Do Favorable ESG Ratings Lead to More Socially Responsible Behavior?

One of the hottest topics in the business world is ESG ratings, which are designed to measure the environmental, social, and governance risks of a company. The idea is that increased transparency about companies’ ESG risks will motivate those with a low scores to improve and at least match the performance of competitors with high scores. Yet research on whether these ratings actually work is surprisingly sparse.

In a new study, we examined how companies responded to some of the first ESG ratings in the early 1990s issued by KLD Research & Analytics (KLD), a pioneering ESG rating agency. Contrary … Read more

Columbia Law School to Hold 2022 Conference on M&A and Corporate Governance

On December 2, 2022, Columbia Law School will hold its 2022 Conference on Mergers & Acquisitions and Corporate Governance. The event is co-sponsored by the school’s Ira M. Millstein Center for Global Markets and Corporate Ownership, the Columbia Law School Center on Corporate Governance, and the law firm of Paul Hastings LLP.

The event brings together members of the federal and Delaware judiciaries, government regulators, academics, and prominent M&A and corporate governance practitioners. This year’s panelists are scheduled to include Delaware Chancellor Kathaleen St. J. McCormick, Delaware Vice Chancellor Lori W. Will, U.S. Senior District Judge Jed S. Rakoff, Chief … Read more

Do Individual Directors Matter?

A fundamental question in corporate governance research is whether the board of directors affects firm value. Some argue that directors contribute no additional value to the firm and may even lower its value if they act only as a rubber stamp on the CEO’s decisions. However, the weight of evidence is that directors can increase value by, for example, using their experiences and connections to improve firm performance in specific settings.

Yet, largely absent from the literature is an investigation of whether individual directors possess unique characteristics that increase value, irrespective of which boards they sit on or the prevailing … Read more

Estimating the Cost of Control Rights in the Corporate Loan Market

Financial covenants have gone in and out of style over the last 30 years. They serve to transfer control rights to lenders when a borrower’s financial metrics breach pre-set contractual thresholds and so provide an interesting laboratory to study debtholder-shareholder conflicts and how they are potentially resolved. First, covenants can enhance efficiency by making contracts between lenders and their borrowers more complete. Second, through the contingent transfer of control during the term of the loan, they provide scope for renegotiation and wealth transfers that are primarily at the discretion of the lender.

In practice, covenant violations are associated with a … Read more

What CEOs Really Get Paid under Long-term Incentive Plans

U.S. public firms increasingly use long-term performance-based plans to compensate CEOs. Under these plans, CEOs are expected to receive different levels of pay based on how the firm performs relative to various performance goals over multi-year periods. For example, Tesla gave Elon Musk a controversial pay package in 2018 with an initial estimated value of $2.6 billion and a potential payout of over $50 billion. However, to realize the payout, Musk needs to meet 12 market capitalization milestones and 16 revenue- or earnings-based milestones in the coming 10 years. What Musk will actually receive at the end of the performance … Read more

Corporate Governance Beyond the Shareholder and Stakeholder Models

In a new paper, we compare the main models of corporate governance (Schoenmaker, Schramade and Winter, 2022). One is the stakeholder model, which recognizes that companies have responsibilities to society that are broader than just making a profit. A problem with that model, though is that it includes multiple goals, making it difficult to hold management accountable. Moreover, the traditional stakeholder model tends to focus on stakeholders who are directly involved with the company, such as employees and customers. Stakeholders without such a direct relation are given short shrift, even though the company’s conduct clearly affects them – and future … Read more

The Global ESG Stewardship Ecosystem

In a recent working paper, we highlight a significant transnational dimension to a remarkable corporate governance development: the dramatic increase in attempts by institutional investors to influence how the companies they invest in address material environmental, social, and governance (ESG) concerns. This form of investor action (or “stewardship” as it is often called) is increasingly common in many markets across the globe.

Scholars have identified various factors behind investors’ focus on ESG when engaging with their investee companies. These include investors’ desire to manage non-diversifiable (or “systematic”) investment risks such as climate change, and political and regulatory initiatives that prompt … Read more

ISS Reviews Shareholder Resolutions on Labor Issues

More shareholder resolutions were filed in the 2022 proxy season than in the previous year, with approximately 932 environmental, social, and governance proposals submitted at U.S. companies so far compared with 903 in 2021, according to ISS Voting Analytics data. The number of proposals focusing on environmental and social issues is estimated to have risen from 500 in 2021 to approximately 588 in 2022. Though many proposals have since been withdrawn, many have been or will be voted on. According to data from ISS Corporate Solutions, 578 shareholder resolutions have either been voted on or are pending in annual meetings

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How Does Board-Shareholder Engagement Really Work?

Board-shareholder engagement plays an important role in corporate governance. In the last decade, investors have increasingly influenced business decisions, and their activities have extended beyond the formal submission of shareholder resolutions for voting at annual meetings. On their part, directors and managers have kept an open channel of communication. Yet, much of board-shareholder engagement consists of private interactions and, as a result, very few details about it are reported.

We seek to fill this gap in a new paper that sheds light on closed-door board-shareholder engagement with a survey of SEC-registered corporations. The survey was circulated among corporate secretaries, general … Read more

How to Improve Disclosure and Promote Better Corporate Governance in Public Companies

Corporate governance guidelines (“CGGs”) are a relatively recent addition to the corporate governance framework of public companies. In 2003, in response to accounting scandals at Enron Corporation and several other large public companies, the NYSE created rules to improve the corporate governance practices of companies listed on the exchange. As part of that initiative, the NYSE directed listed companies to adopt CGGs and to post their CGGs on their company websites.

Under Section 303A.09 of the NYSE Listed Company Manual, companies are required to disclose in CGGs information on seven specific corporate governance topics:  director qualification standards, director responsibilities, director … Read more

Does Firm Strategy Explain the Growing Gap between CEO and VP Pay?

In recent years, the gap between the compensation of CEOs and their vice presidents (VPs) has been increasing, especially equity compensation (i.e., stock and stock options). Scholars have proposed several explanations. First, the pay differential may relate to the varying risks those executives face in managing their firm. Second, it may be the result of tournament incentives: The senior executive with the highest relative output will typically win the tournament, get promoted to the rank of CEO, and receive the promotion prize. Third, a large pay gap could simply reflect inadequate internal governance of the firm, which will benefit the … Read more

The Second Universal Proxy Card Hits EDGAR

Last month, the first universal proxy card (UPC) hit EDGAR under the new SEC rule. We now have another example, with some interesting tidbits for aficionados and proxy junkies, and also for anyone who seeks an edge in proxy contest voting.

This one concerns Apartment Investment & Management (AIM) in a proxy contest with Land & Buildings (L&B). Compared to the earlier one involving AIM ImmunoTech and a group of individuals (below), it seems more straightforward, although no less contentious. Coincidentally, both involve issuers with a symbol of “AIM”…

AIM filed its preliminary proxy statement last week. L&B filed theirsRead more

The New NACD Governance Principles Promote More Engaged and Committed Boards

The new report by the National Association of Corporate Directors (“NACD”), A Framework for Governing into the Future (the “NACD Report”), is a valuable contribution to corporate governance discourse. Among its primary offerings are a forward-looking perspective on governance and a vision of a more engaged and committed board.

The NACD Report is perhaps the most prominent statement of governance principles since the 2018 release of the Commonsense Principles of Governance Practice 2.0. Furthermore, the NACD Report builds upon, yet differs in style and substance from, the tactical approach of the Commonsense Principles and the last (2016) version of the … Read more

What NCAA Football Teaches Us About the Connection Between Executive Pay and Performance

Our paper utilizes National Collegiate Athletic Association (NCAA) Football Bowl Subdivision (FBS) coaching contracts as a managerial setting to examine whether higher top-managerial pay (our Gridiron CEOs) is associated with better team performance. Coaching contracts are quite compelling as they are available for nearly all public universities. Such contracts are for fixed terms: five years on average, with some as long as ten years. In contrast, CEO contracts are mostly “at-will,” meaning they can be terminated without liability, while the rest are for terms of from two to five years.

Dave Clawson, the head coach at Wake Forest University, posted … Read more

Proxy Tactics Are Changing: Can Advance Notice Bylaws Do What Poison Pills Cannot?

Military strategy and takeover strategy share a few things in common. At some point, generals and M&A lawyers each must recognize that the old technology no longer works as it did in the past and can no longer dominate the battlefield. For example, in the Ukraine war, it has become obvious that battle tanks are vulnerable and do not reign supreme. Correspondingly, in the takeover war, the poison pill is no longer the absolute showstopper it once was and can be outflanked by activist hedge funds seeking to run a proxy contest — even if only for a minority of … Read more

How Board Gender Diversity Affects the Relation between CSR and Firm Value

The economic benefits of corporate social responsibility (CSR) and workplace gender diversity are areas of growing interest for business leaders and regulators. Research shows that socially responsible activities enhance firm value while irresponsible social activities destroy value and that firms with more women directors tend to do better on social and environmental issues. In a new study, we examine the interplay between board gender diversity and CSR performance on firm value, more specifically, whether female representation on the board moderates the effect of CSR performance on firm value.

Several arguments suggest that board gender diversity could reduce the negative effect … Read more

ISS Discusses the Rise in Sustainability Officer Pay

Corporations are increasingly adding the role of Chief Sustainability Officer to their executive teams — at pay levels that place them among the top five Named Executive Officers — reflecting rising recognition of environmental, social and governance risk. In this study, we examine the prevalence of these positions among NEOs and how aggregate pay compares with other executive roles. Separately, we look at how the pay of Chief Risk Officers and Supply Chain Officers compares with other NEOs.

Key Takeaways

  • Fewer than 1% of NEOs were CSOs in fiscal 2021
  • The median total compensation of CSOs is higher than the

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Corporate Social Activism and the New Business of Change

The days when activists focused on fights over social issues while businesses concentrated on the pursuit of commercial profit are gone. Through pronouncements, boycotts, sponsorships, lobbying, investments, and divestment, businesses and their executives are at the forefront of some of the most important and contentious issues of our time, from the Russian invasion of Ukraine to voting rights to  gender equity.  As a result, the traditional understandings of capitalism and activism in American life have changed, a topic that I explore in a recent article and a new book.

Throughout U.S. history, corporations have played a critical role in social … Read more

Gibson Dunn Discusses Key Considerations for Stakeholders on ESG Ratings

In March 2022, the Financial Times reported a “boom” in environmental, social and governance (ESG) ratings, with a “race to carve out market share in the very lucrative business of providing advice to investors on environmental, social and governance issues”. These ratings typically assess the impact of ESG factors on a company or product and (in some cases) a company’s impact on the outside world.

It is estimated that there are some 140 different ESG data providers in the market currently, including ESG branches of well-known agencies such as Refinitiv, Moody’s, S&P and Morgan Stanley Capital International (MSCI). This growth … Read more

How Directors’ Oversight Duties and Liability under Caremark Are Evolving

Corporate law prohibits companies from pursuing profits through criminal misconduct. It uses the fiduciary duties imposed on boards under the Caremark doctrine,[1] and the threat of personal liability of directors for deliberate breach, to help motivate directors to make sure their companies comply with the law. Yet Caremark has largely failed: Most boards have neither adopted effective systems to deter corporate crime nor asserted effective oversight over investigations. Caremark did not require directors to obtain information about material compliance failures or detected misconduct, information essential to effective oversight. To induce directors to deter misconduct – even when it is … Read more