Corporate governance - Vigil

An allegation of sexual assault against a manager at Alibaba Group Holding Ltd. has sparked a firestorm of public criticism, prompting Chief Executive Daniel Zhang to intervene in a situation that has stirred questions about sexual harassment in Chinese workplaces

Activist shareholders, who have used litigation to force businesses to address issues of workplace discrimination and harassment, are eyeing a new target: the video game industry. A federal securities fraud claim from an Activision Blizzard Inc. shareholder claiming the company kept investors in the dark about a California state investigation into its alleged “frat boy” culture is the latest challenge to the video-game giant. While the Aug. 3 suit is focused on compensating investors for a stock price drop, it could be followed by shareholder derivative suits that seek changes to internal policies and practices. Lawyers and industry watchers said such lawsuits could be an effective tool to address persistent questions about workplace culture at Activision and in the broader gaming world, as investors take notice of the financial and public relations fallout from toxic employment practices. Other companies including Alphabet Inc., Pinterest Inc., and Victoria’s Secret parent L Brands Inc., have faced lawsuits filed by shareholders over workplace culture and claims of harassment or bias. “These shareholder suits are the ones that are really starting to change things in corporate America,” said San Diego attorney Frank Bottini. “They can have incredibly important, concrete results and really be a catalyst for change at a company or in an industry.”

Five ESG developments to help boards respond to changing investor expectations, proxy voting and disclosure trends and regulatory developments.
#1. Unprecedented support for environmental and social shareholder proposals shows that investors are willing to vote against management to speed progress.
#2. Companies are responding to investor interest by enhancing proxy disclosures around ESG governance and highlighting key ESG ambitions and commitments.
#3. Regulatory developments, including the SEC’s expected rulemaking on climate risk disclosure, are shaping company reporting and investor expectations on ESG. 
#4.Efforts to advance corporate progress on environmental, social and governance (ESG) matters continued to gather momentum and generate the biggest headlines in the 2021 proxy season. #5. #5. These efforts were bolstered by constructive company-investor engagements, record levels of support for environmental and social shareholder proposals, governmental actions on climate and social-related matters, and regulatory developments on ESG reporting.

[...] To help boards keep pace with evolving investor and regulatory expectations and ESG disclosures in proxies, this report examines five ESG developments from the 2021 season and offers key takeaways and questions for boards to consider.

Did the CEOs who signed the Business Roundtable’s celebrated Statement on the Purpose of a Corporation mean what they said? As the statement’s second anniversary (August 19) approaches, new research concludes that they did not. “Our findings support the view that the BRT Statement did not represent a meaningful commitment,” write the researchers, Lucian A. Bebchuk and Roberto Tallarita of the Harvard Law School’s Program on Corporate Governance. Instead, they say, the statement was “mostly for show.” “Mostly for show” is far from the way the statement was presented by the BRT or received by the public for the most part. The statement “moves away from shareholder primacy,” the BRT announced, making a “commitment to all stakeholders;” it “supersedes previous statements and outlines a modern standard for corporate responsibility.” The media broadly agreed. Reuters called it “a bombshell.” It was “stunning,” said USA Today. The Wall Street Journal called it “a major philosophical shift,” and the New York Times said it broke “with decades of long-held corporate orthodoxy.” Fortune made the statement its cover story.

Our 2021 S&P 500 Board Diversity Snapshot looks at what progress S&P 500 boards have made in the past year increasing the diversity of their composition. Our study looks at the racial, ethnic, gender, age and geographic diversity of all S&P 500 directors and the newly appointed class of directors, as well as the diversity of board leaders. The snapshot also highlights proxy disclosures related to diversity, including LGBTQ+ directors, veterans and differently abled board members, and provides advice to boards for increasing their refreshment and building a robust — and diverse — board talent pipeline.

An expert panel is recommending that Canada quickly create an open banking system to allow customers to share their data more easily and safely between financial institutions, urging government to move faster as digital technologies reshape finance. A long-anticipated report from a federal advisory committee on open banking says Ottawa should aim to design, test and launch an open banking system in 18 months – or as soon as January, 2023 – built jointly by officials from government and the financial industry. Open banking is a concept that enables consumers to securely share their banking records with financial-services providers from banks to startups. It aims to give users greater control of their data and stoke competition and innovation by making it easier to switch providers, open accounts and use financial-advice tools that compile data from different accounts. Millions of Canadians already use some form of open banking by linking apps to their bank accounts. This is usually done through an imperfect patchwork of technologies that rely heavily on screen scraping – a technique that aggregates information from a user’s bank accounts by getting permission to use their online login credentials.

The value of the world’s stock of negative-yielding debt has ballooned to more than $16.5tn, the highest in six months, as a relentless global bond rally drags borrowing costs below zero. Government bond yields have tumbled in recent weeks as some traders have piled in, a move that has blindsided many investors who expected an economic rebound from the pandemic along with rising inflation to lift long-term borrowing costs. While some of the biggest moves have come in the US Treasury market as traders unwind their bearish bets, bonds in Japan and the eurozone — the two main bastions of negative-yielding debt — have also benefited. [...] The global pile of negative-yielding debt has grown from just above $12tn in mid-May and is closing in on December’s record level of more than $18tn, according to an index compiled by Barclays. Negative yields mean investors are willing to pay for the opportunity to lend their funds. Those who hold this debt to maturity are guaranteed to make a loss.

After years of lackluster performance, shares of private-equity firms have hit their stride. In the decade or more since Blackstone Group Inc., KKR, Apollo Global Management Inc. and Carlyle Group Inc. went public, their assets under management have exploded as they branched out beyond leveraged buyouts into areas such as real estate, lending and insurance. But their stocks languished, leading executives such as Blackstone chief Stephen Schwarzman to publicly gripe that the market was undervaluing them. That has changed in a big way since the U.S. economy began to emerge from the coronavirus-driven downturn. [...] Including dividends, shares of Blackstone have tripled since April 1, 2020, roughly when the recovery began, pushing its market capitalization to around $140 billion. That is bigger than those of financial giants Goldman Sachs Group Inc. and BlackRock Inc. [...] Private-equity firms—big owners of assets purchased with significant amounts of debt—are ideally positioned to be outsize beneficiaries of current market dynamics. Low interest rates have made borrowing cheap and led yield-hungry investors to funnel hundreds of billions of dollars into the firms’ coffers.

What are the limits to conscious capitalism? Companies increasingly feel compelled to take political positions, but what are the limits once you engage? When I first saw the headlines of Ben & Jerry’s weighing in on the occupied West Bank—that they would stop selling their ice cream in the occupied territories because it “wasn’t consistent with their values”—I knew there would be lessons in conscious capitalism. I just didn’t expect to react so critically. I learned long ago as an undergraduate that trying to unwind Israeli-Palestinian politics was a Rubik’s Cube inside of a Gordian Knot with gloves on. [...] Corporate social activism is not new, though with notable exceptions over the past 250 years, it has largely been a third rail for most companies. The combination of today’s political divisiveness and ESG movements have increasingly forced an escalating number of companies out of their cones of silence. As I have written before, “corporate neutrality is dead.” Cultural leadership—especially visionary leadership ahead of its time—is neither easy nor without its severe critics. Most people, CEOs understandably included, are intimidated enough by the slings and arrows of the present to reflexively avoid helping to shepherd in the future, especially when it is outside of the corporate purpose.

Investor support for environmental and social (or E&S) ballot proposals has reached new heights in 2021, capping years of incremental gains. At the same time, key votes on pay practices and board governance point to a changing dynamic between shareholders and corporate management. An important lever for changing corporate behavior is the corporate proxy ballot, where shareholders propose resolutions aimed at improving disclosures and changing company behaviors. These votes aren’t binding, but they carry significant weight when backed by a majority of shareholders. Just a few years ago, it was relatively rare for shareholders to vote against company management on corporate ballot issues, especially among the largest mutual fund companies who cast votes on behalf of investors in their funds. Now, as companies find themselves losing a record number of votes, environmental, social, and governance advocates have a stronger hand when it comes to direct engagement with company managements over policies they are seeking to change. Here are some of the highlights from 2021 proxy season.

Any business, public or private, with a board of directors may benefit from having directors and officers insurance. Lawsuits targeting directors and officers are becoming more common. Without D&O insurance, the company’s assets and the personal assets of the directors and officers are at risk. In addition, directors and officers insurance protects the personal assets of spouses of a director or officer. These assets could also be at risk in a lawsuit. To attract and retain qualified executives and board members, a company needs to have a D&O insurance policy in place. An estimated 70% or more of all directors and officers have asked about the amount of their organizations’ directors and officers coverage, according to Travelers. Having a solid directors and officers liability insurance policy is one way to attract potential board members to a company.

Australian government research shows cyber-crime is costing the Australian economy approximately $3.5 billion a year. In fact, the government is considering whether to impose personal liability on corporate directors for the cyber-attacks on their organisations. While cyber-risk has been a key issue for many years, research shows that corporate boards do not appropriately understand it—creating a much larger risk for the Australian economy. Information governance and cyber security must become part of a company’s internal compliance program. Otherwise, boards will face much greater scrutiny, potential regulatory investigation and greater difficulty in taking out insurance—both cyber and D&O.

Nasdaq Inc.’s push for greater diversity in corporate boards faces a key hurdle as regulators are poised to rule on the exchange operator’s proposal to include gender and race in its listing rules. Staffers at the Securities and Exchange Commission are expected to release a decision Friday on whether to approve or reject Nasdaq’s proposed changes. Under the proposal, Nasdaq-listed companies would need to meet certain minimum targets for the gender and ethnic diversity of their boards or explain in writing why they aren’t doing so. For most U.S. companies, the target would be to have at least one woman director, as well as a director who self-identifies as a racial minority or as lesbian, gay, bisexual, transgender or queer. Companies would also be required to disclose diversity statistics about their boards. Nasdaq found in a review conducted before submitting its plan late last year that more than three-quarters of its listed companies wouldn’t have met its proposed requirements.

An important CEO attribute that shapes firm strategies such as mergers and acquisitions is uncovered. When the going gets tough, the tough goes shopping for M&A targets. This year looks set to be a record year for mergers and acquisitions, with US$2.4 trillion of deals signed by the end of May, the highest year-to-date total since 1980. The frenzied dealmaking continues a rebound that began in the latter half of 2020, a stunning recovery from the doldrums of the preceding six months when the world was in the throes of Covid-19. What might explain such an acquisitive streak? By some analyses, companies holding up well or thriving in the pandemic are snapping up assets to grow or transform, enabled by high liquidity, low costs of borrowing and a booming stock market. It may also have something to do with the people running these companies. Research has shown that chief executives shape firm strategies such as M&A in different ways depending on personality as well as their interactions with senior managers or the board of directors.

When gary gensler took over as the head of America’s Securities and Exchange Commission (sec) in April, he might have seemed pretty crypto-friendly. Only months before he had taught a course on cryptocurrencies at the Massachusetts Institute of Technology; he has said that the innovation associated with bitcoin will be a “catalyst for change” in finance. Yet, speaking at the Aspen Security Forum on August 3rd, he probably dashed the hopes of crypto buffs. He signalled that he would seek tougher policing of the crypto-sphere, which he described as “rife with fraud, scams and abuse”. Mr Gensler offered the most fleshed-out vision yet for how the sec might regulate cryptocurrencies. These tokens, he said, were not a means of exchange but “highly speculative stores of value”. That in itself was not a problem—investors should be left to gamble should they wish to. But punters often could not access “rigorous, balanced and complete information”, meaning a lot of them could be hurt. [...] But Mr Gensler thinks that, among the 1,600 tokens with at least $1m in market capitalisation, a fair few probably count as securities—and do not follow the rules. These, he said, may include stablecoins, virtual monies pegged to conventional money, some of which may represent a stake in a crypto platform. Mr Gensler asked Congress for more staff to police them.

In the early 15th century many of the Portuguese voyages of discovery around Africa and into Asia were financed by Prince Henry of Portugal, whom historians dubbed “Henry the Navigator”. When Christopher Columbus sought finance for his planned westward voyage to the “Indies”, he first turned to the king of Portugal before achieving success with Ferdinand and Isabella of Spain. Monarchs financed explorations because they believed such trips would boost their power and their treasuries. [...] The resemblance to absolute monarchs does not stop with exploration. Like past rulers, modern tycoons build their own monuments in the form of corporate headquarters, not just skyscrapers in London and New York but the vast, low-rise campuses in Silicon Valley. Whereas the ancient dynasts travelled in horse-driven coaches, modern ceos separate themselves from the public in chauffeur-driven limos and private jets. Like monarchs of old, executives have to deal with rival sources of power. They face the equivalent of feudal barons, in the form of boards of directors who may try to unseat them. And they need to contend with ambitious princelings, who in the modern era are younger executives who would like their job. The good news is that whereas an unseated monarch was likely to be executed, a dethroned boss can enjoy a generous pay-off.

Reaction to the Canadian Securities Administrators’ plan for a new single self-regulatory organization (SRO) has been positive, though industry participants say they’ll be closely watching as details of the new SRO emerge. Investor advocate Ken Kivenko, president of Kenmar Associates, cited “strongly improved” governance relative to the existing SROs — the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA). Governance measures include strengthening the new SRO board’s independence, creating an investor advisory panel and enhancing CSA oversight. While the changes make way for investors to be better heard, leadership of the new SRO will be critical to create a culture where investors are taken seriously, Kivenko said.