Yearly Archives: 2022

SEC Finalizes New Clawback Rules

Posted by Mike Kesner, Lane Ringlee, Pay Governance LLC, on
Tuesday, November 15, 2022
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Mike Kesner is Partner, and Lane Ringlee is Managing Partner at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse M. Fried.

Introduction and Background

On October 26, 2022, the Securities and Exchange Commission (SEC) adopted the final rule requiring that all listed companies adopt and disclose a clawback policy as required under Dodd-Frank. These final rules follow the SEC’s issuance of proposed rules in July 2015, which laid dormant until the re-opening of two separate comment periods in October 2021 and June 2022.

The new clawback rule requires that a listed company adopt and disclose a policy for the recoupment of incentive compensation from its current and former executive officers in the event the company is required to prepare “an accounting restatement due to material noncompliance” under the securities law (colloquially referred to as a “clawback” policy).

The final rule also requires national exchanges to prohibit the listing of any security of an issuer that does not develop and implement a clawback policy that complies with the new rule.

Recap of the Final Rules

The key provisions of the final clawback rules include the following:

Covered Group

  • Applicable to current and former executive officers (Sec. 16 definition) who received incentive-based compensation during the three fiscal years preceding the date of the restatement
  • Newly appointed executive officers are not subject to clawback for prior periods (this is a modification from the proposed rules)

Triggers

  • Restatements that correct errors that are material to previously issued financial statements (“big R” restatements), or
  • Restatements that correct errors that are not material to previously issued financial statements but would result in a material misstatement if (i) the errors were left uncorrected in the current report or (ii) the error correction was recognized in the current period (“little r” restatements)

– Excludes “out of period” adjustments (corrections of immaterial errors recorded in the current period)

– Excludes revisions due to internal reorganizations impacting reportable segment disclosures or changes in capital structure (e.g., stock splits, stock dividends, etc.)

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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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Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School; Kobi Kastiel is Associate Professor of Law at Tel Aviv University, and Senior Fellow of the Harvard Law School Program on Corporate Governance; and Anna Toniolo is Postdoctoral Fellow at the Program on Corporate Governance of Harvard Law School. This post is based on their forthcoming essay, “How Twitter Pushed its Stakeholders under the Bus.” Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here), by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? (discussed on the Forum here), all by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Response to the War in Ukraine: Stakeholder Governance or Stakeholder Pressure? (discussed on the Forum here), by Anete Pajuste and Anna Toniolo.

Our forthcoming essay, “How Twitter Pushed its Stakeholders under the Bus,” offers a case study of Elon Musk’s Twitter acquisition. Given the strong current interest in this acquisition, we discuss, in this and subsequent posts, some of our findings and their implications for current debates on stakeholder capitalism.

An epic battle has been waged this year between Twitter and Elon Musk after Musk tried to get out of the acquisition agreement between them. Twitter won, and its shareholders and corporate leaders captured large financial gains as a result.

While the battle between these two sides has attracted massive media coverage, we believe that insufficient attention has been paid to another group that was expected to be affected by the deal – Twitter’s “stakeholders” (that is, its non-shareholder constituencies). In particular, our analysis concludes that, notwithstanding their stakeholder rhetoric over the years, when negotiating the deal, Twitter’s corporate leaders chose to push their stakeholders under the (Musk) bus.

That is not because Twitter’s corporate leaders were pushed over by Musk. To the contrary, Twitter’s leaders obtained from Musk, and fought hard to keep, large monetary gains for shareholders (a premium of about of $10 billion), as well as for the corporate leaders themselves (who together made a gain of over $1 billion from the deal). In exclusively focusing on these monetary gains, however, Twitter’s leadership elected to disregard stakeholder interests.

Pushed under the bus were Twitter’s employees, which the company fondly called “tweeps” over the years. Although Twitter has for long promised to care for its tweeps, Twitter’s leaders did not attempt to look after, or even raise with Musk how the tweeps would be affected by the negotiated deal.

Instead, Twitter’s leaders chose to allocate the very large monetary surplus produced by the deal entirely to shareholders and the leaders themselves. They chose not to use any part of this surplus to provide any monetary cushion to the tweeps who would lose their positions post-deal. To illustrate, allocating even 2% of the monetary gains that ultimately went to shareholders and corporate leaders to employee protection would have enabled providing a substantial monetary cushion to the about 50% of the tweeps who got the axe shortly after the deal’s closing.

Notably, Twitter’s leaders did not even hold negotiations or discussions with Musk to ensure that tweeps would learn of their lay-offs in a humane way rather than infer it after getting disconnected in the middle of night, or that the move away from the remote work environment to which Twitter expressed a commitment would be gradual rather than sudden.

Also pushed under the bus were the mission statements and core values to which Twitter’s corporate leaders had long pledged allegiance. In negotiating the terms of the transaction, Twitter’s corporate leaders did not negotiate with Musk for any constraints or even soft pledges with respect to maintaining such commitments post-deal. Twitter’s leaders seem not to have even held discussions with Musk regarding his plans in this respect, as they told employees they had no information on these plans. Twitter’s leaders elected to proceed in this way despite warning and indications that Musk could well abandon some or all of Twitter’s strong pre-deal commitments.

Twitter had for long communicated commitments to having a mission and not just a profit goal, and to advancing values such as civic integrity, excluding hate speech, upholding human rights, and even supporting Ukraine in its defense against aggression. But these commitments seem to have received little attention or weight from Twitter’s leaders when they negotiated the Musk deal.

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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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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services. This post is based on an ISS Corporate Solutions memorandum by Senior Editor, Paul Hodgson.

The ransomware attack on the Colonial Pipeline in May 2021 was just one of many signs that environmental and cybersecurity risk are closely connected. Thefts of personal information during a cybersecurity breach erode trust on the part of customers investors, employees and other stakeholders, demonstrating the link between cyber risk and social risk. The new disclosure and reporting requirements embedded in the Security and Exchange Commission’s latest regulations governing the oversight of cybersecurity underline the link between governance risk and cyber risk.

All this evidence shows that either cybersecurity is already part of ESG, and, perhaps, a more appropriate abbreviation should be ESGC. Most enterprise risk management policies have already expanded their oversight from purely financial risk to these other areas, including cybersecurity. Cyber risk can be as harmful to a company’s reputation and value as any other ESG issue, and the damage is inflicted and experienced in much the same way. As cyberattacks increase in size and frequency, the direct and indirect damage to companies — including loss of customer confidence, reputational damage, potential impact on the stock price and possible regulatory actions or litigation — arguably touches all aspects of ESG.

This convergence of these of risks is widely recognized across companies, investors and governments. The World Economic Forum’s Global Risk Report 2022 notes that the five main areas of risk are economic, geopolitical, social, environmental and technological. According to an RBC Global Asset Management Responsible Investment Survey, asset managers rank cybersecurity as their second-biggest concern among ESG-related themes. That places it above the environmental risks of climate change and water and the governance risk of shareholder rights and voting. The only ESG-related theme of higher concern is the governance-related risk of anti-corruption.

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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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David M. Silk and Sabastian V. Niles are Partners and Carmen X. W. Lu is Counsel at Wachtell, Lipton, Rosen & Katz. This post is based on a WLRK publication by, among others, Mr. Silk, Mr. Niles, Ms. Lu, Andrew Brownstein, Steve Rosenblum and Adam Emmerich. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

The universal proxy card, which came into effect on September 1, 2022, represents an important development in shareholder voting: for the first time, all shareholders will be able to vote for their preferred mix of board and dissident director nominees at a contested meeting. While the framework by which major institutional shareholders and the influential proxy advisers ISS and Glass Lewis evaluate proxy contests remains unchanged—dissidents will still need to make a compelling case for change and propose proportionate solutions and qualified nominees—the universal proxy card may meaningfully change the dynamics of contested elections. One consequence is clear: individual director candidates will face increased scrutiny by shareholders and proxy advisors. Shareholders will be able to engage in “elective surgery” and opt away from individual board-nominated candidates whose skills, backgrounds, experiences and contributions compare unfavorably in their view relative to those of individual dissident nominees. With shareholders—and the proxy advisory firms—now able to “cherry pick” from among the entire set of board candidates in a contested election, both the board and dissidents will be expected to more clearly communicate and demonstrate the strengths of each individual nominee.

The universal proxy card rules also come at a key juncture in the economic cycle. Macroeconomic headwinds, trading multiple compression and a bearish earnings outlook have all aided the resurgence of shareholder activism. Investor focus on ESG issues also remains strong. The past proxy season saw a record number of shareholder proposals and continued uptick in private engagement. It is possible that some proponents (including smaller social activists that have previously submitted Rule 14a-8 proposals) may seek to leverage the lower cost of entry created by the new universal proxy card rules to nominate directors as part of ESG-oriented campaigns.

The new universal proxy rules will require a review of company bylaws to ensure that appropriate amendments are implemented to provide sufficient notice and time to prepare for a contested election. Companies would also be well advised to review their preparatory practices prior to their next annual meeting, including board and management readiness, shareholder engagement and outreach, proxy statement and related public disclosures, and board refreshment and composition strategies. We summarize our recommendations below.

Summary of Key Rule Changes

The universal proxy rules require the use of proxy cards listing the names of all director candidates in a contested election, regardless of whether the candidates were nominated by the board or shareholders. Shareholders will be able to “mix and match” their votes for dissidents and board nominees. The new rules also set forth minimum solicitation and notice requirements, including the requirement that dissidents solicit holders of a minimum of 67% of the voting power of shares entitled to vote in the election. Unlike proxy access, the universal proxy rules do not impose minimum ownership thresholds or holding periods nor do they cap the number of nominees. Each side will need to conduct its own solicitation and may use notice and access to deliver its proxy materials and comply with the requisite solicitation requirements. In addition, the “short slate” rule has been eliminated, and the “bona fide nominee” rule has been amended to include nominees that consent to being named in any proxy statement for the applicable shareholder meeting.

Notably, the Securities and Exchange Commission (“SEC”) has not mandated identical universal proxy cards. The new rules require proxy cards to list all nominees, to distinguish among board, dissident and proxy access nominees, to use the same font type, style and size to present all nominees, and to disclose the maximum number of nominees for which voting authority can be given, but the board and dissidents have free reign to make tactical decisions on how to group nominees, including whether to identify nominees recommended or opposed by their side. The likelihood is that dissidents nominating fewer candidates than seats will specify which board-nominated candidates they oppose and which they do not oppose.

Bylaw Amendments

The scope of bylaw amendments in response to the universal proxy rules should be considered in the context of a company’s overall governance profile and structural defenses, but we recommend that all companies at least consider making the following changes:

  • Requiring the dissident’s nomination notice to include a representation that the dissident intends to solicit proxies from shareholders representing at least 67% of the voting power of shares entitled to vote on the election of directors;
  • Requiring the dissident to comply with the universal proxy rules and to provide reasonable evidence thereof prior to the shareholder meeting; and
  • Requiring the dissident to use a proxy card color other than white, which will be reserved for the company’s exclusive use.

In addition, to the extent companies are considering updates to their advance notice bylaws, such amendments should be unambiguous and reasonably serve to provide the company and shareholders with relevant information. Bylaw updates adopted on a “clear day” will receive greater judicial and shareholder deference than changes adopted amid a proxy contest, and in light of the possibility of an increase in proxy contests in the years ahead, now may be a good time to review and update bylaws to reflect evolving market practices.

Proxy Season Engagement

The best preparation for any proxy contest occurs in peacetime, and companies should continue to build relationships and credibility with their investors in the context of their ongoing engagement meetings with investors for the benefit of all board members. Given the limited opportunities for directors to meet with investor stewardship teams during the year, companies should consider how to strike the right balance between introducing newer directors to investors and bringing familiar faces who are more experienced with shareholder engagement. Meeting agendas may also need review; additional time may need to be allocated to allow a robust discussion of board composition and effectiveness. During a proxy contest, it will be helpful if most or even, in certain circumstances, all directors are prepared to engage with key shareholders and proxy advisors.

Proxy Disclosures

As directors face more scrutiny and their roles become ever more complex, it may be time to take a closer look at proxy materials and related disclosures and processes, including D&O questionnaires, director skills matrices and director biographies. Heightened expectations regarding oversight of risk, climate, human capital, cybersecurity and other issues have led to growing investor and regulatory demand for disclosures, as evidenced by the SEC’s recent rulemaking and comment letters. The director skills matrix provides companies an opportunity to communicate and explain the specific substantive skills they believe are critical to the business and the order of priority given to such skills. A well-crafted director skills matrix can effectively highlight the strength of the company’s overall board composition and demonstrate the contribution each director brings to the board. Director biographies can also be leveraged to support the case for each director, highlighting particularly relevant or valuable aspects of their experience.

Board Composition and Refreshment

While dissidents will still need to make the case for change to secure the support of shareholders and proxy advisors, directors who are publicly perceived as having vulnerabilities such as lacking independence, having long tenure, being “overboarded” or just underperforming will face greater scrutiny, and likely face a higher risk of defeat in a proxy contest. Whereas in the past, companies have been able to successfully focus on the collective strength of the board, ISS has already indicated that it “will continue to highlight to clients those nominees from either party who, during our engagements, appear particularly well-qualified.” In preparation for future proxy contests, in addition to providing clarity on strategic and business priorities, boards may need to further refine their approaches to board refreshment and composition (along with director training and education), including paying particular attention to concerns regarding long tenure, overboarding, diversity and relevant expertise and skillsets. In the universal proxy era, shareholders and proxy advisors may be more focused on the individual qualities and skill sets of the director candidates from each side.

Universal proxy marks a new phase of corporate governance. A direct consequence of the rules is increased scrutiny of individual directors and their role on the board. In addition to bylaw amendments to ensure clear understanding of the voting process and timely compliance with the new rules, companies should also look to leverage public and private opportunities to build investor confidence and trust in the board as a whole as well as each member of the board.

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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Jamie Allen is Secretary General, Neesha Wolf is Supporting Research Director at Asian Corporate Governance Association. Kei Okamura is Portfolio Manager at Neuberger Berman East Asia and Japan Working Group Chair at ACGA . This post is based on their open letter published in the Asian Corporate Governance Association. 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; Duty and Diversity (discussed on the Forum here) by Chris Brummer, and Leo E. Strine. 

This post is based on an open letter by ACGA. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

The Asian Corporate Governance Association (ACGA) recently formed a working group of members and other interested investors to discuss the issue of gender diversity on Japanese listed company boards. We are writing to share our thoughts and suggestions on this topic.

There is a growing appreciation that a diverse board is a key driver of strong corporate governance, which is essential to preserve and enhance long-term corporate value. In this context, gender has become a key component of the responsible investment policies of many asset owners and institutional investors around the world, with an increasing number voting against companies with single-gender boards. The issue is gaining traction in new listing regulations as well as corporate governance codes in many jurisdictions. And there is a growing discussion worldwide as to whether enough is being done to promote women to senior management roles in preparation for directorships. As ACGA has found in our engagements with Japanese companies, a diversified boardroom tends to promote more dynamic discussion of a company’s long-term strategy and enhances board effectiveness. There is a growing appreciation that a diverse board is a key driver of strong corporate governance, which is essential to preserve and enhance long-term corporate value. In this context, gender has become a key component of the responsible investment policies of many asset owners and institutional investors around the world, with an increasing number voting against companies with single-gender boards. The issue is gaining traction in new listing regulations as well as corporate governance codes in many jurisdictions. And there is a growing discussion worldwide as to whether enough is being done to promote women to senior management roles in preparation for directorships. As ACGA has found in our engagements with Japanese companies, a diversified boardroom tends to promote more dynamic discussion of a company’s long-term strategy and enhances board effectiveness.

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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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Ning Chiu, Robert A. Cohen, and Michael Kaplan are Partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum by Ms. Chiu, Mr. Cohen, Mr. Kaplan, Martine M. Beamon, John B. Meade, and Greg D. Andres.

A federal district court decision involving alleged Regulation FD violations highlighted analysis of key elements governing the regulation relating to whether information is material and nonpublic, and provides multiple takeaways on evaluating the risk of one-on-one calls with analysts.

Background

On September 8, Judge Engelmayer of the Southern District of New York denied motions for summary judgment filed by both the SEC and the defendants in litigation alleging Regulation FD violations. The defendants included AT&T and three individuals who worked in the company’s investor relations department. The decision puts the case on a path toward trial (absent settlements).

Regulation FD prohibits a company from selectively disclosing material, nonpublic information (MNPI) to certain securities professionals or others likely to use the information to trade, such as analysts and investors, unless the company also discloses the information to the public. Although the court found the evidence overwhelmingly supported the SEC’s claims that the information at issue was both nonpublic and material, it determined that a reasonable jury could find for either side on the third element, scienter.

Because most Regulation FD cases brought by the SEC are settled, the court’s evaluation of the claims and defenses provides insight for companies deciding whether certain communications with analysts might violate Regulation FD.

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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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William W. Bratton is Nicholas F. Gallicchio Professor of Law Emeritus at the University of Pennsylvania Carey Law School. This post is based on his recent paper. 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Section 262(h) of Delaware’s General Corporation Law (DCL) bids the Chancery Court in an appraisal proceeding to “determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger.”  It provides no further instructions regarding the means to the end, other than an admonition to “take into account all relevant factors.”   For additional guidance on the meaning of fair value, we must consult a caselaw that stretches back in time almost a century.

There have been two intervals of disruption in this history—disruptions incident to unexpected revisions of the methodology of fair value ascertainment by the Delaware Supreme Court.  The first was the 1983 decision of Weinberger v. UOP, 457 A.2d 701 (Del. 1983), which withdrew a longstanding and constraining valuation mandate and much expanded appraisal’s menu of acceptable methodologies, inviting reference to state-of-the-art valuation technologies.  The intent and result were to facilitate liberality in the treatment of appraisal petitioners.  The second disruptive intervention occurred more recently, with the decision of three cases–DFC Global Corporation v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017), Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), and Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (2019).  This trio of cases brings back mandatory methodology, imposing the merger price as the basis for fair value ascertainment in appraisals arising from a high-profile subset of arm’s length mergers.  The rulings substantially modify Weinberger without overruling it, lurching away from liberality of treatment.  Controversy and confusion have resulted.

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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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Mike Kesner is Partner and Linda Pappas is Principal at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Paying for long-term performance (discussed on the Forum here); Pay without Performance: The Unfulfilled Promise of Executive Compensation both by Lucian Bebchuk and Jesse M. Fried.

Introduction

During the last week of August, the Securities and Exchange Commission (SEC) released its final set of rules regarding the mandated “Pay Versus Performance” (PVP) disclosure. The new rules are the culmination of various proposals by the SEC dating back to 2015 when the agency first responded to the Dodd-Frank legislative requirement. Pay Governance LLC prepared two recent Viewpoints summarizing our interpretation and analysis of the new disclosure requirements (see Pay Governance Viewpoint on Executive Compensation, SEC Releases Final Rules Regarding Pay-Versus-Performance (PVP) Disclosures dated August 31, 2022 and PVP Q&A: Our Interpretations of the New Pay for Performance Rules dated September 15, 2022).

We stated in the previous Viewpoints that we would supplement our commentary with follow-on analyses and insights regarding the disclosure rules, and this Viewpoint provides an example of both the required and allowed disclosure under the final rule. Regarding supplemental disclosures, the SEC has granted companies significant latitude to include “additional measures of compensation or financial performance and other supplemental disclosures provided such disclosures are clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure”.

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Weekly Roundup: November 4-10, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, November 11, 2022

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This roundup contains a collection of the posts published on the Forum during the week of November 4-10, 2022

Remarks by Chair Gensler Before the Practising Law Institute’s 54th Annual Institute on Securities

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Thursday, November 3, 2022
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Statement by Commissioner Uyeda on Final Amendments to Form N-PX

Posted by Mark T. Uyeda, U.S. Securities and Exchange Commission, on Thursday, November 3, 2022
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Statement by Chair Gensler on Final Amendments to Form N-PX

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Thursday, November 3, 2022
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Losing Control? The 20-Year Decline in Loan Covenant Violations

Posted by Thomas P. Griffin (Villanova University), Greg Nini (Drexel University), and David C. Smith (University of Virginia) , on Friday, November 4, 2022
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Lawsuit Against Meta Invokes Modern Portfolio Theory To Protect Diversified Shareholders

Posted by Frederick Alexander, The Shareholder Commons, on Friday, November 4, 2022
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Shareholder Voting Trends (2018-2022)

Posted by Matteo Tonello, The Conference Board, Inc., on Saturday, November 5, 2022
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Seven Key Considerations for a Reverse Stock Split by a Delaware Corporation

Posted by Jeremy Barr, Valerie Ford Jacob, and Pamela Marcogliese, Freshfields Bruckhaus Deringer LLP, on Sunday, November 6, 2022
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Top 5 SEC Enforcement Developments

Posted by Haimavathi Marlier, Jina Choi, and Michael Birnbaum, Morrison & Foerster LLP, on Monday, November 7, 2022
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Revisiting the Effect of Common Ownership on Pricing in the Airline Industry

Posted by Patrick Dennis (University of Virginia), Kristopher Gerardi (Federal Reserve Bank of Atlanta), and Carola Schenone (University of Virginia), on Monday, November 7, 2022
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The Role of Long-Term Shareholder Voice

Posted by Benjamin Colton, Ryan Nowicki, SSGA, on Monday, November 7, 2022
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Establishing Norms for Director Behavior to Enhance Board Culture and Effectiveness

Posted by Holly J. Gregory, Sidley Austin LLP, on Tuesday, November 8, 2022
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Governance and the Decoupling of Debt and Equity: The SEC Moves

Posted by Henry T. C. Hu (University of Texas), on Tuesday, November 8, 2022
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Crafting the ‘G’ in ESG: Accountability in the Boardroom

Posted by Amma Anaman, Helle Bank Jørgensen, and Chantal Wessels, Nasdaq, Inc., on Tuesday, November 8, 2022
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Practical takeaways of universal proxy card

Posted by Louis L. Goldberg, William H. Aaronson, and Ning Chiu, Davis Polk & Wardwell LLP, on Wednesday, November 9, 2022
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Do Diverse Directors Influence DEI Outcomes?

Posted by Joseph Pacelli (Harvard Business School), on Wednesday, November 9, 2022
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SEC Pay Versus Performance Disclosure Requirements: Initial Observations

Posted by Jordan Lute, Maria Vu, Glass, Lewis & Co, on Wednesday, November 9, 2022
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ESG Ratings: A Call for Greater Transparency and Precision

Posted by Jason Halper, Duncan Grieve, Timbre Shriver, Cadwalader, Wickersham & Taft LLP, on
Thursday, November 10, 2022
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Jason Halper is Partner, Timbre Shriver is an Associate, and Duncan Grieve is Special Counsel at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Shriver, Mr. Grieve, Sara Bussiere, and Jayshree Balakrishnan. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian Bebchuk, and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here) by Lucian Bebchuk, Roberto Tallarita, and Kobi Kastiel; 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; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Roberto Tallarita, and Kobi Kastiel; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark Roe.

In early 2022, the ESG ratings industry attracted attention when electric vehicle manufacturer Tesla Inc. was dropped from the S&P 500 ESG Index. Explaining its decision, S&P cited perceived deficiencies in many ESG areas, including Tesla’s lack of an internal low carbon strategy for reporting and reducing carbon emissions, insufficient codes of business conduct, claims of racial discrimination and poor working conditions at a California factory, and poor handling of a federal investigation into deaths and injuries linked to Tesla’s autopilot vehicles.[1] Tesla was not dropped from other comparable ESG indexes.[2]

The differing treatment of Tesla from an ESG rating perspective highlights several realities about the ESG rating industry: first, the fact that ESG ratings providers use different ranking methodologies often results in assigning divergent rankings to the same company. Second, lumping all of “E” and “S” together—or, at times, all of the different issues within each of these categories—can obscure the reason for a particular company’s ESG rating. The at times low correlation among ranking scores, the lack of granular information as to the basis of the rating, and, more generally, concerns around the transparency of ratings processes have led some to question the value, or how to best make use, of ESG ratings. Confusion and controversy can exist even with respect to ratings conferred by a single ESG ratings provider. Industry commentators, for instance, have raised questions regarding the S&P 500 ESG Index’s inclusion of companies such as ExxonMobil and McDonald’s (the latter of which generated more greenhouse gases than Portugal or Hungary in 2019) and the exclusion of Tesla and technology companies such as Meta.[3]

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