Monthly Archives: April 2022

Weekly Roundup: April 15-21, 2022

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This roundup contains a collection of the posts published on the Forum during the week of April 15-21, 2022.

A Deconstruction of the Short-Termism Thesis

Remarks by Chair Gensler Before the FBIIC and FSSCC

Ninth Circuit Panel Rejects Claim that Twitter Misled Investors

Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies

On the Audit Committee’s Agenda: What’s on the Horizon for 2022

Different Strokes to Move the World

Comment Letter on SEC Rule 10B-1 Position Reporting of Large Security-Based Swap Positions

ESG Pressures Fuel Dealmaking

How Useful are Commercial Corporate Governance Ratings in Emerging Markets?

Remarks by Commissioner Crenshaw at Symposium on Private Firms

The DCF Valuation Methodology is Untestable

Delegated Gender Diversity

CEOs and Sustainability

Spotlight on Boards: Spring 2022 Update

The Proposed Private Fund Advisers Rule

Harvey L. Pitt is Chief Executive Officer at Kalorama Partners LLC and its law firm affiliate Kalorama Legal Services PLLC, and former Chairman of the U. S. Securities and Exchange Commission. This post is based on his comment letter to the U.S. Securities and Exchange Commission.

I submit this comment letter with respect to certain policy aspects of the above-referenced release (the “Proposing Release”) regarding proposed rules (the “Proposed Rules”) under the Investment Advisers Act of 1940 (the “Advisers Act”), [1] in my personal capacity. [2] I am aware of other comment letters that have been submitted or that are being prepared for submission to the Commission; my views are generally in accord with those views recommending against the adoption of the Proposed Rules, and I do not reiterate here arguments that I know or understand are being (or will be) made in those other letters. Instead, those views are incorporated here by reference.

I am also aware of, and share, significant legal questions regarding the Commission’s authority to adopt some of or all the Proposed Rules; again, I do not burden this letter by reiterating those concerns here. The Commission has excellent lawyers on its staff to advise it in that regard, and other lawyers in the private sector are lending their expertise as well. I assume all the salient considerations will be raised and appropriately considered, either by the Commission or in a subsequent challenge if the Proposed Rules are adopted in whole or part. For present purposes, I simply note that the questions surrounding the Commission’s authority to proceed with its proposals are substantial and troubling, and I adopt those comments as if set forth in this letter.

I understand from various sources that, if the Proposed Rules are adopted in something approaching the form in which they have been proposed, judicial challenges are likely. [3] As a result, I urge the Commission to be very careful in this regard. In past years, the Commission has, I believe, adopted rules without sufficient regard to the extent of its legal authority and, in so doing, has impaired its reputation in the courts, ineluctably undermining the Agency’s claim to deference in challenges to subsequent rules. [4] Having served as the Commission’s General Counsel (as well as its Chairman), I am sensitive to such concerns, and urge the Commission to exercise caution before adopting the current Proposed Rules, or anything remotely similar to them.


Environmental Liabilities, Creditors, and Corporate Pollution: Evidence from the Apex Oil Ruling

Ross Levine is the Willis H. Booth Chair in Banking and Finance at the University of California, Berkeley, Haas School of Business. This post is based on a recent paper by Mr. Levine; Jianqiang Chen, Ph.D. student at the College of Technology Management, National Tsing Hua University; Pei-Fang Hsieh, Associate Professor at the College of Technology Management, National Tsing Hua University; and Po-Hsuan Hsu, Professor and Yushan Scholar at the College of Technology Management, National Tsing Hua University. 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); 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); and Exit vs. Voice by Eleonora Broccardo, Oliver Hart, and Luigi Zingales (discussed on the Forum here).

The Environmental Protection Agency (EPA) shows that corporate pollution is the primary source of U.S. land and water pollution that increase cancer, reproductive, neurodevelopmental, and premature death rates. Extensive research examines how environmental regulations influence pollution and health. This work suggests that corporate decision-makers do not fully internalize the social costs of their choices concerning toxic releases, and U.S. environmental regulations do not fully counteract the incentives created by such externalities. However, this research leaves unaddressed the question of how redefining property rights over corporate environmental damages shapes corporate finance and pollution. In a recent paper, we evaluate the impact of the 2008 Apex Oil court decision that made some creditors more legally liable for their corporation’s environmental damages when those firms entered Chapter 11 bankruptcy.

A 2008 change in how courts treat environmental obligations in Chapter 11 bankruptcy offers a unique opportunity to assess how reassigning property rights over pollution shapes corporate behavior. Chapter 11 bankruptcy allows financially distressed firms to reduce (i.e., “discharge”) claims, such as debts. In a series of landmark cases (e.g., Ohio v. Kovacs (1985) and U.S. v. Whizco (1988)), the courts ruled that obligations to clean up polluted sites were financial “claims,” making them dischargeable in Chapter 11 like other debts. Consequently, environmental cleanup liabilities could be shifted from the corporation and its creditors to taxpayers in bankruptcy, leaving more corporate resources available to satisfy the claims of debtholders. Among firms close to bankruptcy, therefore, the dischargeability of environmental liabilities reduced the financial incentives of creditors to pressure their corporations to limit toxic releases.


Spotlight on Boards: Spring 2022 Update

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. RosenblumKaressa L. Cain, and Hannah Clark.

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.

The war in Ukraine and broader geopolitical implications, the coronavirus pandemic and ongoing efforts to return to a “new normal,” as well as other trends and technologies which have been accelerating the pace of disruption, are raising a host of challenges that companies must successfully navigate. As boards of directors seek to provide effective oversight and guidance, their mandate is being further shaped by the wide embrace of ESG, stakeholder governance and the focus on sustainable long-term investment strategies. In this environment, directors need to grapple with the practical implications of this new paradigm, such as adjusting existing board functioning to reflect stakeholder governance, defining corporate “purpose,” integrating ESG considerations into business strategy and delivering sustainable value to all stakeholders. Directors are also facing questions about what, if any, modifications should be made to communications and engagement efforts with shareholders and other stakeholders. In addition, recent events have heightened the emphasis on effective and adaptive crisis management and shone a light on the role of all market participants in combatting social and racial inequality.

The legal rules as to directors’ duties have not changed. What have changed considerably, however, are the expectations of investors and other stakeholders for (1) greater transparency, (2) deeper board engagement and oversight, (3) greater opportunity to engage with directors and (4) responsible investor stewardship to further long-term, sustainable value creation.


CEOs and Sustainability

Kurt Harrison is co-head of the Global Sustainability Practice and Emily Meneer is a Global Knowledge Leader at Russell Reynolds Associates. This post is based on a publication in BRINK. 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 Leo E. Strine, Jr. (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).

The simultaneous global crises of climate change, global pandemics, geopolitics and racial and social injustices continue to wreak havoc on the business landscape. Events like these are a stark reminder of just how much work we must do to build a better, more resilient planet for all.

Leaders today have a once-in-a-generation opportunity to pivot their businesses to a more sustainable future. This isn’t just about making net-zero promises. While environmental goals are an important part of the story, they are not the whole story, because sustainable business spans the full range of the U.N.’s Sustainable Development Goals, covering everything from DE&I and health to economic growth and addressing poverty.

We now have clear data to show that thinking about both shareholders and stakeholders are not opposing goals. In fact, sustainability action unlocks sizable business opportunities.

Recent research found that taking societal impact into account when setting business strategy spurs innovation and helps companies identify new products, services and business models. According to another survey, millennials are 5.3 times more likely to stay with an employer when they have a strong connection to their employer’s purpose. And sustainability is becoming an increasingly influential factor in corporate investment. For example, The CFA Institute found that 75% of investment leaders expect ESG factors to become more influential.

The Risks of Doing Nothing Are Significant

Organizations lacking a stated and credible commitment to sustainability will lose market share, talent, and brand identity to their competitors. Revenues will fall, expenses will rise and shareholders will eventually revolt.


Delegated Gender Diversity

Hao Liang is Associate Professor of Finance at Singapore Management University and Cara Vansteenkiste is a lecturer at the University of New South Wales Business School. 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); 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).

Despite the growing emphasis on gender diversity, women still represent less than 20% of board members in publicly listed firms worldwide. To boost the presence of women in top business positions, many jurisdictions have mandated a minimum number of female directors on corporate boards. In 2004, Norway became the first country to legislate that all Norwegian publicly listed firms should have at least 40 percent female directors. Since then, a wave of board gender legislation and campaigns have swept across the world, including campaigns by institutional investors such as the Big Three (BlackRock, State Street, and Vanguard) who also sought to promote board gender diversity among their portfolio companies.

Is there a business case for board gender diversity? The literature provides mixed evidence on the impact of female board representation on firm value. The skillset view holds that female directors have unique skills and risk appetites that complement the skillsets of male directors, resulting in a diversity premium and higher firm value. The supply view on the other hand states that mandatory board gender quotas can lead to a shortage of qualified female board candidates. Firms that must meet quotas may have to appoint less capable directors, or they may have to overburden existing directors, both of which lead to value destruction and investor exits.


The DCF Valuation Methodology is Untestable

J.B. Heaton is a managing member of One Hat Research LLC.

The goal of discounted cash flow (DCF) valuation analysis is to answer the question, “What is this asset worth?” as in, what is the price that a rational person would be willing to pay for this asset in a competitive asset market. It is a question to which good answers are often needed. The DCF valuation model is a hypothesis about the answer: market value (MV) equals the sum of the discounted expected future cash flows that the asset will provide to its owner:

where E(CFi) is the expected cash flow at future time i, ri is the discount rate for cash flows to be received from this asset at future time i, and N is the number of dates where cash flow is expected to be received. The cash flow expectations and discount rates are those of the equilibrium asset buyer who competes with other potential buyers facing—at least when the asset is fungible and has a perfect substitute owned by others—numerous potential sellers.


Remarks by Commissioner Crenshaw at Symposium on Private Firms

Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the Symposium on Private Firms: Reporting, Financing, and the Aggregate Economy at the University of Chicago Booth School of Business. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you, Michael [Minnis]. I am humbled to be here today with such an impressive group of participants. The private markets and their role in the economy is an important topic and I’m glad to have this gathering of highly respected academics and industry participants thinking about the subject matter. I would also like to thank tonight’s host, the University of Chicago, whose faculty profoundly impact policy-making through their research and discussion. [1] Before I get too far, let me make the standard disclosure that the views I express today are my own and do not necessarily reflect the views of the Commission or its staff.

The Importance of Data

All of us have something in common—our belief in the power of data. I gave a speech a few months back about how important data are, and should be, in driving regulatory thought and action. [2] That may even have landed me the invitation I got to speak here today. Academia can play a huge hand in helping assess not only what needs to be regulated, but how effective existing regulations are. Data should be paramount in our regulatory decision-making and sitting in this room are some of the most sophisticated thought-leaders on data in the securities markets in the world. Starting from the premise that the optimal number of regulations is not zero (and I recognize that there may be those who do not start from that premise), I want to enlist your help as we think through what is the right balance in regulating the private markets, and what those rules should look like.

Plus, this gives me the opportunity to assign some homework to the professors, which I intend to do today. Although we have brilliant resources at the SEC, those resources are also limited. So, I’d like today’s speech to be a call to arms of sorts—help us evaluate how the SEC’s regulations are living up to the stated goals of those regulations, and help us figure out where to go next.


How Useful are Commercial Corporate Governance Ratings in Emerging Markets?

Burcin Yurtoglu is Chair of Corporate Finance at WHU Otto Beisheim School of Management. This post is based on a recent paper authored by Prof. Yurtoglu; Bernard S. Black, Nicholas D. Chabraja Professor of Finance at Northwestern University Kellogg School of Management; Antonio Gledson de Carvalho, Assistant Professor at Fundação Getúlio Vargas School of Business at Sao Paulo; and Woochan Kim, Professor of Finance at Korea University Business School (KUBS). Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani; The “Antidirector Rights Index” Revisited by Holger Spamann; and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

A central issue in evaluating the effects of corporate governance (CG) is how to measure it. Some researchers measure firm-level CG using country-specific indices (CSIs), tailored to each country’s laws and institutions; several studies report that these indices can predict Tobin’s q in emerging markets, in a panel data framework with firm fixed effects. In contrast, commercial CG ratings (CCGRs) apply the same or similar elements across many countries. However, their power to predict relevant outcomes is not known. In our paper, How Useful are Commercial Corporate Governance Ratings in Emerging Markets?, we assess the three best available CCGRs that cover emerging markets over a reasonable time period, Asset4, Thomson Reuters, and MSCI. We find that these ratings have no power to predict Tobin’s q or profitability. We also provide suggestive evidence that the likely root cause is poor construction of the ratings, rather than CG’s inability to predict Tobin’s q.

A substantial body of CG research studies the extent to which firm-level CG choices, often captured in CG indices, predict firm value, profitability and other outcomes. This research involves whether “better” CG has a payoff in firm performance and which aspects of governance are indeed better, as well as what firm attributes predict governance. This research is important because it can guide firm choices of which governance measures to adopt, and investor decisions on which governance measures to support, and which firms to invest in. This research is necessarily conducted at the firm level. It can be conducted in individual countries, or across multiple countries, in both developed and emerging markets (EMs).


ESG Pressures Fuel Dealmaking

Seth Kerschner, Dongho Lee, and Clare Connellan are partners at White & Case LLP. This post is based on a White & Case memorandum by Mr. Kerschner, Mr. Lee, Ms. Connellan, and Dominic Ross.

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 Leo E. Strine, Jr. (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).

As businesses race to catch up with the global ESG (environmental, social, and governance) movement, M&A has become a critical tool for those looking to speedily revamp traditional business models.

In particular, global energy players, many of which have set out ambitious decarbonization commitments within their ESG agenda, are now under the most intense public scrutiny when it comes to their net-zero strategy, and are using M&A to help reach their goals.

Governments are ramping up pressure as well. Just this month, the US Securities and Exchange Commission proposed new rules requiring public companies to disclose their risks related to climate change and their greenhouse gas emissions. Should the SEC’s proposal become law, it will increase transparency for investors, adding data-driven pressure to move to cleaner alternatives. M&A will surely be on the table as a fast-track solution.

Energy leaders bolster net-zero capabilities

One example is the US$2.3 billion acquisition of Spanish solar and wind developer Eolia Renovables by French utility giant Engie and lender Crédit Agricole, announced in November. The transaction gives the buyers control over 899 MW of operating solar and onshore wind farms and a 1.2-GW pipeline of projects, helping Engie reach its target of 50 GW of renewables capacity by 2025.

Crédit Agricole Assurances, meanwhile, aims to double its investments in renewable energy to enable an installed capacity of 11 GW.


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