Yearly Archives: 2022

Weekly Roundup: June 17-23 , 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, June 24, 2022

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This roundup contains a collection of the posts published on the Forum during the week of June 17-23, 2022.

ESG Global Study 2022

Posted by Jessica Ground, Capital Group, on Friday, June 17, 2022
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What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment

Posted by Sean J. Griffith (Fordham Law School), on Friday, June 17, 2022
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Time Running Out Under the HFCAA

Posted by Cydney Posner, Cooley LLP, on Saturday, June 18, 2022
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New Climate-Related Financial Disclosures for Private Companies and LLPs

Posted by Gareth Rees, Matthew Dunlap, and Stephanie Pong, Morrison & Foerster, on Sunday, June 19, 2022
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Proposed ESG Disclosure Requirements for Investment Advisers and Investment Companies

Posted by Laura Ferrell, Sarah Fortt, and Betty Huber, Latham & Watkins LLP, on Monday, June 20, 2022
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Corporate Racial Equity Tracker

Posted by Kavya Vaghul and Ashley Marchand Orme, JUST Capital, on Monday, June 20, 2022
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The SEC’s Authority to Pursue Climate-Related Disclosure

Posted by Jill E. Fisch (University of Pennsylvania), on Monday, June 20, 2022
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“Minimum Standards” for Lawyers Practicing Before the SEC

Posted by Jason Halper, Erica Hogan, and Adam Magid, Cadwalader Wickersham & Taft LLP, on Tuesday, June 21, 2022
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When 9 is the Perfect Number

Posted by Rusty O’Kelley, Rich Fields, and Laura Sanderson, Russell Reynolds Associates, on Tuesday, June 21, 2022
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Competing Views on the Economic Structure of Corporate Law

Posted by Lucian Bebchuk (Harvard Law School), on Tuesday, June 21, 2022
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Chancery Court Continues to Reject Demand Futility Claims Post-Zuckerberg

Posted by Sarah Runnells Martin and Daniel S. Atlas, Skadden, Arps, Slate, Meagher & Flom LLP, on Wednesday, June 22, 2022
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Meeting Expectations for Board Diversity

Posted by David A. Bell, Dawn Belt, and Ron Llewellyn, Fenwick & West LLP, on Wednesday, June 22, 2022
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Proposal on Climate-Related Disclosures Falls Within the SEC’s Authority

Posted by John C. Coates (Harvard Law School), on Wednesday, June 22, 2022
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Regulatory Solutions: A Global Crackdown on ESG Greenwash

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Thursday, June 23, 2022
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Proposal on Climate-Related Disclosures for Investors

Posted by Lawrence A. Cunningham (George Washington University), on Thursday, June 23, 2022
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Statement by Commissioner Peirce on the Regulatory Flexibility Agenda

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Thursday, June 23, 2022
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Statement by Commissioner Peirce on the Regulatory Flexibility Agenda

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Thursday, June 23, 2022
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. 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.

Chair Gensler’s Regulatory Flexibility Agenda [1] for the Securities and Exchange Commission sets forth flawed goals and a flawed method for achieving them. The agenda, if enacted, risks setting off the regulatory version of a rip current—fast-moving currents flowing away from shore that can be fatal to swimmers. Just as certain wave and wind conditions can create dangerous rip currents, [2] the pace and character of the rulemakings on this agenda make for dangerous conditions in our capital markets.

I. The Agenda Devotes the Agency’s Limited Resources to Rulemaking Proposals Disconnected from our Core Mission

The Agenda continues to shun issues at the core of our mission in favor of shiny objects outside our jurisdiction. We used to focus on companies’ disclosure of economically material information; we now focus on disclosure of hot-button matters outside our remit. [3] We once sought to protect retail investors; we now rush to the aid of professional investors. [4] We once worked to help small and emerging companies raise the funds that are their lifeblood; we now work to increase their costs and shrink their investor base. [5] We once hoped to increase the ranks of public companies by making it less costly and more beneficial to be public; we now look for ways to force companies to go public [6] since we are making it costlier to go public and be public. [7]

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Proposal on Climate-Related Disclosures for Investors

Posted by Lawrence A. Cunningham (George Washington University), on
Thursday, June 23, 2022
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Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor at George Washington University Law School. This post is based on a comment letter by Professor Cunningham and 21 other Professors of law and finance.

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); Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here); and Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

This post is based on a comment letter sent to the SEC by Stephen M. Bainbridge (UCLA), Jonathan Berk (Stanford), Sanjai Bhagat (Colorado), Bernard S. Black (Northwestern), William J. Carney (Emory), Lawrence A. Cunningham (GW), David J. Denis (Pittsburgh), Diane Denis (Pittsburgh), Charles M. Elson (Delaware), Jesse M. Fried (Harvard), Sean J. Griffith (Fordham), Jonathan M. Karpoff (Washington), Scott Kieff (GW), Edmund W. Kitch (Virginia), Katherine Litvak (Northwestern) Julia D. Mahoney (Virginia), Paul G. Mahoney (Virginia), Adam C. Pritchard (Michigan), Dale A. Oesterle (Ohio State) Roberta Romano (Yale), Christina P. Skinner (Pennsylvania),and Todd J. Zywicki (George Mason).

We appreciate the contributions of colleagues who have commented on the SEC’s proposal for mandatory climate-related disclosure rules for public companies (the “Proposal”). In particular, we read with interest two letters analyzing whether the Proposal is within the SEC’s rulemaking authority: one from a group of thirty law professors (the “Thirty Professors’ Letter”) and another by Professor John Coates (the “Coates Letter”).

We are moved to offer additional thoughts because these two letters, compared to our prior letter, reflect divergent understandings of the nature and factual background of the Proposal. Moreover, we believe those different understandings will likely play a role in any challenge to final rules that may be adopted pursuant to the Proposal. Illuminating those differences will therefore assist the SEC and ultimately the federal courts.

We agree with the Thirty Professors’ Letter and the Coates Letter that the SEC has broad statutory authority to require disclosures for the protection of investors. We further agree that the relevant inquiry is whether a proposed disclosure requirement will protect investors, not whether it is material, although the two inquiries will generally overlap. Finally, we agree that the relevance of a disclosure requirement to a social issue or to non-shareholder constituents does not demonstrate, in and of itself, that it exceeds the SEC’s authority.

Indeed, the two letters make a strong case that the SEC’s 2010 guidance regarding climate change disclosures (the “2010 Guidance”) was a valid exercise of the SEC’s statutory authority. The 2010 Guidance reminded issuers that several elements of the existing disclosure framework, including disclosure of the material effects of compliance with laws and regulations, material pending legal proceedings, and material risk factors, may require disclosures relating to climate change.

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Regulatory Solutions: A Global Crackdown on ESG Greenwash

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Thursday, June 23, 2022
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on a publication by ISS Governance Research by Thomas Harding, Associate Vice President of Regulatory Solutions Product Development at ISS ESG; William Cowper, ESG Product Manager of Regulatory Solutions at ISS ESG; Karina Karakulova, Director of Regulatory Affairs and Public Policy, ISS; and Manpreet Singh Sandhu, ESG Specialist (Canada) at ISS ESG.

The meteoric global rise of ESG investing is increasingly being met with an equally ambitious regulatory disclosure regime, and, targeting greenwashing, policymakers are beginning to bare their teeth. In the latest salvo, on 25 May the US Securities and Exchange Commission (SEC) voted 3:1 to approve two proposals enhancing scrutiny of ESG funds and advisers’ ESG practices. One proposal seeks to expand the rule governing fund naming conventions and the other proposes additional disclosure requirements by funds and investment advisers about ESG investment practices.

Overview of SEC proposals

While the proposed changes to the Names Rule are ostensibly engendered by the growth in ESG-marketed funds, the proposal also captures other funds that have historically been out of scope of the Names Rule. The Commission estimates that ~ 8,250 (62%) funds are currently subject to the Names Rule and that the proposed rule amendments would increase this estimate to ~ 10,000 (75%) funds.

In a departure from its historical approach, the SEC now proposes to extend the 80% investment policy (i.e., a minimum of 80% of a fund’s assets must be consistent with its name) to apply to fund names that incorporate terms related to investment strategy, such as “growth” or “value,” and proposes circumstances under which deviations from the 80% policy are temporarily permitted. The proposal would require funds to define the terms used in a fund’s name in a way that is consistent with the term’s ‘plain English’ meaning or established industry use. These requirements would also extend to funds where the investment decisions incorporate one or more ESG factors.

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Proposal on Climate-Related Disclosures Falls Within the SEC’s Authority

Posted by John C. Coates (Harvard Law School), on
Wednesday, June 22, 2022
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John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post is based on his recent comment letter. 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); Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock by Lucian A. Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID, by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Corporate Purpose and Corporate Competition by Mark J. Roe (discussed on the Forum here).

I write to comment on legal authority. The proposal is well within the Commission’s authority to adopt. Critiques on legal grounds fall far short of what would be needed for a court to overturn the rule.

Congress, having made a fundamental policy judgment to require “full and fair” disclosure to protect investors, directed the Commission to make ongoing subsidiary choices of precisely what details of disclosure to require and when, after engaging in fact-finding and analysis that Congress chose not to try to do itself.

Here, the proposal frames difficult, subsidiary choices, which divide reasonable observers. Those choices I do not here address. They require fact-finding and expert factual judgments about likely effects, costs, benefits and risks of alternatives, including inaction, in the face of investor needs that have led most large companies to publish inconsistent and variable climate-related disclosures. The Constitution, and Congress, have given the Commission—and not the courts—authority to make those judgments.

Throughout I describe rather than argue for what the law should be. Many legal issues are open to reasonable debate. However, many legal questions have clear answers. The proposed rule specifies the details of disclosure, just as Congress directed the Commission to do. It does not regulate climate activity itself (e.g., greenhouse gas emissions) and would have modest effects on the economy as a whole. It is authorized by clear statutes, is consistent with settled understandings, and addresses disclosure topics covered by rules adopted long ago by the Commission and ratified by Congress. It is not a “transformative” surprising regulatory departure, raising such a “major question” as to justify interpretive methods other than those of a faithful agent of Congress.

Nor has the “major questions doctrine” ever been used to overturn authority unambiguously granted by the plain text of a statute. “Clear statement” canons play no role when statutes speak clearly. Striking down regulations adopted pursuant to clear and limited delegated authority would turn the doctrine’s purpose against itself, prevent Congress from assigning traditional fact-finding and implementation roles to agencies, turn courts into unelected mini-legislatures, and subvert rather than reinforce the separation of powers.

Overturning this rule as unauthorized on that basis would wipe out most of the Commission’s disclosure rulebook. Nothing at stake in this proposed rule justifies such judicial lawmaking.

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Meeting Expectations for Board Diversity

Posted by David A. Bell, Dawn Belt, and Ron Llewellyn, Fenwick & West LLP, on
Wednesday, June 22, 2022
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David A. Bell and Dawn Belt are partners and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum. 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); Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here); and Duty and Diversity by Chris Brummer and Leo E. Strine, Jr. (discussed on the Forum here).

Corporate boardroom diversity has increased significantly over the last few years, and the interest in and demand for gender and racial/ethnic diversity on boards of directors remain high. Lack of corporate board diversity has attracted the attention of shareholders, regulators, employees, customers and other stakeholders, resulting in regulations and various initiatives intended to increase the number of women and members of underrepresented communities serving on boards. Companies that fail to address this important issue do so at their own peril, as shareholders and other stakeholders have demonstrated an increased willingness to take action against companies lacking board diversity, including by voting against or withholding votes from existing directors or otherwise exerting public or commercial pressure. This post discusses board diversity trends and relevant regulations and initiatives and provides some recommendations for companies looking to achieve or increase board diversity.

Recent Board Diversity Trends

We have seen notable strides in achieving board diversity. According to the Missing Pieces Report by Deloitte and the Alliance for Board Diversity, in 2020 there were 347 companies with more than 30% board diversity in the Fortune 500, representing an approximately 21% increase from the number of companies exceeding 30% board diversity in 2018 and more than twice the number of companies in 2010. Similarly, the 2021 Spencer Stuart Board Index revealed directors from historically underrepresented groups—including women and Black/African American, Asian, Hispanic/Latino/a, American Indian/Alaska Native or multiracial men—accounted for 72% of all new directors at S&P 500 companies recently, with 47% of those new independent directors belonging to historically underrepresented racial and ethnic groups and 43% being women. There has also been a significant increase in gender diversity among the companies in the Fenwick – Bloomberg Law SV 150 List, with women directors of such companies representing 30.2% of directors, closing a historical gap with the larger companies in the S&P 100, as discussed in our 2021 Corporate Governance Practices and Trends report. Despite these recent gains, women and ethnic/racial minorities remain underrepresented in the boardroom. According to the Spencer Stuart Index, women and ethnic/racial minorities (including those identified as Black/African American, Hispanic/Latino/a, Asian, American Indian/Alaska Native and multiracial) still constitute only 30% and 21% of S&P 500 board members, respectively.

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Chancery Court Continues to Reject Demand Futility Claims Post-Zuckerberg

Posted by Sarah Runnells Martin and Daniel S. Atlas, Skadden, Arps, Slate, Meagher & Flom LLP, on
Wednesday, June 22, 2022
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Sarah Runnells Martin is counsel and Daniel S. Atlas is an associate at Skadden, Arps, Slate, Meagher & Flom LLP.  This post is based on their Skadden memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

In September 2021, in United Food and Commercial Workers Union v. Zuckerberg, the Delaware Supreme Court embraced the Court of Chancery’s suggestion that the analysis for evaluating demand futility in derivative cases should be streamlined. Rather than employing the prior Aronson v. Lewis or Rales v. Blasband standards, the Supreme Court set forth a new, three-part test that “is consistent with and enhances” those standards, so that “cases properly construing Aronson, Rales, and their progeny remain good law.” [1]

Under Zuckerberg, when ruling on a motion to dismiss where the plaintiff asserts demand futility, Delaware courts will examine whether a director: (1) received a material personal benefit from the alleged misconduct; (2) would face a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; or (3) lacks independence from someone who received a material benefit from the alleged misconduct, or would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand. If the answer to any of those questions is “yes” for at least half of the members of the board that would be considering the demand, then demand would be excused as futile. (See our September 28, 2021, client alert, “Delaware Supreme Court Issues Two Opinions Simplifying Delaware Law on Derivative Claims.”)

Since Zuckerberg, practitioners, companies and directors have watched to see how the new standard was applied, and if it would alter Delaware’s traditional approach to evaluating demand futility, including deference to directors’ ability to make decisions about litigation brought in the company’s name. In a series of opinions, discussed below, the Court of Chancery has applied the Zuckerberg formulation to evaluate director disinterest and independence and found that a demand would not have been futile.

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Competing Views on the Economic Structure of Corporate Law

Posted by Lucian Bebchuk (Harvard Law School), on
Tuesday, June 21, 2022
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Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. This post is based on his recent paper.

I recently placed on SSRN a new essay, Competing Views on the Economic Structure of Corporate Law.

This essay was written for the symposium issue of the University of Chicago Business Law Review celebrating the thirty-year anniversary of the publication of The Economic Structure of Corporate Law by Frank Easterbrook and Daniel Fischel (“E&F”). The essay discusses how my research in the economics of corporate governance over the years has engaged with E&F’s analyses, and our different approaches to the subject.

During the four decades since the E&F writings started to appear, my work has largely focused on the economics of corporate governance. In the course of this work, I paid significant attention to E&F’s writings. Indeed, a significant part of my research in the economics of corporate governance focused on issues also considered by E&F, engaged with their positions, and developed approaches different from theirs. The essay discusses these points in the context of five areas of corporate research that both E&F and I examined, offering substantially different conclusions:

Takeover policy and rules: I discuss E&F’s focus on the facilitation of hostile bids to the fullest extent possible, and I contrast it with my analysis of the benefits of takeover regulation that facilitates competing bids and ensures an undistorted choice for target shareholders.

Contractual freedom in corporate law: I discuss E&F contractarian approach, and I contrast it with my analysis of contractual imperfections and the role of mandatory rules in corporate law.

State competition in corporate law: I discuss E&F’s support for state competition in corporate law, and I contrast it with my analysis of the shortcoming of such competition and the beneficial role of federal law.

Efficiency and distribution in corporate law: I discuss E&F’s concern that any attention to fairness and distribution would impede efficient choices by corporate insiders, and I contrast it with my analysis showing how rules regarding the distribution of corporate payoffs can discourage opportunistic insider choices that would provide them with a larger fraction of the piece but would be overall value-decreasing.

Corporate purpose: Although both E&F and I oppose encouraging and relying on corporate leaders to protect stakeholder interests, we do so for different reasons and offer different approaches regarding the extent to which and the ways in which stakeholders should be protected by governmental rules and interventions.

The essay is available here, and comments would be most welcome.

When 9 is the Perfect Number

Posted by Rusty O'Kelley, Rich Fields, and Laura Sanderson, Russell Reynolds Associates, on
Tuesday, June 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.

No corporate director dreams of sitting on an ineffective board—yet many will find themselves serving on a board that underperforms relative to their expectations.

As part of our 2022 Global Director Behaviors and Board Culture study, over 1,100 directors shared insights about the people they serve with, how they focus their time and attention, and how well their board operates (including both its effectiveness and its overall culture). Not surprisingly, we are particularly interested in directors who rated their board as highly effective; a 9 or 10 on a 1-10 scale.

What is different about those boards that lead to such high performance? We developed a key driver model that assessed which behaviors among a 28-item inventory (related to communication, engagement, relationship building, perspective, and character, as well as specific leadership behaviors demonstrated by their chair) significantly impact board effectiveness. What we discovered was a framework we call the 7+2 Model for Highly Effective Boards:

To develop the most effective board possible, board leaders should look to assemble a group of directors who, as a collective group, always demonstrate seven behaviors:

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“Minimum Standards” for Lawyers Practicing Before the SEC

Posted by Jason Halper, Erica Hogan, and Adam Magid, Cadwalader Wickersham & Taft LLP, on
Tuesday, June 21, 2022
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Jason Halper and Erica Hogan are partners and Adam Magid is special counsel at Cadwalader Wickersham & Taft LLP. This post is based on their Cadwalader memorandum by Mr. Halper, Ms. Hogan, Mr. Magid, William Mills, James Orth and Jayshree Balakrishnan.

In remarks on March 5, 2022 on PLI’s Corporate Governance webcast, Commissioner Allison Herren Lee of the Securities and Exchange Commission stated that, 20 years after its enactment, it is time to revisit the “unfulfilled mandate” of Section 307 of the Sarbanes-Oxley Act of 2002 and establish minimum standards for lawyers practicing before the Commission. [1] Commissioner Lee, who announced that she will not seek a second term when her current one ends this month, took issue with what she called the “goal-directed reasoning” of some securities lawyers—that is, focusing primarily on the outcome sought by executives, rather than the impact on investors and the market as a whole. Such lawyering, Commissioner Lee observed, has a host of negative consequences, including encouraging non-disclosure of material information, harming investors and market integrity, and stymying deterrence. The solution, Commissioner Lee opined, is to fulfill the mandate of Section 307, which empowered the Commission to “issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers.” [2]

Over the last 20 years, the Commission has declined to adopt enhanced rules of professional conduct for lawyers appearing before the Commission. There are good reasons for the Commission’s inaction, including the attorney-client privilege, the goal of zealous advocacy, the fact-specific nature of materiality determinations, and the traditionally state-law basis for the regulation of attorney conduct. Commissioner Lee, moreover, did not propose specific new rules, and recognized that the task was difficult and should be informed by the views of the securities bar and other stakeholders. Nor did she say that action by the Commission was imminent; it is unclear whether the Commission has authority to promulgate new rules under Section 307 given a 180-day sunset under the statute that occurred in 2003. Indeed, neither Commissioner Lee nor any of the other SEC commissioners have issued statements on this topic since the PLI webcast. SEC Enforcement Director Gurbir Grewal has, however, indicated an increased emphasis on gatekeeper accountability in order to restore public trust in the market. [3] Nonetheless, given the Commission’s existing authority to impose discipline under its Rules of Practice, practitioners should be mindful of the potential for increased scrutiny moving forward.

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