Yearly Archives: 2021

SEC Enforcement and Public Companies

Posted by G. Jeffrey Boujoukos, Susan Resley, and Laurie Cerveny Morgan Lewis & Bockius LLP, on
Thursday, January 28, 2021
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G. Jeffrey Boujoukos is partner and leader of the securities enforcement practice, Susan Resley is partner, and Laurie Cerveny is corporate partner at Morgan Lewis & Bockius LLP. This post is based on a Morgan Lewis memorandum by Mr. Boujoukos, Ms. Resley, Ms. Cerveny, and Justin Chairman.

Most media accounts suggest that the incoming Biden administration will usher in a more “aggressive” SEC enforcement posture, with renewed emphasis on investigating potential fraud and controls deficiencies at public companies. SEC Enforcement may face some short-term headwinds to this approach. A dramatic increase in tips, complaints, and referrals during the pandemic, as well as COVID- 19-related delays that may extend the 24-month average lifetime of SEC enforcement investigations, will likely require the SEC to selectively allocate stretched resources in 2021.

Where are the limited resources likely to go beyond the more standard accounting, revenue recognition, and disclosure cases that the SEC regularly investigates and prosecutes?1 Recent enforcement activity points to several areas of interest to the SEC, and provides a valuable window for public companies into the SEC’s methods and priorities, including:

  • Coronavirus-Related Public Disclosures—Enforcement’s First Case
  • Enforcement’s EPS Initiative—Harnessing the Data
  • Executive Perquisites—Continued Enforcement Focus
  • Insider Trading—A Zero Tolerance Policy
  • Buybacks and Rule 10b5-1 Plans—A New Enforcement Theory and Likely Rulemaking in 2021
  • Cyber Intrusions—The Current SEC Playbook
  • Whistleblowers—2020 Was a Record Year

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Former CFTC Chair Gary Gensler to be Nominated as SEC Chair

Posted by Cydney Posner, Cooley LLP, on
Thursday, January 28, 2021
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

Reuters has reported that former CFTC Chair Gary Gensler will be President-elect Biden’s choice for SEC Chair. According to the article, in light of his “reputation as a hard-nosed operator willing to stand up to powerful Wall Street interests”—notwithstanding his former life as an investment banker—the appointment is “likely to prompt concern” among some that he will promote “tougher regulation.” The NY Post attributed his nomination to the most recent Democratic wins in the Senate, which allowed selection of “the more progressive candidate. Only two weeks ago, people close to the Biden transition team had penciled in centrist Robert Jackson Jr….as the SEC frontrunner because he was seen as more likely to win confirmation by a GOP-controlled Senate.” Jackson is a former Democratic SEC Commissioner appointed in 2017. Gensler is an MIT professor and has been leading the Biden transition planning for financial industry oversight.

The WSJ reported that “Mr. Gensler’s nomination would please liberal Democrats who cheered the former regulator’s tough approach to rule-making during the Obama administration, when he spearheaded the overhaul of derivatives markets mandated by the 2010 Dodd-Frank Act and oversaw enforcement actions against investment banks accused of manipulating benchmark interest rates.” As head of the CFTC, he implemented extensive new swaps trading rules and, according to the Washington Post, “gained a reputation as a tough regulator by issuing hefty fines over the Libor currency manipulation scandal.”

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Team Production Theory Across the Waves

Posted by Brian R. Cheffins and Richard Williams (University of Cambridge), on
Wednesday, January 27, 2021
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Brian Cheffins is S. J. Berwin Professor of Corporate Law and Richard Williams is Hogan Lovells University Lecturer in Corporate Law at the University of Cambridge. This post is based on their recent paper.

At first glance, team production theory and U.K. company law are ships passing in the night. The team production model of corporate law, a highly influential theory that debuted in a 1999 Virginia Law Review article by Margaret Blair and Lynn Stout, has as its defining feature the idea that the board of directors of a company operates as a mediating hierarchy tasked with balancing the interests of a corporation’s various constituencies in a manner that addresses the challenges associated with fostering “team production” in a corporate setting. They hypothesized that team production would occur most effectively in a publicly traded company if no one constituency affiliated with the company enjoyed dominant influence over the board. U.K. company law, however, is widely perceived as exhibiting exactly this feature, ascribing a dominant role to shareholders. In our working paper Team Production Across the Waves we show that U.K. corporate governance features a stronger degree of board centrality than would be anticipated with a legal framework that seems to be resolutely shareholder-friendly. In this instance, then, team production theory travels well.

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FCLTCompass—Measuring Time Horizons Across Capital Markets

Posted by Sarah Keohane Williamson, FCLTGlobal, on
Wednesday, January 27, 2021
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Sarah Keohane Williamson is CEO of FCLTGlobal.

Capital markets have many functions in today’s financial system. They promote the vitality of global and regional economies, and they provide new businesses a pathway to success through access to capital. But the core purpose of capital markets is to facilitate transactions—to transform the money from savers into uses that support societal and economic growth, and that, in turn, earn a fair return for the savers themselves.

But the way that capital flows from savers, through various investment vehicles, to the companies that use it can be an opaque process. The structure of this process and the extent to which capital is focused on long-term goals shifts constantly as funds pass from one entity to the next across the investment value chain.

FCLTCompass is our way to spotlight this function. FCLTCompass is an annual reporting of money as it flows through the global investment value chain. Taking 10+ years of financial data, it traces investors’ savings through various asset vehicles, finally arriving at the companies that deploy it in support of economic growth.

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The Changing Face of Activism

Posted by James E. Langston and Claire Schupmann, Cleary Gottlieb Steen & Hamilton LLP, on
Wednesday, January 27, 2021
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James E. Langston is partner and Claire Schupmann is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. 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).

As we enter 2021, shareholder activism continues to evolve. The traditional campaigns waged by repeat activists leveling familiar critiques will undoubtedly persist into the new year and beyond. But by now most companies are well-versed in the old activist playbook and have developed their own game plan. In past years, some became their own activist and dismantled or reshaped their companies before the first shot was fired. Others rightly believed their strategic plan was the right path and focused on execution while remaining on high alert and preparing behind the scenes in the event an activist emerged. And still others became ensnared in activist attacks and sought a truce unless the price of peace was too great. Against this backdrop, a new world of activism with a different set of rules continues to emerge. In the coming era, we expect that activist-like fire will come from new directions, shareholder engagement will become more visible and louder, and ESG and stakeholder purpose in many cases will be the tip of the spear. This is the activist landscape that boards must be prepared to navigate in 2021.

The New Constructivists and Activists

For the last several years, the lines between activists and other investors have continued to blur. Activists have sought to become private equity investors, long-only investors have adopted an activist mentality and now financial sponsors are turning into constructivists (and in some cases, full-bore activists). Financial sponsors are well-positioned to engage in their own brand of public equities constructivism. They have an abundance of capital to deploy with over $850 billion in dry powder reported as of Q3 2020. They also have a deep bench of investment professionals and turnaround experts with sector-specific insights and relationships capable of driving the M&A activity and operational enhancements that have become the hallmarks of activist campaigns.

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The ESG/TSR Activist “Pincer Attack”

Posted by Andrew R. Brownstein, Steven A. Rosenblum, and Trevor S. Norwitz, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 26, 2021
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Andrew R. Brownstein, Steven A. Rosenblum, and Trevor S. Norwitz are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Brownstein, Mr. Rosenblum, Mr. Norwitz, Sabastian V. Niles, Elina Tetelbaum, and Yasmina Abdel-Malek. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

Companies need to prepare for a new strategic threat: a two-front “pincer attack” from environmental, social and governance (ESG) activists, on the one side, and financial total shareholder return (TSR) activists, on the other. An ESG activist attack presents an opportunity for TSR activists to pile on, free-riding on the ESG arguments that many institutional investors support. This is a new twist on “wolf-pack” activism that provides new opportunities for activists to drive a wedge between a company and its key stakeholders. The risks of these pincer attacks are complicated by the proliferation of ESG metrics and inconsistent reporting expectations (despite current promising convergence and rationalization efforts) alongside evolving investor-side voting policies, all of which leave companies vulnerable to attack.

At Exxon Mobil, recently launched ESG activist fund Engine No. 1 announced plans to nominate four people to Exxon’s board of directors, calling for Exxon to set carbon emission reduction targets and shift to a “sustainable, transparent, and profitable long-term plan focused on accelerating rather than deferring the energy transition.” Engine No. 1’s campaign has been publicly supported by the California State Teachers’ Retirement System (CalSTRS) pension fund and the Church of England’s investment fund. At the same time, D. E. Shaw, a large hedge fund that periodically engages in TSR activism, is calling on Exxon to cut spending to improve performance and maintain its dividend, as well as improve its environmental reputation. Even though the activists collectively own a tiny fraction of the oil and gas behemoth, the dual-front tactic presents a significant challenge.

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The Future of Audit Oversight

Posted by J. Robert Brown, Jr., Public Company Accounting Oversight Board, on
Tuesday, January 26, 2021
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J. Robert Brown is a Board Member of the Public Company Accounting Oversight Board. This post is based on his recent public statement.

In creating the Public Company Accounting Oversight Board (PCAOB or Board), Congress fundamentally changed the system of oversight for the auditing profession. The profession’s authority to write its own auditing, quality control, ethics, and independence standards and to discipline itself was removed, replaced by an independent regulator required to act in the interests of investors and the public.

The PCAOB’s implementation of the investor protection mission, however, is not complete. More needs to be done to integrate this mission into the standard-setting, inspection, and enforcement processes. Moreover, this need is taking place during a rapidly changing and challenging environment—the unprecedented economic disruption in the global economy from the pandemic, the inability of the audit process to uncover what appear to be readily apparent financial frauds, the increased reliance by investors on information outside of the financial statements, and the material impact of climate change and other environmental, social and governance (ESG) matters on the financial statements.

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Key Takeaways—2020 Board Index

Posted by Julie Daum, Laurel McCarthy, and Ann Yerger, Spencer Stuart, on
Tuesday, January 26, 2021
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Julie Daum is a Consultant, Laurel McCarthy is a Senior Associate, and Ann Yerger is an Advisor of the North American Board Practice at Spencer Stuart. This post is based on the 2020 U.S. Spencer Stuart Board Index. 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).

The 2020 U.S. Spencer Stuart Board Index finds that boards are heeding the growing calls from shareholders and other stakeholders and adding women directors. But representation of directors of color in U.S. boardrooms is stagnant. And because boardroom turnover remains persistently low, with new directors once again representing only 8% of all S&P 500 directors, changes to overall composition continue at a slow pace.

Key Takeaways—202 0 Spencer Stuart Board Index

  • In recent years, boards have prioritized gender diversity, and a growing share of new directors are women. Female representation among new S&P 500 directors more than doubled over the decade, increasing from 21% in 2010 to 47% in 2020. Today, 28% of all S&P 500 directors are women, compared with 16% in 2010.
  • Progress on racial and ethnic diversity has been much slower. Recruiting of minority directors (defined as Black/African American, Asian and Hispanic/Latinx) increased by just 10 percentage points in the past decade to 22%, which represents a small decline from 23% last year. Of the 92 new minority directors, half (50%) are Black/African American, 35% are Asian, and 15% are Hispanic/Latinx.

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Corporate Governance, Business Group Governance and Economic Development Traps

Posted by Luis Alfonso Dau (Northeastern University), Randall Morck (University of Alberta), and Bernard Yeung (National University of Singapore), on
Monday, January 25, 2021
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Luis Alfonso Dau is Associate Professor of International Business and Strategy and Robert and Denise DiCenso Professor at Northeastern University D’Amore-McKim School of Business; Randall Morck is Jarislowsky Distinguished Chair in Finance at the University of Alberta; and Bernard Yeung is Stephen Riady Distinguished Professor in Finance and Strategic Management at the National University of Singapore. This post is based on their recent paper, forthcoming in the Journal of International Business Studies.

Our paper argues that “good corporate governance” can be a sideshow, and even a distraction, in countries where decision-making power substantially does not rest with the CEOs, officers, and directors of individual listed corporations. In many economies, corporations are organized into business groups (Colpin et al. 2010; Colpin and Hikino 2018). The stock markets of such countries may appear to contain hundreds of distinct corporations. Each has its own shareholders, creditors, employees, officers, directors, CEO, and stock listing. But many, perhaps most, of these corporations belong to one of a handful of business groups. All the firm in such a group share a common ultimate controlling shareholder, usually a powerful family with deep political influence. The CEOs of individual corporations can be “hired help”, in careers of service to the family.

In the United States, vast power rests in the hands of the CEOs, officers, and directors of business corporations. The formal and informal constraints on corporate governance shape the wielding of that vast power. Consequently, American lawyers, economists and policy makers attach great importance to good corporate governance and, in proselytizing the American Way, encourage others to adopt similar laws and regulations. Misapprehending where real decision-making power rests can leave such efforts fundamentally misguided.

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Annual Review of Shareholder Activism

Posted by Jim Rossman, Mary Ann Deignan, and Rich Thomas, Lazard, on
Monday, January 25, 2021
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Jim Rossman is Managing Director and Head of Shareholder Advisory; Mary Ann Deignan is Managing Director; and Rich Thomas Managing Director and Head of European Shareholder Advisory at Lazard. This post is based on their Lazard memorandum. 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).

Observations on the Global Activism Environment in 2020

COVID “Pause” Is Over

  • Global activity saw a strong snap back in Q4, with 57 new campaigns launched (up 128% from Q3 level)
    • As a result, 2020’s final global campaign tally (182 new campaigns launched) was down only 13% from 2019
  • The Q4 rebound was most pronounced in the U.S., where 30 new campaigns represented a 200% increase from Q3 levels
    • Among U.S. targets, mega-cap ($25bn+) companies returned to the spotlight, accounting for ~20% of Q4 activity and featuring prominent campaigns such as Intel / Third Point, Elliott / Public Storage, Exxon / Engine No. 1 and Disney / Third Point
  • Non-U.S. activity saw an uptick for the year, with European and APAC campaign levels up 21% and 11%, respectively, over 2019 levels
  • With two-thirds of U.S. nomination windows opening from December 2020 through February 2021 and strong momentum in Europe and APAC, 2021 is poised for heavy campaign activity

A New European Activism Landscape

  • Europe’s 21% Y-o-Y increase in campaign activity owed largely to the year beginning and ending at a blistering pace, with industrial companies and small to mid-cap players sharply in the crosshairs, resulting in Europe witnessing in 2020 a record year for activism
  • The activism landscape is broadening across large European markets and the “face of the agitator” is diversifying
    • Institutional and occasional activists now account for roughly half of all campaigns
  • Frustrated shareholders are increasingly attacking management and Boards as they seek to control the strategy and direction of targeted companies

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