While the world recovers from the worst of the pandemic, the economic, political and social repercussions will continue to play out in ways that, while unpredictable, are in some respects characterized by observable patterns of cause-and-effect and cyclicality. The pendulum has been swinging back as, for example, the Federal Reserve has been ratcheting up interest rates and tightening liquidity, activist activity is once again on the rise, Republicans have taken control of the House, and back-to-office policies have been eased into effect. In this environment, stasis is the exception rather than the norm, and boards must continue to be nimble … Read more
The SEC rule requiring a universal proxy card in director election proxy fights becomes effective today [September 1]. The resurgence of activism is already in progress, and the universal proxy card may significantly facilitate some proxy contests in which an activist is seeking to elect one or more directors to a company’s board to replace incumbent(s). It will also affect proxy contest strategies, tactical considerations and the behavior of proxy advisory firms assessing competing director slates. As stated by ISS in its report on the universal proxy card:
The indisputable fact about the universal proxy card (UPC) is that it … Read more
Recent high profile investigations into greenwashing, the ongoing war in Ukraine and soaring energy costs have prompted questions as to the purpose and value of ESG, and more broadly, stakeholder capitalism. Some have criticized stakeholder capitalism and ESG as “woke” politics, a threat to shareholder interests and a distraction for boards and management. Others have questioned whether stakeholder capitalism and ESG can straddle “doing good” and “doing well.” Uncertainty also abounds as to what ESG truly means.
We believe stakeholder capitalism and ESG are fundamentally frameworks to enhance the sustainable long-term value of a corporation. Both are tools for boards … Read more
The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.
The war in Ukraine and broader geopolitical implications, the coronavirus pandemic and ongoing efforts to return to a “new normal,” as well as other trends and technologies which have been accelerating the pace of disruption, are raising a host of … Read more
Despite a short dip at the outset of the pandemic, activism has rebounded and now continues at an ever-growing intensity. As we have previously noted, regardless of industry, size or performance, no company should consider itself immune from activism. No company is too large, too popular, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have been and are being attacked. And companies that have faced one activist may be approached, in the same year or in successive years, by other activists or re-visited by the prior activist.
Although … Read more
The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The ongoing coronavirus pandemic and resulting economic and social turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, are propelling a decisive inflection point in the responsibilities of boards of directors. The 2016 and … Read more
Two years ago, the Business Roundtable (BRT) issued a “Statement on the Purpose of a Corporation,” signed by the CEOs of 184 major U.S. corporations, that rejected shareholder primacy, declared “a fundamental commitment to all [corporate] stakeholders” and linked corporate purpose to advancing and protecting the interests not just of shareholders, but of all corporate stakeholders. The BRT’s statement reflected rapidly growing momentum towards a more inclusive corporate governance regime and promised to accelerate stakeholder governance by committing business leaders to the interests of employees, customers, suppliers, communities and the environment.
The BRT statement elevated the topic of stakeholder capitalism … Read more
Last year, we did a mid-year edition of our annual Thoughts for Boards of Directors to highlight key issues and considerations in managing the challenging business environment and profound upheaval caused by the pandemic. Many of these issues are still top-of-mind as the “new normal” continues to evolve, and will continue to be prominent themes in boardroom discussions. As we emerge from the pandemic, boards and management teams should continue to assess their corporate purpose, strategy, risk management procedures, and board committee structures to optimize their ability to deal with the ever-proliferating number and complexity of business risks and opportunities … Read more
From a practical standpoint, the most significant part of the 1970 Milton Friedman essay in the New York Times was the headline: “The Social Responsibility Of Business Is to Increase its Profits.” For a half-century, that phrase has been used to summarize the essay, and alongside Friedman’s similar views in a 1962 treatise, also used in support of “shareholder primacy” as the bedrock of American capitalism. “Shareholder primacy” and “Friedman doctrine” became interchangeable. The Friedman doctrine was a precursor to, and became a doctrinal foundation for an era of short-termism, hostile takeovers, extortion by corporate raiders, junk bond … Read more
The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The coronavirus pandemic and resulting recession, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies by the Business Roundtable, the World Economic Forum, the British Academy, BlackRock, Vanguard, State Street and other investors and asset … Read more
As directors and shareholders become increasingly attuned to ESG considerations and stakeholder-oriented governance, they have sought guidance about how to incorporate these imperatives into the board’s decision-making process—particularly regarding decisions that entail trade-offs or an allocation of resources between and among stakeholders and ESG objectives. Our answer to this question is rooted in the classic bedrock of board functioning: directors must exercise their business judgment. This is not only the practical answer—it is the essential animating principle of Delaware law.
Recently, many who continue to advocate for shareholder primacy, and therefore reject stakeholder governance, have sought to portray stakeholder interests … Read more
The growing view that corporations should take into account environmental, social and governance (ESG) issues in running their businesses, and resistance from those who believe that companies should be managed solely to maximize share price, has intensified the focus on the more fundamental question of corporate governance: what is the purpose of the corporation?
The question has elicited an immense range of proposed answers. The British Academy’s Future of the Corporation Project, led by Colin Mayer, suggests that the purpose of the corporation is to provide profitable solutions to problems of people and planet, while not causing harm. The Business … Read more
In an article posted yesterday [March 2] on the Harvard Law School Forum on Corporate Governance blog, Professor Lucian Bebchuk rejects stakeholder governance and, in so doing, attacks the committed positions of influential institutions as varied as the Business Roundtable, the World Economic Forum, BlackRock, State Street, Vanguard, the UK Financial Reporting Council, and the European Union High-Level Expert Group on Sustainable Finance.
Professor Bebchuk summarizes his article as follows:
“Following the publication of the [Business Roundtable] statement, in December 2019 the World Economic Forum took the unusual step of publishing a manifesto that urged companies to move from the … Read more
The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies by the Business Roundtable, the World Economic Forum, the British Academy, BlackRock, Vanguard, State Street and other investors and asset managers is another inflection point in the responsibilities … Read more
In a letter to directors of public companies, State Street Global Advisors’ President and CEO, Cyrus Taraporevala, reiterated SSgA’s focus on “financially material” ESG issues as “a matter of value, not values.” He also confirmed that SSgA will go beyond engagement and deploy its voting power in director elections to accelerate corporate action on ESG. In SSgA’s view, “fewer than 25% of the companies we’ve evaluated have meaningfully identified, incorporated and disclosed material ESG issues into their strategies.”
As shareholder proposals touching on ESG and sustainability matters proliferate, SSgA has also sounded a cautionary note, flagging that “some shareholder … Read more
This year, each of the major index fund managers, the Business Roundtable, the British Academy, the UK Financial Reporting Council, the World Economic Forum and a number of other organizations (both governmental and nongovernmental) announced that they did not support shareholder primacy and do support sustainable long-term investment and considering ESG matters. However, the initial reaction of the Council of Institutional Investors in denouncing the BRT position from both an economic and legal standpoint, although quickly moderated, has continued to echo in Wall Street trading rooms, at activist hedge funds and in corporate boardrooms. I continue to hear that the … Read more
In response to the sharp increase in campaigns by activist hedge funds in France and Europe generally, a French commission has conducted an extensive investigation and issued a carefully researched, reasonable and balanced report recommending regulatory and procedural changes to rebalance the relationship between companies and activists. The key recommendations are:
- “[S]tronger transparency measures applicable to investors taking public positions, directly or indirectly, aimed at influencing an issuer’s strategy, financial position or governance. An activist taking a public position should disclose, inter alia, the number of shares and voting rights and the type of securities held in the issuer,
The Business Roundtable’s recent call for a commitment to long-term sustainable economic value creation has prompted a vigorous debate about the optimal corporate governance model for achieving that goal.
Certain familiar arguments have reappeared in reaction to the Business Roundtable’s important statement rejecting shareholder primacy and embracing stakeholder governance. Various law firms and commentators insist that such innovation in corporate governance is constrained by an imperative to maximize shareholder value—the ideology that a corporation can have no purpose other than profit maximization for shareholder gain. Others assert that the path to effective governance reform lies with prescriptive regulation, presumptively by … Read more
The stakes for responsible corporate stewardship have never been higher.
Corporations today account for a greater proportion of our collective productivity than ever before. Of the 100 largest economies in the world, 71 are corporations, and only 29 are countries. U.S. corporations alone generated profits of $2.3 trillion in 2018 — the highest in history. Reflecting their unprecedented scale, U.S. corporations have been blamed for accelerating environmental degradation and aggravating disparities in income and wealth. Calls for the exercise of corporate social responsibility have become increasingly urgent. Recognizing this urgency, the Business Roundtable last month embraced broad stakeholder governance and … Read more
There has recently been much debate and some confusion about a bedrock principle of corporate law – namely, the essence of the board’s fiduciary duty, and particularly the extent to which the board can or should or must consider the interests of other stakeholders besides shareholders.
For several decades, there has been a prevailing assumption among many CEOs, directors, scholars, investors, asset managers and others that the sole purpose of corporations is to maximize value for shareholders and, accordingly, that corporate decision-makers should be very closely tethered to the views and preferences of shareholders. This has created an opportunity for … Read more