Yearly Archives: 2021

Pay, Productivity and Management

Posted by Cristina J. Tello-Trillo (U.S. Census Bureau), on
Tuesday, November 9, 2021
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Cristina J. Tello-Trillo is an economist at the U.S. Census Bureau Center for Economic Studies, and Adjunct Professor at the University of Maryland and Johns Hopkins University. This post is based on a recent paper authored by Ms. Tello-Trillo; Scott W. Ohlmacher, economist at the U.S. Census Bureau Center for Economic Studies; Nicholas A. Bloom, William Eberle Professor of Economics at Stanford University; and Melanie Wallskog, PhD candidate in economics at Stanford University.

In the paper Pay, Productivity and Management recently published on the NBER working paper series we study the relationship between productivity, management, and worker’s pay. Using confidential Census matched employer-employee earnings data we find that employees at more productive firms have substantially higher mean pay and higher pay across all percentiles of the earnings distribution. Not only are executive earnings higher but so are earnings at every level, from the 1st percentile upwards. In particular, a 10% increase in productivity is associated with a 0.7% increase in mean pay. This increase is not equally distributed across workers at the firm: a 10% increase in productivity predicts a 1.3% increase in pay for earners at the top 99th percentile (the C-suite), a 0.82% increase in pay for earners at the 90th percentile and only a 0.51% increase in pay for earners at the 10th percentile. We can observe the effects across all percentiles in figure 1.

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SPAC Sweeps

Posted by Michael J. Watling, Russell Johnston, and Katherine Kirkpatrick, King & Spalding LLP, on
Tuesday, November 9, 2021
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Michael J. Watling, Russell Johnston, and Katherine Kirkpatrick are partners at King & Spalding LLP. This post is based on their King & Spalding memorandum.

After a period of astounding growth in the special purpose acquisition company (SPAC) market, FINRA recently joined the SEC in announcing further scrutiny of broker-dealers and their affiliates involved in SPAC offerings, releasing a targeted exam letter earlier this month. [1] In this post we provide an overview of SPACs, the evolution of regulatory review of this activity to date, and some key takeaways from FINRA’s guidance.

Regulatory History

SPACs (also known as “blank check companies”) are shell-type entities formed with the purpose of raising capital through an initial public offering (IPO) to acquire an existing private company. SPACs are an attractive capital raising mechanism for investors because of their speed and efficiency in bringing a company to market, and they theoretically provide early investment access (with accompanying alpha, and risk) to a broader population. However, they require far fewer disclosures than a traditional IPO, including omitting much information about the target’s business operations and finances. They also include what is viewed by some as inherent conflicts of interest and can tempt participants into cutting corners to accelerate the process, as SPAC sponsors stand to greatly profit if a transaction is completed before a two-year expiration period. Finally, as the SPAC market is currently saturated with sponsors seeking targets, there is some concern that those sponsors are settling for less-than-ideal investments to complete a deal. For these reasons, among others, as the SPAC market has grown, regulators have shown increasing interest in policing the market.

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Speech by Deputy Attorney General Monaco on Corporate Criminal Enforcement

Posted by Lisa O. Monaco, U.S. Department of Justice, on
Monday, November 8, 2021
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Lisa O. Monaco is Deputy Attorney General of the United States. This post is based on her recent Keynote Address at the American Bar Association’s 36th National Institute on White Collar Crime.

I have three priorities for my time with you. First, I want to describe three new actions that the department is taking today to strengthen the way we respond to corporate crime. Second, I want to look forward and tell you about some areas we will be studying over the next months, with an eye to making additional changes to help further invigorate the department’s efforts to combat corporate crime. But before both of those, I want to set the scene by discussing trends, as well as the Attorney General’s and my enforcement priorities, when it comes to corporate crime.

We can all agree the department’s enforcement activities in the white-collar space ebb and flow due to a variety of factors—some internal to the department and some external. When I started as a newly minted AUSA, it was an active time for enforcement against corporate crime—one that witnessed the prosecutions of executives at WorldCom, Qwest Communications, Adelphia, Tyco and Enron. I’ve experienced how—when given the right resources and support including dedicated agents—prosecutors can uncover and prosecute the most sophisticated corporate criminals. As Deputy Attorney General, my goal is to set our investigators and attorneys up for continued success, so that they can enforce the criminal law fairly and vigorously, as the facts and law dictate.

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Mandatory Corporate Carbon Disclosures and the Path to Net Zero

Posted by Stefan Reichelstein (University of Mannheim), on
Monday, November 8, 2021
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Stefan Reichelstein is Professor of Business Administration at the University of Mannheim. This post is based on a recent paper authored by Mr. Reichelstein; Patrick Bolton, Barbara and David Zalaznick Professor of Business at Columbia Business School; Marcin Kacperczyk, Professor of Finance at Imperial College London Business School; Christian Leuz, Joseph Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago Booth School of Business; Gaizka Ormazabal, Professor of Accounting and Control at the University of Navarra IESE Business School; and Dirk Schoenmaker, Professor of Banking and Finance at Erasmus University Rotterdam School of Management.

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 pathway to a global economy with net zero carbon emissions is narrowing by the day and its success depends on a universal and ambitious drive to eliminate or capture carbon emissions by governments, corporations, financial institutions, and households. The drive to reduce and ultimately eliminate carbon emissions begins with the mundane tasks of annual measuring and reporting. However, despite significant progress in the methodology for measuring and reporting corporate carbon emissions, the overwhelming majority of publicly listed companies around the world still does not disclose their carbon emissions, and even fewer privately held companies do so. Also, as pointed out in numerous recent publications, the current voluntary disclosures lack a coherent measurement and reporting framework.

With an eye to COP26, we argue in a policy brief posted by the London based Center for Economic Policy Research (CEPR) that mandatory carbon disclosures can make an elementary but essential contribution to the global drive towards a Net Zero economy. Such mandates can deliver much of what policy makers and asset managers need to manage carbon transition risk, and perhaps more importantly, to accelerate the pace of future carbon emission reductions. We argue that such carbon disclosure mandates ought to be simple and straightforward, and that the reported information be verifiable. A common methodology to measure and report greenhouse gas emissions has been established through the International Greenhouse Gas Protocol. This protocol envisions firms measuring their carbon footprints by including all direct (scope 1) and indirect (scope 2 and 3) emissions. The latter comprise the upstream emissions associated with a firm’s operations and the entire supply chain of production inputs, as well as downstream emissions associated with the use of products sold by the firm. Our recommendation entails a mandate for reporting direct emissions.

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SEC Staff Limits Exclusion of “Social Policy” Shareholder Proposals

Posted by David M. Silk, Trevor S. Norwitz, and Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on
Monday, November 8, 2021
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David M. Silk, Trevor S. Norwitz, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Silk, Mr. Norwitz, Mr. Niles, Carmen X. W. Lu, and Ram Sachs. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

The SEC Staff has issued revised guidance rescinding prior Staff Legal Bulletins addressing the exclusion of Rule 14a-8 shareholder proposals based on the social significance to a company, “micromanagement” or  “economic relevance.”  The changes will likely facilitate a larger number of shareholder proposals, including ESG proposals, coming to a shareholder vote.

Ordinary Business Exception:  The new guidance revises the SEC’s application of the “ordinary business” exclusion, which considered whether a proposal was of social policy significance or sought to micromanage a company.  While the Staff has previously focused on the significance of a social policy issue to a particular issuer, they will now focus on the proposal’s “broad societal impact.”  As an example, a proposal related to human capital management will no longer be excluded solely because the issue is not demonstrated to be significant to the company.  Accordingly, the Staff will no longer expect board analyses on the impact on the company to accompany claims for no-action relief under the ordinary business exclusion.  With respect to micromanagement claims, the Staff will focus on the level of granularity of a proposal and the extent of any limitations on the board’s or management’s discretion.  For example, a proposal requesting a company set greenhouse gas emission targets, but providing the company with discretion on a method for its implementation, will no longer meet the threshold for exclusion based on micromanagement.  The new guidance also states that in considering whether a proposal is excessively complex for a shareholder vote, the Staff may consider the sophistication of shareholders with respect to the matter, the availability of data, and the robustness of public discussion.  The Staff specifically noted that references to well-established national or international frameworks may be indicative of topics that shareholders are well-equipped to evaluate.

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BlackRock’s Recent Move Could Benefit Shareholder Activists in Election Contests

Posted by Andrew M. Freedman and Ron S. Berenblat, Olshan Frome Wolosky LLP, on
Sunday, November 7, 2021
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Andrew M. Freedman and Ron S. Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on their Olshan 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).

On October 7, 2021, BlackRock, the world’s largest asset management firm, announced that it has launched an initiative to provide its institutional clients, such as pensions and endowments, the opportunity to make their own voting decisions on proxy matters tied to their investments. Beginning in 2022, these voting options will first be made available to institutional clients invested in its index strategies holdings within institutional separate accounts globally and certain pooled funds in the U.S. and UK that are managed by BlackRock. According to BlackRock, approximately 40% of the $4.8 trillion in index equities it manages will be eligible for these new voting options, including the ability to vote directly on proposals at annual meetings of portfolio companies. Given BlackRock’s penchant for supporting management in election contests, this transfer of voting power could lessen BlackRock’s vast influence in proxy contests by opening up opportunities for shareholder activists to solicit such votes from the ultimate investor.

Eligible BlackRock investors will have the following voting options:

  • Voting proxies according to their own internal policies using their own voting infrastructure;
  • Choosing from a menu of third-party proxy voting policies and votes will be cast according to the selected policy using BlackRock’s voting infrastructure;
  • Voting directly on selected resolutions or companies of their choice using BlackRock’s voting infrastructure (only available to institutional separate accounts); or
  • Continuing to allow BlackRock’s independent investment stewardship group, BlackRock Investment Stewardship (BIS), to vote on their behalf using BlackRock’s voting infrastructure.

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Comments at SEC Speaks Signal Significant Policy Changes

Posted by Adam Hakki, Mark Lanpher, and Philip Urofsky, Shearman & Sterling LLP, on
Sunday, November 7, 2021
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Adam Hakki, Mark Lanpher, and Philip Urofsky are partners at Shearman & Sterling LLP. This post is based on a Shearman memorandum by Mr. Hakki, Mr. Lanpher, Mr. Urofsky, and Adam Schwartz.

On October 13, 2021, SEC Enforcement Director Gurbir Grewal and Deputy Enforcement Director Sanjay Wadhwa appeared at the Practicing Law Institute’s “The SEC Speaks” conference, an annual conference where Commission leaders provide updates on current initiatives and priorities of the Commission for the coming year. Director Grewal and Deputy Director Wadhwa’s remarks signaled some potentially significant policy changes, particularly in terms of how they will measure corporate compliance programs and cooperation levels, when the SEC will allow settling defendants to “neither admit nor deny” the allegations brought by the SEC, and the overall autonomy granted to the front-line enforcement staff. While the impact of any such policy change is uncertain, and will need to be assessed over time, it is an unmistakable shift in tone from the prior administration.

First, in addressing areas of corporate responsibility, Director Grewal stressed the need for companies to maintain and enforce robust compliance controls in the area of required disclosures, use of nonpublic information, record-keeping obligations, and transparency with Commission staff and other government agencies. While none of this is “new,” Director Grewal signaled that the Enforcement Division would increase activity in this area to ensure compliance. As just one example, he noted that “if we learn that, while litigation is anticipated or pending, corporations or individuals have not followed the rules and maintained required communications, have ignored subpoenas or litigation hold notices, or have deliberately used the sort of ephemeral technology that allows messages to disappear, we may well conclude that spoliation of evidence has occurred and ask the court for adverse inferences or other appropriate relief.”

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Corporate Board Practices in the Russell 3000, S&P 500, and S&P Mid-Cap 400

Posted by Matteo Tonello, The Conference Board, and Paul Hodgson, ESGAUGE, on
Saturday, November 6, 2021
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Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. and Paul Hodgson is Senior Advisor to ESGAUGE. This post relates to Corporate Board Practices in the Russell 3000, S&P 500, and S&P MidCap 400: 2021 Edition, an annual benchmarking study and online dashboard published by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and The John L. Weinberg Center for Corporate Governance at the University of Delaware.

Corporate Board Practices in the Russell 3000, S&P 500, and S&P MidCap 400: 2021 Edition documents corporate governance trends and developments at US publicly traded companies—including information on board composition and diversity, the profile and skill sets of directors, and policies on their election, removal, and retirement. The analysis is based on recently filed proxy statements and complemented by the review of organizational documents (including articles of incorporation, bylaws, corporate governance principles, board committee charters, and other corporate policies made available in the Investor Relations section of companies’ websites).

The project is conducted by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and the John L. Weinberg Center for Corporate Governance at the University of Delaware.

The following are the key findings and insights.

For the first time in our annual analysis of proxy statements, in 2021 the majority of S&P 500 companies have disclosed the racial (ethnic) makeup of their boards. According to the disclosure available, boards remain overwhelmingly white, with some business sectors disclosing far more racial diversity than others. This is also true for newly elected directors for which demographic information is made public—less than one-fourth of them are non-white. Companies should consider committing to a multi-year board succession plan where the search for strategic skills and expertise is accompanied by a sustained focus on diversity. They should also investigate best practices on the integration of diversity, equity, and inclusion (DEI) metrics into senior executives’ incentive plans, and continue to improve disclosure of board racial and ethnic diversity.

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SEC Modernizes Filing Fee Rules

Posted by Ron C. Llewellyn and Ran Ben-Tzur, Fenwick & West LLP, on
Saturday, November 6, 2021
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Ron C. Llewellyn is counsel and Ran Ben-Tzur is partner at Fenwick & West LLP. This post is based on their Fenwick memorandum.

On October 13, 2021, the U.S. Securities and Exchange Commission adopted final rules that amend several fee-bearing forms, schedules, statements and related rules to modernize filing fee disclosure and payment methods for securities transactions. The amendments, which will require each filing fee table and related disclosure to be filed as an exhibit in a structured format, will add options for fee payment via Automated Clearing House (ACH) and debit and credit cards, and eliminate fee payments by paper checks and money orders. The SEC first proposed the amendments on October 24, 2019. These amendments are effective on January 31, 2022, but will be phased in throughout transition periods as further discussed below.

Overview

The amendments will affect rules and forms under the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934 (Exchange Act) and the Investment Company Act of 1940 (Investment Company Act). In particular, the following rules and forms will be amended:

  • Securities Act
    • Rules 111, 415, 424, 456, 457, 473
    • Forms S-1, S-3, S-8, S-11, N-14, S-4, F-1, F-3, F-4, F-10, SF-1, SF-3
  • Exchange Act
    • Rules 0-9, 0-11, 13e-1
    • Schedules 13E-3, 13E-4F, 14A, 14C, TO, 14D-1F
  • Investment Company Act
    • Rule 0-8
    • Forms 24F-2 and N-2

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Remarks by Chair Gensler at the Securities Enforcement Forum

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Friday, November 5, 2021
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks at the Securities Enforcement Forum. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you for having me here today. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

In 1934, in his first speech as the SEC’s first Chair, Joseph Kennedy told the National Press Club, “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.” [1]

Though much has changed since then—technology, financial products, and business models are always evolving—Kennedy’s words still ring true today.

Enforcement is one of the fundamental pillars in achieving the SEC’s mission.

One pillar is the policy framework—the laws set by Congress, and the rules enacted by the Commission.

But you’ve also got to examine against those laws and rules, and enforce those rules. That oversight and enforcement are the other two critical pillars.

Think about a football game without referees. Teams, without fear of penalties, start to break the rules. The game isn’t fair, and maybe after a few minutes, it isn’t fun to watch.

Without examination against and enforcement of our rules and laws, we can’t instill the trust necessary for our markets to thrive. Stamping out fraud, manipulation, and abuse lowers risk in the system. It protects investors and reduces the cost of capital. The whole economy benefits from that.

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