Mapping TCFD to the IFRS S2 on Climate Disclosure

Posted by Subodh Mishra, Institutional Shareholder Services Inc., on
Wednesday, May 15, 2024
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Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS-Corporate memorandum by Jacob McKeeman and Erica Chiorazzi.

The inaugural IFRS Sustainability Disclosure Standards were released by the International Sustainability Standards Board (ISSB) in mid-2023, designed to establish a global baseline for corporate disclosures. They are set to be adopted across several jurisdictions in the next few years. The new rules have garnered global support from 64 jurisdictions to date, with 19 national regulators already consulting on adoption of the recommendations under jurisdictional law.

The IFRS S2 Climate-related Disclosures rules are based on the architecture and recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). TCFD has defined climate reporting globally since the release of its recommendations in 2017. According to ISS data, 78% of companies on the S&P 500, 82% on the STOXX 600 and 98% on the FTSE 100 provide climate disclosures informed by TCFD. As an indication of its success, TCFD has now been disbanded, with the ISSB taking over the responsibility for monitoring the continued progress of climate-related disclosures.

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The Lost Promise of Private Ordering

Posted by Jeremy McClane (University of Illinois), Yaron Nili (University of Wisconsin-Madison), and Cathy Hwang (University of Virginia), on
Wednesday, May 15, 2024
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Jeremy McClane is a Professor of Law at the University of Illinois, Yaron Nili is a Professor of Law at the University of Wisconsin-Madison, and Cathy Hwang is the Barron F. Black Research Professor of Law at the University of Virginia. This post is based on their recent article forthcoming in the Cornell Law Review.

Corporate loan covenants serve many purposes. They can protect lenders’ financial interests by imposing operational and financial constraints on borrowers. They can also protect shareholder interests by constraining management waste and self-dealing, supplementing traditional corporate governance mechanisms. But covenants—both those that impose financial constraints and those that impose operational constraints—are disappearing.

In our recent article, “The Lost Promise of Private Ordering,” we provide an in-depth analysis of the evolving dynamics in the corporate loan market, focusing particularly on the diminishing prevalence of governance-related loan covenants. We document the trend of these “gov-lite” loans—loans that have watered-down or missing corporate governance-related covenants. Gov-lite loans signal significant shifts in the mechanisms of corporate governance and the protective measures for lenders and investors.

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The Payoffs and Pitfalls of ESG Due Diligence

Posted by Ferdinand Fromholzer, Dirk Oberbracht, and Jan Schubert, Gibson, Dunn & Crutcher LLP, on
Wednesday, May 15, 2024
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Ferdinand Fromholzer, Dirk Oberbracht, and Jan Schubert are Partners at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum.

A recent global survey of dealmakers by BCG and Gibson Dunn reveals a striking consensus: conducting environmental, social, and governance (ESG) due diligence is now indispensable for M&A transactions.

Dealmakers say that the insights gained from these assessments are crucial not only for mitigating risks but also for preserving and enhancing deal value. Although Europe has spearheaded more stringent ESG regulations, dealmakers in all surveyed countries, including those in the US, recognize the importance of performing such assessments before closing a deal. (See the sidebar “About the Survey.”)

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Corporate Governance, Board Oversight & the 2023 Banking Crisis

Posted by Sarah Wenger, Maria Vu, and Dimitri Zagoroff, Glass, Lewis & Co, on
Tuesday, May 14, 2024
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Sarah Wenger is Senior Analyst, Maria Vu is Senior Director, and Dimitri Zagoroff is Senior Editor at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

In the spring of 2023, the United States witnessed the country’s three largest bank failures since the 2008 financial crisis. Market-wide developments such as high interest rates and regulation rollbacks, along with company-specific factors including overly concentrated clientele and reliance on uninsured deposits, affected leadership’s ability to effectively manage interest rate and liquidity risks, leading to mass deposit flight and ultimately the collapse of Silicon Valley Bank (SVB), followed by Signature Bank (Signature) and First Republic Bank (First Republic).

The impact of macro-economic and strategic issues has been widely discussed. However, the banks’ inability to appropriately align strategy with the macro environment indicates that insufficient risk oversight was also a significant factor. This, in turn, suggests that stronger corporate governance structures could potentially have assuaged or prevented the outcomes of these events.

In this post we examine risk oversight and board composition gaps at SVB, and compensation practices at all three banks, in discussing how the prominent failures of these three mid-sized financial institutions emphasize the importance and impact of corporate governance practices and disclosures.

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The Distinction Between Direct and Derivative Shareholder Claims

Posted by Jim An (Stanford Law School), on
Tuesday, May 14, 2024
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Jim An is a Teaching Fellow and Lecturer in Law at Stanford Law School. This post is based on his recent article forthcoming in the George Washington Law Review.

One of the first legal questions that courts ask when reviewing a shareholder suit is whether the pleaded claims are “direct” or “derivative.” However, although the distinction between direct and derivative claims is often outcome-determinative, the specific legal rules governing that distinction have long been flawed, with courts and commentators calling those rules “subjective,” “opaque,” and “muddled.”

Furthermore, as I argue in a forthcoming article, The Distinction Between Direct and Derivative Shareholder Claims, the predominant legal tests for distinguishing between direct and derivative claims are internally inconsistent, logically indeterminate, and readily manipulable. That said, an improved test is possible by clearly articulating the underlying policy concerns that motivate existing doctrine.

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The 2024 Audit Committee agenda and the questions investors should be asking

Posted by Sophie Gauthier-Beaudoin and Tim Copnell, KPMG, on
Tuesday, May 14, 2024
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Sophie Gauthier-Beaudoin is Head of Investor Engagement and Tim Copnell is Chair of the Audit Committee Institute at KPMG in the UK. This post is based on their KPMG memorandum.

The business and risk environment has changed dramatically over the past year, with greater geopolitical instability, surging inflation, high interest rates, and unprecedented levels of disruption and uncertainty. Audit committees can expect their company’s financial reporting, compliance, risk, and internal control environment to be put to the test by an array of challenges – from global economic volatility and the wars in Ukraine and the Middle East to cybersecurity risks and ransomware attacks and preparations for climate and sustainability reporting requirements, which will require developing related internal controls and disclosure controls and procedures. This is compounded by uncertainty in the UK regulatory landscape and in particular the extent to which internal control frameworks will need to be strengthened, evidenced, and assured as a result of the on-going UK governance and audit reforms.

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The CEO Pay Problem Is Solvable with A.I.

Posted by Joel Paula, FCLTGlobal, on
Monday, May 13, 2024
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Joel Paula is a Research Director at FCLTGlobal. This post is based on his FCLTGlobal memorandum.

Proxy advisors are coming under pressure with accusations that their decision making is opaque, or pushing an “ESG” agenda. There’s no doubt that through their recommendations, they are hugely influential in voting outcomes. In an environment of increased scrutiny, backing voting recommendations with better data and evidence seems like a sound idea. Better yet, the proxy advisors could empower investors with better data, building a stronger case for voting decisions. Why not turn to technology solutions?

Artificial intelligence has already changed the way data is compiled and processed on a mass scale – and in particular in the investment industry, reshaping how professionals make decisions, manage portfolios, and analyze market data. A prominent challenge facing the industry today is the design of executive pay – specifically, structuring it in ways that incentivize strong performance over many years rather than just over a few fiscal quarters.

Proxy advisors’ analysis of executive pay packages for “say-on-pay” voting (the process where shareholders vote to approve or disapprove the compensation packages of a company’s top executives) considers factors like pay-for-performance alignment, the fairness of the package relative to peers, the structure of the compensation (e.g., short-term vs. long-term incentives), among others. The process is data intensive and can be laborious and time consuming.

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Seven Questions about Proxy Advisors

Posted by David F. Larcker and Brian Tayan (Stanford University), on
Monday, May 13, 2024
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David F. Larcker is the James Irvin Miller Professor of Accounting, Emeritus; and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on their recent paper.

We recently published a paper on SSRN (“Seven Questions about Proxy Advisors”) that examines the role and function of proxy advisors.

The proxy advisory industry—in which independent third-party firms provide voting recommendations to institutional investors for matters on the annual proxy—has grown in size and controversy. Despite a large number of smaller players, the proxy advisory industry is essentially a duopoly with Institutional Shareholder Services (ISS) and Glass Lewis controlling almost the entire market.

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Delaware Supreme Court Holds MFW Inapplicable Based on Banker Conflict Disclosure Deficiencies

Posted by Gregory V. Gooding, Maeve O'Connor, and William D. Regner, Debevoise & Plimpton LLP, on
Monday, May 13, 2024
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Gregory V. Gooding, Maeve O’Connor, and William D. Regner are Partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Gooding, Ms. O’Connor, Mr. Regner, Andrew L. Bab, Matthew E. Kaplan, and Jonathan E. Levitsky, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court has reversed a Court of Chancery decision dismissing challenges to the acquisition of Inovalon Holdings, Inc. by a consortium led by Swedish private equity firm Nordic Capital[1] in a decision demonstrating the importance of disclosure of financial advisor conflicts in order to obtain the benefit of business judgment rule review under Kahn v. M&F Worldwide Corp. – the MFW decision. The Supreme Court held that the majority-of-the-minority stockholder vote approving the transaction was not fully informed, based on inadequate disclosure of conflicts of interest on the part of financial advisors to the special committee of Inovalon’s board.

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Insider Trading and Off-Channel Communications in the Age of Remote and Hybrid Work Environments

Posted by Phara Guberman, Kenneth Breen, and Kaitlyn O’Malley, Cadwalader, Wickersham & Taft LLP, on
Sunday, May 12, 2024
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Phara Guberman and Kenneth Breen are Partners and Kaitlyn O’Malley is an Associate at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum.

Though many, if not most, of the measures implemented to address the COVID pandemic have since been rolled back, the transition from fully in-person to remote and hybrid work environments appears to be here to stay. While these arrangements provide employees with additional convenience and flexibility, they also come with risks for companies that are subject to the recordkeeping provisions of federal securities laws and whose employees encounter material nonpublic information (“MNPI”) in the course of their work. Over the past few years, the U.S. Securities and Exchange Commission (“SEC”) has been increasingly aggressive in bringing charges for violations of federal securities laws resulting, at least in part, from the risks associated with remote work environments.

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