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BrandonHoltFirstEssay 10 - 07 Jun 2022 - Main.BrandonHolt
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< | REVISING: Incentivizing Corporate Diversity through Debt Finance | >
> | Incentivizing Corporate Diversity through Debt Finance | | | -- By BrandonHolt - 13 Mar 2022 | | | Shareholder activism may seem like an obvious argument for corporate diversity given the home “diversity” seemingly has under "social" in ESG and the general corporate preference for market-dictated outcomes. Even the Financial Times noted companies and boards must be prepared for investors of varying shareholder interests attacking even “squishy matters where blunt profit maximi[z]ation is not the issue.” | |
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< | While undeniably impactful, shareholder activism is also limited. Its strategies require motivated shareholders, continuous engagement, proxy coordination amongst investors, and significant advisory resources (e.g. legal, activist, and financial advisors). The strategies, like board overhauls, are also antagonistic to the business and can be met with resistance that further delays realized progress. And importantly, these strategies are generally limited to public companies, which only represent a minority of US firms. | >
> | While undeniably impactful, shareholder activism is also limited. Its strategies require motivated shareholders, continuous engagement, proxy coordination, and advisory resources (e.g. legal, activist, and financial advisors). The strategies, like board overhauls, are also antagonistic to the business and can be met with resistance that further delays progress. And importantly, these strategies are generally limited to public companies, which represent a minority of US firms. | | | Debt Financing | |
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< | Unlike a traditional shareholder activist campaign, attaching corporate diversity to debt finance can include private companies and also create a precedent for multiple new parties. | >
> | Unlike a traditional shareholder activist campaign, attaching corporate diversity to debt finance can include private companies and also create a precedent for multiple new parties. As a result, this essay concludes that leveraging debt finance is one of the strongest options to incentive meaningful corporate diversity. | | | As bank loans are a contract, the repayment terms can include an adjustable interest rate. The bank lender would assign an initial rate (based on a market benchmark like LIBOR or another benchmark given LIBOR's phaseout) that may include a premium. The premium, reflecting the borrower's creditworthiness, is triggered if the company has "low" diversity at the consummation of the loan. The borrower and lender can further agree to increase or decrease the interest rate over time based on whether the borrower meets the agreed diversity targets. The borrower need not be the only entity subject to a diversity commitment. The borrower could further bargain for discounts on advising fees if their legal and financial advisors to these transactions similarly fail to meet agreed diversity targets. |
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