Monthly Archives: May 2023

Board Governance and Strategy in a Changing Global Economic Landscape

Carey Oven is National Managing Partner at the Center for Board Effectiveness and Chief Talent Officer, Ira Kalish is Chief Global Economist, and Daniel Bachman is a Senior Manager at Deloitte & Touche LLP. This post is based on a Deloitte memorandum by Ms. Oven, Mr. Kalish, Mr. Bachman, and Jamie McCall.

Why it matters

From an economic perspective, the past few years have resembled a roller coaster. As the pandemic
spread and global commerce grinded to a halt, there were predictions that mass lockdowns would create a severe global recession (or worse). Such concerns had merit, and for a brief time the nation’s economy plummeted into recession. But as businesses adapted to the pandemic’s “new normal,” and especially as the slow reopening process began, some industries benefited from a recovery that was just as swift as the descent.

The recovery from the pandemic has been uneven at best, and it brought its own challenges—chief among them inflation. Board-level strategy around such issues often requires weighing a proverbial constellation of economic data. While cost cutting is often the “standard playbook” response in this area, there is value in weighing all the options available to promote economic resiliency. Periods of volatility are also an opportunity for boards to reaffirm their stewardship commitments. Such actions can pay dividends in social capital—a return on investment that, while not measured in dollars, can be just as valuable.


Chancery Rejects Dismissal of Caremark Claims Against Walmart’s Officers and Directors

Gail Weinstein is Senior Counsel, and Philip Richter, and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Weinstein, Mr. Richter, Mr. Epstein, Andrew J. Colosimo, Brian T. Mangino and Adam B. Cohen 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 Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.

In Ontario Provincial Council of Carpenters’ Pension Trust Fund v. Walton (Apr. 12, 2023), the
Delaware Court of Chancery, at the pleading stage of litigation, rejected dismissal of Caremark
claims brought against Walmart Inc.’s officers and directors in connection with the company’s role in the national opioid epidemic. The decision is a narrow one in that the court, at this early
stage of the litigation, addressed only the issue whether the claims were timely made. Notably,
however, the decision is another in a recent trend of decisions indicating increased judicial
receptivity to Caremark claims at the early pleading stage of litigation—although in most cases the court has continued ultimately to dismiss Caremark claims at the pleading stage, even in the context of arguably egregious factual situations.

Key Points

  • Although this and other recent decisions have indicated increased judicial receptivity to Caremark claims, it remains very difficult for plaintiffs ultimately to achieve success on such claims. The court has moved away from its historical trend of almost invariable dismissal of Caremark claims at the early pleading stage; and recent decisions, including Walton, have expanded the parameters for potential liability under Caremark. Nonetheless, it remains very difficult for plaintiffs to achieve ultimate success on Caremark claims—primarily because they must demonstrate that the defendants acted knowingly and intentionally in violating their oversight duties, and must establish that it would have been futile to bring demand on the board to bring the derivative litigation. However, the court’s increased receptivity to Caremark claims over the past few years has provided plaintiffs with more leverage to negotiate settlement of such claims.


Banking Crises in Historical Perspective

Carola Frydman is Professor of Finance at the Kellogg School of Management at Northwestern University, and Chenzi Xu is an Assistant Professor of Finance at Stanford University Graduate School of Business. This post is based on their recent paper.

The survey paper is organized around three main lessons learned about banking crises: the importance of leverage as a precursor to crises, the large and negative real impact of crises on various sectors of the economy, and that government and central bank intervention has historically ameliorated these effects. To highlight recent advances,  the paper surveys over two hundred empirical studies from the last twenty years (2000-2022) that cover banking crises occurring between 1800 and 1980.
The survey begins by discussing challenges and methodologies in studying historical banking crises empirically. One of the largest is in measurement: what is the right way to capture whether a banking crisis has occurred? The literature has used many, and while each approach is internally consistent, there are disagreements in the chronologies of crises that are available. More recently, the literature has shifted from using retrospective to contemporary sources, from qualitative to quantitative measurements, and towards capturing dimensions of crises beyond just the recognition that they occurred.
With the definition of crises used in the literature in hand, the survey examines the sources and transmission of banking crises, emphasizing that leverage (credit expansion) are critical predictors. Crises occur and escalate with bank runs, influenced by individual depositor behavior. This behavior reveals the significance of social networks, coordination, reputation and trust, and the role of informed and uninformed depositors in propagating financial instability. Heterogeneity in bank fragility also highlights the importance of maturity mismatches and institutional features, such as branching, as additional sources of vulnerability. Transmission of shocks occur both within the banking system, driven by interbank networks transmitting liquidity shocks in presence of moral hazard and asymmetric information; and internationally through exposure to risky assets such as sovereign debt, international bank expansion, and risky capital inflows, especially in emerging markets.


Weekly Roundup: May 5-11, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 5-11, 2023.

Statement by Commissioner Peirce on Share Repurchase Disclosure Modernization

Diversity and Inclusion—an Investor’s Handbook

Delaware M&A: Spring 2023

Superstar CEOs and Corporate Law

Board Actions to Boost Corporate Sustainability

Financing Sustainable Change: What Does Good Governance Look Like?

Q4 2022 Stewardship Activity Report

Racism and Systemic Risk

Diversifying the Boardroom: 2022 Disclosures

Diversifying the Boardroom: 2022 Disclosures

David A. Bell and Dawn Belt are partners and Ron C. Llewellyn is counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David WeissWill Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

The intense focus on board diversity from a variety of stakeholders over the last several years has spurred many companies to examine the composition of their boards and to take action to diversify their boardrooms. While the boards of U.S. companies have slowly diversified over time, the pace of diversification has accelerated since 2018 as a result of legislation and other initiatives, particularly following the calls for racial justice in 2020.

In this post we examine these recent trends in board diversity and other developments in 2022, with a particular focus on efforts to increase racial and ethnic board diversity. In doing so, we examine the board racial/ethnic diversity disclosure practices and resulting demographic data gleaned from the companies in the Standard & Poor’s 100 Index (S&P 100) and the technology and life sciences companies included in the 2022 Fenwick-Bloomberg Law Silicon Valley 150 List (SV 150). For the 2022 proxy season, which generally ran from July 1, 2021 through June 30, 2022, 146 of the SV 150 companies filed proxy statements.

Key Takeaways Include:

  • All of the S&P 100 and 83% of the SV 150 companies provided racial/ethnic board diversity
    data in their proxy statements for the 2022 proxy season.
  • The majority of companies in each group disclosed the racial/ethnic composition of their
    boards by specific racial/ethnic categories.
  • Racial and ethnic minorities have experienced recent gains in board representation, but still
    face many of the same challenges encountered by women.
  • One can extrapolate even from the limited number of companies that disclose racial and
    ethnic diversity information that both the S&P 100 and the SV 150 are significantly far from
    proportional board representation for racial and ethnic minorities compared to the national
    workforce at-large.
  • The demand for greater diversity on U.S. corporate boards and related disclosure of such
    information will likely continue until equitable gender, racial and ethnic representation is


Racism and Systemic Risk

Cary Martin Shelby is a Professor of Law at Washington and Lee University School of Law. This post is based on her recent paper, forthcoming in the Northwestern University Law Review.

News of colossal bank failures have threatened economic stability once again. In March 2023, Silicon Valley Bank (“SVB”) failed after a myriad of factors facilitated a large-scale bank run of its underlying deposits. While SVB’s failure does not seem to have risen to the level of a systemic disruption, it has certainly called into question the Financial Stability Oversight Council’s (“FSOC”) ability to continually effectuate its mission to identify and assess emerging threats to U.S. financial stability. FSOC is comprised of the chairpersons of major U.S. regulators. It was created by Congress shortly following the financial crisis of 2007-09 (the “Great Recession”) to protect against the ever-expanding categories of activities and institutions that could generate and transmit systemic risk. Such risk generally encompasses “the risk of a breakdown of an entire system rather than simply the failure of individual parts.” Even still, a recent report found that FSOC failed to act within their regulatory power to subject SVB to additional oversight despite its knowledge that the bank held excessive levels of uninsured deposits.

I have recently authored an article entitled Racism and Systemic Risk (forthcoming in Northwestern University Law Review), which urges FSOC to recognize yet an additional threat to financial stability that has repeatedly aggravated notable systemic risk disruptions—the insidious virus of racism. Scholars have previously insisted that the private sector acknowledge its contribution to systemic racism, which encompasses deeply entrenched inequities that are intertwined within institutional structures. This article extends these analyses by demonstrating the interconnectedness between racism and systemic risk that has consistently floated past the radar of regulators. It does so through my novel “Systemic Risk and Racism Model” provided below, which examines how racism has exacerbated recent systemic risk disruptions across every stage of their life cycle continuums. The Great Recession as well as climate change, provide quintessential case studies of recent disruptions to filter through this model, particularly since FSOC has officially recognized climate change as a threat to financial stability in 2021. While this post focuses on the Great Recession, my full article provides a robust analysis of how climate change could similarly be filtered through this model.


Q4 2022 Stewardship Activity Report

Benjamin Colton is Global Head of Asset Stewardship, and Michael Younis is Vice President of Asset Stewardship at State Street Global Advisors. This post is based on their SSGA memorandum.

This post reviews State Street Global Advisors’ stewardship activities, including related efforts in the Asia Pacific region with a focus on the Australian proxy voting season, case studies of our social stewardship activities, and an overview of executive remuneration and succession planning. It also outlines thematic stewardship priorities for 2023.


Financing Sustainable Change: What Does Good Governance Look Like?

Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School and Vanessa Havard-Williams is partner and Global Head of Environment & Climate Change at Linklaters LLP. This post is based on their FCA paper. 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; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and 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.

In February 2023 the UK Financial Conduct Authority (FCA) publishedDiscussion Paper DP23/1: Finance for positive sustainable change: governance, incentives and competence in regulated firms.” The purpose of the DP is “to encourage an industry‑wide dialogue on firms’ sustainability‑related governance, incentives, and competencies. In a field where there are many initiatives taking place, our aim is to help narrow this field and help with highlighting good, evolving practices if finance is to deliver on its potential to drive positive sustainable change.” The focus of the DP is “regulated firms” (i.e., financial institutions of various kinds) in the UK and comments are due by May 10, 2023.

It is our view that the ideas and recommendations made in this paper have broader applicability than simply UK-based financial institutions and their regulators. Addressing climate change and integrating sustainability more generally into corporate strategy is a challenge facing companies and financial institutions all over the world. Thus, it is useful to put this DP into a broader context by acknowledging a multitude of incipient sustainability reporting standards. It is also important to acknowledge the increasingly politicized nature of sustainability, especially in the U.S. Without the appropriate governance structures and processes, incentives, and the necessary competencies from the board down to middle management, it will be impossible for any organization to deal with the complex field of sustainability reporting standards while simultaneously being caught between opposing political forces.


Board Actions to Boost Corporate Sustainability

Laura Sanderson co-leads the Board and CEO Advisory Partners in Europe and Sarah Galloway and Kurt Harrison are co-heads of Global Sustainability Practice at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita.

How can boards boost corporate sustainability? Often, when boards decide to increase their focus on sustainability, they struggle to agree on what steps to take and how much effort to put into those first actions.

To help guide these decisions, we’ve examined our research into sustainable leadership and defined 10 actions for boards. They show how boards can build the culture, purpose, strategy, risk alignment, structure, and processes to enhance corporate sustainability.

What’s more, we’ve also found that quickly going all-in on these efforts results in stronger long-term performance.

When assessing how organizations developed their diversity, equity, and inclusion (DE&I) efforts—a critical element of corporate sustainability—we learned that most companies take a linear approach over five to 10 years. But a small group invested heavily upfront. These fast-track companies quickly outpaced traditional ones, reaching maturity in about half the time.

The lesson for boards? Be bold.


Racial Diversity Exposure and Firm Responses Following the Murder of George Floyd

Rafael Copat is an Assistant Professor of Accounting at the University of Texas at Dallas. This post is based on a recent paper forthcoming in the Journal of Accounting Research by Professor Copat, K. Ramesh, Herbert S. Autrey Professor of Accounting at Rice University; Karthik BalakrishnanVernon S. Mackey, Jr. & Verne F. Simons Distinguished Associate Professor of Accounting at Rice University; and Daniela De la Parra, Assistant Professor of Accounting at the University of North Carolina Chapel Hill. 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 TallaritaDoes 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, Roberto Tallarita; and 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.

Diversity, equity and inclusion (DEI) is a highly debated topic in the corporate world these days. Although research has provided only a limited understanding of the impact of DEI on firm value, particularly with regards to race and ethnicity, both firms and regulators have taken actions to expand corporate DEI initiatives. For example, 46% of S&P 500 firms include some DEI metric in their incentive plans (Semler Brossy, 2022). In addition, ISS currently recommends a vote against the chair of the nominating committee for Russell 3000 firms that have no racial diversity on their board. Furthermore, NASDAQ now requires most listed companies to have at least one board member identified as belonging to an “underrepresented minority” or explain why they failed to do so.

In our study, forthcoming at the Journal of Accounting Research and available on SSRN, we examine the valuation effects of a firm’s exposure to race-related diversity issues. We refer to such exposure as “diversity exposure.” We also explore how firms respond to social pressure for racial justice, and what the economic consequences of these responses are.

Our analyses are centered around the murder of George Floyd, a crime that triggered social unrest across the United States. After George Floyd’s murder, many firms revealed their exposure to racial diversity issues in prominent disclosure channels. We employ a novel text-based methodology to extract a measure of corporate diversity exposure from transcripts of conference calls. We find that roughly 29% of all firms in our sample have a diversity-related discussion in at least one conference call following the murder of George Floyd. More importantly, as shown in Figure 1 below, we observe a significant increase in the percentage of sentences that contain diversity terms immediately after the murder.


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