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During the 2008 financial crisis, Wall Street banks and other big financial institutions were deemed “too big to fail.” The crisis unleashed by the pandemic has broadened that elite status to a significant swath of the American private sector. In a bid to soften the coronavirus’s economic blow, the government has stretched its financial safety net wide — from strategically sensitive companies, to entire industries such as energy and airlines, to the market for corporate bonds. “The ‘too big to fail’ that existed for banks has now extended to a lot of other firms,” said Luigi Zingales, a University of Chicago professor of finance who has long studied the interplay of government, regulation and the private sector.
· “Prolonged global recession”, “high unemployment”, “another outbreak of infectious disease” and protectionism dominate the list of near-term worries for companies, according to the World Economic Forum’s report, COVID-19 Risks Outlook: A Preliminary Mapping and Its Implications, released today. It argues that we are not ready for the knock-on effect of far-reaching environmental, societal and technological risks. But a “green recovery” and more resilient, “cohesive, inclusive and equal societies” can emerge if leaders act now. Read the full report here and a second publication on the Challenges and Opportunities in the Post-COVID-19 World
The coronavirus pandemic has brought many board responsibilities into sharp relief but the board’s responsibility to ensure that management appropriately address and respond to human capital risks takes on particular emphasis. While the responsibility to manage risk in general is inarguable, the unique risks to business performance that a worldwide pandemic poses to human capital calls for consideration of an appointment of a board-designated member of management with direct reporting responsibility to the board in whom responsibility is vested for pandemic-related compliance matters. A “Chief Covid Officer,” responsible for ensuring corporate compliance with applicable health and welfare obligations and the resulting safety of employees and consumers, is both an appropriate and desirable method to manage the multi-faceted risk the pandemic poses to corporate entities.
Most securities fraud class actions under SEC Rule 10b-5 involve revelation of negative information about the defendant company that should have been disclosed earlier – bad news that (allegedly) has been covered up by company agents. The standard remedy in such cases is out-of-pocket damages (OOPs). But this measure of harm is inherently ambiguous. Some courts interpret it as price inflation at the time of purchase.[1] Others interpret it as the difference between the price paid and the price at which a stock settles after corrective disclosure.[2]
Alberta’s government-owned money manager is launching a formal investigation into a recent $2.1-billion loss and promising to fix what ails a fund plagued by poor performance. The board of directors at Alberta Investment Management Corp., known as AIMCo, announced that accounting firm KPMG LLP and former Ontario Teachers’ Pension Plan chief risk officer Barbara Zvan were brought in to “to identify lessons learned and corresponding enhancements to AIMCo’s investment and risk management processes.” [...] Ms. Zvan, an actuary by training, volunteered to help the Alberta fund’s board after spending 24 years at the $201-billion Ontario teachers’ fund before leaving in January. She is known as one the country’s top risk management experts.
Although historically a topic of interest in the US, shareholder activism is continuing its outward spread, with the number of activist campaigns steadily increasing across the globe. While there has been a shift toward engagement between issuers and activists and away from confrontation in recent years, generally speaking shareholder activism remains largely aggressive in nature. Moreover, the disruption, financial pressure and new legislation arising from the COVID-19 pandemic is likely to be a major driver for shareholder activism in the year ahead.
Corporate directors, like most businesspeople, are busy. But investors say they can, in fact, be too busy. New research from the School of Management shows that when directors who serve on multiple boards resign, investors react positively at both the company they left and those that keep them on board. “On one hand, sitting on several boards shows these directors are in high demand because of their reputation, experience and expertise,” says study co-author Feng Gu, professor and chair of accounting and law. “But over the past 20 years, a director’s responsibilities have increased significantly, and investors may assume that ‘busy’ directors will be distracted and devote less time to their company.”
On April 17, 2020, France’s securities regulator, the Autorité des marchés financiers (“AMF”), levied one of its largest combined fines ever against Elliott Advisors UK Ltd. and Elliott Capital Advisors L.P., imposing a €20 million penalty for charges that included failure to adequately disclose their positions in a takeover bid. This case marks the second time in the past year that a U.S. activist hedge fund has found itself in the cross-hairs of the AMF and reflects renewed interest by French authorities in regulating short-sellers and activist hedge funds. Since 2019, France’s Finance Minister Bruno Le Maire, the French National Assembly’s Finance Commission, and the AMF, among other market participants, all have endorsed enhanced disclosures for short-sellers and activist investors. In this political environment, and particularly during the COVID-19 crisis and resulting economic downtown, the AMF is likely to demonstrate heightened focus on activist hedge funds whose activities it views as destabilizing to the French market and public companies.
TOKYO — His flagship tech fund is losing money. His company just posted billions in losses. And a key ally, the Chinese technology mogul Jack Ma, stepped aside. Yet Masayoshi Son, the exuberant chief executive of the Japanese conglomerate SoftBank, mustered another spirited defense of his troubled empire on Monday, shifting from contrite to brash and back again in a performance that sought to both reassure investors and restore his own bruised reputation. Mr. Son gave his financial presentation just hours after SoftBank announced that Mr. Ma, a co-founder of the Chinese e-commerce giant Alibaba, had resigned from its board. That news was quickly followed by an earnings report describing losses that were the largest on record for any listed Japanese company, according to NHK, the Japanese public broadcaster. [...] The company’s losses were slightly higher than its estimates, and the Vision Fund reported a loss of $17.7 billion.
Before the meltdown at WeWork and the outbreak of the coronavirus pandemic, Masayoshi Son said he would like to raise a new Vision Fund every two to three years after his initial $100 billion fund. Now the first Vision Fund looks like it could be the last. SoftBank Group Corp. announced Monday that the Vision Fund lost ¥1.9 trillion ($17.7 billion) last business year, triggering the worst loss ever in the company’s 39-year history. SoftBank had to write down the valuations of companies like WeWork and Uber Technologies because of business missteps and the coronavirus fallout. Its return on the fund is negative 6 percent, compared with 62 percent just a year ago. [...] Son also announced Jack Ma, co-founder of Alibaba Group Holding Ltd., will leave the SoftBank board after 13 years and that his company may not pay a dividend this year to preserve cash.
Against rising concerns of mortality, livelihood and recessions driven by COVID-19, “How much should executives get paid?” is, understandably, not the most pressing question to be answered. This pandemic is, first and foremost, a human-capital crisis. The prominence of people in the economic equation has been made apparent, effectively revealing the importance of people versus physical and financial capital. With a direct impact on people’s lives, there is a great deal of uncertainty in terms of basic human needs—food, shelter, health—and concerns regarding the long-term economic impact and the relative pace of the recovery. All of this makes the coronavirus-driven downturn different.
The Delaware Court of Chancery has sustained another Caremark claim, pointing to the absence of documents produced in response to a stockholder’s inspection demand as evidence that the directors “face a substantial likelihood of liability” for “failing to act in good faith to maintain a board-level system for monitoring the Company’s financial reporting.” Hughes v. Hu, C.A. No. 2019-0112-JTL (Del. Ch. Apr. 27, 2020). The case involved Kandi Technologies, a Delaware corporation headquartered in China that sells automobile parts. Kandi had a long history of inadequate internal controls, including improper insider transactions and a 2017 restatement of earnings. The stockholder plaintiff complained that the board failed to implement responsible auditing protocols notwithstanding these clear red flags.
In the past several years, the number of claims filed against newly public companies under Section 11 of the Securities Act of 1933 has increased exponentially. [1] Unfortunately, Section 11 packs quite a punch. Unlike fraud claims under the securities laws which require proof of reckless or intentional misconduct, Section 11 imposes strict liability against the issuer for innocent or merely negligent misstatements in a registration statement and permits recovery for any decline below the stock’s initial offering price. [2] Individual defendants can escape liability only by proving their good faith—a factual inquiry rarely resolved at the pleading stage. The one factor counterbalancing Section 11’s low liability standards and harsh penalties is that standing to bring such claims is strictly limited. Under the statute, only those who purchased stock registered in the offering can assert a Section 11 claim. However, last week’s decision in Slack, together with a few other recent cases, suggest that at least some courts may be willing to cut shareholder plaintiffs some slack by loosening this heretofore strictly construed standing requirement, thereby expanding potential Section 11 liability.
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Warren Buffett was willing to stand by Goldman Sachs Group Inc.’s side during the last economic crisis, at least for the right price. Now, he’s bailing out just as the pandemic throws the U.S. economy onto uncertain terrain. Berkshire Hathaway Inc. sold 84 per cent of its Goldman Sachs stock in the first quarter, marking a reversal for an investor who generally holds large stakes in the banking sector. It was one of the most notable changes in Berkshire’s more-than US$180-billion portfolio in the period, as the bank underperforms the broader U.S. market. [...] Buffett’s retreat followed Solomon’s rise to the top job in October 2018. An investment banker by trade, Solomon has been pushing the firm deeper into less-familiar terrain with transaction banking and deposit gathering, making it look more like its rivals. Buffett has rarely discussed Solomon in public.
Microsoft CEO Satya Nadella sees the world - and thus commerce - going through three stages during the pandemic: response, recovery and reimagination. Nadella’s perspectives on getting through, and beyond, the crisis offers a roadmap that could lead corporate boards to the challenging—and hopefully rewarding— task of “reimagining” the company’s mission. [...] Nadella’s vision of “re-imagination” is consistent with long-accepted principles of corporate governance. The board is charged with specific oversight responsibilities for management strategic planning that is focused on producing sustainable long term value. These are responsibilities which many boards, prior to the pandemic, were already fulfilling in their responses to significant and unforeseen economic, technological and social disruption. Those disruption-driven responses reflected what the National Association of Corporate Directors (“NACD”) described as the need for leadership to reshape “how the board thinks, operates, and interacts with the business.”
The Conference Board and ERT have established a collaboration to create a new measure of CEO Confidence for Europe. The Conference Board Measure of CEO Confidence™ for Europe by ERT for the first half of 2020 is 34 (on a scale from 0 to 100). The report examines the survey results including CEO views about business and economic conditions now, conditions in six months, and the prospects for their own industry. The negative sentiment among business leaders resulted from the dramatic impact of the COVID-19 crisis which delivered a severe supply shock to the economy in Europe and around the world.
The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which was signed into law on March 27, 2020, provided for the establishment and expansion of a range of economic assistance programs designed to help U.S. businesses manage the financial consequences of the ongoing COVID-19 crisis. While these programs may provide a much-needed lifeline to U.S. businesses, the CARES Act also created oversight and enforcement functions, which, along with existing authorities, raise enforcement risks for businesses that choose to participate in the act’s programs.
Big US hedge fund platforms such as Izzy Englander’s Millennium Management, Ken Griffin’s Citadel and Steve Cohen’s Point72 Asset Management look set to emerge from the coronavirus crisis as some of the industry’s biggest winners. After chalking up gains this year, they are on the front foot. Meanwhile, their unusually high fees, which have long proved a stumbling block to some investors, could help them have the pick of talent in a hedge fund industry reeling from the S&P 500’s fastest descent into bear market territory. Their gains reflect a wider phenomenon that is growing in prominence: the hedge fund industry is becoming increasingly concentrated in a small number of larger players, as bigger groups outpace some of their supposedly more nimble rivals.
C-suites and boardrooms are going to look quite different as company leaders try to prioritize safety without sacrificing involvement as they resume some semblance of normal operations. Bloomberg Law asked Hannah Orowitz, managing director on the corporate governance advisory team of shareholder engagement and governance consultancy Georgeson LLC, what pandemic-related corporate governance issues executives and directors need to consider.
fter more than 10,000 years of relative stability—the full span of human civilization—the Earth’s climate is changing. Since the 1880s, the average global temperature has risen by about 1.1 degrees Celsius, driving substantial physical impact in regions around the world. As average temperatures rise, acute hazards such as heat waves and floods grow in frequency and severity, and chronic hazards such as drought and rising sea levels intensify. These physical risks from climate change will translate into increased socioeconomic risk, presenting policy makers and business leaders with a range of questions that may challenge existing assumptions about supply-chain resilience, risk models, and more.
JPMorgan Chase CEO Jamie Dimon said Tuesday in a memo that the coronavirus crisis should be used to build an economy that offers opportunities for “dramatically more people.” The memo, issued ahead of his bank’s annual shareholder meeting, served as an update to the New York-based bank’s response to the pandemic. Dimon also detailed the steps his firm has taken to support customers and employees since the crisis began two months ago, as well as his thinking about returning employees to work sites. “It is my fervent hope that we use this crisis as a catalyst to rebuild an economy that creates and sustains opportunity for dramatically more people, especially those who have been left behind for too long,” Dimon said. “The last few months have laid bare the reality that, even before the pandemic hit, far too many people were living on the edge.”
SAN FRANCISCO — On Jan. 27, at a regularly scheduled Monday morning meeting with top executives at Facebook, Mark Zuckerberg turned the agenda to the coronavirus. For weeks, he told his staff, he had been hearing from global health care experts that the virus had the makings of a pandemic, and now Facebook needed to prepare for a worst-case scenario — one in which the company’s ability to combat misinformation, scammers and conspiracy theorists would be tested as never before. To start, Mr. Zuckerberg said, the company should take some of the tools it had developed to fight 2020 election garbage and attempt to retool them for the pathogen. He asked executives in charge of every department to develop plans for responding to a global outbreak by the end of the week.
Governments must work alongside private lenders to provide sustained support to bridge companies through the crisis, paying particular attention to sectors most likely to suffer a prolonged period of low demand even as the economy re-opens, according to a C.D. Howe Institute working group. At its latest meetings on May 5 and May 12, the Crisis Working Group on Business Continuity and Trade discussed the risks and headwinds for economic recovery and the action that is needed to prevent “scarring” in key economic sectors – notably air travel, agrifood, petroleum, and tourism and accommodation. The group of industry experts and economists noted if businesses face distress and a disorderly wave of insolvencies, the ability of the economy to rebound will be impaired and the recovery slowed. Without an effective “bridge,” the disruption of productive capacity will further slow the recovery – even as restrictions on workplace activities are lifted.
We recently published a paper on SSRN, The First Outside Director, that examines the individual chosen by private and public companies as their first outside director. Little is known about the process by which pre-IPO companies select independent, outside board members—directors unaffiliated with the founder or investor groups. Private companies are not required to disclose their selection criteria or process. They are also not subject to public listing requirements that stipulate independence standards or impose specific monitoring obligations through committees and executive sessions. Instead, board choices are driven largely by company insiders (such as the founder, management, and investors) in consultation with advisors and affiliates to address specific strategic, leadership, or operational issues facing the company. [...] Here, we look at when, why, and how private companies add their first independent, outside director to the board.
As many businesses discharge, furlough, or drastically reduce pay to large shares of their workforces, some compensation committees are announcing their decision to cut base salaries and annual bonuses for C-suite executives as well as board cash retainers. The Conference Board, in collaboration with Semler Brossy’s research team and ESGAUGE Analytics, is keeping track of SEC Form 8-K filings by Russell 3000 companies announcing these reductions. For the live database and some helpful visualizations of key trends across business sectors and company size groups, click here. The following are some key observations from disclosures made since March 1, 2020. (Note: The commentary below refers to disclosure made as of April 24, but the database is updated weekly; please review the database and visualizations for the most current information).
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