Monthly Archives: September 2024

The Magnificent 7: A Sustainability Perspective

Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS ESG memorandum by Hernando Cortina.

Key Takeaways

  • Reflecting their strong contribution to major indices, the so-called Magnificent 7 U.S. stocks have been a major focus of investor attention. This article considers the sustainability performance of the Magnificent 7 compared with the remaining equities in the STOXX USA 500.
  • The article examines six ESG and climate metrics and considers aggregate performance as well as the dispersion in the data. The Magnificent 7’s financial strength is also reviewed using the Economic Value Added (EVA)-based ISS Financial Rating.
  • The Magnificent 7 perform very well across overall ESG performance, carbon risk, emissions, and temperature scenario alignment as well as adequately on water risk. Nonetheless, they notably lag in alignment with the U.N. Sustainable Development Goals.
  • While the aggregate results provide insight, for investors the most valuable aspect of this analysis might be to understand the dispersion within the Magnificent 7 and the specific risks and opportunities individual corporate performance present.

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Shareholder Rights and the Bargaining Structure in Control Transactions

Ryan Bubb is the Robert B. McKay Professor of Law at New York University School of Law, Emiliano Catan is the Catherine A. Rein Professor of Law at New York University School of Law, and Holger Spamann is the Lawrence R. Grove Professor at Harvard Law School. This post is based on their recent paper.

State corporate law grants shareholders two key sets of rights in mergers and acquisitions (M&A). First, shareholders have statutory rights, such as voting on the transaction and appraisal rights for dissenting shareholders. Second, shareholders are entitled to loyal conduct by corporate fiduciaries—managers and directors—through the enforcement of their fiduciary duties. However, legal reforms in recent years have reduced shareholders’ ability to sue for breaches of these duties, placing greater reliance on shareholders’ statutory rights to safeguard their interests. This raises an important question: how powerful is the first set of rights—voting and appraisal—and can it obviate the second set—fiduciary duties? More generally, how should we understand and protect shareholders’ interests in control transactions from a functional perspective?

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Trio of SEC Enforcement Actions Underscores Importance of Internal Controls

Matthew C. Solomon is a Partner, Tom Bednar is a Counsel, and Yasmeen Duncan is an Associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum.

In the past few weeks, the Securities and Exchange Commission (“SEC”) has announced three settled enforcement actions alleging violations of the internal controls provisions of the federal securities laws.  The cases are notable less for the SEC penalties involved—which ranged from no penalty to $400,000—but rather for the other, more dire consequences the companies experienced as a result of internal controls failures, such as financial restatements, delayed SEC filings that led to an exchange delisting, and serious employee misconduct that went unchecked.  The cases underscore the importance of establishing and maintaining effective systems of internal control over financial reporting.

All of the cases – which the companies settled while neither admitting nor denying the SEC’s allegations – highlight the importance of integrating new subsidiaries into the parent’s system of internal controls; maintaining adequate accounting personnel and clear lines of communication; and, when accounting problems are discovered, of acting quickly to investigate and remediate.

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Unveiling Key Trends in AI Shareholder Proposals

Arnaud Cavé and Andrea Hearon are Directors and Niamh O’Brien is a Senior Consultant at FTI Consulting. This post is based on their FTI memorandum.

Overview

AI is the hot topic of 2024. Companies see the opportunity to gain efficiency and drive growth through the adoption of AI, while not ignoring upcoming regulatory obligations and rising investor expectations. Investors want companies to adopt AI to enhance or at least uphold their competitiveness, but they are also increasingly worried about the impact of AI usage on people and the planet. This concern has led to increased scrutiny of AI governance and a rise in AI-related shareholder proposals in the US.

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Doing More, Saying Less: Trends in DE&I Compensation Metrics

Sydney Carlock is a Managing Director, Rose James is a Senior Associate, and Faten Alqaseer is a Senior Managing Director at Teneo. This post is based on a Teneo memorandum by Ms. Carlock, Ms. James, Ms. Alqaseer, Matt Filosa, Diana Lee, and Sean Quinn.

Amidst the debate over corporate ESG and DE&I practices, Teneo’s analysis of recent S&P 500 proxy filings reveals an interesting trend: the practice of including DE&I metrics in executive compensation is not only widespread, but increasing in prevalence.

Contrary to headlines suggesting a retreat from DE&I pay measures, our findings indicate more companies have added DE&I metrics to compensation plans than removed them in 2023. However, a notable shift has occurred – many companies are disclosing less detail about the specific DE&I metrics and goals impacting executive payouts. This shift, likely a strategy to reduce backlash from anti-DE&I activists, clashes with investor demand for transparency and the trend towards increased disclosure that began before the inception of say-on-pay. As companies navigate this complex landscape, they must consider the governance and shareholder implications of altering their DE&I pay-related disclosures.

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Billionaire Superstar: Public Image and Demand for Taxation

Ricardo Perez-Truglia is a Professor of Economics at UCLA’s Anderson School of Management and Jeffrey Yusof is a PhD candidate in Economics at the University of Zurich. This post is based on their recent paper.

In the United States, 741 billionaires collectively hold a staggering $5.2 trillion in wealth. The fortunes of the ultra-wealthy are anything but hidden from public view. American billionaires often lead highly visible lives, with their personal affairs frequently covered by the media. This fascination with billionaire lifestyles even extends into popular culture, where some of the most iconic superhero characters, like Iron Man and Batman, are depicted as billionaires.

This concentration of wealth at the top is part of a larger phenomenon of growing income inequality. Meanwhile, on the other end of the income distribution, homelessness has surged to unprecedented levels, with about one in every 500 Americans without a home. The middle class is also facing significant challenges. For example, only half of those born in the 1980s are earning more than their parents did.

Despite the extreme inequality, billionaires are estimated to pay lower average tax rates than the average American. This could change soon, as there is growing interest among policymakers in increasing taxes on billionaires. For example, Vice President and presidential candidate Kamala Harris proposed that taxpayers with a net wealth above $100 million should pay a minimum tax on their unrealized capital gains, a policy some refer to as the Harris billionaire minimum tax.

Do Americans support taxing billionaires? What factors influence their opinions? In a recent working paper, we address these questions with a survey experiment. We recruited a sample of 9,013 Americans to participate in our study. The survey featured an information-provision experiment in which subjects were randomly assigned to receive one of several pieces of information about billionaires, such as their lavish lifestyles, earnings, or business acumen. In the final part of the survey, we asked participants to indicate their desired income tax rate for billionaires and their support for existing policy proposals aimed at taxing billionaires.

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Weekly Roundup: September 20-26, 2024


More from:

This roundup contains a collection of the posts published on the Forum during the week of September 20-26, 2024

Stand by ESG? The State of 2024 U.S. Sustainability Reports


Hot Topics for Boards and Committees



Securities Law Updates


ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans


13F rulemaking petition


DOJ & SEC Bring Enforcement Actions Against Short Sellers


Risk, the Limits of Financial Risk Management, and Corporate Resilience


The Modern Risk Review


SEC brings whistleblower enforcement actions against seven companies


Shadow Banking and Securities Law


Inside Disney’s Star CEO Wars


Uptick in the Value of Megadeals and Sponsor Transactions Signal a Further M&A Rebound


Do buy-side analysts in earnings conference calls manipulate stock prices?


From Directors to Officers: How Fortune 1000 Companies Are Embracing Delaware’s New Legal Armor


From Directors to Officers: How Fortune 1000 Companies Are Embracing Delaware’s New Legal Armor

Neil McCarthy is Co-Founder and Chief Product Officer, G. Michael Weiksner is Co-Founder and Chief Technology Officer, and James Palmiter is CEO and Co-Founder at DragonGC. This post is based on a DragonGC memorandum by Mr. McCarthy, Mr. Weiksner, Mr. Palmiter, Jennifer Carberry, Natalie Richardson, and Evan Quille, and is part of the Delaware law series; links to other posts in the series are available here.

Delaware amended Section 102(b)(7) of its General Corporation Law (DGCL) in 2022 to allow exculpation of certain senior officers from personal liability for monetary damages for breaches of their fiduciary duty of care (“Officer Exculpation”). Before it was amended DGCL §102(b)(7) only allowed exculpation for directors. To take advantage, Delaware companies need to include a provision in the certificate of incorporation, which typically will require a stockholder vote to implement for companies that are already public.

Since the law changed, DragonGC has been tracking trends in adoption of Officer Exculpation by Delaware companies. In this report, we examine the adoption of Officer Exculpation to date, with an emphasis on Fortune 1000 companies.

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Do buy-side analysts in earnings conference calls manipulate stock prices?

Michael J. Jung is an Associate Professor of Accounting at University of Delaware. This post is based on an article forthcoming in the Journal of Corporate Finance by Professor Jung, Professor Gang Hu, Professor M.H. Franco Wong, Professor Danlei Bonnie Yu, and Professor Frank Zhang.

In our recent study, Do buy-side analysts in earnings conference calls manipulate stock prices?, we use a unique combination of institutional trading data and conference call transcripts to shed light on why buy-side analysts participate in companies’ earnings conference calls. This is an important question because institutional investment firms can trade the stocks of the companies that host the conference calls, which means that the analysts they employ may have incentives to try to influence (i.e., manipulate) the stock price by making positive or negative comments in a public forum. The sports analogy is to throw management a “softball” question when a buy-side analyst wants to boost the stock or a “curve ball” when the analyst wants to hurt the stock. However, buy-side analysts also have incentives to acquire information during the call without an intention to influence the stock. We examine the tone of the conversations between the analysts and company executives, in conjunction with the trading patterns by the employing institutions before and after the conference call, to determine if the data is consistent with either the “stock influence” or “information acquisition” motive (or both).

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Uptick in the Value of Megadeals and Sponsor Transactions Signal a Further M&A Rebound

Daniel L. Luks is a Partner and Justin S. Einhorn is an Associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Key Points

  • Aggregate global M&A deal value is up significantly in 2024 (even though deal volume is down), driven in large part by the announcement of megadeals in the U.S., and reflecting an appetite for dealmaking in the medium term.
  • Notwithstanding continued relatively high interest rates, financial sponsors have pursued some very large transactions this year, sending the global value of sponsor deals soaring.
  • Legislative changes could give a boost to M&A, particularly involving sponsors, by resolving uncertainty about Delaware law governing stockholder agreements.

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