights another important difference in approach that affects both drafting and due diligence considerations for dealmakers. In this case, the court addressed whether a non-compete in a joint venture agreement that binds a party and its “affiliates” restricts ownership of a competing business by a subsequent acquirer of one of the JV parties. Put simply, is a “future” affiliate captured by this restrictive covenant?

The Delaware court came down decisively on the side of measuring “affiliate” status on a rolling basis at each time that contract compliance was tested as opposed to the moment in time when the contract was signed. It is clear that Delaware courts view covered “affiliates” as a dynamic group, rather than the result of a one-time snapshot. While the specific language of the contract was a factor in the decision, the court also noted the practical absurdity of freezing the covered affiliate group at signing — a party would then be able to form a new subsidiary the day after signing and run competitive business through that newly formed affiliate.


ESG and Incentives 2021 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 MasiniMatthew Mazzoni, and Jennifer Teefey. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); The Illusory Promise of Stakeholder Governance (discussed on the Forum here); and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita.

Performance metrics in incentive plans are most effective when they reinforce business priorities and initiatives that are already deemed important by leadership. This is as true for ESG metrics as it is for any other performance objectives, although there are also strong external pressures that appear to be influencing the adoption of ESG metrics today.

Our first report of 2021 delved into the different ESG metrics in the S&P 500, parsing important trends and year-over-year changes in prevalence. This post drills down into how these metrics manifest across industries, with differences driven largely by variance in business models and strategy, as would be expected. For example, we see significant emphasis on employee safety metrics in heavy industries such as Energy and Materials, along with measures tied to environmental impact and stewardship. Similarly, human capital metrics such as retention and talent development are most common in industries with a heavy strategic focus on recruiting and retaining high-caliber talent, such as Financials, Technology, and Health Care.

At the same time, the pressures on corporate leadership and boards to demonstrate commitment to broader social responsibility within ESG have only heightened throughout 2020 and 2021, driven in part by increased focus on the impact of the Covid-19 pandemic on stakeholders as well as the spotlight on racial inequality. These pressures are fueling the adoption of newer social sustainability metrics such as Diversity & Inclusion (“D&I”) in incentive plans across all industries. Headlines continue to highlight blue chip companies that are adding environmental and social (“E&S”) sustainability metrics to go-forward compensation plans, and we expect to see prevalence increase even further by next year.


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