Monthly Archives: April 2023

Jamie Dimon’s Chairman & CEO Letter to Shareholders

Jamie Dimon is Chairman of the Board and Chief Executive Officer of JPMorgan Chase & Co. This post is based on his discussion of the subjects of banking turmoil and regulatory goals in his recent Chairman & CEO Letter to Shareholders.

Banking Turmoil and Regulatory Goals

The recent failures of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe, and the related stress in the banking system, underscore that simply satisfying regulatory requirements is not sufficient. Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves. Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known – both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits. Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements. Even worse, the stress testing based on the scenario devised by the Federal Reserve Board (the Fed) never incorporated interest rates at higher levels. This is not to absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them.

As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. But importantly, recent events are nothing like what occurred during the 2008 global financial crisis (which barely affected regional banks). In 2008, the trigger was a growing recognition that $1 trillion of consumer mortgages were about to go bad – and they were owned by various types of entities around the world. At that time, there was enormous leverage virtually everywhere in the financial system. Major investment banks, Fannie Mae and Freddie Mac, nearly all savings and loan institutions, off-balance sheet vehicles, AIG and banks around the world – all of them failed. This current banking crisis involves far fewer financial players and fewer issues that need to be resolved.


Biden’s First Veto: Understanding the Implications of the DOL’s ESG Rule

Leah Malone and Erica Rozow are partners, and George M. Gerstein is Senior Counsel at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher & Bartlett LLP memorandum by Ms. Malone, Ms. Rozow, Mr. Gerstein, and Emily B. Holland. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian 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; 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; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

On March 20, 2023, President Joe Biden vetoed a Congressional resolution—the first of his presidency—that would have nullified the Department of Labor’s (“DOL”) newly-minted final rule concerning the consideration of environmental, social and governance (“ESG”) factors in corporate retirement plans in the United States (“ESG Rule”). The ESG Rule addresses how a fiduciary under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) may invest (and exercise shareholder rights with respect to) “plan assets” in accordance with ERISA’s fiduciary duties when taking one or more ESG factors into account. [1] Absent a Congressional override of the veto, which appears highly unlikely at this stage, [2] the ESG Rule essentially remains in full force and effect. [3]

As described in more detail here, the ESG Rule (as now reinstated) simply reaffirmed the DOL’s longstanding position: that an ERISA fiduciary must base its investment decisions on factors that the fiduciary reasonably determines are relevant to an investment’s risk and return. This means that an ERISA fiduciary may not sacrifice investment returns, or take on additional risk, to further objectives unrelated to the financial benefits owed to participants and beneficiaries under the plan. The ESG Rule was adopted to overturn a regulation issued in 2020 under the Trump administration providing that ERISA fiduciary investment decisions should be made based on “pecuniary factors” only. [4] The ESG Rule also reiterates the DOL’s position that fiduciaries can and should consider any and all factors that are relevant to the risk/return analysis of a potential investment. These factors may include climate change and other ESG-related issues under certain circumstances. [5] The ESG Rule under no circumstances requires a plan fiduciary to consider ESG-related issues if they are not relevant to that risk/return analysis.


The Directors’ Role Amid Debates over Corporate Purpose, Stakeholders and ESG

Ross S. Clements is an Associate and Lawrence A. Cunningham is Special Counsel at Mayer Brown LLP. This post is based on their Mayer Brown memorandum, and the authors are part of the team of lawyers of Mayer Brown’s Across the Board blog. 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 age-old debate over the purpose of for-profit corporations has reignited, with two rival theories on offer: shareholder primacy and stakeholder parity. The first posits that the primary purpose of corporations is to maximize shareholder value, while the second urges the equal interests of all other constituents, especially employees, customers, and communities.
While the debate can seem complex and polarizing, the reality for corporate directors is simple and subtle: directors’ legal duties run to shareholders, but directors may promote the interests of others when those are rationally related to shareholder interests. If prevailing debate sometimes suggests a stark choice between shareholders and other stakeholders, the reality is that their interests are more aligned than it may seem and directors continue to operate accordingly.

Corporate law has long required directors to act in the best interests of the corporation and its shareholders. In practice, this duty sometimes translated into a mandate to maximize shareholder value—at all costs. But while some businesspeople may follow that practice, most recognize that promoting shareholder interests invariably entails protecting the interests of others, such as employees and customers. Corporate law accommodates this reality by giving directors wide latitude in exercising their business judgment. Rather than such an impractical mandate that directors maximize shareholder value, courts say they must act in the best interests of the corporation and its shareholders.


Gender and the Social Structure of Exclusion in U.S. Corporate Law

Afra Afsharipour is the Martin Luther King, Jr. Professor of Law and Senior Associate Dean for Academic Affairs at UC Davis School of Law, and Matthew Jennejohn is a Professor of Law at Brigham Young University. This post is based on their recent paper, forthcoming in the University of Chicago Law Review.

Law develops through collective effort. A single judge may write a judicial opinion, but only after an (often large) group of lawyers choose litigation strategies, craft arguments, and present their positions. Despite their important role in the legal process, these networks of lawyers are almost uniformly overlooked in legal scholarship—a black box in a discipline otherwise obsessed with institutional detail.

Prior qualitative research suggests that networks are an important source of information, mentoring, and opportunity, and that those professional resources are often withheld from lawyers who do not mirror the characteristics of the typically male, wealthy, straight, and white incumbents in the field. We have a common nickname for the networks that result, which are ostensibly open but often closed in practice: “Old boys’ networks.”

Our article, Gender and the Social Structure of Exclusion in U.S. Corporate Law, is the first academic study that quantitatively analyzes gender representation within a comprehensive network of judges and litigators over a significant period of time. Our study is based on hand-collected data from cases before the Delaware Court of Chancery, the trial court that adjudicates the most—and the most important—corporate law disputes in the United States. We collected seventeen years of docket entries across more than 15,000 matters and 2,700 attorneys as the basis for a massive network. We analyze gender representation among the lawyers involved in Chancery litigation—the “Chancery Litigation Network”—in two ways: (1) straightforward headcounts; and (2) by thinking of the attorneys as actors within a network, which allows us to measure their professional relationships in the field. This network-based approach illuminates men and women’s access to the professional resources that qualitative studies have found to be so important to advancement in the profession.


Does the SEC’s New PVP Disclosure Facilitate Shareholders’ Assessment of Pay for Performance Alignment?

Ira T. Kay is Managing Partner and Founder, Mike S. Kesner is a Partner, and Ed Sim is a Consultant at Pay Governance LLC. This post is based on a Pay Governance memorandum by Mr. Kay, Mr. Kesner, Mr. Kim, and Linda Pappas. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse M. Fried; Pay without Performance: The Unfulfilled Promise of Executive Compensation and Executive Compensation as an Agency Problem both by Lucian Bebchuk and Jesse M. Fried.

The SEC released its final version of the rules mandated by Dodd-Frank regarding the disclosure of pay versus performance (PVP) on August 25, 2022. Since then, thousands of calendar-year U.S. companies have been working diligently to prepare the required information for their 2023 proxies, including compensation actually paid (CAP), a new definition of compensation that is intended to demonstrate the potential value of total pay that has been or may be received by proxy-named executive officers. Importantly, many of the components included in the SEC’s definition of CAP are highly contingent on future financial performance and stock price and do not reflect compensation actually received during the year.

There is a long history of media, government officials, academics, pension funds, and investors criticizing U.S. companies for executive pay and performance disconnects. Such disconnects may be caused, for example, by large grants of time-vested shares and may also be driven in part by the use of grant date fair value of equity incentives that are not adjusted for actual, post-grant financial performance or stock price changes. These grant date values are currently disclosed in the Summary Compensation Table (SCT) and Grants of Plan-Based Awards Table. The SEC PVP disclosure is intended to provide investors with a clear analysis of the alignment or misalignment of the top executives’ CAP with the company’s financial and stock price performance over a 5-year period, starting with 3 years of data in the inaugural year. This analysis, while complex, was intended by the SEC to be viewed by investors as a window into the governance and workings of the company’s pay for performance model.


The Erb Principles for Corporate Political Responsibility

Thomas P. Lyon is Professor and Faculty Director of the University of Michigan’s Erb Institute for Global Sustainable Enterprise. Elizabeth Doty is the Director of the Institute’s Corporate Political Responsibility Taskforce. This post is based on the Erb Principles for Corporate Political Responsibility. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson, Jr., James Nelson, and Roberto Tallarita; and The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss. 

Milton Friedman famously claimed that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”  That view is consistent with the vision of perfectly competitive markets that dominated the field of economics half a century ago and justified economists’ trust in “the free market” to deliver results that serve the public interest.  Friedman’s position is powerful if business takes the “rules of the game” as exogenously given and plays no part in shaping them.  In the US today, however, business is a major source of campaign funding and the dominant force in lobbying in the US.  On what basis should business influence those rules? Businesses today face increasingly difficult tradeoffs between the pro-market and pro-society policies needed to support their own long-term goals, and narrower pro-business policies that may pay off more directly in the near term.  Moreover, much of current campaign activity and the content of lobbying influence is hidden from public view.  When business operates behind closed doors to shape the rules of the game, the presumptions that markets are “free” and faithfully serve the public interest no longer hold.  Public opinion and academic research increasingly suggest the influence of political spending and lobbying behind closed doors are major drivers of dangerously high levels of distrust in government. In response to that distrust, companies are facing increasing pressure to step in to solve societal issues, increasing scrutiny of their political activities and more recently, serious questions about the legitimacy of their political engagements.


Pay Versus Performance Disclosure – Findings from the Early S&P 500 Filers

Kelly Malafis is a Founding Partner and John Swift and Matthew Schwarcz are Analysts at Compensation Advisory Partners. This post is based on their CAP memorandum. Related research from the Program on Corporate Governance includes Pay without Performance: The Unfulfilled Promise of Executive Compensation, Executive Compensation as an Agency Problem, and Paying for Long-Term Performance (discussed on the Forum here) all by Lucian Bebchuk and Jesse M. Fried.

When the SEC finalized its proposed rule for Pay Versus Performance (PvP) disclosure in August 2022, the preparation for the 2023 proxy season suddenly became a fire drill. Management teams and their advisors were trying to get their arms around a new definition of pay called “Compensation Actually Paid” and the necessary calculations for the new disclosure. In addition to the calculations, there were questions around what this new disclosure would look like based on the SEC’s rules and, being the first of its kind, what other companies were doing. Our report provides insights into how companies with early filing dates approached this first year of the PvP disclosure requirement.

Compensation Advisory Partners created a PvP Tracker and analyzed 25 definitive and preliminary proxy statement filings among S&P 500 companies that filed as of 3/6/2023. Our sample, which we refer to as ‘early filers’, covers multiple industries. The early filers have median revenue of approximately $15B and median market cap of approximately $29B. We focused our analysis on aspects of the disclosure where companies had choices (i.e., comparator groups, company-selected measure, location of disclosure in the proxy, etc.) and also made observations on unique findings. Our key findings are summarized below.

Comparator Group for Total Shareholder Return (TSR) Calculations

The majority of companies in our sample elected to use an industry index rather than a custom benchmarking peer group, most often the same industry index that companies use for the Stock Performance Graph in the 10-K. This trend was anticipated as many companies wanted to avoid the SEC requirement to explain changes to a custom peer group in a footnote and compare the Company’s TSR to both the old and the new peer groups. The next most common comparator group was the compensation benchmarking peer group listed in the Compensation Discussion & Analysis (“CD&A”). Companies overwhelmingly chose a comparator group that was also used for the Stock Performance Graph.


Corporate Democracy and the Intermediary Voting Dilemma

Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Carey Law School and Jeff Schwartz is the Hugh B. Brown Presidential Professor of Law at the University of Utah, S.J. Quinney College of Law. This post is based on their recent paper, forthcoming in the Texas Law Review. 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, 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.

Institutional investor voting and engagement has been transformative. Institutional involvement has largely overcome the Berle and Means problem of dispersed passive shareholders, reduced agency costs, and improved corporate governance. Increasingly, however, society is demanding that institutional investors call on their portfolio firms to address social problems and operate sustainably. This shift in objectives—from focusing exclusively on economic value to incorporating values-based considerations—brings a new perspective to institutional engagement. In particular, it highlights the fact that institutional investors engage in “empty voting” in that they are intermediaries who act on behalf of the beneficiaries whose interest are at stake. In our article, Corporate Democracy and the Intermediary Voting Dilemma (forthcoming Texas Law Review), we argue that the shift requires institutional intermediaries—namely, mutual and pension fund managers—to pay greater attention to the views of their beneficiaries.

Fund managers have a fiduciary duty to act on behalf of their funds, and ultimately the beneficiaries of those funds, in their voting and engagement efforts. When corporate governance focused on reducing impediments to shareholder power and increasing managerial accountability, fund managers could meet their fiduciary obligations through thoughtful engagement on such matters. The rise of ESG, however, changes this calculus.


Proxy-Voting Insights: Voting on Politics

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 Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita; The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss.

Executive Summary

Sustainable investing has become an increasingly political matter in the United States. In light of this, there is a much greater need for asset managers to scrutinize corporate lobbying practices and political spending as part of their role as stewards of investors’ capital.

There is broad recognition of this need with regard to climate change and companies’ net-zero strategy. As a recent study by the London School of Economics highlights: “There is growing scrutiny of the alignment of corporate lobbying practices with the statements companies make on how they will act on climate change.” But there is a need for greater transparency on corporate political activity across a range of environmental and social issues, so that investors can make informed decisions on how to allocate their capital. This places a responsibility on asset managers to ensure that companies’ lobbying practices align with their statements on sustainability.

A steady stream of shareholder resolutions at U.S. companies requesting greater transparency on lobbying and political activity over recent years illustrates the level of interest in this topic. In this paper, we take a closer look at all U.S. shareholder resolutions on lobbying and political activity over the last three proxy years, assessing how the top 10 U.S. asset managers are voting on this topic generally and with respect to climate matters.


Takeaways from Proposed Changes to the NIST Cybersecurity Framework

Avi Gesser, and Erez Liebermann are Partners and Michael R. Roberts is a Senior Associate at Debevoise & Plimpton LLP. This post is based on a Debevoise & Plimpton memorandum by Mr. Gesser, Mr. Liebermann, Mr. Roberts, HJ Brehmer, Corey Goldstein, and Stephanie Thomas.

Risk assessments are a critical component of a robust cybersecurity program. To benchmark their risk assessments and cybersecurity maturity reviews, companies often look to recognized industry standards such as the National Institute of Standards and Technology Cybersecurity Framework (“NIST CSF” or “the Framework”). In this Debevoise Data Blog post, we discuss proposed changes to the Framework and offer takeaways for companies that use the Framework for cybersecurity risk assessments.

The Concept Paper

Last updated in 2018, The Framework outlines best practices for reducing cybersecurity risks and has become the standard for assessing cybersecurity maturity for organizations of all sizes. While adherence to the CSF is voluntary for most organizations, regulators, insurers and policymakers have looked to the Framework as one of the ways to assess whether an organization has implemented reasonable security.

In January 2023, NIST released a Concept Paper that details the more significant changes that NIST is considering in drafting the update to the Framework CSF 2.0. The proposed changes to the Framework are based on feedback that NIST received from industry and other stakeholders over a lengthy period, including through its Cybersecurity RFI that involved 134 responses and its Workshop on the CSF 2.0 that was attended by more than 4,000 participants from over 100 countries. The Concept Paper seeks comment on those proposed changes, as well as the existing Framework in general. Comments must be submitted by March 3, 2023 at [email protected]. After reviewing feedback on this Concept Paper and considering insights gained through the workshops, NIST intends to publish its draft CSF 2.0 in the coming months for a 90-day public review.


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