A Global Baseline? How to Navigate Interoperability Across Sustainability Reporting Rules

Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS-Corporate memorandum by Jacob McKeeman and Kieran Woodsworth.

Sustainability reporting rules developed by the International Sustainability Standards Board (ISSB) for the IFRS Sustainability Disclosure Standards are set to be adopted across jurisdictions in the next few years, establishing a global baseline for corporate disclosures. This represents an opportunity for companies to harmonize their sustainability data in a complex regulatory environment. Adopting these new standards as early as possible and understanding their interoperability with other regulations are crucial considerations for sustainability leaders.

Adoption pathways will vary across jurisdictions, from full immediate to partial or phased adoption. Climate disclosures have been designated the highest priority by the ISSB and national regulators globally. The ISSB will take over responsibility this year for monitoring implementation of the recommendations of the Task Force on Climate-Related Disclosures (TCFD), which have defined climate reporting globally since the release of their guidelines in 2017. Gaining an early understanding of the further evolution of climate reporting under the TCFD-based IFRS S2 is critical for companies.

Companies already reporting in line with the TCFD recommendations will have to enhance their climate disclosures to account for ISSB’s requirement, with more detailed information about material climate-related risks, transition plans and resiliency, as well as industry-based metrics and mandatory Scope 3 GHG emissions reporting.

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Transnational Corporate Law Litigation

William J. Moon is Professor of Law at the University of Maryland School of Law. This post is based on his recent article forthcoming in the Duke Law Journal. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.

By now, corporate law scholars and practitioners in the United States widely appreciate the importance of Delaware’s legal compliance jurisprudence. While directors and officers are vested with almost unlimited discretion to make business decisions, that discretion does not extend to corporate lawbreaking. As a matter of black letter law, directors and officers are betraying shareholders when they knowingly enabling the corporation to violate “positive law.”

In my recent paper, titled “Transnational Corporate Law Litigation” (forthcoming in the Duke Law Journal), I explain how Delaware’s legal compliance jurisprudence can be activated to deter corporate lawbreaking in foreign nations. It presents a doctrinal blueprint explaining why violations of foreign law can trigger powerful fiduciary duty claims in the United States against directors and officers of American corporations.

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Doubly-Binding Director Say-on-Pay

Michael R. Levin is the Founder and Editor of The Activist Investor. This post is based on his TAI memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and Pay Without Performance: The Unfulfilled Promise of Executive Compensation both by Lucian A. Bebchuk and Jesse M. Fried and The Growth of Executive Pay by Lucian A. Bebchuk and Yaniv Grinstein.

The TSLA board comp case was vastly interesting and even some fun. I learned a lot about Delaware Chancery Court, figured out how to navigate the befuddling File-and-Serve system, and visited Wilmington to argue our objection to the proposed settlement. I had a terrific time talking with Ron Orol at The Deal about the experience.

You’ll recall the proposed settlement provided for TSLA shareholders to vote on director pay. We objected because it arguably did not require directors to abide by the vote result.

As we wait for Chancellor McCormick to issue her opinion on the settlement, which we hope will include an order for the parties to amend its terms to incorporate the substance of our objection, we ponder what else might happen. Does director say-on-pay make sense only at TSLA, or could it help shareholders at other companies?

We decided to find out. As far as we know, no other company has tried this before.

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Larry Fink’s 2024 Annual Chairman’s Letter to Investors

Larry Fink is Founder, Chairman and CEO of BlackRock Inc. This post is based on Mr. Fink’s annual letter to investors.

Time to rethink retirement

When my mom passed away in 2012, my dad started to decline quickly, and my brother and I had to go through my parents’ bills and finances.

Both my mom and dad worked great jobs for 50 years, but they were never in the top tax bracket. My mom taught English at the local state college (Cal Northridge), and my dad owned a shoe store.

I don’t know exactly how much they made every year, but in today’s dollars, it was probably not more than $150,000 as a couple. So, my brother and I were surprised when we saw the size of our parents’ retirement savings. It was an order of magnitude bigger than you’d expect for a couple making their income. And when we finished going over their estate, we learned why: My parents’ investments.

My dad had always been an enthusiastic investor. He encouraged me to buy my first stock (the DuPont chemical company) as a teenager. My dad invested because he knew that whatever money he put in the bond or stock markets would likely grow faster than in the bank. And he was right.

I went back and did the math. If my parents had $1,000 to invest in 1960, and they put that money in the S&P 500, then by the time they’d reached retirement age in 1990, the $1,000 would be worth nearly $20,000.[1] That’s more than double what they would have earned if they’d just put the money in a bank account. My dad passed away a few months after my mom, in his late 80s. But both my parents could have lived beyond 100 and comfortably afforded it.

Why am I writing about my parents? Because going over their finances showed me something about my own career in finance. I had been working at BlackRock for almost 25 years by the time I lost my mom and dad, but the experience reminded me — in a new and very personal way — why my business partners and I founded BlackRock in the first place.

Obviously, we were ambitious entrepreneurs, and we wanted to build a big, successful company. But we also wanted to help people retire like my parents did. That’s why we started an asset manager — a company that helps people invest in the capital markets — because we believed participating in those markets was going to be crucial for people who wanted to retire comfortably and financially secure.

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Disagreement with ISS concerning activist investor Nelson Peltz

Jeffrey Sonnenfeld is Senior Associate Dean for Leadership Studies and Lester Crown Professor in the Practice of Management, and Steven Tian is Research Director of the Yale Chief Executive Leadership Institute at the Yale School of Management. This post was prepared for the Forum by Professor Sonnenfeld and Mr. Tian. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) and Dancing with Activists (discussed on the Forum here) both by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

Fred Allen once described the media business with the quip, “imitation is the sincerest form of….television”. But ISS, The New York Times, and other cheerleaders of Nelson Peltz/Trian Partners’ activist campaign challenging Disney CEO Bob Iger all seem to miss that Iger towers over his media peers in genuine financial performance, in stark contrast to his underperforming activist challengers. It is a veritable tale of two cities in measuring up the financial track record of Bob Iger against Nelson Peltz.

Of course, the question of both Bob Iger and Nelson Peltz’s financial track records have become a surprisingly contentious area of dispute as the proxy contest nears its grand finale. Both sides have stepped into overdrive, with dozens of glossy 100+ page slide decks and white papers released from all vantage points.

As Disney shareholders begin to cast their ballots on the eve of the Annual Meeting two weeks from now, on April 3rd, it can be hard to separate fact from fiction in comparing the genuine financial track records of Nelson Peltz and Bob Iger. But the factual evidence speaks loud and clear. While Nelson Peltz has a long history of value destruction, Bob Iger’s nearly two decades as Disney CEO has been marked by genuine value creation.

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Governance Recommendations for the United States

Kerrie Waring is CEO, Severine Neervoort is Global Policy Director, and Carol Nolan Drake is Senior Policy Manager at International Corporate Governance Network (ICGN). This post is based on their ICGN memorandum.

The International Corporate Governance Network (“ICGN”) is pleased to publish its Governance Recommendations for the United States (U.S.) at the ICGN Conference, hosted by the International Finance Corporation, in Washington, D.C., from 7-8 March 2024.

Established in 1995, ICGN advances the highest standards of corporate governance and investor stewardship, contributing to successful companies and long-term value creation. Headquartered in London, ICGN’s membership includes investors responsible for assets under management of $77 trillion, based in over 40 countries – 30% of which are based in North America.

The purpose of the ICGN Governance Recommendations is to highlight areas of interests to ICGN Members and to serve as an agenda for dialogue with regulators, standard-setters, and business organisations. The aim is to share international experience on emerging standards and practices related to corporate governance and investor stewardship, and the promotion of well-functioning capital markets.

In developing the recommendations, we have engaged with ICGN Members, particularly institutional investors with globally diversified portfolios. The ICGN Global Governance Principles[1] and ICGN Global Stewardship Principles[2] are referred to as an international benchmark given that they are widely used by ICGN Members in their company assessments and voting decisions, and by regulators when developing corporate governance rules and standards.

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From Moelis to Miller: How to Settle with Activists

Jim Woolery is Founding Partner at Woolery & Co. This post is based on his Woolery & Co. memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists (discussed on the Forum here) and The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) both by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

  • The case before Vice Chancellor Travis Laster is Theodore B. Miller, Jr., et al. v. P. Robert
    Bartolo, et al. C.A. No. 2024-0176-JTL [Excerpt Attached]
  • On February 23rd, Vice Chancellor Laster issued his decision in Moelis and warned that an activist settlement agreement which binds the decisions of directors irrespective of future events, specifically with respect to director recommendations and the size of the board/committees, may violate Section 141(a) of the Delaware Code
  • On March 8th, Vice Chancellor Laster further held in the Miller case that Elliott’s substantial use of derivatives in its Crown Castle position, combined with the fact that the Crown settlement agreement was struck prior to the window for shareholder proposals, presents a colorable claim under Unocal

What do Moelis and Miller mean for boards and activists going forward?

A ‘REASONABLE’ APPROACH TO ACTIVIST SETTLEMENT AGREEMENTS

Under Unocal, the response to an activist threat needs to be reasonable and proportional to the threat that the activist presents to the corporation. If unreasonable and disproportionate, the board’s response may be subject to enhanced scrutiny in Delaware.

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COVID-19 Risk Factors and Boilerplate Disclosure

Adam C. Pritchard is Frances & George Skestos Professor of Law at the University of Michigan Law School. This post is based on a working paper by Stephen J. Choi, Mitu Gulati, Xuan Liu, and Professor Pritchard.

* This illustration depicts the widespread adoption of a boilerplate sentence concerning the outbreak of COVID-19 in Wuhan by various firms in their 10-Ks and 10-Qs. The sentence originates with Starbucks’ January 2020 10-Q.

The SEC mandates that public companies assess new information that changes the risks that they face and disclose these if there has been a “material” change. But does this theory work in practice? Or are companies merely copying and repeating the same generic disclosures?

The term “boilerplate,” though widely used, is rarely defined with precision. In the context of risk factor disclosures, we take it to mean a high degree of similarity to what other companies are saying. A related concept here, also commonly used in an imprecise way, is “stickiness.” We use the term to mean that the disclosure in question is not updated, despite changed circumstances.

The COVID-19 pandemic provides a lens through which to examine boilerplate and stickiness in risk disclosures. The pandemic disrupted business along with the rest of society, escalating uncertainty across various industries due to its severity and pervasiveness. Companies worldwide found themselves grappling with a uniform set of challenges, including stagnation in production due to quarantine measures, reductions in consumption, disrupted supply chains, and the looming threat of economic downturn. This unique context raises several questions: How did public companies adjust their disclosure strategies in response to the pandemic? More specifically, in terms of boilerplate and stickiness, which firms moved first to disclose COVID-19 risks? What was the pattern of subsequent disclosures? Did firms copy their COVID-19 risk factor disclosures from others, or did they craft their own tailored disclosures? And finally, as the COVID-19 risk dissipated, who updated their disclosures to reflect diminishing COVID-19 risks?

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Ira M. Millstein tribute

Stephen M. Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance and a Co-organizer of the Capital+Constitution project.

“Giant” is the word many would use to describe Ira Millstein as a shaper of modern corporate governance. But the word he preferred for himself was “cricket”, as in the character in the Pinocchio story who sits on a wooden shoulder urging the puppet to behave. In a 2009 email Ira explained “I felt that that [cricket] was always my role with the directors, nagging, but fondly, for them to become people with consciences.”

Ira died at aged 97 on March 13, having devoted his eventful life to guiding corporate directors, CEOs, regulators, lawmakers, and institutional investors toward paths of integrity and accountability. His impact was vast. The New York Times obituary the next day focused mainly on the vital missions he led on behalf of his beloved New York City. But he was an architect of the global capital market as well.

In May 1988, Ira opened a conference at Columbia University inaugurating a new project on institutional investors and corporate governance—the first such venture. He had already advised boards at big companies from his perch at Weil Gotshal & Manges on how to replace cronyism with professional oversight. But Ira had arrived at a powerful insight: the clout of institutional investors was essential to propel market-wide reform. He needed to awaken not just corporate boards, but corporate owners.

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The Rise of “Sell-Side Activism”: Why It’s Happening and How to Respond

Maggie Dean is Vice President of Strategic Situations and Investor Relations, and Hunter Stenback is Executive Vice President at Edelman Smithfield. This post is based on their Edelman memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists (discussed on the Forum here) and The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) both by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch.

Most boards and management teams are acutely aware of the threat posed by shareholder activists who often use public letters and media attention to exert pressure on directors and executives. They may be more surprised to hear about an emerging trend: an increase in so-called “sell-side activism” in which a company’s sell-side analysts advocate directly for change.

Historically, the sell-side has parsed earnings reports and executive commentary to update their financial models and apply a valuation multiple to arrive at a “buy,” “sell,” or “hold” recommendation. While their research might identify an underperforming stock and they might change their rating accordingly, sell-siders were typically content to leave advocacy to the shareholders themselves. Sell-siders have also played an important role in facilitating investors’ access to management through the use of roadshows, conferences, and other avenues, and have traditionally sought to maintain positive relationships with management.

Recently though, a growing number of sell-side reports have channeled traditional activist letters, with a clear call to action for management teams and boards. These letters go beyond a traditional “sell” rating, instead advocating for specific, sometimes wholesale, changes at the company. The target companies span a range of market capitalizations, industries, and geographies, and include names like Walgreens, Amazon, and Verisk Analytics. The analysts, meanwhile, represent a mix of bulge bracket and independent firms.

Some analysts have stated that their purpose is to serve as a mouthpiece for investors who have voiced concerns about the company, and to make their own clients aware of common criticisms they are hearing. Others have expressed an interest in advocating for change on behalf of their clients to help the company and stock succeed. No matter the reason, management teams and directors should be paying attention.

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