Yearly Archives: 2023

Investors Press U.S. Boards To Separate Chair, CEO Roles

Posted by Subodh Mishra, Institutional Shareholder Services, on
Thursday, October 12, 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 Corporate Solutions memorandum by Sandra Herrera Lopez, Ph.D., Vice President, ESG Content & Data Analytics, & Veronica Nikitas, Senior Associate, Compensation & Governance Advisory at ISS Corporate Solutions.

K E Y   T AK E A W AY S

  • Shareholder proposals calling for an independent board chair rose by 113% in the Russell 3000 in the first half of 2023 to the highest level in the past 10 years.
  • Despite this spike in the number of proposals, average shareholder support levels have remained steady over the last 10 years at 29% to 35%.
  • Activist investor John Chevedden was responsible for more than half of the proposals that went to a
  • One in four S&P 500 companies chaired by a non-independent director received a shareholder proposal calling for change.
  • Combined Chair and CEO roles are on the decline and they now are present at less than half of the companies across all U.S. indices.

INT R O D U CT I O N

The first half of 2023 saw a significant increase in the number of shareholder proposals calling for an independent board chair that went to a vote. Support levels for such proposals increased slightly, contrasting with a decline in support for shareholder proposals that went to a vote overall.

Looking at independent chair proposals over the last 10 years, we found that they receive significant investor support but almost never gain a majority. Further, we found a correlation between the trends for combined chair-CEO roles and the correlation with shareholder proposals calling for independent chairs.

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Attacks on ESG Investing are also attacks on company support for Sustainability

Posted by Timothy Smith, Interfaith Center on Corporate Responsibility, on
Thursday, October 12, 2023
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Timothy Smith is Senior Policy Advisor at the Interfaith Center on Corporate Responsibility. This post is based on his ICCR memorandum. 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, and 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.

Attacks on ESG Investing and “Woke Capitalism“ are also attacks on company endorsements of and support for Sustainability.

In the last year there has been a mounting wave of attacks against “ Woke Capitalism” and ESG Investing . These attacks are seen in state legislatures and the Congress, by Presidential candidates and conservative nonprofits. These attacks are mostly part of the American landscape while in Europe support for ESG Investing and company sustainability are widely supported. Interestingly these public attacks on “woke capitalism” include Wal-Mart as much as BlackRock.

Literally thousands of major companies publish annual sustainability or Corporate Responsibility reports where they discuss their values, the business case for acting as responsible corporate citizens and detail their goals and work on the environment , social issues and governance. Others work along other companies in their industry to promote leadership on issues like methane reduction, human rights in the supply chain, reduction of the use of plastic, or use of minority owned vendors.

And The Business Roundtable’s 2019 Statement on the Purpose of a Corporation, endorsed by 181 CEOs, correctly acknowledged that the modern corporation had to be accountable to all its stakeholders including its workers, customers, and the communities where it operates. Sustainability for business includes scores of corporate responsibility issues.

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Statement by Chair Gensler on Final Rules Regarding Beneficial Ownership

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Wednesday, October 11, 2023
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent 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 adopted final rules to shorten the deadlines by which beneficial owners of a company — those who own more than 5 percent of the company — must inform the public of their position. I am pleased to support this adoption because it updates these reporting requirements for modern markets, ensures investors receive material information in a timely way, and reduces information asymmetries.

Today’s adoption updates rules that first went into effect more than 50 years ago. In 1968, in the wake of abuses in the 1960s in the mergers and acquisitions field, Congress passed an important law known as the Williams Act. While the legislation offered important investor protections regarding tender offers, it also included provisions requiring public disclosure from individuals with large positions—known as beneficial owners—in the process of accumulating shares in a company with the potential to change or influence control of the company.

Indeed, ahead of the law’s passage, then-SEC Chair Manuel Cohen testified that such disclosure would be important. In his 1967 testimony prior to the law’s passage, Chair Cohen said that the then-current law “does not give the public stockholders adequate information about the arrangements surrounding the acquisition or the purchaser’s intentions with respect to the company.”[1]

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Statement by Commissioner Peirce on Final Rules Regarding Beneficial Ownership

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Wednesday, October 11, 2023
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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.

Although better than the proposed rule,[1] the final beneficial ownership reporting rule continues to rest on flawed economics. Accordingly, I cannot support it.

The heart of the final rule is a shortening of the filing windows for Schedules 13D and G, which report an investor’s holding of large positions in a company’s shares. Although the original filing timelines are not necessarily the Platonic ideal, a decision to shorten the timeframes should be well justified. Here, a justification is lacking.

According to the Commission, shortening the 13D window will mitigate information asymmetries between everyday investors, on the one hand, and 13D filers and “informed bystanders,” on the other hand. By the Commission’s logic, narrowing the filing window should enable uninformed traders to share in profits created by the diligent efforts of more informed investors. But, absent a compelling reason, people who lawfully possess information should not have to hand that information over to their uninformed counterparties.

The Commission’s position ignores that disparities in information and perspective are central to the functioning of our markets.[2] Different people come to the market with different views of what a particular asset is worth and different levels of interest in buying or selling it. One person may desperately want to buy something that someone else is equally eager to sell. Hence, a market is made. The buyers and sellers generally do not have to explain their motivations. The prices speak for themselves.[3]

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State of Cyber Awareness in the Boardroom

Posted by Sarah Kuranda Vallone, VP Marketing (NightDragon) and Edna Twumwaa Frimpong, Director of International Research (Diligent Institute), on
Tuesday, October 10, 2023
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Sarah Kuranda Vallone is a VP Marketing at NightDragon, and Edna Twumwaa Frimpong is a Director of International Research at Diligent Institute. This post is based on a NightDragon and Diligent memorandum by Ms. Vallone, Ms. Frimpong, Dottie Schindlinger, Lisa Edwards, Amy De Salvatore, and Madison Bench.

Introduction

Businesses are spending more money every year trying to defend their digital environment from attackers. In fact, as other areas of the business face tighter budgets this year, 48% of CEOs planned to increase investment in cybersecurity and data privacy, according to a survey from advisory firm PricewaterhouseCoopers. Meanwhile, cybersecurity remains the most challenging area of oversight for corporate leaders, according to a recent survey of public company directors by Diligent Institute and Corporate Board Member.

There’s a good reason for that. It’s clear the digital revolution is only gaining steam, increasing the risk surface every day for attackers to target. Technology now underpins every aspect of our lives and any threat to that digital infrastructure could mean major disruptions for millions of people – if not more catastrophic consequences.

We’re already beginning to see the impacts of this on our personal and corporate lives, including attacks targeting financial organizations, hospitals, critical infrastructure and more. As previously mentioned, these attacks culminate in estimated global losses of around $10.5 trillion by 2025, as well as drive further ramifications to ongoing operations and business reputation [1].

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Reducing the Risk of ‘Greenwashing’ Litigation and Defending Actions That Are Filed

Posted by Jessica Davidson, Nina R. Rose, and Robert A. Silverstein, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, October 10, 2023
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Jessica Davidson and Nina R. Rose are Partners, and Robert A. Silverstein is an Associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Davidson, Ms. Rose, Mr. Silverstein, Jason D. Russell and Meredith C. Slawe. 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, and 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 Points

  • As consumers place increasing emphasis on environmental sustainability, companies face not only the challenge of maintaining eco-friendly practices but also the threat of lawsuits alleging “greenwashing.”
  • Plaintiffs’ attorneys, animal rights groups and state attorneys general have increasingly filed greenwashing consumer class actions.
  • Preventive measures to fend off greenwashing suits include carefully reviewing and documenting product claims and training marketing staff to avoid unsubstantiated claims.
  • Greenwashing cases often survive motions to dismiss, unless the flaws in the suit are evident from the packaging.

“Greenwashing” refers to the practice of making false or misleading claims about the environmental benefits of a product in order to represent it as more environmentally friendly than it actually is. Given consumers’ increasing environmental sensibilities, it is unsurprising that greenwashing has become a major source of litigation.

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2024 U.S. Proxy Season: Recent Proxy and Annual Report Developments

Posted by Laura D. Richman, Mayer Brown LLP, on
Monday, October 9, 2023
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Laura D. Richman is a Counsel at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Jennifer J. Carlson, Lawrence A. Cunningham, Anna T. Pinedo, and David A. Schuette. 

Recent Proxy and Annual Report Developments

INSIDER TRADING DISCLOSURES

In December 2022, the U.S. Securities and Exchange Commission (the “SEC”) amended rules relating to insider trading arrangements and related disclosures. The amendments added conditions to the availability of the affirmative defense to insider trading liability contained in Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”). The amendments were designed to address concerns regarding alleged abuse of the rule by insiders to trade securities on the basis of material nonpublic information (“MNPI”). In addition, the amendments imposed new disclosure requirements regarding an issuer’s insider trading policies and procedures and the adoption, modification, and termination of Rule 10b5-1 plans and similar trading arrangements by directors and officers, as well as new disclosure requirements for executive compensation for certain equity awards made close in time to the issuer’s disclosure of MNPI.

Quarterly Disclosures. New Item 408(a) of Regulation S-K requires disclosure of whether during the company’s most recently completed fiscal quarter (which would be the fourth quarter in the case of an annual report) any director or officer adopted, modified, or terminated a Rule 10b5-1 plan or a similar trading arrangement. For quarterly reports on Form 10-Q, this disclosure is to be provided in Part II, Item 5(c). For annual reports on Form 10-K, this disclosure is to be provided in Part II, Item 9(b). See “Share Buyback Disclosures – Narrative Disclosures” below for similar requirements applicable to a company’s adoption or termination of a Rule 10b5-1 trading arrangement.

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Expecting Corporate Prosociality

Posted by Hajin Kim (University of Chicago), on
Monday, October 9, 2023
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Hajin Kim is an Assistant Professors of Law at the University of Chicago Law School. This post is based on her paper forthcoming in the Journal of Legal Studies. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; 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 Robert H. Sitkoff and Max M. Schanzenbach.

Expecting Corporate Prosociality

The long-running corporate purpose debate often assumes stakeholder preferences for corporate prosociality are exogenous: Investors, employees, and consumers want corporations to be prosocial or they don’t. My paper, Expecting Corporate Prosociality, on SSRN and forthcoming in the Journal of Legal Studies, develops and empirically tests the idea that rhetoric from the debate itself can influence these preferences and stakeholder demands. I find that expectations of exclusive profit maximization (that firms can and should maximize only profits) can reduce stakeholder demands for corporate prosociality. Such a loss in tangible incentives for corporate prosociality would reduce “win-wins”—what is both profitable and good for society.

Consider two worlds—caricatures to illustrate the point: In Profit Maximization World, people expect that businesses can and should maximize only profits. Paula, an employee for ABC Corp., learns that ABC Corp. will cut down old growth forest for a parking lot. She’s upset but doesn’t object. ABC Corp. must do what is most profitable, so what’s the point in complaining?

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What’s Next for Diversity Shareholder Proposals

Posted by David A. Bell, and Ron C. Llewellyn, Fenwick & West LLP, on
Sunday, October 8, 2023
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David A. Bell is a Partner, and Ron C. Llewellyn is a Counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

Following the death of George Floyd and mass protests against racial inequity in 2020 culminating years of slowly building stakeholder pressure on various aspects of diversity, many companies expressed their commitment to racial justice and implemented or enhanced diversity, equity and inclusion (DEI) programs. Such programs included setting hiring and promotion goals for racial minorities, contracting with minority-owned suppliers and service providers, and providing scholarships or grants to institutions providing services to minority communities. There was also a similar increase in diversity-related shareholder proposals such as those related to board diversity, conducting civil rights or racial equity audits and reporting on the effectiveness of DEI programs, some of which received relatively high levels of support from shareholders. However, more recently, there has been some backlash against DEI programs (and ESG initiatives more broadly), including calls by some opponents to dismantle them.

This report examines recent trends in support of DEI programs and recent pushback as revealed by annual meeting proxy voting for DEI-related shareholder proposals since 2020. This report also discusses the voting guidelines and stewardship policies of three of the largest asset managers—BlackRock, Vanguard and State Street (the “Big Three”)—related to DEI shareholder proposals and their recent voting records on key DEI proposals, which can influence the success of such proposals, and compares it to their support of DEI shareholder proposals for the 2023 proxy season. Finally, we suggest some ways that companies can navigate the conflicting demands from various stakeholders regarding their DEI programs and initiatives in the current environment.

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AI and the Role of the Board of Directors

Posted by Holly J. Gregory, Sidley Austin LLP, on
Saturday, October 7, 2023
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Holly J. Gregory is a Partner and co-chair of the Global Corporate Governance practice at Sidley Austin LLP. This post is based on The Governance Counselor piece.

Artificial intelligence (AI) has the capacity to disrupt entire industries, with implications for corporate strategy and risk, stakeholder relationships, and compliance that require the attention of the board of directors.

In 1950, Alan Turing, the father of computer science, famously asked, “Can machines think?” Since then, the application of computer science and algorithms to collect and analyze data, identify patterns, make predictions, and solve problems has advanced significantly. Today’s AI has become much better at mimicking aspects of human intelligence, such as “understanding” language, “perceiving” images, or “generating” new, albeit derivative, content (generative AI). AI is also advancing in its ability to self- improve its own performance (machine learning). (For more on AI and machine learning, see Artificial Intelligence and Machine Learning: Overview on Practical Law; for more on key terms used in descriptions of AI, machine learning, and generative AI, see Artificial Intelligence Glossary on Practical Law.)

As a transformative technology, AI has the capacity to disrupt entire industries, creating new business opportunities and presenting new risks for companies. Companies also play a key role in AI-related research and development (R&D) and deployment, with the potential for considerable societal impact. Boards of directors and their advisors need to consider:

  • How AI is currently used by the company and its competitors.
  • How AI may disrupt the company’s business and industry.
  • The strategic implications and risks associated with AI products and services.
  • The impact of AI applications on the workforce and other stakeholders.
  • The implications for compliance with legal, regulatory, and ethical obligations.
  • The governance implications of the use of AI and related policies and controls.

Board responsibility for managing and directing the company’s affairs requires oversight of the exercise of authority delegated to management, including oversight of legal compliance and ethics and enterprise risk management. The board’s oversight obligations extend to the company’s use of AI, and the same fiduciary mindset and attention to internal controls and policies are necessary. Directors must understand how AI impacts the company and its obligations, opportunities, and risks, and apply the same general oversight approach as they apply to other management, compliance, risk, and disclosure topics.

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