Corporate governance - Vigil

In March 2020, as millions of Americans—a record number of them newly jobless—locked themselves indoors to help fight an accelerating pandemic, they learned that two U.S. Senators had been warned about COVID-19 in a secret briefing and then proceeded to cash in their shares in the nick of time. The stocks Sens. Richard Burr and Kelly Loeffler traded included companies, like hotel chains, that were especially sensitive to the coronavirus. This scandal sparked renewed interest in congressional insider trading—and exposed gaps in current law and leading reform proposals alike. In a new Essay, Congressional Securities Trading, I use the occasion of the pandemic trades to offer a fresh perspective on this evergreen topic.

In a recent paper, we argue that outside investors are cautious about financing start-ups because such companies often lack a track record and tend to be managed in a less-than professional manner, with founders sometimes putting their own interests above the company’s. We posit that investors can alleviate their fears by identifying early stage firms that have effective corporate governance already in place. We propose that debtholders can provide a valuable signal that a company has good governance by demanding that the company be accountable to external constituents. Debt has a magnified impact on governance at entrepreneurial firms.

(Bloomberg) — SAP SE’s abrupt decision to scrap its co-CEO leadership structure was another vivid example from the software industry that two chief executive officers look better on paper than in practice. SAP became the third of its peers to abandon the dual-CEO model, just six months after returning to the structure with the appointments of Jennifer Morgan and Christian Klein. [...]
But time and the novel coronavirus pandemic exposed the risks of having more than one boss: Two executives must sign off on decisions, which often slows operations and generates competing spheres of influence within an organization. [...] “Two heads are not better than one,” said Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “When you have two CEOs, there are inevitable clashes between the two. One will dominate and the other has to go. They always end up with one person being CEO.”

IBM argues shareholders should only be able to remove directors “for cause,” which essentially means for committing crimes. Underperformance for 1, 2, 5 years should not be a reason for removal nor should other measures not involving criminal activity. If IBM were incorporated in Delaware, they would have to provide the right of shareholders to remove directors even if they have not engaged in criminal behavior. This year, I requested several companies incorporated outside Delaware to allow removal of directors without cause. IBM was the only company to refuse the request.

Recent debates have sometimes obscured the value of shareholder voting, which the Council of Institutional Investors (CII) regards as a key element in the legitimacy and functioning of the corporate governance system in the United States and elsewhere. A factor in confusion on this may be overstatement of supposed claims made by institutional investors generally for “shareholder democracy.” In a current paper, for example, Bernard Sharfman writes that “Shareholder voting provides a means by which shareholders can participate in corporate decision making.”[1] However, he goes on to say, “very few public company decisions involve this decision-making mechanism.” Well, one could respond, of course that is the case.

Ottawa is tightening its foreign investment rules, scrutinizing direct investments in Canadian companies related to public health or critical supply chains during the pandemic, as well as any investment by state-owned companies or by investors with close ties to foreign governments. The goal is to "ensure that in-bound investment does not introduce new risks to Canada’s economy or national security, including the health and safety of Canadians,” a policy statement from Innovation, Science and Economic Development Canada said. The new rules will focus primarily on “investments of any value, controlling or non-controlling” in businesses involved in public health or the supply of critical goods and services. The policy also removes any threshold for scrutinizing potential investments in any sector by state-owned or state-connected entities.

Business continuity planning during the COVID-19 pandemic requires that boards of directors and senior management teams confront the unthinkable: How will the business continue to function if key leaders and decision-makers are incapacitated? Boards, senior management and corporate counsel should consider whether the company has in place appropriate leadership resiliency plans, both with respect to senior executive emergency succession and board emergency procedures. While it has been a common practice for at least the past decade for boards of large public companies to have an emergency CEO plan in place, our recent review of the bylaws of Fortune 100 companies reveals that only 20% have adopted specific emergency bylaw provisions to support board decision-making should a number of directors become incapacitated. Such planning is prudent given that most directors are of an age associated with increased susceptibility to complications from COVID-19.

Upcoming first quarter earnings calls may be the most scrutinized in modern corporate history. How to handle these calls in light of the unprecedented social and economic impacts of COVID-19 is a question confronting every company that has not yet announced. Investors, the SEC and other stakeholders are clamoring for insight into what this extraordinary pandemic means for individual businesses, the private sector and the Nation at large. We believe that these upcoming earnings calls provide an opportunity for companies to show leadership and purpose by providing the critical insights that will help investors, analysts and other stakeholders grasp where the company stands today and what the future may hold for the business and the industry.

The application of the U.S. securities laws to blockchain tokens has been a controversial subject, with the Securities and Exchange Commission (SEC) taking an aggressive posture.  On February 6, 2020, SEC Commissioner Hester Peirce proposed a non-exclusive safe harbor from certain of those laws for sales and other distributions of certain blockchain tokens (sometimes called token generation events, airdrops, SAFTs, ICOs or IEOs), as well as secondary trading in such tokens. Token sales became a popular tool in 2016-17 for blockchain projects to seek initial traction for their network or platform by selling the digital item native to the platform (colloquially known as a “token”). 

COVID-19 is testing every part of a corporation and its business continuity planning. And the very top of the organization — namely, the board of directors — is no exception. What are the board’s responsibilities during this crisis? It’s a question that directors should understand clearly and quickly — because after the pandemic ends, investors sifting through the significant financial losses will start asking the inevitable question: “Where was the board?”

ISS and Glass Lewis have issued guidance on their corporate governance voting policies that adds flexibility to reflect the realities of the impact of the COVID-19 crisis and the challenges in responding to it. Public companies will want to consider this guidance since many institutional investors are influenced in their voting by the positions taken by these leading proxy advisory firms. The guidance covers the following subjects: (1) Annual Meetings, (2) Director Issues, (3) Shareholder Rights Plans, (4) Capital Structure and Payouts as well as (5) Compensation Issues.

[...] Shareholder voting allows shareholders to participate in corporate decisions, but very few public company decisions are based on it.  This is understandable, because shareholder voting suffers from a collective action problem that makes it notoriously uninformed. According to Frank Easterbrook and Daniel Fischel, “When many are entitled to vote, none of the voters expects his votes to decide the contest. Consequently none of the voters has the appropriate incentive at the margin to study the firm’s affairs and vote intelligently.” As stated by Jill Fisch, Asaf Hamdani, and Steven Davidoff Solomon, “This collective action problem, however, characterizes all institutional investor engagement in corporate governance – by both active and passive funds. Costly steps that investors may take to improve the performance of companies in their portfolio benefit all the investors that hold shares of these companies.”

Shareholder inspection rights allow a shareholder to access relevant documents and records of their company, so as to address the problem of information asymmetry inherent in the corporate form, and facilitate monitoring of the operation of the company and, if necessary, the bringing of further action for remedies. In the United States (U.S.), all states have now codified shareholder inspection rights, albeit with some significant differences amongst them. Drawing upon overseas experiences such as the U.S. law, China has introduced the regime of shareholder inspection rights, but with some important adaptions made to its local environment. By providing access to relevant information, inspection rights have the potential to serve as an effective mechanism to deal with different types of agency problems in the company: not only the manager–shareholder conflict that is the most serious agency problem in the U.S., but also the conflict between majority and minority shareholders which mainly plagues the corporate governance system in China.