Yearly Archives: 2023

The DNA of 2023 U.S. Sustainability Reports

Posted by Martha Carter, Matt Filosa, Diana Lee, Teneo, on
Friday, October 6, 2023
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Martha Carter is Vice Chair & Head of Governance Advisory, Matt Filosa is Senior Managing Director, and Diana Lee is Senior Vice President at Teneo. This post is based on a Teneo memorandum by Ms. Carter, Mr. Filosa, Ms.Lee, Sean Quinn, and Sydney Carlock. 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.

Since we published our last study on U.S. sustainability reports 12 months ago, political attacks on ESG have escalated heading into the 2024 U.S. presidential campaign. As a result, companies are now facing critical questions on how to communicate their ESG strategies and initiatives, especially within annual sustainability reports that are now the norm for most companies.

For example, would eliminating the acronym “ESG” from corporate communications help quell the backlash? How can companies assess the risks and opportunities of proactively communicating their ESG strategies? What happens if companies miss or reset an ESG goal?

At the same time, global regulations mandating ESG disclosures from companies, including many U.S. companies, are being finalized. These global mandates for ESG disclosures are in direct conflict with the Republican-led antiESG movement in the U.S. Given all of this, companies should expect continued turbulence in the coming year.

To help companies navigate this environment, we are publishing a series of research reports based on our analysis of 250 sustainability reports from S&P 500 companies published in 2023. In this paper, the first of our series, we provide Teneo’s (i) study methodology; (ii) top 10 takeaways from 2023 sustainability reports and (iii) key statistics of 2023 sustainability reports. Over the next several months, we plan to publish follow-up pieces from Teneo ESG thought leaders on disclosure-related topics such as diversity, governance, executive compensation and materiality assessments, as well as a piece from Teneo Studio dedicated to effective sustainability report design.

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Weekly Roundup: September 29-October 5, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, October 6, 2023

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This roundup contains a collection of the posts published on the Forum during the week of September 29-October 5, 2023

Startup Failure

Posted by Elizabeth Pollman (University of Pennsylvania), on Friday, September 29, 2023
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Risk Management and the Board of Directors

Posted by Martin Lipton, John Savarese, and Sarah K. Eddy, Wachtell Lipton Rosen & Katz, on Saturday, September 30, 2023
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California’s Proposed Bills Require Reporting on Climate Emissions and Risks

Posted by David A. Bell, Ron C. Llewellyn and Emily Sacks-Wilner, Fenwick & West LLP, on Sunday, October 1, 2023
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Secret and Overt Information Acquisition in Financial Markets

Posted by Yan Xiong (The Hong Kong University of Science and Technology), Liyan Yang (University of Toronto), on Monday, October 2, 2023
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Director Elections under the Microscope

Posted by Edna Twumwaa Frimpong, Diligent Market Intelligence, on Monday, October 2, 2023
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Corporate Governing: Promises and Risks of Corporations as Socio-Economic Reformers

Posted by Matteo Gatti (Rutgers), on Tuesday, October 3, 2023
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The 2023 Say on Pay Season – Outcomes and Observations

Posted by Linda Pappas, Jose Lawani, and Perla Cuevas, Pay Governance LLP, on Tuesday, October 3, 2023
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The Administrative Origins of Mandatory Disclosure

Posted by Alexander I. Platt (University of Kansas School of Law), on Wednesday, October 4, 2023
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Proxy Voting Insights: Key ESG Resolutions

Posted by Lindsey Stewart, Morningstar, Inc, on Wednesday, October 4, 2023
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Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data

Posted by Jean-Marie Meier (University of Pennsylvania), on Thursday, October 5, 2023
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How to Navigate Equity Plan Proposals

Posted by Austin Vanbastelaer, and Kyle McCarthy, Semler Brossy LLC, on Thursday, October 5, 2023
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How to Navigate Equity Plan Proposals

Posted by Austin Vanbastelaer, and Kyle McCarthy, Semler Brossy LLC, on
Thursday, October 5, 2023
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Austin Vanbastelaer is Principal and Kyle McCarthy is a Senior Associate Consultant at Semler Brossy LLC. This post is based on their Semler Brossy memorandum.

Russell 3000 equity plan proposals are facing historically low shareholder support and higher failure rates in 2023. These headwinds likely reflect both increased shareholder and proxy advisor expectations in equity plan sizing and increased share usage pressure at companies in depressed markets.

Companies will want to slightly adjust their playbook and engage with shareholders differently. The path forward will likely only get tougher as investors and proxy advisors continue to push for equity plans with a shorter expected life, creating more frequent equity plan votes.

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Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data

Posted by Jean-Marie Meier (University of Pennsylvania), on
Thursday, October 5, 2023
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Jean-Marie Meier is a Visiting Assistant Professor of Finance at The Wharton School, University of Pennsylvania, Henri Servaes is Richard Brealey Professor of Corporate Governance at London Business School, Jiaying Wei is an Associate Professor of Finance at Southwestern University of Finance and Economics, and Steven Chong Xiao is an Associate Professor of Finance at University of Texas at Dallas – Naveen Jindal School of Management. This post is based on their working paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; The Perils and Questionable Promise of ESG-Based Compensation (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.

The interest of business leaders, academics, policymakers, and the general public in Environmental, Social, and Governance (ESG) issues has grown exponentially over time and reached an all-time high in 2023, based on Google Trends searches.  From the perspective of corporations and their leaders, an important question is whether ESG strategies help achieve higher profits and maximize shareholder wealth.

Despite a substantial number of articles on this issue, the mechanisms through which ESG activities could affect corporate performance and value remain poorly understood.  One possibility is that ESG efforts affect value through the discount rate channel. For instance, some investors may adjust their required rate of return because they derive utility from holding high ESG firms in their portfolios.  Another possibility is that ESG activities affect firm value because they lead to higher cash flows.  For example, customers could influence a firm’s revenues by adjusting their demand in response to the firm’s ESG policies.

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Proxy Voting Insights: Key ESG Resolutions

Posted by Lindsey Stewart, Morningstar, Inc, on
Wednesday, October 4, 2023
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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 The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales; 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; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart, and Luigi Zingales.

Key Takeaways

The Volume of Shareholder Resolutions Keeps Rising

  • The number of shareholder resolutions proposed at U.S. companies grew by 18% in the 2023 proxy year to a total of 616, from 522 in 2022.
  • This followed an already strong increase of 16% in 2022, following the SEC’s decision to broaden the definition of permissible shareholder resolutions addressing “significant social policy issues.“
  • The recent increase included many resolutions on environmental and social (E&S) topics that asset managers rejected as “prescriptive” or “redundant.”

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The Administrative Origins of Mandatory Disclosure

Posted by Alexander I. Platt (University of Kansas School of Law), on
Wednesday, October 4, 2023
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Alexander I. Platt is Associate Professor at the University of Kansas School of Law. This post is based on his recent paper, forthcoming in The Journal of Corporation Law. Related research from the Program on Corporate Governance includes The Law and Economics of Equity Swap Disclosure (discussed on the Forum here) by Lucian Bebchuk; and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon P. Brav, Robert J. Jackson Jr., Wei Jiang.

History looms large for securities regulation. For many in the field, the “founding” of the U.S. mandatory disclosure regime in the 1930s carries deep meaning, infusing current actions with legitimacy and purpose.

The familiar origin story is undeniably compelling. The brightest legal minds of their generation were called down from the ivory tower to help FDR rein in the excesses of Wall Street. Inspired by their intellectual mentor Louis Brandeis, they overcame fierce resistance from the securities industry (who opposed regulation) as well as from the corporatist wing of New Deal reformers (who favored a broader economic planning role for the government) to craft a legislative solution that was so well-conceived that it has remained in place essentially unchanged for nearly a century – the Securities Act of 1933.

But there’s just one problem: it’s not actually what happened.

In a new paper, “The Administrative Origins of Mandatory Disclosure,” I present a revisionist history of the origins of mandatory corporate disclosure. Drawing on archival sources and other primary documents, I challenge three core assumptions that underlie standard accounts of SecReg’s “founding” moment.

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The 2023 Say on Pay Season – Outcomes and Observations

Posted by Linda Pappas, Jose Lawani, and Perla Cuevas, Pay Governance LLP, on
Tuesday, October 3, 2023
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Linda Pappas is Principal, and Jose Lawani and Perla Cuevas are Consultants at Pay Governance LLC. This post is based on their Pay Governance memorandum.

Say on Pay (SOP) votes were mandated by the Dodd-Frank Act of 2010 as a mechanism to allow shareholders to voice their opinions about the level and structure of executive compensation as well as promote the engagement of companies and their shareholders regarding a key area of corporate governance. The general view was that shareholders would increasingly reject executive pay programs by voting against the SOP proposal in years of poor total shareholder return (TSR) performance unless executive pay was reduced. Our findings show that the 2022 and 2023 SOP seasons run counter to this premise for S&P 500 Index companies. SOP failures in 2022 hit a record high (n=22) when TSR performance was strong (1- and 3-year TSR of 27% and 24%, respectively), whereas SOP failures in 2023 unexpectedly decreased (n=11) when TSR performance declined (1- and 3-year TSR of -19% and +6%, respectively).

As published in our recent Viewpoint entitled, “The 2023 Say on Pay Season – Outcomes and Considerations – April 2023,” we reviewed the full history of SOP outcomes for S&P 500 companies beginning in 2011 through 2022. At the time, we anticipated an active and volatile 2023 SOP season given the decline in TSR performance of the S&P 500 Index in calendar year 2022 (down 19%), historically much lower than any previous year in the SOP era. This Viewpoint adds the 2023 SOP season to our previous findings and highlights the outcomes, which were unexpected given the negative TSR performance in calendar year 2022.

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Corporate Governing: Promises and Risks of Corporations as Socio-Economic Reformers

Posted by Matteo Gatti (Rutgers), on
Tuesday, October 3, 2023
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Matteo Gatti is a Professor of Law at Rutgers Law School. This post is based on his working paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita.

Corporations are increasingly active in public affairs across a range of critical issues such as racial justice, gender parity, climate change, and more. This trend has given rise to two phenomena: corporate socio-economic advocacy and government substitution. Together, they form what I refer to as “corporate governing.”

Corporate Socio-Economic Advocacy: In this aspect of corporate governing, companies align themselves with (typically progressive) causes and actively participate in policy initiatives. They provide expertise, coordination, and resources to further political causes that resonate with their values.

Government Substitution: A lesser discussed but equally important facet of corporate governing involves corporations stepping in to perform quasi-governmental functions when the government either cannot or chooses not to. They tackle tasks traditionally handled by governments, often with the aim of offering improved conditions to society, particularly their employees. For instance, they may provide better healthcare benefits or support underrepresented communities.

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Director Elections under the Microscope

Posted by Edna Twumwaa Frimpong, Diligent Market Intelligence, on
Monday, October 2, 2023
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Edna Twumwaa Frimpong is the Head of International Research at Diligent Institute. This post is based on her Diligent memorandum. Related research from the Program on Corporate Governance includes The Myth of the Shareholder Franchise (discussed on the Forum here) by Lucian A. Bebchuk; and Universal Proxies (discussed on the Forum here) by Scott Hirst.

“Proxy advisors Glass Lewis and ISS appear to be taking opposing sides when it comes to issuing recommendations on directors.”

Proxy season offers shareholders essential vision into how companies are reacting to various risks and opportunities, which often results in issuers being confronted with tough questions from key stakeholders, an issue that has likely become more common, given the current unstable business environment. The first half of 2023 demonstrated that a growing portion of investors are opposing directors on a global scale, and there are a variety of reasons why this is the case.

According to Diligent Market Intelligence (DMI) data, there is a growing level of dissent against director re/elections. and there are a variety of reasons why this is so. Usually, shareholders opt to vote against director re/elections to flag their dissatisfaction with governance issues, ESG shortcomings and the broader strategic direction of a company.

The stakes are high and director re/elections are becoming a popular tool with which investors can send a clear message that they expect better from a company. In the first half of 2023, support for global director re/elections has declined to 95.6%, compared to 96.4% and 96.1% throughout 2021 and 2022, respectively.

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Secret and Overt Information Acquisition in Financial Markets

Posted by Yan Xiong (The Hong Kong University of Science and Technology), Liyan Yang (University of Toronto), on
Monday, October 2, 2023
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Yan Xiong is an Assistant Professor of Finance at The Hong Kong University of Science and Technology, and Liyan Yang is a Professor of Finance at the Rotman School of Management, University of Toronto. This post is based on their paper forthcoming in The Review of Financial Studies. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

In February 2020, Castlefield, a U.K. investment company, publicly disclosed on its website a site visit it conducted with Alumasc, a U.K.-based supplier of premium building products. Site visits are considered costly and significant activities for investors to acquire information. Investors may have incentives to keep secret these activities to maintain their trading advantage over the market. Therefore, it raises the question of why an investor would voluntarily disclose the incidence of their site visits.

In fact, the mandatory disclosure of corporate site visits has been a subject of debate. The idea can be viewed as an extension of Regulation Fair Disclosure (Reg FD), which aims to prevent selective disclosure of material nonpublic information and ensure a level playing field for all investors. While the United States has not adopted a similar requirement, China has mandated the disclosure of site visits to enhance transparency.

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