Monthly Archives: March 2022

Workforce Diversity Data Disclosure

Posted by Kavya Vaghul, Aleksandra Radeva, and Kim Ira, JUST Capital, on
Wednesday, March 9, 2022
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Kavya Vaghul is Senior Director of Research and Aleksandra Radeva and Kim Ira are Research Analysts at JUST Capital. This post is based on their JUST Capital 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), and Duty and Diversity by Chris Brummer and Leo E. Strine, Jr. (discussed on the Forum here).

Key Findings

  • As of September 2021, the majority of companies in the Russell 1000 (55%) disclose some type of racial and ethnic workforce data, a notable increase since January 2021, when only 32% of companies disclosed racial and ethnic data.
  • Between September 2020 and September 2021, the share of companies disclosing an EEO-1 Report or Intersectional Data, the gold standard for demographic data reporting, has more than doubled, from 4% to 11%.
  • While EEO-1 Report or Intersectional Data disclosure has historically been concentrated in the Technology industry (24 companies at the time of this analysis), the number of companies disclosing this data in the Financials industry has nearly caught up, more than doubling between January 2021 and September 2021, from nine companies to 22 companies.

After a year and half of pledges and promises to help advance racial equity, totaling at least $50 billion in both internal and external initiatives, investors, regulators, employees, and other key stakeholders are still looking for signals of action from corporate America. For many, a first step is transparency around corporate diversity, equity, and inclusion (DEI) efforts and, in particular, around racial and ethnic workforce and board demographics as an indicator of the state of representation.

While stakeholders recognize that this is a work in progress for companies, and that they can’t expect perfection, they’re making it clear that they’re no longer willing to accept inaction or silence on what steps companies have taken. Of Americans JUST Capital and The Harris Poll surveyed, 84% agreed that companies “often hide behind public declarations of support for stakeholders but don’t walk the walk.” Shareholder proposals on DEI soared last proxy season. Following New York City Comptroller Scott Stringer’s call to 67 S&P 100 companies to share the racial, ethnic, and gender breakdown of their workforces, half of this group has either disclosed or committed to disclose this data. The SEC has noted that disclosure of human capital metrics—workforce-related data, policies, and practices—is a key area of focus and that it could be issuing standards for disclosure on these measures this year.

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SEC Proposes New Rules for Private Fund Advisers

Posted by David N. Solander, McDermott Will & Emery LLP, on
Wednesday, March 9, 2022
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David N. Solander is partner at McDermott Will & Emery LLP. This post is based on his MWE memorandum.

US Securities and Exchange Commission (SEC) Chairman Gary Gensler has ramped up an aggressive regulatory agenda that zeroes in on advisers to private funds. On February 9, 2022, the SEC commissioners approved several proposed rules under the Investment Advisers Act of 1940 (the Proposed Rules) which, if passed, would have significant effects on the operation of private funds. The Proposed Rules will include new requirements for investor quarterly statements, private fund audits, adviser-led secondaries, side letter practices and annual reviews, and the outright prohibition of certain activities. Several of the Proposed Rules will also apply to investment advisers not registered with the SEC, including venture capital fund advisers, smaller private fund advisers and many non-US advisers.

Below is a summary of the significant changes under the Proposed Rules. Comments to the Proposed Rules are due on the later of (a) 30 days after the Proposing Release is published in the Federal Register or (b) April 11, 2022.

In Depth

Prohibited Activities

Under the Proposed Rules, advisers to private fund managers (including SEC-registered and unregistered advisers) would be subject to the following:

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DOJ Delivers Stark Message About Corporate Cooperation

Posted by John F. Savarese, Ralph M. Levene, and Sarah K. Eddy, Wachtell, Lipton, Rosen & Katz, on
Tuesday, March 8, 2022
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John F. Savarese, Ralph M. Levene, and Sarah K. Eddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Savarese, Mr. Levene, Ms. Eddy, David B. Anders, and Jeohn Salone Favors.

As we noted in our year-end post, DOJ previewed last fall a crackdown on corporate misconduct and the resurrection of Obama-era policies that make it harder for companies to earn cooperation credit and leniency.  Yesterday, speaking at the ABA Institute on White Collar Crime, Attorney General Merrick Garland and Assistant Attorney General for the Criminal Division Kenneth Polite furthered that message:  Companies under investigation must identify everyone connected to the suspected misconduct, and credit-worthy remediation may in some circumstances mean cleaning house at the top even where the most senior executives were not directly involved.

In his speech, AG Garland underscored DOJ’s renewed focus on individual corporate malefactors and announced that DOJ was backing this commitment with more funding, more investigative agents, more DOJ attorneys, and “force-multipliers” to support white-collar enforcement initiatives.  One force-multiplier is corporate cooperation:  “[T]o be eligible for any cooperation credit, companies must provide [DOJ] with all non-privileged information” about “all individuals” involved in or connected to the conduct under investigation, “regardless of their position, status, or seniority, and regardless of whether a company deems their involvement as ‘substantial.’”

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Board Diversity Matters: An Empirical Assessment of Community Lending at Federal Reserve-Regulated Banks

Posted by Brian D. Feinstein (The Wharton School), Peter Conti-Brown (The Wharton School), and Kaleb Nygaard (Yale University), on
Tuesday, March 8, 2022
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Brian D. Feinstein is Assistant Professor of Legal Studies & Business Ethics at The Wharton School of the University of Pennsylvania; Peter Conti-Brown is Class of 1965 Associate Professor of Financial Regulation and Associate Professor of Legal Studies & Business Ethics at The Wharton School of the University of Pennsylvania; and Kaleb Nygaard is a Research Associate at the Yale Project on Financial Stability. This post is based on their recent paper. 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); and Duty and Diversity by Chris Brummer and Leo E. Strine, Jr. (discussed on the Forum here).

A crucial set of questions in banking law and corporate governance is what effect, if any, does the diversity of decisionmakers have on specific outcomes. The challenge in answering the question, though, is that the more senior these decisionmakers become, the further removed they are from the policy outcomes whose consequences we want to predict. These two areas are important examples of this phenomenon: in corporate governance, the diversity of corporate boards is a perennial question, despite the reality that boards function far removed from corporate decision-making. In banking, it is even more complex: given how much the public and private sectors interact in formulating bank policy, what is the consequence of the diversity of regulators?

In Board Diversity Matters: An Empirical Assessment of Community Lending at the Federal Reserve-Regulated Banks, we exploit some idiosyncratic aspects of US banking to render these questions answerable. We conclude that the increased presence of minority directors on the twelve regional Federal Reserve Banks—the quasi-governmental entities responsible for evaluating many commercial banks’ lending to underserved, and disproportionately majority-minority, communities—is associated with greater lending to these communities. In other words, the more diverse these boards, the better the outcomes for underserved minorities.

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How Sarah Bloom Raskin’s Confirmation May Affect Climate-Related Banking Regulation

Posted by Jason Halper, Rachel Rodman, and Sara Bussiere, Cadwalader, Wickersham & Taft LLP, on
Tuesday, March 8, 2022
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Jason Halper and Rachel Rodman are partners and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Rodman, Ms. Bussiere, Daniel Meade, Timbre Shriver, and Victor Celis. 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).

On February 3, 2022, the U.S. Senate Committee on Banking, Housing, and Urban Affairs (the “Committee”) considered President Biden’s nomination of Sarah Bloom Raskin for Vice Chair for Supervision and a Member of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), along with the nominations of Dr. Lisa Cook and Dr. Philip Jefferson to be members of the Board of Governors. [1] Ms. Raskin, a former deputy secretary of the U.S. Department of Treasury and former governor of the Federal Reserve Board, seemed to be more controversial than her fellow nominees given her past statements arguing that the Federal Reserve, and other bank regulators, should take a more active role in promulgating regulations aimed at climate-related financial risks. [2] The Committee was scheduled to vote on February 15, 2022 to move President Biden’s nominees out of committee to the full U.S. Senate, but Republican committee members boycotted the vote, delaying a full Senate vote. [3]

In a May 2020 op-ed, Ms. Raskin questioned efforts to amend the Federal Reserve’s Main Street Lending Program that would allow companies in the fossil fuel industry to receive loans from the Federal Reserve. [4] She later opined that “. . . all US regulators can—and should—be looking at their existing powers and considering how they might be brought to bear on efforts to mitigate climate risk.” [5]

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Gender Pay Gap

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Monday, March 7, 2022
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Duncan Paterson is Head of the ESG Thought Leadership Program at ISS ESG; and Katharina Gallowski is Associate Vice President for Research at ISS ESG. This post is based on their ISS 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); and and Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here).

The topic of gender diversity has been on the lips of the responsible investment sector for many years. One of the earliest factors that allowed investors to identify those companies taking a progressive stance on governance issues, the measurement of the percentage of women on corporate boards of directors, has been standard practice for ESG-minded investors for over a decade. But has all this talk delivered in terms of on-the-ground outcomes for women in the workforce? The results are mixed at best.

The Benefits of Gender Diversity

One of the hot topics in responsible investment today is the concept of double materiality. This concept, key in European sustainable finance regulation, implies that ESG data should be used not only to judge the potential financial implications of ESG risks TO a company, but also to form judgments about the impacts OF a company’s activities on the environment and society. Criteria related to gender diversity can be surprisingly influential in this discussion.

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The Effect of Media-Linked Directors on Financing and External Governance

Posted by Alberta Di Giuli (ESCP Business School) and Paul Laux (University of Delaware), on
Monday, March 7, 2022
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Alberta Di Giuli is Professor of Finance at ESCP Business School, and Paul Laux is Professor of Finance at the University of Delaware Lerner College of Business and Economics. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

Could the presence in a firm’s board of a member that concurrently sit in a media company influence the media coverage of that firm? And what are the consequences in terms of financing and ownership for the firm in question?

In our paper, The Effect of Media–Linked Directors on Financing and External Governance, forthcoming in the Journal of Financial Economics, we test the hypothesis that firms that share a board member with a media firm receive higher media coverage. The increased media coverage acts, or is perceived, as a “watch dog” or a source of external monitoring, and allows the firm to switch from high intense monitoring form of financing (e. g. bank loans) to less intense one (e. g. bonds).

Our hypothesis builds on recent findings (Bharath and Hertzel, 2019) that show that increased external governance has a significant negative impact on the use of bank financing over public debt issuance as it affects the demand for creditor governance: firms endogenously switch among different governance mechanisms to shape an optimal governance structure.

In our sample of U.S. public companies over 2002-2019 period we find that firms that share a board member with a media firm have a significantly higher media coverage than firms that don’t. We examine the implications of this increase media coverage on financing and we show that firms that share a board member with a media firm decrease the amount of new secured bank loans (7% of lagged assets) and in general bank debt (5% of lagged assets) and increase the amount of bond financing (5% of lagged assets).

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Four Takeaways from the SEC’s Proposed Cybersecurity Rules

Posted by Charu Chandrasekhar, Avi Gesser, and Julie Riewe, Debevoise & Plimpton LLP, on
Monday, March 7, 2022
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Charu Chandrasekhar is counsel, and Avi Gesser and Julie Riewe are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Ms. Chandrasekhar, Mr. Gesser, Ms. Riewe, H Jacqueline Brehmer, Christopher Ford, and Matthew Rametta.

On February 9, 2022, the SEC released its much-anticipated proposed rules relating to cybersecurity risk management, incident reporting, and disclosure for investment advisers and funds.

Chair Gensler recently emphasized that cybersecurity rulemaking in this area is one of his priorities, and placed particular emphasis on establishing standards for cybersecurity hygiene and incident reporting for registrants. The proposed rules, which are the most detailed cybersecurity rules that Chair Gensler’s SEC has issued thus far, reflect the SEC’s intense attention to cybersecurity risk and its willingness to deploy the full scope of its regulatory authority to promulgate standards that address this risk.

These proposed rules would impose significant new requirements on registered investment advisers and funds, and are generally consistent with cybersecurity requirements imposed on other companies by New York’s Part 500 Cybersecurity Regulation and the Federal Trade Commission’s updated Safeguards Rule.

Key Requirements under the Proposed Rules

(1) Cybersecurity Risk Management Policies & Procedures: The proposed rules would require advisers and funds to adopt and implement policies and procedures that are “reasonably designed” to address cybersecurity risks. There are several “general elements” that advisers and funds will need to address in their cybersecurity policies and procedures, including risk assessment practices, user security and access, preventing unauthorized access to funds, threat and vulnerability management, and incident response and recovery. The proposed rules require advisers and funds, on an annual basis, to: (1) review and assess the design and effectiveness of their cybersecurity policies and procedures; and (2) prepare a report describing the review, explaining the results, documenting any incident that has occurred since the last report, and discussing any material changes to the policies and procedures since the last report.

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SEC Proposes Amendments to Schedules 13D and 13G

Posted by Curtis A. Doty, Marla L. Matusic, and Anna T. Pinedo, Mayer Brown LLP, on
Sunday, March 6, 2022
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Curtis A. Doty is partner, Marla L. Matusic is counsel, and Anna T. Pinedo is partner at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Doty, Ms. Matusic, Ms. Pinedo, Christina M. Thomas, Laura D. Richman, and Jennifer J. Carlson. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Background

On February 10, 2022, the Securities and Exchange Commission (the “SEC”) proposed amendments to Schedules 13D and 13G relating to beneficial ownership reports (the “Proposed Amendments”). [1]

The Securities Exchange Act of 1934 (the “Exchange Act”), Section 13(d), was originally enacted to address the increasing use of cash tender offers in corporate takeovers. Section 13(d) requires disclosure by investors of the accumulation of significant positions, or of certain increases in such positions, in the voting stock of public companies. These disclosures are intended to provide transparency to the market generally, and to stockholders and the company, and to function as an early warning to the company regarding a potential change of control transaction. Section 13(g) permits short-form disclosure by certain passive or early investors that hold or obtain significant positions in the voting stock of public companies. Specifically, Section 13(g) states that “[a] person who would otherwise be obligated. . .to file a statement on Schedule 13D may, in lieu thereof, file with the Commission, a short-form statement on Schedule 13G.” [2]

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Biotech’s ESG Crossroads

Posted by Julia Forbess and Ron C. Llewellyn, Fenwick & West LLP, on
Sunday, March 6, 2022
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Julia Forbess is partner and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum.

Overview

Corporate social responsibility has long factored into investment decisions, and the integration of environmental, social and governance (ESG) factors into corporate decision-making dates back nearly two decades. But in the last few years, ESG has become a common boardroom topic as investment funds with an ESG focus have raised billions and ESG’s non-financial metrics are increasingly factored into how investors and other stakeholders evaluate corporations. The SEC has also expressed an interest in ESG disclosure more broadly and has indicated the potential for rulemaking in the near future.

ESG practices and trends tend to be discussed as if there is one standard for all public companies, from the S&P 100 to small-cap growth industries. In an effort to understand the common practices of pre-commercial biotech companies, Fenwick has collected and analyzed data through the review of the public disclosures of 50 U.S.-based, development-stage public biotech companies with market capitalization ranging from $1.3 billion to $4.6 billion.

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