Corporate governance - Vigil

(Bloomberg) -- Norway plans to spend a record 420 billion kroner ($41 billion) of its oil wealth to weather the brutal Covid-19 downturn. The richest Nordic economy and western Europe’s biggest oil and gas producer has been hit on two fronts as the coronavirus pandemic shut down mainland activity and led to a collapse in the global crude market. The Norwegian government now expects mainland gross domestic product to drop 4% this year, according to key figures from the government’s revised budget due later on Tuesday. Norway has amassed a $1 trillion sovereign wealth fund from decades of petroleum production that gives it tremendous fiscal fire power. The so-called structural oil-corrected deficit will represent 4.2% of the fund’s value this year, exceeding the country’s 3% fiscal rule.

While the federal government is considering statutes and regulations that mandate gender and racial diversity on corporate boards of directors, the states have already begun to take action. Already a dozen states have enacted or are poised to enact requirements to enhance diversity on boards. The statutes are grounded on a large body of empirical evidence that board diversity contributes significantly to “good governance” and improved financial performance. Businesses must focus on enhancing the diversity of their boards to both comply with the new statutory requirements and secure the underlying benefits to their performance. But while states are starting to act, many corporations have not.

Although we all hope for a quick return to stability, the current environment raises the possibility of an increase in down-round financings—private company financings in which the company has a reduced valuation from its prior financing round. In recent weeks, we have observed pressure on valuations and the emergence of more onerous, less company-friendly terms in several, though certainly not all, financing rounds. Down rounds raise a number of delicate and important issues for companies and investors, including impacts on employees and investors; fiduciary duty considerations for the company’s board (and others), along with a heightened risk of stockholder litigation; and oftentimes complex structuring considerations.

Business leaders would do well to emulate New Zealand’s prime minister and the New York governor by testing their crisis messaging against three checklists. A leader’s key weapon in battling any crisis is exceptional communication. The Mandarin word for crisis, “Wei Ji”, combines two characters (危 机): danger and opportunity. How a business leader manages and communicates will determine which character takes prominence. Exceptional communication is crucial to survive, stabilise and surge towards post-crisis opportunities. Covid-19 is the biggest crisis of our lifetimes—and leaders must provide quality communications to secure their lines of effective engagement right now.

On May 8, 2020, the Commission published an important new communication aimed at relaxing State aid rules for COVID‑19‑related equity injections by States into non‑financial companies.[1] While previous initiatives aimed at relaxing State aid rules (in particular the so‑called “Temporary Framework”, or “TF”, adopted on March 19, 2020) [2] were focused on maintaining companies’ access to liquidity, this new communication recognizes that the economic effects of COVID‑19 will also endanger their solvency and thus require more structural (and potentially competition‑distortive) measures such as equity or hybrid capital injections or subordinated loans (i.e., debt instruments that are subordinated to ordinary senior creditors in case of insolvency proceedings).

Apart from COVID-19, few topics garner as much global attention these days as the looming climate crisis. And let us not forget that before the outbreak of the pandemic the front pages of most newspapers were filled with stories and pictures of the extraordinary wildfires in Australia, which by some estimates have cost the country up to 5% of GDP. The visible warming of the planet (2019 was the warmest year on record) has put climate change at the centre of people’s preoccupations all over the world. Yet, even a casual observer can see that countries have implemented widely differing policies to combat climate change. Some regions of the world, most notably Scandinavia, have been at the forefront of transitioning their economies towards renewable energy. Other countries have taken very limited steps in this regard, or even reversed past policy commitments towards reducing carbon emissions, as the United States has done by brashly pulling out of the 2015 Paris Agreement. Similar antagonistic stances towards climate change mitigation have been appallingly on display by the Australian government in the midst of the worst wildfires in Australian history and by the Brazilian government facing a resurgence in forest fires in the Amazon by wildcat miners and farmers.

These days, humanity’s top priority is our personal health and safety as well as that of our families and our employees. The fact that I am still working signals another key priority: keep the cash coming through the company door—and preserve it as much as possible. There is a lot of discussion about these priorities and the various trade-offs they entail, how they should be ordered and how companies should organise and govern themselves to effectively address them. But the topic of this post is not today but the “day after”. Sooner or later corporate boards and leaders will emerge from their domestic trenches to rebuild their company’s—and the world’s—economic future. And the future will not be what was imagined in pre-coronian times.

The 2020 proxy season has been anything but routine, with the COVID-19 pandemic and the resulting state shelter-in-place orders requiring many companies to make the shift from physical to virtual annual meetings, and state corporate laws being amended to allow these virtual meetings to occur. Yet we had not seen a virtual annual meeting used in a proxy contest until April 30, 2020, when shareholders of TEGNA Inc. participated in the first election contest conducted at a virtual, rather than physical, annual meeting (all of the company’s twelve nominees were re-elected). While the concept and technology have existed for several years, virtual annual meetings were slow to become widespread. [...] This year, in light of the COVID-19 pandemic and lockdown requirements, most public companies are using virtual annual meetings, with a large majority doing so for the first time. Yet companies have been reluctant to use virtual meetings for contested situations, due to the extra complexity of such meetings and the unavailability of a commercial platform to do so.

The event study—a statistical tool borrowed from financial economics—has become a critical tool in securities fraud litigation. In litigation, event studies are used to measure the extent to which market prices react to the release of new information. Their results are introduced as evidence on the efficiency the market in which the securities trade, the impact of the fraudulent disclosures on market prices, the causal relationship between the fraud and plaintiff’s economic harm, and the appropriate calculation of damages. Courts vary both in the extent to which they require the use of an event study and the degree to which they accept other evidence with respect to these issues, but a properly-conducted event study is often a key factor.

Since Google (now Alphabet) issued dual-class stock at its IPO in 2004, the subject has been vigorously debated throughout the world.  Unlike firms whose shares all have equal voting rights (“one-share, one-vote firms”), companies with dual-class stock allow a founder to attach enhanced voting rights to the shares that he or she holds, while issuing shares with inferior voting rights to public stockholders.  All classes of such stock possess equal rights to share in the cash-flow of the corporation, thereby creating a divergence in voting and cash-flow rights in the capital structure of the company.  Dual-class stock therefore enables a founder to hold a majority of the voting rights in a company while holding only a minority of the cash-flow rights.  In the first half of 2019, 26 per cent of U.S. IPOs adopted dual-class structure, compared with only 1 percent in 2005.

In a somewhat roundabout way, I would like to make the argument that Larry Fink, CEO of BlackRock, is creating a new form of shareholder empowerment. Unfortunately, I do not find this to be a positive development for corporate governance. In a recent post on the Columbia Law School’s Blue Sky Blog, I provided a summary of my new article, “The Risks and Rewards of Shareholder Voting.” The objective of my article is to fill in the gaps in our collective understanding of shareholder voting, a topic that does not get enough attention. What I argue is that an institutional investor’s voting will generally be uninformed and, to some extent, always reflect the biases of the investor’s management. From a policy perspective, I conclude that “regulators, shareholders, and managers should always be extremely wary of any proposal to increase the use of shareholder voting as a decision-making tool.”

In light of the ongoing coronavirus pandemic (COVID-19), corporations face an increasingly difficult task: navigating the volatility of the financial markets and performance of the company’s financial metrics (e.g., share price and earnings per share) while balancing initiatives that champion goodwill and sustainability on their behalf and on behalf of their key stakeholders. Stock buyback programs are a common tool used by corporations to manage volatility and enhance stockholder value. In 2018 and 2019, corporations repurchased nearly $1.5 trillion of their own shares through stock buyback programs. These repurchases generally served to stabilize, even encourage, share prices and increased earnings per share. However, recent events have led to increased public scrutiny, both financially and politically, of the adoption and continuation of these programs, including from the highest levels of government. Accordingly, implementation and usage is down drastically—more than 35% in dollar volumes year-to-date.

In the middle decades of the 20th century, government officials broadened access to the courts, placing public law more at the center of traditionally private disputes. They professionalized and regularized criminal justice, which previously had been a somewhat, if not significantly, privatized domain. They expanded and intensified industrial and financial regulation and enacted laws and rules to structure and discipline myriad commercial transactions and relationships. They assumed greater responsibility for funding and directing major infrastructure projects. And, to pay for all of this, they imposed steep and relatively progressive taxes. By the last decades of the 20th century, critics expressing frustration with what they characterized as government overreach forced the state to retreat.