Does Proxy Advice Allow Funds to Cast Informed Votes?

Our examination of the votes cast by 155 mutual funds on over 6 million corporate election items during 2004-2017 led us to a surprising conclusion: We found that Institutional Shareholder Services’ (ISS) proxy advice did not lead funds to vote as if they were informed – more often than not it pushed them in the opposite direction.

The purpose of proxy advice is to allow funds to cast their votes as if they were informed, without having to actually become informed. Given the centrality of proxy advice in today’s corporate elections, the viability of shareholder democracy hinges on the advice’s … Read more

Wachtell Lipton Discusses the Purpose of the Corporation

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 … Read more

The Role of the External Auditor in Managing Environmental, Social, and Governance Reputation Risk

Companies are under increasing pressure to manage their reputations on environmental, social, and governance (ESG) issues. Some companies have lost revenue, gone bankrupt, been boycotted by customers, or otherwise suffered a decline in value because of a negative reputation on ESG. We refer to the risk of this decline in value as ESG risk. Managing ESG risk, adequately informing investors of ESG risk, and increasing financial support for sustainable activities are primary concerns of public companies and their regulators. The U.S. Securities and Exchange Commission (SEC) and the European Commission recently issued public statements and taken actions toward achieving these … Read more

Skadden Offers a Scorecard on Diversity in the Corporate Boardroom

The social and political disruptions of the past year have heightened the awareness of diversity challenges, including at public and private companies in the U.S.  In particular, the representation of women and other diverse individuals in the boardroom is of continuing relevance.  Last month, Deloitte and the Alliance for Board Diversity[1] published a comprehensive report analyzing the current makeup of boards of directors at Fortune 500 and Fortune 100 companies.[2]  That report concluded that the composition of boards at the country’s largest companies has not changed materially in the last several years.  Against this backdrop, a number of … Read more

Hiding in Plain Sight: The Global Implications of Manager Disclosure

Delegated asset management, and mutual funds in particular, have become the investment vehicle of choice for retail investors in capital markets worldwide. At the end of 2020, open-end mutual funds had a total of $63 trillion in assets under management globally, and almost half of all U.S. households owned shares of a mutual fund (2021 Investment Company Fact Book).

While there are clear benefits to professionally managed and diversified investment funds, the potential for agency conflicts have long been a concern. Historically, financial regulators have relied on disclosure requirements for funds as the solution to these potential conflicts. … Read more

Entrenchment or Efficiency? CEO-to-Employee Pay Ratio and the Cost of Debt

Critics have argued that the rule requiring companies to disclose the ratio of CEO compensation to employee pay is too expensive and time consuming, with the U.S. Chamber of Commerce estimating the cost to U.S. companies at more than $700 million per year. The Securities and Exchange Commission, however, has put the annual cost at about $73 million[1], and in 2015 its commissioners voted 3-2 to adopt the rule. Since then, income inequality has reached unprecedented levels, and the CEO-to-employee pay ratio has skyrocketed. According to the Economic Policy Institute, the ratio was on average 21-to-1 in 1965 but grew … Read more

The Impact of Mandatory Gender Pay Gap Disclosure in the UK

Firms are coming under increasing pressure to close and disclose their gender pay gaps. The pressure stems from several sources, including, (i) socially conscious investors; (ii) interest groups advocating the incorporation of ESG factors into corporate decision-making and stakeholder capitalism more broadly; (iii) influential capital market intermediaries such as index providers; and (iv) regulators. For example, in recent years the U.S. Securities and Exchange Commission (SEC) has implemented new rules requiring firms to make disclosures about human capital and, more generally, has increased its focus on diversity, equity, and inclusion (DEI) initiatives within public companies.[1]

Advocates argue that there … Read more

Wachtell Lipton Discusses Key Corporate Governance Issues for Mid-Year 2021

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

ISS Discusses How ESG Investing Stands Up to the Critics

There is a quote that is commonly misattributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you, then you win.”

At the regular get-togethers in the responsible investment industry, war stories are frequently exchanged about the amused responses to environmental, social and governance (ESG)-related pitches; the confusion; the doors shut in faces. There are plenty of examples of the first two stages of the process.

It should be heartening therefore for the responsible investment industry to discover that it has matured to the extent that some of its more common shared understandings are … Read more

ESG and the Pricing of IPOs: Does Sustainability Matter?

In recent years, investors and others in the financial community have devoted increasing attention to the role of sustainability in financial markets and the economy at large. Sustainability is now seen as an alternative form of risk management, a way to create and preserve non-monetary value for future generations, and an area in which markets and clients expect financial institutions and corporations to take significant action. With research showing that investors consider sustainability and ESG ratings in their investment decisions, accounting and investor-relations professionals are including ESG reporting and related strategies in their financial communications, including in analyses of initial … Read more

Arnold & Porter Discusses Delaware Case on SPACs and Breaches of Fiduciary Duties

The complaint filed in Franchi v. Multiplan Corp. et al. in the Chancery Court of Delaware on April 9, 2021 [1], has received a fair amount of attention because it claims breaches of fiduciary duties of a SPAC’s Board of Directors and officers with respect to a de-SPAC transaction, requiring entire fairness judicial review, and because it essentially alleges that, as a general matter, conflicts of interest and flawed processes in approving mergers with targets is endemic to the nature of SPACs. Given the prevalence of SPACs and the recent SEC statement regarding the risks of conflicts of interest in … Read more

Creating Controversy in Proxy Voting Advice

Proxy advisory firms have emerged as major players in corporate governance by helping to address the public goods aspects of information production in corporate governance. These firms provide both a) recommendations on how to cast proxy votes and b) research reports that contain the full rationale for their recommendations, including detailed information on the operating firm’s governance. While proxy advisers’ research reports are only available to their subscribing shareholders, their recommendations are often made public in the media. Through both these public recommendations and private research reports, proxy advisers, such as ISS, have a substantial impact on voting outcomes.… Read more

Does Firm-Specific Knowledge Matter for New Audit Committee Chairs and Financial Reporting Quality?

Overcoming the learning curve for a new situation or role at work can be difficult, especially when the situation or role requires specialized knowledge. Newly appointed audit committee chairs face a particularly steep learning curve, given that audit committees of publicly traded corporations are responsible for monitoring management’s financial reporting decisions. Doing the job effectively requires understanding the company’s culture, risks, internal controls, activities, and policies. It also requires coordinating the activities of the audit committee and obtaining information about important company decisions and practices from members of the senior management team, internal auditors, and external auditors. Corporate governance experts … Read more

The Corporate Objective and Contemporary Shareholders: Is It Time for “Strategic” Corporate Governance?

The long-standing debate about corporate purpose has stirred multiple thought-provoking articles across various disciplines. Should companies embrace shareholder value maximization or deal with the fuzziness of the goals of multiple constituencies? Instead of contributing to either side of the shareholders versus stakeholders debate, in our forthcoming article in the Journal of Management Studies, we  critically assess the challenges that contemporary shareholder practices pose for corporate governance and highlight the need for strategic corporate governance, or governance policies and practices that make a priority of the sustainable competitive advantage of the firm.

We focus on three critical assumptions about maximizing … Read more

Aggressive Boards and CEO Turnover

A common dilemma for people who seek advice is that good advice sometimes comes at the cost of revealing negative information about the persons seeking it. In the world of corporate decision making, a CEO who seeks the counsel of the board of directors due to a problem with, for example, a project, is also implicitly conveying that the problem arose under her stewardship. The CEO thus faces the following predicament: She can accurately communicate the problem to the board and therefore get the board’s expert advice on how to proceed, or the CEO can mislead the board by, say, … Read more

How Corporate Governance Codetermination Works in Practice

Codetermination is a system of shared corporate governance between workers and shareholders. While such a system has long been a staple of the European business world, it has been generally ignored by U.S. corporate governance scholars. When it has made an appearance, it has largely served as a foil for shareholder primacy and an example of corporate deviance.

Over the last 15 years, however, an expanding body of empirical research on codetermination has shown surprisingly positive results about the system’s efficiency, resilience, and benefits to stakeholders. Rather than experiencing the failures predicted by the law-and-economics view of shareholder primacy, codetermination … Read more

Cleary Gottlieb Discusses EC’s Corporate Sustainability Reporting Directive

On April 21, 2021, the European Commission published an ambitious new package of “sustainable finance” regulation proposals. By far the most awaited element of this release concerned the Commission’s proposal for the review of the Non-Financial Reporting Directive (“NFRD”) – soon to become the Corporate Sustainability Reporting Directive (“CSRD”).

Under the NFRD, large “public-interest” entities (that is: large listed companies, large credit and insurance institutions, and other entities designated as such by Member States) are currently required to report certain non-financial information as part of their annual management report, largely on a comply-or-explain basis.

The CSRD … Read more

Common Ownership and the Decline of the American Worker

American workers are more productive than ever, but they take home the same pay they did 40 years ago.  While firms have enjoyed blockbuster profits—and the U.S. gross domestic product has tripled—most American households have not shared in this increasing prosperity. As wages have stagnated, income inequality has skyrocketed. Causes like de-unionization, globalization, immigration, labor market concentration, and technology have been blamed for these trends. But an additional culprit has escaped detection: common ownership—a few powerful institutional investors controlling large stakes in most U.S. corporations. In a new article, we explain how the shift to common ownership has been … Read more

The History and Revival of the Corporate Purpose Clause

The corporate purpose debate is experiencing a renaissance. The contours of the modern debate are relatively well developed and typically focus on whether corporations should pursue shareholder value maximization or broader social aims. A related subject that has received much less scholarly attention, however, is the formal legal mechanism by which a corporation expresses its purpose—the purpose clause of the corporate charter.

This clause, or set of provisions, is the formal legal mechanism by which a corporation expresses its purpose in its highest constitutive document that is filed with the state. As corporations often take advantage of broad enabling statutes … Read more

Corporate Purpose and Acquisitions

Acquisitions are at the core of corporate strategy, enabling companies to expand and reposition themselves in the market. In 2019 alone, they accounted for nearly $3.7 trillion of economic activity. Yet acquirers famously struggle to realize value from these transactions. In a new study, we find that this challenge may be explained, at least in part, by the difficulty in maintaining a clear and compelling corporate purpose in the aftermath of the deal.

Purpose can loosely be understood as the “why” behind an organization’s existence. A recent survey of nearly 500 executives by Harvard Business Review Analytics Services revealed that … Read more