Corporate Governance

Stanford Law and the Corporate Social Voice

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The recent controversy involving public speech at Stanford Law School suggests an appropriate, and pressing, topic to be addressed by the corporate social voice. Consistent with recent practice, corporations can serve their stakeholders by using the Stanford example to promote the civic importance of freedom of speech. In many ways, this would represent a logical, if somewhat unorthodox, extension of what BlackRock Chairman Larry Fink has described as the “inextricable link between purpose and profit”.

In today’s corporate social responsibility environment, many enterprises are reorienting strategies  to serve the interests of a broader set of stakeholders, especially in circumstances where … Read more

Operational Risk and the New Caremark Liability for Boards of Directors

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In a new article, we identify a subtle and unrecognized shift in Caremark[1] cases that changes how the Caremark doctrine actually works. Caremark claims, which accuse corporate directors of breaching the fiduciary duty of loyalty by not making a good faith effort to oversee their company’s operations, have traditionally focused on financial mismanagement and regulatory violations. Yet recent Caremark claims have arisen from sudden and physical accidents that cause loss of human life or major damage to the environment. These accidents have included ice cream contamination, oil pipeline explosions that irreparably damaged the environment, and two airplane accidents that … Read more

Are Corporate Net-Zero Pledges Just More Greenwash?

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Since the international Paris Agreement on climate change was adopted in 2015, there has been a massive upsurge in corporate net zero pledges. In our new article, we explored the climate commitments of large Australian companies. We wanted to understand whether and how these commitments are being propelled by the activities and initiatives of institutional investors, civil society, and other stakeholders. We also wanted to explore whether corporate net zero commitments are robust and likely to lead to real world emissions reductions in line with Paris targets, or whether they are just more greenwash.

The answer is, for the … Read more

ISS Discusses Big EU Changes to Corporate Governance

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The rationale behind a number of recent EU legislation changes focusing on corporate governance has been to prioritise a long-term focus on governance through various transparency measures as well as some concrete requirements for action, and on allowing shareholders and other stakeholders to be well informed. This is evident in the revised Shareholder Rights Directive adopted in 2017, and also in the most recent legislative initiatives discussed in this review. The Corporate Sustainability Reporting Directive and the proposed directive on Corporate Sustainability Due Diligence revise current obligations and introduce new ones under EU law regarding company disclosure and corporate governance … Read more

Poison Pills in the Shadow of the Law

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Poison pills are one of the most powerful deterrents to hostile takeovers, making a takeover so unattractive and expensive that a potential acquirer declines to pursue it. A pill typically works by triggering the issuance of new shares to “old” shareholders when a hostile takeover threat arises, thus diluting the acquirer’s stake and making the acquisition unviable.

In the four decades since its invention, however, the pill has  sparked many debates about its benefits and drawbacks and particularly its impact on the adopting firm’s value. Though the pill’s deterrence of hostile takeovers may seem beneficial at first glance, a hostile … Read more

Shearman & Sterling Discusses Personal Liability in UK of Directors for Climate Strategy

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In a potentially precedent-setting case, 11 directors of global energy company Shell Plc (formerly Royal Dutch Shell Plc) [1] are being sued in their personal capacity over the company’s energy transition strategy. The claim, which has been filed in the English High Court, alleges that the strategy is “fundamentally flawed” and puts the global energy company at risk as the world transitions toward net zero, in breach of the directors’ fiduciary duties to the company.

The claim is brought by non-profit organization ClientEarth, and is supported by a group of institutional investors collectively holding more than 12 million Shell shares … Read more

Wachtell Lipton Discusses Larry Fink’s Annual Letters to Investors

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For more than ten years, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, has published separate annual letters — one to CEOs and another to BlackRock’s shareholders. This year, Fink combined the two letters into one to underscore that in serving its clients, BlackRock has also created value for its shareholders — a demonstration of stakeholder capitalism at work.

As we recently explained, major asset managers such as BlackRock play a critical role in supporting companies as they seek to fulfill their fundamental purpose of pursuing long-term, sustainable value creation. Central to this mission is … Read more

Do Companies Take Remedial Actions After Socially Irresponsible Behavior?

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Companies involved in scandals often suffer damage to their reputations from media, consumer, or investor criticism For instance, notable oil spills, from Exxon’s 1989 Exxon Valdez disaster to BP’s 2010 Deepwater Horizon debacle, resulted in both hundreds of millions of dollars in direct regulatory penalties and short-term stock market losses (Länsilahti 2012), substantial longer-term losses of reputational capital, (McGuire, Holtmaat, and Prakash 2020) and punitive legislation. The reputational consequences of socially irresponsible corporate actions may also escalate in light of a recent increase in investors’ interest in environmental, social, and governance (ESG) issues.

However, little … Read more

Activist Shareholders in Corporate Governance: Lessons from Australia

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Much of the debate about activist shareholders is informed by experience in Northern Hemisphere markets, particularly the United States. In my recently published book, I examine the topic from an Australian perspective.

Australia is ideal for exploring shareholder activism for several reasons. It has a substantial share market, and its pensions and fund management industries are some of the largest in the world and own a considerable proportion of Australian listed equities. Australia’s public companies tend to have an ownership structure that is conducive to activism because of a low incidence of controlling blockholders. Australia also provides shareholders with generous … Read more

How Public Short Campaigns Harm Product Innovation

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The GameStop short squeeze at the beginning of 2021 has brought attention to a class of short sellers who launch high-profile public short campaigns (PSCs) to talk down a target firm’s stock. These activist short sellers, unlike traditional short sellers who often keep their short positions private, publicly denounce their targets and present evidence of specific allegations, such as accounting irregularities and product deficiencies, or they may simply allege that a target’s stock is overvalued.

The increasing prominence of these activist short sellers prompts debate on what roles they play in the financial market. Critics and, in particular, the management … Read more

The Challenges of Succeeding a Long-Tenured CEO

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Financial theory suggests that a firm with strong corporate governance (e.g., an effective board of directors), keeps a CEO exactly as long as is optimal for the firm. When the firm’s board and other corporate governance mechanisms are ineffective, however, a CEO can stay on longer than is optimal, to the detriment of shareholder value (Brochet et al., 2021).

Theoretical studies (e.g., Casamatta and Guembel, 2010) indicate that a CEO’s decisions affect a firm’s future performance, potentially beyond the CEO’s tenure. However, the empirical evidence for this finding is almost nonexistent. If a long CEO tenure is indeed associated with … Read more

ISS Discusses Russell 3000 Boards Becoming More Diverse

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There has been a lot of talk about how to increase racial and ethnic diversity on U.S. corporate boards as well as many initiatives to help nominating committees identify candidates from under-represented groups. To assess the current situation, ISS Corporate Solutions took a look at the diversity trend in the Russell 3000 over five years, with a special focus on Black/African American directors in recognition of Black History Month.

Key Takeaways

  1. For the first time, minority directors occupy more than 20% of board seats among Russell 3000 companies
  2. Black/African Americans saw the highest increase in directorships, a rise of more

… Read more

The Adani Group Scandal Casts Doubt on the Rule of Law in India

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Sound policymaking has helped India modernize and achieve robust economic growth, positioning it to become an increasingly important player on the world stage. But recent developments – and scandals – show that the government must address some major issues if it wants to sustain India’s global rise. — Nouriel Roubini[1]

As India chairs the G20 meeting in Bengaluru, the country emerges as one of the most economically powerful and politically important countries in the world. However, recent events are casting doubts on its commitment to the rule of law and undermining the trust of global investors.

The latest troubling … Read more

Covington Discusses Corporate Political-Disclosure Shareholder Proposals

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The 2023 proxy season is underway for public companies and their investors. Corporate secretaries, lawyers, and executives are actively engaged in the SEC’s shareholder proposal process. Consistent with recent proxy seasons, a significant number of companies are receiving proposals calling for new or enhanced political disclosures. Although these proposals have been around for some time, recent contentious election cycles, debate over hot-button issues, including the Supreme Court’s 2022 decision in Dobbs v. Jackson Women’s Health Organization, and increased investor focus on ESG matters (as well as criticism of such focus) have cast an ever-increasing focus on disclosure of corporate political … Read more

Why the Poison Pill Is Still Relevant After All These Years – Even in Japan  

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More than 40 years after its invention by lawyer Martin Lipton, the poison pill remains the subject of important judicial decisions and academic debate over corporate governance questions, in both the United States, its country of origin, and Japan, its adopted home. The pill’s development has taken divergent paths in the two countries because of their markedly different corporate governance environments. Yet today, shareholder activism and concern for environmental, social, and governance (ESG) issues may be causing those paths to converge, a possibility highlighted by recent judicial decisions on anti-activist pills in the Delaware courts and the Japanese Supreme Court.… Read more

The Determinants and Consequences of Appointing Activist Directors

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In recent years, an increasingly popular strategy among hedge fund activists has been to acquire  seats on the boards of target companies. These board seats are held by what we refer to as “activist directors,” who may be affiliated with the activists or nominated by them. However, obtaining board representation has costs, which include the direct costs of getting board representation and the risk of staking one’s reputation on the company’s future performance. Additionally, board positions come with fiduciary responsibilities to all shareholders, and access to inside information may limit the ability of activists to trade the stock of targets.… Read more

OECD Presents New Research on Corporate Sustainability

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The Organisation for Economic Co-operation and Development (OECD) has published a new report on sustainability policies and practices for corporate governance. It includes a new dataset comparing the main trends and features of corporate sustainability at the global level, as well as the comparative analysis of legal and regulatory frameworks in fourteen jurisdictions (Brazil, India, Japan, Mexico, People’s Republic of China, the United States, among others), with a particular focus on the Latin America region. The report also presents the results of OECD surveys conducted with 275 Latin American companies comprising around half of the region’s market capitalisation and … Read more

Board Committee Charters and ESG Accountability

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Increasing corporate focus on environmental, sustainability, and governance (“ESG”) has prompted considerable criticism from across the ideological spectrum.  Those who disagree with that focus – viewing it as a breach of fiduciary duty and antithetical to profit maximization – have sparked a so-called “anti-ESG” movement.  But even those who believe that ESG aligns with shareholder value and the best interests of the corporation raise concerns, especially about how best to ensure that corporate ESG commitments are  not merely rhetorical, greenwashing, or a passing fad.  To shed light on these concerns and gain perspective about the potential illusory or short-term nature … Read more

The Effects of SEC Comment Letters on Compensation Contract Efficiency

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In a new paper, we examine whether SEC comment letters on deficiencies in compensation disclosure have an impact on executive-compensation “contract efficiency,” meaning the extent to which such contracts align with shareholder interest. The goal of comment letters is not to change firms’ compensation contract design but to make sure that compensation details are disclosed in compliance with securities regulations so that shareholders are informed. We posit, however, that these letters indirectly influence compensation contract design by improving disclosure.

Improved disclosure can lead to changes in compensation contracts because better-informed market participants strengthen market discipline. In fact, one of the … Read more

Is Social Justice a Corporate Scam?

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Last December, Subaru boasted in TV ads of having donated over $250 million to charity in the last few years.  The company specifically claimed that it was the ASPCA’s largest corporate donor. Animal lover that I am, I got a warm feeling from those ads and, when I need a car, I might well turn to Subaru, as my son has done.  Not everyone feels this way.

In his new book, “Woke Inc.: Inside Corporate America’s Social Justice Scam”,[1] wunderkind and high-flying tech entrepreneur Vivek Ramaswamy suggests that Subaru and I are woefully misguided. His writing style is so … Read more