Yearly Archives: 2022

2022 ISS Global Benchmark Policy Survey

Posted by Subodh Mishra and Georgina Marshall, Institutional Shareholder Services, Inc. , on
Wednesday, November 2, 2022
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Subodh Mishra is Global Head of Communications and Georgina Marshall is Global Head of Research at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Kathy Belyeu, Michael Ellis, Hailey Knowles, and Renata Schmitt Silva.

Overview of Process and Response

This document summarizes the findings of the ISS 2022 Global Benchmark Policy Survey, which opened on August 3 and closed on Aug. 31,2022.

The survey is a part of ISS’ annual global policy development process, and was, as is the case every year, open to all interested parties to solicit broad feedback on areas of potential ISS policy change for 2023 and beyond.

We received 417 responses to the survey: 205 responses from investors and investor-affiliated organizations, 212 from non-investor respondents. Responses that lacked an email address were not accepted. Multiple responses from the same person were also not accepted; only the response submitted last was counted.

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Twenty-Year Review of Audit and Non-Audit Fee Trends

Posted by Nicole Hallas, Kayla Coello, and Sarah Keohane, Audit Analytics, Inc., on
Wednesday, November 2, 2022
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Nicole Hallas is Manager of Research Analytics, Kayla Coello is a Research Analyst and Sarah Keohane is a Data Analyst at Audit Analytics. This post is based on an Audit Analytics memorandum by Ms. Hallas, Ms. Coello, Ms. Keohane, and Ms. Watson.

Executive Summary

Introduction

Analyzing fees paid to external auditors provides insights into audit risk and auditor independence.

Audit fees are an indicator of audit complexity and risk. Higher risk audits require more auditor resources (hours, personnel, specialists, etc.) to reduce audit risk to an acceptable level. Analyzing fees by industry, company size, and location can provide insight into the level of risk and
auditor effort various sectors of publicly listed companies entail.

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Remarks by Commissioner Crenshaw at the Inaugural ECGI Responsible Capitalism Summit

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on
Tuesday, November 1, 2022
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Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Introduction

It is a pleasure to be here today at the Inaugural ECGI Responsible Capitalism Summit. Coincidentally, this is my inaugural trip overseas as a Commissioner. I came into office in the midst of the global pandemic, so I have not had the opportunity to meet with groups of academics, policy-makers, members of industry, and the general public in-person. I am glad to be able to do so now and I hope to benefit from the ideas and discussions produced at this forum. Thank you to Professor [Marco] Becht for organizing today’s discussions, and to Professor [Eilis] Ferran for that kind introduction.

As always, I must give the standard disclaimer that the views I express today do not necessarily represent those of the Commission, my fellow Commissioners, or members of the Commission’s staff.

When I accepted the invitation to this conference, I did not realize that my remarks would precede a Nobel Laureate, Professor Oliver Hart. My praises to Professor Becht for putting together such an esteemed group. I’m pleased to precede Professor Hart, who is here today to discuss his new paper, The New Corporate Governance, co-authored with Professor Zingales, a highly accomplished professor in his own right, and the author of the renowned book Saving Capitalism from the Capitalists, as well as a co-host to a podcast that my staff and I regularly discuss. As I considered how best to contribute to today’s discussion, I turned to their work for inspiration. And I hope that I can offer you some interesting perspectives from my vantage point as a U.S. securities lawyer and policy-maker – a vantage point that is, admittedly, somewhat narrow in scope, both in terms of geography and specialized subject matter. The mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. Although that may, at first blush, sound broad, our foundational and authorizing statutes, interpreted by the U.S. judiciary and a near-century of agency practice, provide certain bounds to carrying out that mission. This is the perspective through which I read the Hart and Zingales paper, and this is the perspective that I bring to my work as an SEC Commissioner. More specifically, this is the lens through which I consider the SEC’s proposed climate-related disclosure rule that I will discuss today.

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ESG Trends – What the boards of all companies should know about ESG regulatory trends in Europe

Posted by Alain Pietrancosta (University of Paris) and Alexis Marraud des Grottes, Orrick Herrington & Sutcliffe LLP, on
Tuesday, November 1, 2022
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Alain Pietrancosta is Professor of Law at the Sorbonne Law School at the University of Paris and Alexis Marraud des Grottes is a partner at the Paris office of Orrick Herrington & Sutcliffe LLP. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, (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; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

France and Europe are at the forefront of ESG regulation. They have taken steps that go far beyond mere reporting requirements, aiming at designing a new capitalism. This so-called responsible capitalism will have significant consequences for European companies, but also for non-European companies doing business in Europe, as the EU shows more and more inclination to enforce its ESG regulation on a worldwide basis. At a time when the United States is avidly debating the advisability of introducing climate disclosure rules for public companies, or additional information regarding professional investors’ ESG investment practices, a closer look should be taken at what Europe, led by France, has already accomplished in this area and where major current reforms are leading. From a regulatory viewpoint, this will help measure the gap between the two continents and perhaps, in some areas, draw avenues for rapprochement so that multinationals do not have to undergo a mix of regulations and ensure that neither companies nor investors are faced with a fragmented proliferation of standards, frameworks and parameters. From a practical standpoint, it is of the utmost importance for the boards of directors of multinational companies, in this period of rapid change, to identify key ESG issues and better anticipate the European regulatory efforts to green the economy.

Those who wonder what tomorrow’s ESG regulation may be like should usefully turn to the EU, which has initiated significant reforms in this area for several years, most often based on the French model. France is indeed a forerunner in terms of legal developments and an undisputed leader in social and environmental matters. It is a source of inspiration that fuels new aspirations in Europe. In this respect, it is worth noting that on June 30, 2022, the day before the end of the French presidency of the EU, the European Parliament and the Council reached an agreement on the “Corporate Sustainability Reporting Directive” (CSRD) requiring large and listed companies to publish annually sustainability information, extending the scope and increasing the substance of the 2014 “Non-Financial Reporting Directive” (NFRD).

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Lessons from Twitter v. Musk on Access to Directors’ and Executives’ Emails

Posted by Gail Weinstein, Scott B. Luftglass and Philip Richter, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Tuesday, November 1, 2022
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Gail Weinstein is Senior Counsel, and Scott B. Luftglass and Philip Richter are Partners at  Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Luftglass, Mr. Richter, Mr. Steven Epstein, Mr. Brian T. Mangino, and Ms. Erica Jaffe and is part of the Delaware law series; links to other posts in the series are available here.

In a letter opinion issued in connection with discovery matters in Twitter v. Musk (Sept. 13, 2022), the Delaware Court of Chancery ruled that Twitter is not entitled to obtain Elon Musk’s communications on his email accounts at two other (i.e., non-Twitter-affiliated) companies about the deal and his intention to terminate it. The court held that the emails were protected by the attorney-client privilege and that the companies’ policies allowing company access to personal communications on the company email accounts did not defeat the privilege given that the policies were not applied to Musk.

Twitter has claimed that Musk’s termination of the merger agreement pursuant to which he agreed to acquire Twitter is invalid as his alleged reasons for terminating the agreement are a pretext for a change of heart about proceeding with the deal after a steep decline in the stock price of technology companies, including Twitter, that occurred after the agreement was signed. Musk communicated about the termination of the Twitter merger agreement on his email accounts at Space Exploration Technology Corp. (SpaceX) and Tesla, Inc.—both of which are companies that Musk controls. Musk refused to produce the emails, asserting that they were protected from disclosure under the attorney-client privilege. Chancellor Kathaleen St. J. McCormick explained that, to support a claim of attorney-client privilege, Musk had to demonstrate that he had “an objectively reasonable expectation of confidentiality in the SpaceX and Tesla emails.” The court held that, based on the expectation of privacy that Musk had with respect to his SpaceX and Tesla email accounts, his personal emails on those accounts are not discoverable by Twitter.

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Statement by Chair Gensler on Proposed Amendments Regarding Service Providers Oversight

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Monday, October 31, 2022
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. 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.

Today, the Commission is considering whether to adopt proposals regarding investment advisers’ use of third-party service providers. I think that these rules, if adopted, would better protect investors by requiring that investment advisers take steps to continue to meet their fiduciary and other legal obligations regardless of whether they are providing services in-house or through outsourcing, whether through third parties or affiliates.

Registered investment advisers—over 15,000 of them in total—play a critical role in our economy, advising over 60 million accounts with combined assets under management of more than $100 trillion [1] These advisers provide advice to pension funds, endowments, retail investors, and so many others across the American public and beyond.

More than 80 years ago, Congress recognized the importance of investment advisers when they passed the Investment Advisers Act of 1940. They realized that there’s a fundamental difference between an operating company that makes cars and an investment adviser that manages someone else’s money.[2] The Investment Advisers Act includes various obligations, such as fiduciary obligations, to protect the investing public.

Though investment advisers have used third-party service providers for decades, their increasing use has led staff to make several recommendations to ensure advisers that use them continue to meet their obligations to the investing public. When an investment adviser outsources work to third parties, it may lower the adviser’s costs, but it does not change an adviser’s core obligations to its clients.

Thus, today’s proposal would specify requirements for investment advisers designed to ensure that advisers’ outsourcing is consistent with their obligations to clients. In particular, the proposed rules include four requirements for investment advisers:

  • First, to conduct due diligence prior to outsourcing certain core advisory functions (covered functions)—as well as to periodically monitor third-party service providers’ performance;
  • Second, to maintain books and records related to the oversight of third-party service providers;
  • Third, to report census-type information about third-party service providers to the public and the SEC; and
  • Fourth, to conduct due diligence and monitoring for third-party recordkeepers and obtain reasonable assurances that the third-party recordkeepers will meet certain standards.

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Statement by Commissioner Peirce on Proposed Amendments Regarding Service Providers Oversight

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Monday, October 31, 2022
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Commissioner Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you Chair Gensler. Investment advisers are fiduciaries to their clients, so why are we giving them step-by-step instructions on how to do their jobs? If we think Congress got it wrong—that investment advisers cannot, absent regulatory handholding, serve their clients faithfully—then we should tell Congress. The approach we are taking—incrementally displacing their judgment with our own—is neither statutorily grounded nor protective of investors. I could have supported Commission guidance highlighting the importance of an adviser’s ongoing obligations to its clients when it has engaged a service provider. I cannot support repackaging existing fiduciary obligations into a new set of prescriptions for investment advisers.

Proposed rule 206(4)-11, among other things, would establish due diligence and monitoring obligations for advisers that outsource “covered functions” to a service provider. What precisely is the problem this proposal is trying to correct? The release tells us that some advisers are operating under the misimpression that outsourcing certain functions somehow absolves them of their responsibilities as fiduciaries with respect to those functions.

Why this sudden urgency to propose a rulemaking reconfirming the incontrovertible fact that outsourcing does not terminate an adviser’s fiduciary duty? Has there been a surge of enforcement actions against advisers for service provider-related failures or infractions? Are our examiners seeing advisers running from their fiduciary obligations with respect to outsourced functions? Are we aware of widespread investor harm due to advisers not overseeing their service providers? If the answer to any of these questions is yes, the release does not tell us so.

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Stakeholderism Silo Busting

Posted by Aneil Kovvali (Indiana University Maurer School of Law) , on
Monday, October 31, 2022
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Aneil Kovvali is an Associate Professor of Law at the Indiana University Maurer School of Law, Bloomington. This post is based on his recent paper, forthcoming in the University of Chicago Law Review. 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? (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; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

Separate fields of business law are undergoing tumultuous debates. The orthodox view that antitrust law should focus exclusively on consumer welfare is threatened by increasingly influential figures like Lina Khan and Tim Wu, who urge a focus on preserving smaller companies and the threat of political domination by large firms. The orthodox view that bankruptcy law should focus on creditor interests has drawn public outrage as parties and judges pursue it to its logical conclusion in cases of mass injury like Purdue Pharma and Johnson & Johnson, pursuing maneuvers that protect financial creditors and investors and curtail litigation by victims of misconduct. The orthodox view that corporate law should focus exclusively on shareholders’ financial interests has been challenged by a growing group of business leaders, politicians, and academics. And the orthodox view that securities regulation should focus on disclosures material only to investors may be nearing collapse, as the Securities and Exchange Commission (SEC) pushes forward on rules compelling companies to disclose information about climate change. In each of these areas, there is a high profile and consequential conversation underway about whether the field should focus on a single constituency or a broader range of stakeholders.

With a few notable exceptions, participants in these conversations have treated them as separate conversations, drawing on the logic and literature of each individual field. But there is value in conceiving of them as one broader conversation. The fields share a common history and have been shaped by common economic and political forces. The arguments in each space share important similarities. And considering the issues together can yield fresh insights and actionable proposals.

To begin, the fields have a common history. Each field began as a muddle of competing policy objectives. During different periods of crisis, the each field was treated as part of a common toolkit for addressing problems. More recently, each field was reformed to focus on a single constituency by visionary leaders. And recent changes in the broader economic and regulatory environment have fed robust challenges to each orthodoxy.

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Statement by Chair Gensler on Final Rules Regarding Clawbacks of Erroneously Awarded Compensation

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Sunday, October 30, 2022
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. 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.

Today, the Commission is considering adopting final rules mandated by the Dodd-Frank Act regarding clawbacks of erroneously awarded incentive-based compensation. I believe that these rules, if adopted, would strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.

Corporate executives often are paid based on the performance of the companies they lead, with factors that may include revenue and business profits. If the company makes a material error in preparing the financial statements required under the securities laws, however, then an executive may receive compensation for reaching a milestone that in reality was never hit. Whether such inaccuracies are due to fraud, error, or any other factor, today’s rules would implement procedures that require issuers to recover erroneously-rewarded pay, a process known as a “clawback.”

Congress took on this common-sense issue after the financial crisis through Dodd-Frank, mandating that the Securities and Exchange Commission adopt rules on clawbacks. More specifically, Congress mandated that the Commission adopt rules directing national securities exchanges to require clawback policies as part of their listing standards. Through this action, Congress built upon the earlier requirements they passed as part of the Sarbanes-Oxley Act in 2002, which requires chief executive officers and chief financial officers who commit misconduct in connection with their companies’ financials to return incentive-based pay from the previous 12 months.

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Statement by Commissioner Peirce on Final Rules Regarding Clawbacks of Erroneously Awarded Compensation

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Sunday, October 30, 2022
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Commissioner Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

What we are doing today—implementing the statutory clawbacks mandate—is commendable. But how we are doing it—expansively, inflexibly, and impractically—is not. Accordingly, I cannot vote to adopt this rule.

Section 954 of the Dodd-Frank Act generally requires the Commission to direct exchanges to require listed companies to “develop and implement a policy” for disclosing how they handle incentive-based compensation tied to reported financial information and, when that reported information has to be restated, a policy for clawing back related erroneously awarded compensation.[1] Congress did not prohibit us from allowing listing exchanges and issuers some flexibility in crafting, respectively, the required listing standards and policies and procedures. Nor did Congress, in adopting this provision, prohibit us from using our exemptive authority under Section 36 of the Exchange Act, which allows the Commission to tailor the implementing regulations if doing so is “necessary or appropriate in the public interest, and is consistent with the protection of investors.”[2] Instead of taking advantage of this statutory flexibility, the release before us adopts a prescriptive approach that, because of its breadth and inflexibility, in some cases, could impose costs on shareholders greater than the benefits they derive from the clawbacks.

Had we built flexibility into the rule, listing exchanges and companies could have developed sensible approaches to achieving the laudable goal of clawing back compensation paid on the basis of subsequently restated financial metrics. The adopting release, however, fails to permit listing exchanges to craft workable listing standards and enforce them in a common-sense manner. Likewise, the final rule does not permit company boards, guided by their fiduciary duty, to determine when clawing back compensation makes sense. Such an approach would have served shareholders by ensuring that companies claw back erroneously awarded compensation when doing so yields a net benefit to shareholders.

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