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02/19/20 [UPDATED] ESG

NEW: Wachtell suggests that Environmental, Social, and Governance considerations will increasingly impact M&A activity, discussing their relevance to due diligence and communications regarding transactions, as well as differential concerns between acquirer and target concerns, and the relationship between ESG performance and cost of capital in The Coming Impact of ESG on M&A.

Stewardship and Collective Action: The Australian Experience discusses collective action of investors in promoting corporate stewardship utilizing Australian stewardship codes, and suggests considerations for development of policy guiding investor participation in corporate governance in other jurisdictions.

Eric Scheiner and Jennifer Quinn Broda of Kennedys discuss risks that companies may assume in efforts to satisfy or failure to meet corporate social responsibility objectives having potential implications for D&O insurers and policyholders in Potential D&O Risks Arising from Corporate Social Responsibility.

Wachtell discusses BlackRock’s recent announcements regarding its commitment to sustainability as a key focus of its investment strategy in Sustainability in the Spotlight.

The CFA Institute discusses the results of surveys addressing how finance professionals and investors believe investments can support environmental, social, and governance objectives without undermining their monetary value in Sustainable Value for Money: How to reconnect finance with the needs of society.

McKinsey discusses socioeconomic risks attributable to climate change, and considerations for companies and governments Integrating climate risk into decision-making in Climate risk and response: Physical hazards and socioeconomic impacts.

Cooley discusses a McKinsey study of the economic effects of climate change as a possible impetus supporting increased focus of financial investors on issues of sustainability in McKinsey looks at socioeconomic impact of climate risk.

BlackRock discusses the ways in which it is accelerating integration of sustainability into technology, risk management, and investment in Sustainability as New Standard for Investing.

Cooley discusses BlackRock’s recent announcements regarding its commitment to sustainability as a key focus of its investment strategy in BlackRock puts sustainability at the center of investment strategy, expects more transparency in sustainability disclosure.

BlackRock discusses the economic consequences of climate change and its commitment to making sustainability the center of its investment strategy in A Fundamental Reshaping of Finance.

The Role of ESG in the Financial Performance of Banks finds a positive correlation between the return on assets and Environmental, Social, & Governance performance for European banks.

ISS discusses the link between Environmental, Social, & Governance performance and financial performance, presenting evidence that firms with favorable ESG performance ratings are more profitable, less volatile, good allocators of capital, and less cyclical, in ESG Matters.

Morningstar discusses “encouraging” findings from proxy votes of large asset managers in 2019 demonstrating support for shareholder-proposed sustainability resolutions, while noting that the largest fund providers were significantly less supportive of such resolutions, in How Can Fund Providers Protect the Future for Worker-Investors?

State Street discusses the results of a global survey of Environmental, Social, & Governance investing, noting factors affecting adoption and barriers to adoption of ESG factors by institutional investors Into the Mainstream: ESG at the Tipping Point.

02/17/20 [UPDATED] Executive Compensation

NEW:  Willis Towers Watson reports that the use of retention requirements precluding corporate executives from selling equity awarded under incentive plans immediately upon vesting has nearly doubled over the past decade in CEO Stock Incentives Increasingly Tied to Stock Ownership and Retention.

Are CEOs Encouraged to Take Too Much Risk? investigates the relationship between CEO compensation is related to health and safety violations, non-compliance with labor laws, and other workforce-related violations, finding evidence suggesting that CEO risk-taking incentives are positively related to the frequency and the severity of workplace violations.

02/17/20 Debt Covenants

Managerial Optimism and Debt Covenants examines the allocation of control between entrepreneurs and investors through debt covenants that transfer control rights to lenders when a company’s financial performance fails to achieve established thresholds as a means of balancing against managerial over-optimism.

02/17/20 [UPDATED] Disclosures

NEW:  Reuters reports that a study of corporate disclosures on management of social and environmental risk required under the European Union’s 2018 Non-Financial Reporting Directive revealed “big gaps between many companies’ words and action,” in Sustainability disclosures by European companies generally poor: study.

ESG Performance and Disclosure: A Cross-Country Analysis examines the relationship between ESG factors, disclosure, and financial performance across countries with varying policies imposing ESG disclosure requirements, finding correlation between quantity of disclosures and quality of data, and no relationship between ESG and risk-adjusted returns, but a small effect on volatility.

The U.S. Chamber of Commerce discusses proposed guidelines for Environmental, Social & Governance disclosures in ESG Reporting Best Practices.

Ernst & Young discusses corporate disclosures relating to human capital and culture in How and Why Human Capital Disclosures are Evolving.

Davis Polk discusses best practice guidelines for Environmental, Social & Governance disclosures proposed by the U.S. Chamber of Commerce. Chamber of Commerce Releases Best Practices for Voluntary Environmental, Social & Governance (ESG) Disclosure.

02/12/20 Universal Demand

How Shareholder Rights Affect Firms’ Financing Decisions examines the relationship between firm capital structure and Universal Demand laws requiring stockholders to make demand on boards before filing derivative lawsuits, finding a shift from equity to debt financing after passage of Universal Demand laws, attributed to lower stock market liquidity and more severe agency conflicts between shareholders and managers.

 

02/12/20 [UPDATED] Shareholder Primacy, Employee Board Representation

NEW:  Long-Term Stock Exchange’s Michelle Greene summarizes concerns that have led to current sentiment questioning the “shareholder primacy” doctrine and proposing corporate consideration of stakeholder interests, and proposed strategies for stakeholder engagement and involvement, particularly of employees, in corporate governance in Let’s Get Concrete About Stakeholder Capitalism.

Glass Lewis discusses employee participation in corporate strategy and decision-making through ownership of company stock and representation on the board of directors, with examples of those practices in Germany, in Worker Participation: Employee Ownership and Representation.

Worker Representation on U.S. Corporate Boards advocates inclusion of employee representatives on corporate boards of directors, proposes reforms, and discusses considerations for implementation of employee board representation.

Labor in the Boardroom examines possible consequences of including employee representatives on corporate boards by comparing production, wage, and financial metrics at companies before and after abolition of a German law requiring that one-third of stock corporations’ board seats be elected by employees, where stockholders solely controlled newly incorporated stock corporations.

02/11/20 CEO Visibility

CEO Networks and Shareholder Litigation investigates the relationship between CEO network power and influence and securities class action lawsuits, finding suits against firms with better connected CEOs are more often brought by institutional plaintiffs and less likely to be frivolous, and more connected CEOs more often leave firms (willingly or unwillingly), and board representation by independent directors increases following the suit.

02/02/20 Fiduciary Self-Dealing

Self-Dealing in a Comparative Light discusses the “strict” fiduciary self-dealing rule precluding self-dealing by directors, prevalent in the UK, and the “flexible” rule that permits self-dealing if fair to the corporation and stockholders, adopted in the US, suggesting that application of various cleansing devices results in substantive similarity in operation.

01/30/20 [UPDATED] Index Funds

NEW: Reversing the Fortunes of Active Funds observes that passive funds recently surpassed active funds in total assets under management, noting that active funds participate in and bear the costs of monitoring portfolio companies but passive funds to not, the trend will tend to reduce monitoring, and proposes the use of tax mechanisms to help defray active funds’ monitoring costs.

BlackRock founder Barbara Novick spoke at the Harvard Law School Program on Corporate Governance on index fund managers’ corporate stewardship, responding to academic arguments that funds exert too much or too little influence over portfolio companies. Video of Barbara Novick Keynote Presentation.

Tulane’s professor Ann Lipton discusses current academic disputes regarding index funds’ incentives to participate in the governance of their portfolio companies, and consequences of concentrated stock ownership by mutual funds in Index Funds in Corporate Governance: Once More Unto the Breach.

Asset Management, Index Funds, and Theories of Corporate Control challenges recent academic articles that argue index funds exert too much, or, conversely, too little, but in either case, socially sub-optimal influence over portfolio companies, as ungrounded in the realities of the asset management business.

Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy examines how index fund managers monitor, vote, and engage with portfolio companies, and expected impact of concentrated index fund ownership on corporate governance and performance, and the economy.