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Wirecard has proven once again that stellar growth and stunning revenues do not always mean that a company is well-founded. Although the board of directors has responsibilities towards the shareholders and the latter have certain information rights, organizational failure and mismanagement remain often unnoticed until it's too late. Additional corporate governance laying down the fundamentals on management and organization is therefore vital for long-term success, to ensure that the checks and balances among the stakeholders involved (shareholders, founders, and employees) are appropriate. Good corporate governance is not only relevant for traditional equity financing, but also for alternative ways of funding, in particular for projects aiming at creating new decentralized ecosystems by using distributed ledger technology. Contributors in DLT-projects very often provide funding without getting any rights similar to shareholders in a stock corporation. The relationship is mainly based on trust and is very fragile. Organizational failures or mismanagement by the project founders often result in delays of the planned project, or even a partial or total loss of the funding provided, and leave the contributors without any rights of control or legal remedies. It is necessary that the governance models are looked at more closely and discussed more widely. In the following, We will be presenting a decentralized community-enabling governance model #decenGov for DLT-ecosystem projects by using a Swiss association acting as the core of the ecosystem.
Gov. Gen. Julie Payette has created a toxic environment at Rideau Hall by verbally harassing employees to the point where some have been reduced to tears or have left the office altogether, sources tell CBC News. Four members of Payette's communications team have departed during the pandemic period alone. A fifth person is leaving this week and another two have taken leaves of absence. It's just the latest wave of staff to quietly transfer out of the small office in response to mistreatment during Payette's mandate, multiple sources said. "This has gone from being one of the most collegial and enjoyable work environments for many of the staff to being a house of horrors," said one government source. "It's bullying and harassment at its worst." CBC News spoke to a dozen sources with direct knowledge of the office during Payette's mandate. They spoke on the condition of anonymity because they feared they could lose their jobs or their careers could suffer. Many of the sources are still in the public service, while others are former Rideau Hall employees. The sources say Payette has yelled at, belittled and publicly humiliated employees.
[...] Covid-19 has taught us many lessons, and perhaps the most important one is that successfully managing through a crisis of this magnitude and complexity is a unique opportunity to build trust, credibility and corporate reputation across all stakeholders. The following are some final communications considerations as we navigate the pandemic:
(1) Continue to monitor Covid-19, sector and peer group developments to stay abreast of relevant information you’ll need to communicate effectively
(2) Carefully craft messages that are transparent, credible and accessible to investors and that consider the fluid nature and many unknowns of the pandemic
(3) For companies that suspended guidance, fill the void with information and metrics that help investors model the business in the current environment
(4) Remember that consistent and transparent communication in good times and bad is the way to go. Investors and analysts know nobody has all the answers – don’t let that stand in the way of forthcoming communication
(5) Don’t wait for things to get back to normal to meet with investors: leverage the opportunity to meet with existing and new investors efficiently through virtual non-deal roadshows, conferences or good old-fashioned phone calls
(6) Know how your company is being valued and stay ahead of vulnerabilities to activism
(7) Broadly communicate your ESG story. If you haven’t focused on ESG, now is the time to get started. The humanity companies demonstrate during this crisis will be recognized and remembered.
The EU has borrowed from capital markets in the past, but never on such a scale, nor with the ability to spend the proceeds so freely. The European Union took a giant step toward selling hundreds of billions of euros in common bonds for the first time. The proposed issuance is part of a €1.8 trillion ($2.1 trillion) spending package to combat the recession caused by the coronavirus, hammered out by the region’s leaders in the early hours of Tuesday. Why does the EU plan to issue bonds? Leaders from the EU’s 27 nations authorized borrowing up to €750 billion from capital markets—an unprecedented step for the bloc—to finance a recovery fund that will aid countries suffering because of the pandemic. Funds will be funneled to nations that have endured the biggest hit from coronavirus, with the debt-laden southern European countries likely to be among the biggest beneficiaries. After pushback from the Netherlands and other thrifty members, leaders agreed to distribute €390 billion of the fund as grants, and €360 billion as loans. Investors say the sale of common bonds would represent a move toward the kind of economic integration required to ensure the eurozone’s long-term survival.
The Seventh Circuit Court of Appeals has just issued a decision of special interest to defendants in securities class actions under Section 10(b) of the Exchange Act. [...] This new ruling has multiple implications for the defense of securities class actions. First, district courts cannot fail to consider defendants’ evidence at class certification stage, merely because the same evidence may also be relevant to merits issues. Second, where applicable, defendants should consider offering expert analysis at the class certification stage severing the “transaction causation” link between the alleged misrepresentation and the market price. Third, defendants must be careful about the probative value of the evidence they offer: as discussed below, the Court expressed skepticism that “no price movement” is the same thing as “no price impact.” We discuss below why we believe plaintiffs—not defendants—should bear the burden of distinguishing between these two concepts.
Updates in the past two months to voluntary ESG disclosure frameworks raise questions for companies about these overlapping and arguably competing standards. On July 8, 2020, the Global Reporting Initiative (GRI) published an initial draft of a standard for ESG disclosures for the oil & gas industry. [...] The GRI sector program, currently in its pilot phase, “focus[es] reporting on the sustainability issues that matter most” to an industry. It is intended to work in conjunction with the underlying GRI standards, which are applicable across industries, by assisting more than 40 “high-impact sectors” to identify and address ESG impacts. For each sector standard, a working group of stakeholders chosen by GRI’s sponsor will assist in:
(A) Describing a given sector’s most significant impacts;
(B) assessing which topics are likely to be “material” (as defined by GRI) based on the significant impacts identified; and
(C) recommending disclosures for reporting purposes.
Originating during the 1930s, Directors and Officers Liability Insurance (D&O) reduces the risk of liability that may be caused by the misconduct of senior managers while performing their duties. The core purposes of D&O include reducing the pressure of civil compensation liability on a company’s business activities, providing compensation protection for investors, and helping to ensure a ready supply of talent for director and senior staff positions. Over the years, D&O has become an important part of the corporate governance of global listed companies, particularly within more developed markets. According to media reports1, nearly 100% of listed companies in the U.S., and nearly 90% of listed companies in Europe, purchase D&O. In contrast, the first D&O policy appeared in China in 2002 and, so far, less than 10% of Chinese A-share listed companies purchase it. This lukewarm response to D&O insurance has recently become a hot topic in the domestic insurance market.
As the SEC considers exempting many firms from disclosing their equity holdings, an academic study delves into a unique hedge fund dataset. In the years leading up to the 2008 financial crisis, a large asset manager kept a database on current, past, and prospective hedge fund managers — grading them on, among other characteristics, their transparency (or lack thereof). Over a decade later, the hedge fund industry may be about to get a whole lot less transparent — and researchers argue that this data should raise alarms about secretive managers. [...] The conventional wisdom is that this lack of transparency is a trade-off for better performance. As one hedge fund consultant observed, “the managers that are less transparent tend to be managers that have done very well and performed very well, and they can kind of dictate not only the terms of their fund but the level of disclosure they’re willing to give.” This secrecy, as the study’s authors note, “may allow [hedge funds] to pursue proprietary investment strategies with less concern that others might mimic and free ride on their strategies.”
Organizations are human undertakings, operating in an
increasingly uncertain, complex, interconnected, and volatile
world. They often have multiple stakeholders with diverse,
changeable, and sometimes competing interests. Stakeholders entrust organizational oversight to a governing body,
which in turn delegates resources and authority to management to take appropriate actions, including managing risk.
For these reasons and more, organizations need effective
structures and processes to enable the achievement of
objectives, while supporting strong governance and risk
management. [...] The Three Lines Model helps organizations identify structures and processes that best assist the achievement
of objectives and facilitate strong governance and risk
management.
On July 16, 2020, the Court of Justice of the European Union (CJEU) struck down the EU-U.S. Privacy Shield as a valid mechanism for transferring personal data from the European Economic Area (EEA) to the United States (Schrems II). The European Commission Standard Contractual Clauses (SCCs) for data transfers remain valid but are subject to increased due diligence on the part of data exporters to ensure that the privacy laws of the importing country are adequate. Below, we discuss the background to Schrems II, the judgment itself and key takeaways. [...] The Safe Harbor, which thousands of U.S. companies had been relying on, allowed such companies to self-certify adherence to various privacy principles and then transfer data from the EEA to the U.S. in compliance with the Data Protection Directive. The CJEU decision was based, in part, on the access that U.S. authorities had to the personal data of EEA-based individuals, the scale of which had been unearthed by the former National Security Agency contractor Edward Snowden. The EU and the U.S. subsequently negotiated and implemented the Privacy Shield as the data transfer mechanism to replace the Safe Harbor framework. While the Privacy Shield sought to address the issues the CJEU had raised with the Safe Harbor, the basic mechanism remained the same; companies could self-certify adherence to various privacy principles and then transfer data from the EEA to the U.S. Over 5,000 U.S. companies took advantage of the Privacy Shield.
[...] The Kakabadse team’s international studies at Henley Business School have identified that for over 5,000 boards, 85% of board directors did not know, could not tell you, and did not share a clear view of the competitive advantage of the firm on whose board they sat. This worrying misalignment did not occur because of data omission or obscurity, but because of the complexity involved in operating across contrasting markets. In these circumstances free thinking is required, as opposed to rationalist, predictive or linear argument. Realising competitive advantage can no longer be limited to the product or service offering. It is more to do with devoted teams engaging in challenging markets while expending equal amounts of effort on defending corporate reputation. How can such a quality of interaction continue when future board members do not consistently attend board meetings but vote from a distance? This point was firmly driven home by our UK survey results, which highlighted that the management had downgraded their board colleagues’ performance and contribution by more than 40%. The study further surfaced the finding that no management respected their board “because they are out of touch.” The board’s disengagement from the management and workforce is a clear recipe for catastrophe.
In 1985, the Delaware Supreme Court, in Unocal Corp. v. Mesa Petroleum Co.,[1] held that the “omnipresent specter” of a conflict of interest sufficiently clouds judicial review of anti-takeover measures to require application of enhanced scrutiny. Notably, the court essentially took judicial notice of the inherent nature of the conflict that “of necessity” confronts the directors in these cases. Thus, the court delayed application of the deferential business judgment rule until directors could satisfy the court that a threat to the corporation existed and that adopted anti-takeover devices were reasonably related to the perceived threat. Today, political divisiveness has risen to the point that many believe they must resist opposing political ideologies (and advance their own) at all times and in all places – including in the workplace. [...] My paper argues that not only is shareholder wealth maximization the optimal goal of corporate governance, but it is fairly characterized as the current rule of corporate governance in many relevant jurisdictions, including, importantly, Delaware. Thus, adherence to fiduciary duties in these jurisdictions must be analyzed in terms of shareholder wealth maximization except when pursuit of another goal is expressly authorized.
A move to bring Canadian short-selling rules in line with United States securities law could reverberate through Canada’s junior capital markets as regulators look to limit a controversial trading strategy used to finance high-risk companies, notably in the cannabis industry. Earlier this month, an Ontario government task force recommended banning a sophisticated short-selling technique used by hedge funds active in Canada’s small-cap public markets. Short selling is a bet that a company’s share price will drop. In anticipation of a financing deal, a hedge fund will short a company’s shares, then buy into the deal to cover the short position, acquiring a block of newly issued shares at a discount to the market price. [...] In a wide-ranging report published two weeks ago, the task force suggested prohibiting investors from participating in a financing deal if they have previously shorted the same securities. In practice, this would likely involve a restricted period ahead of a deal, similar to what exists in U.S securities law, Ms. Tripp said. Canadian rules already prohibit insider trading. However, it can be difficult for regulators to prove that a market participant intended to break the law, Ms. Tripp said. “The task force is looking at this in a simple way: How do we simply stop this behaviour?” The change could have a significant impact on deal-making in speculative sectors such as junior mining, cannabis and psychedelics, industry insiders say. It would make it more expensive for hedge funds to trade around deals and could force investment bankers to rethink how they source capital for high-risk companies.
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The EY Center for Board Matters collects and analyzes governance data for more than 3,000 US public companies through its proprietary corporate governance database.
Since the 1980s, the fruits from rising economic output from workers at American corporations have concentrated earnings at the top. Average worker wages have stagnated, while those of senior managers soared. This follows a precipitous decline in the top marginal tax rate along with deterioration in the power of collective bargaining owing to declining unionization rates.
Meeting certain performance benchmarks, often pegged to a firm’s stock price, determines that senior pay. A survey of misconduct and other catastrophes of the American workplace shows the abiding presence of extraordinary pay packages. Because of badly constructed pay incentives, thousands of bankers engaged in widespread fraud, inflating a housing bubble whose rupture cost millions their jobs, savings and homes. [...] Similarly, corners cut at Boeing led to the crash of two airliners, while the CEO’s pay turned, in part, on cost cutting.
Stagnating worker wages for decades to bloat the pay in the C-suite has led to massive income and wealth inequality. The induced coma of the pandemic has ripped the scar off this economic wound, requiring massive aid to newly displaced workers who have no savings to fund more than a few weeks of basic expenses, such as groceries, rent, or medicine.
Washington must to repair this dynamic. Leaders should reform executive compensation, force board directors to exercise responsible diligence over management, overhaul tax laws, and restore union organizing and bargaining rights.
Shortsighted solutions to recurring problems—antipatterns—often sabotage a company’s transformation. Most major organizations today have embarked on transformation programs in response to changes in customer, competitive, and regulatory landscapes. Whether the transformations are labeled agile, digital, or DevOps, their fundamental premise is to build value by establishing short, iterative, and continuous feedback loops between product and customers that dramatically improve both the product and its time to market. [...] In this article, we synthesize ten of the most frequent technology antipatterns that we have observed in transformations across more than 50 major organizations. How many do you recognize in your organization?
1. Force-fitting technology solutions: Are you choosing technology out of context? [...]
2. Adopting cutting-edge tech that’s not fully mature: Are you adopting new technology that seems promising but doesn’t have a proven track record? [...]
3. Building out your own cloud infrastructure without sufficient capabilities: Have you let security and regulation block your adoption of public cloud? [...]
4. Initiating big-system-replacement programs: Are you focusing on system replacement rather than improving existing systems in a way that is faster and more cost-effective? [...]
5. Focusing on architecture and tooling improvements without enhancing process and delivery discipline: Did you re-architect and implement new tooling but forget to adapt the delivery processes ? [...]
Climate change has started to significantly affect a large number of firms in the economy. A challenge for investors, regulators, and policy makers lies in the difficulty to properly quantify firm-level exposure to climate change, with respect to the associated risks but also in terms of the opportunities that come with it. Complications stem from different sources.
First, the effects of climate change on firms are highly uncertain.
Second, the effects of climate change are likely to be heterogeneous across firms, even among firms within the same industry.
Third, there exists no common understanding about how to reliably quantify firm-level climate change exposure. [...]
In our paper, we use transcripts of earnings conference calls to construct time-varying measures of firm-level exposure to climate change. [...] Our method adapts the machine learning keyword discovery algorithm proposed by King et al. (2017) to produce four (related) sets of climate change bigrams: the first set captures climate change aspects broadly defined, while the remaining three sets cover specific climate topics, that is, opportunity, physical (e.g., sea level rises, natural disasters), and regulatory shocks (e.g., carbon taxes, cap and trade markets).
Fintech firms, once perceived as disruptors of the traditional banking industry, are now increasingly seen as attractive partners for established financial institutions. Partnership arrangements between banks and new financial technology startups have therefore mushroomed over the last several years. Such partnership agreements, which come in different forms and contexts, are usually advantageous for both sides: Banks may ordinarily suffer from legacy issues and cumbersome internal processes, and therefore benefit from fintech firms’ superior technology to develop new business ideas. At the same time, a bank’s broad customer base may allow a startup to benefit at an earlier stage from economies of scale and facilitate market entry, while fintechs may also enjoy reputational spill-overs from partnering with an established institution. Most of these arrangements share the goals of outsourcing key banking functions and facilitating market entry for new market players while overcoming relatively tough regulatory hurdles.
When the retrospectives of 2020 are written, one of the year’s most striking features will be the way the COVID-19 pandemic unfolded — as Mike Campbell, a character in Hemingway’s The Sun Also Rises, described his descent into bankruptcy — “gradually and then suddenly.” Early on, there was a belief that the end of the pandemic would follow a parallel, if opposite, trajectory. “If we choose to fight hard,” said Tomas Pueyo in his March 2020 essay “The Hammer and the Dance,” “the fight will be sudden, then gradual.” Nearly four months and well over 500,000 deaths later, Pueyo’s hopes seem faintly quixotic. As with many world-historical events, the pandemic tempts us to imagine our lives afterward — a vaccine, a parade, a cozy dinner with friends — but our current reality makes that future far less certain. In some places in the United States, for example, there has been flagrant disregard for “the hammer” and outrage at “the dance”: people protesting on behalf of haircuts and against masks, flouting social-distancing rules, and at least one US governor going so far as to refuse outright to reinstate restrictions. As a result, we are seeing a record number of cases, to the extent that the European Union has instituted a travel ban for Americans. COVID-19’s impact isn’t just physical, it’s societal. Just as our bodies have no intrinsic immunity to the virus, neither do our health, technology or governmental systems. While the medical community focuses on research, prevention and treatment, we have to build capacity across multiple domains simultaneously.
The Covid-19 pandemic has forced corporate America to take a long, hard look at itself. Corporate responses to this crisis involve reassessing entire business structures—from employee rights and benefits to supply chain management to environmental, social, and governance matters. This assessment necessitates an evaluation of the purpose of the corporation, a debate that has been academic for years but is now all too real for business leaders in the current health and economic crisis. Is it possible that the resolution to this debate is simple enough for the old Franciscan friar, William of Occam? When asking about the purpose of a corporation, perhaps the answer relies on making fewer assumptions. What if the debate about corporate purpose is resolved by adopting a different corporate form? Delaware corporate law doesn’t preclude the board of directors from considering the interests of stakeholders. In fact, fiduciary duties of directors require them to promote shareholder value, and to use business judgment to reconcile the various stakeholder interests to arrive at an action or decision that is in the best interest of the corporation. However, Delaware does provide an alternative corporate form: the public benefit corporation (PBC). This form explicitly requires a corporation to have a material positive impact on society and the environment, and also requires directors to consider other stakeholder interests along with the financial interests of shareholders. A key feature of the Delaware PBC is that it provides a right of action for shareholders to sue the company if the company does not uphold its purpose and the interest of stakeholders.
The Big Three index funds—Vanguard, BlackRock, and State Street—play an increasingly important role in proxy voting. Their influence derives from the fact that under US law, as well as that of many other jurisdictions, index funds have a legal right to vote their investors’ shares in corporate elections. Given index funds’ explosive growth in recent years, a key question emerges: what is the scale of index funds’ influence over corporate elections? As I discuss in a forthcoming paper, ‘Margins: Estimating the Impact of the Big Three on Shareholder Proposals’, the Big Three are the largest shareholders at a staggering number of the 250 largest public companies as calculated by Fortune (the ‘Fortune 250’). The Big Three combined are the largest shareholder in 96% of Fortune 250 companies. Vanguard and BlackRock combined (the ‘Big Two’) are the largest shareholder in 94.4% of such companies, and Vanguard alone (the ‘Big One’) is the largest shareholder in 65.6% of such companies.
Modern information technologies have greatly facilitated timely dissemination of information to a broad base of investors at low costs. In our paper entitled The Real Effects of Modern Information Technologies, we exploit the staggered implementation of the EDGAR system from 1993 to 1996 as a shock to information dissemination technologies to examine their effects on the real economy. Our first hypothesis is that the EDGAR implementation leads to an increase in the level of corporate investment through the equity financing channel. This hypothesis follows from the conventional wisdom that greater and broader information dissemination leads to an increase in the amount of total information in the marketplace, which improves the functioning of the financial market and firms’ access to external capital, thereby allowing firms to tap into new investment opportunities.
The pandemic has had an emphatic impact on rewards for shareholders. A report this reveals that dividend payments in the UK were cut in the second quarter by a “dizzying” 57.2%, or £22bn. The statistics, compiled by Link Asset Services, show that 176 companies opted to hold on to cash during the lockdown by cancelling dividend payments. A further 30 reduced their dividends. In all, they amounted to three-quarters due to pay in Q2. Link says dividends paid in Q2 this year are the lowest since 2010 and “the decline itself is by far the biggest ever recorded”. Only the scale of the figures should come as a surprise. As lockdown took effect, many sectors saw business grind to a halt forcing them to seek state aid as well as take drastic measures. Many took government loans, making dividend payments—even if cash was available—a significant reputational and financial risk. [...] Resetting dividends is viewed as a healthy development by many market observers concerned that some big-name companies have paid out at record levels while also managing significant debt. In more stable times a dividend cut may have been viewed by the market as a red flag; in the current environment many regard it as good sense. Another consideration for boards mulling dividend payments is: are they legal?
On July 10, 2020, the Securities and Exchange Commission (the “SEC”) proposed changes that would substantially reduce the number of investors required to file quarterly reports showing their holdings of U.S.-listed equities on Form 13F.[1] The SEC’s proposal would increase the 13F reporting threshold 35 fold — from $100 million to $3.5 billion — and eliminate the ability to exclude de minimis positions from reporting on Form 13F.[2] According to the SEC, almost 90% of the investment managers who file a Form 13F today would no longer be required to do so. However, the SEC’s data shows that the institutional investment managers that would need to continue reporting are responsible for disclosing over 90% of the aggregate dollar value of securities reported on Form 13F — likely reflecting the increase in the proportion of the market held by the largest mutual fund managers. While the proposed increase in the reporting threshold is significant, the SEC’s proposal is also notable for its decision not to consider significant changes to the 13F reporting regime suggested by the various commentators over the past several years. [...] “Institutional investment manager” is defined broadly and includes all persons and entities (other than natural persons managing their own accounts[5]) that manage 13F securities in excess of the $100 million threshold. Corporations and other entities that manage portfolios for their own account are generally included in the definition of “institutional investment manager.”[6] “13F securities” are primarily comprised of U.S.-listed equities (including foreign private issuers, closed-end funds and exchange traded funds), though certain equity options, convertible debt securities and warrants are also included.[7] The SEC publishes a list of all 13F securities each quarter.[8]
Nature’s bounty is not easy to count, partly because she was kind enough not to bill us for it. Some economists, however, have attempted to put a dollar figure on the value of the world’s land, forests, fisheries, minerals and fossil fuels—or what is left of them. Their work has fed into the Inclusive Wealth project, initiated by the United Nations, directed by Managi Shunsuke of Kyushu University and advised by Sir Partha Dasgupta of Cambridge. They estimate the world’s natural capital amounted to over $91trn in 2014, or over $13,000 per person. (The estimates use 2005 exchange rates and prices.) New Zealand has more natural capital per person ($380,000) than oil-rich Kuwait ($362,000) or Saudi Arabia ($180,000). Gabon has more than anywhere else. Many researchers now think of natural resources as a “curse” that erodes competitiveness and breeds corruption—economies which are heavily dependent on exporting raw materials are often dominated by small, rapacious elites. For example, Congo, which relies on mining, has about 25% more natural capital per person than the global average, but remains desperately poor. Conversely, countries like Singapore enjoy a high gdp per person despite an utter lack of God-given resources. About two-thirds of Singapore’s wealth consists instead of traditional capital: infrastructure, buildings, plant and equipment. The rest is the “human capital” reflected in its people and their skills. On average, however, countries with more natural capital also tend to have a higher gdp per person. So is it a curse or a blessing? Some economists argue that natural bounty raises the level of gdp but slows its growth rate: it provides an additional, steady stream of income that grows less quickly than the rest of the economy.
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