Yearly Archives: 2022

Racial and Ethnic Diversity on U.S. Corporate Boards—Progress Since 2020

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Thursday, July 21, 2022
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Subodh Mishra is Managing Director at Institutional Shareholder Services, Inc. This post is based on an ISS memorandum by Fassil Michael, Head of Thought Leadership for ISS Governance.

Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

The summer of 2020 was a turning point in the push for corporate diversity and inclusion initiatives. The tragic murder of George Floyd and the reactions that followed it resulted in demands for racial equality and anti-racism measures that resounded across the globe, including the corporate world.

Subsequently, many companies pledged to do their part to address inequalities and, likewise, many investors began to seriously reflect on their racial and ethnic diversity policies. Some investors adopted or strengthened their proxy voting policies demanding greater transparency from their portfolio companies around racial and ethnic diversity information, believing that which cannot be measured cannot be managed. Others adopted explicit requirements on board diversity in the form of minimum absolute number or percentage of corporate board seats going to racially/ethnically diverse director candidates. As the ISS board diversity data shows, there has been visible progress since 2020 in the number of racially/ethnically diverse directors on US company boards, and this uptick in diversity and inclusion initiatives has been dubbed by some “The George Floyd Effect”.

Taking a measurement point at the end of every US proxy season, two years on, the results show racial/ethnic diversity increases on U.S. boards, both at large- and mid-caps. The graph below shows that the percentage of Russell 3000 companies with no racial/ethnic diversity on their boards went down from 38 percent in 2020 to 10 percent in 2022. The percentage of companies with one racially/ethnically diverse director increased slightly from 32 percent in 2020 to 35 percent in 2022. Additionally, the percentage of companies with two or more racially/ethnically diverse directors went up from 29 percent in 2020 to 55 percent in 2022.

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SEC Proposed Reforms of SPACs: A Comment from Andrew Tuch

Posted by Andrew F. Tuch (Washington University in St. Louis) , on
Thursday, July 21, 2022
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Andrew F. Tuch is Professor of Law at Washington University in St. Louis. This post is based on his comment letter submitted to the SEC. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates, IV.

The Securities and Exchange Commission released proposed rules for special purpose acquisition companies (SPACs), shell companies, and projections (the Release). In a comment letter I filed with the SEC, I provide a critical assessment of this proposal.

The Commission proposed far-reaching changes intended to enhance investor protections and align disclosure and liability rules in de-SPACs more closely with those in traditional IPOs. An under-appreciated feature of the proposed reforms is that they would subject de-SPACs to provisions closely modeled on Rule 13e-3 of the Exchange Act, which applies to going-private transactions, including management buyouts. Intended to tackle potential conflicts of interest and other abuses, Rule 13e-3 requires extensive disclosures about the substantive fairness of going-private transactions and must be carefully navigated by transaction planners. Although I discuss other aspects of the proposed reforms in my comment letter, I focus here on the proposed rules modeled on Rule 13e-3.

Of these rules, proposed Items 1606 and 1607 are the most important. They would require SPACs to state whether they reasonably believe the de-SPAC and any related financing transaction are fair to the SPAC’s unaffiliated security holders and to discuss the material factors upon which such belief is based (Item 1606). They would also require SPACs to state whether the SPAC or SPAC sponsor has received any report, opinion, or appraisal from an outside party relating to the transaction and summarize that third party opinion, among other matters (Item 1607).

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Inclusive Culture and DE&I: Gold Medal Boards Take the Lead

Posted by Rusty O'Kelley, Rich Fields, and Laura Sanderson, Russell Reynolds Associates, on
Thursday, July 21, 2022
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Rusty O’Kelley co-leads the Board and CEO Advisory Partners in the Americas, Rich Fields leads the Board Effectiveness practice, and Laura Sanderson co-leads the Board and CEO Advisory Partners in Europe at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Fields, Ms. Sanderson, PJ Neal, Jemi Crookes, and Elena Loridas.

Around the globe, diversity, equity, and inclusion (DE&I) has grown to become a critically important boardroom topic given the increasing focus by legislatures, regulatory bodies, stock exchanges, investors, and the general public. Many of these stakeholders have enhanced their expectations around DE&I because of the growing body of research that shows improving DE&I results in improved business performance, not to mention the reality of an increasingly diverse workforce and labor market. (Please see our earlier study on this topic, undertaken in partnership with State Street and the Ford Foundation, “The Board’s Oversight of Racial and Ethnic Diversity, Equity, and Inclusion.”)

Given increases in investor and stakeholder expectations, directors are focusing in equal measure on DE&I in the boardroom and DE&I in the enterprise. It is therefore no surprise that the majority of directors we surveyed reported that their board diversified itself in at least one of five ways (gender, age, ethnicity, nationality, or sexual orientation) over the last 24 months.

Yet as with so many other topics, Gold Medal Boards (boards whose directors rate their board effectiveness as a 9 or 10 on a 1-10 scale, and report the company as having outperformed relevant TSR benchmarks for two or more consecutive years) went above and beyond: 67% reported diversifying by gender (compared to 59% of all respondents), 50% diversified by age (compared to 43%), 34% by ethnicity (compared to 25%), 29% by nationality (compared to 28%), and 4% by sexual orientation (the same as all respondents).

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The Long and Winding Road to Financial Reporting Standards

Posted by Robert Eccles (Oxford University), and Kazbi Soonawalla (Oxford University), on
Wednesday, July 20, 2022
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Robert G. Eccles is Visiting Professor of Management Practice, and Kazbi Soonawalla is a Senior Research Fellow in Accounting at Oxford University Said Business School. This post is based on the first part of a three-part series on financial reporting by Professor Eccles and Dr. Soonawalla.

It is currently an exciting time in the world of setting standards for sustainability reporting. It is also a complex and confusing one. Last year saw the IFRS Foundation establish the International Sustainability Standards Board (ISSB). The ISSB has consolidated the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB). The VRF was formed in a merger of the Sustainability Accounting Standards Board (SASB) and the International Integration Reporting Council (IIRC). The ISSB has also made the framework of the Task Force on Climate-related Financial Disclosures (TCFD) a key part of its work. At the same time, the European Financial Reporting Advisory Group (EFRAG) is working to establish the reporting standards for the European Union’s Corporate Sustainability Reporting Directive (CSRD). The Global Reporting Initiative (GRI) had been supporting this work and more recently announced a collaboration with the ISSB. Many wonder whether the confusion of many NGOs working on standards for sustainability reporting is simply being replaced by a world of confusion from different government-backed organizations doing the same thing. It is in this context we think it is useful to put the last two years into the historical perspective of 150 years of setting standards for financial reporting. There is a rich and fascinating literature on the history of the accounting profession and establishment of accounting standards with Professor Stephen A. Zeff being one of the most distinguished scholars in this field. We have benefited enormously from his work.

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Navigating the Shifting ESG Landscape and Its Impacts on Value Chains

Posted by Sarah Fortt, Julia Hatcher, and Angela Walker, Latham & Watkins LLP, on
Wednesday, July 20, 2022
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Sarah Fortt and Julia Hatcher are partners and Angela Walker is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Fortt, Ms. Hatcher, Ms. Walker, Paul Davies, Betty Huber, and Sabrina Singh. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Koi Kastiel and Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

As the world of ESG rapidly evolves, businesses increasingly are being held to account for ESG issues not only within their direct control, but also throughout their value chains. Often complex and transnational in nature, value chains, particularly the more attenuated aspects, can pose unique—and even hidden—ESG risks. If companies do not identify and manage these risks, they may result in reputational, operational, and economic losses.

Meanwhile, the world continues to reel from global supply chain disruptions due to the conflict in Ukraine, the COVID-19 pandemic, and climate change, among many other factors. Regulators, investors, consumers, and other stakeholders are increasingly demanding that companies also take into account ESG factors throughout their value chains, such as upstream and downstream environmental impacts and workforce and workplace considerations, in addition to traditional areas of compliance, including bribery or corruption issues. [1]

Failure to take into account these factors can lead to operational challenges, including supply chain disruptions, as well as regulatory scrutiny, corporate liability, shareholder and securities litigation risks, and significant brand and reputational damage. [2] At the same time, businesses may be able to increase their resilience and versatility by thinking creatively about the risks and opportunities within their value chains.

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SEC Increases the Unpredictability of the Shareholder Proposal No-Action Process

Posted by Marc S. Gerber and Ryan J. Adams, Skadden, Arps, Slate, Meagher & Flom LLP, on
Wednesday, July 20, 2022
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Marc S. Gerber is partner and Ryan J. Adams is counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Key Points

  • Numerous no-action letters relating to the 2022 proxy season overturned both recent and long-standing precedent, creating a level of uncertainty that companies will need to factor into their future no-action strategies and engagement with shareholder proponents.
  • With Staff Legal Bulletin 14L, the SEC Division of Corporation Finance Staff realigned its approach for determining whether a proposal relates to “ordinary business” with a previous standard providing an exception for certain proposals raising significant social policy issues.
  • Staff Legal Bulletin 14L also outlined a revised and more stringent approach to the micromanagement prong of the ordinary business exclusion.
  • The 2022 proxy season revealed the Staff’s approach to recent amendments to the shareholder proposal rule, including narrowly applying the one-proposal limit.

The shareholder proposal no-action process relating to the 2022 proxy season was bound to be interesting and contentious for a number of reasons.

Investors showed significantly increased support for environmental and social shareholder proposals in the 2021 proxy season and submitted more prescriptive proposals for the 2022 season.

In November 2021, the Staff of the Division of Corporation Finance (Staff) of the Securities and Exchange Commission (SEC) published Staff Legal Bulletin No. 14L (SLB 14L), announcing that certain analytical approaches adopted under the prior SEC leadership would be abandoned or modified. (See our November 5, 2021, client alert “SEC Staff Issues New Shareholder Proposal Guidance, Rescinding 2017-2019 Guidance.”)

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Regulated Human Capital Disclosures

Posted by Ethan Rouen (Harvard Business School) and Thomas Bourveau (Columbia University), on
Tuesday, July 19, 2022
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Ethan Rouen is an Assistant Professor of Business Administration at Harvard Business School; Thomas Bourveau is an Associate Professor at Columbia University; Anthony Le and Maliha Roychowdhury are Doctoral Students at Columbia Business School . This post is based on their recent paper.

Human capital has been an increasingly important component of firms’ operations for at least the last two decades, but because firms’ investment in and management of their employees do not fall under the formal definition of an asset, there has been almost no human capital disclosure under U.S. GAAP. That changed in November 2020, when an amendment to Regulation S-K went into effect that required publicly traded firms to disclose in their 10-K filings descriptions of their human capital resources and risks.

The amendment took a principles-based approach to human capital reporting, declining to identify relevant human capital metrics or even define the term “human capital,” arguing that definitions will likely vary greatly across firms and will evolve over time.

In a new working paper, we examine what quantitative human capital disclosures look like for more than 2,000 publicly traded firms and document how they changed in response to the amendment to Reg S-K. We begin this analysis by asking whether the change in rule sated investors’ demand for these disclosures and provide evidence that there remains a need for more regulation. In the year after the passage of the amendment, the SEC requested public comment on its climate disclosure rule. Of the 656 letters sent to the SEC in response, 20 percent specifically mentioned human capital, even though the new rule had nothing to do with human capital. More than 35% of the letters requesting better human capital disclosure came from institutional investors, and 40% came from non-profit organizations, suggesting that diverse stakeholders desire this information. Almost half of the letters specifically requested additional quantitative disclosures, with letter writers pushing mostly for metrics related to diversity, equity, and inclusions, retention and turnover, and compensation.

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Shining a Sustainability Light on the Darker Side of Big Tech

Posted by Kian Masters and Li Zhang, Morgan Stanley Investment Management, on
Tuesday, July 19, 2022
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Kian Masters is a Senior Associate and Li Zhang is Portfolio Manager and Executive Director in the Global Balanced Risk Control team at Morgan Stanley Investment Management (MSIM). This post is based on an MSIM memorandum by Mr. Masters, Ms Zhang, Andrew Harmstone, Managing Director and Senior Portfolio Manager and Christian Goldsmith, Managing Director, at Morgan Stanley Investment Management.

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); Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian A. Bebchuk, Kobi Kastiel and Roberto Tallarita; 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).

At a Glance

  • Big Tech has grown incredibly large, fueled by the unprecedented collection, processing and analysis of digital data.
  • Yet this growth has conflicted with users’ interests, particularly in areas related to user privacy, and misinformation. This may raise questions about the sustainability of Big Tech’s growth models.
  • At the same time, these companies’ concentrated market power also raises questions about
    potential antitrust action.
  • Corporate governance structures appear inadequate for guiding more effective self-regulation, which raises regulatory risks at a time when technology is being buffeted by macro headwinds.
  • In our view, shining a sustainability light on the dark side of Big Tech can yield important insights into risks that traditional (non-ESG) approaches may under-appreciate.

Introduction

In today’s digital economy, data is the key resource underpinning economic value creation. Data is crucial to the development of most online services and is indispensable to the development of emerging technologies such as artificial intelligence and machine learning. Capturing and analysing data is therefore central to the business models of some of the most successful companies in today’s economy. However, as with the overuse of natural resources, the pervasive collection of data, particularly personal data, has negative externalities that cannot be ignored.

In this paper, we focus on the “Big Tech” companies that dominate the new data economy. We discuss the potential social consequences associated with digital data mining and assess whether these issues might become a headwind for these data-driven companies, which are increasingly in the shadow of the regulator.

By “Big Tech,” we are primarily referring to mega-cap technology companies headquartered in the U.S. [1] While not homogeneous, we find it analytically useful to bundle these companies together, given their societal omnipresence and market power.

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Name That Boon: SEC Proposes Rules on ESG Fund Names & Disclosures

Posted by Matt Filosa, William Edwards, and Oliver Parry, Teneo, on
Tuesday, July 19, 2022
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Matt Filosa is Senior Managing Director of Governance, William Edwards is Senior Managing Director, and Oliver Parry is Managing Director at Teneo. This post is based on a Teneo memorandum by Mr. Filosa, Mr. Edwards, Mr. Parry, Martha Carter, and Harvey Pitt.

On May 25th, the SEC proposed two rules that seek to provide the market with greater clarity on how funds incorporate ESG factors into their investment activities. While the SEC’s prosed rules are directed at investment companies and mutual funds, other companies are likely to be impacted as well. The proposed rules were also released at a time where the debate around the merits of ESG has greatly intensified.

To help companies make sense of all the recent ESG activity, we have provided our insights on:

  1. The recently intensified ESG debate and the heightened focus on “greenwashing;”
  2. The current state of “ESG funds;”
  3. The proposed SEC rules on fund names and ESG fund disclosure;
  4. How the proposed rules could potentially impact

ESG—What is it Good For? The ESG Debate Intensifies

The amount of public debate regarding the merits of ESG has been quite remarkable in recent weeks. Tesla CEO Elon Musk tweeted that ESG is “a scam.” Former Vice President Mike Pence penned a Wall Street Journal op-ed calling ESG “a craze.” These grave concerns about ESG seem to focus on companies weighing in on political issues such as abortion or LGBTQ rights, the opacity and inconsistency of 3rd party ESG ratings and companies being forced by large investors to tackle societal issues such as climate change and employee diversity. Perhaps surprisingly, a few individuals at asset management firms have also expressed concerns about ESG investing, further evidence that the investor community is not monolithic in its ESG beliefs.

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Stock Market Short-Termism: What the Empirical Evidence Tells Policymakers

Posted by Mark J. Roe (Harvard Law School), on
Monday, July 18, 2022
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Mark J. Roe is David Berg Professor of Business Law at Harvard Law School. This post is based on his recent paper, forthcoming in the Journal of Law, Finance, and Accounting, and also draws from his recent book, Missing the Target: Why Stock Market Short-Termism Is Not the Problem (Oxford University Press, 2022).

Related research from the Program on Corporate Governance includes Corporate Short-Termism – In the Boardroom and in the Courtroom (discussed on the Forum here) and Looking for the Economy-Wide Effects of Stock Market Short-Termism (discussed on the Forum here), both by Mark J. Roe; The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

In this paper and the related book section, I assess what the evidence on stock-market-induced short-termism tells us for policymaking. For this kind of policymaking purposes, we want to know whether the stock market is inducing economy-wide costs, and what the cheapest remedy would be for those costs. In public discourse, stock-market-induced short-termism is thought to be significant economically and socially.

Although the non-academic views seem to approach consensus that stock market short-termism is a major problem, there is no consensus in the academic studies on the subject. With the studies so divided, it’s hard to be sure that there’s a serious problem that should be prioritized over other economic problems the country faces.

Second, when we examine the mixed and divided evidence, we see that the evidence for short-termism tends to indicate that the short-termism involved is small. That is, strong studies find short-termism, but they generally find the inefficiencies to be small.

Third—and a contribution of the material that is not well-developed in the academic literature—the methodological setup needed for most successful empirical studies aims to reveal a local effect in a local treatment group. That method does not show that there is an economy-wide impact, and generally does not seek to show that it is. For the most part, the direct evidence that we want—is the economy suffering overall?—is not available. Most of the rigorous studies cannot readily scale to make an economy-wide finding.

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