Monthly Archives: November 2021

Sustainability and Investing Lessons Learned in the Pandemic Era

Daniel C. Roarty is Chief Investment Officer of Sustainable Thematic Equities at AllianceBernstein L.P. This post is based on his AllianceBernstein 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).

The coronavirus pandemic has prompted massive changes for countries, societies, people and businesses. Interconnected environmental, social and governance issues have reinforced the role of sustainable investing strategies as an indispensable part of investor allocations for a post-COVID-19 world.

When the history of COVID-19 is written, the pandemic period will be seen as more than just a health and economic crisis. Both contributed to a social reckoning, with a growing focus on inequality around the world, while the intensifying global climate crisis has added new and unpredictable threats.

Taken together, these four pandemic-era trends have fueled a conceptual change in the purpose of investing. Before the pandemic, traditional investing viewed economic and social issues as largely distinct spheres; companies existed to enrich their owners—the shareholders. Now, those spheres are intertwined. You can’t fully understand the economics of a business without understanding how a company interacts with customers and society. Powerful social forces affect businesses and are fundamental to gaining investment insight into a company’s growth path and return potential. Here are four lessons that we think will endure long after the world has healed from COVID-19.

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2021 Board Effectiveness: A Survey of the C-Suite

Paul DeNicola is Principal and Leah Malone is Director at the Governance Insights Center, PricewaterhouseCoopers LLP, and Paul Washington is Executive Director of the ESG Center at The Conference Board, Inc. This post is based on their PwC/Conference Board memorandum.

It’s rare for corporate directors to receive candid feedback from their company’s management teams. The nature of the board of directors’ oversight role makes it an uncomfortable proposition. But the view of the boardroom from the C-suite can be illuminating—and surprising. That is why PwC and The Conference Board asked more than 550 public company C-suite executives to share their perspective on their boards’ overall effectiveness, their strengths and weaknesses, and their readiness to tackle some of the biggest challenges facing companies today.

The results were clear: most executives say board performance is falling short of the mark.

This isn’t to say that executives were uniformly negative in their assessment. Many agreed that directors had a firm grasp of core matters such as the company’s strategy, the risks and opportunities before it, and the priorities of its shareholders.

Yet most executives had a less positive view of overall performance. Asked to rate the effectiveness of their boards, just 29% of executives gave directors a grade of good or excellent. Most (55%) said that they were doing a fair job overall, and a small minority (16%) graded their effectiveness as poor.

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Weekly Roundup: November 19-25, 2021


More from:

This roundup contains a collection of the posts published on the Forum during the week of November 19-25, 2021.




ESG Global Study 2021



How GPs Can Compete for Capital Through ESG


Regulated Funds


Stock Investors’ Returns are Exaggerated


The World Targets Change


2021 Annual Corporate Directors Survey


The Economics of Deferral and Clawback Requirements


The Sustainability Board Report 2021


Securities Enforcement Quarterly


Core Earnings: New Data and Evidence


2021 Annual Corporate Governance Review


US Deputy Attorney General Signals Aggressive DOJ Focus on Corporate Crime

US Deputy Attorney General Signals Aggressive DOJ Focus on Corporate Crime

Ted Diskant and Julian L. Andre are partners at McDermott Will & Emery LLP. This post is based on their MWE memorandum.

At an October 28, 2021, speech before the American Bar Association’s Annual National Institute on White Collar Crime, US Deputy Attorney General (Deputy AG) Lisa Monaco re-emphasized the priority placed by current leadership within the US Department of Justice (DOJ) on prosecuting white-collar crime at both the individual and corporate level. Deputy AG Monaco also announced three new actions that DOJ will be taking—effective immediately—to strengthen the way DOJ responds to corporate crime.

While Deputy AG Monaco emphasized that DOJ will continue to focus on individual accountability in white-collar criminal investigations and prosecutions, all of the changes announced focus on the manner in which corporations will be expected to behave—and will be evaluated—in the context of a DOJ investigation.

  • First, to be eligible for any cooperation credit, corporations will now be required to provide DOJ “with all non-privileged information about individuals involved in or responsible for the misconduct at issue.” It will no longer be sufficient for companies to limit such disclosures to those individuals who were “substantially involved” in the misconduct.
  • Second, in evaluating a corporate resolution, prosecutors are now directed to consider “the full range” of prior state or federal “criminal, civil and regulatory” misconduct by a company, rather than limiting such consideration to misconduct of the same type or that is factually related to the misconduct at issue.
  • Third, corporations will once again be regularly subject to the prospect of independent monitorships as part of corporate resolutions. Prosecutors will be free to require monitorships as a condition of resolutions “whenever it is appropriate to do so to satisfy [DOJ] that a company is living up to its compliance and disclosure obligations.”

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2021 Annual Corporate Governance Review

Hannah Orowitz is Senior Managing Director of ESG, Brigid Rosati is Managing Director of Business Development and Corporate Strategy, and Rajeev Kumar is Senior Managing Director at Georgeson LLC. This post is based on a Georgeson memorandum by Ms. Orowitz, Ms. Rosati, Mr. Kumar, Ed Greene, Aaron Miller and Michael Maiolo.

Shareholder Proposals

The 2021 proxy season produced unprecedented results, including record high proposal submission levels, average support levels and passage levels, among other notable results related to shareholder proposals. These results reveal that investors’ heightened focus on ESG risks and opportunities is having a meaningful impact on voting decisions, such as:

  • A total of 71 shareholder proposals passed, compared to 45 in 2020 and 50 in 2019
  • 33 environmental and social proposals passed, [1] the highest number on record and an 83% increase compared to the 2020 proxy season
  • Over one third of environmental shareholder proposals voted upon passed; average support across voted proposals exceeded 39%
  • Average support for social proposals increased to 32.6%, compared to approximately 27% average support in both the 2020 and 2019 seasons
  • Record-breaking support for shareholder proposals focused on political spending, plastic pollution, greenhouse gas emissions, deforestation and board and workforce diversity, as well as management-supported proposals relating to climate change, diversity, equity and inclusion (DE&I) and human rights
  • A sizeable increase in negotiated settlements (withdrawals) of shareholder proposals compared to the 2020 and 2019 proxy seasons

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Core Earnings: New Data and Evidence

Ethan Rouen is an Assistant Professor of Business Administration at Harvard Business School; Eric C. So is the Sloan Distinguished Professor of Management at the MIT Sloan School of Management; and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration at Harvard Business School. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

Financial statements contain a wealth of information about a firm’s net income, an estimate of the net value flow during a period. Investors commonly seek to distinguish the component of earnings that stems from a firm’s central business activities (“core earnings”) from those components that result from ancillary business activities or transitory shocks. This exercise is essential for interpreting and forecasting firm performance.

The behavior of sell-side analysts and managers attests to the importance of distinguishing core and non-core earnings. Analysts regularly report and forecast firms’ earnings on a non-GAAP basis (“street earnings”) by excluding from GAAP earnings items deemed transitory or not reflective of the central business activities. Similarly, managers commonly report non-GAAP “pro forma” earnings that exclude items they consider unimportant for understanding firm performance. A concern with these metrics is that managers and analysts choose in a biased fashion which items to include or exclude. For example, pro forma earnings often exclude stock-based compensation expenses, which result from central business activities and are recurring. Excluding these measures help to paint a rosier picture of firm performance.

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Securities Enforcement Quarterly

Charles J. Clark and Craig S. Warkol are partners and Alex Wharton is an associate at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

Introduction

While the third quarter of 2021 marked the end of the fiscal year for the U.S. Securities and Exchange Commission (“SEC” or “Commission”), it also seems to be the start of an aggressive enforcement agenda led by its new Chairman and Director of Enforcement. In this post, we discuss the latest enforcement actions and statements from regulators related to digital assets, the SEC’s innovative “shadow trading” insider trading case, and fraud claims brought against an alternative data vendor notwithstanding that it was not engaged in securities transactions. This post also describes recent enforcement actions against investment advisers and broker-dealers for deficient cybersecurity procedures aimed at protecting customer information. We conclude by summarizing enforcement cases of particular interest to this audience, many of which illustrate the enforcement themes highlighted in previous editions of SRZ’s Securities Enforcement Quarterly.

More from the SEC on Cryptocurrencies and Digital Assets

SEC Chair Gary Gensler continues to signal that the SEC will take an aggressive approach toward digital asset issuers, exchanges, and lending platforms. The SEC Chair recently characterized the cryptocurrency market as the “Wild West” and indicated his belief that it requires more federal oversight. [1] Speaking on a panel at the Aspen Security Forum in August 2021, Gensler said the crypto market, which is currently valued at over $1.5 trillion, lacked necessary and common investor protections that the SEC is tasked with providing, allowing the market to become “rife with fraud, scams and abuse.” [2] At a September 2021 appearance before the Senate Banking Committee, Gensler commented that Coinbase, the nation’s largest cryptocurrency exchange, has yet to register with the SEC “even though they have dozens of tokens that may be securities,” [3] and later stated that “hundreds or thousands” of tokens that are traded on such exchange platforms are likely securities, [4] which would require the platforms to register with the SEC or apply for an exemption.

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The Sustainability Board Report 2021

Frederik Otto is Founder and Business Advisor, Nicolas Alexander is Policy Advisor, and Tias van Moorsel is Sustainability Advisor at the Sustainability Board Report. This post is based on The Sustainability Board Report 2021. 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 Sustainability Board Report 2021 At a Glance

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The Economics of Deferral and Clawback Requirements

Florian Hoffmann is Associate Professor of Finance at KU Leuven; Roman Inderst is Chair of Finance and Economics at Goethe University Frankfurt, and Marcus Opp is Associate Professor of Finance at the Stockholm School of Economics. This post is based on their recent paper, forthcoming in the Journal of Finance. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback by Jesse Fried (discussed on the Forum here).

The 2007-08 financial crisis put compensation practices in the financial sector on the agenda of financial regulation. On a supra-national level, the Financial Stability Board (FSB) adopted its Principles for Sound Compensation Practices in 2009 “to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes.” In particular, short-term oriented bonus schemes have been identified as a key factor contributing to excessive risk-taking by financial institutions. This triggered regulatory initiatives around the world to intervene in the timing of bankers’ incentive compensation. For example, in the United Kingdom bankers’ variable pay compensation is now subject to minimum deferral periods of 3 to 7 years, and can be clawed back upon severe underperformance for 7 to 10 years. These regulatory restrictions do not only apply to top-level executives, but a broad set of banks’ “material risk-takers:” E.g., for Barclays alone, the compensation packages of 1746 employees are currently affected by this regulation (see Barclays 2020 Pillar 3 report).

Our study analyzes the positive and normative effects of such regulatory interventions in the timing dimension of bankers’ compensation packages. The punchline of our theoretical analysis is that even if bankers’ laissez-faire compensation contracts are socially suboptimal, such policy interventions do not robustly help mitigate risks in the financial sector, and, potentially, even backfire. At a very high level, the fallacy of targeting compensation packages is that “wrong” compensation contracts are merely a symptom of distortions in the financial sector, but not their root. That is, whichever distortion has led bank shareholders to write contracts incentivizing their key risk takers to take excessively risky actions in the first place, it is still present if they face regulatory constraints on compensation design. Capital regulation instead directly targets the root of the key distortion towards excessive risk tolerance in the financial sector, excessive leverage fueled by bailout expectations. Accordingly, our study suggests a “pecking order” of regulatory tools, in which compensation regulation should be considered only if capital regulation is restricted.

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2021 Annual Corporate Directors Survey

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

The corporate world is never static, but the first years of this decade have presented an unusual compilation of challenges. The COVID-19 pandemic has posed a nearly unprecedented public health emergency, with lasting global implications. The stock markets have reached record highs, interest rates have fallen to record lows, and unemployment figures skyrocketed before labor markets tightened. The country weathered a divisive presidential election. At the same time, social justice concerns have taken hold. In 2020, protests for racial justice swept the country, leaving a sustained focus on how to address current inequities and past wrongs.

Against this backdrop, business now beats NGOs, governments, and the media as people’s most trusted institution, according to the Edelman Trust Barometer. Customers and consumers are looking to companies to get involved in social issues in a new way, making statements and creating policies on public concerns that wouldn’t have been top of mind before. This includes social justice issues, as well as companies’ role in dampening the acceleration and effects of climate change.

These changes have had broad impacts on companies, from their employee base to the executive suite—and up to the boardroom. Boards are historically slow to change, in part because they are relied upon as a stabilizing force for corporations. But as the world is changing, directors are driven to change their playbook as well.

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