Yearly Archives: 2021

Board’s Oversight of Racial DE&I

Posted by Benjamin Colton (State Street Global Advisors), Jack “Rusty” O’Kelley (Russell Reynolds Associates), and Holly Fetter (State Street Global Advisors), on
Thursday, July 22, 2021
, , , , , ,
More from: , , ,

Benjamin Colton is Global Co-Head of Asset Stewardship at State Street Global Advisors; Jack “Rusty” O’Kelley is Co-leader, Board & CEO Advisory Practice at Russell Reynolds Associates; and Holly Fetter is Assistant Vice President, Asset Stewardship at State Street Global Advisors. This post is based on their SSgA 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (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).

Executive Summary

  • What motivates board oversight of racial equity: The following risks and opportunities motivated directors’ increased focus on racial and ethnic diversity, equity, & inclusion (DE&I): reputation, strategy, financing, regulatory and compliance, and human capital. Directors did not cite the potential economic impact of racial inequity as a key motivator.
  • Oversight in practice: Directors referenced one or more of the three major committees—audit, compensation, and nominations and governance—as having explicit oversight of racial and ethnic DE&I. Most boards undertake a hybrid approach to oversight—discussing the issue in committee, but also making it a full-board topic. The full-board discussions often center on the interplay between DE&I and strategy and on DE&I as a component of corporate culture.
  • Where boards are focusing their attention: Directors indicated a heightened focus on racial and ethnic diversity as it relates to workforce diversity and representation; inclusion and belonging; retention, promotion and succession planning; and engagement on social and political issues. Few directors spoke about oversight of the potential impacts of their company’s products, services or operations on communities of color.
  • Metrics and performance management: Directors—especially those who sit on the compensation committee—seek to identify the proper metrics to measure progress on DE&I and then to link executive compensation to performance against those goals. Directors also described the challenge of getting good data and interpreting it correctly.
  • Challenges in a global context: Multinational corporations face a particular challenge when it comes to overseeing racial and ethnic diversity. Different regions and countries define and collect data on diversity in different ways. It is important to obtain the right data and to interpret it correctly.
  • Guidance: Our conversations with directors led to the development of “10 Responsibilities of Boards in the Effective Board Oversight of Racial and Ethnic Diversity,” a roadmap for boards that wish to elevate their focus on DE&I. We fully recognize that boards need to incorporate this guidance into their oversight practices in a way that is tailored to their particular company’s context:

READ MORE »

What the Shell Judgment Means for US Directors

Posted by Cynthia A. Williams (York University, Robert Eccles (Oxford University), and Ellie Mulholland (CCLI), on
Thursday, July 22, 2021
, , , , , , , , , ,
More from: , , , ,

Cynthia A. Williams is the Osler Chair in Business Law at Osgoode Hall Law School at York University; Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; and Ellie Mulholland is Director of the Commonwealth Climate and Law Initiative. This post was authored by Professor Williams, Professor Eccles, Ms. Mulholland, Sarah Barker, and Alex Cooper.

The recent decision of a Dutch court in Milieudefensie and Ors. v Royal Dutch Shell plc reinforces the expansion of tort law to climate change issues. As this application of tort increases, directors will need to be aware of and manage the increased risks in order to comply with their company law duties. Investors should also adopt a forward-looking approach to managing climate-related liability risks in their portfolios and consider whether to ask questions of investee companies in their stewardship and engagement. 

In May 2021, the Hague District Court ordered Royal Dutch Shell plc (RDS) to reduce the CO2 emissions of the Shell group by 45% by 2030, relative to 2019 levels, across all its value chain emissions (scopes 1, 2 and 3) (Milieudefensie and Ors. v Royal Dutch Shell plc C/09/571932 / HA ZA 19-379). The court found that as a result of the CO2 emissions of the Shell group, certain Dutch citizens would suffer harm, meaning RDS would fail to meet the “unwritten standard of care” in the Dutch Civil Code and fail to act in accordance with the due care exercised in Dutch society. Therefore, the court ruled that RDS must reduce the CO2 emissions of the Shell group through implementing a compliant Shell group corporate policy. The ruling is provisionally enforceable, meaning that Shell must comply with it during any appeal process.

READ MORE »

Global Climate and Sustainability Reporting Continues to Grow

Posted by David M. Silk, Sabastian V. Niles, and Carmen X. W. Lu, Wachtell, Lipton, Rosen & Katz, on
Thursday, July 22, 2021
, , , , , , , ,
More from: , , , ,

David M. Silk and Sabastian V. Niles are partners and Carmen X.W. Lu is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Silk, Mr. Niles, Ms. Lu, and Ram Sachs.

The momentum toward universal mandatory reporting and disclosure on climate risk and sustainability has gained additional strength with recent developments at the international, domestic and state levels. These steps follow years of calls from investors for standardized and comparable climate-related disclosures.

International. In June, the G7 Finance Ministers and Central Bank Governors issued a statement calling for mandatory climate-related financial disclosures based on the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”) framework. The G7 also indicated support for the efforts of the International Financial Reporting Standards (“IFRS”) Foundation to develop baseline global sustainability reporting standards that draw on the TCFD framework and to establish an International Sustainability Standards Board (“ISSB”) in connection with COP26 later this year, with the first set of ISSB standards due in mid-2022. In addition, the G7 endorsed the establishment of the Taskforce on Nature-related Financial Disclosures (“TNFD”), which seeks to build upon the TCFD framework to reach other nature-related risks, including plastics in the oceanic food chain and loss of soil fertility, with a view to releasing a disclosure framework by 2023.

Emissions-related disclosures will likely become more important for compliance with cross-border trade regulations. EU leaders have proposed various iterations of carbon pricing, including a Carbon Border Adjustment Mechanism that would tax goods imported into the EU based on the greenhouse gasses emitted in their production. Congressional Democrats have included a conceptually similar “polluter import fee” in proposed budget legislation, but the likelihood of passage is unclear at best.

READ MORE »

Speech by Commissioner Peirce on ESG Disclosure

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Wednesday, July 21, 2021
, , , , , , , , ,
More from: ,

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the Brookings Institution. 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, Aaron [Klein], for that introduction. This summer was the summer of the cicadas. The dull hum of their song permeated the solitude of an evening stroll, along with the disconcerting crunch as pedestrian attempts to avoid squashing the creatures inevitably failed. Every seventeen years the beady-eyed cicadas emerge from underground—a natural wonder, perhaps therefore to be forgiven for their uncouth habits and off-putting appearance. [1] As eighteenth century farmer and self-taught naturalist Benjamin Banneker, having observed three appearances of cicadas, wrote:

[I]f their lives are Short they are merry, they begin to Sing or make a noise from the first they come out of Earth till they die, the hindermost part rots off, and it does not appear to be any pain to them for they still continue on Singing till they die. [2]

Cicadas arrive on schedule and behave with a comfortable predictability. Banneker could be quite sure cicadas would emerge when he was 68 as they had done when he was 17, 34, and 51. [3] He feared when meeting them for the first time at 17 that they would devastate the crops, so he tried to kill as many as possible. On their second time through, though, he “had more sense than to endeavor to destroy them, knowing that they was not so pernicious to the fruit of the Earth as I did imagine they would be.” [4] He had learned their patterns and was able to measure their schedule and their activity.

People like predictable and measurable things—things that we can quantify, standardize, and compare with one another. Especially when something is important to us, even when we cannot easily categorize, measure, and identify what is coming, we nevertheless try. This tendency is evident in another phenomenon of this summer season, the loud calls for environmental, social, and governance (“ESG”) disclosures to facilitate the measurement and comparison of issuers and investment products. People want hard data to allow apples to apples comparisons. [5] The natural desire for ESG certainty, however, runs into the many real-life uncertainties and complications that characterize the overflowing ESG bucket. Any ESG rulemaking will have to confront these difficult realities. Before I go there, however, I better give my standard disclaimer, which is that the views I represent are my own views and not necessarily those of the SEC or my fellow Commissioners.

READ MORE »

Using ESG Tools to Help Combat Racial Inequity

Posted by Adam O. Emmerich, David M. Silk, and Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on
Wednesday, July 21, 2021
, , , , , , , ,
More from: , , , , ,

Adam O. Emmerich, David M. Silk, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Emmerich, Mr. Silk, Mr. Niles, Elina Tetelbaum, and Carmen X. W. Lu. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); 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 events of last summer galvanized the nation and the world and drew much-needed attention to how systemic racism and injustice continues to burden communities of color, who also disproportionately bore the weight of the pandemic. In the months that followed, we witnessed a marked shift in corporate America. This shift was evidenced not only by the millions of dollars pledged towards fighting racial inequality but also in the growing recognition among business leaders that corporate America ought to play an active role in combatting racial injustice and inequity, both in the communities where they do business and their boards, management, workforce, business partners and customers. One year on, we review the ESG tools and approaches that have helped buttress efforts to address racial inequity and the increasing expectations of investors and stakeholders, and discuss how companies can continue to tackle these issues, including how a strong ESG oversight and governance framework can help boards and management in deciding when and how to speak out with respect to stakeholder priorities.

READ MORE »

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

Posted by Michele C. Maman and Richard M. Brand (Cadwalader, Wickersham & Taft LLP), and Peter S. Kaufman (Gordian Group), on
Wednesday, July 21, 2021
, , , , , , , , ,
More from: , , , , , , ,

Michele C. Maman and Richard M. Brand are partners at Cadwalader, Wickersham & Taft LLP, and Peter S. Kaufman is President of Gordian Group LLC. This post is based on a Cadwalader memorandum by Ms. Maman, Mr. Brand, Nicholas A. Gravante and Christopher M. Floyd of Cadwalader; Mr. Kaufman, and Henry F. Owsley of Gordian Group.

I. Executive Summary.

As the year 2020 was coming to a close, District Judge Rakoff issued a decision in In re Nine W. LBO Sec. Litig., No. 20 MD. 2941 (JSR), 2020 WL 7090277 (S.D.N.Y. Dec. 4, 2020) (“Nine West”) that sent some shockwaves through the M&A community with respect to the future of corporate governance in the context of director duties relating to the sale of a plainly solvent company.

As the second quarter of 2021 comes to a close, the implications and potential for far-reaching consequences of Judge Rakoff’s decision continues to draw fascinating intellectual debate amongst legal and financial advisors and corporate professionals alike, as reasonable minds differ as to whether Judge Rakoff’s decision also marked a new beginning—as with much else in 2020—for directors in their execution of applicable state-mandated duties. Indeed, the New York Times recently published an article [1] discussing Judge Rakoff’s decision and querying whether the private equity party that Wall Street has been embracing for years might be coming to an end as “[w]hat had for decades been considered a virtue—selling a company for a market-clearing price to the benefit of existing shareholders—might have become a vice.”

READ MORE »

Further on the Purpose of the Corporation

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, July 20, 2021
, , , , , ,
More from: , , ,

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, William Savitt, and Carmen X. W. Lu. 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); 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 recent years, the concept of “corporate purpose” has been invoked as a shorthand to address a corporation’s commitment to include stakeholder governance—and with it commitments to sustainability, diversity, inclusion, social responsibility and other ESG issues—as part of a corporate strategy that achieves sustainable long-term growth and creates long-term value for the benefit of all stakeholders.

Recognizing the importance of corporate purpose in helping guide efforts to build back better following the pandemic, a distinguished group of academics at Oxford University formed the “Enactment of Purpose Initiative.” The Initiative seeks to encourage the elemental constituencies of a corporation—directors, management, asset owners and managers, and other internal and external stakeholders—to collaborate to articulate an actional principle of purpose, which, when applied to the special circumstances of each corporation, will orient the firm towards mission-driven growth that delivers both profit and social responsibility.

READ MORE »

SPAC IPOs and Sponsor Network Centrality

Posted by Fangzhou Lu (University of Hong Kong), on
Tuesday, July 20, 2021
, , , ,
More from: , , ,

Fangzhou Lu is Assistant Professor of Finance at the University of Hong Kong Business School. This post is based on a recent paper authored by Mr. Lu; Chen Lin, Stelux Professor in Finance at the University of Hong Kong Business School; Roni Michaely, Professor of Finance at the University of Hong Kong Business School; and Shihua Qin, Research Postgraduate Student at the University of Hong Kong Business School.

Special purpose acquisition companies (SPACs)—the shell companies whose sole purpose is to identify a private firm to merge with—have become an increasingly important channel for firms to raise money. In 2020, for instance, in the U.S. alone, 248 SPAC IPOS raised $83.4 billion, much more than that raised by traditional IPOs. However, SPACs are also known for underperforming after the acquisition. Since the identity of the merged firm is not known prior to the IPO, and there is little other advance information, investors must place their trust in SPAC sponsors. And here, our research shows there are discernible factors that can indicate the relative success of a SPAC.

SPAC sponsors are more important than in traditional IPOs because, similar to the role of VC’s general partners, investors give them a “blank check” and rely on them to invest it wisely later. The sponsors are also subject to few checks and balances, and a large part of their compensation is not tied to long-term performance, hence increasing the likelihood of less successful deals. All this means that the credentials, reputation, and quality of SPAC sponsors, which we measure using their network centrality, can be essential to a SPAC IPO’s eventual success. Network centrality measures how connected managers are, the extent to which they can exert influence in a social network, and the ability to obtain information. Finally, high network centrality signals to investors that the sponsors have some recognition of success and are regarded as trustworthy by others. These features make network centrality a good proxy for the reputation, experience, and quality of SPACs sponsors. Our research shows that the strength and extent of sponsors’ network connections in the private equity and venture capital industries is a major predictor of their performance. Sponsors with high network centrality are associated with better IPO fundraising, better acquisition targets, and better long-run stock returns, as well as the significantly higher operational performance of the target firm post-merger.

READ MORE »

President Biden’s Executive Order on Promoting Competition

Posted by Sheila Adams, Christopher Lynch, and Margaret Tahyar, Davis Polk & Wardwell LLP, on
Tuesday, July 20, 2021
, , , , , , , ,
More from: , , , , , ,

Sheila Adams is partner, Christopher Lynch is counsel, and Margaret Tahyar is partner at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Adams, Mr. Lynch, Ms. Tahyar, Ronan Harty, Howard Shelanski, and Jesse Solomon.

President Biden signed an ambitious Executive Order on July 9, 2021, which pushes several federal agencies to advance competition principles in a range of economic sectors, and establishes a White House Competition Council within the Executive Office of the President. Much of the Executive Order is broad and its true effects are not likely to be felt until those efforts play out in a variety of rulemakings and other agency proceedings and likely subsequent litigations.

On Friday, July 9, 2021, President Biden issued an Executive Order announcing that his Administration would prioritize steps to “address overconcentration, monopolization, and unfair competition in the American economy” (Competition Order). Described in a White House press release as a bold “whole-of-government effort,” the Competition Order sets out and reaffirms the Administration’s antitrust policy and encourages or directs federal agencies to take dozens of specific measures in key economic sectors to further this policy.

Takeaways

A number of federal agencies, in addition to the DOJ and the FTC, have historically played a role in promoting competition across industries. The Competition Order is directing executive agencies and encouraging independent agencies both to intensify those efforts and to implement policy priorities in furtherance of that objective via rulemaking or other agency efforts. While the Competition Order does include several specific initiatives that various agencies may adopt, much of the Competition Order is quite broad and, rather than enacting specific changes, directs or encourages federal agencies to consider potential rulemaking on topics as diverse as merger enforcement, Internet access, banking, and agribusiness. As a result, the true effects of the Competition Order are not likely to be felt until those efforts play out in a variety of rulemakings and other agency proceedings in the ensuing months and years. Many agency actions resulting from the Competition Order will be subject to legal challenge.

READ MORE »

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

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Monday, July 19, 2021
, , , , , ,
More from: , ,

This post is based on an ISS EVA memorandum by Anthony Campagna, Global Director of Fundamental Research for Institutional Shareholder Services ISS EVA, and Gavin Thomson, Associate Director, ISS ESG, the responsible investment arm of Institutional Shareholder Services. 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).

Environmental, Social, and Governance (ESG) investing has evolved greatly as a concept over the past two decades. It now reaches nearly every aspect of the corporate and investment decision-making process, and rightfully so. This growth has presented so many amazing opportunities for investors and corporations to measure and improve practices across all aspects of the E, S, and G spectrum. It has also created a host of challenges for investment professionals who are trying to answer the question: “Does ESG matter?”

Globally ISS ESG continues to see and measure improvements in corporate ESG practice:

ISS ESG has also watched and listened as sustainability reporting continues to evolve, with different approaches developing in different global regulatory situations. While these changes have driven the availability of clean, comparable, and consistent data, challenges remain in the capture, measurement, and analysis of that data.

READ MORE »

Page 41 of 90
1 … 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 … 90