Monthly Archives: April 2024

Diversifying demographics of assets under management

Posted by Victoria Tellez and Jessica Pollock, FCLTGlobal, on
Thursday, April 4, 2024
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Victoria Tellez is an Associate Director, and Jessica Pollock is a Research Associate at FCLTGlobal. This post is based on their FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.; and Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried.

Asset owners, such as pension plans, sovereign wealth funds, and endowments and foundations, typically allocate their investments to asset managers based on expected performance, risk, and other key characteristics. In building a portfolio, they try to diversify key risks over time horizons that align with their objectives.

While not a guaranteed formula for success, evidence indicates that diverse teams can improve long-term value creation by improving decision-making and incorporating a range of perspectives, skills, and abilities. However, an examination of investment decision-makers handling institutional assets under management (AUM) in the US reveals a significant lack of diversity in demographics. Asset management firms owned by white males oversee 98.6 percent of AUM across different asset classes, while minority-owned firms account for less than 2 percent of the total AUM. The notion that the best managers are overwhelmingly white males, who make up at most 30 percent of the US population, defies logic, highlighting substantial untapped potential.

While the underrepresentation of diverse professionals in the global asset management industry is widely acknowledged, the AUM gap is particularly wide. As an illustration, FCLTGlobal’s analysis reveals that the 25 most common male names globally are associated with overseeing more than 11 times the assets under management compared to their female counterparts.

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Minutes Are Worth the Minutes: Good Documentation Practices Improve Board Deliberations and Reduce Regulatory and Litigation Risk

Posted by Leo E. Strine, Jr. (University of Pennsylvania), on
Thursday, April 4, 2024
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Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. This post is based on his article forthcoming in the Fordham Journal of Corporate and Financial Law.

In the last decade, the salience of corporate minuting and documentation processes has greatly increased.  More than ever, plaintiffs are using requests for books and records to attempt to state breach of fiduciary duty and securities law claims.  Regulators also demand these records when investigating potential compliance concerns.  In the 21st Annual Albert A. DeStefano Lecture on Corporate, Securities & Financial Law at Fordham University School of Law on February 27, 2024, Minutes Are Worth The Minutes: Good Documentation Practices Improve Board Deliberations and Reduce Regulatory and Litigation Risk, this subject was my focus. I have now published the underlying article of the same name, which can be accessed here.

This increased concentration on corporate records has manifested itself in important ways in litigation in the Delaware Court of Chancery and the Delaware Supreme Court, such as:

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Proposed Amendments to the DGCL Address Recent Caselaw on Stockholder and Merger Agreements

Posted by Eric Klinger-Wilensky, Melissa DiVincenzo and Patricia Vella, Morris, Nichols, Arsht & Tunnell LLP, on
Thursday, April 4, 2024
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Eric Klinger-Wilensky, Melissa DiVincenzo and Patricia Vella are Partners at Morris, Nichols, Arsht & Tunnell LLP. This post is based on a Morris Nichols memorandum by Mr. Klinger-Wilensky, Ms. DiVincenzo, Ms. Vella, Jeffrey Wolters, and Kyle Pinder and is part of the Delaware law series; links to other posts in the series are available here.

The Council of the Corporation Law Section of the Delaware State Bar Association today released proposed Amendments (“Amendments”) to the Delaware General Corporation Law (“DGCL”) that, if adopted into law, would address recent caselaw regarding the facial validity of certain stockholder agreements, the ability of parties to a merger agreement to contract for certain pre-closing remedies and for the appointment of a stockholder representative to enforce post-closing remedies, and the process required to approve merger agreements.[1]

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Women in the boardroom

Posted by Kevin Tracey, Karen Edelman, and Karen Bowman, Deloitte Touche Tohmatsu Limited, on
Wednesday, April 3, 2024
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Kevin Tracey is Leader of the Global Boardroom Program, Karen Edelman is Senior Editor, and Karen Bowman is US Automotive Leader, Global CXO Program Leader, and Member of the Board of Directors at Deloitte Touche Tohmatsu Limited. This post is based on a Deloitte Insights memorandum by Mr. Tracey, Ms. Edelman, Ms. Bowman, and Anna Marks. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.; and Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried.

Executive summary

Gender parity on boards will be elusive without greater focus and action

The business case for diversity has been established for some time. Companies with more diverse boards have shown that they tend to perform better financially.[1] What’s more, organizations that are more diverse as a whole with respect to gender—from top executives and board members to managers and employees—tend to outperform those that are less gender-diverse.[2]

What remains in question, however, is this: With women still underrepresented on company boards globally, why aren’t organizations and investors doing more to realize the benefits that diverse boards bring?

The eighth edition of the Deloitte Global Boardroom Program’s Women in the boardroom: A global perspective finds that women hold less than one-quarter of the world’s board seats (23.3% in 2023).

Continued efforts from a wide range of stakeholders have indeed yielded some positive results toward achieving gender parity: Since 2022, the number of women on boards has risen 3.6%, and the timeline toward achieving parity has dropped by seven years (figure 1).

However, despite the number of initiatives around the world to increase the number of women serving on boards, progress isn’t happening quickly enough. If this rate of change were to hold steady, it is unlikely that gender parity on boards will be reached before 2038—and possibly later. And, there is no clear path to gender parity in the board chair role.

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How Did Corporations Get Stuck in Politics and Can They Escape?

Posted by Jill E. Fisch (University of Pennsylvania) and Jeff Schwartz (University of Utah), on
Wednesday, April 3, 2024
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Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Carey Law School, and Jeff Schwartz is the Hugh B. Brown Presidential Professor of Law at the University of Utah S.J. Quinney College of Law. This post is based on their recent paper, forthcoming in the University of Chicago Business Law Review. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian A. Bebchuk and Robert J. Jackson, Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian A. Bebchuk, Robert J. Jackson, Jr., James Nelson, and Roberto Tallarita; and The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss.

Corporations have long sought to promote their business interests through political engagement. Today, however, corporations are taking public positions on a multitude of contested political and social issues—through advertisements, statements, and promotions—positions that are unrelated to their business operations.  In our forthcoming article, How Did Corporations Get Stuck in Politics and Can They Escape? (forthcoming University of Chicago Business Law Review), we term this form of engagement, “political posturing,” and we argue that it is bad for shareholders, stakeholders, and society.

Examples of political posturing are everywhere. Hundreds of corporations proclaimed their support for BlackLivesMatter. Dozens publicly opposed the Supreme Court’s Dobbs decision, which overturned Roe v. Wade. Coca Cola and Delta prominently criticized Georgia’s restrictive voting laws. Disney took a stand against Florida’s “Don’t Say Gay” law. Today, we know where corporations stand on almost every politically contentious issue.

There are several reasons corporations suddenly developed political views. Activists, employees, and investors began to call for companies to take a stand. Corporations obliged, not only to quell these voices, but to use politics as a way to market their products. Gillette, for instance, ran an advertising campaign highlighting forms of toxic masculinity and asking, in reference to its famous slogan, whether this is “the best a man can be.” The campaign thus sought to use politics to sell razors rather than the razors’ attributes. Corporations are also trapped in a collective action problem, where they fear that if they fail to take a position, they will lose ground to competitors that do. Social media, where taking a stance is the only way to get noticed and silence is denounced as complicity, amplifies these effects.

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DOJ Announces New Whistleblower Program and Enforcement Initiatives

Posted by Louis Gabel, Karen Hewitt and James Loonam, Jones Day, on
Wednesday, April 3, 2024
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Louis Gabel, Karen Hewitt, and James Loonam are Partners at Jones Day. This post is based on a Jones Day memorandum by Mr. Gabel, Ms. Hewitt, Mr. Loonam, Jill Hengen, Jordan Matthews, and Hank Walther.

In Short

The Development: On March 7, 2024, Deputy Attorney General (“DAG”) Lisa Monaco discussed updates to the Department of Justice’s (“DOJ” or “Department”) corporate criminal enforcement policies and announced a pilot program that will financially reward whistleblowers unveiling major corporate misconduct.

The Result: The policies and priorities discussed reaffirm DOJ’s “carrot and stick” approach to encouraging companies to self-disclose criminal misconduct and cooperate with the Department’s efforts to prosecute individual wrongdoers. The new whistleblower reward program, which is expected to take shape over the next 90 days, provides stronger incentives for tipsters to disclose corporate and financial misconduct. Further, DOJ has adopted an aggressive stance toward seeking enhanced penalties for corporate misuse of new and disruptive technologies like artificial intelligence (“AI”).

Looking Ahead: DOJ continues to emphasize aggressive enforcement of white-collar crime against entities and individuals and remains committed to incentivizing voluntary self-disclosure (“VSD”) by corporations. And increasingly, the Department is incentivizing individuals to expose wrongdoing by providing non-culpable whistleblowers with financial incentives through the impending DOJ whistleblower program. Given the special scrutiny the Department will apply to the use of technologies like AI, companies should consider updating their compliance programs to mitigate risks related to the misuse of AI.

On March 7, 2024, DAG Monaco delivered the keynote remarks at the American Bar Association’s National Institute on White Collar Crime. Her remarks centered on DOJ’s enforcement priorities and the tools it will use to identify and hold accountable individual and corporate wrongdoers. First, DAG Monaco discussed DOJ’s efforts to encourage companies to voluntarily self-disclose evidence of wrongdoing, emphasizing the recent uptick in self-disclosures and the resulting prosecutions of senior executives across diverse industries. Second, she unveiled a pilot whistleblower rewards program about which DOJ will provide more details in the next 90 days; this program will financially compensate individuals who report major corporate misconduct to DOJ. And third, she discussed how DOJ will apply its existing law-enforcement toolkit to emerging technologies like AI.

VSD Programs  

DAG Monaco discussed DOJ’s efforts to incentivize VSD of corporate misconduct, both through a department-wide directive to U.S. attorneys’ offices to develop and implement their own VSD programs, and through the implementation of DOJ’s own VSD policy applicable to all U.S. attorneys’ offices.

“We’ve structured our Voluntary Self Disclosure programs to encourage companies to take responsibility for misconduct within their organizations. And we’ve conditioned benefits on the company’s willingness to step up and own up—requiring it to disgorge profits, upgrade compliance systems, and cooperate in investigations of culpable employees,” DAG Monaco said.

DAG Monaco offered examples from two U.S. attorneys’ offices—the Southern District of New York and the Northern District of California—of how these efforts are paying off from an enforcement perspective. Both offices are piloting what amount to VSD programs for individuals, offering non-prosecution agreements to certain categories of at-fault individuals who self-disclose wrongdoing and cooperate against other, more culpable targets.

DAG Monaco emphasized that “no matter how good a company’s cooperation, a resolution [with DOJ] will always be more favorable with voluntary self-disclosure.”

New Whistleblower Program  

DAG Monaco also announced that, in the next 90 days, DOJ will launch a pilot program that will financially reward traditional corporate whistleblowers—those not involved in any wrongdoing but who discover and report misconduct by others.

In remarks on March 8, 2024, Acting Assistant Attorney General Nicole Argentieri specified that the pilot program will be spearheaded by DOJ’s Criminal Division—especially the Money Laundering and Asset Recovery Section (“MLARS”), given that the Department’s statutory authority is tied to the Department’s forfeiture program. See 28 U.S.C. § 524(c)(1)(C) (authorizing the attorney general to pay awards from “information or assistance leading to civil or criminal forfeitures”). MLARS will work closely with U.S. attorneys, the FBI, and other DOJ offices to develop program guidelines that will address eligibility requirements for potential whistleblowers.

The new whistleblower program will fill gaps in what DAG Monaco described as a patchwork of already existing programs, including at the Securities and Exchange Commission (“SEC”), the Commodity Futures Trading Commission (“CFTC”), the Internal Revenue Service, and FinCEN—all of which have been successful, but limited in scope, given the agencies’ jurisdictions. Additionally, while qui tam actions provide whistleblowing incentives, those are available only for fraud against the government. By contrast, the new program seeks to address the full range of corporate and financial misconduct that the Department prosecutes by providing financial incentives where no such incentives currently exist.

Under the new program, individuals who help DOJ discover significant corporate or financial misconduct could qualify to receive a portion of the resulting forfeiture. Payments will be offered under the following limited circumstances:

  • Only after all victims have been properly compensated;
  • Only to those who submit truthful information not already known to the government (i.e., the whistleblower must be “first in the door”);
  • Only to those not involved in the criminal activity itself; and
  • Only in cases where there is not an existing financial disclosure incentive—including qui tam or another federal whistleblower program.

Like the SEC and CFTC programs, which limit rewards to cases where the agency orders sanctions of $1 million or more, DOJ is considering establishing a monetary threshold as a way of focusing resources on the most significant cases.

While DOJ always accepts information about violations of federal law, the Department is especially interested in information about criminal activity in the U.S. financial system and both foreign and domestic corruption cases.

“Used proactively, this program … will create new incentives for individuals to report misconduct to the department. And it will drive companies to invest further in their own internal compliance and reporting systems,” DAG Monaco said.

Corporate Compliance and AI 

AI is an enormously powerful technology that holds great potential for corporations, but also creates potential peril, if the government believes it is being used to commit corporate crimes. DAG Monaco discussed how DOJ has taken note, promising to use an old tool—sentencing enhancements—against misuse of the new, disruptive technology. Now, similar to the use of firearms in the commission of a crime, DOJ will seek harsher penalties against individual and corporate defendants using AI to commit white-collar crime to account for the serious risks the technology poses to the public.

To further combat misuse of AI, prosecutors assessing a company’s compliance program during corporate resolutions will now scrutinize the company’s ability to manage AI-related risks. DAG Monaco has directed the Criminal Division to incorporate assessment of disruptive technology risks—including risks associated with AI—into its guidance on Evaluation of Corporate Compliance Programs.

Three Key Takeaways  

  1. DAG Monaco’s remarks reinforce DOJ’s commitment to aggressively pursuing white-collar crime, including through the use of voluntary self-disclosure policies.
  2. DOJ’s impending whistleblower reward program will ramp up incentives for individuals to disclose potential corporate misconduct, and will cover a broader range of conduct than the currently existing patchwork of whistleblower programs.
  3. Given DOJ’s firm stance on corporate misuse of AI, companies should review their compliance programs to ensure that they adequately assess, monitor for, and remediate AI-related risks.

Link to original piece can be found here.

The SEC Climate Disclosure Rule: Separating Signal from Noise

Posted by Miriam Wrobel, FTI Consulting, on
Tuesday, April 2, 2024
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Miriam Wrobel is Senior Managing Director and Global Leader of FTI Consulting’s Environmental, Social and Governance and Sustainability practice. This post is based on a FTI Consulting memorandum by Ms. Wrobel, Ben Herskowitz, Alanna Fishman, Todd Rahn, and John Glennon.

After many ‘head fakes’ since March 2022 when the US SEC first released its proposed climate rule, namely “The Enhancement and Standardization of Climate-Related Disclosures for Investors”, we finally have some clarity. Per the publicly broadcast US SEC Open Meeting on Wednesday, the Commission adopted a finalized ruling following a vote, which resulted in 2 votes against and 3 in favor of adoption. Per the Factsheet outlining the rule released by the Commission immediately prior to the March 6th Open Meeting and the final rule released immediately following, several substantive changes were made to the proposed requirements released in March 2022, indicating in our view that the Commission feared the rule would inevitably face destructive legal challenges if reporting requirements were not diluted in rigor or were perceived to remain a liability for issuers. Even with these somewhat expected and dilutive changes, challenges to the rule — legal, political and otherwise — are almost certain. We detail these likely challenges later on in this piece.

The final rules will become effective 60 days after publication in the Federal Register, or approximately late in the second quarter. In the interim, below we outline some of the more significant and substantive changes captured in our comparison of the March 2022 proposed and the March 2024 final rulings.

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Corporate Technocracy ESG Governance Beyond Shareholder Democracy or Managerialism

Posted by Aisha Saad, Georgetown University, on
Tuesday, April 2, 2024
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Aisha Saad is an Associate Professor of Law at the Georgetown University Law Center. This post is based on her article forthcoming in the Columbia Business Law Review. 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 and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

ESG (Environmental Social Governance) is in the crosshairs of a conservative campaign against “woke capitalism”. This is evidenced by an aggressive legislative agenda featuring 181 anti-ESG bills proposed or enacted between 2018 and 2023. Attacks on the legitimacy and practical possibility of ESG are starting to bear fruit. For example, the SEC’s new climate-related disclosure rule has been substantially watered down from its initial draft two years ago. Shortly before that, a number of major financial institutions departed the world’s biggest investor coalition on climate change. In recent months ExxonMobil initiated a high-profile legal battle against two of its investors alleging that their climate-focused shareholder proposal is a bad-faith effort to undermine the company’s business. While some anti-ESG advocacy is motivated by political opportunism, more substantive concern with the problems that riddle ESG governance remains unaddressed.

In a new article in the Columbia Business Law Review, I advance a novel paradigm for governing corporate ESG that accounts for the principal-agent challenges undermining prevailing proposals. I argue that a “corporate technocracy” provides a solution for redeeming the possibilities of ESG by addressing and overcoming key governance critiques.

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Corporate Transparency Act Ruled Unconstitutional, but Scope of Judgment Is Limited

Posted by Satish Kini, Aseel Rabie and Jonathan Steinberg, Debevoise & Plimpton LLP, on
Tuesday, April 2, 2024
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Satish Kini is a Partner, Aseel Rabie is a Counsel, and Jonathan Steinberg is an Associate at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Kini, Ms. Rabie, Mr. Steinberg, Jeremy Lin, and Elliot Werner.

On March 1, 2024, the U.S. District Court for the Northern District of Alabama held the Corporate Transparency Act (the “CTA”) unconstitutional. The relief granted by the court is limited to enjoining the federal government from enforcing the CTA against the plaintiffs in the case, the National Small Business Association (“NSBA”) and Isaac Winkles, an NSBA member (together, the “plaintiffs”). The judgment, thus, leaves the CTA intact against other parties and is highly likely to be appealed. However, the court’s decision likely paves the way for further challenges to the CTA.

Background. The CTA was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 and, generally, requires the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to implement a beneficial ownership reporting regime, requiring companies to disclose information about their beneficial owners, senior officers and other control persons to the federal government.

FinCEN’s first regulation implementing the CTA was published on September 30, 2022 and went into effect on January 1, 2024. It establishes which entities must report beneficial ownership information to FinCEN, what information must be reported and when reports are due. See our client updates on the regulations here and here.

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BlackRock has expanded Proxy Voting Choice to millions of U.S. retail shareholder accounts

Posted by Joud Abdel Majeid and Rachel Aguirre, BlackRock Inc., on
Monday, April 1, 2024
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Joud Abdel Majeid is Global Head of Investment Stewardship, and Rachel Aguirre is Head of U.S. iShares Product at BlackRock Inc. This post was prepared for the Forum by Ms. Abdel Majeid and Ms. Aguirre.

In 2022, BlackRock launched its “Voting Choice” program, providing eligible clients with more opportunities to participate in the proxy voting process where legally and operationally viable. In launching Voting Choice, BlackRock led a major industry movement to help more investors express their preferences through shareholder voting.

Since the launch, BlackRock has continued to extend the pool of eligible client index equity assets that can participate in the program and expanded the range of voting policies from which clients can choose.

On February 14, BlackRock expanded Voting Choice through a U.S. pilot program to eligible shareholder accounts in its flagship iShares Core S&P 500 ETF (IVV) which seeks to track the S&P 500 Index, enabling more than three million U.S. retail shareholder accounts invested in the fund. This pilot expands Voting Choice to individual investors beyond institutional investors for the first time since the launch of the program.

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