Tag: Boards of Directors


Delaware Court Faults Committee Process & Advisory Work in Finding Lack of Good Faith

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Jonathan M. Moses, and Ryan A. McLeod. 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.

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Jonathan M. Moses, and Ryan A. McLeod. 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.

On April 20, 2015, the Delaware Court of Chancery entered a $171 million post-trial judgment after finding a master limited partnership overpaid for assets from its parent. In re El Paso Pipeline Partners L.P. Derivative Litig., C.A. No. 7141-VCL (Del. Ch. Apr. 20, 2015).

The case concerned a 2010 “dropdown” transaction in which El Paso Pipeline Partners L.P. purchased assets from its controlling parent entity, El Paso Corporation. The limited partnership agreement governing the MLP permitted such transactions so long as they were approved by a conflicts committee whose members believed in good faith that the transaction was in the best interests of the MLP. After the parent proposed a dropdown transaction, the MLP’s committee retained legal and financial advisors and negotiated revised terms. Although the committee members initially expressed reservations about aspects of the proposed transaction in light of an earlier dropdown deal, each testified that he ultimately concluded that the transaction was in the best interests of the MLP, stressing that it was immediately accretive to the holders of the MLP’s common units. After receiving a fairness opinion from its financial advisor, the committee approved the transaction and litigation ensued.

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New Statistics and Cases of CEO Succession in the S&P 500

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2015 Edition, a Conference Board report supported by a research grant from Heidrick & Struggles and authored by Dr. Tonello, Jason D. Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO Succession Practices: 2015 Edition, a Conference Board report supported by a research grant from Heidrick & Struggles and authored by Dr. Tonello, Jason D. Schloetzer of Georgetown University, and Melissa Aguilar of The Conference Board. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

CEO Succession Practices, which The Conference Board updates annually, documents CEO turnover events at S&P 500 companies. The 2015 edition contains a historical comparison of 2014 CEO successions with information dating back to 2000. In addition to analyzing the correlation between CEO succession and company performance, the report discusses age, tenure, and the professional qualifications of incoming and departing CEOs. It also describes succession planning practices (including the adoption rate of mandatory CEO retirement policies and the frequency of performance evaluations) and disclosure, based on findings from a survey of general counsel and corporate secretaries at more than 300 U.S. public companies.

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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.

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.

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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Shareholder Activism: an Engagement Opportunity

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

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

The recent surge in shareholder activism [1] continues to keep boards on alert heading into the 2015 proxy season. Some companies are taking proactive measures to prepare for potential activist investor campaigns, including engaging long-term institutional investors.

Based on what we’re hearing from long-term institutional investors, these efforts are worthwhile in that they foster constructive relationships and alignment with key shareholders.

The EY Center for Board Matters (the Center) recently had conversations with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities. We also gained insights from investors, directors and other stakeholders through our proxy season dialogue dinners. [2]

This post is the second 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 upcoming two will focus on proxy statement disclosures, and the shareholder proposal landscape.

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2015 Proxy Season Insights: Board Composition

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

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

Heading into the 2015 proxy season, board composition and renewal are once again in the spotlight for a number of reasons.

  • Investors increasingly seek confirmation that boards have the skill sets and expertise needed to provide strategic counsel and oversee key risks facing the company, including environmental and social risks.
  • The continued lack of turnover on many boards and slow progress on increasing diversity, including by gender and ethnicity, are bringing director tenure and board succession planning under scrutiny.
  • A new widespread push for proxy access could make it easier for shareholders to nominate their own candidates to the board. [1]

These factors make it increasingly important for boards to explain their composition in a compelling way. Meeting this expectation is made all the more challenging by the fact that investors are assessing board composition using different factors.

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Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims

The following post comes to us from Mark Lebovitch and Jeroen van Kwawegen of Bernstein Litowitz Berger & Grossmann LLP. 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 following post comes to us from Mark Lebovitch and Jeroen van Kwawegen of Bernstein Litowitz Berger & Grossmann LLP. 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 Supreme Court’s May 8, 2014 Opinion in ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP”) marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. The article, Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims, asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Accordingly, the authors support the March 6, 2015 proposal from the Delaware Corporation Law Council to legislatively prohibit the use of fee-shifting provisions in the public company context. Rather than simply criticize ATP and support the legislative proposal, we propose a carefully tailored answer to frivolous litigation, which mitigates abuses, conforms to longstanding legal principles, and preserves the benefits of board accountability and meritorious stockholder litigation.

First, the article argues that directors must not be permitted to use their corporate and fiduciary powers as a weapon to avoid accountability to the stockholders whose assets they manage. The authors detail the policy and legal problems with the concept of allowing directors to impose fee shifting bylaws, putting in question the relationship between stockholders and boards that forms the foundation of the modern public corporation. If ATP applies to public corporations, the Delaware Supreme Court, sub silentio, reversed several bedrock principles of Delaware corporate law and upset the balance of powers between stockholders and boards that has been in existence for decades.

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The Influence of Board of Directors’ Risk Oversight on Risk Management Maturity and Firm Risk-Taking

The following post comes to us from Christopher Ittner of the Department of Accounting at the University of Pennsylvania and Thomas Keusch of the Department of Business Economics at Erasmus University Rotterdam.

The following post comes to us from Christopher Ittner of the Department of Accounting at the University of Pennsylvania and Thomas Keusch of the Department of Business Economics at Erasmus University Rotterdam.

A variety of external events, including inquiries into the causes of the 2008 financial crisis and changes in regulations and listing rules have fostered rising expectations for boards of directors to exert greater oversight of their organizations’ risk management processes. The primary impetus behind these external pressures is the belief that stronger board oversight over risk management processes will lead to substantive improvements in risk management and more informed risk-taking. Many observers, however, argue that board members often lack the time, skills, and information necessary for effective risk oversight. They contend that the adoption of governance practices that are advocated or mandated by external parties is often window-dressing. This point of view suggests that board risk oversight will have little effect on companies’ risk management practices or risk-taking.

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A Say on “Say-on-Pay”: Assessing Impact After Four Years

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

The 2015 proxy season is the fifth one in which shareholders of thousands of publicly traded corporations have cast non-binding votes on the executive pay programs of the companies in which they are invested. The holding of such a vote, commonly known as Say-on-Pay, is required under Section 951 of the Dodd-Frank law. [1] That requirement applies to most publicly traded companies. Following are some observations on Say-on-Pay.

Results of Votes

In each of the four years of Say-on-Pay—2011-2014 proxy seasons—at the Russell 3000 companies holding Say-on-Pay votes (i) the executive pay program received favorable votes from over 90 percent of the shareholders voting at 75 percent of those companies and (ii) 60 or fewer companies had a majority of votes cast disapproving the executive pay program. [2]

Evaluating the Impact

Following are two propositions on how well Say-on-Pay is working.

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The Benefits of Limits on Executive Pay

The following post comes to us from Peter Cebon of the University of Melbourne and Benjamin Hermalin, Professor of Economics at the University of California, Berkeley. Work from the Program on Corporate Governance about CEO pay includes: The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers, and Urs Peyer (discussed on the Forum here); Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); and Lucky CEOs and Lucky Directors by Lucian Bebchuk, Yaniv Grinstein and Urs Peyer (discussed on the Forum here).

The following post comes to us from Peter Cebon of the University of Melbourne and Benjamin Hermalin, Professor of Economics at the University of California, Berkeley. Work from the Program on Corporate Governance about CEO pay includes: The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers, and Urs Peyer (discussed on the Forum here); Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); and Lucky CEOs and Lucky Directors by Lucian Bebchuk, Yaniv Grinstein and Urs Peyer (discussed on the Forum here).

Our paper, When Less Is More: The Benefits of Limits on Executive Pay, forthcoming in the Review of Financial Studies, addresses the question of whether limits on executive compensation harm or benefit shareholders. In particular, our model shows that if regulation limits executive compensation, this can make it possible for the board to give the CEO incentives that are both more effective and less costly, and for the two parties to create a relationship that is more collaborative. Among the implications—some of which we are exploring in a companion paper in progress—is this collaborative relationship makes it more attractive for the CEO to pursue long-run strategies (e.g., organic growth) that are more profitable than the short-run strategies (e.g., mergers and acquisitions) they would have pursued if firms had to rely on stock-based compensation for their executives.

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