Yearly Archives: 2022

Navigating a World Where Almost Everyone Is an Activist

Posted by James E. Langston, Kyle A. Harris, and Claire Schupmann, Cleary Gottlieb Steen & Hamilton LLP, on
Saturday, February 5, 2022
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James E. Langston and Kyle A. Harris are partners 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 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).

In many ways, 2021 was a high-water mark for corporate activism. The levels of traditional shareholder activism rebounded from the lows reached during the early days of the COVID-19 pandemic. M&A activism increased substantially as shareholder activists sought to capitalize on the M&A boom. Large-cap activism returned as activists targeted Fortune 500 CEOs with increasing frequency. The year also saw the emergence of a new brand of ESG-themed shareholder activism in the wake of the Engine No. 1 activist campaign supported by CalPERS at ExxonMobil and the copycat ESG tactics deployed by other shareholder activists.

At the same time, ESG shareholder proposals passed in record numbers as institutional investors sought to burnish their ESG credentials and attract an ever-growing pool of ESG capital. Under the Biden administration, the SEC joined the fray and facilitated activism by taking a step back from its role in policing which shareholder proposals make it onto the annual meeting agenda and moving to repeal Trump-era reforms designed to limit the influence of ISS and Glass Lewis. The ranks of climate change and DE&I activists expanded significantly, and their campaigns became more potent as efforts to accelerate change through corporate accountability gained traction amidst positive publicity and favorable political winds. Employee activism also proliferated as high-profile unionization drives accelerated and workforce-wide walkouts to register disapproval of corporate cultures continued to spread.

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ESG Engagement Success

Posted by Hannah Orowitz, Georgeson, on
Friday, February 4, 2022
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Hannah Orowitz is Senior Managing Director of ESG at Georgeson. This post is based on her Georgeson memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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).

To communicate your company’s ESG story and achievements while meeting investor expectations, you need effective investor engagement. Whether you’re hosting roadshows, investor days, issue-specific multi-stakeholder discussions or one-on-one engagements with investors or proxy advisors, you need to be transparent, accountable and prepared in order to build credibility with investors and gain support when it comes to voting.

Why engagement matters

Engaging with your investors positions your company as transparent and proactive, which in turn helps to foster a positive relationship. Reaching out to investors for feedback opens lines of communication to discuss the reasons behind the voting decisions and allows companies to better prepare for similar situations in the future.

Outcomes witnessed in 2020 prove that if a company doesn’t ensure its board and senior management are accessible, investors will not hesitate to use their voting power to make their views known, particularly when it comes to directors failure of oversight. If you have had a disappointing voting outcome, investors and major proxy advisors will be carefully scrutinizing the board’s responsiveness, which means shareholder engagement is key to demonstrate your company is considering their feedback.

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How Cyberattacks Target Stakeholders

Posted by Meredith Griffanti, Evan Roberts, and Josh Chodor, FTI Consulting, on
Friday, February 4, 2022
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Meredith Griffanti and Evan Roberts are Managing Directors and Josh Chodor is a Senior Consultant at FTI Consulting. This post is based on a publication in O’Dwyer’s November 2021 issue.

For businesses hit by ransomware attacks, paying the ransom is often the most practical solution to recovering data and minimizing an extremely stressful situation.

However, paying a ransom, which can sometimes range into the millions, is easier said than done. In situations where a ransom isn’t or can’t be paid for a variety of business reasons—such as potential sanctions— organizations need to prepare for the avenues that threat actors will leverage to inflict significant reputational harm.

A common theme of today’s ransomware attacks is double extortion: Not only will a threat actor lock a company’s files and demand a ransom payment, but it will also threaten to release sensitive information that has been exfiltrated from a victim organization’s environment. These threat actors may not truly care about the content of such data; it’s simply a money-making operation.

Direct communication with key stakeholders

An evolution of the double extortion attack is particularly sinister: direct outreach to a victim company’s stakeholders. This new strategy forces organizations, already under tremendous pressure, to act quickly to get ahead of the messaging around an attack in an attempt to reduce reputational risk and maintain stakeholder trust.

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Weekly Roundup: January 28-February 3, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, February 4, 2022

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This roundup contains a collection of the posts published on the Forum during the week of January 28-February 3, 2022.

The SEC Takes Aim at the Public-Private Disclosure Gap

Posted by David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, on Friday, January 28, 2022
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Blockchain in the Banking Sector: A Review of the Landscape and Opportunities

Posted by David L. Portilla, David J. Kappos, Minh Van Ngo, Sasha Rosenthal-Larrea, John D. Buretta and Christopher K. Fargo, Cravath, Swaine & Moore LLP, on Friday, January 28, 2022
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Guidance on Climate-Related Disclosure

Posted by Benjamin Colton, Devika Kaul, and Michael Younis, State Street Global Advisors, on Friday, January 28, 2022
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Statement by Commissioner Peirce on Reopening of Comment Period for Pay Versus Performance

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Saturday, January 29, 2022
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Statement by Commissioner Lee on Reopening of Comment Period for Pay Versus Performance

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on Saturday, January 29, 2022
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Statement by Chair Gensler on Reopening of Comment Period for Pay Versus Performance

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Saturday, January 29, 2022
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Chancery Court Allows deSPAC Litigation to Proceed

Posted by John R. Ablan, Philip O. Brandes, and Brian J. Massengill, Mayer Brown LLP, on Sunday, January 30, 2022
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Theranos: The Limits of the “Fake It Till You Make It” Strategy

Posted by Carrie H. Cohen, James M. Koukios, and Christine Y. Wong, Morrison & Foerster LLP, on Sunday, January 30, 2022
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Log4j: Enforcement Risk for Public Companies

Posted by Caitlyn M. Campbell, Scott Ferber, and Todd S. McClelland, McDermott, Will & Emery LLP, on Monday, January 31, 2022
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An Economic Substance Approach to SPAC Regulation and the Implications of MultiPlan for SEC Rulemaking

Posted by Harald Halbhuber (NYU), on Monday, January 31, 2022
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The Materiality Debate and ESG Disclosure: Investors May Have the Last Word

Posted by David Lopez, Jared Gerber, and Jonathan Povilonis, Cleary Gottlieb Steen & Hamilton LLP, on Monday, January 31, 2022
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M&A Outlook for 2022

Posted by Jim Langston, Kyle Harris, and Nickolas Bogdanovich, Cleary Gottlieb Steen & Hamilton LLP, on Tuesday, February 1, 2022
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The 2022 Boardroom Agenda

Posted by Robert Lamm and Carey Oven, Deloitte LLP, on Tuesday, February 1, 2022
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The Corporate Governance Gap

Posted by Kobi Kastiel (Tel Aviv University) and Yaron Nili (University of Wisconsin), on Tuesday, February 1, 2022
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Survey on Corporate Political Activity for 2022

Posted by Cydney Posner, Cooley LLP, on Wednesday, February 2, 2022
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White-Collar and Regulatory Enforcement: What Mattered in 2021 and What to Expect in 2022

Posted by John F. Savarese, Ralph M. Levene, and Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on Wednesday, February 2, 2022
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Spoofing and its Regulation

Posted by Merritt B. Fox (Columbia University), Lawrence R. Glosten (Columbia University), and Sue S. Guan (Santa Clara University), on Wednesday, February 2, 2022
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Best Practices for Establishing ESG Disclosure Controls and Oversight

Posted by David A. Bell and Ron C. Llewellyn, Fenwick & West LLP, on Thursday, February 3, 2022
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Managing Through a Historic Transition

Posted by Benjamin Colton and Ryan Nowicki, State Street Global Advisors, on Thursday, February 3, 2022
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Systemic Stewardship with Tradeoffs

Posted by Marcel Kahan and Edward Rock (NYU), on Thursday, February 3, 2022
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Systemic Stewardship with Tradeoffs

Posted by Marcel Kahan and Edward Rock (NYU), on
Thursday, February 3, 2022
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Marcel Kahan is George T. Lowy Professor of Law and Edward B. Rock is Martin Lipton Professor of Law at NYU School of Law. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); and The Limits of Portfolio Primacy by Roberto Tallarita (discussed on the Forum here).

Many have started to look to the corporate sector to control carbon emissions and mitigate climate change. But any serious effort to control carbon emissions will have winners and losers: companies that will benefit from reduction; and companies that will bear the brunt of mitigation efforts. In particular, concentrated carbon emitters such as oil exploration and production companies are likely to suffer. If so, who will force the carbon emitters to cut their carbon output? Who will be the agents of change in the corporate sector?

In recent years, the proponents of a corporate focused strategy have started to look to “universal owners”—the asset managers and owners that hold a significant swath of many public companies. As a group, they hold a significant percentage of the shares of public companies, often with substantial holdings in individual portfolio firms. Given their “universal” holdings, some commentators have argued that these universal owners should use their influence in portfolio companies to benefit their overall portfolios (and society), rather than focusing on the value of any particular company. According to some, universal owners should adopt “systemic stewardship” and push for market wide initiatives to reduce environmental externalities and control systemic risk (e.g., standardized climate risk disclosure). According to others, universal owners should pursue a more ambitious agenda and take affirmative steps to mitigate the risks of climate change to the long-term value of the portfolio by, for example, pushing carbon emitters to cut output, whether or not that promotes firm value. For example, consider the recent suggestion that BlackRock should pressure ExxonMobil and Chevron to reduce their carbon emissions substantially because the decline in the share value of these companies would be more than offset by an increase in the value of other BlackRock portfolio holdings.

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Managing Through a Historic Transition

Posted by Benjamin Colton and Ryan Nowicki, State Street Global Advisors, on
Thursday, February 3, 2022
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Benjamin Colton is Global Head of Asset Stewardship and Ryan Nowicki is Assistant Vice President of Asset Stewardship at State Street Global Advisors. This post is based on their SSgA memorandum.

Key Takeaways

  • The global COVID-19 pandemic, an elevated culture of shareholder engagement and broadened expectations of material risk oversight have heightened the time commitment required to serve as a director on a public company board.
  • Investors would benefit from increased transparency over how Nominating Committees assess their directors’ time commitments and what factors are included in this discussion.
  • We are updating our voting policy and guidelines on directors’ commitments to ensure Nominating Committees evaluate their directors’ time commitments, regularly assess director effectiveness, and provide public disclosure on their policies and efforts to investors.

A Historic Transition

The global COVID-19 pandemic, an elevated culture of shareholder engagement and broadened expectations of material risk oversight have heightened the time commitment required to serve as a director on a public company board. State Street Global Advisors’ Asset Stewardship team values the critical role that effective boards play in keeping management focused on their companies’ long-term goals. This is especially true as companies across industries set transformational climate-related targets and redefine their approach to human capital management. Through our engagements with investee companies, we learned how their strategies and operations are continuously reinvented to meet a confluence of challenges, including the global health crisis and the systemic risks of climate change and gender, racial and ethnic inequity. These forces continue to shape board agendas, with directors citing corporate resiliency [1] as the emerging topic most central to their conversations in 2021.

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Best Practices for Establishing ESG Disclosure Controls and Oversight

Posted by David A. Bell and Ron C. Llewellyn, Fenwick & West LLP, on
Thursday, February 3, 2022
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David A. Bell is partner 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 The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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 demand for information regarding companies’ environmental, social and governance (ESG) activities, risks and opportunities has risen sharply. Shareholders and other stakeholders seek ESG information that is useful, comparable and accurate, which necessitates that companies establish appropriate controls to gather, verify and disseminate such information. The variety of potential sources for ESG data may pose a challenge to companies trying to put a disclosure controls and procedures framework in place. This guide includes some suggestions and considerations for public companies in developing disclosure controls and related policies and procedures for ESG information.

Increased SEC Scrutiny

In September 2021, the United States Securities and Exchange Commission sent comment letters to a number companies in different industries seeking more information about their climate-related disclosures (or lack of such disclosures in their SEC filings) referencing the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010). The SEC posted a Sample Letter To Companies Regarding Climate Change Disclosures in which it asked, among other matters, for companies to explain why certain climate-related disclosures were included in corporate social responsibility reports (generally found on company websites) but not SEC filings. The SEC has also expressed an interest in ESG disclosure more broadly, and has indicated the potential for rulemaking in the near future. Whether because of SEC regulations or to meet the expectations of investors and other key stakeholders, the amount of ESG information that companies will disclose in their SEC filings will likely increase. With the potential for increased visibility of ESG disclosure and the associated liability for false or misleading statements or omissions under securities law, as well as the risk of investor-, employee- or public-relations harm even where inaccuracies may not be material, companies should pay special attention to the disclosure controls that they have in place. Doing so will also better position companies if more ESG disclosure is mandated.
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Spoofing and its Regulation

Posted by Merritt B. Fox (Columbia University), Lawrence R. Glosten (Columbia University), and Sue S. Guan (Santa Clara University), on
Wednesday, February 2, 2022
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Merritt B. Fox is the Arthur Levitt Professor of Law at Columbia Law School; Lawrence R. Glosten is the S. Sloan Colt Professor of Banking and International Finance at Columbia Business School; and Sue S. Guan is Assistant Professor of Law at Santa Clara University School of Law. This post is based on their recent paper.

Drawing on microstructure and financial economics, our new paper, Spoofing and Its Regulation, seeks to clarify the considerable confusion among commentators and the courts with regard to a common kind of quote-driven manipulation, often referred to as “spoofing.” We conclude normatively that spoofing is a socially undesirable activity and provide a sounder rationale for finding it illegal under the Securities Exchange Act of 1934 than has been offered so far.

The Nature of Spoofing

Quote manipulation refers to the practice where a trader uses quotes—limit orders constituting binding commitments posted on an exchange, until canceled, to buy or sell a given number of shares at a stated price—in order to buy or sell shares at a more favorable price in a separate transaction going in the opposite direction. Once the separate transaction has been executed at the favorably changed price, the trader cancels these quotes, which she can usually do because they have yet to be executed against.

With spoofing, the trader’s manipulative quoting activity is at prices equal or inferior to the best quotes in the market for transactions going in the opposite direction of the transaction she really seeks to have execute. Suppose, for example, the manipulator wishes to buy a certain number of shares. Her spoof involves three steps. First, she submits a buy limit order (a bid quote) at a price equal to the NBB (national best bid). Second, she submits one or more sell limit orders (offer quotes), at prices equal to, or above, the NBO (national best offer), aggregating to a much larger number of shares than her bid. These sell limit orders are the manipulative quotes. They are intended to induce quoting and transacting behavior of other market participants that results in the manipulator’s buy limit order being executed against, something that otherwise would have been much less likely to occur. Third, the manipulator cancels her sell limit orders. Where the actually desired transaction is instead a sale, the manipulator does a mirror image of these steps, first submitting an offer at the NBO and then bids for a large number of shares at prices equal to or below the NBB.

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White-Collar and Regulatory Enforcement: What Mattered in 2021 and What to Expect in 2022

Posted by John F. Savarese, Ralph M. Levene, and Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Wednesday, February 2, 2022
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John F. Savarese, Ralph Levene, and Wayne M. Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Savarese, Mr. Levene, Mr. Carlin, David B. Anders, Sarah K. Eddy, and Carol Miller.

Introduction

The Biden administration has just completed its first full year in office, and the talk has been tough. New leadership at DOJ, the SEC, the FTC, the CFTC, and other regulatory and law enforcement agencies have issued statements and policy revisions signaling their intention to train more focus on white-collar and regulatory enforcement. We correctly predicted this tougher stance in our wrap-up memorandum last year. What we did not anticipate was the announcement of policies that, depending on how they are implemented, could resurrect what we have viewed as ill-conceived approaches to eligibility for cooperation credit, monitorship imposition, civil penalties, and corporate admissions.

At the Department of Justice, the new leadership includes Attorney General Merrick Garland, Deputy AG Lisa Monaco, and Assistant AG for the Criminal Division Kenneth A. Polite Jr. In her first major speech in October 2021, DAG Monaco announced three significant revisions to corporate enforcement policies that echo initiatives touted by the DAG’s Obama-era predecessor, Sally Yates: (1) prosecutors making charging decisions about a company must consider “all misconduct by the corporation discovered during any prior domestic or foreign criminal, civil, or regulatory enforcement actions against it,” whether or not the “past misconduct is similar to the instant offense”; (2) any company seeking cooperation credit will once again be required to provide the government with “all nonprivileged information relevant to all individuals involved in the misconduct”—not just those whose involvement was substantial; and (3) prosecutors are now encouraged to more often consider imposing monitors as part of corporate criminal resolutions.

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Survey on Corporate Political Activity for 2022

Posted by Cydney Posner, Cooley LLP, on
Wednesday, February 2, 2022
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).

If you think 2021 was a tough year for corporate political activity, 2022 may be even more challenging. That’s according to a recent survey from The Conference Board of government relations executives and managers of political action committees. In the survey, 87% of respondents said they expect 2022 to be at least as challenging as 2021, and 42% anticipate that it may actually be worse. In the aftermath of the January 6, 2021 attack on the Capitol, many companies and CEOs spoke out, signed public statements and determined to pause or discontinue some or all political donations. The heated political climate also heightened sensitivity to any dissonance or conflict between those public statements or other publicly announced core company values and the company’s political contributions, further complicating the political environment for companies and executives. In the survey, respondents cited a number of factors that contributed to the difficult environment for corporate political activity in 2021: in particular, 77% cited the frequent emergence of new social and political issues on which companies faced pressure to take a stance. According to the Executive Director of The Conference Board ESG Center, “With the 2022 mid-term election year bringing sustained scrutiny, companies that engage in political activity need to make the affirmative case for why they do so….They should focus on engaging and educating both internal and external stakeholders on how their activities serve both corporate and societal purposes.”

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