Yearly Archives: 2024

Prestige, Promotion, and Pay

Posted by Daniel Ferreria (London School of Economics) and Radoslawa Nikolowa (Queen Mary University of London), on
Monday, April 1, 2024
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Daniel Ferreria is a Professor of Finance at the London School of Economics and Political Science, and Radoslawa Nikolowa is an Associate Professor of Economics and Finance at Queen Mary University of London. This post is based on their article published in The Journal of Finance. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian A. Bebchuk and Yaniv Grinstein; The CEO Pay Slice (discussed on the Forum here) by Lucian A. Bebchuk, Martijn Cremers, and Urs Peyer; and Paying for Long-Term Performance (discussed on the Forum here) by Lucian A. Bebchuk and Jesse M. Fried.

CEOs, corporate executives, managing directors in investment banking, and partners in law firms are all positions that are considered prestigious. They are also highly paid. This bundling of prestige and pay is a common feature in many high-level jobs. Specifically, in professional services firms, being promoted to managing director or partner usually results in an increase in both pay and prestige.

There are good reasons why prestigious jobs pay more. After all, we expect those promoted to top positions to be highly talented, and top talent is scarce. Still, since most people enjoy being promoted to a prestigious position, why do firms need to pay so much more to those at the top of hierarchies?

In Economics, the traditional framework for thinking about jobs with desirable (or undesirable) characteristics is the theory of compensating differentials. In The Wealth of Nations (Book X, Part I, 1776), Adam Smith writes: “Honour makes a great part of the reward of all honourable professions. In point of pecuniary gain, all things considered, they are generally under-recompensed.” According to this logic, employees should be willing to “pay” for desirable job characteristics by accepting lower financial compensation. Thus, all else constant, prestigious jobs should pay less. In the article “Prestige, Promotion, and Pay,” published in The Journal of Finance, we argue that when firms design internal careers to attract potential employees, prestigious jobs should pay more.

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Key Implications of SEC’s Climate-Related Disclosure Rules

Posted by Catherine M. Clarkin, C. Michelle Chen, and June M. Hu, Sullivan & Cromwell LLP, on
Monday, April 1, 2024
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Catherine M. Clarkin and C. Michelle Chen are Partners, and June M. Hu is Special Counsel at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Clarkin, Ms. Chen, Ms. Hu, Robert W. Downes, and Sarah P. Payne. 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 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.

Summary

On March 6, 2024, the Securities and Exchange Commission (“SEC”) in a 3-to-2 vote[1] adopted its landmark climate-related disclosure rules (the “Final Rules”), which will significantly expand the climate-related information that U.S. public companies and foreign private issuers (other than Canadian issuers reporting on Form 40-F) will be required to disclose in their periodic reports and registration statements.[2] Our March 7, 2024 publication provided a high level summary of the Final Rules. This memorandum provides additional analysis of the Final Rules and their implications for public companies.

The Final Rules were adopted to provide investors “more complete and decision-useful information about the impacts of climate-related risks on registrants”.[3] After receiving a record 24,000 comment letters on its March 2022 proposed rulemaking (the “Proposed Rules”),[4] the SEC narrowed the Proposed Rules. Notably, the SEC qualified many disclosure requirements by materiality (including disclosures of Scope 1 and 2 greenhouse gas (“GHG”) emissions), eliminated the proposed Scope 3 emissions reporting requirements, and narrowed the proposed financial statement disclosures.

Nevertheless, the Final Rules still prescribe expansive climate-related disclosures that will meaningfully increase the cost, compliance challenges and liability exposure associated with public reporting. Key implications of the Final Rules for public companies include:

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Questioning technology governance orthodoxy

Posted by Mike Bechtel, Carey Oven, and Bill Briggs, Deloitte Touche Tohmatsu Limited, on
Sunday, March 31, 2024
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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.

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SEC Adopts New Rules for Climate-Related Disclosures

Posted by Brian Breheny, Marc Gerber, and Raquel Fox, Skadden, Arps, Slate, Meagher & Flom LLP, on
Saturday, March 30, 2024
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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 Kim, Liz 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.

Overview

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.

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Legal Risk and Insider Trading

Posted by Marcin Kacperczyk (Imperial College London) and Emiliano S. Pagnotta (Singapore Management University), on
Friday, March 29, 2024
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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.

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Weekly Roundup: March 22-28, 2024

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, March 29, 2024

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

Disentangling the value of ESG scores and classification of sustainable investment products

Posted by Andrew Siwo, New York University and Cornell University, on Friday, March 22, 2024
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Remarks by Chair Gensler before Columbia Law School Conference in Honor of John C. Coffee, Jr.

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on Saturday, March 23, 2024
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The SEC’s Proposed Safeguarding Rule Will Cost Investors

Posted by R.J. Rondini, Investment Company Institute (ICI), on Sunday, March 24, 2024
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New OECD Research on Sustainable Bonds

Posted by Caio de Oliveira, Adriana De La Cruz, and Pietrangelo De Biase, OECD, on Monday, March 25, 2024
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Trading and Shareholder Democracy

Posted by Doron Levit (University of Washington), Nadya Malenko (Boston College), and Ernst Maug (University of Mannheim), on Monday, March 25, 2024
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The Rise of “Sell-Side Activism”: Why It’s Happening and How to Respond

Posted by Maggie Dean and Hunter Stenback, Edelman Smithfield, on Monday, March 25, 2024
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Ira M. Millstein tribute

Posted by Stephen Davis (Harvard Law School), on Tuesday, March 26, 2024
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COVID-19 Risk Factors and Boilerplate Disclosure

Posted by Adam C. Pritchard, University of Michigan, on Tuesday, March 26, 2024
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From Moelis to Miller: How to Settle with Activists

Posted by Jim Woolery, Woolery & Co., on Tuesday, March 26, 2024
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Governance Recommendations for the United States

Posted by Kerrie Waring, Severine Neervoort, and Carol Nolan Drake, International Corporate Governance Network (ICGN), on Wednesday, March 27, 2024
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Disagreement with ISS concerning activist investor Nelson Peltz

Posted by Jeffrey Sonnenfeld and Steven Tian (Yale University), on Wednesday, March 27, 2024
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Larry Fink’s 2024 Annual Chairman’s Letter to Investors

Posted by Larry Fink, BlackRock Inc., on Wednesday, March 27, 2024
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Doubly-Binding Director Say-on-Pay

Posted by Michael R. Levin, The Activist Investor, on Thursday, March 28, 2024
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Transnational Corporate Law Litigation

Posted by William J. Moon (University of Maryland), on Thursday, March 28, 2024
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A Global Baseline? How to Navigate Interoperability Across Sustainability Reporting Rules

Posted by Subodh Mishra, Institutional Shareholder Services Inc., on Thursday, March 28, 2024
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A Global Baseline? How to Navigate Interoperability Across Sustainability Reporting Rules

Posted by Subodh Mishra, Institutional Shareholder Services Inc., on
Thursday, March 28, 2024
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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.

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Transnational Corporate Law Litigation

Posted by William J. Moon (University of Maryland), on
Thursday, March 28, 2024
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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.

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Doubly-Binding Director Say-on-Pay

Posted by Michael R. Levin, The Activist Investor, on
Thursday, March 28, 2024
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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.

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

Posted by Larry Fink, BlackRock Inc., on
Wednesday, March 27, 2024
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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.

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