Monthly Archives: March 2024

Questioning technology governance orthodoxy

Mike Bechtel is Managing Director and Chief Futurist, Carey Oven is National Managing Partner, and Bill Briggs is Chief Technology Officer at Deloitte Touche Tohmatsu Limited. This post is based on a Deloitte memorandum by Mr. Bechtel, Ms. Oven, Mr. Briggs, Jamie McCall, and Caroline Schoenecker.

Why it matters

Formerly a siloed and specialized topic, technology has become interwoven throughout many
facets of governance. Yet even for the tech-savvy, strategizing around the increasingly rapid
pace of advancement could prove challenging. Deloitte’s Tech Trends 2024 may be useful for
boards looking to separate the signal from the noise of current technology dialogues. According
to the report, upcoming technology advancements are poised to fundamentally change how
humans and machines interact in the workplace (and beyond). The board’s technology oversight
processes may (or may not) be prepared for that kind of potential shift. But in either case, there
are ways for boards to improve capacity in this area.

Development speed

Emerging tech’s speed of development may indicate a need to assess risks more frequently.

In us we trust

Technology can facilitate stronger connections with the board’s stakeholders.

Raising the (digital) bar

Consider increasing the minimum technology fluency expectations for directors.


SEC Adopts New Rules for Climate-Related Disclosures

Brian Breheny, Marc Gerber, and Raquel Fox are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Breheny, Mr. Gerber, Ms. Fox, Caroline KimLiz Malone and Jeongu Gim. 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 A. 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.

On March 6, 2024, the Securities and Exchange Commission (SEC) voted 3-2 to adopt new rules mandating climate-related disclosures in public companies’ annual reports and registration statements. While the final rules are meaningfully scaled back from the proposed rules and adopt a materiality-based approach, they nevertheless add potentially significant climate-related disclosure requirements for companies, including foreign private issuers. The final rules provide extensive phase-in periods as summarized in the annex to this publication, and the earliest compliance period applies to large accelerated filers for their annual reports for fiscal year 2025.clim

Highlights of the new disclosure requirements are described below.


Potentially Extensive Disclosure Requirements, but Scaled Back From the Proposed Rules. In many cases, climate-related disclosures will be required only if determined to be material. Among others, potentially required disclosure items include:

  • Climate-related risks and their impacts on business strategy and outlook.
  • Climate-related mitigation or adaptation activities.
  • Climate-related targets or goals.
  • Climate-related risk oversight and governance.


Legal Risk and Insider Trading

Marcin Kacperczyk is Professor of Finance at Imperial College London, and Emiliano S. Pagnotta is an Associate Professor of Finance at Singapore Management University. This post is based on their article published in the Journal of Finance. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation (discussed on the Forum here) by Jesse M. Fried.

The debate on whether and under what circumstances insider trading should be illegal has a long tradition. The dominant view that promotes enforcement actions against trading based on material, nonpublic information highlights their potential to reduce firms’ cost of capital and increase investment and welfare. However, society can only achieve such desirable goals if insider trading regulations provide meaningful criminal deterrence. While some evidence exists on aggregate consequences of enforcement mechanisms, less is known about ex-ante incentives driving the behavior of individual insiders. Specifically, do illegally informed traders rationally internalize legal risks? If so, is this process reflected in their trades and prices? While addressing these issues is vital to assess insider trading regulations’ effectiveness, one faces a formidable empirical challenge: neither private information nor legal risks are readily observable.

To enhance our understanding, we contribute in three ways:

  1. We manually collect data on individual trades and the resulting legal outcomes from 530 illegal trading investigations prosecuted by the SEC. We characterize over 6,500 trades in 975 firms from 1995 to 2018, representing many assets and market conditions. We examine the information sets, timing, quantity traded, and penalties of illegal insiders.
  2. To benchmark the impact of legal risks on trading, we develop a stylized equilibrium framework of informed trading featuring an insider who internalizes his own trades’ effect on prices, the probability of being prosecuted by a regulator, and the conditional value of a legal fine.
  3. We exploit two plausibly exogenous sources of variation in legal risk exposure to test the model’s predictions.

Controlling for various behavioral predictors, we provide consistent evidence that legal risk deters insider trading.


Weekly Roundup: March 22-28, 2024

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 22-28, 2024

Remarks by Chair Gensler before Columbia Law School Conference in Honor of John C. Coffee, Jr.

The SEC’s Proposed Safeguarding Rule Will Cost Investors

New OECD Research on Sustainable Bonds

Trading and Shareholder Democracy

The Rise of “Sell-Side Activism”: Why It’s Happening and How to Respond

Ira M. Millstein tribute

COVID-19 Risk Factors and Boilerplate Disclosure

From Moelis to Miller: How to Settle with Activists

Governance Recommendations for the United States

Disagreement with ISS concerning activist investor Nelson Peltz

Doubly-Binding Director Say-on-Pay

Transnational Corporate Law Litigation

A Global Baseline? How to Navigate Interoperability Across Sustainability Reporting Rules

Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS-Corporate memorandum by Jacob McKeeman and Kieran Woodsworth.

Sustainability reporting rules developed by the International Sustainability Standards Board (ISSB) for the IFRS Sustainability Disclosure Standards are set to be adopted across jurisdictions in the next few years, establishing a global baseline for corporate disclosures. This represents an opportunity for companies to harmonize their sustainability data in a complex regulatory environment. Adopting these new standards as early as possible and understanding their interoperability with other regulations are crucial considerations for sustainability leaders.

Adoption pathways will vary across jurisdictions, from full immediate to partial or phased adoption. Climate disclosures have been designated the highest priority by the ISSB and national regulators globally. The ISSB will take over responsibility this year for monitoring implementation of the recommendations of the Task Force on Climate-Related Disclosures (TCFD), which have defined climate reporting globally since the release of their guidelines in 2017. Gaining an early understanding of the further evolution of climate reporting under the TCFD-based IFRS S2 is critical for companies.

Companies already reporting in line with the TCFD recommendations will have to enhance their climate disclosures to account for ISSB’s requirement, with more detailed information about material climate-related risks, transition plans and resiliency, as well as industry-based metrics and mandatory Scope 3 GHG emissions reporting.


Transnational Corporate Law Litigation

William J. Moon is Professor of Law at the University of Maryland School of Law. This post is based on his recent article forthcoming in the Duke Law Journal. 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.

By now, corporate law scholars and practitioners in the United States widely appreciate the importance of Delaware’s legal compliance jurisprudence. While directors and officers are vested with almost unlimited discretion to make business decisions, that discretion does not extend to corporate lawbreaking. As a matter of black letter law, directors and officers are betraying shareholders when they knowingly enabling the corporation to violate “positive law.”

In my recent paper, titled “Transnational Corporate Law Litigation” (forthcoming in the Duke Law Journal), I explain how Delaware’s legal compliance jurisprudence can be activated to deter corporate lawbreaking in foreign nations. It presents a doctrinal blueprint explaining why violations of foreign law can trigger powerful fiduciary duty claims in the United States against directors and officers of American corporations.


Doubly-Binding Director Say-on-Pay

Michael R. Levin is the Founder and Editor of The Activist Investor. This post is based on his TAI memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and Pay Without Performance: The Unfulfilled Promise of Executive Compensation both by Lucian A. Bebchuk and Jesse M. Fried and The Growth of Executive Pay by Lucian A. Bebchuk and Yaniv Grinstein.

The TSLA board comp case was vastly interesting and even some fun. I learned a lot about Delaware Chancery Court, figured out how to navigate the befuddling File-and-Serve system, and visited Wilmington to argue our objection to the proposed settlement. I had a terrific time talking with Ron Orol at The Deal about the experience.

You’ll recall the proposed settlement provided for TSLA shareholders to vote on director pay. We objected because it arguably did not require directors to abide by the vote result.

As we wait for Chancellor McCormick to issue her opinion on the settlement, which we hope will include an order for the parties to amend its terms to incorporate the substance of our objection, we ponder what else might happen. Does director say-on-pay make sense only at TSLA, or could it help shareholders at other companies?

We decided to find out. As far as we know, no other company has tried this before.


Larry Fink’s 2024 Annual Chairman’s Letter to Investors

Larry Fink is Founder, Chairman and CEO of BlackRock Inc. This post is based on Mr. Fink’s annual letter to investors.

Time to rethink retirement

When my mom passed away in 2012, my dad started to decline quickly, and my brother and I had to go through my parents’ bills and finances.

Both my mom and dad worked great jobs for 50 years, but they were never in the top tax bracket. My mom taught English at the local state college (Cal Northridge), and my dad owned a shoe store.

I don’t know exactly how much they made every year, but in today’s dollars, it was probably not more than $150,000 as a couple. So, my brother and I were surprised when we saw the size of our parents’ retirement savings. It was an order of magnitude bigger than you’d expect for a couple making their income. And when we finished going over their estate, we learned why: My parents’ investments.

My dad had always been an enthusiastic investor. He encouraged me to buy my first stock (the DuPont chemical company) as a teenager. My dad invested because he knew that whatever money he put in the bond or stock markets would likely grow faster than in the bank. And he was right.

I went back and did the math. If my parents had $1,000 to invest in 1960, and they put that money in the S&P 500, then by the time they’d reached retirement age in 1990, the $1,000 would be worth nearly $20,000.[1] That’s more than double what they would have earned if they’d just put the money in a bank account. My dad passed away a few months after my mom, in his late 80s. But both my parents could have lived beyond 100 and comfortably afforded it.

Why am I writing about my parents? Because going over their finances showed me something about my own career in finance. I had been working at BlackRock for almost 25 years by the time I lost my mom and dad, but the experience reminded me — in a new and very personal way — why my business partners and I founded BlackRock in the first place.

Obviously, we were ambitious entrepreneurs, and we wanted to build a big, successful company. But we also wanted to help people retire like my parents did. That’s why we started an asset manager — a company that helps people invest in the capital markets — because we believed participating in those markets was going to be crucial for people who wanted to retire comfortably and financially secure.


Disagreement with ISS concerning activist investor Nelson Peltz

Jeffrey Sonnenfeld is Senior Associate Dean for Leadership Studies and Lester Crown Professor in the Practice of Management, and Steven Tian is Research Director of the Yale Chief Executive Leadership Institute at the Yale School of Management. This post was prepared for the Forum by Professor Sonnenfeld and Mr. Tian. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) and Dancing with Activists (discussed on the Forum here) both by Lucian A. 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.

Fred Allen once described the media business with the quip, “imitation is the sincerest form of….television”. But ISS, The New York Times, and other cheerleaders of Nelson Peltz/Trian Partners’ activist campaign challenging Disney CEO Bob Iger all seem to miss that Iger towers over his media peers in genuine financial performance, in stark contrast to his underperforming activist challengers. It is a veritable tale of two cities in measuring up the financial track record of Bob Iger against Nelson Peltz.

Of course, the question of both Bob Iger and Nelson Peltz’s financial track records have become a surprisingly contentious area of dispute as the proxy contest nears its grand finale. Both sides have stepped into overdrive, with dozens of glossy 100+ page slide decks and white papers released from all vantage points.

As Disney shareholders begin to cast their ballots on the eve of the Annual Meeting two weeks from now, on April 3rd, it can be hard to separate fact from fiction in comparing the genuine financial track records of Nelson Peltz and Bob Iger. But the factual evidence speaks loud and clear. While Nelson Peltz has a long history of value destruction, Bob Iger’s nearly two decades as Disney CEO has been marked by genuine value creation.


Governance Recommendations for the United States

Kerrie Waring is CEO, Severine Neervoort is Global Policy Director, and Carol Nolan Drake is Senior Policy Manager at International Corporate Governance Network (ICGN). This post is based on their ICGN memorandum.

The International Corporate Governance Network (“ICGN”) is pleased to publish its Governance Recommendations for the United States (U.S.) at the ICGN Conference, hosted by the International Finance Corporation, in Washington, D.C., from 7-8 March 2024.

Established in 1995, ICGN advances the highest standards of corporate governance and investor stewardship, contributing to successful companies and long-term value creation. Headquartered in London, ICGN’s membership includes investors responsible for assets under management of $77 trillion, based in over 40 countries – 30% of which are based in North America.

The purpose of the ICGN Governance Recommendations is to highlight areas of interests to ICGN Members and to serve as an agenda for dialogue with regulators, standard-setters, and business organisations. The aim is to share international experience on emerging standards and practices related to corporate governance and investor stewardship, and the promotion of well-functioning capital markets.

In developing the recommendations, we have engaged with ICGN Members, particularly institutional investors with globally diversified portfolios. The ICGN Global Governance Principles[1] and ICGN Global Stewardship Principles[2] are referred to as an international benchmark given that they are widely used by ICGN Members in their company assessments and voting decisions, and by regulators when developing corporate governance rules and standards.


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