Monthly Archives: October 2021

The Current State of Human Capital Disclosure

Alison Omens is Chief Strategy Officer, Aleksandra Radeva is Junior Analyst, and Kavya Vaghul is Senior Director of Research at JUST Capital. This post is based on a JUST Capital memorandum by Ms. Omens, Ms. Radeva, Ms. Vaghul, Emily Bonta, Catrina Notari, and Ian Sanders. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver 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).

Key Findings

To meet growing expectations on human capital disclosure—from investors, workers, regulators, the American public, and other key stakeholders—the country’s 100 largest employers have work to do. Between July and August 2021, JUST Capital analyzed the 100 largest U.S. employers for how they disclose across 28 metrics covering six key human capital themes—Employment and Labor Type, Job Stability, Wages, Compensation, and Benefits, Workforce Diversity, Equity, and Inclusion, Occupational Health and Safety, and Training and Education. We wanted to better understand the current state of human capital disclosure across commonly recommended standards and metrics. Overall, the data revealed three key trends:

  1. Disclosure is low across the board, with the disclosure rate below 20% for the majority of metrics.
  2. Most metrics are currently disclosed in Corporate Social Responsibility or Sustainability Reports, which do not require auditing or have standardization requirements.
  3. Metrics that have highest levels of disclosure are most likely to be reported in Annual Reports (10-K filings).

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Racial Equity Audits: A New ESG Initiative

Ron S. Berenblat and Elizabeth R. Gonzalez-Sussman are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Berenblat, Ms. Gonzalez-Sussman, Claudia B. Dubón, Rebecca L. Van Derlaske, Ian A. Engoron, and Sarah R. Matchett. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver 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).

I: Introduction

The increasing focus on environmental, social and governance (“ESG”) considerations at public companies, including this year’s highly publicized proxy contest at Exxon Mobil Corporation (“Exxon”), has demonstrated the growing importance of understanding ESG and the implications it can have for investors and companies. Among the many ESG developments bubbling to the forefront of the markets in recent years is the desire of investors to see companies address social justice concerns. In particular, shareholders have begun to request that companies conduct racial equity audits (“Racial Equity Audits”), which generally seek an independent, objective and holistic analysis of a company’s policies, practices, products, services and efforts to combat systemic racism in order to end discrimination within or exhibited by the company with respect to its customers, suppliers or other stakeholders. We anticipate greater interest in Racial Equity Audits and similar initiatives in the upcoming proxy season and accordingly believe companies will be pushed to critically and objectively examine their current internal practices and policies relating to equity and inclusion to identify areas in need of improvement.

A. Overview of the ESG Landscape Today

ESG considerations can be broken down into three categories. First—environmental criteria, which considers a company’s actions as a steward of the environment, such as what steps a company is taking to address the depletion of the planet’s resources, pollution and greenhouse gas emissions, or the effects of climate change. [1] Second—social criteria, which considers how a company engages with all of its stakeholders (including employees, customers and suppliers) rather than just shareholders, including the treatment and diversity of its employees on the frontline, management and boardroom levels, the effects of a company on the surrounding community, and whether a company is working with suppliers who share similar socially desirable values. [2] Third—corporate governance, which considers how a company governs itself and holds itself accountable taking into account the structure and diversity of a company’s board of directors, the separation between management and the board of directors, executive compensation, equal and fair pay amongst employees, and the extent to which a company or its management or board of directors are undertaking lobbying efforts, making political and charitable donations, or engaging in corruption or bribery. [3]

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Carbon Zero and the Board

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, David M. Silk, and Ram Sachs. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver 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).

The pursuit of carbon neutrality has forced challenging board discussions about companies’ medium and long-term strategies. Increasingly, investors, customers and other stakeholders expect companies to set—and meet—carbon reduction goals. Investors, in particular, are pushing for standardized climate and sustainability metrics from companies. Forthcoming SEC rulemaking is likely to mandate such disclosures, including with respect to greenhouse gas emissions. Looking ahead, as climate metrics become widely available, and as carbon reduction commitments become operational requirements, boards will need to proactively communicate how climate change and the transition away from carbon will impact their business outlook and planning. Already, the market has rewarded companies that are well-positioned to transition to a carbon-constrained operating environment, and is starving fossil fuel production projects of necessary capital.

Within this context, directors must now grapple with near-existential questions of whether and how to transition into a low or no-emission future. Some companies may choose to proceed on course, with long-term wind-down and liquidation in mind. More frequently, boards will work with management to assess the conversion of products and operations to more sustainable alternatives. Increasingly, boards are considering whether and how to diversify into new business lines that are more resilient to climate stressors or a changing regulatory environment. All of these decisions lead to a host of disclosure, regulatory and stakeholder concerns.

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Disrupting the Disruptors? The “Going Public Process” in Transition

Aswath Damodaran is Professor of Finance at New York University Stern School of Business. This post is based on his recent paper.

For decades, the process that private companies in the United States have used to get listed on public markets has followed a familiar script, using bankers as intermediaries to price and sell their offerings, primarily to preferred clients. As the number of public offerings has surged in the last few years, there have also been disruptions at three levels.

  • The first is in the types of companies going public, with many firms entering the public markets with large losses and unformed business models. For much of the twentieth century, the prototype for a private company that was going public was that of a small, growing company, with a working business model, making or on the verge of making profits, and a need for capital that exceeded what venture capitalists could offer. The median going-public company has become larger (in terms of revenues, in constant dollar terms) and less profitable; only 20% of firms that went public between 2016 and 2020 were making money, in contrast to the 80% of firms that went public between 1980 and 1990.
  • The second is in process that a private company follows to go public, for the last few decades, has been built around bankers as intermediaries. The traditional IPO process takes too long, costs too much, and leaves both issuing companies and investors dissatisfied, the former because the process takes too long and is too inefficient, and the latter because they feel that only a select few can partake at the offer price. One alternative is direct listings, where the company dispenses with the banking services (setting an offering price and roadshows) and lets the market set the price on the offering date. This process, by reducing the need for banking intermediaries, is less costly but it still takes time and comes with constraints, especially in the context of raising capital from the offering to cover future business needs. A special purpose acquisition company (SPAC) offers a different approach to going public, with an initial listing of an entity that raises public, with the intent of merging with a private business that wants to be in the public markets. The sponsors of the SPAC are the key players in this game, since investors in the entity are dependent upon the sponsors finding a target and negotiating a good deal. While SPACS may be more time efficient, and SPAC sponsors get a little more leeway than conventional IPOs in disclosure and marketing, the sponsor’s substantial slice of capital (20% or higher) is large enough to wipe out any potential timing and pricing benefits in the deal, making them often the only winners in this process.

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Weekly Roundup: October 22–28, 2021


More from:

This roundup contains a collection of the posts published on the Forum during the week of October 22–28, 2021.


​U.S. DOL Proposes ESG-Related Updates to the ERISA Investment Duties Regulation



ESG Regulatory Reform


The Stablecoins Debate


SEC Highlighting the Need to Consider Climate Change Disclosures in SEC Filings


Board Readiness for Shareholder Activism


Are Narcissistic CEOs All That Bad?


BlackRock to Permit Some Clients to Vote



Climate in the Boardroom 2021


Climate Stewardship



Taking Corwin Seriously


The New Landscape of Human Capital Metrics


Books and Records Demands


A Test of Stakeholder Governance


Raiders and Activists

Raiders and Activists

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Theodore N. Mirvis, and Sabastian V. Niles. 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).

We have long been advising and defending companies attacked or threatened by raiders and activists seeking to profit by bust-up takeover, greenmail extortion or increase in stock price by financial engineering and excess leverage. Those attacks and pressures have often involved reducing wages and/or firing employees, cutting CAPEX and compromising the long-term outlook, competitiveness and sustainability of the enterprise— all to the detriment of the value of the company and the shareholders who are left holding the bag after the raider/activist has emptied it. We have also long supported and innovated a number of defenses, like the “poison pill,” protective bylaws and charter provisions, amendments to state corporation statutes and federal regulations that address raider/activist proxy fights and give boards of directors the necessary tools to fulfill their duties. In 2016 we worked with the World Economic Forum to advance The New Paradigm for modernizing shareholder engagement, fostering a collaborative framework of partnership between companies, their major investors and stakeholders and creating long-term, sustainable value while advancing corporate purpose and ESG imperatives.

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A Test of Stakeholder Governance

Stavros Gadinis is Professor of Law and Amelia Miazad is Director and Senior Research Fellow of the Business in Society Institute at the University of California at Berkeley School of Law. This post is based on their recent paper, forthcoming in the Journal of Corporation Law. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver 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).

In our paper, A Test of Stakeholder Capitalism, we argue that companies turn to stakeholders to obtain more information about how to deal with looming risks. Many corporate choices affect stakeholders, whose reaction, if assessed beforehand, can help the company in its decisionmaking. When management realizes that stakeholder feedback can help it prepare a more effective response to a business challenge, it launches initiatives seeking to better understand stakeholders’ perspectives and, if pertinent, adjust its choices. Many have defended stakeholder capitalism on other grounds, ranging from improving aggregate social welfare (Edmans 2020), to addressing externalities (Condon 2020), to aligning with shareholders’ long-term interests (Strine 2019, Lipton 2017). Others have criticized managers’ embrace of stakeholderism as paying lip service to lofty ideas while failing to follow through in practice (Bebchuk and Tallarita 2021a, Bebchuk and Tallarita 2021b) and instead using broad discretion to benefit executives and directors (Bebchuk, Kastiel, and Tallarita 2021). Finally, others have questioned whether lumping all stakeholder interests together provides any real guidance to management and boards (Davidoff Solomon & Fisch 2021). In contrast, we focus on ESG as a technology for extracting information from and managing interactions with affected parties – not as purpose, but as governance.

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Books and Records Demands

Edward B. Micheletti and Jenness E. Parker are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The right of stockholders to seek corporate books and records is a well-established feature of corporate law in Delaware, where most big American companies are incorporated. But the number of statutory records demands has spiked in recent years, and the scope of the requests has broadened, as Delaware courts have limited companies’ defenses and taken companies to task for aggressively resisting shareholder requests.

For boards and their companies, this has potential consequences. Stockholders, many with an eye toward litigation, are sometimes able to access emails, texts and other material through a records demand that can lay the grounds for a suit. What used to be a simple matter of granting access to formal, board-level books and records reflecting board decisions now has the potential to be more expansive and disruptive if casual communications that directors and executives assumed would not be part of the “official” corporate records are revealed to potential adversaries.

Below is a primer for directors on the evolving nature of these requests and what it means for boards.

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The New Landscape of Human Capital Metrics

Ariel Babcock is Head of Research, Allen He is Associate Director, and Devin Weiss is Research Associate at FCLTGlobal. This post is based on their FCLTGlobal 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 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).

Intuitively, many companies understand the importance of strategically investing in their employees. Past academic research has found employees contribute materially to the long-term value creation of a corporation. For instance, the “100 Best Companies to Work in America” had significantly higher stock returns than industry averages. Higher firm investment in intangible assets is associated with higher revenue, and strong relationships have been demonstrated between employee satisfaction, productivity, and loyalty to the consumer base.

Given the links between employee support and firm performance, investors have cast increasing importance on companies’ disclosures of human capital metrics. In the U.S., the Securities and Exchange Commission has begun to regulate the matter. With the modernization of Regulation S-K, the SEC has signaled to companies the importance of keeping track and disclosing vital human capital metrics. This move has the potential to shake up the disclosure landscape amongst public companies in the U.S., and it is the first time in thirty years that these requirements have undergone significant changes.

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Taking Corwin Seriously

Itai Fiegenbaum is a Visiting Assistant Professor at Willamette University College of Law. This post is based on his recent paper, forthcoming in the Lewis & Clark Law Review, and is part of the Delaware law series; links to other posts in the series are available here.

Friendly sales of control are a well-known breeding ground for corporate agency costs. Managers, for instance, might be tempted to push through a transaction with a favored bidder instead of exploring an overture organized by a party against whom they hold a grudge. Or they might offer the buyer a sweetheart deal with the anticipation (if not expectation) of lavish compensation from the newly-sold entity. Both situations leave shareholders shortchanged.

Delaware law is aware of incumbents’ predilection to stray from shareholders’ interests and accordingly subjects friendly sales to a heightened standard of review. The Revlon standard, so named for the iconic case in which it was unveiled, stands for the proposition that usual business judgement rule deference is no longer warranted in a sale scenario. The courts are instead instructed to evaluate the board’s decision making process in an attempt to uncover deviations from the proper goal of shareholder value maximization. The standard used to have actual bite, as evinced by high profile transactions that were invalidated by the courts. While the doctrinal directive has remained essentially constant for three decades, its application today is quite different. Judges are loathe to nix a firm offer to purchase a company. Egregious misdeeds will at most be remedied by additional disclosure and a slight delay before the deal is sent to the shareholders for their approval. And under the powerful Corwin doctrine, a positive shareholder vote restores business judgment rule review, thereby insulating the transaction from judicial oversight.

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