Yearly Archives: 2021

Stewardship Excellence: ESG Engagement In 2021

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on

Monday, July 26, 2021

Engagement, Environmental disclosure, ESG, Institutional Investors, International governance, Proxy advisors, Stewardship, Sustainability
More from: Julia Haake, Institutional Shareholder Services Inc.

This post is based on an Institutional Shareholder Services memorandum by Dr. Julia Haake, Managing Director, Global Head of Stewardship & Engagement at ISS ESG. 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).

The Evolution and Big Drivers of Engagement

Over the past decade and more, various soft and hard law initiatives have combined with investor demand as active ownership approaches and engagement have grown globally, driving more common frameworks for investment stewardship for investors seeking positive change at companies they invest in.

Since the 1970’s and 1980s, active ownership and engagement strategies have grown in sophistication and created an awareness of the importance of long-term sustainability and impacts on corporate performance and risk mitigation. When the Principles for Responsible Investment (PRI) were launched in 2006 and the financial crisis hit in 2008, stewardship and engagement gradually received broader attention and more formal frameworks for investment stewardship quickly materialized, as evidenced by the launch of the UK Stewardship Code in 2010. The subsequent decade saw growth in the evidence for positive financial outcomes from good stewardship and responsible investing, but also in the increasing risks from globally recognized issues such as climate change and social inequalities.

Some of the strong drivers of the increased investor activity in engagement are the various ‘soft law’ initiatives that have been proliferating around the globe. With close to 4,000 signatories, the PRI via their Principle 2 is still clearly one of the largest global industry advocacy organizations, representing over $100 trillion in assets.

Outsourcing Active Ownership in Japan

Posted by Icko Suzuki (Waseda University), on

Monday, July 26, 2021

Hedge funds, Institutional Investors, International governance, Japan, Shareholder activism
More from: Hideaki Miyajima, Icko Suzuki, Julian Franks, Marco Becht

Kazunori Suzuki is Professor of Finance at Waseda Business School. This post is based on a recent paper by Professor Suzuki; Marco Becht, Professor of Finance at Université Libre de Bruxelles; Julian Franks, Professor of Finance at London Business School; and Hideaki Miyajima, Professor of Commerce at Waseda Business School.

The Japanese stock market is large and most companies are widely held. The fraction of foreign ownership has been rising steadily and Japanese institutional investors are increasingly committed to active ownership. There have been a number of high profile hedge fund activist campaigns at internationally well-known companies like Sony and, most recently Toshiba. Yet, research on international hedge fund activism has shown that activist campaigns have been comparatively unsuccessful in Japan, including at Sony. The giant Government Pension Investment Fund (GPIF) was instrumental in setting up the Global Asset Owners’ Forum that engages on Environmental, Social and Governance (ESG) internationally, yet it is unclear how much progress has been made in GPIF’s home country. ESG engagement is often conducted in private and is therefore unobservable.

The research paper provides evidence that active ownership in Japan can be successful when conducted in private. It relies on data from the Japan Engagement Consortium (JEC), a stewardship service provided by Governance for Owners Japan (GOJ) serving Japanese and international clients. Its purpose is to engage companies on behalf of the JEC members. The decision to engage with a particular company is taken by GOJ but after consultation with consortium members. To be selected for engagement at least one consortium member must hold shares in the target. An agenda is agreed after preliminary meetings have taken place with the prospective target company. The service heavily relies on personal meetings, reputation, and discretion. There is an explicit understanding that contacts with the target companies are kept private, even if the target company rejects the invitation to engage.

Buybacks: Look Before You Leap

Posted by Allen He, FCLTGlobal, on

Monday, July 26, 2021

Capital allocation, Firm performance, Long-Term value, Pay for performance, Repurchases, Shareholder value, Short-termism
More from: Allen He, FCLTGlobal

Allen He is Associate Director at FCLTGlobal. This post is based on his FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here), and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

As the global economy rebounds, companies are preparing to launch a record wave of buybacks. Buybacks have become a global phenomenon over the past 20 years, with many companies viewing them as an attractive alternative to dividends in returning capital to shareholders. They are flexible, recycle excess cash to the economy, and provide tax advantages in certain jurisdictions.

While buybacks can indeed be an effective way to distribute capital under certain circumstances—and can be used to signal to investors that their stock is undervalued – care must be taken to mitigate the downsides of buying back shares.

Common pitfalls

As tempting as buybacks may be as a quick way to return funds to shareholders, there are several pitfalls to consider.

From a strategic perspective, timing a buyback poorly can lead to losses. Companies cannot perfectly predict the market and often buy at market peaks, rather than troughs, due to overconfidence. This is also the tendency when the firm is generating excess capital. It can be mitigated by taking a long-term dollar-cost averaging approach to buybacks, adjusting the strategy based on market conditions and adopting a break-even scenario analysis.

Connecting the Dots: Breaking the ESG Code

Posted by Dan Romito and Addison Holmes, Pickering Energy Partners, on

Sunday, July 25, 2021

Boards of Directors, Disclosure, Environmental disclosure, ESG, Index funds, Institutional Investors, Materiality, Stakeholders
More from: Addison Holmes, Dan Romito, Pickering Energy Partners

Dan Romito is Consulting Partner and Addison Holmes is an Associate in ESG Strategy & Integration at Pickering Energy Partners. This post is based on their Pickering Energy Partners 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).

Executive Summary

In this post, we analyze how the language used in the capital markets is evolving as a result of trends in ESG investing. We suggest that traditional index investors can no longer be described as passive, due to their active engagement with corporates. Further, we analyze how activist engagements are beginning to hinge more and more on ESG themes. We then describe the dependence of ESG analysis on vast sets of unstandardized data. Finally, we contend that management teams must have a strategy around the data they disclose. We believe it is imperative for corporates to evolve alongside the changing tide emerging within the capital markets.

We recommend the following seven action items for evolving with the markets:

Take time to understand the data already being utilized by ratings providers along with the outputs reflected in investment analysis (i.e., SSGA R-Model, Blackrock Aladdin Climate, etc.)
Ensure ESG disclosures are on topics material to economic reality rather than those that tell an easy marketing story—PR marketing and Investor marketing is analogous to Oil and Water
The corporate sustainability report as it is known today is a great start, but it represents only the second inning of the ballgame—evolution is required to take control of the narrative
Recognize that commitment to one framework is not enough – investors treat frameworks and ratings as a mosaic and use proprietary methodologies to piece together and measure differentiators
Realize that ESG disclosures in their current form do not provide the underlying context required to properly value intangibles, implying a disconnect in firm value
Understand that replicating peer efforts does not provide a unique perspective and in most cases compounds the “echo chamber” concern, especially at the board level
Invest in a comprehensive cybersecurity program, as it is critical both to financial and to ESG performance, and is probably one of the next “shoes to drop”

SEC Increasingly Turns Focus Toward Strength of Cyber Risk Disclosures

Posted by Vivek Mohan, David Simon, and Richard Rosenfeld, Mayer Brown LLP, on

Sunday, July 25, 2021

Cybersecurity, Disclosure, Risk, Risk disclosure, Risk management, SEC, SEC rulemaking, Securities regulation
More from: David Simon, Julie Sweeney, Richard Rosenfeld, Vivek Mohan, Mayer Brown

Vivek Mohan, David Simon, and Richard Rosenfeld are partners at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Mohan, Mr. Simon, Mr. Rosenfeld, and Julie L. Sweeney.

On June 11, 2021, the US Securities and Exchange Commission (“SEC” or “Commission”) announced that it would focus on cybersecurity disclosures made by public companies as part of its regulatory agenda. [1] Given the SEC’s continued interest in cybersecurity issues, high-profile ransomware attacks and executive orders issued by President Biden, it is no surprise that the SEC is focused on taking an increasingly active role in a whole-of-government response to cybersecurity threats. Although it will be some time before a final rule on cybersecurity risk disclosures is issued, a proposal from the SEC is expected in October 2021. In the meantime, public companies should begin preparing for what is likely to be a new SEC rule mandating cybersecurity disclosures.

This Legal Update provides background on the new SEC chairman and the SEC rulemaking process, the SEC’s prior guidance on cybersecurity disclosures and steps that public companies can begin taking now to prepare for enhanced SEC oversight of cybersecurity disclosures.

Was the Exxon Fight a Bellwether?

Posted by Thomas Ball, James Miller, and Shirley Westcott, Alliance Advisors, on

Saturday, July 24, 2021

BlackRock, Boards of Directors, Climate change, Engine No. 1, ESG, ExxonMobil, Index funds, Institutional Investors, Proxy advisors, Proxy contests, Shareholder activism, Vanguard
More from: Brian Valerio, James Miller, Shirley Westcott, Thomas Ball, Alliance Advisors

Thomas Ball is Senior Vice President, James Miller is Managing Director, and Shirley Westcott is Senior Vice President at Alliance Advisors. This post is based on an Alliance Advisors memorandum by Mr. Ball, Mr. Miller, Ms. Westcott, and Brian Valerio. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Background

The most groundbreaking development this proxy season was that Exxon Mobil, one of the largest corporations in the world, lost three board seats in a proxy fight with Engine No. 1, giving the dissident control of a quarter of the board. [1] Engine No. 1 focuses on impact investing and recently announced it is starting an Exchange-Traded Fund (ETF) (ticker symbol—VOTE) that will actively vote proxies to advance this agenda. [2] Engine No. 1 launched in December with approximately $250 million in assets [3] and owned 0.02% of Exxon’s outstanding shares. [4]

The outcome marks a victory for those shareholders that have been pushing back on Exxon’s climate-related plans and disclosures, and follows several years in which the SEC allowed the omission of climate-related shareholder proposals. The high-profile campaign led by the dissident—and ultimately supported by pension plans and a slew of other investors—aimed at expressing disapproval of the company’s governance on this issue.

Engine No. 1 targeted Exxon because it believed the company’s recent strategies have not yielded positive results and the company was slow to adapt to changes in the energy industry. [5] Critics pointed to Exxon’s relatively light focus on reducing carbon emission and investments in renewable energy compared to its peers and European counterparts. Engine No. 1 also highlighted financial underperformance and Exxon’s lack of board experience in the energy industry. [6] It argued that Exxon should aim to be part of an energy transition because while “[t]here might still be money in oil now … the key to profitability involved taking a longer view on the health of the business.” [7]

Commenters Weigh in on SEC Climate Disclosures Request for Public Input

Posted by Gabriel Rosenberg, Margaret Tahyar, and Betty Huber, Davis Polk & Wardwell LLP, on

Saturday, July 24, 2021

Climate change, Environmental disclosure, ESG, Liability standards, SEC, SEC rulemaking, Securities regulation, Sustainability
More from: Betty Moy Huber, Eric Lewin, Gabriel Rosenberg, Joseph Hall, Margaret Tahyar, Robert Cohen, Davis Polk

Gabriel Rosenberg and Margaret Tahyar are partners and Betty Huber is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Rosenberg, Ms. Tahyar, Ms. Huber, Robert Cohen, Joseph Hall and Eric Lewin.

The SEC’s request for public input on climate disclosures attracted 297 institutional comments totaling 3,290 pages. The views range from questioning the SEC’s authority to imploring the SEC to mandate comprehensive, internationally aligned and assured disclosures in SEC filings. This post summarizes thirty comment letters we consider both important and representative of differing stakeholder views, in anticipation of a formal SEC proposal expected in or before October 2021.

Overview of the request for public input

The SEC took a first step toward the adoption of climate disclosure requirements by issuing a request for public input (the RFPI) on March 15, 2021. The RFPI requested comments from investors, registrants and other market participants “[i]n light of demand for climate change information and questions about whether current disclosures adequately inform investors.” To facilitate the SEC staff’s view of existing disclosure rules, the RFPI requested comment on fifteen questions, ranging from how the SEC could best regulate climate disclosures to whether the SEC should expand its focus from climate disclosures alone to a focus on environmental, social and governance (ESG) matters as part of a broader, comprehensive disclosure framework.

Corporate Governance in the Face of an Activist Investor

Posted by Jonathan R. Macey (Yale), on

Friday, July 23, 2021

Boards of Directors, Duke Energy, Engagement, Firm performance, Hedge funds, Institutional Investors, Management, Shareholder activism
More from: Jonathan Macey

Jonathan Macey is Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale Law School and Professor in the Yale School of Management. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Among the most important issues in modern corporate governance of public companies is how such companies should respond to approaches made by activist investors. The recent responses by Duke Energy Corporation to overtures from activist investor Elliott Management are a case study in how not to deal with an activist investor.

Duke Energy is underperforming and overcompensating its executives relative to its peers. Proxy advisors have noted that there is a misalignment between executive pay and corporate performance, and pay-for-performance models show a weak connection between executive compensation and company performance.

In light of this, it was hardly a surprise when, on May 17, 2021, the activist investor Elliott Management, one of Duke Energy’s largest shareholders, disclosed that it was in touch with the Duke Energy management. Elliott Management was not seeking to launch a hostile takeover of Duke Energy. Rather, Elliott simply and modestly suggested that Duke consider a couple of options. Most importantly, Elliott’s analysis was that Duke’s geographically noncontiguous service territories in Florida and Indiana should be separated from Duke’s operations in the Carolinas.

EESG Activism After ExxonMobil

Posted by David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, on

Friday, July 23, 2021

Boards of Directors, Climate change, Engine No. 1, Environmental disclosure, ESG, ExxonMobil, Institutional Investors, Proxy contests, Shareholder activism, Shareholder proposals, Shareholder voting, Sustainability
More from: David Katz, Laura McIntosh, Wachtell Lipton

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. 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 high-profile ExxonMobil shareholder vote in May sent shock waves through many of corporate America’s boardrooms. While there were various factors at play in the ExxonMobil scenario, the bottom line is this: A newly launched and virtually unknown hedge fund with a tiny stake in a massive global enterprise managed to leverage environmental and governance issues into winning three board seats at the annual meeting, displacing three incumbent directors, and is now in a position to influence the strategic direction of the company. Engine No. 1 LLC accomplished the unlikely feat of electing three nominees to ExxonMobil’s board by garnering broad support from an array of sources, notably profit-oriented activists and major institutional investors.

Overall, the 2021 proxy season saw a significant increase in shareholder support for EESG-related (i.e., relating to environmental, employee, social, and governance issues) proposals compared to 2020 and 2019. The ExxonMobil proxy contest is an example of the risks and dynamics at play in the current environment.

Weekly Roundup: July 16-22, 2021

Posted by the Harvard Law School Forum on Corporate Governance, on

Friday, July 23, 2021

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of July 16-22, 2021.

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Yearly Archives: 2021

Stewardship Excellence: ESG Engagement In 2021

The Evolution and Big Drivers of Engagement

Outsourcing Active Ownership in Japan

Buybacks: Look Before You Leap

Common pitfalls

Connecting the Dots: Breaking the ESG Code

Executive Summary

SEC Increasingly Turns Focus Toward Strength of Cyber Risk Disclosures

Was the Exxon Fight a Bellwether?

Background

Commenters Weigh in on SEC Climate Disclosures Request for Public Input

Overview of the request for public input

Corporate Governance in the Face of an Activist Investor

EESG Activism After ExxonMobil

Weekly Roundup: July 16-22, 2021

Strengthening Internal Controls: What Do Investors Need?

Chair Gensler’s Insight on the SEC’s New Regulatory Agenda

Addressing the Consultation Conundrum

Presidio Shines Light on Key Delaware Deal Litigation Trends and Topics

Breach of Fiduciary Duties in Administering Defined Contribution Plans

What Explains Differences in Finance Research Productivity During the Pandemic?

Putting the F into ESG—The Importance of Financial Materiality in ESG Investing

President Biden’s Executive Order on Promoting Competition

SPAC IPOs and Sponsor Network Centrality

Further on the Purpose of the Corporation

Warnings Persist for Corporate Directors Evaluating LBO and Other Multi-Step Transactions

Using ESG Tools to Help Combat Racial Inequity

Speech by Commissioner Peirce on ESG Disclosure

Global Climate and Sustainability Reporting Continues to Grow

What the Shell Judgment Means for US Directors

Board’s Oversight of Racial DE&I

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