Monthly Archives: July 2023

ESG Mid-Year Review: Key Trends in 2023 Thus Far

Marc S. Gerber, Greg Norman, and Simon Toms are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Gerber, Mr. Norman, Mr. Toms, Boris Bershteyn, Tansy Woan and Kathryn Gamble.

Further Developments in the Green Energy Transition

  • The green energy transition continues to be a focus following the invasion of Ukraine.
  • Enactment of the Inflation Reduction Act in the U.S. has led the EU to respond with the Green Deal Industrial Plan and the U.K. has outlined its own strategy to compete against the U.S. for clean energy and climate-related projects.

Almost a year and a half on from Russia’s invasion of Ukraine, the dependence of many countries on Russian oil and gas continues to be apparent. Policymakers continue to seek alternative energy sources to combat this reliance, creating strong incentives to fast track renewable energy deployment.

Scaling up renewable energy projects will require considerable funding. Transmission improvements alone will entail an estimated investment of $12 trillion by 2050, equal to 30% of all investment required for the energy transition. Given the need for such investment, governments have leaned toward creating financial incentives for the private sector rather than relying primarily on direct government investment, beginning in the U.S. with the Inflation Reduction Act (U.S. IRA).

Alongside a number of other proposals, the U.S. IRA earmarked $369 billion for clean energy and climate-related projects, seeking to attract both domestic and foreign companies to establish green energy businesses in the U.S. This has resulted in a boom in green energy investments in the U.S., with Europe and the U.K. hurrying to match these incentives to prevent the loss of renewable businesses.

In response, the European Union (EU) set out proposals to compete with the U.S. IRA. The two main aspects are a relaxation of EU state aid rules and the Green Deal Industrial Plan (GDIP). First presented on February 1, 2023, the GDIP aims to provide support to scale up the EU’s manufacturing capacity for net-zero technologies and further relaxes state aid rules by means of making additional tax benefits available. The GDIP also proposed a number of new pieces of legislation to encourage the scaling up of clean energy, including the Net-Zero Industry Act (NZIA), which aims to bolster the EU’s renewables manufacturing capacity and strengthen its energy resilience.


The Financial and Economic Dangers of Democratic Backsliding

Layna Mosley is Professor of Politics and International Affairs at Princeton University. This post is based on her report.

The last decade has witnessed the erosion of democratic institutions and practices in a wide range of countries, including established democracies, newer democracies, and countries thought to be on the path from autocracy to democracy. In its 2023 report, the V-Dem Institute details this trend, noting that, for the first time in more than twenty years, there are more closed autocracies than liberal democracies in the world. This shift includes increased government repression of civil society organizations, deteriorations in election quality, and increased government censorship of media.

Although the features of political institutions in the United States have not changed substantially in recent years, some political actors have grown more willing to use these institutions to undermine democratic practices. In the November 2022 elections in the United States, election-denying candidates had modest success in statewide races for governor, attorney general, and secretary of state. The decentralized nature of U.S. election administration, however, means that the actions of even a single state-level official could wreak significant havoc on national electoral processes.

The high-profile losses in statewide races also conceal more ominous signs at other levels. Counting statewide elected officials, candidates for the House and Senate, and state legislative candidates, 226 election-denying candidates prevailed, or about 66 percent. Across 17 states, 23 election-denying officials now hold positions that oversee voting and electoral administration. Indeed, U.S. states can serve as laboratories not necessarily for improved public policies and democratic practices, but also for the erosion of democratic institutions. Moreover, many members of the majority party in the U.S. House of Representatives are election deniers. The erosion of democratic practices and norms therefore remains a serious threat in the United States, especially as the 2024 elections approach.


Stockholder Barred from Inspecting Books and Records Related to Board’s ESG-Related Decision

Rick S. Horvath, Stephen M. Leitzell, and Neil A. Steiner are Partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Horvath, Mr. Leitzell, Mr. Steiner, and Christopher J. Merken 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 The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaFor Whom Corporate Leaders Bargain (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.

Key Takeaways

  • Proof that an inspection demand is improperly “lawyer-driven” will overcome a stockholder’s pretextual claim for investigating wrongdoing.
  • A stockholder does not have a proper purpose for investigating an “ordinary business decision” when he admits he had “no reason to believe” any director acted out of self-interest.
  • Production of all relevant Board minutes was sufficient to satisfy stockholder’s investigative needs in this case.
  • Three years of emails were not necessary for investigating corporate actions taken in a single month in 2022.

On June 27, 2023, the Delaware Court of Chancery issued a post-trial memorandum opinion in Simeone v. The Walt Disney Company rebuffing a stockholder attempt to inspect books and records of The Walt Disney Company (“the Company”) related to the Company’s March 2022 response to Florida’s “Parental Rights in Education” bill, sometimes referred to as the “Don’t Say Gay” law (the “Legislation”). [1] Based in large part on the stockholder’s own testimony, the Court held that the stockholder’s “stated purposes” for the inspection demand were pretextual and improperly “lawyer-driven.” [2] The Court added that the stockholder failed to prove a credible basis to investigate wrongdoing related to the Company’s “ordinary business decision” to comment on a matter of employee and public concern. [3] Alternatively, even if the stockholder had demonstrated a proper purpose, the Court held that three years of emails among and between the Company’s Board of Directors and its CEO were not necessary for the stockholder’s purpose because the Company had already produced policies and Board minutes and materials related to the Company’s actions taken in March 2022.


Reviewing Board Action Interfering With Director Elections or Stockholder Voting Rights in Control

Jonathan K. Youngwood is Partner and Global Co-Chair of Simpson Thacher’s Litigation Department, and Craig Waldman and Stephen Blake are Partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher & Bartlett LLP memorandum by Mr. Youngwood, Mr. Waldman, Mr. Blake, and Peter Kazanoff and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently affirmed a Chancery Court decision finding that the board of a real estate services company had not acted for “inequitable purposes” and had “compelling justifications” for a stock sale, which diluted plaintiff’s 50% ownership interest in the company, broke a director election deadlock, and mooted plaintiff’s petition to appoint a corporate custodian. Coster v. UIP Cos., 2023 Del. LEXIS 202 (Del. June 28, 2023) (Seitz, C.J.). The Supreme Court held that the Chancery Court did not err as a legal matter, and its factual findings were not clearly wrong. As to the proper standard of review for stockholder challenges to board action that interferes with director elections or stockholder voting rights in control contests, the Supreme Court folded the three standards of review in this area into a unified standard.

Background and Procedural History

The company had two 50% owners, one was a co-founder and the other was the widow of the second co-founder, and plaintiff in this case. The company provided a range of services to investment properties, many of which were held in special purpose entities. In 2018, plaintiff called for a stockholder meeting, where her multiple motions seeking to affect the size and composition of the board failed due to the co-owner’s opposition. A second stockholder meeting also ended in deadlock. Plaintiff then filed a complaint in the Chancery Court seeking the appointment of a custodian under Section 226(a)(1), with “broad oversight and managerial powers,” not just to resolve the stockholder deadlock. Viewing such a custodial appointment as a threat to the company’s revenue (as it would have given rise to broad termination rights in the company’s special purpose entity contracts), the board sold a one-third interest in the company to a key executive who was also a director. [1] This stock sale diluted plaintiff’s ownership interest, broke the director election deadlock and mooted the custodian action.


House ESG Working Group Takes on Shareholder Proposal Process

Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

“ESG month” may not be exactly what you think. It’s the moniker, according to Politico, ascribed to the plan of the House Financial Services Committee, reflected in this interim report from its ESG Working Group, “to spend the next few weeks holding hearings and voting on bills designed to send a clear signal: Corporations, in particular big investment managers, should think twice about integrating climate and social goals into their business plans.”  But this is not just another generic offensive in the culture wars; according to Politico, this effort is more targeted—aimed not at major brands of beer or amusement parks, but rather at the processes that some argue activists use to pressure companies to address ESG concerns, as well as the “firms that play big roles in ESG investing.”   At the first of six hearings on July 12, Committee Chair Patrick McHenry maintained that the series of hearings and related proposed legislation was not about “delivering a message,” but was rather about protecting investors and keeping the markets robust and competitive. First item up? Reforms to the proxy process to prevent activists from diverting attention from core issues; while he supported shareholder democracy, he believed that democracy should reflect the say of the shareholders, not external parties that, in his view, exploit the existing process to impose their beliefs. The Working Group appears to have identified the shareholder proposal process as instrumental in promoting ESG concerns. Will this spotlight have any impact?

What is the ESG Working Group? The report tells us right upfront:  “The Environmental, Social, and Governance (ESG) Working Group was created at the beginning of this Congress for the specific purpose of developing a policy agenda designed to protect the financial interest of everyday investors from progressive activists who are using our institutions to force far-left ideology on Americans.”  The report identifies a number of priorities, including reforming the proxy system, ensuring the accountability of the proxy advisory firms, enhancing the alignment of voting decisions with retail investors’ best interests (also involves proxy advisors), increasing transparency and oversight of large asset managers “to ensure their practices reflect the pecuniary interest of retail investors,” improving ESG rating agency accountability and transparency, and protecting U.S. companies from burdensome EU regulations. In addition, in light of the “politicization of the SEC”—as the Working Group sees it—another priority is to “strengthen oversight and conduct thorough investigations into federal regulatory efforts that would contort our financial system into a vehicle to implement climate policy,” and to “demand transparency, responsibility, and adherence to statutory limits from financial and consumer regulatory agencies.”  I counted at least 18 bills that the Committee is proposing to address these issues.


Board Diversity Census on Fortune 500 Boards

Carey Oven is National Managing Partner at the Center for Board Effectiveness and Chief Talent Officer, Caroline Schoenecker is an Experience Director at Deloitte & Touche LLP and Cid Wilson is the President and CEO of the Hispanic Association on Corporate Responsibility. This post is based on a report from the Alliance for Board Diversity in Collaboration with Deloitte by Ms. Oven, Ms. Schoenecker, Mr. Wilson, Linda Akutagawa, Lorraine Hariton, and Michael Hyter. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum hereby 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.

Executive summary and key findings

At the risk of oversimplifying things, the data for the 7th edition of the Missing Pieces report shows a persistent theme that might be best characterized as: uneven progress. On the one hand, women and underrepresented racial and ethnic groups (UR&EG) hold 46.5% of Fortune 100c and 44.7% of Fortune 500 board seats—the highest ever. However, women from underrepresented racial and ethnic groups hold only 7.8% of board seats across Fortune 500 companies. This is an increase from 2020, when women from underrepresented racial and ethnic groups held 5.7% of board seats.

Another way to assess progress is whether levels of boardroom representation reflect the demographic composition of the nation. At a high level, the analysis suggests there is still much work to be done in this area. For example, individuals from underrepresented racial and ethnic groups hold 22.2% of board seats across Fortune 500 companies. This is certainly an improvement from 2020, when the proportion of UR&EG board members was 17.5%. However, United States census data shows 40.6% of the nation’s population is from underrepresented racial and ethnic groups. At the current pace, it would take the boards of Fortune 500 companies more than two decades for board representation to match the current level of representation of individuals from underrepresented racial and ethnic groups in the population.

Of course, as time passes, underrepresented racial and ethnic groups will continue to be a larger share of the broader population. Based on the Census Bureau’s population projection figures, there is no period where the total proportion of board seats held in the Fortune 500 by individuals from underrepresented racial and ethnic groups reaches population parity through at least 2060. [1] As the table to the right indicates, some individual UR&EG populations will see parity at current rates—though the date of parity varies greatly.


Weekly Roundup: July 21-27, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 21-27, 2023.

BlackRock to Expand Proxy Voting Choice to Its Largest ETF

Buyer Found Liable for Aiding and Abetting Target’s Sale Process Fiduciary Breaches

Navigating Global Uncertainty: Do Foreign National Directors Protect US Firms from Supply Chain Disruptions

Greenwashing: Navigating the Risk

Racial Targets

Global Compliance Risk Benchmarking Survey: ESG

2023 Sustainable Investment Survey

Sustainability in the Spotlight: Has ESG Lost Momentum in the Boardroom?

Statement by Commissioner Peirce on Public Company Cybersecurity Disclosures

Statement by Chair Gensler on Public Company Cybersecurity Disclosures

Statement by Chair Gensler on Public Company Cybersecurity Disclosures

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Today, the Commission is considering adopting final rules regarding cybersecurity disclosures by public companies. I am pleased to support these rules because they will enhance and standardize disclosures to investors with regard to public companies’ cybersecurity practices as well as material cybersecurity incidents.

Increasingly, cybersecurity risks and incidents are a fact of modern life. When material incidents occur, they can have a range of consequences—including financial, operational, legal, or reputational.

Currently, many public companies provide cybersecurity disclosure to investors. I think companies and investors alike, however, would benefit if this disclosure were made in a more consistent, comparable, and decision-useful way.

Thus, this adoption will enhance public companies’ cybersecurity disclosure in two ways.


Statement by Commissioner Peirce on Public Company Cybersecurity Disclosures

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Commissioner Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Chair Gensler. Although better than the proposal, this final cybersecurity disclosure rule continues to ignore both the limits to the SEC’s disclosure authority and the best interests of investors. Moreover, the Commission has failed to explain why we need this rule. Accordingly, I dissent.

Cyber risk and the attendant disclosure obligations have been front-and-center for public companies for a long time, and the SEC has underscored the importance of cyber disclosures. In 2011, “the Division of Corporation Finance issued interpretive guidance providing [its] views concerning operating companies’ disclosure obligations relating to cybersecurity.” [1] In 2018, the Commission issued interpretive guidance to assist public companies in fulfilling their obligation to “take all required actions to inform investors about material cybersecurity risks and incidents in a timely fashion, including those companies that are subject to material cybersecurity risks but may not yet have been the target of a cyber-attack.” [2] When companies fail to make the required disclosures about cyber risks or inform investors of a cyber incident in a timely manner, the Commission can bring an enforcement action based on existing disclosure obligations. [3] We do not need additional regulations. However, I could have supported a cyber rule designed to guide public companies in their obligation to disclose material cyber risks and material cyber incidents in a way that would be net-beneficial to investors. Today’s rule, by contrast, reads like a test run for future overly prescriptive, overly costly disclosure rules covering a never-ending list of hot topics.


Sustainability in the Spotlight: Has ESG Lost Momentum in the Boardroom?

Julie Daum is Leader, North American Boards Practice, at Spencer Stuart, and Kira Ciccarelli is a Lead Research Specialist at the Diligent Institute. This post is based on a report by Ms. Daum, Ms. Ciccarelli, Jason Baumgarten, and Dottie Schindlinger. 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 TallaritaStakeholder 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.

Is ESG still a priority or is it losing momentum?

In the last year, we’ve seen watershed moments in the world of ESG. In Europe, there has been added pressure on companies to tighten and enhance their approach to sustainability more broadly, without relying on the blanket term “ESG.” Meanwhile, in the United States, high-profile and divisive backlash has made some companies and leaders fearful to even use the term ESG. This begs the question: is ESG still a priority, has it lost momentum in the boardroom or does it just depend on where you are in the world?

In 2022, our inaugural survey and report set out to understand how boards were structuring oversight of ESG and how companies were pivoting to address these issues. In light of how rapidly the financial and ESG climate has changed over the last year and with new insights from a much larger, more global sample of board members, this updated edition aims to shed additional light on the following:

  • Organizational approach: How are directors and companies thinking about, managing and overseeing ESG issues, and how has this changed in the last year? What are the biggest obstacles?
  • Boardroom action: How often do boards discuss and evaluate progress on ESG goals? What actions are boards taking in light of current or upcoming regulatory changes, and where do they need better insight?
  • Strategy & future state: Where are environmental and social metrics incorporated? What are the benefits? How could things change in the next few years?
  • Oversight structures: Where does ESG oversight sit within the board? On committees? How are these structures changing?
  • Regional distinctions: Are there differences by geography?


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