Monthly Archives: March 2022

Remarks by Commissioner Lee at PLI’s Corporate Governance

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at PLI’s Corporate Governance – A Master Class 2022. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Send Lawyers, Guns and Money: (Over-) Zealous Representation by Corporate Lawyers [1]

Thank you Brian [Breheny] for the introduction and to the Practicing Law Institute for having me today. Before I begin, I want to take a moment to acknowledge the on-going humanitarian disaster in Ukraine. My thoughts are with the people of Ukraine, who have demonstrated impossible bravery, and with those of you who may have friends or relatives affected by this crisis.

It’s a privilege to address my fellow members of the bar. This privilege is very meaningful to me personally in part because of my unexpected path into the legal profession and my deep regard for the ideals of public service that our profession represents.

I do not come from a family of lawyers; in fact my parents did not even attend college. I never laid eyes on an actual lawyer during my childhood. What I knew about them came from TV shows, which means I assumed their jobs were to cleverly question witnesses at trial until they confessed to the crime for which another had been charged. Despite (or maybe because of) this misperception, I secretly dreamed of becoming a lawyer and was awed to the point of reverence by the profession. As I worked my way through college and eventually, in my late thirties, through law school, I began to better understand what lawyers do and what it means to be a member of a “profession”—how the calling stood apart from other businesses principally because advocating for fidelity to the law is, at its core, a form of public service. [2] Taking this to heart, I launched an initiative in law school that led to the adoption of a requirement for students to complete pro bono work as part of the curriculum.

I have lived the experience of law from the perspectives of an outsider with no idea of what lawyers do, a student, a client, a securities law practitioner, an enforcement lawyer (both civil and criminal), and now as a Commissioner helping to shape regulatory policy. My belief in the ideals of the profession—ideals that I know you all share—has only grown stronger with time.

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Women in the Boardroom: 2022 Update

Dan Konigsburg is Global Corporate Governance Leader at Deloitte and Sharon Thorne is Chair of the Deloitte Global Board of Directors. This post is based on a Deloitte memorandum by Mr. Konigsburg, Ms. Thorne, and Carey Oven. 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 Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here).

Is the world making reasonable progress towards increasing the proportion of women on boards? The data indicates not. Women occupy just 20% of board seats globally, and continue to be excluded from the highest levels of corporate leadership.

In 2011, when the Deloitte Global Boardroom Program began researching how many women served on corporate boards globally, the conversation about achieving gender equity among the highest leadership ranks was just starting to percolate. Since then, increasing women’s representation at the boardroom table has become something of a movement: More and more countries have developed initiatives to address gender parity, the conversation has vastly expanded, and, consequently, numbers have risen. Some countries, such as France, have really upped their numbers in a substantial way following government-mandated gender quotas. More than 40% of board seats among French companies are now occupied by women.

Deloitte’s report this year showed that progress is happening, albeit slowly. The global average of women on boards sits at just under 20% (19.7%), an increase of just 2.8 percentage points since the last report, published in 2019 [1] (figure 1). At this pace, the world will not reach parity until at least 2045, over twenty years from now. While this is still unacceptably slow, the pace of change has accelerated slightly: Deloitte’s last report showed parity being reached by 2052, indicating a timeline that has been reduced by almost a decade.

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The Further Erosion of Investor Protection: Expanded Exemptions, SPAC Mergers, and Direct Listings

Andrew F. Tuch is Professor of Law at Washington University in St. Louis and Joel Seligman is President Emeritus and University Professor at the University of Rochester and Dean Emeritus and Professor of Law at Washington University in St Louis. This post is based on their recent paper.

Since at least the 1930s, when the federal securities framework was adopted, most companies undertaking initial public offerings (IPOs) have relied on firm-commitment underwriters to act as intermediaries between themselves and investors. The close relationship between IPOs and underwriting, governed by Section 11 of the Securities Act of 1933, is implicit in a regime that has proven successful over the years. Section 11 imposes near-strict liability on corporate insiders and certain secondary actors, primarily underwriters, incentivizing careful due diligence. Among other provisions of the Securities Act, Section 11 was instrumental in restoring confidence in US capital markets in the wake of the Great Depression and has helped them become the world’s deepest and most liquid. It is no surprise that investors, their interests guarded by underwriters acting in the role of gatekeepers, made the IPO the pinnacle event for emerging companies seeking capital for growth.

Today, traditional IPOs may be on the wane as firms turn to mergers with special purpose acquisition companies (SPACs) and direct listings, alternatives that provide routes to public markets entirely or partially without an underwriter or due diligence. SPAC mergers and direct listings dispense with nearly century-old techniques for capital raising, weakening investor protection. As a result, these IPO alternatives introduce new risks into financial markets. The shift in corporate activities has been permitted, indeed encouraged, by Congress and the Securities and Exchange Commission (SEC).

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SEC Proposes Additional Private Fund Disclosures

Ellen Kaye Fleishhacker and Robert Holton are partners and Patrick Derocher is an associate at Arnold & Porter LLP. This post is based on an Arnold & Porter memorandum by Ms. Fleishhacker, Mr. Holton, Mr. Derocher, Stephen Culhane, and Veronica Callahan.

On January 26, 2022, the US Securities and Exchange Commission (SEC or Commission) voted in favor of proposing amendments to Form PF, which is the confidential reporting form that certain SEC-registered investment advisers to private funds must file with the SEC. In the SEC’s press release regarding the proposed amendments, Chair Gary Gensler pointed to the decade of experience the SEC and Financial Stability Oversight Council (FSOC) have had analyzing the information collected on Form PF, and stated: “We have identified significant information gaps and situations where we would benefit from additional information.”

The proposed rules, which will be open for a 30-day public comment period, would (i) require large advisers to hedge funds and private equity funds to file reports within one business day of the occurrence of certain reporting events, (ii) lower the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management, and (iii) require additional information regarding large private equity funds and large liquidity funds to be reported.

This post discusses the background of Form PF, explains the amendments that have been proposed by the SEC, and identifies certain practical considerations related to the proposed amendments.

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended Section 204(b) of the Investment Advisers Act of 1940 to require certain disclosures by private fund investment advisers. The purpose of these disclosures­, which became the basis for Form PF in 2011, is to assist FSOC in assessing systemic risk in the US financial system and protect investors. The requirements came about in response to the financial crisis of 2008 and the subsequent regulatory push to improve the ability of the SEC—and the federal government more broadly—to assess the health of the financial system and respond to developments that may threaten the stability of the markets and negatively impact individual investors.

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Weekly Roundup: February 25-March 3, 2022


More from:

This roundup contains a collection of the posts published on the Forum during the week of February 25-March 3, 2022.

SEC Proposes Substantial Increases to Form PF Reporting


ESG: 2021 Trends and Expectations for 2022


SEC’s Role in Cybersecurity



Asset Management Industry Confronts the Challenges Presented by Climate Change Transition



SPAC Law and Myths


SEC Continues March Towards More Intrusive Regulation of Private Funds


Overcoming the Hurdles to Board Leadership on Climate Change


The Need for Disclosure About Worker Voice


SEC Proposes Unprecedented Cybersecurity Rules



Board Disclosure of Race and Ethnicity Gains Traction


C-Suite and Board Engagement in a COVID-19 Environment


Private or Public Equity? The Evolving Entrepreneurial Finance Landscape


The Rise of Climate Litigation

The Rise of Climate Litigation

Shagun Agarwal is a Climate Solutions Associate at ISS ESG. This post is based on his ISS 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).

Climate litigation is an increasingly common and accessible area of environmental law, and is being used to hold countries and public corporations to account for their climate mitigation efforts and historical contributions to the problem of climate change.

A Global Surge in Litigation

There is a clear upward trend in the use of climate litigation. Until 2017, the total number of climate litigation cases was 884 across a total of 24 countries, with 654 of these cases being in the United States. By 2020, this number had nearly doubled to 1,550 cases across 38 countries.

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Private or Public Equity? The Evolving Entrepreneurial Finance Landscape

Michael Ewens is Professor of Finance and Entrepreneurship at the California Institute of Technology, and Joan Farre-Mensa is Associate Professor of Finance at the University of Illinois at Chicago. This post is based on their recent paper.

The U.S. entrepreneurial finance market has undergone dramatic changes over the last two decades. Capital raised by privately-held venture capital (VC)-backed startups grew from $28.9 billion in 2002 to $118.2 billion in 2019 (in real 2012 dollars). At the same time, the number of annual IPOs in the U.S. has declined from an average of 436 from 1991 through 2000 to an average of 113 from 2001 through 2020. In Private or Public Equity? The Evolving Entrepreneurial Finance Landscape, we review the changes in the entrepreneurial finance market and provide a framework to analyze their causes and consequences.

We begin by describing the regulatory differences between publicly-listed and private firms, and how these regulatory differences translate into differences in the financing and informational frictions the firms face. Next, we explore how several regulatory, technological, and competitive changes affecting both startups and their investors have altered the costs and benefits of going public over the last two decades. These changes have impacted both early-stage and late-stage startups, leading to shifts in both the supply and demand for private and public equity capital.

At the early-stage level, technological innovations such as cloud computing in 2006 have decreased startups’ financing needs, particularly during the initial, experimental stage of the entrepreneurial process. At the same time, the emergence of incubators and of new online platforms that help connect investors to startups—alongside the regulatory changes that have facilitated them—have contributed to a marked increase in the fundraising options available to early-stage startups. We show that a key consequence of these changes is that entrepreneurs raising their first round of venture capital now retain 30 percent more equity in their firm and are more likely to control their board of directors than their earlier counterparts.

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C-Suite and Board Engagement in a COVID-19 Environment

Jen Veenstra and Kristin Chisesi are managing directors at Deloitte. This post is based on a Deloitte memorandum by Ms. Veenstra, Ms. Chisesi, Carey Oven, Karen Mazer, and Caroline Schoenecker. Related research from the Program on Corporate Governance includes Stakeholder Capitalism in the Time of Covid by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

Facilitating board interactions in a COVID-19 environment

Boards fulfill an essential oversight role for CEOs and their management teams. C-suite executives can help the board to carry out its responsibilities, including providing critical information and insights. As companies continue to navigate the pandemic and the associated economic fallout, it is particularly critical that executives provide boards with information and analysis in order to help achieve resilience and execute the enterprise’s strategy.

Through subject matter interviews and a culmination of research studies, we highlight how some key C-suite members can help the board and facilitate better board interactions in the current environment:

CEO

More than other C-suite leaders, CEOs have the potential to mobilize their boards as a strategic asset. That is particularly true as companies reposition themselves for growth, and possibly brace for increased shareholder activism.

The pandemic has presented a range of challenges, including a focus on workforce health and well-being and return-to-work strategies that have elevated human capital management to a boardroom issue. However, CEOs have had to contend with much more than the pandemic this past year. Accelerating social change and renewed emphasis on corporate purpose beyond shareholder primacy continue to shape the future and amplify uncertainty. Despite—or possibly because of—these and other challenges, boards expect CEOs to articulate the vision and strategy that will allow their companies to thrive regardless of what comes next.

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Board Disclosure of Race and Ethnicity Gains Traction

Susan Angele, Annalisa Barrett, and Stephen Brown are Board Leadership Senior Advisors at KPMG. This post is based on their KPMG memorandum, a version of which originally appeared in The Power of Difference by the National Association of Corporate Directors.

Pressure on corporations to increase and disclose their board’s diversity continues to intensify. The murder of George Floyd and other Black Americans in the spring of 2020 and the subsequent social unrest accelerated corporate efforts around diversity, equity, and inclusion as well as stakeholder and regulator demands for faster progress and greater transparency.

While there is a growing patchwork of regulations encouraging board diversity of gender, race and ethnicity, and sexual orientation and gender identity, the only board demographic information that all U.S. public companies are currently required to disclose is the age of each director. Nasdaq’s Board Diversity Rule is poised to have the most widespread impact to date, which will require most companies listed on its U.S. exchange to annually disclose board diversity statistics using a standardized template and to have at least two diverse directors or explain why they do not. This includes one director who self-identifies as female and one director who self-identifies as an “underrepresented minority” or as a member of the LGBTQ+ community. [1]

Nasdaq’s rule follows California SB 826 and AB 979, [2] which require public companies headquartered in California to have—depending on board size—one or more directors who self-identify as female as well as one or more directors who self-identify as coming from an “underrepresented community” (i.e., racially or ethnically diverse or LGBT). [3]

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Is Economic Nationalism in Corporate Governance Always a Threat?

Martin Gelter is Professor of Law at Fordham University School of Law. This post is based on his recent paper. 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).

During the past decades, participants in corporate law and corporate governance academic debates around the world have generally been skeptical of policies implementing economic ‘Nationalism’ or ‘protectionism.’ While these are chiefly subjects of other areas of law, such as foreign direct investment or international trade law, literature in recent years has documented a close interaction with corporate law and governance. This paper argues that corporate governance policies intended to serve a particular country’s interest may not always be as bad as we usually think.

Economic protectionism and convergence in corporate governance

A key trend antagonistic to protectionism is international convergence in corporate governance, which partly developed from the larger globalization debate. During the 1990s and 2000s, scholars argued whether and to what extent corporate governance laws and practices would converge to a single model, with the likely endpoint being one that favors the interests of all equity investors collectively (rather than, e.g., controlling shareholders, the government, or employees). Ultimately, the convergence debate can be seen as a more prominent aspect of the globalization debate that took place at the time.

Participants in the convergence debate observed a growing propensity among multinational corporations to access capital markets, growing capital markets in many countries, the unraveling of control blocks, and a reduction of state ownership, all of which paralleled a partly convergent legal development. The direction of causality was not always clear. On the one hand, a system prioritizing the interests of all equity investors may be a precondition for capital market development and separation of ownership and control; on the other hand, causation may be reversed, meaning that a growing interest group of equity investors throughout society, including among beneficiaries of retirement plans, may have helped to make shareholder-oriented corporate law more politically acceptable.

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