Yearly Archives: 2022

Remarks by Commissioner Uyeda at the 2022 Cato Summit on Financial Regulation

Posted by Mark T. Uyeda, U.S. Securities and Exchange Commission, on
Friday, November 18, 2022
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Mark T. Uyeda is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent remarks. The views expressed in the post are those of Commissioner Uyeda, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you, Jennifer [Schulp], for the kind introduction. Good morning to everyone here in person and those participating virtually. I appreciate being part of your conference focusing on the rise of environmental, social, and governance (ESG) investing and the future of financial regulation. The conference raises a number of important questions, such as “what is ESG?,” “what role should ESG play in investment decisions?,” and “should ESG be considered in assessing financial stability?” [1] As you consider these issues, I wanted to share some thoughts that reflect my individual views as a Commissioner and do not necessarily reflect the views of the full Commission or my fellow Commissioners.

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Weekly Roundup: November 11-17, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, November 18, 2022

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This roundup contains a collection of the posts published on the Forum during the week of November 11-17, 2022

Illustrative Disclosure for the SEC’s New PVP Rules

Posted by Mike Kesner, Linda Pappas, Pay Governance LLC, on Friday, November 11, 2022
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Fair Value as Process: A Retrospective Reconsideration of Delaware Appraisal

Posted by William Bratton (University of Pennsylvania), on Friday, November 11, 2022
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Rare Court Decision in Regulation FD Litigation Highlights Risks of Calls with Analysts

Posted by Ning Chiu, Robert A. Cohen, and Michael Kaplan, Davis Polk & Wardwell LLP, on Saturday, November 12, 2022
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Gender Diversity in TSE Prime Market Boards: an open letter from ACGA

Posted by Jamie Allen, Kei Okamura, and Neesha Wolf, ACGA, on Sunday, November 13, 2022
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Preparing for the 2023 Proxy Season in the Era of Universal Proxy

Posted by David M. Silk, Carmen X. W. Lu, Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on Monday, November 14, 2022
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ESG and C: Does Cybersecurity Deserve Its Own Pillar in ESG Frameworks?

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Monday, November 14, 2022
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How Twitter Pushed its Stakeholders under the (Musk) Bus

Posted by Lucian A. Bebchuk, Kobi Kastiel, Anna Toniolo (Harvard Law School), on Monday, November 14, 2022
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SEC Finalizes New Clawback Rules

Posted by Mike Kesner, Lane Ringlee, Pay Governance LLC, on Tuesday, November 15, 2022
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Does Voluntary Financial Disclosure Matter? The Case of Fairness Opinions in M&A

Posted by Adam Badawi (University of California, Berkeley), Matthew Cain (University of California, Berkeley), Steven Davidoff Solomon (University of California, Berkeley), on Tuesday, November 15, 2022
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2022 CPA-Zicklin Index on Corporate Political Disclosure and Accountability

Posted by Dan Carroll, Bruce Freed, Karl Sandstrom, Center for Political Accountability, on Tuesday, November 15, 2022
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Remarks by Chair Gensler Before the Investment Adviser/Investment Company National Seminar

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Wednesday, November 16, 2022
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Representations & Warranties, Fraud, and Risk Shifting: An Analytical Framework

Posted by Steven L. Schwarcz (Duke University), on Wednesday, November 16, 2022
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Supply chain strategies: For many companies, the traditional balance is shifting

Posted by Carey Oven, Jim Kilpatrick, Deloitte, on Wednesday, November 16, 2022
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Chancery Court Addresses Board Responsibility Under Caremark for Cybersecurity Risk

Posted by Gail Weinstein, Philip Richter, Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on Thursday, November 17, 2022
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Can Old Sin Make New Shame? Stock Market Reactions to the Release of Movies Re-Exposing Past Corporate Scandals

Posted by Hui Zhou (Tulane University) , on Thursday, November 17, 2022
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Exponential Expectations for ESG

Posted by Olwyn Alexander, Dariush Yazdani, PricewaterhouseCoopers LLP, on Thursday, November 17, 2022
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Exponential Expectations for ESG

Posted by Olwyn Alexander, Dariush Yazdani, PricewaterhouseCoopers LLP, on
Thursday, November 17, 2022
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Olwyn Alexander is Global Asset and Wealth Management Leader and Dariush Yazdani is Global Asset and Wealth Management Market Research Centre Leader at PricewaterhouseCoopers LLP. This post is based on their PwC report. Related research from the Program on Corporate Governance includesThe Illusory Promise of Stakeholder Governance (discussed on the Forum here); and Will Corporations Deliver Value to All Stakeholders? (discussed 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 E. Strine, Jr; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

Introduction: The ESG imperative

As ESG-orientated mandates fast become the default—not just in Europe but also the US—the race is on to shift allocations and retrofit existing funds to keep pace with investor expectations. But as vital as the conversion efforts are, they’re only a stopgap. As our survey underlines, long-term survival and success depend on the ability of asset managers to prepare for the next big shakeup in the market by differentiating their strategy and delivering on their purpose.

As the AWM industry and its investors emerge from the covid-19 pandemic with renewed purpose, ESG funds have moved from the margins and into the mainstream. One of the most striking findings from our worldwide survey of 250 institutional investors and 250 asset managers, representing nearly half of global assets under management (AuM), is the exponential rate at which this transformation is taking place, as established markets grow and new markets come on stream.

The US, which is the largest AWM market (US$67 trillion in AuM at the end of 2021), had been thought to trail behind Europe in attitudes towards ESG. But our survey found that 81% of institutional investors in the US plan to increase their allocations to ESG products over the next two years, almost on par with Europe (83.6%). Under our base-case growth projection scenario, ESG AuM in the US would more than double, from US$4.5 trillion in 2021 to US$10.5 trillion in 2026. Spurred on by recent landmark legislation that commits US$390 billion to fight climate change, the overall direction of travel among US investors is clear, even if the complexion of administrations changes and some state governments continue to push back on ESG.

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Can Old Sin Make New Shame? Stock Market Reactions to the Release of Movies Re-Exposing Past Corporate Scandals

Posted by Hui Zhou (Tulane University) , on
Thursday, November 17, 2022
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Hui Zhou is a PhD Student at Tulane University. This post is based on a recent paper by Ms. Zhou, Professor Han Jiang, Professor Le (Lexi) Kang, and Professor Ziye Zoe Nie.

On November 12, 2019, a movie named Dark Waters was premiered in North American theaters. This widely commended movie revisited a dark history of a chemical firm — DuPont, highlighting the true story of how a tenacious attorney fought against DuPont on behalf of numerous victims of the environmental misconduct of the firm. During DuPont’s earnings call prior to Dark Waters’ release, some investors expressed concerns that the movie would cast a shadow over DuPont shares. However, many analysts believed that the price reaction of DuPont’s stock to this movie, if any, would quickly fade as the featured water contamination scandal was revealed to the public years before the movie release. The impact of this movie turned out to be surprisingly prominent — Dark Waters incited significant and persistent negative stock market reactions towards DuPont: The stock price of DuPont took a major dive, dropping by 9.08% over the first week after the movie was premiered on November 12, 2019, and further slumping by another 1.42% over the second week.

Dark Waters rakes up DuPont’s past scandal that has been public information years before its release. Specifically, the featured class action lawsuit against was settled in 2005, and the related controversial topic was also reported by a New York Times article in 2016. Therefore, it is intriguing to see that the re-exposure of such an old scandal can still impair shareholder value after its original dust has long settled. Meanwhile, it is widely studied in corporate scandal literature that the initial exposure of a firm’s deviant conducts results in losses in the value of the focal firms’ stocks. The aforementioned pronounced and persistent market reactions to Dark Waters’ release, however, provide an instructive example that the true cost of corporate scandals documented in previous studies is likely to be understated. In this regard, does DuPont’s case also apply to other companies whose past publicly known scandals are resurfaced on big screens? In this paper, we systematically examine whether and how the release of movies reiterating past corporate scandals (hereon, scandal re-exposing movies) can incur significant market reactions towards firms featured in those movies.

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Chancery Court Addresses Board Responsibility Under Caremark for Cybersecurity Risk

Posted by Gail Weinstein, Philip Richter, Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Thursday, November 17, 2022
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Gail Weinstein is Senior Counsel, and Philip Richter and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Brian T. Mangino, Erica Jaffe, and Shant P. Manoukian. This post 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 Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.

In Construction Industry Laborers Pension Fund v. Bingle (Sept. 6, 2022) (SolarWinds), the Delaware Court of Chancery dismissed a derivative suit asserting Caremark claims against the directors of SolarWinds Corporation for their alleged failure to oversee the company’s cybersecurity risk. SolarWinds, which developed software for businesses to help them manage their information technology infrastructure, was attacked by cyber hackers, resulting in the massive leaking of its customers’ personal information. When the attack (known as “Sunburst”) was disclosed, SolarWinds’ stock price dropped by 40%. Stockholders brought suit and argued that demand on the board to bring the suit was futile as a majority of the directors faced a likelihood of personal liability under Caremark for breach of the duty of loyalty in having failed to oversee the company’s cybersecurity risk. The case was dismissed at the pleading stage.

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Supply chain strategies: For many companies, the traditional balance is shifting

Posted by Carey Oven, Jim Kilpatrick, Deloitte, on
Wednesday, November 16, 2022
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Jim Kilpatrick is Global Supply Chain & Network Operations Leader and Carey Oven is National Managing Partner at the Center for Board Effectiveness and Chief Talent Officer at Deloitte LLP. This post is based on their Deloitte memorandum.

In the era of lean and just-in-time management approaches, many companies adopted supply chain strategies with a primary focus on cost and efficiency. With a formula for an effective supply chain focused on how to achieve the lowest cost with the highest level of efficiency, production facilities and suppliers of goods and services might be located virtually anywhere, as long as they could deliver to their critical customers on time at the agreed price. Supply chains, along with business strategies more broadly, became increasingly global.

In more recent years, an era in which low-probability, high-impact events have become more common, supply chains built around this formula have seen their share of challenges. Geopolitical tensions, war, increasingly severe weather, and a global pandemic, to name a few, have disrupted the flow of goods and services in unexpected and unprecedented ways. In many companies, the scale and scope of disruption over the past few years has prompted new discussions about whether supply chain strategies should give more consideration to risk and resilience.

The global pandemic was a critical driver of this shift, as regional lockdowns, infrastructure constraints, and even closed borders quickly put the spotlight on the vulnerabilities of global supply chains. Further events, such as war in Ukraine, and increasing awareness of the concentration of critical commodities in a few geographies have accelerated the discussions.

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Representations & Warranties, Fraud, and Risk Shifting: An Analytical Framework

Posted by Steven L. Schwarcz (Duke University), on
Wednesday, November 16, 2022
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Steven L. Schwarcz is the Stanley A. Star Distinguished Professor of Law & Business at Duke University School of Law and Senior Fellow of the Centre for International Governance Innovation. This post is based on his recent paper.

In Representations & Warranties, Fraud, and Risk Shifting: An Analytical Framework, I attempt to build a systematic framework for analyzing breaches of representations and warranties (“R&W”s). Many contracts include R&Ws in order to reduce information asymmetry and to reallocate risk between the parties. When used in asset-sale agreements, R&Ws are assertions by a seller to the buyer about the quality of the assets being sold. When used in financing agreements, R&Ws are assertions by a borrower to the lender about the borrower’s financial condition, its ability to repay the financing, and the quality of the collateral. Whichever the context, I refer to the parties providing these assertions as “warrantors.”

To provide real world grounding, the Article takes into account actual R&Ws used in business and finance, starting with those used in securitization transactions. Securitizations exemplify the current controversy over the meaning of R&Ws and also broadly represent the problems because they incorporate the same types of R&Ws found in both asset sales and financings.

A warrantor that breaches a R&W normally would be liable for contract-breach damages, which are calculated as expectation damages. Expectation damages can be an inefficient remedy for R&W breach, however, because they cannot always be calculated and awarded costlessly. Parties therefore have examined alternative breach remedies. In securitizations, they’ve settled on a “cure-or-repurchase” remedy: requiring the warrantors either to correct, or “cure,” the breach or to repurchase the breaching loan—the type of underlying asset that generates cash to repay securitization investors.

Warrantors contend that this “sole remedy” should adequately shift risk. Litigating investors now counter, however, that it insufficiently shifts risk if the breaches are extensive. They also contend that extensive R&W breaches should constitute fraud and that, in the presence of fraud, their remedies should not be limited.

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Remarks by Chair Gensler Before the Investment Adviser/Investment Company National Seminar

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Wednesday, November 16, 2022
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Good morning. Welcome to the Compliance Outreach Program of the Securities and Exchange Commission’s Investment Adviser/Investment Company National Seminar.

My thanks to the SEC staff for organizing this seminar—particularly in the Divisions of Examinations, Enforcement, and Investment Management—and to the industry participants in the audience and on today’s panels.

As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of my fellow Commissioners or the staff.

Compliance

In thinking about compliance, my mind goes to two texts—not the off-channel communications that firms are required to document[1]—but rather two texts from long ago: one from nearly 400 years ago, and another from nearly 4,000 years ago.

First, there’s Shakespeare, who wrote in his 1623 comedy Measure for Measure: “Good counsellors lack no clients.”[2]

As chief compliance officers, I think that you all seek to be considered as “good counsellors.”

That brings me to the second text, one written in stone: the Hammurabi Code. Written nearly four millennia ago, the code included various provisions about borrowing, lending, and interest rates related to silver and grain, the currencies of the day.[3] Even in 1700 BCE, the code’s authors understood that there were inherent conflicts of interest when it comes to finance.

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2022 CPA-Zicklin Index on Corporate Political Disclosure and Accountability

Posted by Dan Carroll, Bruce Freed, Karl Sandstrom, Center for Political Accountability, on
Tuesday, November 15, 2022
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Dan Carroll is Vice President for Programs and Counsel of the Center for Political Accountability and oversees the CPA-Zicklin Index, Bruce F. Freed is CPA’s President, and Karl J. Sandstrom is strategic advisor to the Center and senior counsel with Perkins Coie. Related research from the Program on Corporate Governance includes The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson, Jr., James Nelson, and Roberto Tallarita; The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss; Shining Light on Corporate Political Spending (discussed on the Forum here); and Corporate Political Speech: Who Decides? (discussed on the Forum here) both by Lucian Bebchuk, and Robert J. Jackson Jr.

In a major expansion, the 2022 CPA-Zicklin Index, the nation’s premier benchmarking of U.S. companies for transparency and accountability of their political spending, doubled its rating from the S&P 500 companies to the Russell 1000.

The Index is a nonpartisan scorecard that now gives attention to large and medium-cap U.S. companies that are not S&P 500 components. This will help protect more shareholders and others concerned about increasing risks of company political spending and will enable companies to compare, their policies and practices with those of their  peers and leaders in their industries.

Former Securities and Exchange Commission Acting Chair and Commissioner Allison Herren Lee highlighted in the Index foreword the progress made and the remaining holes that pose an even greater threat as U.S. democracy comes under heavier assault.

As she pointed out, the threat is fueled in part by corporate political money. “[C]orporations continue to pour billions of dollars into political coffers around the country, with little transparency, and thus little accountability, for the political spending decisions made in the twelve years since the Supreme Court’s ruling in Citizen’s United opened the spigot on corporate political spending,” she wrote. “The trend lines in the CPA-Zicklin Index over the past decade show some laudable increases in transparency, but the analyses also show that non-transparency around corporate influence in the political process remains a significant issue.”

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Does Voluntary Financial Disclosure Matter? The Case of Fairness Opinions in M&A

Posted by Adam Badawi (University of California, Berkeley), Matthew Cain (University of California, Berkeley), Steven Davidoff Solomon (University of California, Berkeley), on
Tuesday, November 15, 2022
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Adam B. Badawi is Professor of law at Berkeley Law School; Matthew D. Cain is Senior Fellow at the Berkeley Center for Law and Business at Berkeley Law School; and Steven Davidoff Solomon is Professor of Law at Berkeley Law School. This post is based on their recent paper.

Louis D. Brandeis famously said that “sunlight is the best disinfectant” to promote vigorous and copious financial disclosure. While this principle seems like a common-sense aspiration, research has found that the social benefit of disclosure in the capital markets can be more complex and even negative. There is also a vigorous debate over the virtues of mandatory versus voluntary disclosure and the need for the former over the latter.

In Does Voluntary Financial Disclosure Matter? The Case of Fairness Opinions in M&A, recently posted to the SSRN, we use the shifting nature of Delaware disclosure requirements for fairness opinions in tender offers to assess the impact of voluntary versus mandatory disclosure in mergers and acquisitions (“M&A”) transactions. Unlike transactions structured as a merger—where the disclosure of fairness opinion details has long been required—the disclosure obligations for transactions structured as tender offers have shifted over recent decades. In this study, we scrape the details from over 900 disclosures by tender offer targets that span these changes in disclosure regimes. The sample, which encompasses 1995 to 2019, covers three distinct approaches taken by Delaware courts to tender offer disclosure. Prior to 2000, Delaware said little about the need to divulge the details of fairness opinions when a firm was the target of a tender offer. In this initial period, disclosure of these details was essentially voluntary. Around 2001, Delaware courts concluded that this information could be material to shareholders, but a series of cases in this period gave mixed messages about the level of detail required. Tender offer targets thus had to balance the costs of additional disclosure against a relatively low prospect of liability. By 2007, it became clear that a failure to disclose the relevant details of a fairness opinion would bring a significant risk of fiduciary liability. After this period, disclosure of fairness opinion details was essentially mandatory if a firm sought to avoid liability.

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