Monthly Archives: December 2021

Statement by Commissioner Peirce on Buybacks Disclosure Proposal

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.

Thank you, Chair Gensler. Both dividends and share repurchases are ways companies return cash to shareholders. Yet, say “dividend,” and nobody gets angry, but say “share buyback,” and the rage boils over. Today’s proposal channels some of that rage against repurchases in a way that only a regulator can—through painfully granular, unnecessarily frequent disclosure obligations. This proposal requires daily repurchase disclosure to be furnished with the Commission one business day after execution. Because I do not support the indirect regulation of corporate activity through disclosure requirements, I respectfully dissent.

Today’s proposal unpersuasively attempts to justify itself by pointing to information asymmetries that may exist between issuers and affiliated purchasers, on the one hand, and investors, on the other. Let me quote from the release here:

[W]e are concerned that, because issuers are repurchasing their own securities, asymmetries may exist between issuers and affiliated purchasers and investors with regard to information about the issuer and its future prospects. This, in turn, could exacerbate some of the potential harms associated with issuer repurchases. [1]

Why not address such a concern through a more tailored requirement to disclose buyback announcements and terminations?


Statement by Commissioner Roisman on Buybacks Disclosure Proposal

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.

Good morning. Thank you to the staff who worked on this proposal. I know you spent many hours not only working on this rulemaking, but talking with my team and me about our various questions. I truly appreciate all of your dedication and efforts.

That said, I have very mixed feelings about the proposal before us. I have decided to support it because, as I have said in other contexts, I believe that a so-called “cooling-off” period should take place after individuals have implemented a 10b5-1 plan. However, I do not feel confident that other requirements we are including in this proposal are necessary, and I have several fundamental concerns about the rulemaking process here.

Fundamental Concerns About Our Rulemaking Process

First, the rulemaking appears designed to address a problem in our marketplace, which we do not have much evidence actually exists. I feel similarly about the companion proposal that we will consider later this morning, which would place new requirements on companies purchasing their own outstanding shares, the “Share Repurchase Disclosure Modernization” (“buybacks proposal”). [1] These rulemakings seem premised on the justification that 10b5-1 plans and buybacks are being used hand-in-glove by executives to artificially inflate their companies’ share prices to benefit themselves and facilitate insider trading. Underpinning this justification are assumptions that existing rules may not adequately enable us to prosecute illegal insider trading and that 10b5-1 plans are facilitating this evasion. I have not seen evidence to support this conclusion or these underlying assumptions.


Remarks by Commissioner Crenshaw on Climate Pledges

Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent virtual remarks at the Center for American Progress and Sierra Club. 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.

Thank you Daniella [Gibbs Léger], I am thrilled to be here today. And I want to commend the Center for American Progress and the Sierra Club for the hard work and dedication behind the important research that is being recognized today [Dec. 14, 2021]. Climate change is a crisis that poses an existential threat to our society, and our capital markets will not escape the impact. [1] But before I continue, I must give my standard disclaimer that the views I express are my own and do not necessarily reflect the views of the Commission or its staff.

Net-Zero Pledges

In my role at the Securities and Exchange Commission, my staff and I monitor corporate disclosures and announcements. In other words, like you all, I pay attention to what companies are saying both to the SEC, but also publicly on their website or on social media. In the months and days leading up to COP26, I noted, in particular, many public companies announcing net-zero emission pledges. [2] In fact, recent data show a significant percentage of publicly traded companies around the world have committed to a net-zero strategy. [3] This is, ostensibly, good news. Yet, when I dig a bit deeper, it is sometimes unclear to me how companies will achieve these goals. [4] Nor is it clear that companies will provide investors with the information they need to assess the merits of these pledges and monitor their implementation over time. [5] Investors have noted the importance of understanding how the pledges are being implemented this year, 5 years from now, and 10 years from now; rather than simply waiting to see if, 30 years from now, the goal of net-zero emissions comes to fruition. [6] That is too late. So while net-zero emissions pledges are an important step forward, they underscore the loud, repeated, and sustained calls for decision-useful metrics—metrics calculated using reliable and comparable methodologies that enable investors to decide whether the companies mean what they say. [7] That is a core purpose of the SEC’s disclosure obligations. [8]


The Corporate Director’s Guide to ESG

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. 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).

For many, the term ESG (environmental, social, governance), conjures notions of investors chasing feel-good stories of sustainability, diversity, and ethics. But given the heightened interests from various stakeholders, corporate directors know ESG is much more.

Far from being just window dressing, making organizations appear socially responsible to the outside world, there are real risks at play when it comes to ESG issues. And there are even more opportunities to be seized.

What is ESG?

ESG is on the minds of many investors today. It can represent risks and opportunities that will impact a company’s ability to create long-term value. This includes environmental issues like climate change and natural resource scarcity. It covers social issues like labor practices, product safety, and data security. And it involves governance matters that include board diversity, executive pay, and tax transparency.

Figure 1 paints a picture of the breadth of topics that can fall under the ESG umbrella. Not all of them will be relevant or material for every company. For example, a financial services firm might focus more on human capital and data security, while a food and beverage manufacturer may be more interested in how they source raw materials.


SEC Adopts Mandatory Universal Proxy in Contested Elections

Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

In early January 2015, hedge fund activist Trian launched a closely followed proxy fight against DuPont, claiming that the company had underperformed and that it should, among other things, be broken up into three parts. DuPont responded that, through implementation of its own strategic plan, it had delivered total shareholder return and cumulative capital return in excess of its proxy peers and the S&P 500. Rejecting DuPont’s offer of a single board seat, Trian nominated a short slate of four directors and commenced an election contest. Fast forward to February, when Trian submitted to the DuPont board a request that DuPont allow the use of a “universal proxy,” thus allowing shareholders to vote for their preferred combination of DuPont and Trian nominees using a single proxy card. Trian argued that it would provide shareholders with “maximum freedom of choice” and represent “best-in-class corporate governance.” After consulting “with a range of proxy and governance experts” and evaluating the DuPont shareholder base, DuPont rejected that request, contending that there was “insufficient infrastructure” to support the use of a universal proxy card and that the process could “undermine voting access” for DuPont’s huge contingent of retail shareholders. In particular, DuPont was concerned that “the use of a universal proxy card would limit voting options for our ‘Street-name’ holders, as well as deprive holders of the ability to simply sign and return voting forms without marking a preference.” At the annual meeting, Trian lost its bid, and DuPont’s full slate of nominees was elected. But the DuPont story ultimately ended favorably for Trian, notwithstanding its loss in the proxy contest. After the election contest, Trian reignited its battle to break up the company and, after the company failed to hit targeted earnings, the CEO resigned. DuPont ultimately entered into an agreement to be acquired. A new rulemaking from the SEC to mandate the use of universal proxy, adopted last week by a vote of four to one, would likely have affected the course of that campaign and perhaps its outcome. Will we see more contested elections in the future?


Statement by Commissioners Peirce and Roisman on Chair Gensler’s Regulatory Agenda

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.

While Chair Gary Gensler’s newly released regulatory agenda [1] is ambitious in scope, we are disappointed with its content. It fails to include any items intended to facilitate capital formation and misses opportunities to foster fair, orderly, and efficient markets and further investor protection. Instead the agenda is brimming with plans to redo recently completed rules, add new regulatory obligations, and constrain investor choice.

I. Facilitating Capital Formation

The Regulatory Flexibility Agenda (“Agenda”) neglects to include a single item designed to help companies raise capital. Indeed, several items listed are poised to do the exact opposite.

One example is the proposal to alter the thresholds at which an issuer is required to register a class of securities with the Commission. [2] In 2012, Congress enacted the bipartisan Jumpstart Our Business Startups (a.k.a., the JOBS Act), [3] which, among other provisions aimed at improving capital access for newer companies, specifically raised these thresholds in order to allow companies greater flexibility in deciding whether and when to go public. This provision has been especially important for pre-IPO companies that use equity as part of their employee compensation arrangements and for startups in industries with high initial capital requirements. Lowering these thresholds may both contradict the express will of Congress and potentially undermine our mission to facilitate capital formation. A likely unintended consequence of lowering thresholds will be to limit the opportunity of employees, smaller investors, and other non-institutional investors to invest in promising businesses.


ESG: Hyperboles and Reality

George Serafeim is the Charles M. Williams Professor of Business Administration at Harvard Business School. This post is based on his recent paper. 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).

ESG has risen from an obscure and niche concept to a widely used term around the world. When I started working in this area, most (if not all) of my students at Harvard Business School had no idea what ESG meant. Nowadays, they use the term ESG in the classroom taking as a given that everyone understands what they are referring to. The same experience I have had as board member, advisor, and investor. ESG has become a common term heard in investment committee, corporate management, and board director meetings. This is a remarkable development for a concept that barely existed a decade ago.

Companies now implement ESG strategies, investors develop ESG products, and regulators design ESG policies. This activity has been fueled by a significant increase in the number of ESG data that has in turn fueled ESG evaluations. These evaluations span corporates, investors, countries, products, and even universities, using a wealth of ESG metrics. Everything can be evaluated nowadays from an ESG perspective. Perhaps unsurprisingly, negative evaluations are coming with increased scrutiny for those evaluated. A frequent response is a call to distance from those with negative evaluations, through boycotts, exclusions, and divestments.

This explosion of activity has led to several hyperboles about the role of ESG in society, organizations, and markets. For some, ESG has enormous influence on corporate and investor behavior, while for others it has none. Similar levels of extreme polarized views can be found about the performance implications from ESG and about the usefulness of ESG evaluations and assessments. In this post, I seek to provide insights into three areas that are of great interest to ESG practitioners and scholars. First, I discuss several mechanisms through which the ESG field could influence corporate behavior. Second, I discuss about the connection between ESG and corporate value. Third, I discuss issues around ESG assessments and ratings.


Keeping Pace with the Climate Transition

Carlo M. Funk is the lead ESG Investment Strategist at State Street Global Advisors covering Europe, the Middle East and Africa regions (EMEA). This post is based on his SSgA memorandum.

Climate change has already become one of the most prominent line items on the world’s agenda. But we believe that its impact on the global macroeconomy is just beginning and increasing in pace. In our view, investors should think of the transition to a low-carbon economy as a multi-dimensional shock event, spread out over time, that will have major regulatory and economic consequences and profound investment implications. Investors who think the pace of climate-related change in markets/economies will be slow could be in for a major surprise.

A Stronger and Faster Transition

Recent events, country-specific incentives, and multiple positive feedback loops are setting the stage for faster movement toward decarbonization in 2022 and beyond.

First, COP26 highlighted the urgency of global action. Under the Paris Agreement in 2015, nearly every country agreed to work together to limit global warming to well below 2 degrees Celsius, with an aim of 1.5 degrees. However, data shows that the targets that countries announced in Paris do not remotely reach that goal. COP26, which was seen as an opportunity for countries to make more aggressive targets, resulted in a wide range of outcomes. (For more of our thinking on the ramifications of COP26, see Post COP26: Outcomes and Opportunities.)


DOL Proposed Investment/Proxy ERISA Regulations

Andrew L. Oringer and Steven W. Rabitz are partners and Naina G. Kamath is an associate at Dechert LLP. This post is based on their Dechert memorandum. 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).

The U.S. Department of Labor (the “DOL”) on October 14, 2021, released a new Proposed Regulation (the “Proposed Regulation”) generally relating to the prudence and loyalty duties under the fiduciary rules of the Employee Retirement Income Security Act of 1974 (“ERISA”) and to the voting of proxies. The Proposed Reg ulation is the latest attempt to address the appropriateness of the consideration of environmental, social and governance (“ESG”) factors in connection with investment-related decisions by fiduciaries of employee benefit plans that are subject to ERISA (“Plans”).

While the Proposed Regulation does not expressly mention ESG factors, it is nevertheless driven by ESG considerations. The Proposed Regulation would reframe certain aspects of the existing newly amended ERISA regulations to bring them more in-line with the current administration’s approach to ESG generally.

Since 1994, the DOL under various presidential administrations has published guidance (referred to as “sub-regulatory authority”), regarding economically targeted investments, the precursor to recent years’ ESG factors. The DOL’s view, as exemplified in such guidance, reflects a pendulum, as sub-regulatory authority has been tailored to be consistent with the varied agendas of each presidential administration.

The previous administration released a proposed regulation on June 23, 2020 and a subsequent final regulation on October 30, 2020 (the “2020 Proposed Prudence Regulation” and the “Existing Prudence Regulation ,” respectively), directly addressed by the Proposed Regulation. The previous administration also released a proposed regulation on August 31, 2020 and subsequent final regulations on December 11, 2020 (the “2020 Proposed Proxy Regulation” and the “Existing Proxy Regulation,” respectively). Many regarded these efforts as an attempt to address that administration’s concerns about the growth in ESG and other collateral considerations. While the Existing Prudence Regulation and Existing Proxy Regulation (together, the “Existing Regulations”) reflect the previous administration’s view that a fiduciary’s consideration of ESG factors should be minimal, the preamble to the Proposed Regulation (the “2021 Proposed Regulation Preamble”) may possibly be read to go so far as to affirmatively consider ESG factors to be appropriate considerations when selecting and monitoring Plan investments.


Stocks for the Long Run? Evidence from a Broad Sample of Developed Markets

Aizhan Anarkulova is a Ph.D. candidate in Finance at the University of Arizona; Scott Cederburg is an Associate Professor of Finance and the Sheafe/Neill/Estes Fellow in Finance at the University of Arizona; and Michael S. O’Doherty is Associate Professor of Finance and the Charles Jones Russell Distinguished Professor of Finance at the University of Missouri. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

Prior research suggests that investing in stocks is an extremely attractive option for investors and institutions with long holding periods. For example, Mehra and Prescott (1985) demonstrate that the historical equity premium in the United States (U.S.) is quite large, and Siegel (2014) documents that long-term losses from diversified stock market investments in the U.S. are infrequent. In a recent study, Fama and French (2018) use simulation methods based on U.S. data to show that equity investors with 20- or 30-year horizons face a very small chance of losing money and a large chance of realizing a substantial gain.

Although these conclusions based on the historical record of the U.S. equity market are reassuring, there are reasons to be skeptical. First, the U.S. return history is short from a statistical perspective in that even a 100-year sample period contains few independent observations of long-horizon (e.g., 30-year) investment outcomes. Second, conclusions from U.S. data likely suffer from both easy data bias (Dimson, Marsh and Staunton, 2002) and survival bias (Brown, Goetzmann, and Ross, 1995). Easy data bias follows from researchers’ tendency to consider uninterrupted return data from successful markets which are more readily available, and survival bias follows from conditioning on end-of-sample outcomes. Third, long-term investors should be concerned not only with average investment outcomes, but also with extreme tail events. There are several notable cases of developed stock markets experiencing losses over long holding periods, in contrast with the historical U.S. experience. As a classic example, Japan had the largest equity market in the world at the end of 1989, but experienced a stock market return of -9% in nominal terms and -21% in real terms over the subsequent 30 years.


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