Monthly Archives: September 2021

How Private Equity-Backed Companies Can Move the Needle on Sustainability

Mark Adams co-leads Russell Reynolds Associates’ Private Equity practice; Joy Tan is a member of Russell Reynolds Associates’ Center for Leadership Insight; and Emily Taylor co-leads Russell Reynolds Associates’ Private Equity practice. This post is based on a Russell Reynolds memorandum by Mr. Adams, Ms. Tan, Ms. Taylor, and Alix Stuart. Related research from the Program on Corporate Governance includes 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; 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).

Sustainability commitments at the private equity firm level are not translating into portfolio company businesses

Private equity firms are making highly visible commitments to address the challenge of sustainability. Market-leading firms, such as The Carlyle Group, EQT, and TPG Capital, now produce sustainability reports and have dedicated executives overseeing sustainability initiatives and embedding sustainability throughout the deal cycle. Other firms are even making debt funding contingent on hitting certain ESG targets. [1] This comes in response to pressure from society at large, but also from fund investors—88% of limited partners use ESG performance indicators when making investment decisions, according to recent research by Bain & Company. [2]

Despite these public commitments, PE-backed portfolio companies do not appear to be making consistent progress toward sustainability goals. According to the Russell Reynolds Associates 2021 Global Leadership Monitor (GLM), which surveyed nearly 200 portfolio company CEOs, C-suite leaders and next-generation executives, only 44% believe that their executive leadership teams are effectively embracing opportunities for ESG, compared to 67% of public company executives. This suggests that good intentions are not yet translating into action for portfolio companies.


The Effects of Going Public on Firm Performance and Commercialization Strategy: Evidence from International IPOs

Gordon M. Phillips is Laurence F. Whittemore Professor of Business Administration at Dartmouth College Tuck School of Business. This post is based on a recent paper by Mr. Phillips; Borja Larrain, Associate Professor of Finance at the Pontificia Universidad Católica de Chile; Giorgo Sertsios, Sheldon B. Lubar Associate Professor of Finance at the University of Wisconsin Milwaukee Lubar School of Business; and Francisco Urzúa, City University of London.

Going public is a key decision for many firms. Whether or not going public is good for firms has been called into question by authors and the press who have written that firms after they go public may be myopic as the public markets may cause firms to suboptimally focus on the short-term at the expense of the long term. We raise an alternative perspective and examine whether going public may be optimally be associated with a change in strategy to raise funds for commercialization and also to focus on increasing profitability. We examine firms in 16 countries around the world that file for IPOs using a sample of 3,400 firms. For a benchmark for IPO firms, we use firms that file for an IPO but withdraw and do not complete their IPO. For all these firms, our data contains pre- and post-IPO-attempt information irrespective of whether firms complete or withdraw their IPO. In particular, the post-withdrawal profitability of private firms has not been previously considered. We also build unique measures of commercialization decisions for both public and private firms.

Explanations for why firms go public include diversification and liquidity for previous owners, as well as to raise capital for expansion. There are conflicting benefits and costs of going public. There is the positive effect of additional capital that allows the firm to undertake new investment opportunities. There are also potential agency costs as going public changes concentrated ownership to dispersed ownership where the incentives of managers and investors can diverge, or managers faced with stock market pressure can become myopic. The stylized fact in the literature so far is that, on average, profitability falls after IPOs, which seems to speak against the benefits of public status. In addition, recent evidence shows that IPO firms have lower patenting rates and fewer citations after going public. These results could be interpreted as evidence of short-termism or agency costs of being public. However, being public may might alternatively be associated with an optimal change in strategy to raise funds for commercialization and to focus on increasing profitability. (A recent WSJ article on UBER raises this possibility saying “Mr. Khosrowshahi (CEO) has moved to restructure Uber to deliver on a promise to make the company profitable, … The company has promised to be profitable on an adjusted basis before interest, taxes, depreciation and amortization by the end of next year (2021).” (Wall Street Journal, December 7, 2020)). READ MORE »

SEC Cyber Enforcement Actions: Lessons for Private Fund Managers

Jason Daniel is partner, Jenny Walters is senior practice attorney and Natasha Kohne is partner at Akin Gump Strauss Hauer & Feld LLP. This post is based on their Akin Gump memorandum.

On August 30, 2021, the Securities and Exchange Commission announced three enforcement actions against registered investment advisers for alleged cybersecurity failures involving cloud-based email systems. All three actions (which were settled) imposed six-figure penalties on the advisers, despite the Staff’s acknowledgement that none of the actions resulted in any unauthorized trades or fund transfers to unauthorized parties for any client accounts and despite the relatively small number of clients involved.

These three enforcement actions are just the latest example of the SEC’s focus on cybersecurity for the past several years. Since 2015, the agency and its staff have issued risk alerts, brought enforcement actions and included cybersecurity as a stated priority examination area. These actions illustrate that cybersecurity responsibilities are, without doubt, part and parcel of an investment adviser’s overall duties, including the obligations under Regulation S-P to adopt “written policies and procedures that address administrative, technical and physical safeguards for the protection of customer records and information.”


Navigating ESG Disclosure Regulation for US Public Companies

Thomas Singer is a Principal Researcher in the ESG Center at The Conference Board, Inc. This post is based on his Conference Board memorandum. Related research from the Program on Corporate Governance includes 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; 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).

Companies traditionally communicate their sustainability activities to stakeholders through large, comprehensive reports, often running more than 100 pages, that go by a number of different names: Corporate Social Responsibility (CSR), Environmental, Social & Governance (ESG), or Sustainability. Almost all S&P 500 companies issue these reports, indicating that sustainability storytelling is now mainstream and expected of large US companies. In addition, companies increasingly customize information on their sustainability initiatives for rating agencies, business partners, regulators, and others.

Companies face a number of challenges in telling their sustainability stories: 1) deciding what issues are truly important to disclose to convey a clear, cohesive, authentic, and distinctive story about the company; 2) maintaining consistency, ensuring that their story effectively addresses the interests of multiple stakeholders; 3) providing information that’s not only accurate and reliable, but genuinely trusted (including during crises); and 4) managing the ever-evolving—and often frustrating—landscape of sustainability regulations, reporting frameworks, and ESG rating firms—as well as the growing demands by business partners who have their own requests for sustainability-related information.

To tackle some of these challenges, The Conference Board convened a working group of over 300 executives from more than 150 companies who met over the span of 10 months to focus on how companies can tell their sustainability stories authentically, reliably, and effectively to multiple constituencies. [1] Some members of this working group also responded to surveys. This post captures the key insights from the working group sessions as well as the survey results. More detailed guidance can be found in the four accompanying practical guides.


SPACs: Insider IPOs

Usha R. Rodrigues is M.E. Kilpatrick Professor of Law at the University of Georgia School of Law, and Michael Stegemoller is Harriette L. and Walter G. Lacy, Jr., Chair of Banking and Finance at Baylor University Hankamer School of Business. This post is based on their recent paper.

A special purpose acquisition company (SPAC) is an organizational form that allows a group of managers to raise cash via an initial public offering (IPO) in order to acquire a privately held firm. The SPAC organizers hold the cash raised from the IPO in a trust account, invested in government-backed securities. The acquisition, termed the “de-SPAC,” must occur within a limited time, or else the SPAC shareholders get their money back by redeeming their shares. Indeed, SPAC shareholders can redeem their shares—i.e., claim their money back from the trust account—in two circumstances: 1) if the managers successfully locate a target; or 2) if the SPAC reaches the end of its limited life having failed to negotiate a merger. SPACs thus theoretically offer benefits to both their shareholders and the private targets they acquire. The SPAC’s public shareholders get the first crack at owning a newly public operating company—a chance usually reserved for those lucky enough to have been allocated shares in an IPO—with no downside risk if the transaction falls through or if they simply decide they don’t like the look of the target. SPACs also purportedly offer the private firm—the target—capital raising and access to the liquidity of the public markets via a mechanism cheaper, faster, and less painful than a traditional IPO.


Revisiting Whistleblower Response Procedures

John F. Savarese, Ralph Levene, and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Savarese, Mr. Levene, Mr. Carlin, and David B. Anders.

Over the years, we have repeatedly underscored that effective implementation of well-designed procedures for responding to corporate crises, including for properly addressing whistleblower reports, is critically important in light of increased governmental enforcement activity and the value of securing credit for cooperation and remediation efforts. In yet another reminder of why such preparation is so vital, the SEC announced last week that, with its most recent awards, it has paid more than $1 billion to whistleblowers since the inception of its formal whistleblower program in 2012, and that the pace of such awards in 2021 is at record levels. SEC Chair Gary Gensler used this milestone to remind public companies that the Commission’s whistleblower program remains one of the most significant sources of information triggering Staff investigations and to urge potential whistleblowers to continue to come forward with credible information about potential violations of the securities laws.


The Activism Vulnerability Report Q2 2021

Jason Frankl is Senior Managing Director and Brian G. Kushner is Senior Managing Director and Leader of Private Capital Advisory Services at FTI Consulting. This post is based on their FTI Consulting 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).

Market Update

The more things change, the more they stay the same. Although COVID-19 remained a global concern, U.S. equity markets continued to push higher in Q2 2021. For the year, the S&P 500 Index is up 18.3%, while the Dow Jones Industrial Average has returned 14.7% and the Nasdaq Composite Index has returned 14.2%. [1]

Year-to-Date Performance (2021) [2]

While value stocks outperformed growth stocks in the Q1 2021, that style rotation appears to have been short-lived, and the longer-term trend of growth stock outperformance has continued so far in 2021. Year-to-Date, the S&P 500 Growth Index has returned 20.6% compared to the S&P 500 Value Index, which has returned 17.9%. [3]


Investors’ Response to the #MeToo Movement: Does Corporate Culture Matter?

Mary Billings is Associate Professor of Accounting, April Klein is Professor of Accounting, and Yanting (Crystal) Shi is a PhD candidate in Accounting, all at NYU Stern School of Business. This post is based on their recent paper. 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).

Good corporate governance is a bedrock of corporate America, with a central tenet being the board of directors’ role in effectively overseeing and monitoring the firm. Recently, institutional investors have focused on changing board composition. Beginning in 2017, two of the “Big 3” institutional investors, State Street and BlackRock, began an ESG activist campaign for their portfolio firms to include women on their board of directors, voting consistently against directors on the nominating committee if the firm presented a ballot of directors with zero women. Prominent proxy advisors, including ISS and Glass Lewis, also have advanced voting policy guidelines that reflect commitments to board gender diversity. In 2020, Goldman Sachs joined this campaign by announcing it would not underwrite IPOs in the U.S for firms with all-male boards of directors.

Given the voting and financial clout of these institutions, it is not surprising that their activism wielded significant influence in this governance area. Between 2017 and 2020, the number of S&P 1500 firms having all-male boards dropped from 179 to 30, with no S&P 500 board retaining a board without at least one woman director. In 2020, of the top 25 U.S. IPOs, just one company, Dun & Bradstreet, went public with an all-male board, compared to 12 IPOs in 2018. Government and regulators also have responded. In 2018, California passed legislation mandating most publicly traded companies based there to have at least three women on their boards by the end of 2021 (California Senate Bill No. 826), and in 2020, the NASDAQ proposed a change to its corporate governance listing requirements by requiring the inclusion (or explanation of non-inclusion) of at least one woman board member.


How the Best Boards Approach CEO Succession Planning

Maria Castañón Moats is Leader and Paul DeNicola is Principal at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Many boards aren’t fully prepared for CEO departures despite succession planning being one of their primary responsibilities. If we’ve learned anything during the pandemic, it’s that anything can happen. There are important steps directors can take to be better prepared for both planned departures and the unexpected.

Why CEO succession planning can be hard

Planning for who will be the company’s next leader has long been one of a board’s most important responsibilities. Without the right person at the top, even the best companies with the most innovative strategies will struggle. The COVID 19 crisis has accelerated the pace of digital transformation, industry consolidation, and flexible work arrangements. So, boards may need to rethink the skills they look for in a top leader in the post pandemic environment.

Businesses need strong leadership more than ever. Yet all too often, boards are caught unprepared when they need a change in leadership. Why does this happen? For a start, it can be difficult just to have the conversation. In high performing companies, directors may be concerned that broaching the topic of succession will cause the current CEO to think they are looking for a replacement. In under performing companies, directors may want to avoid doing anything to make the CEO worry about job security when they need to focus on driving strategy.


Board Practices Quarterly: The Outspoken Corporation

Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on a Deloitte/Society for Corporate Governance memorandum by Ms. Cooper, Mr. Lamm, Ms. Morrison, Debbie McCormack, Carey Oven, and Darla C. Stuckey.

Corporate leaders are increasingly speaking out on potentially controversial social, political, and environmental issues as a matter of principle and/or in response to changing stakeholder pressures and expectations that corporate America can influence the dialogue on these issues. As is the case with many other corporate practices, taking a stance publicly on controversial or sensitive topics poses both risks and opportunities, including alienating or appealing to key stakeholders; enhancing or damaging the corporate culture; and eroding or building trust and brand reputation. As a result of these dynamics, many corporate leaders and boards of directors are considering—in many cases, for the first time—whether and how their companies should approach public engagement on these issues.

This post looks at how companies approach public engagement on social, political, environmental, or public policy issues and the related role of the board. It presents findings from a July 2021 survey of in-house members of the Society for Corporate Governance that addressed, among other matters, designation of a company spokesperson; governing documentation; the role of management; board oversight and practices; and stakeholder engagement.


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