Cleary Gottlieb Discusses DOL’s Declining to Enforce Rules on ERISA Plan Investments and Proxy Voting

On Wednesday, March 10, after engaging in conversations with stakeholders, the U.S. Department of Labor’s Employee Benefits Security Administration issued an enforcement policy statement in which it declined to enforce two DOL rules put in place by the Trump administration in 2020.

The first of these rules placed limitations on the ability of plans subject to ERISA to invest in environmental, social and governance (“ESG”) funds. In particular, it provided that a fiduciary’s duty of loyalty and prudence under ERISA would only be satisfied if investments were selected solely on the basis of pecuniary factors (defined as factors that have … Read more

ESG Incidents and Shareholder Value

Corporations increasingly integrate environmental, social, and governance (ESG) issues into their business practices and signal this by committing to sustainability initiatives, such as the UN Global Compact or the 2019 Business Roundtable Statement on the Purpose of a Corporation. This development has spurred a debate on whether companies can become more profitable by creating societal value (e.g., Edmans 2020), but there is relatively little discussion of companies that have been involved repeatedly in ESG-related incidents. For example, before its Deepwater Horizon oil spill in 2010, BP had a long history of major and minor environmental and safety incidents. Between 2007 … Read more

The Information Mechanism in Corporate Citizenship: Evidence from COVID-19

When governments fail to respond quickly and effectively to a crisis, can companies help address the issue? In a recent article, we explore an important mechanism through which firms can do so as corporate citizens: information transmission within organizations. Specifically, we study whether U.S. firms’ business networks with China and Italy, including trade, executive, and branch-office networks, become information networks that can be used to mitigate the negative impacts of COVID-19.

COVID-19 and measures intended to contain its spread resulted in significant societal change and required governments to take unprecedented measures. Meanwhile, for companies, the pandemic made employee safety a … Read more

The Management Case for Inclusionary Corporate Purpose

The most vital and deeply practical argument for more broadly understanding corporate purpose comes from the management literature and the data on how to motivate people in organizations. Put simply, people in organizations do not work as hard or come up with as many innovations for companies unless they see themselves as part of a broader purpose beyond wealth maximization for shareholders. Employee engagement, first described in management literature, and now addressed even in mainstream business publications such as Forbes, is “the emotional commitment [an] employee has to the organization and its goals. When employees care … Read more

Pay for Destruction: The Executive Compensation Arrangements That Encourage Value-Decreasing Stock Buybacks

We are living through a stock buyback revolution. Over the last decade, the amount that U.S. public firms have spent on buying back stock from their shareholders rose threefold to a record level of roughly $1 trillion in each of 2018 and 2019. By the end of 2019, the scale of buyback activity had increased to the point that total shareholder payouts (stock buybacks and dividends together) took up the full amount of corporate earnings. After a pandemic-related pause in 2020, the buyback wave is roaring to life again.

The economic and financial importance of stock buybacks has sparked a … Read more

The Agency Costs of Sustainable Capitalism

At the World Economic Forum in Davos in January 2020, Larry Fink – the chief executive of the world’s largest asset manager, BlackRock – wore a climate change-themed scarf. It featured the “warming stripes” visual, where the color of the stripes represented the annual average temperatures of planet earth from 1850 to 2019. The scarf served to emphasize Fink’s – and BlackRock’s – professed commitment to putting sustainability at the center of the firm’s investment approach. Yet, in a new paper, I argue that, when it comes to climate change, there are significant gaps between the interests … Read more

How Department of Labor Rules on ESG Leave Undirected Votes Adrift

Just before year end, the Department of Labor finalized its new rules on ESG investing and voting for retirement and pension funds.  The rules sharply restrict the ability of the fiduciaries of retirement and pension funds to make investments based on ESG factors or to vote shares held by such funds in favor of ESG issues.  The rules are unlikely to prove popular with the Biden administration, but regardless of how long they survive, the rules currently apply to trillions of dollars of investments and raise interesting questions about who will ultimately control the placement of a huge amount of … Read more

Key Governance Take-Aways from the Association of Corporate Counsel Chief Legal Officer Survey

The newly released Chief Legal Officers Survey (“Survey”) from the Association of Corporate Counsel (“ACC”)[1] is an important governance resource on s board’s responsibility to exercise oversight of a company’s legal affairs in general and the operation of its legal department in particular. The Survey confirms the overall value of a CLO hierarchically positioned to both influence corporate strategy and support the role of corporate governance.

The Survey offers a number of helpful perspectives on the interaction between legal and business matters. In that regard, the Survey data help inform the board on organizational structure and the role and … Read more

Lifting Labor’s Voice: A Principled Path Toward Greater Worker Voice and Power Within Corporate Governance

Many public policymakers and economists believe that American workers’ sharply declining share of corporate profits over the past few decades has been a major cause of increasing income inequality in the United States.  To some, the explanation for this profound change in the division of the corporate pie is simple.  Since the 1980s, the power of stockholders to demand corporate policies favoring their interests has drastically increased, while the leverage of working people in the corporate power structure has drastically decreased.  As a result, stockholders have grabbed much more of the pie, and left workers with crumbs.

Leading public officials … Read more

The Duty of Care for Board Members Should Include Competence in ESG

It is becoming clearer to investors and corporate managers that material environmental, social, and corporate governance (ESG) issues need to be managed as part of an organization’s business strategy.   Climate change, racism, economic inequality, water scarcity, cybersecurity threats – these are just a few of the material ESG issues posing risk and opportunity.

Unfortunately, our research finds that board members may not be up to the task.  We analyzed the credentials of each of the 1,188 Fortune 100 board directors based on Bloomberg and company biographies in 2018 and found that 29 percent had credentials (such as board memberships and … Read more

How Stricter Disclosure Rules for Private Meetings Affect Stock Price Informativeness and Volatility

Private meetings between management and investors occur worldwide and are generally held at corporate headquarters with invited investors and sell-side analysts (a.k.a., site visits).  Ng and Troianovski (WSJ, 2015) report that U.S. investors pay $1.4 billion a year to securities firms that can arrange face time with executives.  These meetings differ from other management-investor interactions such as investor conferences and analyst or investor days in that they are generally not publicized in advance and their content may never become public unless hosting firms are required to publish the meeting details by regulation.  Since 2009, the Shenzhen Stock Exchange (SZSE) in … Read more

The Myth of Dual Class Shares: Lessons from Asia

Companies with dual class shares have, as the term suggests, two (or more) classes of common stock. One class gives its holders voting power proportionate to their equity shareholdings. The other offers a group of shareholders, normally corporate insiders, weighted voting rights, which allow the insiders to retain control with less than majority ownership of the company.

The recent wave of high-profile technology giants, from Google to Facebook, that have gone public with dual class shares in the U.S. has led to the revival of the use of such share structures. Dual class shares have also gained traction among policymakers … Read more

Gibson Dunn Discusses EU Developments in Corporate Human Rights Due Diligence

The concept of mandatory corporate human rights due diligence is gaining momentum, both within Europe and on the international stage

In this two-part alert, we examine key global legislative developments and proposals on this important topic. In Part One, we look at very recent steps taken by the institutions of the EU towards implementation of legislation at a pan-European level. In Part Two, we will consider developments at a national level within the EU and also look beyond Europe as we discuss the position in APAC, the US and Canada.

Mandatory Corporate Human Rights Due Diligence: EU Developments

What exactly … Read more

The Voting Premium of Stock

Holders of large blocks of a company’s shares are pervasive in developed economies. La Porta et al. (1999) find that only 17 percent of large firms in countries with strong shareholder protection qualify as widely-held, and Holderness (2009) shows that 96 percent of large U.S. firms have blockholders who own at least 5 percent of a company’s stock. Blockholders  influence corporate policies in many ways, with voting being arguably the most important, as it empowers shareholders to elect directors, approve major corporate transactions, and decide on governance issues. Since voting rights and dividend rights are bundled together in shares, blockholders’ … Read more

The Lost Lessons of Shareholder Derivative Suits

Many corporate law scholars watched in amazement as merger litigation exploded over the past 15 years.  In 2005, only 37 percent of mergers involving U.S. public companies and with a transaction size of at least $100 million were challenged in court.  Today, approximately 85 percent of such mergers are challenged in court.  And these suits look different from the merger suits of the past. Instead of money, for example, shareholders today typically receive additional disclosures about the merger that have little value.  Instead of being filed in Delaware and other state courts, more cases are brought in federal court.  And … Read more

Why Would Passive Funds Invest in Corporate Governance?

The Big Three passive fund managers (BlackRock, State Street, and Vanguard) have roughly quadrupled their collective ownership stake in S&P 500 companies over the past two decades (Hirst and Bebchuk, 2019). This enormous increase in ownership by passively managed funds raises questions regarding the corporate governance of firms because it is unclear to what extent passively managed funds have the incentives to monitor their portfolio firms. Reduced monitoring and oversight in aggregate can open the door to executive entrenchment, inefficient corporate investments, and inattention to long-term risks.

Passive funds primarily compete on both price and performance with other … Read more

Lessons from India’s Struggles with Corporate Purpose

The escalating debate over corporate purpose is not confined to developed economies in the West. Rapidly developing economies in nations like India are similarly grappling with how to define and develop a legal framework around corporate purpose. Corporate social responsibility (CSR) and a re-examination of corporate purpose have been at the centerpiece of discussions about corporate governance reforms in India. In a new book chapter, I discuss the lessons that can be learned from India’s experience with corporate purpose.

For over a decade, India has taken a multi-pronged approach toward redefining corporate purpose. Voluntary guidelines issued by the Indian Ministry … Read more

The Financialization of Corporate Governance

Members of the academic community, the business world, and law firms have long been debating shareholder primacy, stakeholder governance, and corporate purpose. In a forthcoming essay, I outline these arguments but suggest that reform of corporate governance should be focused on executive compensation and compelling fiduciaries subject to ERISA and other legal regimes to protect retirement savings. In my opinion, the financialization of corporate governance fomented by activist investors that led to compensating executives with equity is the primary cause of the dissatisfaction with corporate performance by non-shareholder constituencies.

My essay traces the development of the financialization of corporate governance … Read more

Paul Hastings Discusses Integrating Human Rights and ESG into International Regulatory Compliance

As we wrote toward the end of 2020, the risks associated with business and human rights, and ESG more generally, have led a growing number of companies to create human rights/ESG management systems or to integrate human rights/ESG into existing compliance programs.  Relying on the UN Guiding Principles on Business and Human Rights (“UNGPs”), we listed six core elements of human rights/ESG compliance programs – which are generally part of effective international regulatory compliance programs.  We promised to provide detailed posts regarding each individual element where we will discuss the key components of that element and how its presence in … Read more

Addressing ESG in 2021: Who Is in Charge?

Over the course of 2020, market forces drove corporations and institutional investors to make expansive commitments to their purpose and social responsibility. This fueled companies in many regions to publish lengthy reports under the ESG moniker (Environmental, Social and Governance). The volume of individual company disclosures will almost certainly increase dramatically in 2021. Will the quality of disclosures improve? How should these disclosures be integrated into the presentation of fundamental business performance?

In the U.S., the Securities and Exchange Commission has been noticeably absent from the intensifying public debates on the E and the S of ESG. It already addresses … Read more