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The Informed Board
Winter 2021
The business world confronts a host of shifting challenges
in 2021. To help boards navigate these, Skadden is launching
The Informed Board, a package of concise articles that provide
broad insights about key issues directors face. We aim to help
flag potential challenges that may not be obvious, explain
trends, share our observations and give directors practical
tips without a lot of legal jargon. These are based not just on
Skadden’s deep knowledge of the law, but on our front-line
experience inside boardrooms.
We look forward to our continuing discussions with you.
01 Why Does the Brand 12 Audio Interview: How
of My Phone Affect My Far Can the SEC Go?
Credit Rating?
14 New Tactics and ESG
04 A Practical Guide to Themes Take Shareholder
the Role of Directors in Activism in New Directions
Fighting Ransomware
17 Get Used to the New Normal
07 The Brexit Deal Leaves in US-China Trade Relations
Some Mighty Big Holes
09 ESG: Many Demands,
Few Clear Rules
The Informed Board / Winter 2021
Why Does the Brand of My
Phone Affect My Credit Rating?
To capitalize on the promise of artificial
intelligence and alternative data, boards need
to anticipate and mitigate various risks.
−− Hidden biases need The Potential may prove to be a predictor of, say,
to be prevented. the likelihood you will default on a
Alternative data and artificial loan or that you will perform well in a
−− Neither regulators intelligence (AI) have generated job you are applying for.
nor the public will be tremendous excitement in the
business world. The technology To the companies that use such
satisfied with “black box”
offers the potential for faster, more models, this may seem like brilliant
decisions. data mining — unearthing nonob-
efficient and more reliable decisions.
Banks and fintech platforms already vious predictors that outperform
−− Reputational risk must
use them to make credit decisions, conventional ones. But to regulators
be weighed alongside
and they show promise in other and those harmed by AI-based
legal requirements. decisions whose rationales cannot
areas, from fraud prevention to
hiring decisions. be fully explained, the process may
seem capricious.
But the surprising predictive success
of AI-based decision models is AI models are the subject of
precisely what makes them tricky particularly lively debate in the
legally. Often, the developers of such lending sphere, both because lending
models cannot explain the relation is a heavily regulated activity and
between a variable and its predictive because the technology may turn out
value. Anything from where you shop to be more reliable than traditional
to the type of mobile phone you use credit bureau factors (number of
or the first letter of your last name tradelines, average balance, debt-to-
income, etc.). The latter have proven
1 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Why Does the Brand of My
Phone Affect My Credit Rating?
less effective in predicting defaults it excluded any candidate from two If predictive value were the only
over the past year, particularly during women’s colleges. That could violate factor, the brand variable might
the pandemic. employment nondiscrimination laws satisfy “safety and soundness” bank
in jurisdictions where it’s not neces- rules. But regulations often require
Alternative data may also benefit sary to show discriminatory intent. more than predictive value. U.S.
consumers who have not estab- banking regulators require that finan-
lished the kind of borrowing track This sort of unforeseen bias is on the cial models be “conceptually sound.”
record typically relied on by credit minds of bank regulators, because And banking rules in the U.S., EU
bureaus. It could therefore expand it could violate fair lending rules. and Hong Kong all generally require
the population qualifying for credit. This hiring example was cited by lenders to be able to explain to an
Similar benefits and problems arise in Federal Reserve Bank Governor Lael applicant why credit was denied.
recruiting and other areas where AI Brainard in a recent speech about
models based on alternative data are AI in financial services. Regulators Hence, “explainability” — the ability
being explored. may demand proof that a similar to articulate the relationship between
nonobvious variable is not a proxy for a variable and the attribute being
Hidden Biases another, forbidden factor such as the predicted — has become a buzzword
race or gender of the applicant. in AI, and is particularly central to
The appeal of AI is that the tech- fintech regulation and the growth
nology can make predictions using The hiring example also underscores of AI in finance. In the U.S., regu-
offbeat data that humans cannot that companies cannot blindly accept lators may also ask if a prospective
make or explain. But the fact that AI AI-based recommendations as tech- borrower could anticipate that a
uncovers new and surprising predic- nical wizardry. The predictions based lender would consider a certain factor
tors by poring through hundreds of on novel data may be quite explain- in its decision, so the applicant can
types of data poses a basic problem: able if you dig deep enough. take action to avoid being denied
The most valuable variables may credit. If the model uses, say, the
have no obvious relation to the thing Predictors That Aren’t first letter of an applicant’s surname,
being predicted, such as a borrower’s Understood the consumer would have few
ability to pay its debts. options. (And, of course, if the phone
An AI model’s “black box” quality brand proved to be correlated with
In the worst cases, outcomes of itself poses a problem, apart from race, gender or some other factor
these models may be both surpris- any biases. To illustrate this, assume lenders cannot consider, that would
ing and problematic. For example, one variable in a lender’s underwrit- pose fair lending and other problems.)
one AI-based recruiting model for ing model is whether the applicant
software developers relied on the uses an Apple or a Samsung mobile
success of previous hires. They were phone, because that (hypothetically) Potential for Bad Publicity
almost entirely male, however, and has been shown to be highly predic- Finally, reputational risk needs to be
the model turned out to have a strong tive of an applicant’s risk of default. weighed. If it becomes public that an
bias against women — so strong that institution makes decisions based on
2 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
Why Does the Brand of My
Phone Affect My Credit Rating?
complex “black box” models relying
on puzzling alternative data, it could
lead to bad publicity. Several years A Checklist for Boards
ago, a lender drew criticism for scor-
ing applicants based in part on the
Key steps companies can take to identify and miti-
chain stores where they shopped. As gate the risks of using alternative data and artificial
a result, the company stopped using intelligence models:
that factor.
Make sure the company has Document the results of these
Explain Yourself reviewed each variable used analyses and any action plans
in the model through a com- that grow out of them.
In many cases, the best approach pliance lens. For model vari-
will be the common sense one: Make ables that are not intuitively Make sure that the use of al-
sure your business can explain the associated with the decision ternative data does not violate
relationship between each type of at issue, management should data privacy laws, contractual
data used and the decisions that challenge modelers to explain restrictions on its use (e.g.,
result. That will be necessary to why the variable nondisclosure agreements)
satisfy regulators, customers and is predictive. or intellectual property rights.
For instance, “scraping” data
the public at large.
Conduct statistical analyses of from public websites with-
models to determine whether out permission may infringe
some variables serve as a intellectual property rights or
Authors proxy for prohibited biases violate terms of use.
Brian D. Christiansen / Washington, D.C. (race, gender, ethnicity, etc.),
and explore less discriminato-
Ken D. Kumayama / Palo Alto
ry alternatives.
Sven G. Mickisch / New York
Sonia K. Nijjar / Palo Alto Confirm the accuracy of
Simon Toms / London alternative data points on a
regular basis and validate
Austin K. Brown / Washington, D.C.
that the model is operating as
expected with respect to the
data to avoid “model drift.”
Perform periodic risk as-
sessments, with a focus on
the impact of such data on
outcomes for groups that are
protected by law.
3 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
The Informed Board / Winter 2021
A Practical Guide to the Role
of Directors in Fighting Ransomware
Ransomware is such a major threat to businesses
that directors need to take an active role overseeing
cybersecurity programs.
−− Boards need to take an The biggest cyberthreat most Two legal developments bear directly
active role overseeing companies face is not attacks backed on directors’ roles in dealing with
cybersecurity measures. by nation-states like the recent the problem:
SolarWinds hacking episode. It is
Officers and directors may face
−− Directors may be held ransomware, a type of malware that
encrypts its victims’ data and holds personal liability in the event of
personally responsible
it hostage until a ransom is paid in a cyber attack. Lawsuits arising
for lapses that result in from other kinds of data breaches
attacks. untraceable bitcoin.
reflect an emerging expectation
These attacks have grown more that directors must play an active
−− U.S. money laundering
frequent and sophisticated at the role in cybersecurity planning and
and sanctions rules may same time that more people cannot delegate the issue entirely to
prohibit some ransom are working remotely and are more management. Those cases suggest
payments. reliant on corporate IT systems. that directors may be held personally
According to BitDefender’s analysis liable for (a) failing to ensure proper
of the cyberthreats, there was a policies were in place to protect a
715% increase in detected and company or (b) issuing misleading
blocked ransomware attacks in the statements about their companies’
first half of 2020 versus that period preparedness. For example:
in 2019. Many of these are never
publicly disclosed. In some recent –– A class action complaint against
attacks, sensitive data was stolen one company alleges that its board
before it was encrypted, and the knew of an initial data breach
attackers threatened to leak it if the whose scope only became clear
victims failed to pay. two years later but “failed to act
4 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
A Practical Guide to the Role
of Directors in Fighting Ransomware
sufficiently upon the full extent U.S. anti-money-laundering and
of knowledge known internally sanctions laws may bar some
by the company’s information ransom payments. Boards need to be
security team.” aware that the Treasury Department
requires ransomware victims and
–– In litigation over the theft of their financial institutions to perform
consumer credit information from due diligence on those to whom
Equifax, a federal judge found they plan to pay ransom. Because
that the company “relied upon several prolific ransomware groups
The Growing Role of a single individual to manually are subject to U.S. sanctions, Trea-
Boards in Cybersecurity implement its [software] patching sury rules may prohibit some ransom
Planning across its entire network” and payments. That leaves the victims
that person “had no way to know with no choice but to rebuild their
where vulnerable software in
25%
systems from scratch and suffer the
need of patching was being run on consequences of having their data
Equifax’s systems.” That “failed disclosed publicly.
Share of financial services
firms whose boards discussed to meet the most basic industry
cybersecurity more than once standard,” the court found, and
a year in 2017 therefore “it was false, or at least
Authors
misleading, for Equifax to tout its
advanced cybersecurity protec- Michael E. Leiter / Washington, D.C.
95% tions” in public filings. Maxim Mayer-Cesiano / New York
William Ridgway / Chicago
Share of those whose boards
The implication: Directors need to
or committees discussed
cybersecurity at least four take this threat seriously and play
times a year in 2020 an active oversight role in implement-
ing protections.
48%
Share that involve their boards
in cybersecurity exercises
Source: McKinsey
5 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
A Practical Guide to the Role
of Directors in Fighting Ransomware
A Checklist for Managing Ransomware Risks
Boards should discuss cybersecurity regularly. A Procedures need to be in place to deal with such
recent McKinsey survey of financial services com- a situation. At a minimum, secure communica-
panies suggests best practices. Nearly 95% of the tion alternatives need to be in place, and records
firms reported that one of their board committees required to respond to a crisis must be accessible
discussed cybersecurity and technology risks four even if primary IT systems are down.
times or more per year. Almost half the companies
involved the board in cybersecurity exercises, and Cybersecurity needs to be assessed within
nine in 10 provided regular updates on cybersecu- a larger risk management framework. Given
rity to the full board. the potentially catastrophic impact of an attack,
cybersecurity risks need to be evaluated as part of
Financial services firms furnish a good model
a company’s overall risk management. Budgets
because they have long been targets of attacks
for risk mitigation need to factor in the damages
and have advanced cybersecurity programs.Their
an attack could cause, including its impact on
approach hints at what shareholders, regulators
customers and suppliers. Companies should find
and others are likely to demand from boards in
metrics to monitor their progress in mitigating
other industries.
cyberrisks. Objective metrics will also be needed to
back up any claims the company makes about its
Responsibilities need to be defined in advance.
cybersecurity practices, especially those aimed at
The inevitable disruption of an attack can be com-
investors.
pounded by uncertainty about who should handle
different aspects of the response. For instance,
Consider hiring outside vendors to test your sys-
CIOs/CTOs, general counsels and communications
tems and people. A survey of directors last year
chiefs will each have roles, sometimes overlap-
by the University of California, Berkeley and Booz
ping, so their responsibilities need to be spelled
Allen Hamilton showed that many companies seek
out in advance.The board should also consider
regular third-party advice to ensure that manage-
pressure-testing management’s plans and lay
ment is keeping up with the latest evolving threats.
down procedures to ensure the board plays an
That may be essential for the board to fulfill its
appropriate oversight role during an incident.
oversight role.
Prepare a response playbook in advance. Corpo- Even for companies that follow established proce-
rate networks are often disabled by ransomware. dures, such as the National Institute of Standards
Since attackers typically demand payment within andTechnology’s Cybersecurity Framework, third
days, victims can find themselves scrambling parties can help verify that those are being ad-
to engage outside experts (e.g., a digital foren- hered to. For example, the American Institute of
sics consultant, ransomware negotiator, outside Certified Public Accountants has set standards for
counsel and public relations specialist) and make companywide audits of cyberrisk measures.
strategic decisions while the company’s e-mail
system is inoperable and vital records are inacces-
sible. It may be impossible, for example, to fulfill
contractual obligations to notify customers about
the incident because contact or contract informa-
tion has been locked up by encryption.
6 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
The Informed Board / Winter 2021
The Brexit Deal Leaves
Some Mighty Big Holes
The Brexit agreement covered goods
but not financial or other services,
creating uncertainty for many businesses.
−− Goods trade was pro- The Christmas Eve agreement That includes financial services,
vided for, at the cost of between the United Kingdom and state aid and subsidies, data flows
much new paperwork. the European Union to settle their and mutual recognition of profes-
relationship now that the U.K. has sional services. Since services
−− Crucial rules for banking withdrawn from the union was hailed make up the majority of the U.K.’s
and other services were by both parties as a successful economic output, this leaves signif-
left unresolved. conclusion to their protracted, conten- icant uncertainty surrounding the
tious talks. future trade relationship.
The goods news. The Trade and Take financial services, which
Cooperation Agreement (TCA) allows account for nearly 7% of the U.K.
goods trade without tariffs or quotas, economy. The parties committed to
something the EU has not agreed implement international standards,
to so comprehensively with other such as the Basel Committee’s rules
nations. But goods will need to meet for the banking sector, to which both
complex rules-of-origin requirements, sides are already party. There is also
and businesses will have to adapt to a commitment to establish a struc-
a new regime of customs paperwork ture for regulatory cooperation. But
that was unnecessary when the U.K. that is a long way from establishing
was part of the EU. concrete rules.
Financial services and other Significantly, the TCA does not
omissions. Other key areas of trade cover “passporting rights,” which
were not addressed by the agree- have allowed U.K. financial firms to
ment or rules were not finalized. operate in the EU under their U.K.
7 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesThe Brexit Deal Leaves
Some Mighty Big Holes
licenses. Options such as “enhanced In the meantime, many facets of
equivalence” or mutual recognition the future economic trade between
remain to be discussed, but the U.K. the EU and U.K. remain up in the air.
may conclude that the price of agree-
ing to an equivalence regime, which
would allow firms to operate under Author
their home state regulation for certain
Simon Toms / London
financial services, is too high. This
could lead to significant regulatory
divergence in coming years.
8 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesThe Informed Board / Winter 2021
ESG: Many Demands,
Few Clear Rules
Regulators and investors are pressing companies
to act on ESG issues, but there are few agreed
standards. What is a board to do?
−− Boards can expect inves- Environmental, social and governance warming is limited to well below
tors and regulators to issues (ESG) rose to the top of many 2ºC,” and to disclose how those
demand increased disclo- agendas in 2020. Long-standing plans are “incorporated into … long-
sure of ESG metrics. concerns about environmental issues term strategy and reviewed by your
continued to be important, but the board of directors.”
−− With no uniform set “S” in ESG came to the fore as the
world faced COVID-19 and the Growing demand for disclosure
of ESG standards, and a lack of uniform reporting
companies with global issues raised by the Black Lives
Matters movement. standards. The continuing growth
operations may face a of ESG-focused investing, as well as
hodgepodge of disclosure A focus on customers, employees, the increased emphasis that asset
requirements. communities and other stakeholders managers and institutional investors
will continue in 2021. We also expect are placing on ESG issues, is driving
−− Investors will push for environmental issues to remain demand for ESG metrics. Nonprofit
ESG to play a role in a significant topic with the Biden groups, governments and regulators
executive compensation. administration’s recommitment to the have drafted or endorsed varying
Paris Agreement and the upcoming approaches. But the proposed disclo-
−− Directors need to be U.N. Climate Change Conference of sure regimes have varied by region
fluent in these topics the Parties (COP26) in November. and there is a lack of consensus as
when engaging with to which metrics are most relevant
shareholders. For example, on January 26, asset or useful. With asset managers such
manager BlackRock announced that as BlackRock putting their weight
it will ask “companies to disclose a behind a move toward common
plan for how their business model global standards, a core set of report-
will be compatible with a net zero ing standards is likely to emerge in
economy — that is, one where global the coming years.
9 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesESG: Many Demands,
Few Clear Rules
The United States: Asset manag- Meanwhile, Nasdaq has proposed
ers BlackRock, State Street and amending its listing standards to
Vanguard, among others, have require companies to enhance
encouraged companies to follow their disclosures regarding director
reporting standards set by the diversity. In addition, companies
Sustainability Accounting Standards eventually would be required to have
Board and the framework established at least one female director and at
by the Task Force on Climate-related least one director from a racially or
Financial Disclosures (TCFD), which ethnically diverse background or the
was formed under the Basel, Switzer- LGBTQ community, or explain why
land-based Financial Stability Board. their board lacks them.
The United Kingdom and European
Union: A proposal pending in the
There is no company whose business model won’t
U.K. would force more than 650
be profoundly affected by the transition to a net zero public companies, including all of
economy — one that emits no more carbon dioxide those in the FTSE 100, to make the
than it removes from the atmosphere by 2050 … environmental disclosures in line
As the transition accelerates, companies with a well- with the TCFD recommendations by
articulated long-term strategy, and a clear plan to the end of 2022. The rules would be
address the transition to net zero, will distinguish extended to all large private compa-
nies in the U.K. by 2023.
themselves with their stakeholders — with customers,
policymakers, employees and shareholders — by In the EU, new rules will require
inspiring confidence that they can navigate this global fund managers to demonstrate how
transformation. But companies that are not quickly ESG factors are being integrated into
investment decisions. The European
preparing themselves will see their businesses and
Commission has also produced
valuations suffer … " guidelines for companies on reporting
–– Larry Fink / Chairman and CEO, BlackRock / 2021 Letter to CEOs, January 2021
climate change information.
A patchwork of standards will
Many expect the Securities and make compliance challenging. For
Exchange Commission under the companies operating in multiple
Biden administration to consider jurisdictions, the hodgepodge of rules
rules requiring ESG disclosures, and guidelines may impose extensive
potentially addressing climate but differing disclosures.
change, workforce diversity and
corporate political contributions, but The upshot: Companies need to
no new rules are imminent. (Listen to begin preparing to comply with
a short interview about possible ESG different reporting requirements
initiatives by the SEC.) around the world.
10 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesESG: Many Demands,
Few Clear Rules
Some investors want executive holder activists have placed on ESG point out boards with no more than
compensation tied to ESG perfor- issues, see “New Tactics and ESG one woman director, and in 2022 it
mance. Many investors subscribe to Themes Take Shareholder Activism in will recommend against nominating
the view that you get the results that New Directions.”) committee chairs of boards with
you measure and reward, and we fewer than two female directors if the
expect some investors to continue to Diversity will likely feature board has at least seven members.
argue for ESG to play a part in setting prominently in 2021. Investors
executive compensation. The U.K. continue to advocate that new Get ahead of ESG and communicate
Investment Association, representing directors and executives better your progress. Boards and manage-
250 asset managers, Norway’s $1.3 reflect the societies within which ment teams need to understand
trillion national oil fund and the $400 their companies operate. For the ESG changes that institutional
billion Dutch civil pension fund ABP example, the New York City investors, activists and regulators
have said that companies should Employees’ Retirement System are seeking, and how the various
consider whether their remuneration advocates policies to ensure that disclosure mandates are shaping
systems promote sustainable busi- a diverse range of candidates are up so they can address shareholder
ness practices and progress on ESG considered when directors and concerns and respond to new disclo-
issues. BlackRock has adopted proxy executives are named. sure guidelines and requirements.
voting guidelines for EMEA compa- Proxy advisory services in the U.S. Although disclosure may not be
nies stating that ESG-driven metrics will continue to play a role on these required, and guidelines vary across
for remuneration should be specific issues. For example, starting in 2021, jurisdictions, waiting for mandatory or
and linked to the achievement of Institutional Shareholder Services consistent disclosure regimes is not
strategic objectives. will monitor the boards of compa- an option for most companies. Those
Expect increasing pressure on ESG nies in the Russell 3000 and S&P that fail to tell their own ESG story
issues. Boards can expect more 1500 indices and flag those with no will do so at their own peril. They are
demands for accountability on ESG apparent racial or ethnic diversity. at risk of third parties painting a less
matters in 2021, from investors and In 2022, ISS will recommend voting flattering and less accurate picture.
other stakeholders. For example, against nominating committee chairs
in 2020, major oil companies in the of these companies where a board
U.S. and Europe faced shareholder lacks diversity. Authors
campaigns demanding reduced Marc S. Gerber / Washington, D.C.
Already, Glass Lewis, another proxy
emissions, some spearheaded by Simon Toms / London
advisor, generally votes against nomi-
new ESG-focused activist funds. (For nating committee chairs of all-male
a look at the new emphasis share- boards. Starting this year, it will
11 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesThe Informed Board / Winter 2021
Audio Interview:
How Far Can the SEC Go?
Opponents of mandatory disclosures about climate risk
and diversity will argue that they exceed the agency’s authority —
a five-minute chat with ex-SEC general counsel Robert Stebbins.
−− Listen to the recording Opponents of mandatory disclosures to require ESG disclosures across the
about climate risk and diversity will board even when these disclosures
argue that they exceed the agency’s are not necessarily material to an
authority — a six-minute chat with investor’s understanding of a compa-
Robert Stebbins, the SEC’s general ny’s business.
counsel until January.
Bob, to start off, many people expect
more rulemaking generally from the
Transcript commission once Gensler is in place.
Ann Beth Stebbins: This is Ann Beth Is that what you foresee?
Stebbins. I’m a partner in Skadden’s
Bob Stebbins: I do. Then at that point
M&A Group, and I’m joined here
there will be a 3-2 majority for the
this morning by Bob Stebbins. Bob
Democratic commissioners, Demo-
was until January the general coun-
cratically appointed commissioners.
sel of the Securities and Exchange
And I do think you’ll see rulemaking
Commission, and he also happens
obviously and at the focus, he hasn’t
to be my husband. We’re going to
really foreshadowed what his theo-
discuss what direction the SEC might
ries of emphasis are going to be yet,
take under Gary Gensler, President
but I think one could expect given
Biden’s nominee for chairman.
what we’ve been reading about
There’s been a lot of speculation that
for a good while now that ESG and
a Democratic-controlled SEC may
specific climate issues could be
implement rules requiring corporate
something, prescriptive requirements
disclosures on ESG issues — every-
relating thereto could be something
thing from climate risks to diversity
that they focus on.
in the workplace. What I want to
discuss today is the SEC’s authority
12 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesAudio Interview:
How Far Can the SEC Go?
Ann Beth Stebbins: Right now the Ann Beth Stebbins: The other thing of reasons but it’s unrelated to the
SEC does require under its current I’ve been thinking about is “how far SEC’s mission, that gets much trick-
rules companies to disclose informa- can the SEC go in its rulemaking?” ier for the SEC and the courts.
tion about climate. How are we going Clearly climate — and let’s just take
to see a shift from what’s currently that for example, since we’ve been Ann Beth Stebbins: Some of these
required to what we might expect to talking about it — is important to areas we are talking about are a little
see required of companies? President Biden, and he will have gray. I mean investors obviously are
legislative initiatives. He has already very interested in climate from a big
Bob Stebbins: The big picture, rejoined the Paris climate accord. picture macro perspective. And you
the way we view disclosure is we So you can expect executive-level have the BlackRocks, Vanguard, State
think it’s important to a company to actions, which we’ve seen. You can Street all putting out white papers
disclose everything that’s material expect bills to be introduced in the on climate and the importance of
about their business and take a look legislature. But, how does the SEC’s climate. You have the big institutional
at, think about when they think about rulemaking work alongside the legis- investors taking a stand on board
their business, what’s material to lative and executive actions that we diversity. So it’s clearly important
them and make sure that’s getting may see in this area? to big institutional investors, but I
disclosed somewhere in their public guess what you’re thinking is “is that
filings. What they’re talking about Bob Stebbins: Big picture of the material to an investment decision
is something more prescriptive. So SEC, we always expect when we’re of Joe consumer, Mr. and Mrs. Main
let’s say climate wasn’t a material drafting rules that everything that Street?” as Jay would’ve called them
risk to you under a materiality-based we’re going to do is going to be under the Clayton SEC.
standard, then at that point there’s challenged in court. And there have
nothing to disclose. But, if you’re been instances, of course, where Bob Stebbins: Well I would say that,
Exxon, obviously it is material, and so rules are struck down. It doesn’t I think that the rules you are talking
we would expect to see a fair amount happen a lot, but it happens. So about, at least in the examples you
of disclosure. What they’re talking when the SEC gets away from its gave, have a better chance of surviv-
about is having prescriptive disclo- mission — it is a tripartite mission, ing than some of the other rules. You
sures that would require everyone to including investor protection and can tie it to investors caring. To the
make certain disclosures regardless taking care of the markets, and extent that it’s defensible and there is
of how material or immaterial the capital formation is the third part — support that investors care about it, I
risks are to the company. Well, that’s it’s tricky. And then things are going think there’s great chance these rules
the tricky part, right? So when you to be judged certainly more closely are going to survive, right?
do prescriptive requirements, you’re by the courts. So the SEC always Ann Beth Stebbins: Right. Thanks
inserting your judgment about what’s needs to be cognizant of making sure a lot.
important to investors, and the SEC that what it’s doing in rulemaking
doesn’t really have expertise to do can be defended as something that
that. That’s where it gets tricky, and the reasonable investor it’s material
Author
that’s always where it gets tricky on to and something they’re interested
prescriptive requirements. in. And if it’s information that might Ann Beth Stebbins / New York
be a very nice thing to do for a lot
13 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesThe Informed Board / Winter 2021
New Tactics and ESG Themes
Take Shareholder Activism
in New Directions
The dividing lines between activist and private equity
firms are blurring, and new types of activists are emerging.
−− Activism is likely to Shareholder activism levels decreased and liquidity issues companies
rebound as the business in 2020 amid the upheaval and faced in 2020 reduced M&A activity
world recovers from uncertainty brought on by COVID-19. and made it harder for activists to
COVID-19 disruptions. But activists did launch a number of advocate transformative deals, such
high-profile campaigns and there was as the sale of a company, a breakup
−− Some activists are raising an uptick of activism in the second or major divestiture, or a large
permanent capital, giving half of the year; and more than 80 dividend payout. In addition, there
them new leverage, and CEOs were replaced during activist were fewer announced deals for
campaigns. activists to challenge.
activist approaches have
become more accept- Today, even well-performing compa- As the economy rebounds and
able to many institutional nies may find themselves targets of business becomes more predictable,
investors. activist campaigns on environmental activists are likely to press companies
and social issues, as new funds have to undertake transactions and
−− Even high-performing been formed to specialize in these advocate for changes to the deals
companies may face areas. Moreover, established activists companies propose.
pressure on ESG issues. have established new types of invest-
ment vehicles that could strengthen COVID-19 problems may spur some
−− The best defense is a their hands. Preparing for the possi- campaigns. Underperformance is
solid relationship with bility of an activist campaign should another traditional target of activists.
and understanding therefore be on the board agenda at As businesses struggle to cope with
of your shareholders, most public companies. the challenges of the pandemic, or
if a company’s stock price does not
coupled with a plan for
Expect an uptick in activism in 2021. return to pre-pandemic levels, some
dealing with activists if
Historically, many activist campaigns could find themselves vulnerable to
they emerge. have focused on M&A and returns activists pressing for operational or
of capital. The economic uncertainty governance changes.
14 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesNew Tactics and ESG Themes
Take Shareholder Activism
in New Directions
Even companies with solid financial firms, pursuing outright acquisitions tional asset managers have now
performance may face activists. or negotiating for large stakes in openly adopted activist tactics. For
Environmental, social and governance companies for extended periods example, Wellington Management,
(ESG) themes featured prominently (private investments in public enti- the largest shareholder of Bristol-My-
in 2020 activist campaigns, and ties, or PIPEs). In 2020, three of ers Squibb, came out against the
several factors are likely to accelerate the best-known names in activism, drugmaker’s $74 billion deal to buy
that trend. Pershing Square, Starboard Value and biotech Celgene in 2019.
Third Point, formed SPACs (special
Many institutional investors, even purpose acquisition companies), shell This reflects a broader transition to
managers of passive index funds, companies that raised capital to buy a more shareholder-centric model of
have called for the business world businesses. One of the most influen- corporate governance. Potentially,
to address environmental and social tial established activist firms, Elliott any investor with a clear agenda,
issues such as diversity. (See Management, formed a buyout fund sufficient resources and the support
“ESG: Many Demands, Few Clear in 2019. of a wide shareholder base can utilize
Rules.”) Major American and Euro- activist tactics.
pean oil companies, for instance, Meanwhile, some private equity
have been pressed to lower their firms have pursued more activist-like Framing a Strategy
emissions by activist groups that are strategies, and in some cases, activ-
backed by major pension funds and ists have teamed up with strategics Given the evolution of activism, it is
asset managers. or private equity firms on acquisi- vital for boards to ensure that their
tions. Since activists often zero in companies have strategies to address
Some established activists have on management and operational activist pressure.
recently formed ESG-focused funds shortcomings, a buyout is a logical
alongside their regular pools to Shareholder engagement is the
next step.
target companies they contend have best defense. Ongoing dialogue with
not met ESG standards, and some These moves may alter the calculus shareholders is the best preventive
veteran activists, including ValueAct for companies in some situations, strategy. Know your most significant
founder Jeff Ubben, have formed because an activist investor with shareholders and understand their
new ESG-only activist firms. Other sufficient capital and a proven willing- investment theses. Engagement with
new ESG funds have been formed by ness to take a long-term position in a shareholders more broadly allows
groups with few ties to established company or to take it private poses a management to build relationships,
activist firms. more serious threat than one known articulate the company’s strategy and
only for saber-rattling and then trad- establish the credibility that manage-
Boards need to prepare for this ing out of the stock. ment and the board will need in the
new set of players and their event an activist surfaces.
agendas, paying close attention to Traditional investors have become
their companies’ ESG profiles and more open to activism. Over the last Executives usually take the lead in
ratings, and not just the financial few years, as activism has become communications with shareholders,
vulnerabilities that traditionally more accepted, some long-only but direct engagement by indepen-
attracted activists’ attention. asset managers, including money dent directors is becoming more
managers, have supported activist common, particularly regarding
The lines between activists and campaigns where they thought it subjects under the board’s purview,
other investors are blurring. A would increase the value of their such as executive compensation,
number of major activist firms have investments. Usually, this has been capital allocation and succession plan-
begun acting more like private equity behind the scenes, but some tradi- ning, and when a company is facing
15 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesNew Tactics and ESG Themes
Take Shareholder Activism
in New Directions
Activist Campaigns
586
Jan-Dec 2020 567 566
576 581
572 569
555 563
554 550
546
22
19 20
15 16
14
Open Campaigns at Month-End 12
New Campaigns at Month-End 8 8 9
6 5
Source: ActivistMonitor/Merger Market
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
major challenges. A company needs substantial stake, assemble a team
to weigh the pros and cons of using of advisers and prepare a playbook
a director in this role, and give careful in case an activist emerges. Another
thought to the choice of directors and tool being used more frequently is
prepare them thoroughly. a “table-top” simulation of different
activist scenarios to test and refine a
Assess vulnerabilities and prepare company’s reactions.
responses. Proactively review your
company’s vulnerabilities ahead of Early board involvement is critical. If
any activist approach, looking at the an activist surfaces, it is crucial that
business from the activist’s perspec- management alerts the board imme-
tive. Consider whether alternative diately so directors are educated and
financial and business strategies (say, are actively involved in the response.
a divestiture, spinoff or enhanced To avoid missteps, the board and
return of capital) could boost share- management must be aligned in their
holder value. An open-minded review approach and coordinate both internal
can go a long way toward reducing and external communications.
the risk of an activist intervention.
Develop a defensive plan. Implement
Authors
a stock surveillance warning system
to monitor new shareholdings, have Richard J. Grossman / New York
a shareholder rights plan ready to Neil P. Stronski / New York
implement if an activist acquires a
16 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesThe Informed Board / Winter 2021
Get Used to the New Normal
in US-China Trade Relations
Restrictions are unlikely to loosen under the
new administration because there is bipartisan
support now for taking a hard line with China.
−− Tariffs and other restric- The restrictions the United States Our Predictions
tions on trade with China and China placed on trade with each
other during the Trump administration Given the new bipartisan consen-
are unlikely to change
are unlikely to change significantly sus, President Biden will be under
significantly under the pressure to be “tough on China.” As
under the Biden administration.
Biden administration, so a result, we expect that the Biden
Over the past four years, bipartisan
companies will have to administration will retain virtually all
support developed for a more aggres-
adapt their operations sive policy toward China on trade, of the measures taken by the Trump
and supply chains accord- and the countries’ trade disputes are administration against China. Here is
ingly. now intertwined with strategic and what to expect more specifically:
human rights issues, making them
−− A bipartisan consensus more difficult to resolve.
Tariffs are likely to remain in place.
has developed supporting Approximately $370 billion of Chinese
many of the Trump admin- Companies therefore need to prepare imports into the U.S. are subject
istration’s policies toward for this new normal: an extended to the tariffs imposed since 2018.
period of tariffs, export controls and The Biden administration is unlikely
China.
other barriers to trade and invest- to remove or reduce these without
−− Trade disputes are closely ment, particularly in high tech. The receiving something in return. It will
linked to other strategic Chinese and American economies be difficult for China to make conces-
are too deeply linked to fully decou- sions with respect to the primary
tensions between the
ple, but some relationships will likely sticking points: industrial subsidies,
U.S. and China.
be unwound and new ones will be cyber intrusions, and state direction
slower to form. and control over Chinese companies.
17 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesGet Used to the New Normal
in US-China Trade Relations
Export control measures will The new administration may take –– President Biden may impose sanc-
continue to tighten. It is unlikely that stronger action with respect to forced tions on parties perceived to be
the Biden administration will remove labor and other perceived human undermining democratic processes
Chinese firms from the so-called rights abuses. For example: and institutions in Hong Kong.
“Entity List” of companies that are
severely restricted in their purchases –– It may take a broader approach and
target companies outside of Xinji-
Other Restrictions Affecting
of U.S. goods, software and tech- Chinese Companies
nology. Moreover, recently tightened ang that allegedly use forced labor
“military end use” rules impose provided by “vocational centers” in The Biden administration’s policy
similar controls in many cases. The Xinjiang that the U.S. claims target decisions will take place against the
new administration will also continue the province’s ethnic minorities, background of other recent measures
to identify and control “emerging and including Uyghurs, or have other limiting Chinese operations and
foundational technologies” that will indirect ties to the alleged use of capital-raising in the U.S.
further restrict Chinese companies’ forced labor in Xinjiang.
In August, President Trump signed
ability to access U.S. technology. –– Most products sourced in whole or executive orders barring the sale of
For its part, China may retaliate by in part from Xinjiang will likely be two popular apps for Chinese internet
using its own version of the Entity banned. There was strong biparti- firms, TikTok and WeChat, out of
List — the “Unreliable Entities List” san support for the Uyghur Forced concern that the Chinese government
— against U.S. companies to block Labor Prevention Act (UFLPA) could collect personal data of Amer-
them from trading with or investing in 2020, and similar legislation ican citizens using the platforms.
in China. has been introduced in the new (Both orders were later enjoined by
The U.S. likely will allow SMIC session of Congress. This legisla- federal courts.)
to buy some semiconductor tion would create a presumption
that all goods sourced from Xinji- In November, President Trump
technology. China’s leading
ang are made with forced labor issued an executive order barring
semiconductor company, SMIC,
and thus are barred from importa- Americans from investing in the secu-
was added to the Entity List in
tion into the United States. rities of companies with ties to the
December. We do not expect the
Chinese military. The New York Stock
Biden administration to remove it, –– Apart from the UFLPA, we Exchange indicated that it would
but, given SMIC’s importance as a expect U.S. Customs and Border delist three Chinese telecoms compa-
supplier to many U.S. companies, Protection to continue and, in fact, nies identified by the government in
we expect the government will grant intensify its efforts to investigate order to comply. In addition, the Hold-
export licenses for less sensitive the supply chains for imports from ing Foreign Companies Accountable
technology that SMIC wants. Xinjiang and bar products that are Act was signed into law in Decem-
The Biden administration will made through forced labor. ber. It prohibits a foreign company’s
emphasize human rights. In 2019 securities from being listed or traded
–– The impact of these measures
and 2020, the U.S. imposed sanc- on U.S. exchanges if the company’s
would extend well beyond the
tions and export restrictions on an financial statements are not subject
apparel industry, which relies on
array of entities and individuals in to inspection by the U.S. Public
cotton from Xinjiang. For example,
China, based on their activities in Company Accounting Oversight
a significant portion of the global
Xinjiang province, Hong Kong and the Board for three consecutive years
supply of the polysilicon used in
South China Sea, reflecting human beginning in 2021 — inspections that
solar panels comes from Xinjiang.
rights and security concerns. China thus far has not allowed.
18 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesGet Used to the New Normal
in US-China Trade Relations
In early January, President Trump not already altered their sources of
issued an executive order banning supply will need to consider changes.
transactions with eight additional In many cases, that will entail find-
Chinese apps, including Alipay. ing new suppliers in countries such
as Vietnam, Thailand and Mexico,
The Future for US and either on an exclusive basis or as
Chinese Companies parallel “China-plus-one” alternatives.
Measures such as the UFLPA, export
Supply chains will be altered indef- controls and sanctions may also
initely. Since U.S. tariffs are likely necessitate changes to American
to remain in effect for some time, companies’ supply chains.
American companies that have
US Trade in
Goods With China
2011-2020 600
400
Two-Way Trade Total
Imports
Exports 200
Source: U.S. Census Bureau
(data in USD billions) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Chinese FDI Into
the United States 8.78
2014-2020
1.98 3.33
Minority Stakes 1.30
Greenfields
0.93 2.22 0.43
1.77
1.93
0.82 1.07 0.55 1.04
Source: Rhodium (data in USD billions)
2014 2015 2016 2017 2018 2019 2020
19 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesGet Used to the New Normal
in US-China Trade Relations
For their part, Chinese companies will We expect that Chinese investors will
continue to explore ways to become primarily invest in the U.S. market
less reliant on U.S. technology, given through passive minority stakes in
the tightening of U.S. export controls. investment funds, certain forms of
venture capital and greenfield opera-
Chinese investment in the United tions, which are not subject to CFIUS
States will remain at relatively low reviews. Lower levels of Chinese
levels. Since the onset of the trade investment may create opportunities
war, Chinese investment in the U.S. for investors from other countries.
has plunged, and it is likely to remain
at relatively low levels for some
time. In part, the drop reflects an
Authors
expansion since 2018 of the authority
of the Committee on Foreign Invest- Jeffrey Gerrish / Washington, D.C.
ment in the United States (CFIUS), Brooks Allen / Washington, D.C.
which reviews foreign investments
on national security grounds. CFIUS
has recommended blocking or
unwinding several Chinese invest-
ments in recent years, which has had
a chilling effect.
20 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesContacts
Brian D. Christiansen Michael E. Leiter Ann Beth Stebbins
Partner / Washington, D.C. Partner / Washington, D.C. Partner / New York
202.371.7852 202.371.7540 212.735.2660
brian.christiansen@skadden.com michael.leiter@skadden.com annbeth.stebbins@skadden.com
Marc S. Gerber Maxim Mayer-Cesiano Neil P. Stronski
Partner / Washington, D.C. Partner / New York Partner / New York
202.371.7233 212.735.2297 212.735.2839
marc.gerber@skadden.com maxim.mayercesiano@skadden.com neil.stronski@skadden.com
Jeffrey Gerrish Sven G. Mickisch Simon Toms
Partner / Washington, D.C. Partner / New York Partner / London
202.371.7670 212.735.3554 44.20.7519.7085
jeffrey.gerrish@skadden.com sven.mickisch@skadden.com simon.toms@skadden.com
Richard J. Grossman Sonia K. Nijjar Brooks E. Allen
Partner / New York Partner / Palo Alto Counsel / Washington, D.C.
212.735.2116 650.470.4592 202.371.7598
richard.grossman@skadden.com sonia.nijjar@skadden.com brooks.allen@skadden.com
Ken D. Kumayama William Ridgway Austin K. Brown
Partner / Palo Alto Partner / Chicago Counsel / Washington, D.C.
650.470.4553 312.407.0449 202.371.7142
ken.kumayama@skadden.com william.ridgway@skadden.com austin.brown@skadden.com
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