Monthly Archives: October 2021

Statement by Commissioners Peirce and Roisman on Staff Report on Equity and Options Market Conditions in Early 2021

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 [October 18, 2021], the staff issued a report on the so called “meme stock” episode that occurred this past January.  We would like to thank the staff not only for their hard work on this report, but also for keeping the Commission fully and timely informed during the period of extreme volatility discussed in the report.  While the report includes an interesting account of the events, it does not appear that many conclusions can be drawn from the data.  This report should have been an anodyne report on the events of earlier this year and, if evident from the data, an assessment of the causes of those events.  Surprisingly, the report turned into an account of those events awkwardly intertwined with discussions of market practices and policies that mirror Commission-level conversations unrelated to the specifics of January’s events.  Including these discussions distracts rather than informs our understanding of the meme stock episode.

In the wake of an anomalous market event, it can be tempting to identify a convenient scapegoat and leverage the event to pursue regulatory actions without regard to the factual record.  The report, however, finds no causal connection between the meme stock volatility and conflicts of interest, payment for order flow, off-exchange trading, wholesale market-making, or any other market practice that has drawn recent popular attention.  Indeed, in our discussions about causes of the January episode, whether with staff or with market participants, we have seen no evidence that these practices were a cause of these events.

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Expanding Proxy Voting Choice

Mark McCombe is Chief Client Officer, Salim Ramji is Global Head of ETFs and Index Investments, and Sandy Boss is Global Head of Investment Stewardship at BlackRock, Inc. This post is based on their BlackRock memorandum.

Our view is the choices we make available to clients should also extend to proxy voting. We believe clients should, where possible, have more choices as to how they participate in voting their index holdings.

Beginning in 2022, BlackRock is taking the first in a series of steps to expand the opportunity for clients to participate in proxy voting decisions where legally and operationally viable. To do this, BlackRock has been developing new technology and working with industry partners over the past several years to enable a significant expansion in proxy voting choices for more clients.

Much like asset allocation and portfolio construction, where some clients take an active role while others outsource these decisions to us, more of our clients are interested in having a say in how their index holdings are voted. We want to provide choice to these clients while continuing to support those who have selected BlackRock’s industry-leading investment stewardship team to vote on their behalf.

These voting choice options will first be available to institutional clients invested in index strategies – within institutional separate accounts globally and certain pooled funds managed by BlackRock in the U.S. and UK. Approximately 40% of the $4.8 trillion index equity assets we manage [1] for our clients will be eligible for these new voting options.

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How to Translate ESG Imperatives into Executive Compensation

Kathryn Neel is a managing director and Seymour Burchman is a senior advisor at Semler Brossy Consulting Group LLC. This post is based on their Semler Brossy 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).

Pressures on corporate boards to address environmental, social, and governance concerns are stronger than ever. The good news is that by investing in these areas even without an immediate commercial payoff, companies can bolster their long-term positions with both the stock market and society.

Companies still need to make sure the ESG issues they tackle will boost profitability over time—otherwise, investors will leave and financial resources will not be available to further serve society. But in serving shareholders, they can also promote a broader set of stakeholders. The choice is not either/or; it is both/and.

Here are guidelines for translating ESG imperatives into action, especially for executive compensation.

Where to Start with ESG—Focus and Priorities

No company, of course, can address all of the many ESG concerns out there, partly because of a simple lack of resources and capabilities. Where to focus? The answer lies in matching two key sets of criteria. Each concern should be relevant both for the business and for major stakeholders, as follows. These actions might not change financial results in the short run but will likely pay off in the long term.

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Preparing for Potential Updates to HCM & Board Diversity Disclosure Requirements

Sophia Hudson is partner at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis memorandum by Ms. Hudson; Alexandra Farmer, Sofia Martos, Sara Orr, Jennie Morawetz, and Robert Hayward. 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).

Recent market and regulatory trends in the U.S. relating to environmental, social and governance (“ESG”) matters have increased the expectation that corporations provide enhanced disclosures with respect to human capital management (“HCM”) and diversity, equity and inclusion (“DEI”).

In 2021, in response to new Regulation S-K amendments, companies expanded disclosures related to HCM and DEI matters in their proxy statements and 10-Ks and saw a marked increase in investor support for DEI-related shareholder proposals compared to prior years. President Biden has signed a number of executive orders focused on HCM and DEI, among other ESG topics. [1] In line with this agenda, and as a response to growing investor pressure to expand ESG disclosures, the U.S. Securities and Exchange Commission (“SEC”) has indicated in its Spring 2021 regulatory agenda that proposed rules entitled “Human Capital Management Disclosure” and “Corporate Board Diversity” could be released as early as October 2021.

This post provides a brief overview of existing HCM- and diversity-related disclosure requirements and recent developments related to the anticipated proposed rules, and offers suggestions on how public companies can prepare for the potential changes ahead.

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Are Star Law Firms Also Better Law Firms?

Alberto Manconi is Associate Professor of Finance at Bocconi University. This post is based on a recent paper authored by Mr. Manconi; Allen Ferrell, Greenfield Professor of Securities Law at Harvard Law School; Ekaterina Neretina, Assistant Professor of Finance and Business Economics at the University of Southern California Marshall School of Business; Dr. William Powley; and Luc Renneboog, Professor of Finance at Tilburg University.

Since 1970, the top 10 plaintiff law firms are associated each year with around a third of all settlements in corporate litigation in the U.S. Despite the economic importance of corporate litigation as a restitution and governance mechanism, and the key role that plaintiff law firms play in its functioning, there is little systematic empirical evidence on their performance. Do “star” plaintiff law firms provide their clients with a better service and, if they do, in what ways? How competitive is the market for their services? Are there frictions that limit competition from less prestigious law firms? These questions speak to the broader issues of the effectiveness and the governance of corporate litigation.

To attempt to answer these questions, we assemble a novel, comprehensive database on plaintiff law firms in corporate litigation in the U.S. covering shareholder, intellectual property, employment, product liability, and antitrust lawsuits, as well as lawsuits related to aspects of a given industry and to government contracts and relations.

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2021 Corporate Governance Trends in the Retail Industry

Audra Cohen and Melissa Sawyer are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Cohen, Ms. Sawyer, Eric Krautheimer, and Matthew Goodman.

Executive Summary

Many investors take into account corporate governance in their investment decisions. Retail companies are generally in-line with the governance norms of companies across the S&P 500, although differences exist in corporate governance trends between brick-and-mortar retail companies and e-commerce retail companies. For example, e-commerce retailers have greater rates of board refreshment and are more likely to separate the roles of CEO and chair than their brick-and mortar counterparts. Furthermore, e-commerce retailers are more likely to permit shareholders to act via written consent and are less likely to permit shareholders to call a special meeting.

Retail companies should consider what governance practices work best for their particular products, customer base, board composition, investor base and strategic objectives. Analyzing broader industry trends can be helpful, but companies should determine their practices based on conversations with directors, investors and key stakeholders. [1]

For purposes of our analyses, we reviewed the corporate governance practices of the 14 retail companies identified in Annex A (the “Retail Companies”). Of those Retail Companies, nine are historically brick-and-mortar companies (the “Brick-and-Mortar Retailers”) and five are historically e-commerce companies (the “E-Commerce Retailers”). However, it should be noted that the line between brick-and-mortar companies and e-commerce companies is becoming increasingly blurred, as brick-and-mortar companies continue to expand into the e-commerce space and vice versa.

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SEC Comments on Climate Change Disclosure

Jina Choi and David M. Lynn are partners at Morrison & Foerster LLP. This post is based on their Morrison & Foerster 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).

The Division of Corporation Finance of the U.S. Securities and Exchange Commission recently published a sample letter to companies providing illustrative comments that the Division of Corporation Finance may issue to companies regarding their climate-related disclosure, or the absence of climate-related disclosure [1] (the “Sample Letter”).

This action is the latest in a series of developments demonstrating the SEC’s focus on climate disclosure by public companies.

  • The SEC continues to focus on and spotlight climate change and ESG-related disclosure obligations under the federal securities laws.
  • The SEC may be working to update its 2010 guidance on climate change disclosure and the staff of the Division of Corporation Finance has sent out letters to public companies providing comments on climate-related disclosure or the lack of such disclosure in SEC reports.
  • The SEC set forth a Sample Letter with illustrative comments regarding Risk Factor and MD&A disclosures.
  • Companies should also consider recent guidance on how climate-related risks may need to be addressed in financial statements.
  • The SEC’s Enforcement Division has set up an ESG Task Force which is focusing on any material gaps or misstatements in companies’ disclosure of climate risks under existing rules.

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SEC Enforcement Order Highlights Risks of Data-Based Market Intelligence

Kimberly Zelnick, Doru Gavril, and Christine E. Lyon are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Zelnick, Mr. Gavril, Mr. Lyon, and Brock Dahl.

Data miners and data aggregators should carefully examine their policies and procedures to avoid the inclusion of material nonpublic information (“MNPI”) in analytical products. Consumers of such analyses should avoid trading activities informed by market intelligence that is knowingly based on MNPI. Last week, the SEC announced a $10 million settlement with market data intelligence company AppAnnie that has broad implications for both producers and consumers of data-based market intelligence. The ruling pushes the enforcement envelope in significant ways, but leaves unanswered many questions that will be critical as the role of big data grows.

Novel Issues Underpin the SEC Settlement

AppAnnie is an app analytics and app market data provider. Founded in 2010, it was premised on a simple model of gathering data: users would download a free, high quality app on their phone (e.g., a VPN app). In turn for the free use of its app, AppAnnie would be allowed to collect the end-user’s data on their use of other apps of interest. Over time, at scale, AppAnnie would amass a large, free, and incredibly valuable dataset of user behavior.

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Board Refreshment and Succession Planning in the New Normal

Rich Fields is leader of the Board Effectiveness Practice; Rusty O’Kelley III is co-leader of Board and CEO Advisory Partners for the Americas; and Laura Sanderson is co-leader of the Board and CEO Advisory Partners for EMEA, at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum.

Increasingly assertive institutional investors, aggressive hedge fund activists, empowered ESG experts, and powerful proxy advisors are ramping up their demands on public company boards. These and other influential stakeholders are scrutinizing corporate boards to see if they have the right people to succeed—and that they are committed to effective refreshment, board succession, and board evaluation practices. For these reasons, Russell Reynolds is updating its prior advice to directors and boards on how to successful navigate these heightened expectations. Those found wanting are more likely than ever to face meaningful consequences, including losing for support incumbent directors in both contested and uncontested elections.

Part of the reason for this enhanced attention is simple: the work of boards has never been more difficult and important. From the unprecedented challenges of the COVID-19 pandemic, economic volatility, geopolitical instability, and board agendas bursting at the seams with topics new and old, boards and their members are being tested like never before. Many boards have risen to the occasion, providing steady and thoughtful leadership; others have struggled, failing to add (or eroding) value.

Against this backdrop, many boards and leadership teams have taken a step back to evaluate their composition and effectiveness, asking themselves tough questions:

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A Guide for Boards and Companies Facing Ransomware Demands

Antonia M. Apps and Adam Fee are partners and Matthew Laroche is special counsel at Milbank LLP. This post is based on their Milbank memorandum.

On September 21, 2021, the U.S. Department of the Treasury announced a set of actions designed to counter ransomware, principally by discouraging ransomware payments. The Department of the Treasury’s Office of Foreign Assets Control’s (“OFAC”) for the first time designated a virtual currency exchange for facilitating financial transactions for ransomware actors. OFAC also issued an updated advisory about ransomware that, among other things, emphasized that the U.S. government continues to strongly discourage ransomware payments and strongly encourage reporting to and cooperating with government agencies in the event of an attack. [1]

Though the Department of the Treasury’s actions do not prohibit victim companies from paying ransoms, they add another layer of complexity for victim companies deciding whether to pay. Paying a ransom carries short-term and long-term consequences, carries legal and regulatory risk, as highlighted by the Department of the Treasury’s recent actions, and could shape the outlook and reputation of a company for years to come. The decision also is one most companies will have to make. Ransomware groups continue to proliferate, and attacks have become more common, sophisticated, and successful. In addition to the Department of the Treasury, several other law enforcement and regulatory bodies have issued guidance and made public statements discouraging ransomware payments and describing the risks from making them. Among other things, they note that paying the ransom encourages future attacks against the victim company and others, and does not guarantee the restoration of data or the return of stolen data without public disclosure. [2]

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