Yearly Archives: 2022

Can High ESG Ratings Help Sustain Dividend Growth?

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Thursday, August 18, 2022
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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.

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Gender Pay Gap Across Cultures

Posted by Kristina Minnick (Bentley University), on
Thursday, August 18, 2022
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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.

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Proxy Voting: Managers Focus on Environmental and Social Themes

Posted by Lindsey Stewart, Morningstar, Inc., on
Thursday, August 18, 2022
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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.

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BlackRock Supports Consistent Climate-Related Disclosures; Urges Global Coordination

Posted by Sandra Boss and Michelle Edkins, BlackRock, Inc., on
Wednesday, August 17, 2022
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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.

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The Corporate Law Reckoning for SPACs

Posted by Minor Myers (University of Connecticut), on
Wednesday, August 17, 2022
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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.

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

Posted by Nina Wilson, Edelman, on
Wednesday, August 17, 2022
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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.

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Proxy Season 2022 Briefing: United States

Posted by Brianna Castro, Courteney Keatinge, and Aaron Wendt, Glass, Lewis & Co., on
Tuesday, August 16, 2022
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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.

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Identifying Corporate Governance Effects: The Case of Universal Demand Laws

Posted by Steven Davidoff Solomon (University of California at Berkeley), Panos N. Patatoukas (University of California at Berkeley), and Byung Hyun Ahn (Dimensional Fund Advisors), , on
Tuesday, August 16, 2022
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Steven Davidoff Solomon is Professor of Law at the University of California at Berkeley School of Law; Byung Hyun Ahn is a Researcher at Dimensional Fund Advisors; and Panos N. Patatoukas is Associate Professor of Finance at the University of California at Berkeley Haas School of Business. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian A. Bebchuk.

Index constructs and identifiers are regularly utilized in empirical corporate governance research. They are popular. The use of legal changes as plausibly exogenous sources of variation in the economic determinants of corporate governance is also common. State antitakeover laws, particularly business combination laws, are often used as exogenous identifiers to assess corporate governance effects. Despite their popularity, there is a growing body of literature questioning the interpretation of tests that use legal changes for identification.

In Identifying Corporate Governance Effects: The Case of Universal Demand Laws recently posted to SSRN, we contribute to the debate by examining the adoption of Universal Demand (UD) laws, an increasingly popular proxy for exogenous variation in corporate governance mechanisms. UD laws were enacted by 23 states between 1989 and 2005 and require that shareholders make a demand on the board before suing for breach of fiduciary duty or other derivative actions. Because the board can refuse the demand or otherwise prosecute the case, or decline to prosecute, academics have theorized that UD laws decrease the ability of shareholders to litigate and effectively monitor the board. Since UD laws are exogenously imposed by the state, they have the potential to address the issue of endogeneity in the relation between corporate governance and litigation risk.

In a novel paper, Appel (2019) first deployed the enactment of UD laws as a plausibly exogenous source of variation in the use of entrenchment provisions commonly opposed by shareholders. Appel’s empirical investigation zeroes in on variation in the widely-used entrenchment index (E-Index), which captures the sum of provisions restricting shareholder voting power and antitakeover provisions (Bebchuk et al. 2009). The key finding is that the enactment of UD laws across adopting states is associated with a significant increase in the E-Index. Prior work interprets this finding as prima facie evidence of a causal link between shareholder litigation rights and corporate governance. A fast-growing stream of studies in corporate finance and accounting relies on the adoption of UD laws to identify cause-and-effect links between management entrenchment and various firm outcomes. The common thread across these studies is that UD laws had a direct effect on management entrenchment.

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ESG Trends and Expectations

Posted by Marc S. Gerber, Greg Norman, and Simon Toms, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, August 16, 2022
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Marc S. Gerber, Greg Norman and Simon Toms are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Gerber, Mr. Norman, Mr. Toms, Adam M. Howard, Kathryn Gamble, and Patrick Tsitsaros.

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.; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

Introduction

Environmental, social and governance (ESG) considerations continued to play a key role in the first six months of 2022, with geopolitical circumstances resulting in a reexamination of a number of ESG beliefs. In our February 2022 post “ESG: 2021 Trends and Expectations for 2022,” we set out our predictions for 2022, some of which have come to fruition but a number of which have been sidelined by unforeseen events. In this post, we discuss the ESG matters that we predicted would be key themes this year, such as new legislation in the U.K., the U.S. and Europe, criticism of ESG data, executive remuneration, and the role of ESG in the tech/cyber space, and also those ESG matters we did not expect to see, ranging from the impact of the Ukraine invasion, increased regulatory scrutiny and some impactful U.S. Supreme Court decisions. We also highlight two key topics we believe will prove central to ESG discussions in the coming months: the green energy transition and the role of sustainability advice and consulting.

Unexpected Developments

Impact of Politics and the Invasion of Ukraine [1]

Russia’s invasion of Ukraine has significantly impacted ESG trends and performance in the first six months of the year. Some have viewed the effects as a setback for the ESG movement, as oil and gas prices soared and ESG-focused funds underperformed, while others believe this could be a turning point as nations are forced to consider green energy and shift reliance on oil and gas from Russia.

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

Posted by Joanna Cound, Sarah Matthews, and Michelle Edkins, BlackRock, Inc., on
Monday, August 15, 2022
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Joanna Cound is Managing Director, Sarah Matthews is Director and Michelle Edkins is Managing Director at BlackRock, Inc. This post is based on BlackRock’s response to the Exposure Draft ED/2022/S2 Climate-Related Disclosures issued by the International Sustainability Standards Board.

This post is based on BlackRock’s response to The Exposure Draft ED/2022/S2 Climate-related Disclosures issued by the International Sustainability Standards Board. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

BlackRock manages assets on behalf of institutional and individual clients worldwide, across equity, fixed income, liquidity, alternatives, and multi-asset strategies. Our clients, the asset owners, include pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world. Because our clients have diverse financial objectives, we consider a variety of investment factors, risks, and opportunities, including those related to climate.

Asset managers investing on behalf of clients are not just looking for more data on climate risk; they need high-quality information that is (1) relevant to understanding climate- related risks and opportunities, and (2) reliable, timely, and comparable across jurisdictions. Investors also recognize that climate data, controls and risk methodologies are still evolving. As a fiduciary to our clients, BlackRock has engaged with public companies on climate disclosure over the past five years. We have observed these companies continually developing and adapting their climate risk management and reporting tools, improving the quality of their disclosure over time.

BlackRock strongly supports the ISSB’s goal of providing a global baseline of standards to support the disclosure of more reliable, comparable, and consistent climate-related information. We view both the ISSB Exposure Draft ED/2022/S1 on sustainability-related financial information and ED/2022/S2 on climate-related disclosure as important contributions to a multi-year, multi-jurisdictional effort towards improving the availability, quality, comparability, timeliness, and interoperability of sustainability-related disclosures.

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