Monthly Archives: August 2022

Better Succession Planning Starts with Knowing Your CEO

Richard Holt is Managing Director at Alvarez & Marsal, and Amerino Gatti is Energy Executive at Helix Energy. This post is based on an NACD BoardTalk publication.

The average age of CEOs is nearly 60 years of age within the S&P 500. As the average age of CEOs grows older, the average CEO tenure is growing shorter, to about 6.9 years. In this environment, your organization will likely look soon for a replacement, as will many other companies. Are you ready?

Understandably, many companies have been preoccupied with the major economic disruption in the market and may not have invested the time or leveraged the expertise of their board members to focus on effective CEO succession planning.

If you’re not thinking about this topic now, though, you may be in need of a wake-up call, especially in today’s competitive labor market. All signs point to a hiring desert for companies that are unprepared. Some companies are late to the game—but it’s not too late. Boards can act now to ensure their plans are ready to meet the challenges of the future.

Get to Know Your CEO and Plan

The best medicine for healthier succession planning is garnering a deep understanding of what your company needs in a CEO, and that means really getting to know your current CEO and engaging in robust business scenario planning with the CEO and executive team.

Data suggest that many boards of directors are unprepared for engaging in the process of CEO development and succession. A study by The Rock Center for Corporate Governance at Stanford University and Heidrick & Struggles found that only 51 percent of boards can identify their internal successor CEO. Thirty-nine percent say they have zero internal candidates. This isn’t surprising given that when boards do meet to discuss succession planning, they on average only spend 1.14 hours on the topic, according to a separate study by The Rock Center and the Institute of Executive Development.


2021: The Year of CFO Turnover and Strides in Gender Diversity

Jenna Fisher is senior partner and co-leader of the Global Financial Officers Practice; Jim Lawson is co-leader of the Global Financial Officers Practice; and Rose Mistri-Somers is managing director at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Ms. Fisher, Mr. Lawson, Ms. Mistri-Somers, and Catherine Schroeder.

Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

CFO turnover is running high, with 2021 surpassing 2020 and 2019 churn rates, Russell Reynolds Associates’ recent analysis of the S&P 500 revealed. In 2021, there were 89 CFO transitions in the S&P 500, bringing CFO turnover to 18%—the highest its been in the past few years.

This high churn rate is the result of a combination of factors, including a frothy IPO market that has significantly increased the number of public company CFO opportunities, as well as overall strong equity performance that puts retirement in closer reach for some.


Weekly Roundup: August 12-18, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 12-18, 2022.

CSOs Have More Impact When Aligned To The CEO

Should Your Company Go Private?

What CEOs Must Consider When Wading Into Politics and Policy Discussions

PE Firms Poised for Diversity Drive

On Index Investing

BlackRock Response to the Exposure Draft Climate-Related Disclosures Issued by ISSB

ESG Trends and Expectations

Identifying Corporate Governance Effects: The Case of Universal Demand Laws

Proxy Season 2022 Briefing: United States

Proxy Voting: Managers Focus on Environmental and Social Themes

Gender Pay Gap Across Cultures

Can High ESG Ratings Help Sustain Dividend Growth?

Can High ESG Ratings Help Sustain Dividend Growth?

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on a publication by Hernando Cortina, CFA, Head of Index Strategy, and Brian Kennedy, Index Strategy Associate, at ISS ESG.

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? (discuss on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo Strine; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.

For many, investing in the current market environment can be described as navigating uncharted waters. With US inflation running at a 40-year high and a rocky first half of the year for both equity and fixed income markets globally, uncertainty is high. One possible source of returns in this environment could be dividends, particularly from those companies able to grow their dividends despite the prevailing macroeconomic headwinds. Companies with dividend growth that keeps pace with inflation could potentially be favored by investors.

Despite market uncertainties, investor interest in Environmental, Social, and Governance (ESG) considerations remains high. Flows into ESG exchange-traded funds, while slowing down compared to 2021, have remained positive this year. Understanding the relationship between ESG scores and subsequent dividend growth therefore could be of significant value to investors.

This post presents a case study of US large and mid-cap equities and their subsequent three-year dividend growth, distinguishing among them based on their ESG ratings at the start of the study period, December 2018. The analysis is based on a starting equity universe drawn from the 2018 composition of the Solactive GBS United States Large and Mid Cap Index.

The two key metrics in the analysis are the ISS ESG Corporate Rating as of December 2018, as well as annual dividends paid in the calendar years 2018 and 2021, drawn from Bloomberg. The ISS ESG Corporate Rating is ISS ESG’s comprehensive ESG Score, incorporating Environmental, Social, and Governance pillars. The 2018 and 2021 dividends are used to calculate a three-year dividend growth rate.


Gender Pay Gap Across Cultures

Kristina Minnick is Stanton Professor of Finance at Bentley University. This post is based on a recent paper by Professor. Minnick; Natasha Burns, Professor of Finance at the University of Texas at San Antonio; Jeffry Netter, Josiah Meigs Professor of Finance at the University of Georgia Terry College of Business; and Laura T. Starks, Professor of Finance at the University of Texas at Austin McCombs School of Business.

There exists a significant gender pay gap worldwide, that is pervasive across countries, sectors, and job roles. According to a 2021 report by the World Economic Forum, women earn 37% less than men in similar positions. Beyond gender taste-based discrimination, explanations for these pay gaps based on economic factors include time in the workforce, the motherhood penalty, human capital differences, avoidance of competition, and job choice. We contribute to this accumulated research by demonstrating that a society’s cultural norms can explain why women are paid less than men. We provide empirical evidence that cultural factors, which are embedded in societies long before the compensation decisions, significantly improve our ability to explain the pay gap (from 44% with traditional determinants of executive compensation to 95% when also including the cultural norms).

Using a cross-country sample of corporate executives, we exploit differences in cultural beliefs and attitudes to examine their relations with gender wage differentials. The corporate executive labor market is one in which the pool of people with appropriate talent and skill is limited relative to the demand, creating significant competition.* Our sample consists of top executives across 31 countries over the 2004-2016 period. Our measures of culture derive from the World Values Survey, a widely used survey of individual attitudes conducted in many countries by teams of social scientists. We focus on three primary culture categories. The first category captures a society’s beliefs and attitudes regarding women’s education and work, that is, whether women should receive equal education to men, and whether positive views toward women’s roles in the workplace exist. The second category includes views such as the degree to which religious beliefs are dogmatic, the acceptance of violence toward women as well as acceptance of intolerance and corruption. The third category of cultural variables relate more toward markets and executive compensation in general, including societal views on hard work and success, the role of the individual, and the level of trust.


Proxy Voting: Managers Focus on Environmental and Social Themes

Lindsey Stewart is Director of Investment Stewardship Research at Morningstar, Inc. This post is based on his Morningstar memorandum.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, and Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the forum here) and The Specter of the Giant Three (discussed on the Forum here), both by Lucian Bebchuk and Scott Hirst; and The Limits of Portfolio Primacy (discussed on the Forum here) by Roberto Tallarita.

Executive Summary

Active ownership—also called “investment stewardship”—has taken on ever greater significance as environmental, social, and governance themes feature more prominently in investing. This has been prompted by the search for solutions to address systemic issues like climate change and rising inequality.

At shareholder meetings, it has become common for environmental and social issues in particular to feature in both management and shareholder resolutions, with the latter rapidly increasing in number this year. Asset managers are responding by making their voting policies on E&S themes more detailed and specific. This is a positive development for investors as it gives them better sight of asset managers’ stances on key issues and helps them select the managers best aligned with their own E&S objectives as well as financial ones.

In this report, we dissect the current voting policies of 25 large asset managers—12 in the United States and 13 in Europe—and analyze the key E&S themes they cover. We also discuss the positions these managers take on E&S issues and the level of detail they provide in their policies, grouping them in four categories based on their level of focus on E&S themes, from Very High to Low.


BlackRock Supports Consistent Climate-Related Disclosures; Urges Global Coordination

Sandra Boss is Global Head of Investment Stewardship and Michelle Edkins is Managing Director of Investment Stewardship at BlackRock, Inc. This post is based on a BlackRock memorandum.

BlackRock’s role is to offer our clients a range of choices and help them make informed decisions to achieve their long-term financial objectives such as retirement. We do this as a fiduciary to our clients. Many of our clients are increasingly focused on the investment risks and opportunities associated with a transition to a lower-carbon economy. These clients seek to understand how companies are planning to mitigate risks and capture opportunities associated with this transition. Clients representing more than $3.3 trillion in assets entrusted to BlackRock have made net zero commitments as their own investment objective. These clients are particularly focused on obtaining clear, comparable, and high-quality climate-related disclosures to inform their investment decisions.

Given the role that climate risk and opportunities will play in our clients’ investment portfolios, BlackRock has consistently advocated for providing investors with high-quality, globally comparable climate-related disclosures.

There also is growing consensus that an orderly, just transition to net zero will benefit companies and the economy, which we believe will benefit our clients. We have also advocated for climate-related disclosures applied to both public and private companies. These disclosures should aim to enable informed investment decisions and support our clients’ investment and portfolio goals.

The foundation for climate-related disclosures, as we have consistently affirmed, is the Taskforce on Climate-related Financial Disclosures (“TCFD”). [1] TCFD is a principles-based approach, developed with input from investors and companies. Because of its relative simplicity and consistency, TCFD has garnered significant support from governments, central banks, and more than 2,600 organizations as of 2021, a 70% increase from 2020.


The Corporate Law Reckoning for SPACs

Minor Myers is Professor of Law at the University of Connecticut School of Law. This post is based on his recent paper, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates.

The ascendance of SPACs in U.S. capital markets has attracted intense regulatory scrutiny from federal officials, especially the SEC. This federal attention on SPACs is natural, as at first glance the SPAC appears to be simply an alternative to the conventional IPO, itself regulated chiefly at the federal level. The SPAC, however, is critically different from the IPO. An IPO is a transaction: the issuer sells stock, and public purchasers buy it, and the issuing corporation owes no fiduciary duty to the IPO purchasers. By contrast, the SPAC is an entity, not a transaction. And in fact SPACs are a very particular kind of entity: a standard corporation, organized usually under the laws of Delaware. My paper is the first to examine the corporate law dynamics of SPACs in detail, and it makes two distinct claims.

First, it demonstrates that the SPAC industry has exhibited a striking disregard of corporate law, failing to live up to basic equitable and statutory expectations under existing doctrine. Compared to other public corporations, the SPAC adopts a highly idiosyncratic governance model. The SPAC vests near-despotic control over all substantive decision-making in the hands of the sponsor. And SPAC boards are always populated by persons selected by the sponsor and often classified, making it impossible to wrest control from the sponsor during the life of the SPAC. The merger vote is engineered to achieve success, as the redemption right and warrants induce stockholders to vote in favor of a transaction regardless of their views on its merits, and the redemption decision likewise affords public holders limited influence. At the same time, the all-powerful sponsor has a deep conflict of interest with public holders. With a business combination, the sponsor secures a 20% stake, a potentially gargantuan reward. Without one, the sponsor’s stake is worth nothing. The result is that the sponsor has two incentives at odds with the public holders: to pursue any transaction, regardless of its advisability for public stockholders, and to obscure that fact from public stockholders to minimize redemptions. The sponsor acts unconstrained by any customary corporate mechanism for handling conflicted situations, as there are no disinterested decisionmakers anywhere in the SPAC. A SPAC thus offers its business combination to the public holder as a take-it-or-leave-it proposition, from which the investor has a custom-built remedy that is reputed to be complete. I call this approach the private fund model, as it broadly characterizes the structure that prevails among private investment funds.


What to Know About the SEC’s ESG Investing Rule Proposals

Nina Wilson is Vice President of Edelman ESG Advisory. This post is based on her Edelman memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

The May 31, 2022, law enforcement raids of the Frankfurt offices of Deutsche Bank AG and its asset management unit, DWS Group, over accusations of prospectus fraud and “greenwashing”—generally defined as the practice of making false, misleading or unsubstantiated claims about the environmental and/or social impact of an investment—have asset managers, among other stakeholders, wondering: could similar actions be on the horizon in the U.S.?

U.S. asset managers are right to be wary: the raids in Germany came just days after the U.S. Securities and Exchange Commission (SEC) proposed new disclosure and naming requirements for funds that consider environmental, social and governance (ESG) factors in their investment decisions.

The proposals are the latest in an intensified focus on transparency and fair marketing of ESG products and services by the U.S. regulator. The same week the proposed rules were released, the SEC announced that BNY Mellon Investment Adviser, Inc. agreed to pay a $1.5 million fine to the SEC to settle allegations that the firm made misleading claims about ESG funds it managed. Most recently, the Wall Street Journal reported that the SEC is also investigating Goldman Sachs over its ESG and clean-energy investment funds.


Proxy Season 2022 Briefing: United States

Brianna Castro is Senior Director of U.S. Research; Courteney Keatinge is Senior Director of Environmental, Social & Governance Research; and Aaron Wendt is Director of U.S. Governance Policy at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

Key Trends

Last year’s SPACs and IPOs expand this year’s proxy season

  • The U.S. research team covered more than 200 additional U.S. meetings in 2022 compared to 2021 (+6.37% increase, following an +8% increase from 2020 to 2021). A frothy IPO and SPAC-merger market in 2021 led to many companies holding first-year AGMs in 2022.

Diversity rulings on hold, but investor interest remains strong

  • In judgments that came down at the height of proxy season, California’s landmark board gender and “underrepresented community” diversity laws were both deemed to violate the equal protection clause of the state constitution. The laws remain on hold pending potential appeals; boards should continue to expect pressure from investors and external stakeholders to increase board diversity.

Excessive granting and overall pay continued to drive Say on Pay opposition

  • This can partially be attributed to the “mega-grant” trend, as many companies within the wave of new listings gave their executives outsized awards.
  • We also saw an uptick in retention one-time awards, with many companies citing the need to keep top talent during a tumultuous economic environment and a few even citing the “Great Resignation.”

More shareholder proposals, but lower shareholder support

  • As a result of a more permissive regulatory environment and the growing focus on ESG-related issues, over 100 more shareholder proposals went to a vote during the 2022 proxy season relative to the previous year. The increase was largely as a result of proposals submitted by advocacy groups, such as NGOs and think tanks.
  • However, at the same time, shareholder support for these proposals declined for most types of shareholder proposals, with average shareholder support for these resolutions dropping from 36% in 2020 to 31% in 2022.


Page 4 of 9
1 2 3 4 5 6 7 8 9