Category Archives: Practitioner Publications

Do Proxy Advisors Say On Pay Voting Policies Improve TSR?

The following post comes to us from Pay Governance LLC and is based on a Pay Governance memorandum by Ira Kay, Brian Johnson, Brian Lane, and Blaine Martin.

The vast majority—98%—of companies have passed their annual say on pay votes (SOP) over the past four years. Proxy advisor voting recommendations remain highly influential on these votes, and many companies, perhaps hundreds, have changed the structure of their executive pay programs to try to comply with proxy advisor policies and to obtain a “FOR” SOP vote recommendation from proxy advisors. Proxy advisors base voting recommendations on quantitative and qualitative tests that are highly tailored to their own perspective of and guidance on what comprises a successful executive pay model. [1] Are these voting recommendations correlated with long-term shareholder value creation as measured by total shareholder returns (TSR)? While correlation does not prove causation, what possible explanations may explain the correlation observed in our research?

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SEC Implements Dodd-Frank Reporting and Dissemination Rules for Security-Based Swaps

The following post comes to us from Arthur S. Long, partner in the Financial Institutions and Securities Regulation practice groups at Gibson, Dunn & Crutcher LLP, and is based on the introduction of a Gibson Dunn publication; the complete publication, including footnotes and charts, is available here.

Implementation of the derivatives market reforms contained in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) may fairly be characterized as a herculean effort. The Commodity Futures Trading Commission (CFTC) has finalized dozens of new rules to implement Title VII’s provisions governing “swaps.” Although Title VII requires the Securities and Exchange Commission (SEC or Commission) to implement similar provisions for “security-based swaps” (SBSs), the SEC’s rulemaking process has lagged the CFTC’s.

Earlier this year, the SEC finalized two of its required rules: one (Final Regulation SBSR) governs the reporting of SBS information to registered security-based swap data repositories (SDRs) and related public dissemination requirements; the other covers the registration and duties of SDRs (SDR Registration Rule). Additionally, the SEC published a proposed rule to supplement Final Regulation SBSR that addresses, among other things, an implementation timeframe, the reporting of cleared SBSs and platform-executed SBSs, and rules relating to SDR fees (Proposed Regulation SBSR). Comments on Proposed Regulation SBSR must be submitted to the SEC by May 4, 2015.

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Are Companies Setting Challenging Target Incentive Goals?

The following post comes to us from Pay Governance LLC and is based on a Pay Governance memorandum by Ira Kay, Steve Friedman, Brian Lane, Blaine Martin, and Soren Meischeid.

Do companies set appropriately challenging goals in their incentive plans? How does a compensation committee determine whether management is recommending challenging goals? How important are earnings guidance and analyst expectations in goal setting? Are more challenging goals achieved as frequently as less challenging goals? How much are annual incentive payouts increased by the achievement of incentive goals? How does the stock market react to challenging goals?

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2015 Canadian Hostile Take-Over Bid Study

The following post comes to us from Fasken Martineau DuMoulin LLP and is based on the executive summary of a Fasken Martineau study by Aaron J. Atkinson and Bradley A. Freelan, partners in the Mergers & Acquisitions practice at Fasken Martineau DuMoulin LLP. The complete publication is available here.

In Canada, there are numerous ways to acquire a public company; however, a take-over bid made directly to shareholders is the only means by which legal control can be acquired without the consent of the target board. Such an unsolicited (or “hostile”) bid is often used to bypass the board and present an offer directly to shareholders after discussions with the target board have failed, thereby putting the target company “in play”.

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Optimizing Proxy Communications

The following post comes to us from Ernst & Young LLP, and is based on a publication by the EY Center for Board Matters.

Proxy statements continue to evolve. New disclosure trends are sharpening company messaging to investors, while other disclosure practices leave investors seeking clarification.

To learn what kinds of disclosures are most valuable to investors, EY asked them where they would like to see disclosure enhancements and the kinds of disclosure practices they prefer.

The EY Center for Board Matters recently had conversations with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities.

This post is the third in a series of four posts based on insights gathered from those conversations and previewing the 2015 proxy season. The first post (available here) focused upon board composition; the second (available here) upon shareholder activism. The upcoming final post will focus on the shareholder proposal landscape.

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Delaware Enacts New Rapid Arbitration Act

The following post comes to us from David J. Berger, partner focusing on corporate governance at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Rapid Arbitration Act (DRAA)—which provides a streamlined arbitration process that will allow for prompt, cost-effective resolution of business disputes—was passed by the Delaware House of Representatives on March 19, 2015, and the Delaware Senate on March 31, 2015, and was signed by Governor Jack Markell on April 3, 2015. The DRAA will become effective on May 4, 2015, and will be codified as new Chapter 58 of Title 10 of the Delaware Code. As summarized in more detail below, the DRAA offers a real alternative to the litigation process, providing companies with the chance to engage in a fast, relatively low-cost dispute resolution process without the burden of extensive discovery. The DRAA may be particularly beneficial to companies that are in commercial relationships with each other and that seek to avoid a lengthy, extensive, and public litigation process.

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Three Practical Steps to Oversee Enterprise Risk Management

The following post comes to us from Latham & Watkins LLP, and is based on a Latham publication by Scott Hodgkins, Steven B. Stokdyk, and Joel H. Trotter.

Oversight of enterprise risk management, or ERM, continues to challenge boards and occupy a prominent place on the governance agenda. Effective ERM seeks to balance risk and opportunity while enhancing value-creation opportunities. Proxy advisors may recommend “against” or “withhold” votes against directors of companies that experience a material failure of risk oversight.

A leading ERM framework, developed by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, directs boards to:

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Trends in Board of Director Compensation

The following post comes to us from Pay Governance LLC and is based on a Pay Governance memorandum by Steve Pakela and John Sinkular.

Over the past 15 years, the methods of compensating non-employee directors have changed in tandem with the risk and workload of being a director. The catalyst for change over this time period includes a variety of regulatory requirements, such as Sarbanes-Oxley and Dodd Frank, enhanced proxy disclosure rules and increases in shareholder activism. By way of examples, Audit Committees meet more frequently and must have at least one qualified financial expert, and Compensation Committees have greater workloads. Today’s corporate director needs to dedicate more time to the job, assume greater risk, and meet higher qualification standards. Arguably, these issues, and newer issues such as director tenure limits, have reduced the pool of available individuals who are willing to serve as a director. As with all things impacted by supply and demand, the total compensation provided to directors has increased. Over the past decade, total director remuneration has grown by approximately 5% per year on average.

With the changing role and the increase in total compensation, the design of director compensation programs has changed over time as well. The basic construct of the director compensation arrangement continues to be a mix of cash and equity. However, the means of delivering these two elements has changed rather dramatically over the past decade. Below we review key elements of director compensation programs.

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Resolution Preparedness: Do You Know Where Your QFCs Are?

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Frank Serravalli, Dan Weiss, John Simonson, and Daniel Sullivan. The complete publication, including appendix, is available here.

In January, the US Secretary of Treasury issued a notice of proposed rulemaking (“NPR”) that would establish new recordkeeping requirements for Qualified Financial Contracts (“QFCs”). [1] US systemically important financial institutions (“SIFIs”) and certain of their affiliates [2] will be required under the NPR to maintain specific information electronically on end-of-day QFC positions, and to be able to provide this information to regulators within 24 hours if requested. This is a significant expansion in both scope and detail from current QFC recordkeeping requirements, which now apply only to certain insured depository institutions (“IDIs”) designated by the FDIC. [3]

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Further Recognition of the Adverse Effects of Activist Hedge Funds

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton. Earlier posts by Mr. Lipton on hedge fund activism are available here, herehere, and here. Recent work from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here). For five posts by Mr. Lipton criticizing the Bebchuk-Brav-Jiang paper, and for three posts by the authors replying to Mr. Lipton’s criticism, see here.

Despite the continued support of attacks by activist hedge funds by the Chair of the SEC, and many “Chicago school” academics who continue to rely on discredited statistics, there is growing recognition by institutional investors and prominent “new school” economists of the threat to corporations and their shareholders and to the economy of these attacks and the concomitant short-termism they create.

In a “must read,” March 31, 2015 letter to the CEOs of public companies, Laurence Fink, Chairman of BlackRock and one of the earliest to recognize the danger from attacks by activist hedge funds, wrote:

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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Breeden
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    Daniel Fischel
    Stephen Fraidin
    Byron Georgiou
    Larry Hamdan
    Carl Icahn
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Barry Rosenstein
    Paul Rowe
    Rodman Ward