July 7, 2020

No Good Deed Goes Unpunished: ESG Initiatives Attract Activist Funds

According to a recent study cited in this “Institutional Investor” article, companies that implement social responsibility plans are twice as likely to enter activist hedge funds crosshairs as firms that are not addressing these issues:

The study, evaluating data on U.S.-based activist campaigns from 2000 to 2016, found that hedge funds are significantly more likely to target companies that have a strong performance record in corporate social responsibility. In fact, the likelihood of a company being targeted increased from 3% to 5% if their CSR scores rose by two standard deviations above the average. If companies are trying to do the right thing in industries that have historically not addressed environmental, social, or governance issues, they’re even more likely to be in the sight lines of activists, according to the study.

Ain’t that a kick in the head? According to Prof. Rodolphe Durand, one of the study’s authors, activists believe that these initiatives are a waste of money & distract management from efforts to maximize profits.

Prof. Durand says that if you want to prioritize ESG without attracting the attention of activists, forget the greenwashing & go all-in: “management teams that clearly articulate their operational and financial strategies for impact and ESG initiatives have a better chance of escaping an activist campaign than those who are vague about their plans.”

Insurance: Michigan Court Nixes Covid-19 Coverage Claim

One of the top of mind issues for many companies in recent months has been whether their business interruption insurance policies will pick up part of the tab for Covid-19 losses. We blogged a few months ago that companies seeking to recover under those policies were likely to face an uphill climb. This Faegre Drinker memo reviews the first substantive judicial decision on Covid-19 coverage issues, and the result is consistent with that prediction:

Generally, insurers in such suits have taken the position that the virus has not caused physical damage to the insured’s property and therefore there has been no trigger for coverage under the terms of the policies at issue. Insurers have also argued that, under the terms of the policies, there can be no coverage for business interruption because losses caused by viruses are specifically excluded.

On July 2, 2020, a judge in Ingham County, Michigan issued what appears to be the first substantive decision in a COVID-19 business interruption coverage case. In Gavrilides Management Company, et al. v. Michigan Ins. Co., the insured argued that the virus exclusion did not apply because the loss of access was caused by the government orders, not by the virus. In addition, the insured argued that the loss of use of the property caused by the governmental orders constituted “direct physical loss” within the meaning of the policy. Applying Michigan law, the court rejected both arguments.

Ruling from the bench on a motion to dismiss, the judge held that “direct physical loss or damage” requires more than mere loss of use or access. The judge then held that the virus exclusion unambiguously excluded coverage caused by the impact of COVID-19.

Since the insureds’ arguments are similar to the arguments made in other cases, the memo says that case will undoubtedly be cited by insurers in other business interruption coverage cases pending throughout the country.

Financial Reporting: Staff Comments on Covid-19 Impairment Testing Disclosure

The pandemic’s economic impact has caused many companies to conclude that they need to conduct impairment testing. Companies that find themselves in that position may want to take a look at this Audit Analytics blog, which highlights a recent Staff comment on a Covid-19 Q1 impairment charge disclosure. Here’s the comment letter and here’s the company’s response.

John Jenkins