Yearly Archives: 2021

Weekly Roundup: August 27-September 2, 2021

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, September 3, 2021

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This roundup contains a collection of the posts published on the Forum during the week of August 27-September 2, 2021.

SEC Maintains Focus on Contingent Liabilities

Posted by John F. Savarese and Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on Friday, August 27, 2021
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ESG and Incentives 2021 Report

Posted by John Borneman, Tatyana Day, and Olivia Voorhis, Semler Brossy LLC, on Friday, August 27, 2021
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Delaware and New York Part Ways on Treatment of Future Affiliates Covered by Contract Restrictions

Posted by Daniel E. Wolf and Jonathan L. Davis, Kirkland & Ellis LLP, on Saturday, August 28, 2021
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Statement by Chair Gensler on Broker-Dealer and Investment Adviser Digital Engagement Practices

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Saturday, August 28, 2021
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SEC Updates Qualified Client Threshold

Posted by Kathryn M. Furman, John Wilson and Doug Elsbeck, King & Spalding LLP, on Sunday, August 29, 2021
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2021 Say on Pay and Proxy Results

Posted by Todd Sirras, Justin Beck, and Austin Vanbastelaer, Semler Brossy LLC, on Monday, August 30, 2021
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Why Do Bank Boards Have Risk Committees?

Posted by René M. Stulz (The Ohio State University), on Monday, August 30, 2021
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Corporate Racial Equality Investments—One Year Later

Posted by Robert Schwarz, The Conference Board, on Monday, August 30, 2021
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A Special Board Committee Can Help Drive Corporate and Transformational Success

Posted by Ryan McManus, National Association of Corporate Directors (NACD), on Tuesday, August 31, 2021
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M&A Rumors about Unlisted Firms

Posted by Alexander Groh (Emlyon Business School), on Tuesday, August 31, 2021
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Survey on Perceptions of Stakeholder Governance and Corporate Purpose

Posted by Jennifer Tonti, JUST Capital, on Tuesday, August 31, 2021
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Private Equity Carve-Outs Ride Post-COVID Wave

Posted by Germaine Gurr and Arlene Arin Hahn, White & Case LLP, on Wednesday, September 1, 2021
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Cross-Listings, Antitakeover Defenses, and the Insulation Hypothesis

Posted by Nan Yang, Albert Tsang, and Lingyi Zheng (Hong Kong Polytechnic University), on Wednesday, September 1, 2021
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The SEC’s Upcoming Climate Disclosure Rules

Posted by Sarah Solum, Valerie Ford Jacob, and Michael Levitt, Freshfields Bruckhaus Deringer LLP, on Wednesday, September 1, 2021
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ESG 2.0—The Next Generation of Leadership

Posted by Kurt B. Harrison, Emily Meneer, and Beijing Zhu, Russell Reynolds Associates, on Thursday, September 2, 2021
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Corporate Directors’ Implicit Theories of the Roles and Duties of Boards

Posted by Steven Boivie (Texas A&M University), Michael C. Withers (Texas A&M University), Scott D. Graffin (University of Georgia), and Kevin P. Corley (Arizona State University), on Thursday, September 2, 2021
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Spotlight on Boards

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Thursday, September 2, 2021
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Spotlight on Boards

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Thursday, September 2, 2021
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, and Hannah Clark.

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The ongoing coronavirus pandemic and resulting economic and social turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, are propelling a decisive inflection point in the responsibilities of boards of directors. The 2016 and 2020 statements of corporate purpose by the World Economic Forum and the 2019 embrace of stakeholder capitalism by the Business Roundtable, together with current statements of policy by most of the leading corporations, institutional investors, asset managers and their organizations, as well as governments and regulators in and outside the United States, lead us to summarize the purpose of the corporation:

The objective and purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to ensure its success and grow its value over the long term. This requires consideration of, and regular engagement with, all the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, communities and society at large) as determined by the corporation and its board of directors using their business judgment. Fulfilling this purpose in such a manner is fully consistent with the fiduciary duties of the management and the board of directors and the stewardship duties of shareholders (institutional investors and asset managers), who are essential partners in supporting the corporation’s pursuit of its purpose.

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Corporate Directors’ Implicit Theories of the Roles and Duties of Boards

Posted by Steven Boivie (Texas A&M University), Michael C. Withers (Texas A&M University), Scott D. Graffin (University of Georgia), and Kevin P. Corley (Arizona State University), on
Thursday, September 2, 2021
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Steve Boivie is Professor of Management at Texas A&M University Mays Business School; Michael C. Withers is Associate Professor of Management at Texas A&M University Mays Business School; Scott D. Graffin is Professor of Management at the University of Georgia Terry College of Business; and Kevin P. Corley is Professor of Management and Entrepreneurship at Arizona State University W.P. Carey School of Business. This post is based on their recent paper, forthcoming in the Strategic Management Journal.

Introduction

In the fifteen years since the passage of the Sarbanes-Oxley (SOX) Act in the U.S., several institutional and regulatory changes have helped reshape boards of directors. During this time, other factors have emerged to place greater pressure on boards as well. In particular, larger activist investors have applied pressure on boards to focus their efforts on managerial oversight. Increasingly third-party rating services and proxy advisors such as Institutional Shareholder Services (ISS) have suggested boards need to be more independent and focused on shareholder interests. Given this changing context, we conducted extensive interviews with 50 active directors and executives to try and better understand how directors view their jobs and what they view as some of the best practices.

How do directors view their board service?

Our informants consistently told us they view their primary task as working with the executive team to help improve and inform decision making. From this perspective, directors need to trust their CEO in terms of the strategic direction of the firm, and if that trust is not there, the CEO should be removed. Directors do not necessarily view their responsibility as explicitly monitoring for opportunism. Reflecting this point, one director stated, “The board has a separate fiduciary responsibility to work on behalf of shareholders, but that doesn’t mean that they’re beholden to someone other than the management team, because the management team has that same responsibility.” Interestingly, however, as managers prepare for and conduct due diligence in expectation of deep discussions and probing from the board on strategic issues, indirect monitoring often occurs through an “invisible hand.”

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ESG 2.0—The Next Generation of Leadership

Posted by Kurt B. Harrison, Emily Meneer, and Beijing Zhu, Russell Reynolds Associates, on
Thursday, September 2, 2021
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Kurt B. Harrison is a senior member of Russell Reynolds Associates’ Financial Services sector and co-head of the global Sustainability practice; Emily Meneer leads Russell Reynolds Associates’ Sustainability practice Knowledge team; and Beijing Zhu is a member of Russell Reynolds Associates’ Financial Services sector Knowledge team. This post is based on their Russell Reynolds memorandum.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); 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).

As anyone involved with ESG will attest, the current level of demand for ESG leadership talent is unsurpassed and unrelenting.

Even firms with long-standing track records of successfully integrating ESG principles into their organizations are finding it more difficult than ever to stay ahead of dynamic and constantly evolving ESG expectations. Companies that have previously resisted establishing a formalized ESG policy and framework are finally bowing to pressure from their investors, consumers, employees, boards and regulators, and now find themselves scrambling to catch up. As ESG has gone from being a functional requirement to a commercial imperative, best-in-class organizations are embracing ESG in part because they firmly believe in the financial benefits of incorporating sustainability into their corporate and investment strategies.

All of these factors have led to an avalanche of demand for ESG leadership talent, straining what was already a very thin talent pool. It is clear that next-generation ESG leaders will look quite different from earlier archetypes, as the scope of the role grows and requires a far more senior and agile executive to be considered as a credible “ESG 2.0” leader.

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The SEC’s Upcoming Climate Disclosure Rules

Posted by Sarah Solum, Valerie Ford Jacob, and Michael Levitt, Freshfields Bruckhaus Deringer LLP, on
Wednesday, September 1, 2021
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Sarah Solum, Valerie Ford Jacob, and Michael Levitt are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Solum, Ms. Jacob, Mr. Levitt, Pamela Marcogliese, Elizabeth Bieber and Heather Kellam. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); 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).

In his remarks before the Principles for Responsible Investment “Climate and Global Financial Markets” webinar on July 28, 2021, SEC Chair Gary Gensler provided insights into what companies might expect from the SEC’s upcoming climate disclosure rules. Gensler’s remarks follow in the wake of other similar proposals for enhanced climate disclosure made by authorities in the European Union and various European countries.

“When it comes to disclosure, investors have told us what they want,” Gensler said in his speech. “More than 550 unique comment letters were submitted in response to my fellow Commissioner Allison Herren Lee’s statement on climate disclosures in March. Three out of every four of these responses support mandatory climate disclosure rules.” Gensler believes that “the SEC should step in when there’s this level of demand for [climate] information relevant to investors’ decisions.”

Gensler said that new climate change rules follow in the footsteps of historical changes the SEC has made to disclosure requirements, such as adding new requirements for risk factors in 1964, MD&A in 1980 and stock compensation in the 1990’s.

Gensler analogized this evolving public company disclosure to the expansion of the Olympics:

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Cross-Listings, Antitakeover Defenses, and the Insulation Hypothesis

Posted by Nan Yang, Albert Tsang, and Lingyi Zheng (Hong Kong Polytechnic University), on
Wednesday, September 1, 2021
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Nan Yang is Assistant Professor of Finance at the Hong Kong Polytechnic University; Albert Tsang is Professor of Accounting at the Hong Kong Polytechnic University; Lingyi Zheng is a postdoctoral fellow at the Hong Kong Polytechnic University. This post is based on their recent paper, forthcoming in the Journal of Finance Economics. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk; and Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

Understanding why firms cross-list their shares abroad has attracted many studies in finance (Karolyi, 2006, 2012). These studies has argued that overseas listings can broaden firms’ shareholder base, or bond firms to stronger legal enforcement and more prestigious financial intermediaries in the hosting countries. While these studies mainly focus on the capital market benefits of cross-listings (e.g., lower cost of capital, higher stock valuation, and higher liquidity), we examine a new motive for cross-listing: to insulate firms from hostile takeovers. In our paper, forthcoming in the Journal of Finance Economics, we provide strong evidence that firms are more likely to cross-list in foreign countries when facing corporate control threats.

Kastiel and Libson (2019) is the first to propose this new motive in their insulation hypothesis. They argue that cross-listing can protect firms from potential hostile takeovers owing to the increased costs and barriers for acquirers. If acquirers launch tender offers in both domestic and foreign exchanges, they can be subject to massive direct fees. Acquirers would also be concerned about immense complexity, uncertainty, and possible litigation risk when dealing with different accounting regimes, governance, and other regulatory requirements between jurisdictions. The complexity, uncertainty, and litigation risk also represent significant costs because time is crucial in the success of a takeover attempt, and these matters could cause serious delays in the merger process.

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Private Equity Carve-Outs Ride Post-COVID Wave

Posted by Germaine Gurr and Arlene Arin Hahn, White & Case LLP, on
Wednesday, September 1, 2021
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Germaine Gurr and Arlene Arin Hahn are partners at White & Case LLP. This post is based on a White & Case memorandum by Ms. Gurr, Ms. Hahn, Darragh Byrne, Ferdinand Mason and Tzi-Yang Seow.

Last spring, Dell spun off its cloud computing business, VMWare, in a deal valued at nearly US$63 billion, with the equity from the deal funneled to existing shareholders including Dell itself and the PE firm Silver Lake Partners, Dell’s strategic financial partner since 2013.

The unconventional Dell deal serves as a bellwether for surging PE carve-out activity, and for increasingly out-of-the-box dealmaking.

Corporate divestitures to PE have boomed over the past 12 months. Following the market pause in Q2 2020, such deals spiked to highs not seen for at least four years.

H2 2020 witnessed US$254 billion in private equity carve-outs, according to data from Dealogic. The momentum carried over into 2021: In H1, US$281.1 billion in such deals was recorded, a 197% year-on-year increase. The numbers reveal a rise in deals at the top end of the market, as volume of 436 deals in H1 2021 was only a 12% rise on H1 2020—and a drop on the 520 transactions struck in the second half of 2020.

The Dell VMWare deal—though unusual in many ways—exemplified the strength of the US market for PE carve-outs. US-based deals were responsible for US$133.5 billion of deal value, nearly half of the global total.

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Survey on Perceptions of Stakeholder Governance and Corporate Purpose

Posted by Jennifer Tonti, JUST Capital, on
Tuesday, August 31, 2021
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Jennifer Tonti is Managing Director of Survey Research & Insights at JUST Capital. This post is based on her JUST Capital memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); 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).

Since the Business Roundtable redefined the Purpose of a Corporation two years ago, we’ve been tracking how Americans think companies are measuring up to this new stakeholder-focused purpose. The macro perspective is that America’s largest companies are perceived to be doing well promoting an economy that serves all Americans; a sharp increase (16-20 percentage points) from when we first asked this question in August 2019.

Yet when asked specifically about corporations’ impact on individual stakeholders, the perception is that shareholders continue to win out over other stakeholder groups.

  • Pluralities say that in the two years since the BRT’s announcement, corporations have not changed the degree to which they prioritize their stakeholder groups—workers, customers, communities, the environment, and shareholders.
  • While more respondents say that companies have a positive impact on the various stakeholder groups than have a negative or no effect, shareholders continue to get the lion’s share of attention (68% positive impact) over other stakeholders such as workers (48%) or the environment (41%).

Americans continue to be optimistic about capitalism as an economic system, but there is near universal agreement that a more evolved form of capitalism is needed to:

  • Ensure the greater good of society.
  • Produce the kind of society respondents want for the next generation.
  • Work for the average American.

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M&A Rumors about Unlisted Firms

Posted by Alexander Groh (Emlyon Business School), on
Tuesday, August 31, 2021
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Alexander Groh is Professor of Finance at Emlyon Business School. This post is based on a recent paper, forthcoming in the Journal of Financial Economics, by Mr. Groh; Yan Alperovych, Associate Professor of Finance at Emlyon Business School; Douglas J. Cumming, DeSantis Distinguished Professor of Finance and Entrepreneurship at Florida Atlantic University; and Veronika Czellar, Professor of Data Science, Economics and Finance at SKEMA Business School. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

Mergers and acquisitions (M&As) are important events in the life cycle of corporations and have the potential to affect a wide range of stakeholders. They can lead, among many other possibilities, to strategic reorganization, product discontinuation, accelerated growth, geographic expansion, layoffs, or increased competition. The transactions are usually initiated by the acquirer or the seller or, alternatively, by the target or outside managers. Deal negotiations eventually start after direct contact between the future partners or following a limited auction process organized by M&A intermediaries. Regardless of the process used to begin “merger talks”, the participants regularly bind themselves to strict confidentiality using non-disclosure agreements (NDAs). The purpose of these NDAs is to limit the incidence of deal negotiation information leaks, with their potential knock-on effects on deal consummation and value. These effects are caused by the uncertainty regarding the final merger outcome, as revealed in an M&A transaction rumor. In particular, information leaks can create tension in the respective companies, e.g. among employees, customers, and suppliers, or mistrust among the negotiating parties. Rumors are known to damage employee morale and impede organizational communication. They hamper restructuring and layoffs during periods of corporate change and may damage sales. For listed companies, it has been shown that M&A rumors are spread to manipulate stock prices. In general, rumors adversely affect stock prices and thus reduce market efficiency. Merger talks may fail because of rumors, leading deals to collapse or transactions to close at changed deal values.

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A Special Board Committee Can Help Drive Corporate and Transformational Success

Posted by Ryan McManus, National Association of Corporate Directors (NACD), on
Tuesday, August 31, 2021
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Ryan McManus is a director of the National Association of Corporate Directors (NACD) New York Chapter, founder and CEO at Techtonic.io, managing director at Inflexhn Partners, and a director at Nortech Systems. This post is based on his NACD memorandum.

Finding time to engage on corporate strategy is a regular concern of directors. One aspect of strategy oversight in particular—the emerging and urgent topic of digital transformation—distinguishes itself from traditional operational considerations because of its critical impact on a company’s business model, investments, leadership, and culture. The companies that lead in the digital economy win big, while companies that fall behind face significant threats—competitive, security, and even existential. (For more board-level insights on this, join me at the foundation program of the NACD Digital Transformation Continuous Learning Cohort on Aug. 24 and 25.)

Many organizations and leadership teams, however, continue to struggle with digital transformation despite attempts at new strategies and investments amid urgent competitive and market pressures. Boards looking to enhance governance of digital transformation, or other highly transformative topics (such as sustainability and environmental, social, and governance matters), regularly establish new committees that can improve board oversight and engagement.

For example, with an eye toward new growth, in 2018 Nortech Systems established a science and technology committee accompanied by the unanimous approval and support of the CEO, board chair, and full board. The impact on the organization has been nothing short of extraordinary. Directors interested in reviewing the committee charter can find it on the Nortech website.

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