Monthly Archives: November 2021

How GPs Can Compete for Capital Through ESG

Posted by Addison Holmes, Pickering Energy Partners, on
Sunday, November 21, 2021
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Addison Holmes is an Associate in ESG Strategy & Integration at Pickering Energy Partners. This post is based on her Pickering Energy Partners 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).

Executive Summary

  • The Pickering Energy Partners ESG Consulting team ran an analysis of the 100 private equity firms most active in Energy deals over the last 5 years. [1]
  • In analyzing those 100 firms and scoring them on their ESG disclosure, we saw that the competitive bell-curve based on disclosure completeness displays a positive skew. This indicates most firms are just beginning their ESG journey and there exists a great opportunity to establish a competitive advantage.
    • 33% had no ESG integration at all
    • 12% were in the “Crawl” phase, with either an ESG website or general ESG statement
    • 20% were in the “Walk” stage, developing ESG policies that outline a firm’s approach to ESG evaluation and integration into the investment process
    • 35% were in the “Run” stage, with a strong reporting infrastructure in place to monitor ESG-related KPIs among portfolio companies, aggregate this data, and report to stakeholders at a regular cadence
  • Of the 100 firms analyzed, 45 were PRI signatories.
    • However, only 28 had an ESG report. This implies many firms are not compliant with the current PRI requirements.
    • Only 16 are actively considering TCFD, indicating that many GPs do not understand the requirements of being a PRI signatory will likely be non-compliant in the future.
  • Firms that participate in more energy deals and which have higher committed capital tend to also have higher ESG reporting quality because they have more LPs that are requesting this data. That said, high quality reporting opens larger pools of capital and supports fundraising efforts.
    • Of those firms with the highest ESG reporting quality, 80% are PRI signatories and 80% consider TCFD, and 70% consider GRI.
  • High quality ESG reporting comes in the form of regular reports (including an annual ESG report), qualitative commentary supported by quantitative data, and disclosing data points that are common across frameworks, material to the businesses of portfolio companies, and influential for LPs.
    • Low quality ESG reporting, on the other hand, comes at the risk of lost deals and increasing LP frustration.
  • In conclusion, we recommend that GPs control the narrative by:
    • Formally incorporating ESG-related considerations within the broader strategic considerations and directives of the firm
    • Identifying material ESG data points relevant to the economic reality of portfolio companies and monitor these data points on a consistent basis to identify risks and opportunities in the portfolio
    • Establishing and conveying an ESG narrative that highlights a distinct set of value drivers and is supplemented by data

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2022 Glass Lewis Policy Guidelines: United States

Posted by Eric Shostal, Glass, Lewis & Co., on
Sunday, November 21, 2021
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Eric Shostal is Senior Vice President of Research and Engagement at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Mr. Shostal, Kern McPherson, Courteney Keatinge, and Brianna Castro.

Summary of Changes for 2022

Glass Lewis evaluates these guidelines on an ongoing basis and formally updates them on an annual basis. This year we’ve made noteworthy revisions in the following areas, which are summarized below but discussed in greater detail in the relevant section of this document:

Board Gender Diversity

We have expanded our policy on board gender diversity. Beginning in 2022, we will generally recommend voting against the chair of the nominating committee of a board with fewer than two gender diverse directors, or the entire nominating committee of a board with no gender diverse directors, at companies within the Russell 3000 index. For companies outside of the Russell 3000 index, and all boards with six or fewer total directors, our existing policy requiring a minimum of one gender diverse director will remain in place.

Our voting recommendations in 2022 will be based on the above requirements for the number of gender diverse board members. However, beginning with shareholder meetings held after January 1, 2023, we will transition from a fixed numerical approach to a percentage-based approach and will generally recommend voting against the nominating committee chair of a board that is not at least 30 percent gender diverse at companies within the Russell 3000 index.

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ESG Global Study 2021

Posted by Jessica Ground, Capital Group, on
Saturday, November 20, 2021
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Jessica Ground is Global Head of ESG at the Capital Group. This post is based on her Capital Group 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).

Global investors strongly prefer an active approach to ESG. Threequarters use active funds to integrate environmental, social and governance (ESG) issues — more than double the proportion using passive funds and trackers. Rather than investing in funds that merely screen out unethical sectors, investors want managers to identify and manage ESG risks and opportunities through bottom-up security selection and fundamental analysis.

Further underlining the preference for active management, nearly half of investors point to exercising voting rights and having regular meetings with senior executives at companies as key engagement tools. Investors appear to be looking for a holistic approach to ESG that encompasses all stages of the investment process.

The importance attached to qualitative analysis reflects a need for better ESG data and information. Investors point to a lack of robust data as a top barrier to greater ESG adoption. Issues with the quality and consistency of data pose particular problems throughout the investment journey. Investors say the uncertainty around the reliability of ESG scores is the greatest hurdle when incorporating ESG data, ratings and research. And one-fifth of respondents identify lack of consistency among different rating provider scores as the top implementation challenge.

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BlackRock’s Move to Expand Proxy Voting Choice Creates Unknowns

Posted by Douglas Chia, Soundboard Governance, on
Saturday, November 20, 2021
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Douglas Chia is Founder and President of Soundboard Governance LLC and a Fellow at the Rutgers Center for Corporate Law and Governance. This post is based on his Soundboard Governance memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

BlackRock, the world’s largest asset manager, announced on October 7, 2021 that it will start giving certain of its institutional index equity clients the ability to instruct BlackRock how those clients would like their votes to be cast at shareholder meetings of companies in BlackRock’s index funds. This move is savvy. BlackRock can look like a good corporate governance actor furthering shareholder democracy by placing voting power back into the hands of asset owners and deflect criticism that it too often defers to management and elects not to use its massive voting power in more activist ways. The announcement has received wide praise, but the move creates a few unknowns.

Transparency

BlackRock will give its clients several choices on how to instruct their shares to be voted, including continuing to give BlackRock full discretion. However, close observers of proxy voting activity will not know which of BlackRock clients choose to take back discretion on their votes or how those clients cast those votes, even when BlackRock submits its Form N-PX filings. None of this information will become public unless BlackRock or its clients voluntarily disclose it.

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SEC Dramatically Changes the Rules for Proxy Contests

Posted by Kai Liekefett, Derek Zaba, and Beth Berg, Sidley Austin LLP, on
Friday, November 19, 2021
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Kai Liekefett, Derek Zaba, and Beth Berg are partners at Sidley Austin LLP. This post is based on their Sidley memorandum. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

On November 17, 2021, the U.S. Securities and Exchange Commission (SEC) adopted new Rule 14a-19 and amendments to existing rules under the Securities Exchange Act of 1934 to require the use of “universal” proxy cards in all nonexempt director election contests at publicly traded companies in the U.S. The new “Universal Proxy Rules” contain only slight modifications from rules the SEC first proposed in October 2016, for which the SEC reopened the public comment period during 2021. The rules will take effect for shareholder meetings after August 31, 2022. We expect a significant increase in proxy contest threats once the Universal Proxy Rules go in effect.

Members of Sidley’s Shareholder Activism & Corporate Defense Practice sent a formal comment letter to the SEC regarding the proposed rules — the only letter from a U.S. law firm suggesting material amendments that would protect against the potential for misuse of a mandatory universal proxy system. As we argued previously, the Universal Proxy Rules create the equivalent of “proxy access on steroids.” While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least 3% of a company’s outstanding shares for three years to put dissident directors on the company’s proxy statement, the Universal Proxy Rules confer substantially more significant rights to shareholders without any minimum ownership requirements (i.e., owning only one share for one minute will be sufficient). Although this was a concern voiced by several Commissioners, the SEC proceeded with the adoption of the Universal Proxy Rules as originally proposed. The new rules will reshape the process by which hostile bidders, activist hedge funds, social and environmental activists, and other dissident shareholders may utilize director elections to influence control and policy at public companies.

As the rules will dramatically change the methods by which proxy contests at public companies have been conducted for decades, this article summarizes the principal mechanics of the Universal Proxy Rules and the implications of the rules for public companies.

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Statement by Commissioner Roisman on Proposed Amendments Related to Proxy Voting Advice

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on
Friday, November 19, 2021
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Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent public statement. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Over the past several years, much has been said about what the rise in fund ownership throughout our equity markets might mean for our economy. [1] But one outcome of increasing fund growth is clear: as funds come to own an ever larger percentage of U.S. corporate equities, they can influence the outcome of a variety of matters that companies submit to a shareholder vote. [2] As recently as a month ago, [3] the Commission acknowledged this fact and pursued policies designed to ensure that those who manage funds approach voting in a manner that serves the best interest of their clients. [4]

I. The Importance of Proxy Voting Advice to Investors

One cannot consider the implications of fund voting without also considering the role of those unique businesses that have become integral to the voting processes of so many asset managers: proxy voting advice businesses, also known as proxy advisory firms or proxy advisors. [5] Since fund portfolios often hold securities of many public companies, asset managers often face the prospect of voting on hundreds—if not thousands—of proposals relating to hundreds of fund portfolio companies each year, with the significant portion of those voting decisions concentrated in a period of a few months. [6] Proxy advisory firms offer services to assist them. Most substantively, these services include providing research and analysis regarding the matters subject to a vote; developing voting guidelines that asset managers can adopt; and making recommendations about how funds should vote on specific matters. [7] Proxy advisors also commonly provide electronic vote management systems through which asset managers can access not only their voting advice, but also proxy ballots pre-populated with the proxy advisor’s voting recommendations, ready for submission to be counted. [8]

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Weekly Roundup: November 12-18, 2021

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, November 19, 2021

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This roundup contains a collection of the posts published on the Forum during the week of November 12-18, 2021.

M&A/PE Update

Posted by Gail Weinstein, Philip Richter, and Steven J. Steinman, Fried, Frank, Harris, Shriver & Jacobson LLP, on Friday, November 12, 2021
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Optimizing The World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead

Posted by Lawrence A. Hamermesh (University of Pennsylvania), Jack B. Jacobs (Young Conaway Stargatt & Taylor, LLP), and Leo E. Strine, Jr. (University of Pennsylvania), on Friday, November 12, 2021
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Roundup of Director Overboarding Policies

Posted by Holly Gregory, Rebecca Grapsas, and Claire Holland, Sidley Austin LLP, on Saturday, November 13, 2021
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2021 U.S. Board Index

Posted by Julie Hembrock Daum, Kathleen Tamayo, and Ann Yerger, Spencer Stuart, on Saturday, November 13, 2021
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Renren Settlement Highlights Increased Risk of U.S. Derivative Litigation Concerning Foreign Private Issuers

Posted by Stephen Blake, Adam Goldberg, and Bo Bryan Jin, Simpson Thacher & Bartlett LLP, on Sunday, November 14, 2021
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FSOC Issues Report Declaring Climate Change as Emerging Threat to U.S. Financial Stability

Posted by Jason Halper, Sara Bussiere and Timbre Shriver, Cadwalader, Wickersham & Taft LLP, on Sunday, November 14, 2021
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Investment Management Regulatory Update

Posted by Gregory S. Rowland, Sarah Kim, and Leon Salkin, Davis Polk & Wardwell LLP, on Monday, November 15, 2021
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Does Regulatory Cooperation Help Integrate Equity Markets?

Posted by Roger Silvers (University of Utah), on Monday, November 15, 2021
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Of Owners and Ownership

Posted by Paul Singer, Elliott Investment Management, on Monday, November 15, 2021
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DOJ Announces Revisions Strengthening Corporate Criminal Enforcement Policies

Posted by Jonathan Kolodner, Joon Kim, and Elizabeth (Lisa) Vicens, Cleary Gottlieb Steen & Hamilton LLP, on Tuesday, November 16, 2021
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Hearing on Board Gender Diversity Statute

Posted by Cydney Posner, Cooley LLP, on Tuesday, November 16, 2021
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Elizabeth Holmes and The Mythology of Silicon Valley

Posted by Boris Feldman and Sarah Solum, Freshfields Bruckhaus Deringer LLP, on Tuesday, November 16, 2021
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Stockholder Nominees Barred For Noncompliance With “Clear Day” Advance Notice Bylaw

Posted by Andre G. Bouchard, Krishna Veeraraghavan, and Steven J. Williams, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Wednesday, November 17, 2021
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The Rescue of Fannie Mae and Freddie Mac–Module F: Federal Reserve’s Large-Scale Asset Purchase (LSAP)

Posted by Rosalind Z. Wiggins (Yale), on Wednesday, November 17, 2021
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Remarks by Commissioner Crenshaw Remarks at the PepsiCo-PwC CPE Conference

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on Wednesday, November 17, 2021
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Statement by Commissioner Lee on Proposed Amendments Related to Proxy Voting Advice

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on Thursday, November 18, 2021
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Statement by Commissioner Peirce on Universal Proxy

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Thursday, November 18, 2021
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Statement by Commissioner Crenshaw on Universal Proxy

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on Thursday, November 18, 2021
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Statement by Commissioner Crenshaw on Universal Proxy

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on
Thursday, November 18, 2021
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Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Congratulations to the rulemaking team from the Division of Corporation Finance, as well as the staff within the Division of Economic and Risk Analysis and the Office of the General Counsel. This rulemaking has been several years in the making, [1] and I am glad that we are here today to finalize it.

The reality of modern board of director elections is that few shareholders attend a corporation’s annual meeting in-person to vote. [2] The ramifications of this are meaningful. Proxy voters in contested Board of Directors elections are usually unable to choose a mix of dissident and management nominees. [3] By contrast, those who vote in person, can.

The amendments before us serve a simple and important purpose: to ensure that shareholders can, by proxy, cast votes for a mix of management’s slate of director candidates and a dissident’s slate of director candidates in contested elections. Just as any shareholder who casts their vote in-person at the shareholder’s annual meeting is able to do.

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Statement by Commissioner Peirce on Universal Proxy

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Thursday, November 18, 2021
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I support universal proxy, but not today’s version of universal proxy.

Shareholders voting by proxy should be able to split their vote among company and dissident nominees. Allowing shareholders a straightforward way of choosing a mixed slate through a universal proxy card can facilitate sensible changes to board composition. Universal proxy makes sense for both operating companies and investment companies. This particular universal proxy rule, however, may facilitate changes to the company that advance special interests rather than enhancing corporate value by serving as a tool for frivolous, as well as serious, activists. I might have been able to support the rule if I felt we had explored thoroughly the potential that the rule could afford activists without a demonstrated commitment to the company an opportunity to meddle in the company’s affairs. I do not believe we have done this work so I cannot support the rule.

The price of entry onto the company’s proxy card under this rule is low. Aside from requiring the dissident to list the company’s nominees on its proxy card and satisfy notice and filing requirements, the rule’s only gating requirement is that the dissident state an intention to solicit 67 percent of the voting power of the shares entitled to vote at the meeting and alert the company if its intentions change. While a 67 percent threshold is an improvement from the 50 percent threshold in the proposal, even the new threshold is easy to meet or ignore. Indeed, most dissidents already meet it. [1] Moreover, because the rule focuses on voting power rather than shareholder accounts, dissidents will often be able to meet the threshold by soliciting a small number of institutional shareholders, while ignoring small shareholders. The solicitation of large shareholders is not very burdensome given that the rule permits the use of notice-and-access solicitation; sending a postcard with a website link to proxy materials will suffice. The rule also lacks a clear enforcement mechanism for a dissident that fails to carry through on its solicitation intentions.

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Statement by Commissioner Lee on Proposed Amendments Related to Proxy Voting Advice

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on
Thursday, November 18, 2021
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Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Proxy advisors play a unique and important role in helping shareholders vote to protect their investments and ensure their interests are being served. It is therefore important that our rules do not interfere with the independence of proxy voting advice, introduce unnecessary cost and complexity into an already compressed proxy voting process, or otherwise burden the free and full exercise of shareholder voting rights. For this reason, I’m pleased that we are revisiting certain aspects of the amendments governing proxy voting advice adopted last year so that our rules are appropriately tailored to the needs of investors and other market participants.

Today’s proposal represents a targeted reappraisal of only certain aspects of those amendments that generated substantial concern, particularly among investors (the intended beneficiaries of the changes), that we didn’t get the balance right in last year’s final rules. Specifically, last year’s amendments included mechanisms to enhance management’s influence over proxy voting advice by effectively requiring that issuers be given access to and an opportunity to respond to such advice, and that proxy advisors separately notify their clients of those responses despite the fact that they are publicly filed. [1] Last year’s rules also amended a note to the proxy-related anti-fraud provisions to add examples of material misstatements or omissions related to proxy voting advice, creating uncertainty regarding the scope of liability for such advice. [2] These features of last year’s rules prompted considerable concern. [3] Today’s proposal responds to those concerns by proposing to eliminate the issuer access and response provisions, and clarify the scope of fraud liability for proxy advisors.

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