The New Corporate Governance

In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. Consider two examples from 2021. Eighty-one percent of DuPont shareholders approved a proposal requiring the company to disclose how much plastic it releases into the environment each year and to assess the effectiveness of DuPont’s pollution policies. Sixty-four percent of ExxonMobil shareholders approved a proposal requiring the company to describe “if, and how, ExxonMobil’s lobbying activities … align with the goal of limiting average global warming to well below 2 degrees Celsius…”

It is hard to explain this behavior using the … Read more

Arnold & Porter Discusses California Challenge to Rulings Rejecting Board Diversification

The California Secretary of State has appealed a decision by the Los Angeles County Superior Court striking down the second of California’s two board diversity laws, which required all publicly traded companies headquartered in California to include a minimum number of female directors. The appeal will challenge the court’s finding that the board diversity legislation violates the Equal Protection Clause of the California Constitution because its classification of director candidates based on gender does not further a compelling government interest.

In addition, the same court—acting through a different judge—has also overturned California’s other board diversity statute, which required boards of … Read more

Wachtell Lipton Discusses Delaware Approval of Officer Exculpation from Personal Liability in Charters

For over 45 years, Delaware law has permitted directors of Delaware corporations to be exculpated from personal monetary liability to the extent such protections are set forth in the certificate of incorporation, subject to certain exceptions.  However, such protective statutory provisions did not reach officers.  As contemplated in our April 2022 memorandum, Delaware has now adopted important amendments to Delaware’s General Corporation Law that would expand the right of a corporation to adopt an “exculpation” provision in its certificate of incorporation to cover not only directors (as has been allowed and widely adopted since 1986, following Smith v. Van Read more

How Private Shareholder Engagements on Material ESG Issues Affect Companies

Shareholders have increasingly taken the lead in pushing for corporate sustainability. In 2021, for example, 20 percent of U.S. environmental and social shareholder proposals won over 50 percent of shareholder support, while in 2016 only 3 percent of such proposals were approved by a majority of shareholders. [1] Investors have also strengthened their private engagement efforts, with collaborative groups like Climate Action 100+ urging firms to make their operations more environmentally sustainable. Yet an important question persists: How relevant are these stewardship activities to the financial performance of target firms?

In a new working paper, we use an extensive global … Read more

Davis Polk Discusses Key Takeaways for Banks of Basel Climate Report

Here are the key takeaways from the Basel Committee’s final Principles for the Effective Management and Supervision of Climate-Related Financial Risks (the “Basel Principles”).

  1. The core elements of the Basel Principles align closely with proposed principles from the OCC and FDIC

    • The Basel Principles1 align closely with the climate-related risk management principles proposed by the Office of the Comptroller of the Currency (the “OCC Proposal”)2 and the Federal Deposit Insurance Company (the “FDIC Proposal”).3
    • The Basel Principles are part of the Basel Committee on Banking Supervision’s (the BCBS or the “Basel Committee”) work of assessing how the

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The Corporation as Trinity

In Adolf Berle’s famous 1954 essay, “Corporate Capitalism and The City of God,” certain passages that once seemed musty and redolent of a bygone era are now eerily timely. Like current critics, Berle chides corporate leaders who think they can simply mind their own business, oblivious to larger social concerns. “For the fact seems to be that the really great corporat[e] managements have reached a position for the first time in their history in which they must consciously take account of philosophical considerations,” Berle wrote. “They must consider the kind of community in which they have faith, and which … Read more

Realigning Stockholder Inspection Rights

Access to corporate information plays a pivotal role in stockholder litigation. One key to that access is stockholders’ statutory right to inspect a corporation’s books and records prior to filing litigation, enshrined in the Delaware General Corporation Law’s Section 220. In the context of derivative actions – i.e., actions brought by a stockholder on behalf of a company – Section 220 takes on an even greater importance. In order to maintain standing to pursue those claims, the stockholder plaintiff either must have made a wrongfully refused demand of the relevant board that it institute litigation, or must proceed on a … Read more

Gibson Dunn Discusses Shareholder Proposal Developments for the 2022 Proxy Season

This post provides an overview of shareholder proposals submitted to public companies during the 2022 proxy season,[1] including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests.[2]

I.   Summary of Top Shareholder Proposal Takeaways from the 2022 Proxy Season

In November 2021, the Staff issued Staff Legal Bulletin No. 14L (Nov. 3, 2021) (“SLB 14L”).[3]  In SLB 14L, the Staff rescinded Staff guidance and reversed no-action decisions published during the tenure of former Division Director Bill Hinman,[4] upending the Staff’s recent approach to the application … Read more

A New Podcast Debuts: The Cutting Edge

Today, the Blue Sky Blog launches its newest podcast series, The Cutting Edge: Current Issues in White Collar Crime and Corporate Governance. The series features top scholars, lawyers, and other esteemed figures in the legal world discussing breaking developments in white collar crime and corporate governance and the tough ethical and professional issues they raise. John C. Coffee Jr., the Adolf A. Berle Professor of Law at Columbia Law School, hosts the series, and Jed S. Rakoff, senior federal district judge in the Southern District of New York, joins as a commentator.

In Episode 1, Coffee and Rakoff speak with … Read more

Why Do Institutional Investors Request Climate-Related Disclosures?

An important debate is playing out over the role of institutional investors in the global effort to mitigate climate risk and achieve net-zero emissions. While some believe that institutional investors are sufficient catalysts in preparing us for a low carbon economy, others are more skeptical and prefer regulatory interventions. This skepticism is fueled by the perception that a substantial number of institutional investors engage in “greenwashing” (i.e., actions that do little to reduce emissions).

Our paper contributes to this debate by exploring the motivation behind institutional investors’ public requests for climate-related information. We assess whether institutional investors request these disclosures … Read more

Do We Need a Restatement of the Law of Corporate Governance?

In 1978, the American Law Institute (ALI) authorized a project originally intended to result in a Restatement of corporate law.[1] The drafters intended their project to be a departure from traditional restatements.[2] As they visualized it, the project was to offer “a combination of classic Restatement, forward looking guidelines, and perhaps also model provisions.”[3] Their efforts, however, met with immediate resistance. When Tentative Draft No. 1 was published in 1982, it was widely criticized for failing to restate the law but rather proposing major and dramatic changes in the law.[4]

As the decade-long drafting process continued, … Read more

Stakeholder Capitalism’s Viewpoint Diversity Problem

Concerns about a lack of viewpoint diversity in stakeholder capitalism have been touched upon in commentary about the SEC’s recent climate change proposal. For those not caught up, the SEC has proposed a rule that would “require registrants to provide certain climate-related information in their registration statements and annual reports.”[1] The proposed rule has been widely discussed, and to some extent criticized, in corporate governance circles. Professor Sean Griffith, for example, argued in a recent paper that “the proposed climate rules create controversy by imposing a political viewpoint, by advancing an interest group agenda at the expense of investors … Read more

What the Language of Shareholder Stewardship Can Teach Us

Stewardship has, along with sustainability, social equality, biodiversity, and climate risk management, emerged in recent years as a favorite buzzword in corporate governance and investment management circles. But the language used by investors to express stewardship objectives and practices varies significantly. For some, stewardship is nearly synonymous with voting: it is a matter of shareholder engagement with company management and is aimed at maximizing long-term value. Others expand the long-lamented notion of shareholder ownership to include active ownership and responsible investing. For still others, stewardship is about “building stronger portfolios,” both active and passive.

To complicate matters further, stewardship … Read more

ISS Discusses Progress in Racial and Ethnic Diversity on U.S. Boards Since 2020

The summer of 2020 was a turning point in the push for corporate diversity and inclusion initiatives. The tragic murder of George Floyd and the reactions that followed it resulted in demands for racial equality and anti-racism measures that resounded across the globe, including the corporate world.

Subsequently, many companies pledged to do their part to address inequalities and, likewise, many investors began to seriously reflect on their racial and ethnic diversity policies. Some investors adopted or strengthened their proxy voting policies demanding greater transparency from their portfolio companies around racial and ethnic diversity information, believing that which cannot be

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Corporate Culture and Financial Reporting Quality

Corporate culture is an important determinant of companies’ behavior and success and, as a result, has drawn much attention, particularly from the business press. While some companies have received praise for their corporate cultures, others such as Wells Fargo, Valeant Pharmaceuticals, Toshiba, and Hertz have been severely criticized for maintaining cultures that have led to some of the most egregious misconduct in recent years, despite each of these companies having formal ethics and compliance guidelines (Zach 2015). But while the broad impact of corporate culture is clear – it affects everything from ethics decisions (Audi et al. 2016) and economic … Read more

Wachtell Lipton Discusses Legal Considerations for Decentralized Autonomous Organizations

We recently wrote about the emergence of a new breed of business organizations — decentralized autonomous organizations (DAOs) — to contend that the governance design for these blockchain-based organizations should heed some of the hard-fought lessons that have helped to form the pillars of modern corporate governance.  It is also important to confront certain features of DAO governance that present distinct challenges for counterparties seeking to invest or engage in commercial transactions with DAOs.  A few recent DAO controversies highlight the need for greater clarity in the legal status of DAOs, more robust governance, and a reckoning with the distinct … Read more

Paul Hastings Discusses Japanese Poison Pills Without Shareholders’ Blessing

In many jurisdictions, poison pills are devised and implemented by the board of directors without shareholders being involved. Since the 2007 Supreme Court case[1] (in re Bulldog Sauce) in Japan, however, courts have largely relied on the voice of shareholders in reviewing the legality of pills. This raises several issues: how realistic it is to rely on shareholders’ resolution as a matter of corporate governance, and whether it is practically appropriate to seek shareholders’ approval when in-market purchases can be achieved in Japan in a short period of time in large quantities. We discussed a similar issue … Read more

Does the Adoption of Say-on-Pay Laws Affect Firms’ ESG Performance?

Can investors successfully advocate for improved ESG outcomes at their portfolio companies? We examine whether the introduction of say-on-pay (SOP) laws provides investors with a way to increase the extent to which executive compensation is tied to ESG metrics and whether doing so, in turn, improves a firm’s ESG performance.

Surveys have found that investors value firms’ commitment to sustainability and social issues.  For example, a recent survey of 325 investors internationally by PwC found that 79 percent of investors agreed with the statement, “ESG risks are an important factor in investment decision-making” (The Economic Realities of ESG, … Read more

Issuer Liability: Ownership Structure and the Circularity Debate

In many countries, investors can hold publicly traded companies liable for public misstatements. Issuer liability is intuitively appealing because statements are generally made on behalf of the company by its representatives. Moreover, large companies typically have deep pockets, which ensures compensation for investors who incurred losses because they traded during the period when stock prices were distorted by false information.

However, in the United States – the country where securities class actions are most prevalent –, many scholars are highly skeptical about the social value of issuer liability through securities class actions. The critique is usually framed under the rubric … Read more

Reimagining Board Committees to Accommodate Worker Voice

Employees at U.S. public corporations have increasingly demanded that their concerns be heard at the very senior levels of management.  If current trends continue, boards of directors could also be challenged to accommodate “worker voice” more formally.  Rather than being caught flat-footed, boards should reimagine the process through which they receive information about employee sentiment with the goal of penetrating existing structural barriers.  Boards can start by establishing a dedicated board committee with the proper remit and resources, thereby creating a mechanism for, and demonstrating a commitment to, hearing and understanding worker voice.

In a recent essay, I contribute … Read more