Defenseless companies invite activism

Miles Rogerson is a Financial Journalist at Diligent Market Intelligence (DMI). This post is based on his Diligent memorandum.

Nearly half of the Russell 3000 companies targeted by activists in 2023 had few defenses against such advances.

According to Diligent Market Intelligence’s (DMI) Governance data, of the 103 Russell 3000 companies targeted by primary- and partial-focus activists in 2023, 50 had a “low” corporate defense score. Another 33 had a defense score ranked as “medium” while 20 companies had defenses ranked as “high.”

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Weekly Roundup: April 26-May 2, 2024


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This roundup contains a collection of the posts published on the Forum during the week of April 26-May 2, 2024

The CSDDD: How the Phoenix Can Rise from the Ashes


That Starbucks DEI Case Doesn’t Stand for What You Think It Does


Climate Action 100+ Departures Put Proxy Voting in the Spotlight


Introduction to SEC v. Panuwat: Understanding “Shadow” Insider Trading


For or against? The year in shareholder resolutions—2023


UK Takeover Panel Proposes Narrowing the Scope of Companies Subject to the Takeover Code


Data in the Driver’s Seat: What Boards Need to Know about Data Governance


Against Contractual Formalism in Shareholder Oppression Law


Action Items for Boards: Where Directors and C-Suite Leaders Align and Diverge


The SEC and CFTC Overhaul Form PF


Contextual Corporate Governance



The Board Member’s Oversight of AI Risk – Moving from Middle to Modern English



Sharpened Expectations on Climate


Sharpened Expectations on Climate

Carine Smith Ihenacho is Chief Governance and Compliance Officer, Tim Smith is Lead Investment Stewardship Manager, and Kristin Verpe is Investment Stewardship Analyst at Norges Bank Investment Management (NBIM). This post is based on their NBIM memorandum.

Summary

In September 2023, Norges Bank Investment Management published a revised set of expectations on climate change to further support companies in managing the evolving climate related risks and opportunities. We present six core expectations, which apply to all companies, and provide further direction on good practices we encourage companies to adopt.[1] This blog post provides an overview of our updated expectations on climate change, and how the expectations inform our voting decisions as we enter the 2024 AGM season.

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The proxy advisory industry: Influencing and being influenced

Chong Shu is an Assistant Professor of Finance at the University of Utah. This post is based on his article forthcoming in the Journal of Financial Economics.

Investors, except for the largest ones, are generally apathetic towards corporate governance, reluctant to spend resources to effectively monitor their portfolio firms (Berle and Means, 1932). This apathy paves the way for proxy advisory firms to bridge the gap by exploiting economies of scale in information collection. However, this seemingly efficient solution becomes problematic as the industry consolidates around two major players: Institutional Shareholder Services (ISS) and Glass Lewis. This consolidation raises concerns about the diversity and quality of their advice. The role of proxy advisory firms thus emerges as both a solution and a subject of scrutiny.

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The Board Member’s Oversight of AI Risk – Moving from Middle to Modern English

Sean Dowd is a Local Market Leader, Partner, and Managing Director; Rich Kando is a Partner and Managing Director; and Chris Crovatto is a Director at AlixPartners LLP. This post was prepared for the Forum by Mr. Dowd, Mr. Kando, and Mr. Crovatto.

“Whan that Aprill with his shoures soote
The droghte of March hath perced to the roote,
And bathed every veyne in swich licour
Of which vertu engendred is the flour,
Whan Zephirus eek with his sweete breeth
Inspired hath in every holt and heeth
The tendre croppes, and the yonge sonne
Hath in the Ram his halve cours yronne,
And smale foweles maken melodye,
That slepen al the nyght with open ye…”

-Geoffrey Chaucer, The Canterbury Tales, 1.1 General Prologue

GenAI Prompt: “In Chaucer’s Middle English, please summarize the sentiment on Capitol Hill this spring as it relates to the proliferation of GenAI …”

GenAI Response: “There are too many press releases to summarize and I have not yet been properly trained in Middle English.”

Artificial Intelligence, including advanced forms of Generative Artificial Intelligence (“GenAI”), has been a headline grabbing topic for upwards of a year and arguably served as the driving force in keeping the NASDAQ Composite trading near all-time highs. GenAI can be thought of as “a machine-learning model that is trained to create new data, rather than making a prediction about a specific dataset. A generative AI system is one that learns to generate more objects that look like the data it was trained on.”[1] It is a revolutionary technology akin to the release of mobile telephones in the 70’s or better still, the introduction of automobiles a mere 500-years after Chaucer penned his literary classic. It appears that the application of GenAI spans well beyond the realm of assisting struggling high school English students across our nation in achieving their ‘Gentleman’s C’ (…or is it now a ‘Gentleman’s B’ with the advent of these wildly powerful technologies?).

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Shaping Tomorrow’s Dialogues – Bridging Gaps between Companies and Investors

Sallie Pilot is a Senior Adviser at The Investor Forum. This post is based on her Investor Forum report.

In the dynamic landscape of investment, where change and uncertainty are dominant features, the Investor Forum, has undertaken a comprehensive assessment of the pivotal dialogues between UK listed companies and their institutional investors. The standout finding is that the foundations of the relationships are robust and when companies and their investors have opportunities for meaningful dialogue, they are more likely to realise their common goal of sustainable long-term value creation. 

These insights from the Investor Forum, a non-profit community interest company set up by institutional investors in UK equities, confirm the role that effective communications can have in driving sustainable long term value creation amidst rapidly changing stakeholder interests and market dynamics.

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Contextual Corporate Governance

Kevin D. Chen is an Assistant Professor of Accounting at Duke University, John E. Core is the Nanyang Technological University Professor and a Professor of Accounting at MIT, and Wayne R. Guay is the Yagao Professor of Accounting at the University of Pennsylvania. This post is based on their SSRN working paper.

Although academics and practitioners generally view corporate governance as context-specific, existing measures of governance quality in the literature typically do not incorporate contextual information. That is, these measures assert the efficacy of specific governance mechanisms, often weighted equally, without considering that different types of firms might require different governance structures. While this practice undoubtedly stems from its convenience in operationalizing measures of governance quality, incorporating contextual factors would seem a natural next step in extending these measures and our understanding of the way governance influences corporate decision-making. How does context matter for corporate governance? To what extent is governance-relevant context observed or unobserved? Can observed contextual information be leveraged to improve measures of governance quality?

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The SEC and CFTC Overhaul Form PF

Michael Didiuk is a Partner, Malik Rollins is Special Counsel, and Joseph Daly is an Associate at Schulte Roth & Zabel LLP. This post is based on their Schulte memorandum.

The US Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) have overhauled Form PF and private fund managers have until March 12, 2025, to begin reporting on the new Form. The changes to the reporting requirements mandated by the amendments to the Form (“Form PF Amendments”) will require substantial preparation by many managers.[1]

The Form PF Amendments are designed to enhance both the SEC’s and the Financial Stability Oversight Council’s (“FSOC”) monitoring of systemic risk, and strengthen the regulatory oversight of private funds and investor protection efforts.[2] The Form PF Amendments were jointly adopted by the SEC and CFTC on Feb. 8, 2024, with the Chairman of the SEC, Gary Gensler, noting “since Form PF first was adopted [12 years ago], the SEC, CFTC, and FSOC have identified gaps in the information . . . from private fund advisers . . . and amendments . . . will enhance the [SEC’s, the CFTC’s,] and [the] FSOC’s understanding of the private fund industry as well the potential systemic risk posed by the industry and its individual participants. In addition, the adoption also furthers investor protection efforts.”

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Action Items for Boards: Where Directors and C-Suite Leaders Align and Diverge

Frank Kurre is a Managing Director at Protiviti, Mark Rogers is Founder and CEO at BoardProspects, and Michael Tae is Co-President at Broadridge Investor Communication Solutions. This post is based on their Protiviti memorandum.

The relationship between the board and the management team is vital to the success of any company or organization, and like every relationship, there are areas of strong alignment, as well as points of divergence.

This is a principle well understood in the corporate governance community, but as longtime advisers to boards and management teams, our organizations (Protiviti, Broadridge and BoardProspects) sought to quantify these alignments and disagreements.

Based on our survey of more than 1,000 directors and C-level executives, respondents reported a meaningful perception gap between how the Board views its performance and risk preparedness and how management teams view these same critical areas. Taken together, the areas of agreement and the points of difference provide reminders and insights on how boards and the C-suite can accomplish more together.

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Against Contractual Formalism in Shareholder Oppression Law

Benjamin Means is a Professor of Law and the John T. Campbell Chair in Business and Professional Ethics at the University of South Carolina School of Law, and Douglas K. Moll is the Beirne, Maynard & Parsons, L.L.P. Professor of Law at the University of Houston Law Center. This post is based on their article forthcoming in the UC Davis Law Review.

In a closely held corporation, there are few shareholders, the stock is not publicly traded, and, typically, the principal shareholders take an active role in management. Without control rights or exit rights, however, minority shareholders are inherently vulnerable to mistreatment. The majority elects the board of directors, and the board calls the shots. Taken together, the minority’s lack of control and lack of liquidity empower majority shareholders to freeze out the minority owners from any return on their investment. Compounding this unfair treatment, the majority may then offer to repurchase the minority’s stock at pennies on the dollar, knowing that the minority has no choice but to capitulate.

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