Rusty O’Kelley III co-leads Board & CEO Advisory Partners in the Americas; Rich Fields is leader of the Board Effectiveness Practice at Russell Reynolds Associates; and Laura Sanderson co-leads Board & CEO Advisory Partners in Europe. This post is based on their Russell Reynolds memorandum. Related research from the Program on Corporate Governance includes Stakeholder Capitalism in the Time of COVID, by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).
During the early weeks of the COVID-19 pandemic, we spoke to seasoned board directors and retired CEOs with a track record of navigating crises to identify a set of crisis management lessons for boards. As organizations are now faced with a new geopolitical crisis following Russia’s invasion of Ukraine, many of these crisis management recommendations for boards remain relevant.
This post begins with a short overview of the specific issues that organizations will need to grapple within the coming days and weeks. While the relevance and impact of these issues will vary by company and industry, few organizations are likely to be insulated from the effects of this invasion.
Critical Issues for Management
While the economic consequences of this invasion are far secondary to the human toll, analysts have identified multiple factors that will strain the global economy. Europe’s reliance on Russia for natural gas will push energy prices even higher, while modelling by Capital Economics puts the worst-case scenario for oil prices at $120-140 per barrel. [1] Commodity prices are also likely to rise. Russia and Ukraine account for one third of the world’s wheat exports and one fifth of its corn trade. Both countries are also key players in the production of metals such as nickel, copper, and iron. Disruption to trade routes–including rail links from China and shipping in the Black Sea—is also a cause for concern. [2]
Leaders will need to manage across a range of issues, including:
- Employee safety and wellbeing: The immediate focus will be the safety of employees and their families in the region. Longer-term, organizations should plan for the potential impact of further inflation, especially for their lowest-paid workers.
- Supply chain disruptions: The Covid-19 pandemic revealed the fragility of global supply chains. Organizations will need to move quickly to understand their dependence on raw materials from the region, as well as the cascading effects of rising energy prices.
- Sanctions and business exposure to the region: As the sanctions against Russia evolve, organizations will be tested by monitoring and understanding how the sanctions vary across countries. More broadly, even where business is not directly affected by sanctions, leaders will have choices to make about the risks associated with continuing to do business in the region.
- Cybersecurity: Organizations will need to ensure that they are well-positioned to protect their digital infrastructure. While experts believe that direct cyberattacks on companies outside Ukraine are unlikely, the risk of contagion is real. Organizations that interact with companies or institutions in Ukraine could be vulnerable to collateral damage (as happened in 2017 with the NotPetya malware attack). [3]
The Law and Economics of Equity Swap Disclosure
More from: Lucian Bebchuk
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. This post is based on his recent paper, The Law and Economics of Equity Swap Disclosure, which is in turn based on a comment letter he filed with the Securities and Exchange Commission in response to a request for comments on its proposal regarding the disclosure of equity swaps.
Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.
The Securities and Exchange Commission has put forward for public comment a rule proposal that would mandate immediate disclosure of the acquisition of any equity swap position with a dollar value exceeding $300 million. In my paper The Law and Economics of Equity Swap Disclosure, and in a comment letter I filed with the Commission, I provide a critical assessment of this proposal.
The Commission proposed several rules in its recent Release No. 34-93784 (the “Release”). My focus is on one important element of the Proposed Rules—the mandated disclosure of “equity-based swaps” (“the Equity Swap Rule”). I do not discuss other aspects of the Proposed Rules such as those regarding the disclosure of “credit default swaps.”
I begin by discussing a serious cost that the Equity Swap Rule would impose—its detrimental effect on hedge fund activism—that the Commission might have overlooked and that is not considered in the Release.
I then identify a problematic disparity between the treatment of equity swaps and equity securities that the Proposed Equity Swap Rule would introduce. I also explain that the rationales put forward in the Release cannot justify introducing such a disparity.
Finally, based on the preceding analysis. I identify a number of issues that the Commission should analyze before putting forward for public comment any proposed rule governing disclosure of equity swaps. Without analyzing these issues, and receiving public comment on the results of such an analysis, the Commission would not have an adequately informed basis for concluding that a rulemaking in this area would protect investors and promote efficiency, competition, and capital formation.
Below is a more detail account of my analysis:
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