The Harvard Law School Forum on Corporate Governance

Tag: Long-Term value

Getting Back to the Long Term

Posted by Blair Jones and Roger Brossy, Semler Brossy Consulting Group LLC, on

Tuesday, September 7, 2021

Boards of Directors, Corporate purpose, ESG, Executive Compensation, Incentives, Long-Term value
More from: Blair Jones, Roger Brossy, Semler Brossy

Blair Jones and Roger Brossy are Managing Directors at Semler Brossy Consulting Group LLC. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Don’t Let the Short-Termism Bogeyman Scare You by Lucian Bebchuk (discussed on the Forum here); and The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here).

With the coronavirus pandemic (we hope) tapering off this summer, boards are looking ahead to more normal compensation programs for 2022. They can pull back on the extraordinary measures and structures of 2020–21 and return to their long-term paths to strengthen or transform their organizations. Those paths were already a bit obscured by ongoing disruption in many industries, but then the pandemic pushed them decisively to the side. Companies can now get out of reactive mode and start to control their future again.

Still, it’s important for boards to resist the temptation to pick up where they left off in 2019. The pandemic and other developments have changed the landscape for corporate behavior and strategy. Executive compensation must adapt accordingly for companies to capture fresh opportunities and overcome new challenges.

Taking Stock

2020 was especially difficult for many boards. For their compensation programs, many resorted to new measures, goals, and performance periods, or used discretion. Others introduced special awards to promote retention or maintain motivation. Many of these approaches veered from the typical path but were deemed necessary to administer relevant and fair rewards amid the crises.

The Board’s Role in Sustainable Leadership

Posted by Laura Sanderson, PJ Neal, and Emily Meneer, Russell Reynolds Associates LLP, on

Monday, August 23, 2021

Board oversight, Boards of Directors, Climate change, Corporate purpose, Environmental disclosure, ESG, Long-Term value, Stakeholders, Sustainability
More from: Emily Meneer, Jemi Crookes, Laura Sanderson, PJ Neal, Russell Reynolds

Laura Sanderson co-leads the Board and CEO Advisory Partners in Europe; PJ Neal leads the Center for Leadership Insight; and Emily Meneer leads the Social Impact and Education sector Knowledge Management team at Russell Reynolds Associates LLP. This post is based on a Russell Reynolds memorandum by Ms. Sanderson, Mr. Neal, Ms. Meneer, and Jemi Crookes. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

Sustainability—both social and environmental—has quickly risen to the top of corporate agendas in recent years. This is in part because of the growing evidence that sustainable practices result in improved financial performance, and in part due to pressure from investors, employees, and the public for companies to articulate the role they play in addressing societal challenges. As one director recently told us, sustainability “has never been a higher priority for the board than it is today.”

In 2020, Russell Reynolds Associates published a study in partnership with the United Nations Global Compact examining the attributes that make executive leaders effective at driving sustainability outcomes. In this post, we study the issue from the board’s perspective, looking at how corporate directors engage with the challenges and opportunities related to sustainability, how they structure and operate the board to oversee related activities, and ultimately, how they enable sustainable in the enterprise.

Building on Common Ground to Advance Sustainable Capitalism

Posted by Colin Mayer, Amelia Miazad, and Rupert Younger (Enacting Purpose Initiative), on

Thursday, August 19, 2021

Board composition, Boards of Directors, Corporate purpose, Diversity, Engagement, ESG, Executive Compensation, Incentives, Institutional Investors, Long-Term value, Stakeholders
More from: Amelia Miazad, Colin Mayer, Rupert Younger, Enacting Purpose Initiative

Colin Mayer is Co-Chair of the Enacting Purpose Initiative (EPI) and Peter Moores Professor of Management Studies at University of Oxford Saïd Business School; Amelia Miazad is North American Chair of EPI and Founding Director and Senior Research Fellow of the Business in Society Institute at the University of California at Berkeley School of Law; and Rupert Younger is Chair of EPI and Director of the Oxford University Centre for Corporate Reputation at University of Oxford Saïd Business School. This post is based on their EPI report.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

Introduction

There is a growing consensus in the global business and investment community that sustainable and inclusive capitalism is vital to society, the environment, and the economy. This paradigm shift is propelling corporate purpose to the top of the agenda for directors and investors.

The first report from the Enacting Purpose Initiative, Enacting Purpose Within the Modern Corporation, A Framework for Boards of Directors, was published in August 2020. This report builds upon that foundation by setting out how directors can work with their investors to leverage corporate purpose to address societal issues and sustain long-term value creation.

This report’s recommendations were informed by extensive dialogue with over 35 board members in the Director Steering Group and over 30 global investors and asset owners and managers in the Investor Steering Group. We remain encouraged by the common ground between investors and directors regarding the value of corporate purpose. This report lays out that common ground in order to produce actionable insights for directors seeking to deepen their collaboration with investors on corporate purpose.

Let Your Mission Guide Your Executive Pay

Posted by Seymour Burchman and Mark Emanuel, Semler Brossy LLC, on

Monday, August 16, 2021

Boards of Directors, Compensation committees, Corporate purpose, ESG, Executive Compensation, Incentives, Long-Term value, Pay for performance, Short-termism, Stakeholders, Tesla
More from: Mark Emanuel, Seymour Burchman, Semler Brossy

Seymour Burchman is a senior advisor and Mark Emanuel is a managing director at Semler Brossy LLC. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Many business thinkers have criticized corporate “short-termism” that discourages crucial long-term investments in intangible capabilities. Executive pay programs get much of the blame, as even “long-term incentives” last only three years, with the goals for each year’s tranche reset annually.

Those brief periods are understandable given that most company strategies in fast-paced markets require agile responses to near-term market developments. But then how can companies carry out long-term investments?

One answer is to realign pay programs to support the company’s larger mission and purpose, rather than a particular strategy. Boards can link a new set of incentives to progress toward achieving the mission, with an eye to promoting sustainable growth. Once executives are focused on and paid for long-term, mission-driven success, they’ll be more inclined to make the necessary investments.

These new incentives could replace existing three-year plans or become an entirely new set of incentives to complement the existing annual and three-year plans. Two incentive programs would be simpler to communicate and would minimize redundancy. But many boards might prefer a separate, third program to ease the transition from current incentive practices.

Don’t Wait to Prepare for an Emergency Succession

Posted by James M. Citrin, Cassandra Frangos, and Melissa Stone, Spencer Stuart, on

Saturday, August 14, 2021

Boards of Directors, Executive turnover, Human capital, Long-Term value, Management, Succession
More from: Cassandra Frangos, James Citrin, Joseph Kopsick, Melissa Stone, Spencer Stuart

James M. Citrin and Cassandra Frangos are Consultants and Melissa Stone is Director of Development and Operations at Spencer Stuart. This post is based on a Spencer Stuart memorandum by Mr. Citrin, Ms. Frangos, Ms. Stone, and Joseph M. Kopsick.

Most boards address emergency CEO succession in some way, even if it’s just discussing the “name in the envelope” who could be quickly tapped for an interim period of time. The COVID-19 crisis underscored the importance of having a robust, formal emergency succession plan and raised questions about how prepared most organizations really are.

In this post, we highlight best practices for developing an emergency succession plan, including:

Defining the criteria and responsibilities of an interim CEO
Aligning on the “name in the envelope”
Maintaining a view of relevant external talent
Codifying the plan

Define the criteria for the interim successor

Boards historically have prioritized continuity and the likely investor reaction when selecting an interim CEO successor—someone who can give investors confidence that the company is in good hands until a permanent successor is selected. Not surprisingly, the most common interim leaders in emergency successions are the board chair, another board director, the CFO, the COO and, occasionally, a division president or general counsel.

In a crisis, the board may prioritize different criteria depending on the context and stakeholder needs: a “culture carrier” or leader with significant followership who can calm the organization and maintain continuity in the short term; an executive who is able to rally the leadership team; a highly effective communicator; or the CFO, who is closest to the financials and may be best positioned to manage through a cash crunch.

Buybacks: Look Before You Leap

Posted by Allen He, FCLTGlobal, on

Monday, July 26, 2021

Capital allocation, Firm performance, Long-Term value, Pay for performance, Repurchases, Shareholder value, Short-termism
More from: Allen He, FCLTGlobal

Allen He is Associate Director at FCLTGlobal. This post is based on his FCLTGlobal memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here), and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

As the global economy rebounds, companies are preparing to launch a record wave of buybacks. Buybacks have become a global phenomenon over the past 20 years, with many companies viewing them as an attractive alternative to dividends in returning capital to shareholders. They are flexible, recycle excess cash to the economy, and provide tax advantages in certain jurisdictions.

While buybacks can indeed be an effective way to distribute capital under certain circumstances—and can be used to signal to investors that their stock is undervalued – care must be taken to mitigate the downsides of buying back shares.

Common pitfalls

As tempting as buybacks may be as a quick way to return funds to shareholders, there are several pitfalls to consider.

From a strategic perspective, timing a buyback poorly can lead to losses. Companies cannot perfectly predict the market and often buy at market peaks, rather than troughs, due to overconfidence. This is also the tendency when the firm is generating excess capital. It can be mitigated by taking a long-term dollar-cost averaging approach to buybacks, adjusting the strategy based on market conditions and adopting a break-even scenario analysis.

Further on the Purpose of the Corporation

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on

Tuesday, July 20, 2021

Corporate purpose, ESG, Fiduciary duties, Long-Term value, Profitability, Shareholder primacy, Stakeholders
More from: Carmen Lu, Martin Lipton, William Savitt, Wachtell Lipton

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, William Savitt, and Carmen X. W. Lu. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

In recent years, the concept of “corporate purpose” has been invoked as a shorthand to address a corporation’s commitment to include stakeholder governance—and with it commitments to sustainability, diversity, inclusion, social responsibility and other ESG issues—as part of a corporate strategy that achieves sustainable long-term growth and creates long-term value for the benefit of all stakeholders.

Recognizing the importance of corporate purpose in helping guide efforts to build back better following the pandemic, a distinguished group of academics at Oxford University formed the “Enactment of Purpose Initiative.” The Initiative seeks to encourage the elemental constituencies of a corporation—directors, management, asset owners and managers, and other internal and external stakeholders—to collaborate to articulate an actional principle of purpose, which, when applied to the special circumstances of each corporation, will orient the firm towards mission-driven growth that delivers both profit and social responsibility.

Putting the F into ESG—The Importance of Financial Materiality in ESG Investing

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on

Monday, July 19, 2021

ESG, Institutional Investors, Long-Term value, Materiality, Proxy advisors, Stakeholders, Sustainability
More from: Anthony Campagna, Gavin Thomson, Institutional Shareholder Services Inc.

This post is based on an ISS EVA memorandum by Anthony Campagna, Global Director of Fundamental Research for Institutional Shareholder Services ISS EVA, and Gavin Thomson, Associate Director, ISS ESG, the responsible investment arm of Institutional Shareholder Services. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

Environmental, Social, and Governance (ESG) investing has evolved greatly as a concept over the past two decades. It now reaches nearly every aspect of the corporate and investment decision-making process, and rightfully so. This growth has presented so many amazing opportunities for investors and corporations to measure and improve practices across all aspects of the E, S, and G spectrum. It has also created a host of challenges for investment professionals who are trying to answer the question: “Does ESG matter?”

Globally ISS ESG continues to see and measure improvements in corporate ESG practice:

more companies committing to carbon goals and more biodiversity awareness;
more awareness of inclusive Corporate Social Responsibility policies, increased gender and ethnic diversity at board and management level; and
better board composition, shareholder rights, and increases in stewardship practices such as engagement and voting.

ISS ESG has also watched and listened as sustainability reporting continues to evolve, with different approaches developing in different global regulatory situations. While these changes have driven the availability of clean, comparable, and consistent data, challenges remain in the capture, measurement, and analysis of that data.

New OECD Corporate Governance Reports and the G20/OECD Principles of Corporate Governance

Posted by Serdar Celik and Daniel Blume, OECD Corporate Governance Committee, on

Thursday, July 15, 2021

Boards of Directors, COVID-19, Diversity, ESG, International governance, Long-Term value, OECD, Stakeholders, Sustainability
More from: Daniel Blume, Serdar Celik, OECD

Serdar Celik is Acting Head and Daniel Blume is a Senior Policy Analyst in the Corporate Governance and Corporate Finance Division of the Organization for Economic Co-operation and Development (OECD). This post is based on two OECD reports issued on June 30, 2021, by the OECD Corporate Governance Committee, chaired by Mr. Masato Kanda of Japan. Related research from the Program on Corporate Governance includes Learning and the Disappearing Association between Governance and Returns by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here); and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

The Organisation for Economic Co-operation and Development (OECD) has just issued two major new reports—The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis, and the 2021 edition of the OECD Corporate Governance Factbook—that will serve as key references for the OECD’s upcoming review and revisions to the G20/OECD Principles of Corporate Governance.

The G20/OECD Principles, since their first issuance by the OECD in 1999 and subsequent revisions in 2005 and 2015, are now recognized as the leading global standard to guide policy makers and regulators in devising effective institutional, legal and regulatory frameworks for the corporate governance of listed companies. Endorsed not only by the 38 members of the OECD but also by the G20 and Financial Stability Board, more than 50 jurisdictions worldwide now adhere to this OECD recommendation.

However, as the new OECD report on The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis makes clear, both the COVID-19 pandemic and longer-term trends suggest that governments’ corporate governance frameworks will need to make further adaptations to ensure that capital markets may serve their intended purpose of allocating substantial financial resources to support long-term investments underpinning economic growth and innovation. READ MORE »

Ripples of Responsibility: How Long-Term Investors Navigate Uncertainty With Purpose

Posted by Matthew Leatherman, Ariel Babcock, and Victoria Tellez, FCLTGlobal, on

Friday, July 9, 2021

Corporate Social Responsibility, Diversity, Engagement, ESG, Institutional Investors, Long-Term value, Short-termism, Stakeholders, Stewardship
More from: Ariel Babcock, Matthew Leatherman, Sam Sterling, Victoria Tellez, FCLTGlobal

Matt Leatherman is Director, Ariel Babcock is Head of Research, and Victoria Tellez is Senior Research Associate at FCLTGlobal. This post is based on a FCLTGlobal memorandum by Mr. Leatherman, Ms. Babcock, Ms. Tellez, and Sam Sterling. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Investment organizations around the world face an array of ever-changing external expectations. These expectations go well beyond traditional notions of achieving return targets or liability matching and can create important responsibilities that are broader than fiduciary duty or asset stewardship. Ripples of Responsibility provides tools for understanding and fulfilling these responsibilities. Together with our members and others, we have piloted this publication’s toolkit in workshops focused on six different domains of responsibility: economic impact at home and abroad, equity lending and stewardship, impasses in corporate engagement, racial and gender diversity of portfolio companies, climate and environmental impact, and reputation management.

The way that investment organizations navigate existing responsibilities and new expectations that arise has a tremendous effect on their long-term success.

When an investment organization fails to fulfill true responsibilities, staff can become distracted from their long-term focus, interrupting the organization’s long-term investment strategy. Consequences also can include turnover in leadership or responses by legal or regulatory authorities that narrow the discretion of leadership. Yet positive cases of investment organizations meeting evolving expectations abound: two examples are Future Fund’s efforts to ensure that external managers steward its reputation appropriately and the New Zealand Super Fund’s participation in the national response to social media firms live streaming the Christchurch atrocity. [1] [2]

Page 1 of 45

1 2 3 4 5 6 7 8 9 10 11 … 45 Next »