Monthly Archives: September 2023

Guarding Against a Short Attack

Posted by Richard J. Grossman, Neil P. Stronski and Demetrius A. Warrick, on
Tuesday, September 19, 2023
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Demetrius A. Warrick, Richard J. Grossman, and Neil P. Stronski are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

Key Points

  • To prepare for the possibility of a short seller attack, companies should assess their vulnerabilities, maintain open channels of communication with shareholders, monitor short positions and changes in their shareholder base, and formulate a communications strategy.
  • In the face of a short attack, it is vital for a company to respond promptly with detailed evidence to rebut the short seller’s accusations point by point.
  • Share buybacks and dividend increases may help to restore a share price depressed by a short attack, but there is a risk that these may be seen as superficial defensive moves that do not address fundamental questions about the business.
  • Suing the firm or individuals behind a short attack or seeking an intervention by regulators rarely is successful and can backfire, drawing attention to the criticisms.

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2023 Proxy Season Digest

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Monday, September 18, 2023
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an ISS memorandum by Toby Huang, Associate, Data Analytics; and Sandra Herrera Lopez, Ph.D., Vice President, ESG Content & Data Analytics at ISS Corporate Solutions.

Introduction

Each year during proxy season, ISS Corporate Solutions (ICS) analyzes recently collected data from Russell 3000 company filings. This year we focused on director support and diversity, executive compensation, and shareholder proposals. In this season-ending review, we aggregate our findings for a comprehensive lookback on the 2023 proxy season.

Key Takeaway

  • Boards continued to diversify while director support levels trended slightly lower.
  • Failed Say-on-Pay proposals were down, but median support levels are also declining.
  • One year Say-on-Pay frequency is increasingly becoming the norm among smaller companies.
  • ESG-related performance metrics are gaining popularity in executive compensation packages.
  • Environmental and Social shareholder proposals are gaining prevalence but support has weakened.

Board of Directors

  • Director Vote Support Declining
  • Diversity among Boards of Directors
  • Percentage of Women on the Board in Leadership Roles

Director vote support has eroded steadily by about 1% over the past five years. Women and ethnic minorities enjoy 0.5%-1.0% higher support than their counterparts.

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Discretionary Investing by ‘Passive’ S&P 500 Funds

Posted by Peter Molk (University of Florida), and and Adriana Robertson (University of Chicago), on
Monday, September 18, 2023
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Peter Molk is the John H. and Mary Lou Dasburg Professor of Law at the University of Florida Levin College of Law and  Adriana Z. Robertson is Donald N. Pritzker Professor of Business Law at the University of Chicago Law School.  This post is based on their recent paper. 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, and Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the Forum here) by Lucian Bebchuk and Scott Hirst; and The Specter of the Giant Three (discussed on the Forum here) by Lucian Bebchuk and Scott Hirst.

So-called “passive” index funds, which track a pre-specified underlying index, manage over $12 trillion in assets. It is widely assumed that the managers of these funds cannot select portfolios that deviate from the index’s holdings. In Discretionary Investing by ‘Passive’ S&P 500 Funds, we show this assumption is false as a matter of both law and empirical fact. We analyze funds that track the S&P 500 – the most widely used index – and find their holdings regularly diverge from the index’s, by between 1.7% and 7.5% in the fourth quarter of 2022 alone. These deviations amount to over $60 billion in discretionary investment decisions, roughly equivalent to Target Corporation’s entire market capitalization. Our findings complicate the standard narrative around index funds and weaken many of the criticisms traditionally levied against these funds.

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The EU Corporate Sustainability Reporting Directive -what non-EU companies should know

Posted by Peter Pears, Tim Baines, and Oliver Williams, Mayer Brown LLP, on
Sunday, September 17, 2023
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Peter Pears and Tim Baines are Partners and Oliver Williams is an Associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Pears, Mr. Baines, Mr. Williams, Patrick Scholl, James Taylor, Musonda Kapotwe. 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; For 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.

The EU Corporate Sustainability Reporting Directive (“CSRD“) entered into force on 5 January 2023 and the associated European Sustainability Reporting Standards (“ESRS“) were adopted by the European Commission on 31 July 2023. Together, the CSRD and ESRS create detailed sustainability reporting requirements that will apply to a significant number of EU and non-EU companies and substantially increase the scope of their sustainability reporting.

Application of the rules is now imminent and, for some, CSRD reporting periods will begin from 1 January 2024.

In this update, we take a look at the implications of the CSRD for non-EU companies and what companies can do to prepare.

Overview of the disclosure requirements

Under the CSRD, in-scope companies will be required to disclose a wide range of sustainability-related information, including:

  1. a description of the company’s business model, strategy and sustainability risks and opportunities;
  2. ESG-related targets and annual progress on meeting these targets;
  3. separate sustainability statements included in the company’s management reports, containing sector-agnostic, sector-specific and company-specific information, in accordance with the ESRS;
  4. implementation plans in relation to the transition to a sustainable economy, measures taken to limit global warming in line with the Paris Agreement and to achieve climate neutrality by 2050 and exposure to coal, oil and gas-related activities;
  5. sustainability matters that affect the company and the impact of the company on sustainability matters (the so called “double materiality” perspective);
  6. greenhouse gas emission targets;
  7. policies in relation to sustainability (including incentive schemes linked to sustainability matters);
  8. EU taxonomy alignment data; and
  9. due diligence processes implemented by the company in relation to sustainability matters and the actual and potential adverse impacts of the company’s operations and value chain.

Significant additional detail has been provided for in the ESRS, including two cross-cutting standards (ESRS 1 and ESRS 2) that provide general reporting concepts (including double materiality and reporting boundaries) and overarching disclosure requirements, and ten topical standards with specific disclosure requirements for ESG matters. For more detail on the disclosure requirements under the CSRD and the ESRS, please read our earlier updates here and here.

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In 2022, Corporate Time Horizons Shorten, Investors’ Lengthen

Posted by Allen He, Jessica Pollock, FCLTGlobal, on
Saturday, September 16, 2023
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Allen He is a Director, and Jessica Pollock is a Research Associate at FCLTGlobal. This post is based on their FCLTGlobal memorandum.

Data from year-end 2022 shows the investment horizon gap between companies and investors [1] remains slim, though for the first time since our tracking began, investors are leading with longer investment horizons than companies. On paper, closer alignment of investment horizons between providers and users of capital may appear to be a positive development for value creation in capital markets. However, ‘closer’ doesn’t necessarily equal ‘better’.

While the past year reflects a continued long-term upward trend in investor horizons, it also revealed a material decline in investment horizons for corporates. This raises questions about the potential for corporates’ long-term value creation. Specifically, the material reduction in corporate investment horizons over the last two years brings them to their lowest value since FCLTGlobal’s tracking began. Furthermore, the increasing horizons can be attributed more to changes in portfolio composition than to a fundamental shift in investment behavior. It is important to note that the effects of these trends vary significantly across geographies, sectors, and even within asset classes. We highlight a few of the key drivers in corporate and investor investment horizon changes below.

Companies’ investment horizons shortened in 2022

Companies in 2022 underwent a notable shift in investment strategies, resulting in companies shrinking their investment horizon. This reduction, from 5 years 4 months in 2021 to 5 years in 2022, was primarily driven by two key factors: an upsurge in buybacks and a decrease in retained earnings. As businesses increasingly opted to repurchase their own shares and allocate fewer funds to retained earnings, they experienced a shorter-term orientation to capital deployment. This shift reflects a changing landscape, indicating a stronger emphasis on immediate return of capital to investors in the corporate world.

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Financial Implications of Rising Political Risk in the US

Posted by Stephen Davis (Harvard Law School), on
Friday, September 15, 2023
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Stephen M. Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance and a Co-organizer of the Capital+Constitution project.

Calls to overturn elections and limit voting in the US are having a powerful, long-term, but under-the-radar impact on the financial world. First hard evidence surfaced on August 1 2023, when Fitch Ratings downgraded the US’s credit level, citing deteriorating governance standards. Now, according to a first nonpartisan probe of investor opinion in the wake of the January 6, 2021 insurrection at the Capitol, some 90% of big institutional investors believe threats to democracy in the US are rising. But, worryingly, less than 30% of these same investors are confident that US public companies are today equipped to manage that political risk. Indeed, on average, respondents estimated that only some 45% of public corporations “are well-prepared to handle political risk to their businesses in the US.”

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Weekly Roundup: September 8-14, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, September 15, 2023

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This roundup contains a collection of the posts published on the Forum during the week of September 8-14, 2023

Proceduralism: Delaware’s Legacy

Posted by Dalia Tsuk Mitchell (George Washington University), on Friday, September 8, 2023
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SEC Finds Forms 12b-25 Not Up to Snuff

Posted by Cydney S. Posner, Cooley LLP, on Saturday, September 9, 2023
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Significant Rule Changes for Private Fund Advisers

Posted by Laura Ferrell, Aaron Gilbride, and Jamie Lynn Walter, Latham & Watkins LLP, on Sunday, September 10, 2023
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Capital-Market Effects of Tipper-Tippee Insider Trading Law: Evidence from the Newman Ruling

Posted by Andrew T. Pierce (Georgia State University), on Monday, September 11, 2023
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Activist Settlements: Fiduciary Questions for Boards

Posted by Neil Whoriskey, Milbank LLP, on Monday, September 11, 2023
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Does ESG Crowd Out Support For Government Regulation?

Posted by Hajin Kim (University of Chicago), Joshua Macey (University of Chicago), and Kristen Ann Underhill (Cornell University), on Tuesday, September 12, 2023
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2023 U.S. Regional Brief

Posted by John Galloway, Vanguard, Inc., on Tuesday, September 12, 2023
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ESG Reporting for Private Companies

Posted by David A. Bell, Dan Dorosin, and Ron C. Llewellyn, Fenwick & West LLP, on Wednesday, September 13, 2023
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Testimony of Chair Gary Gensler Before the U.S Senate Committee on Banking, Housing, and Urban Affairs

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Wednesday, September 13, 2023
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MS40 Activist Ownership Analysis

Posted by Jonathan Ostroff, Geoffrey Weinberg, Gerry Davis, Morrow Sodali, on Thursday, September 14, 2023
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Remarks by Commissioner Lizárraga before Eurofi

Posted by Jaime Lizárraga, U.S. Securities and Exchange Commission, on Thursday, September 14, 2023
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Remarks by Commissioner Lizárraga before Eurofi

Posted by Jaime Lizárraga, U.S. Securities and Exchange Commission, on
Thursday, September 14, 2023
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Jaime Lizárraga is a Commissioner at 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 Commissioner Lizárraga and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good evening, and thank you, David, for your kind introduction and for your leadership in organizing this conference.[1]

It is a pleasure to join you in this beautiful part of the world, a UNESCO World Heritage Site.

This culturally and linguistically diverse region has special meaning for me. I grew up in a place called San Diego, in a Spanish-speaking home, with parents who immigrated to the United States from Mexico.

My mother and grandmother, both devout Catholics, once took me to another pilgrimage site near their hometown in Mexico. This site, originally given the name Santiago de Talpa in the year 1599, is located near a city named Compostela, in a region once known as Nueva Galicia.

So it is particularly special to be here in light of this personal connection and of the deep bonds and shared history and traditions between Galicia and Spain and the Americas.

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MS40 Activist Ownership Analysis

Posted by Jonathan Ostroff, Geoffrey Weinberg, Gerry Davis, Morrow Sodali, on
Thursday, September 14, 2023

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Jonathan Ostroff is Senior Director and Geoffrey Weinberg and Gerry Davis are Managing Directors at Morrow Sodali. This post is based on a Morrow Sodali memorandum by Mr. Ostroff, Mr. Weinberg, Mr. Davis, Tom Margadonna, Michael Verrechia, and Paul Schulman. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

In our analysis of the equity investment positions of the MS40* Activist Investors for the 2nd quarter of 2023, we observed the following notable trends:

1. While Third Point initiated seven of the largest twenty new positions this quarter and Elliott was responsible for five, the largest position increase was Icahn Associates’ holdings in Icahn Enterprises as a defensive response to Hindenburg Research’s public short position.

2. With Elliott’s new position in Seadrill and Starboard’s stake in Algonquin Power & Utilities, North America (excluding the US) saw the largest increase in MS40 ownership, with a $1 billion quarter over quarter increase.

3. For the quarter, non-US investments by the MS40 was 31% of the total, the highest point in the past year. In a year-over-year comparison, non-US investment represented only 25% in 2Q2022.

4. The number of MS40 investments in SPACs was once again down, for the quarter saw a 40% decline in market value to $1.6 billion, in 4Q2022 it represented $5.4 billion dollars, and during the 2Q2022 high, it was $8.3 billion. There are under 300 positions in SPACs, a drop from 500 in the previous quarter.

5. We saw Biotechnology shift back into being the most active sub-industry group with the initiation of 27 new positions and 44 liquidations. Application Software was once again the second most active group, and Regional Banks, despite their recent turmoil, saw the liquidation of 58 positions, fading from last quarter’s spotlight.

6. Among the quant investors, the largest sector exposure was in Information Technology (Semiconductors/Software) and Industrials (Machinery/Ground Transportation) with a shift away from the Financials (Financial Services/Capital Markets). DE Shaw made the largest contribution to these changes with increases at Nvidia, Meta, Microsoft, and Uber and shifts out of Visa and Charles Schwab. This helps to explain the variance in the chart below as just four sectors saw net increases among MS40 holders, while five experienced double-digit declines in the number of positions held.

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Testimony of Chair Gary Gensler Before the U.S Senate Committee on Banking, Housing, and Urban Affairs

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Wednesday, September 13, 2023
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent testimony. 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.

Good morning, Chairman Brown, Ranking Member Scott, and members of the Committee. Thank you for inviting me to testify today. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

Protecting the Public for 90 Years

For 90 years, the federal securities laws and the SEC’s work to oversee them have played a crucial role for the public both in good times and in times of stress. The core principles of U.S. securities markets regulation have contributed to America’s economic success and geopolitical standing around the globe.

At this remarkable agency, we serve investors building for a better future and issuers raising money to fund innovation, while overseeing the $100 trillion capital markets where they meet. The essence of this is captured in our three-part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The SEC is the cop on the beat watching out for your constituents. In the last year, we’ve filed approximately 750 enforcement actions and conducted approximately 3,000 examinations of registrants. We engage with more than 40,000 registrants—asset managers, brokers, dealers, exchanges, fund complexes, public companies, and many more.

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