October 16, 2020

Skeletons in the Closet: Companies Unprepared to Confront Their Pasts?

Now that the threat of “cancel culture” is omnipresent, many of us spend a lot of time thinking about how to prevent or respond to current missteps. But today’s blunders are only part of the risk. According to this recent survey of 50 C-suite execs, only 8% felt comfortable that their company hasn’t previously engaged in practices that would be deemed unseemly under today’s ethics or standards – that broke down into 76% knowing of problematic practices or events, and 16% being unsure. Here’s an excerpt:

Executives might know what’s included in documented corporate histories, but not about matters that were not publicized or documented. Instances that, at the time were both legal and standard practices, but are now threats both in the courts of law and public opinion may be especially difficult for executives to get their arms around. Two acute examples of such practices are companies (or predecessor companies they acquired) that: 1) once owned, insured, or used slaves as assets for collateral and 2) participated in manufacturing or other industrial practices that contributed to the climate crisis.

Forty-two percent of respondents said they thought the broader public was aware of past actions by their company that conflict with today’s ethics or standards, but just as many were unsure. That more than four in 10 respondents don’t have a good grasp of the public’s awareness of their company history means too many companies haven’t done enough work to understand their own pasts or how their pasts are perceived by the public.

You can’t change the past – and ethics standards will likely keep evolving. But you can – and should – have a plan for addressing your history. According to the survey, only 26% of execs said they were “very prepared” to respond if problematic actions came to light, so there is room for improvement. In addition, there are differences in how executives and investors are viewing these threats. Here’s more detail on that:

• C-suite executives are far more concerned about the impact of unknown past racial injustices and somewhat more concerned about sex or gender discrimination than investors, who are significantly more concerned about past support for divisive social or political causes.

• Executives are more concerned about the damage that unseemly revelations may do to their brand equity. But investors are more concerned with the potential for media and customer backlash and lower valuations.

• More than half of investors surveyed would put specific contingencies on a deal after a problematic discovery was made and one in four would require the company to respond in writing to the claims. More significantly, 29 percent of investors said they would dismiss the investment opportunity outright.

• Among investors, 32 percent said they are very or somewhat unlikely to regain confidence in a company following the revelation of a past bad action – even if the company addressed the past action in ways the investors deemed appropriate.

IPO Governance Trends: Takeover Defenses Remain Common

According to the latest survey of IPO governance trends by Davis Polk, there’s been “widespread and generally increasing adoption” of takeover defenses at both controlled and non-controlled companies in advance of IPOs – even as seasoned public companies have been abandoning the same defenses due to shareholder pressure. The survey looked at the Top 46 “controlled company” IPOs and the Top 50 “non-controlled company” IPOs by deal size from April 1, 2018 through July 10, 2020. Here are some other findings:

Exclusive Forum Provisions: The number of both controlled and non-controlled companies that adopted exclusive forum provisions (another governance attribute disfavored by some shareholder advocates) during the current survey period continued to grow from past survey periods. In the current survey, 91% of controlled companies and 98% of non-controlled companies adopted exclusive-forum provisions. These included both exclusive forum provisions addressing claims under the Securities Act of 1933 (the “’33 Act”) and exclusive forum provisions addressing other claims against the company. This is a substantial increase from the 14% and 26% of controlled and non-controlled companies, respectively,that adopted such provisions in our 2014 survey.

Direct Listings: When we compared the one comparable direct listing during the current survey period (Slack Technologies, Inc.) to the non-controlled companies, we found similar governance provisions. Slack’s takeover defenses were identical to the vast majority of non-controlled companies, including a staggered board, prohibitions on shareholder action by written consent, shareholder ability to call a special meeting, the requirement of a super majority to amend the bylaws and plurality voting for uncontested director elections.

Dual-Class Shares: Over 25% of controlled companies, and 28% of non-controlled companies, had a class of shares with unequal voting rights.

Shareholder Written Consent: 9% of controlled companies and 12% of non-controlled companies permitted shareholder action by written consent. We’ve blogged on The Proxy Season Blog about how this is becoming a “hot topic.”

Check out the full 60-page survey for info on board & committee structure, advance notice bylaws, board & shareholder rights, equity awards, employment agreements, and more.

Direct Listings: CII Urges SEC to Deny Nasdaq Proposal

Last week, the CII sent this letter in response to the SEC’s request for comments on Nasdaq’s “primary direct listings” proposal. In line with the points raised in its September petition to stay the NYSE’s similar proposal, the Council urged the Commission to disapprove the proposal for two reasons:

1. It would compound problems shareholders face in tracing their share purchases to a registration statement (i.e., “proxy plumbing” issues)

2. It may lead to a decline in effective governance at public companies, by allowing companies to sidestep IPO governance checks (the letter looks at Palantir’s recent deal as an example)

Liz Dunshee