According to a recent CFO Dive article, everybody’s largest shareholder is running out of patience with the pace of ESG disclosures. Here’s an excerpt:
BlackRock, the world’s largest asset manager, is losing patience with companies that are slow to disclose the details of their adherence to environmental, social and governance (ESG) principles, according to Jessica McDougall, a director for investment stewardship at BlackRock. “We don’t have patience much longer for these disclosures to be forthcoming,” McDougall said Tuesday in a webcast sponsored by Diligent, adding “we are increasingly seeing the impacts of climate change not only across our portfolios but also across the global economy.”
BlackRock, which manages $9 trillion in assets, has pressed for more disclosure in recent years, “but this was the year that we really started to take more concerted action based on what companies were providing us” before the 2021 proxy season, McDougall said. “Where we felt that companies were falling short for a variety of ESG issues, we were more inclined to support those [shareholder] proposals this year.”
Value Edge Advisors blogged that, during this same webcast, T. Rowe Price’s head of corporate governance said that the big asset managers are feeling the heat from their own clients, regulators & the media, so they’re ratcheting up the pressure on their portfolio companies. Specifically, they’re looking for inconsistencies between those companies’ stated ESG priorities and their political advocacy:
Large asset managers are feeling acute pressure on ESG from clients, the press and regulators, explained Donna Anderson, vice president and head of corporate governance at T. Rowe Price. She said the fund firm is developing analytical and tracking tools to help portfolio managers and stewardship teams identify gaps between companies’ stated ESG priorities that are undermined or canceled out by political spending or membership in trade associations that lobby state and federal legislators for regulations contrary to companies’ official positions.
“If you’re doing business as usual but your [corporate social responsibility] departments are generating tons of reports, assertively staking claim to these various goals, but they’re not being operationalized, it’s going to become evident,” said Anderson during the event. “That’s a real problem in our view.”
According to BlackRock’s recent Stewardship Report, its support for shareholder proposals doubled this year from 17% to 34%, and it voted against 10% of incumbent directors this year, up from 8.5% last year. These recent comments suggest that there’s more bludgeoning to come from the mega asset managers if companies don’t get religion when it comes to both ESG disclosure & operationalizing their stated ESG priorities.
While BlackRock & T. Rowe ramp up the heat, companies that dutifully churn out the kind of detailed ESG disclosure investors say they want may find themselves in for an unpleasant surprise from the ESG ratings industry, at least according to a new study discussed in this HBS newsletter:
Receiving more information can clarify the complex, but not when it comes to environmental, social, and governance (ESG) scores. A recent study shows that the more information a company discloses about its ESG practices, the more rating agencies disagree on how well that company is performing along these dimensions. According to the research, a 10 percent increase in corporate disclosure is associated with a 1.3 to 2 percent increase in ESG score variation among major ratings providers, which all interpret and process disclosures differently.
With more than $30 trillion in sustainable investment capital on the line, the stakes are high for companies and investors. Institutions, such as asset managers, pension funds, and endowments, often rely on ESG ratings to make investment decisions. Divergent scores hurt firms, investors, and markets, the research findings suggest, and these effects appear to be worsening over time.
“People are being sold on money being invested responsibly by using these ratings that nobody really understands,” says Harvard Business School Assistant Professor Anywhere “Siko” Sikochi, who co-authored the paper Why Is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings with HBS professor George Serafeim and Dane Christensen of the University of Oregon. “That’s where the danger is in having all these different ratings not being aligned in some way.”
You know, there’s something about this problem that’s strangely familiar – where have I heard something like it before? Oh yeah, that’s right – in the Book of Genesis:
And the Lord said, Behold, the people is one, and they have all one language; and this they begin to do: and now nothing will be restrained from them, which they have imagined to do. Go to, let us go down, and there confound their language, that they may not understand one another’s speech. So the Lord scattered them abroad from thence upon the face of all the earth: and they left off to build the city. Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth: and from thence did the Lord scatter them abroad upon the face of all the earth.
Remember way back in March 2020 when the SEC announced that employees at its DC headquarters would begin to work remotely due to the pandemic? Like many of us, they’re still remote – and last week an announcement on the Coronavirus page of the SEC’s website said that they’re going to stay remote until at least January 3, 2022.
On the one hand, I guess it’s a hopeful sign that the SEC thinks it will eventually be January 2022, but on the other hand, this is just another piece of evidence that today’s date is Wednesday, March 571, 2020.
Some commenters have suggested that one of the advantages of a direct listing might be the ability to insulate companies & other potential IPO defendants from Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. Last year, a California federal court rejected that argument and the 9th Circuit has affirmed the lower court’s ruling.
Section 11 provides that if the registration statement for a security contains an untrue statement or omission, any person acquiring “such security” may bring an action against the parties enumerated in the statute. Courts have generally interpreted the “such security” language to mean the securities issued under the particular registration statement, and have thus imposed an obligation on plaintiffs to “trace” their securities to those issued in the offering.
In Pirani v. Slack Technologies, (9th Cir.; 9/21), the 9th Circuit observed that the case involved an issue of first impression – “what does ‘such security’ mean under Section 11 in the context of a direct listing, where only one registration statement exists, and where registered and unregistered securities are offered to the public at the same time, based on the existence of that one registration statement?” It concluded that the term encompassed both the securities that were registered in connection with the direct listing and those that were unregistered:
Slack’s unregistered shares sold in a direct listing are “such securities” within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence. Any person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement. Because this case involves only one registration statement, it does not present the traceability problem identified by this court in cases with successive registrations. . . All of Slack’s shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration.
In her Twitter thread about the decision, Prof. Ann Lipton suggests that the case could have implications for Section 11 claims that go beyond direct listings. For instance, she says that “the same logic could equally be applied to companies that release shares from lockup early; those shares, too, are only trading on the exchange because of the earlier-filed registration statement.”
A few months ago, I blogged about a recent study suggesting that there was an epidemic of non-compliance when it came to crowdfunded offerings. So, maybe it isn’t surprising that in its first Regulation Crowdfunding enforcement proceeding, the SEC’s Division of Enforcement targeted not only alleged fraudsters, but a crowdfunding portal that the SEC claims ignored “red flags” and otherwise failed to comply with its obligations to protect investors. Here’s an excerpt from the SEC’s press release:
According to the SEC’s complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC. Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors.
As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd’s platform. Petrescu allegedly failed to address red flags including Shumake’s criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors.
In its complaint filed with a Michigan federal court, the SEC contends that portal’s alleged shortcomings violated Section 4A(a)(5) of the Securities Act and Rule 301(c)(2) thereunder, which obligates an intermediary to deny access to its platform if the intermediary “has a reasonable basis for believing that the issuer or the offering presents the potential for fraud or otherwise raises concerns about investor protection.”
The boom in SPAC IPOs has left hundreds of newly-public buyers flush with cash and chasing De-SPAC mergers before the clock strikes midnight – but competition for deals is fierce and regulators are ramping up their scrutiny of SPAC deals. Tune in tomorrow for the DealLawyers.com webcast – “Navigating De-SPACs in Heavy Seas” – to hear Erin Cahill of PwC, Bill Demers of POINT BioPharma, Reid Hooper of Cooley and Jay Knight of Bass Berry discuss the key issues facing SPACs as they seek to complete their de-SPAC transactions in this challenging environment.
Yes, you read that correctly – this is a webcast hosted by DealLawyers.com, but we’re also offering it without any additional charge as a bonus for our TheCorporateCounsel.net members!
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to submit your state and license number and complete the prompts during the program.
In what may be the least surprising finding by a study since the one that concluded that people are happier on the weekend, researchers recently found that more narcissistic CEOs like to “go big or go home” when it comes to M&A. Here’s an excerpt:
We find that highly narcissistic CEOs spend more money on corporate acquisitions than less narcissistic CEOs and that highly narcissistic CEOs favor size over quantity when making corporate acquisitions. Furthermore, we find that such irrational focus on size over quantity is penalized by the stock market. Our findings are based on UK non-financial firms and contribute to the existing literature by investigating preferences of narcissistic CEOs in the corporate acquisition arena and the stock market’s reactions to such preferences.
I guess one question you might have is exactly how these folks decided how narcissistic a particular CEO was? It turns out the answer is based on three little words – “I, me, mine.” The primary indicator that the study used for narcissism was how many times the CEO used first person singular pronouns in quarterly earnings conferences.
Speaking of word choices, it turns out that there’s a magical incantation for better IPO pricing, and this Mayer Brown blog reports that a recent study says it’s “ESG”:
Alessandro Fenili and Carlo Raimondo, in their study and paper ESG and the Pricing of IPOs: Does Sustainability Matter, find a significant relationship between a discussion of ESG related issues and IPO pricing. They performed textual analyses of 783 US IPOs completed during the period from 2012 through 2019 across various industries.
Given investor interest in sustainability and ESG in their investment decisions, the study focuses on the amount of information about sustainability disclosed by IPO issuers. In order to assess IPO disclosures, the study considered a list of words that were associated with ESG topics. Then, they performed textual and other analyses on the IPO prospectuses. A large increase in the number of ESG “words” in the IPO prospectuses was found to lead to reduced information asymmetry (investors have better information on which to base their investment decision regarding the IPO issuer’s ESG focus) and to less IPO underpricing.
The blog says that the study provides evidence of a strong association between ESG disclosure during an IPO and less IPO underpricing and more accurate evaluation by investors of the IPO issuer’s valuation.
Wow, so that’s all it takes? I bet there are a lot of unicorns feeling kind of silly now about wasting their time writing founders letters and over-the-top mission statements for their S-1s. I’m not sure how everyone will use these findings, but I’ve spent enough time working with investment banks to be pretty confident in my prediction that the next coal mining or fracking company prospectus you pick up will be chock full of ESG-related jargon. If you don’t believe me, just remember, these are the folks who turned cab dispatchers and commercial real estate businesses into tech companies through the power of bankerspeak.
Once again, the English philosopher Bishop Berkeley nailed it several centuries ago – “to be is to be perceived.”
Here’s the scenario: a company moved to Canada and changed its name, and when it did so, it mistakenly changed its CIK number with the SEC. As a quick trip to the Edgar page on the SEC’s website will inform you, that “Central Index Key” number is used to identify corporations and individual people who have filed disclosure with the SEC. You aren’t supposed to change your CIK for a name or address change, but hey, what’s the worst that could happen? How about the SEC instituting a Section 12(j) proceeding seeking to involuntarily deregister your securities:
On September 22, 2020, the Commission issued an order instituting an administrative proceeding (“OIP”) against STRATABASE under Section 12(j) of the Securities Exchange Act of 1934.1 The OIP alleged that STRATABASE had violated periodic reporting requirements and sought to determine, based on those allegations, whether it was “necessary and appropriate for the protection of investors to suspend . . . or revoke the registration” of STRATABASE’s securities.
On June 21, 2021, the Division of Enforcement moved to dismiss this proceeding. The Division states that, on June 9, 2021, it spoke with counsel for Strata Power Corporation, the successor to STRATABASE. The Division states that it subsequently confirmed the following representations made during that conversation by counsel for Strata Power Corporation: (i) that when STRATABASE changed its name after moving to Canada in 2004, it also inadvertently changed CIK numbers; and (ii) that Strata Power Corporation was up to date in its periodic filings at the time that this proceeding was instituted and remains current.
Fortunately, the SEC granted the Division’s motion to dismiss, but can you imagine being the poor lawyer who received notice of the institution of this proceeding?
If you’re old enough to remember the original version of “Stark Trek,” you probably recall an episode called “The Trouble with Tribbles.” The plot involved a somewhat sketchy interstellar trader who arrived selling purring little fluff-balls known as “tribbles.” These creatures were adorable and soothing, and everybody on the crew loved them. The only problem was that they bred uncontrollably and their sheer numbers quickly threatened to overwhelm the entire starship.
It seems to me that plot of this 50+ year old Star Trek episode – which my wife says I’m a dork for using in this blog – actually isn’t a bad analogy for the potential consequences of the retail investor boom over the past year. Like tribbles, retail investors usually are considered pretty cuddly by company management, but when the size of the retail base explodes, all sorts of complications can arise. This recent WSJ article detailing the travails of companies that found themselves on the receiving end of Robinhood’s “free stock” promotion is a good example of some of those complications. Here’s an excerpt with a hair-raising tale from a small cap issuer about just how much Robinhood’s promo cost it:
One company pushing back is Florida-based drugmaker Catalyst Pharmaceuticals Inc., which says Robinhood’s program cost it more than $200,000 last year and could be even more expensive this year. “Catalyst has become aware that Robinhood has been giving away shares of Catalyst’s common stock at no charge as part of its promotional program,” Catalyst Chief Executive Patrick McEnany wrote in a June comment letter to the Securities and Exchange Commission. “Catalyst believes that there are likely numerous companies facing this same issue, and that the costs of distributing materials to small stockholders under these circumstances is onerous and unreasonable.”
To put this into perspective, Catalyst only had about $120 million in revenues last year, so you can see why they’d gag on Robinhood sticking them with an additional $200,000 in mailing costs. Not to pat ourselves on the back, but Liz flagged the issue of potentially alarming rises in proxy distribution costs on our “Proxy Season Blog” more than a year ago. She also recently blogged about the NYSE’s rule change that will no long require issuers to bear fees associated with shareholders who only hold shares due to broker promos.
It appears that this issue may at least be on its way to being managed, but I think there’s reason to believe that the unprecedented influx of retail investors over the past year means that the problem of higher proxy distribution costs isn’t the only “trouble with tribbles” that public companies are going to have to deal with in the near future. What do I mean by that? Well, a couple of concerns come to mind. . .
