Yearly Archives: 2022

Gender Pay Gap

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on

Monday, March 7, 2022

Compensation ratios, Diversity, ESG, Europe, Executive Compensation, International governance
More from: Duncan Paterson, Katharina Gallowski, Institutional Shareholder Services Inc.

Duncan Paterson is Head of the ESG Thought Leadership Program at ISS ESG; and Katharina Gallowski is Associate Vice President for Research at ISS ESG. This post is based on their ISS memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); and and Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here).

The topic of gender diversity has been on the lips of the responsible investment sector for many years. One of the earliest factors that allowed investors to identify those companies taking a progressive stance on governance issues, the measurement of the percentage of women on corporate boards of directors, has been standard practice for ESG-minded investors for over a decade. But has all this talk delivered in terms of on-the-ground outcomes for women in the workforce? The results are mixed at best.

The Benefits of Gender Diversity

One of the hot topics in responsible investment today is the concept of double materiality. This concept, key in European sustainable finance regulation, implies that ESG data should be used not only to judge the potential financial implications of ESG risks TO a company, but also to form judgments about the impacts OF a company’s activities on the environment and society. Criteria related to gender diversity can be surprisingly influential in this discussion.

The Effect of Media-Linked Directors on Financing and External Governance

Posted by Alberta Di Giuli (ESCP Business School) and Paul Laux (University of Delaware), on

Monday, March 7, 2022

Blockholders, Boards of Directors, Information environment, Ownership, Public perception, Reputation
More from: Alberta Di Giuli, Paul Laux

Alberta Di Giuli is Professor of Finance at ESCP Business School, and Paul Laux is Professor of Finance at the University of Delaware Lerner College of Business and Economics. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

Could the presence in a firm’s board of a member that concurrently sit in a media company influence the media coverage of that firm? And what are the consequences in terms of financing and ownership for the firm in question?

In our paper, The Effect of Media–Linked Directors on Financing and External Governance, forthcoming in the Journal of Financial Economics, we test the hypothesis that firms that share a board member with a media firm receive higher media coverage. The increased media coverage acts, or is perceived, as a “watch dog” or a source of external monitoring, and allows the firm to switch from high intense monitoring form of financing (e. g. bank loans) to less intense one (e. g. bonds).

Our hypothesis builds on recent findings (Bharath and Hertzel, 2019) that show that increased external governance has a significant negative impact on the use of bank financing over public debt issuance as it affects the demand for creditor governance: firms endogenously switch among different governance mechanisms to shape an optimal governance structure.

In our sample of U.S. public companies over 2002-2019 period we find that firms that share a board member with a media firm have a significantly higher media coverage than firms that don’t. We examine the implications of this increase media coverage on financing and we show that firms that share a board member with a media firm decrease the amount of new secured bank loans (7% of lagged assets) and in general bank debt (5% of lagged assets) and increase the amount of bond financing (5% of lagged assets).

Four Takeaways from the SEC’s Proposed Cybersecurity Rules

Posted by Charu Chandrasekhar, Avi Gesser, and Julie Riewe, Debevoise & Plimpton LLP, on

Monday, March 7, 2022

Cybersecurity, Disclosure, Investment advisers, Private funds, SEC, SEC rulemaking, Securities regulation
More from: Avi Gesser, Charu Chandrasekhar, Christopher Ford, H Jacqueline Brehmer, Julie Riewe, Matthew Rametta, Debevoise & Plimpton

Charu Chandrasekhar is counsel, and Avi Gesser and Julie Riewe are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Ms. Chandrasekhar, Mr. Gesser, Ms. Riewe, H Jacqueline Brehmer, Christopher Ford, and Matthew Rametta.

On February 9, 2022, the SEC released its much-anticipated proposed rules relating to cybersecurity risk management, incident reporting, and disclosure for investment advisers and funds.

Chair Gensler recently emphasized that cybersecurity rulemaking in this area is one of his priorities, and placed particular emphasis on establishing standards for cybersecurity hygiene and incident reporting for registrants. The proposed rules, which are the most detailed cybersecurity rules that Chair Gensler’s SEC has issued thus far, reflect the SEC’s intense attention to cybersecurity risk and its willingness to deploy the full scope of its regulatory authority to promulgate standards that address this risk.

These proposed rules would impose significant new requirements on registered investment advisers and funds, and are generally consistent with cybersecurity requirements imposed on other companies by New York’s Part 500 Cybersecurity Regulation and the Federal Trade Commission’s updated Safeguards Rule.

Key Requirements under the Proposed Rules

(1) Cybersecurity Risk Management Policies & Procedures: The proposed rules would require advisers and funds to adopt and implement policies and procedures that are “reasonably designed” to address cybersecurity risks. There are several “general elements” that advisers and funds will need to address in their cybersecurity policies and procedures, including risk assessment practices, user security and access, preventing unauthorized access to funds, threat and vulnerability management, and incident response and recovery. The proposed rules require advisers and funds, on an annual basis, to: (1) review and assess the design and effectiveness of their cybersecurity policies and procedures; and (2) prepare a report describing the review, explaining the results, documenting any incident that has occurred since the last report, and discussing any material changes to the policies and procedures since the last report.

SEC Proposes Amendments to Schedules 13D and 13G

Posted by Curtis A. Doty, Marla L. Matusic, and Anna T. Pinedo, Mayer Brown LLP, on

Sunday, March 6, 2022

Derivatives, Disclosure, Hedge funds, Institutional Investors, Schedule 13D, Schedule 13G, SEC, SEC rulemaking, Securities regulation
More from: Anna Pinedo, Christina Thomas, Curtis Doty, Jennifer Carlson, Laura Richman, Marla Matusic, Mayer Brown

Curtis A. Doty is partner, Marla L. Matusic is counsel, and Anna T. Pinedo is partner at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Doty, Ms. Matusic, Ms. Pinedo, Christina M. Thomas, Laura D. Richman, and Jennifer J. Carlson. 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.

Background

On February 10, 2022, the Securities and Exchange Commission (the “SEC”) proposed amendments to Schedules 13D and 13G relating to beneficial ownership reports (the “Proposed Amendments”). [1]

The Securities Exchange Act of 1934 (the “Exchange Act”), Section 13(d), was originally enacted to address the increasing use of cash tender offers in corporate takeovers. Section 13(d) requires disclosure by investors of the accumulation of significant positions, or of certain increases in such positions, in the voting stock of public companies. These disclosures are intended to provide transparency to the market generally, and to stockholders and the company, and to function as an early warning to the company regarding a potential change of control transaction. Section 13(g) permits short-form disclosure by certain passive or early investors that hold or obtain significant positions in the voting stock of public companies. Specifically, Section 13(g) states that “[a] person who would otherwise be obligated. . .to file a statement on Schedule 13D may, in lieu thereof, file with the Commission, a short-form statement on Schedule 13G.” [2]

Biotech’s ESG Crossroads

Posted by Julia Forbess and Ron C. Llewellyn, Fenwick & West LLP, on

Sunday, March 6, 2022

Biotech companies, Board composition, Boards of Directors, Disclosure, Diversity, ESG, Human capital, SASB
More from: Julia Forbess, Ron Llewellyn, Fenwick

Julia Forbess is partner and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum.

Overview

Corporate social responsibility has long factored into investment decisions, and the integration of environmental, social and governance (ESG) factors into corporate decision-making dates back nearly two decades. But in the last few years, ESG has become a common boardroom topic as investment funds with an ESG focus have raised billions and ESG’s non-financial metrics are increasingly factored into how investors and other stakeholders evaluate corporations. The SEC has also expressed an interest in ESG disclosure more broadly and has indicated the potential for rulemaking in the near future.

ESG practices and trends tend to be discussed as if there is one standard for all public companies, from the S&P 100 to small-cap growth industries. In an effort to understand the common practices of pre-commercial biotech companies, Fenwick has collected and analyzed data through the review of the public disclosures of 50 U.S.-based, development-stage public biotech companies with market capitalization ranging from $1.3 billion to $4.6 billion.

Remarks by Commissioner Lee at PLI’s Corporate Governance

Posted by Allison Herren Lee, U.S. Securities and Exchange Commission, on

Saturday, March 5, 2022

Disclosure, Inside counsel, Materiality, Misconduct, SEC, Securities enforcement, Securities fraud, Securities litigation, Securities regulation
More from: Allison Herren Lee, U.S. Securities and Exchange Commission

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at PLI’s Corporate Governance – A Master Class 2022. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Send Lawyers, Guns and Money: (Over-) Zealous Representation by Corporate Lawyers [1]

Thank you Brian [Breheny] for the introduction and to the Practicing Law Institute for having me today. Before I begin, I want to take a moment to acknowledge the on-going humanitarian disaster in Ukraine. My thoughts are with the people of Ukraine, who have demonstrated impossible bravery, and with those of you who may have friends or relatives affected by this crisis.

It’s a privilege to address my fellow members of the bar. This privilege is very meaningful to me personally in part because of my unexpected path into the legal profession and my deep regard for the ideals of public service that our profession represents.

I do not come from a family of lawyers; in fact my parents did not even attend college. I never laid eyes on an actual lawyer during my childhood. What I knew about them came from TV shows, which means I assumed their jobs were to cleverly question witnesses at trial until they confessed to the crime for which another had been charged. Despite (or maybe because of) this misperception, I secretly dreamed of becoming a lawyer and was awed to the point of reverence by the profession. As I worked my way through college and eventually, in my late thirties, through law school, I began to better understand what lawyers do and what it means to be a member of a “profession”—how the calling stood apart from other businesses principally because advocating for fidelity to the law is, at its core, a form of public service. [2] Taking this to heart, I launched an initiative in law school that led to the adoption of a requirement for students to complete pro bono work as part of the curriculum.

I have lived the experience of law from the perspectives of an outsider with no idea of what lawyers do, a student, a client, a securities law practitioner, an enforcement lawyer (both civil and criminal), and now as a Commissioner helping to shape regulatory policy. My belief in the ideals of the profession—ideals that I know you all share—has only grown stronger with time.

Women in the Boardroom: 2022 Update

Posted by Dan Konigsburg and Sharon Thorne, Deloitte, on

Saturday, March 5, 2022

Boards of Directors, Diversity, ESG, Human capital
More from: Carey Oven, Dan Konigsburg, Sharon Thorne, Deloitte

Dan Konigsburg is Global Corporate Governance Leader at Deloitte and Sharon Thorne is Chair of the Deloitte Global Board of Directors. This post is based on a Deloitte memorandum by Mr. Konigsburg, Ms. Thorne, and Carey Oven. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); and Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here).

Is the world making reasonable progress towards increasing the proportion of women on boards? The data indicates not. Women occupy just 20% of board seats globally, and continue to be excluded from the highest levels of corporate leadership.

In 2011, when the Deloitte Global Boardroom Program began researching how many women served on corporate boards globally, the conversation about achieving gender equity among the highest leadership ranks was just starting to percolate. Since then, increasing women’s representation at the boardroom table has become something of a movement: More and more countries have developed initiatives to address gender parity, the conversation has vastly expanded, and, consequently, numbers have risen. Some countries, such as France, have really upped their numbers in a substantial way following government-mandated gender quotas. More than 40% of board seats among French companies are now occupied by women.

Deloitte’s report this year showed that progress is happening, albeit slowly. The global average of women on boards sits at just under 20% (19.7%), an increase of just 2.8 percentage points since the last report, published in 2019 [1] (figure 1). At this pace, the world will not reach parity until at least 2045, over twenty years from now. While this is still unacceptably slow, the pace of change has accelerated slightly: Deloitte’s last report showed parity being reached by 2052, indicating a timeline that has been reduced by almost a decade.

The Further Erosion of Investor Protection: Expanded Exemptions, SPAC Mergers, and Direct Listings

Posted by Andrew F. Tuch (Washington University in St. Louis) and Joel Seligman (University of Rochester and Washington University in St. Louis), on

Friday, March 4, 2022

Capital formation, Direct listings, Investor protection, IPOs, Mergers & acquisitions, PSLRA, Securities litigation, Securities regulation, SPACs, Special purpose vehicles
More from: Andrew Tuch, Joel Seligman

Andrew F. Tuch is Professor of Law at Washington University in St. Louis and Joel Seligman is President Emeritus and University Professor at the University of Rochester and Dean Emeritus and Professor of Law at Washington University in St Louis. This post is based on their recent paper.

Since at least the 1930s, when the federal securities framework was adopted, most companies undertaking initial public offerings (IPOs) have relied on firm-commitment underwriters to act as intermediaries between themselves and investors. The close relationship between IPOs and underwriting, governed by Section 11 of the Securities Act of 1933, is implicit in a regime that has proven successful over the years. Section 11 imposes near-strict liability on corporate insiders and certain secondary actors, primarily underwriters, incentivizing careful due diligence. Among other provisions of the Securities Act, Section 11 was instrumental in restoring confidence in US capital markets in the wake of the Great Depression and has helped them become the world’s deepest and most liquid. It is no surprise that investors, their interests guarded by underwriters acting in the role of gatekeepers, made the IPO the pinnacle event for emerging companies seeking capital for growth.

Today, traditional IPOs may be on the wane as firms turn to mergers with special purpose acquisition companies (SPACs) and direct listings, alternatives that provide routes to public markets entirely or partially without an underwriter or due diligence. SPAC mergers and direct listings dispense with nearly century-old techniques for capital raising, weakening investor protection. As a result, these IPO alternatives introduce new risks into financial markets. The shift in corporate activities has been permitted, indeed encouraged, by Congress and the Securities and Exchange Commission (SEC).

SEC Proposes Additional Private Fund Disclosures

Posted by Ellen Kaye Fleishhacker, Robert Holton, and Patrick Derocher, Arnold & Porter LLP, on

Friday, March 4, 2022

Disclosure, Dodd-Frank Act, Form PF, Hedge funds, Institutional Investors, Private equity, Private funds, SEC, SEC rulemaking, Securities regulation
More from: Ellen Fleishhacker, Patrick Derocher, Robert Holton, Stephen Culhane, Veronica Callahan, Arnold & Porter

Ellen Kaye Fleishhacker and Robert Holton are partners and Patrick Derocher is an associate at Arnold & Porter LLP. This post is based on an Arnold & Porter memorandum by Ms. Fleishhacker, Mr. Holton, Mr. Derocher, Stephen Culhane, and Veronica Callahan.

On January 26, 2022, the US Securities and Exchange Commission (SEC or Commission) voted in favor of proposing amendments to Form PF, which is the confidential reporting form that certain SEC-registered investment advisers to private funds must file with the SEC. In the SEC’s press release regarding the proposed amendments, Chair Gary Gensler pointed to the decade of experience the SEC and Financial Stability Oversight Council (FSOC) have had analyzing the information collected on Form PF, and stated: “We have identified significant information gaps and situations where we would benefit from additional information.”

The proposed rules, which will be open for a 30-day public comment period, would (i) require large advisers to hedge funds and private equity funds to file reports within one business day of the occurrence of certain reporting events, (ii) lower the reporting threshold for large private equity advisers from $2 billion to $1.5 billion in private equity fund assets under management, and (iii) require additional information regarding large private equity funds and large liquidity funds to be reported.

This post discusses the background of Form PF, explains the amendments that have been proposed by the SEC, and identifies certain practical considerations related to the proposed amendments.

Background

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended Section 204(b) of the Investment Advisers Act of 1940 to require certain disclosures by private fund investment advisers. The purpose of these disclosures, which became the basis for Form PF in 2011, is to assist FSOC in assessing systemic risk in the US financial system and protect investors. The requirements came about in response to the financial crisis of 2008 and the subsequent regulatory push to improve the ability of the SEC—and the federal government more broadly—to assess the health of the financial system and respond to developments that may threaten the stability of the markets and negatively impact individual investors.

Weekly Roundup: February 25-March 3, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on

Friday, March 4, 2022

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of February 25-March 3, 2022.

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Yearly Archives: 2022

Gender Pay Gap

The Benefits of Gender Diversity

The Effect of Media-Linked Directors on Financing and External Governance

Four Takeaways from the SEC’s Proposed Cybersecurity Rules

Key Requirements under the Proposed Rules

SEC Proposes Amendments to Schedules 13D and 13G

Background

Biotech’s ESG Crossroads

Overview

Remarks by Commissioner Lee at PLI’s Corporate Governance

Send Lawyers, Guns and Money: (Over-) Zealous Representation by Corporate Lawyers [1]

Women in the Boardroom: 2022 Update

The Further Erosion of Investor Protection: Expanded Exemptions, SPAC Mergers, and Direct Listings

SEC Proposes Additional Private Fund Disclosures

Background

Weekly Roundup: February 25-March 3, 2022

SEC Proposes Substantial Increases to Form PF Reporting

ESG: 2021 Trends and Expectations for 2022

SEC’s Role in Cybersecurity

SEC Proposed Amendments to Private Fund Manager Reporting

Asset Management Industry Confronts the Challenges Presented by Climate Change Transition

Corporate Governance Trends in 2022 and Beyond

SPAC Law and Myths

SEC Continues March Towards More Intrusive Regulation of Private Funds

Overcoming the Hurdles to Board Leadership on Climate Change

The Need for Disclosure About Worker Voice

SEC Proposes Unprecedented Cybersecurity Rules

Is Economic Nationalism in Corporate Governance Always a Threat?

Board Disclosure of Race and Ethnicity Gains Traction

C-Suite and Board Engagement in a COVID-19 Environment

Private or Public Equity? The Evolving Entrepreneurial Finance Landscape

The Rise of Climate Litigation

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