Yearly Archives: 2021

Remarks by Chair Gensler Before the Small Business Capital Formation Advisory Committee

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Tuesday, September 28, 2021
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his remarks before the Small Business Capital Formation Advisory Committee. 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, Carla [Garrett]. It’s good to be with this Committee again. I’d like to thank the members for their time and willingness to represent the interests of America’s small businesses. As is customary, I’d like to note I’m not speaking on behalf of the Commission or the SEC staff.

I look forward to your readouts from today’s discussion on late-stage, private rounds of financing, as well as the pathways to our public markets.

Last time we gathered, I spoke about my father, Sam Gensler, a small business owner who never had more than a few dozen employees. He didn’t tap the capital markets like many small business owners today.

As a society, the U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world. Our companies, including small businesses, rely on our capital markets more than companies in other countries do.

Consider this: The U.S. capital markets represent 38 percent of the globe’s capital markets. [1] This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share. [2]

Furthermore, corporate bonds, a $10 trillion market, [3] is about the same size of commercial bank lending in this country. [4]

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Remarks by Commissioner Peirce Before the Small Business Capital Formation Advisory Committee

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Tuesday, September 28, 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 remarks at the SEC Small Business Capital Formation Advisory Committee Meeting. 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, Carla [Garrett] and thank you to the Committee members and today’s panelists. Welcome to Andrea [Seidt] to the Committee. I am particularly happy to have a fellow Ohioan involved. Thanks to Mike [Pieciak] for serving on the Committee. I am looking forward to today’s discussions on small business capital formation trends at this stage in the pandemic, and the changing dynamics of pre-IPO financing and going public. Two trends to be featured today—SPACs and the significant increase of institutional investor participation in late stage private capital raising rounds—demonstrate the hunger for growth opportunities in our markets. Making it possible for retail investors to get access to some of this early growth remains an important matter for the Commission’s consideration.

The desire to expand private investment opportunities to more individuals was on full display at our May 2021 Small Business Forum. The Forum’s Report, [1] which was released this morning, includes valuable policy recommendations by the participants, many of which have been discussed by this Committee. The Report includes some frustratingly non-committal responses by the Commission. History teaches us that the Commission’s non-committal responses with regard to Forum recommendations could translate into no action at all. Now is not the time for a full response to all of the Forum’s recommendations, but I will address a few of them and urge this Committee to continue pushing the Commission to show more of a commitment to facilitating small business capital formation.

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Delaware Supreme Court Announces New Demand Futility Test

Posted by William Savitt, Ryan A. McLeod, and Anitha Reddy, Wachtell, Lipton, Rosen & Katz, on
Tuesday, September 28, 2021
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William Savitt, Ryan A. McLeod, and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

In what promises to be a landmark decision, the Delaware Supreme Court last week reframed the rules governing derivative litigation. United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021).

A Facebook stockholder sued current and former directors to recover costs the company had incurred in connection with a proposed stock reclassification. The Court of Chancery dismissed the suit, finding that the plaintiff had failed to establish that at least half of the current directors were incapable of independently evaluating whether to pursue the suit.

The Delaware Supreme Court affirmed. Writing for the unanimous Court, Justice Montgomery-Reeves adopted a new test to determine when a stockholder will be permitted to press corporate claims over the board’s opposition. The Court emphasized that “the demand-futility analysis provides an important doctrinal check that ensures the board is not improperly deprived of its decision-making authority.” The essential inquiry is thus whether “there is reason to doubt that the directors would be able to bring their impartial business judgment to bear on a litigation demand” by a stockholder. When a corporation’s charter exculpates directors from liability for breach of care claims, such claims “no longer pose a threat that neutralizes director discretion.” Accordingly, the Court held that directors are not disabled from impartially considering a demand simply because the proposed complaint alleges that they breached their duty of care.

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The Upcoming Bebchuk-Edmans Debate on “The Promise of Stakeholder Capitalism: Real or Illusory?”

Posted by Leeor Ofer (Harvard Law School), on
Monday, September 27, 2021

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The London Business School Centre for Corporate Governance and the Financial Times will host next week a virtual debate on stakeholder capitalism between Professors  Lucian Bebchuk and Alex Edmans. The debate will be moderated by Gillian Tett of the Financial Times.

Titled “The Promise of Stakeholder Capitalism: Real or Illusory?,” the virtual debate will be held on Tuesday, October 5 2021 at 12:00-13:20 EST. Readers are welcome to watch the debate and  can register to the Zoom session here.

Bebchuk will present the view that, due to the structural incentives of corporate leaders, the promise of stakeholder capitalism is largely illusory and external regulations would thus be necessary to address stakeholder concerns. By contrast, Edmans will argue that if and when stakeholder capitalism is done the right way, it can deliver substantial benefits for shareholders and society.

After they make their initial presentations, Bebchuk and Edmans will subsequently challenge each other on their positions. Gillian Tett will then moderate the Q&A with questions of her own as well as fielding questions from the audience.

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. His recent co-authored articles on stakeholder capitalism include “Will Corporations Deliver Value to All Stakeholders?” and “The Illusory Promise of Corporate Governance” (with Roberto Tallarita) as well as “For Whom Corporate Leaders Bargain” (with Kobi Kastiel and Roberto Tallarita).

Alex Edmans is Professor of Finance, and Academic Director of Centre for Corporate Governance, at London Business School. He is also the author of the book “Grow the Pie: How Great Companies Deliver Both Purpose and Profit.”

Ms. Gillian Tett is Chair of the Editorial Board and Editor-at-Large (US) of the Financial Times, and Co-Founder of Moral Money, which focuses on the world of socially responsible business, sustainable finance, impact investing and ESG trends.

For registration to the Zoom event, please visit here.

C-Suite Executives Should Fill the Trust Gap

Posted by Michael Bondar and Don Fancher, Deloitte, on
Monday, September 27, 2021
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Michael Bondar is a Principal at Deloitte Risk & Financial Advisory, and Don Fancher is a Principal Global Leader at Deloitte Forensic. This post is based on their Deloitte 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).

Trust in an organization is an ongoing relationship between an entity and its various stakeholders—and is earned through that entity’s actions. Those actions, however, cannot be strictly embodied in a crisis response strategy to address a trust breach. Instead, by investing in trust proactively, organizations can build “trust equity”—a reserve of trust that can not only improve performance and generate value on an ongoing basis, but also allow the organization to be more resilient when a crisis inevitably hits. Managing these trust-based relationships starts at the very top and requires the focus and attention of the C-suite.

The disruptive events of the past year have shined a bright light on the power of trust, revealing the central roles of transparency and consistency in cultivating it in organizations. (Think vaccine efficacy, for example.) Global and societal challenges have also reinforced how intangibles, rather than physical assets, often lead to value creation. In other words, the stronger the relationships organizations have with their stakeholders, the more trust is generated.

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Board Structure Is Key to Oversight

Posted by David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, on
Monday, September 27, 2021
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David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal.

The primary role and responsibility of boards of directors is management oversight. Recent lawsuits against public company directors for oversight failures should prompt boards to consider whether their current governance structures are optimal for maximizing oversight effectiveness. It is common, but potentially problematic, for the audit committee to be tasked with all compliance oversight. This scenario can create an opportunity for a plaintiff to claim that the audit committee had insufficient resources to provide effective oversight of the compliance function. This claim may be even stronger when it relates to critical company-specific and industry-specific risks, particularly in heavily regulated industry sectors. Boards of directors should thoughtfully review their board committee structures to determine if there is sufficient management oversight of mission-critical company and industry risks and, where appropriate, consider reallocating responsibilities among various board committees, with corresponding updates to committee charters.

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Five Essential Strategy Questions Boards Should Be Asking

Posted by Stephen Klemash, Gaurav Malhotra, and Lance Mortlock, EY, on
Sunday, September 26, 2021
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Stephen Klemash is EY Americas Center for Board Matters Leader, Gaurav Malhotra is EY Americas Reshaping Results & US Restructuring Leader, and Lance Mortlock is EY Canada Managing Partner for Energy. This post is based on their EY memorandum.

In brief

  • Management and the board should define “long-term” and develop a strategy that is focused not on where the organization “is going” but where it “can go.”
  • It is essential for an organization’s talent strategy and ESG priorities to be aligned and integrated with the overall strategy.
  • Boards can help recalibrate the risk framework to focus on a longer-term horizon and reframe the discussion from risk to opportunity.

C-suites have adapted to the tumultuous environment created by the global pandemic, and only a few could have predicted the rebound occurring in specific geographies and sectors so quickly.

While the rapid pace of economic expansion has been a welcome opportunity for certain businesses, the long-term robustness of the recovery could be challenged by uneven events in specific geographies, the unwinding of government support programs, the scarceness of labor, the rise of inflation or the resurgence of COVID-19 variants.

As organizations continue their strategy refresh discussions, the following five questions should be top of mind for board members and management teams to make sure that their strategy adequately focuses on the future while recognizing the past and present stakeholder concerns.

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SEC’s Investor Advisory Committee Recommends Changes to Rule 10b5-1 Trading Plans

Posted by Joseph A. Hall, Michael Kaplan, and Emily Roberts, Davis Polk & Wardwell LLP, on
Saturday, September 25, 2021
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Joseph A. Hall, Michael Kaplan, and Emily Roberts are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Responding to a recent call from SEC Chair Gary Gensler to “freshen up” Rule 10b5-1, a subcommittee of the SEC’s Investor Advisory Committee (IAC) released draft recommendations on August 26 calling for changes to the operation of Rule 10b5-1 securities trading plans. The recommendations, which don’t seem to distinguish between insider selling plans and company repurchase plans, include a four-month “cooling off” period between plan adoption and the first trade, as well as mandatory disclosure of Rule 10b5-1 plans. The IAC also recommends expanding Form 4 reporting requirements to include insiders of foreign private issuers. Although the IAC has no formal role in SEC rulemaking, the recommendations are likely to inform the agency’s thinking as it develops proposals for amending Rule 10b5-1.

[Note: The Investor Advisory Committee approved the draft recommendations at its September 9th meeting, with the understanding that the recommendations would be revised to make clear that they do not apply to company repurchase plans.]

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A New Way of Seeing Value

Posted by Witold Henisz (The Wharton School of the University of Pennsylvania), on
Friday, September 24, 2021
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Witold Henisz is the Deloitte & Touche Professor of Management (in Honor of Russell E. Palmer, former Managing Director) at The Wharton School of the University of Pennsylvania. This post is based on his Engine No. 1 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).

Engine No. 1’s Total Value Framework is a data-driven approach to investing that puts a tangible value on a company’s environmental, social and governance impacts and ties those impacts to long-term value creation.

Interest in environmental, social and governance (ESG) has never been greater, and yet, ESG ratings systems conflict with one another and remain uncorrelated from financial returns. The inability to tie data to actual outcomes has supported shareholders divesting rather than holding a company and engaging when a problem arises.

For the first time, the Total Value Framework measures, in dollars and cents, the material negative and positive impacts a company has and demonstrates how a company’s performance and value can be enhanced by the investments it makes in its employees, customers, communities, and the environment.

At Engine No. 1, we believe there is no tradeoff between impact and returns. The Total Value Framework is an important step forward for CEOs, board members, and investors to include impact analysis in long-term decision making to drive better economic results.

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The Impact of a Principles-Based Approach to Director Gender Diversity Policy

Posted by Tor-Erik Bakke (UIC), Laura Field (University of Delaware), Hamed Mahmudi (University of Delaware), and Aazam Virani (University of Arizona), on
Friday, September 24, 2021
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Tor-Erik Bakke is Associate Professor of Finance at the University of Illinois at Chicago College of Business Administration; Laura Field is the Donald J. Puglisi Professor of Finance at the University of Delaware Lerner College of Business and Economics; Hamed Mahmudi is Assistant Professor of Finance at the University of Delaware Lerner College of Business and Economics; and Aazam Virani is Assistant Professor of Finance at the University of Arizona Eller College of Management. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

A corporate governance issue that has drawn broad attention is the under­representation of females on corporate boards. Many attempts to address this issue follow a rules-based approach, in which mandated quotas for female representation in boards are imposed. An alternative to a prescriptive regulatory approach is a principles-based one, under which firms publicly disclose their compliance with suggested “best practice” guidelines, and, if their practices depart from the guidelines, firms must explain the reasons for their non-compliance. In the U.S., the SEC has recently approved a Nasdaq principles-based proposal aimed at improving board diversity, in which firms are required to have at least one director who self-identifies as female and another who self-identifies as an underrepresented minority or LGBTQ+. To avoid forced delisting, a firm must “diversify or explain”: either have the required number of diverse directors or explain why it does not. Fried (2021) argues that Nasdaq’s proposal will generate substantial risks for investors, as existing research has shown that increasing board diversity can lead to lower share prices. Fried notes that there has been no research on a “diversify or explain” regulation such as that proposed by Nasdaq.

We seek to fill this gap by studying the effects of a “diversify or explain” legislation that has been in place in Canada since 2014. The Ontario Securities Commission (OSC) introduced female representation policy disclosure requirements, which came into effect in December 2014. The amendment requires listed firms to disclose policies regarding the representation of females on the board and in the executive suite, or to provide an explanation for their absence.

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