Monthly Archives: March 2023

2023 – The year of the risk-centric agenda

Krista Parsons is a Managing Director and Audit Committee Programs Leader, Maureen Bujno is a Managing Director, and Kimia Clemente is a Senior Manager at the Center for Board Effectiveness at Deloitte & Touche LLP. This post is based on a Deloitte memorandum by Ms. Parsons, Ms. Bujno, Ms. Clemente, and Nidhi Sheth.

The audit committee’s role in risk oversight

Predicting the future is difficult, particularly in times of change and uncertainty. However, it seems safe to predict that the 2023 agendas of many audit committees will be risk-centric.

Of course, risk oversight is among the most important—if not the most important—of the audit committee’s responsibilities. While the audit committee is not responsible for overseeing all of a company’s risks, it is often responsible for oversight of the company’s risk oversight policies and processes, principally the enterprise risk program. This program, which management leads, entails identifying key risks across the organization, from financial risks to workforce risks and from risks due to raw material shortages to risks arising from natural disasters and other crises. In other words, except in cases where a company has a risk committee,[1] the audit committee oversees the process of evaluating and managing risks that could pose a threat to the company’s viability and success. According to the latest Audit Committee Practices Report published by Deloitte and the Center for Audit Quality, 43% of the total respondents surveyed said that the audit committee has primary oversight responsibility for enterprise risk management.

However, the audit committee’s responsibility for risk oversight goes beyond understanding and advising with regard to the creation and implementation of a sound enterprise risk program. The committee is charged with understanding and advising on how management continuously identifies, monitors, and assesses risks and ensuring that material risks are allocated to the full board or the appropriate committee. And the audit committee is itself responsible for overseeing key areas of risk, such as risks that impact financial reporting and disclosure, including internal controls and fraud.


The Venture Corporation

Gad Weiss is a J.S.D. Candidate at Columbia Law School. This post is based on his recent paper.

Technological innovation is a powerful driving force for human advancement and welfare. Modern societies celebrate the numerous ways that innovative feats have contributed to the quality of life, from curing diseases to tackling global environmental challenges. Startups play an indispensable role in promoting innovation. The collaboration between entrepreneurs and venture capitalists (“VCs”) has been observed to incentivize disruptive research and development in a way that cannot be replicated within established firms, in academia, or elsewhere. In some nations, startups are also significant contributors to the economy. The United States is a striking example. Firms that launched as venture-backed startups dominate US capital markets in terms of market capitalization and proportional weight of leading market indexes, and significantly contribute to US job creation. Many economies strive to create a US-like startup ecosystem and reproduce its success locally.


An Auspicious Start for Universal Proxy

Michael R. Levin is founder and editor of The Activist Investor. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

We discern a definitely interesting and possibly significant impact of the new universal proxy card (UPC) rules on US proxy contests, even though it’s still somewhat early. We see that impact both in how activist investors plan proxy contests, and in the small number of contests that have concluded under UPC.

We heard all manner of predictions about UPC before and since its September 1, 2022 implementation date. In one account, company advisors warn of a “disaster” for BoDs and activist advisors cautioned the inherent high cost of a successful proxy contest would weigh against the initial enthusiasm that might prompt more of them. Shareholders welcomed it.

Observers expected proxy contests to become more personal, proxy advisors to gain influence, and companies to settle contests more eagerly. We echoed some of these predictions, and added a few of our own, mostly favorable to activist investors. We expected more ESG proponents that previously relied on precatory proposals to nominate directors at companies they think moved too slowly to implement successful proposals.

Based on the initial proxy contests since implementation, a number of these predictions appear accurate, although as we noted at the outset, it’s still early. In the one contest that actually voted under UPC, it helped shareholders exactly as the SEC intended.

What have we seen so far? We can think about this question in two ways: how activist investors have planned proxy contests under UPC, and how proxy contests have worked out under UPC.


Fiduciary Duties of Public Pension Systems and Registered Investment Advisors

Matt Cole is the Chief Investment Officer at Strive Asset Management. This post is based on his Strive 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; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff. 

So-called Environmental, Social, and Governance (“ESG”) investment practices have come under increasing legal scrutiny.  Areas of legal concerns include potential breaches of fiduciary duty, conflicts of interest, violations of antitrust law, and violations of federal securities law.

This white paper addresses three questions:

1. Does state law prohibit public pension trustees from choosing investments, adopting investment strategies, or exercising appurtenant voting rights based on ESG considerations?

2. Does state law prohibit public pension trustees from allocating capital to funds, including index funds, owned by asset management firms that engage with portfolio companies, and/or exercise appurtenant voting rights, to promote ESG objectives?

3. Does state or federal law prohibit a registered investment advisor (“RIA”) from investing client capital, or advising a client to invest capital, in funds, including index funds, owned by asset management firms that engage with portfolio companies and/or exercise appurtenant voting rights to promote ESG objectives, without expressly informing the client of these ESG-promoting practices and obtaining the client’s express advance consent?


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