Trust: A Critical Asset

Don Fancher is Principal of Risk & Financial Advisory, Jennifer Lee is Canadian Managing Partner, and Debbie McCormack is Managing Director at Deloitte. This post is based on a Deloitte memorandum by Mr. Fancher, Ms. Lee, Ms. McCormack, and Bob Lamm.


The responsibilities of boards of directors continue to evolve and increase, particularly given the events of the past year. In addition to perennial topics such as strategy, succession, financial reporting, compliance, and culture, boards are experiencing broader demands on their oversight from expanding stakeholder and shareholder considerations; continuing challenges of the ongoing global pandemic and its aftermath; and addressing the changing role of the corporation in society at large on matters such as racial justice and climate. The growth in the number and complexity of board responsibilities is taking place in an environment of growing skepticism towards our various institutions.

Against that background, companies and their boards can help to address these multiple challenges by considering one of the most critical assets not on their balance sheets―trust.

What is trust?

Trust has been defined as “our willingness to be vulnerable to the actions of others because we believe they have good intentions and will behave well toward us.” [1] However, particularly for a business enterprise, trust is not an ephemeral quality or attitude. Rather, it is a critical asset, albeit one that is not reported on the balance sheet or otherwise in the financial statements, as it has no intrinsic value.


Repairing the US Financial Reporting System

Lynn E. Turner is Former SEC Chief Accountant and Senior Advisor to Hemming Morse LLP. This post is based on an open letter to SEC Chairman Gary Gensler, authored by Mr. Turner and 33 other individuals.

The under-signed individuals and organizations share a deep concern about the present state of the financial reporting infrastructure in the United States. Two decades after a wave of major accounting scandals swept U.S. markets and Congress responded with passage of the Sarbanes-Oxley Act (SOX), many of the root causes of that crisis—deeply flawed and outdated accounting standards, weak and ineffective auditor oversight, and auditors who lack both independence and professional skepticism—have reemerged as pressing issues. For too many years, the Commission itself has been either complicit or passive in the face of these developments. We are writing to urge you to take bold action to restore the financial reporting infrastructure on which investor protection, the fair and orderly functioning of our markets, and the efficiency of the capital formation process all depend.

The original federal securities laws are based on a principle that is elegant in its simplicity—that “all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.” [1] As the Alliance of Concerned Investors (AOCI) stated in their April letter, “investors are empowered to make useful investment decisions only when they are provided with robust and timely financial information.” [2] Increasingly, there is a growing demand for that information to include applicable disclosures regarding environmental, social and governance (ESG) issues. It’s not just investors, however, but effective market oversight and capital formation, that benefit from the transparency needed to ensure that capital flows efficiently to its best uses. For that system to work, the information that companies report must be complete and accurate. When financial reporting fails to provide the information that investors are demanding, or when investors lose faith in financial reports’ reliability, our markets suffer, as we saw to devastating effect two decades ago.


SEC Announces Latest Amendments to Proxy Advisor Rules Will Not Be Enforced, Pending Additional Review

David A. Bell is partner and Ryan Mitteness and Jennifer Hitchcock are associates at Fenwick & West LLP. This post is based on a Fenwick memorandum by Mr. Bell, Mr. Mitteness, Ms. Hitchcock, and Soo Hwang.

Gary Gensler, the new chairman of the U.S. Securities and Exchange Commission, released a statement on June 1, 2021, directing SEC staff to consider revisiting its interpretation and guidance from September 2019 regarding the application of the proxy rules to proxy advisors (the 2019 Guidance), and the amendments that it adopted in July 2020 that modified Rules 14a-1(l), 14a-2(b) and 14a-9 under the Securities Exchange Act of 1934 (the 2020 Amendments).

The 2019 Guidance and the 2020 Amendments were further discussed in our prior alert, “SEC Tightens Regulations on Proxy Advisory Firms.” They defined voting recommendations and related materials provided by proxy advisory firms, such as Institutional Shareholder Services (ISS), as “solicitations” subject to antifraud rules and imposed conditions that must be met in order for proxy advisory firms to rely on the exemptions from filing full proxy solicitation materials that had been historically available to them. These new conditions included disclosure of conflicts of interest, providing companies with the opportunity to respond to voting recommendations at or prior to the time such recommendations are released, and providing access to responses by the subject company to the advisory firms’ recommendations. The amendments also specified the circumstances that would cause proxy advice to be “misleading” within the meaning of anti-fraud Rule 14a-9.


Director Compensation Practices in the Russell 3000 and S&P 500

Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post is based on co-publication by The Conference Board, Semler Brossy, and ESGAUGE, authored by Mr. Tonello, Mark Emanuel,Todd Sirras, Elijah Ostro, and Paul Hodgson. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, and Executive Compensation as an Agency Problem, both by Lucian Bebchuk and Jesse Fried.

Director Compensation Practices in the Russell 3000 and S&P 500: 2021 Edition documents trends and developments in non-employee director compensation at 2,855 companies issuing equity securities registered with the US Securities and Exchange Commission (SEC) that filed their proxy statement in the period between January 1 and December 31, 2020, and, as of January 2021, were included in the Russell 3000 Index. The project is a collaboration among The Conference Board, compensation consulting firm Semler Brossy, and ESG data analytics firm ESGAUGE.

Data from Director Compensation Practices in the Russell 3000 and S&P 500: 2021 Edition can be accessed and visualized through an interactive online dashboard at The dashboard is organized into six parts.

Part I: Compensation Elements, with benchmarking information on the prevalence, value, and year-on-year increases of cash retainers, meeting fees, stock awards, stock options, and any benefits and perquisites.

Part II: Supplemental Compensation, including the cash retainer and meeting fees granted for serving on board committees and the premiums offered for board and committee leadership roles.

Part III: Equity-Based Compensation, which reviews cash and equity compensation mix, the prevalence and value of various equity award types, and the vesting schedules of awarded equity.

Part IV: Stock Ownership Guidelines and Retention Policies, for a detailed analysis of the features of ownership guidelines for board members (including their disclosure, their compliance window, the definition of ownership adopted, and whether the guidelines revolve around a multiple of the cash retainer or a specific number of shares) and the types of retention requirements applicable to equity-based compensation (including the retention ratios and the duration of the retention period).

Part V: Compensation Limits, including the prevalence of limits by type (whether total compensation limits, dollar-denominated limits or share-denominated limits) and the median and average value of these ceilings.

Part VI: Deferred Compensation and Deferred Stock Units (DSUs), including elective and mandatory deferrals, to what compensation element the deferral applies, the form of the deferred compensation payout, the use of deferred cash investment vehicles (such as money-market or savings accounts, retirement accounts, or others) and the prevalence, value, holding requirements, vesting periods, and payout forms of DSUs.


Federal Corporate Law and the Business of Banking

Morgan Ricks is Professor of Law at Vanderbilt University Law School, and Lev Menand is an Academic Fellow, Lecturer in Law, and Postdoctoral Research Scholar at Columbia Law School. This post is based on their recent paper, forthcoming in the University of Chicago Law Review.

It is a bedrock (though still controversial) principle of American business law that corporate formation and governance are the province of state, not federal, law. But for more than a century and a half there has been one giant exception to this basic principle of American federalism: around 1,200 national banks, which hold $13 trillion in assets. National banks aren’t just federally licensed; they are federally chartered. And as the federal government’s creations, they reside outside the jurisdiction of any state’s corporate laws. The Office of the Comptroller of the Currency (OCC), a century-and-a-half old federal government agency, issues national bank charters and promulgates rules governing national bank formation, governance, and dissolution. By contrast, other federally regulated businesses—including stock exchanges, broker-dealers, investment companies, and bank holding companies—although licensed by federal agencies, owe their corporate existence to the states.

In a forthcoming paper, Federal Corporate Law and the Business of Banking, we examine this corporate law anomaly. Our paper reinterprets the National Bank Act (NBA)—the organic statute governing the OCC and national banks—as a corporation law and analyzes the business of banking through a corporate law lens. It reveals that national banks are a corporate governance solution to an economic governance problem. National banks were designed as federal instrumentalities charged with creating money—a delegated sovereign privilege. Congress recruited private shareholders and managers as an economic governance device: to serve as a check on monetary overissue as well as to avoid politicized asset allocation within the federal government’s monetary framework.


NYSE Amends Related Party Transaction Approval Requirements

Matthew E. Kaplan is partner, Nicholas P. Pellicani is counsel, and Martha G. Brown is an associate at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Kaplan, Mr. Pellicani, Ms. Brown, and Joshua M. Samit.

The New York Stock Exchange (“NYSE”) recently amended its rules regarding related party transaction approval requirements. As amended, Section 314.00 of the NYSE Listed Company Manual (“Section 314.00”) now requires a company’s audit committee or another independent body of a company’s board of directors to review in advance all “related party transactions” that must be disclosed: (i) by domestic companies under Item 404 of Regulation S-K of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), irrespective of transaction value; and (ii) by foreign private issuers under Item 7.B of Form 20-F, irrespective of materiality. Previously, Section 314.00 required that related party transactions be reviewed and evaluated (not necessarily in advance) by an appropriate group within the company, such as the audit committee or a similar body, and defined related party transactions as those that “normally include” transactions between a company and its officers, directors and principal shareholders.


Opportunities for Postdoctoral and Doctoral Corporate Governance Fellows

The Program on Corporate Governance at Harvard Law School (HLS) is pleased to announce that it is seeking applications from highly qualified candidates who are interested in working with the Program as Post-Doctoral or Doctoral Corporate Governance Fellows.

Applications are considered on a rolling basis, and the start date is flexible. Appointments are commonly for one year, but, contingent on business and funding, the appointment period can be extended for additional one-year period/s.

Candidates should have a J.D., LL.M., or S.J.D. from a U.S. law school by the time they commence their fellowship. Candidates still pursuing an S.J.D. are eligible so long as they will have completed their program’s coursework requirements by the time they start.

During the term of their appointment, Fellows will be in residence at HLS and will be required to work on research and other activities of the Program, depending on their skills, interests, and Program needs. The position includes a competitive fellowship salary and Harvard University benefits. Fellows will also be able to spend time on their own projects.

Applicants should have an interest in corporate governance and in academic or policy research in this field. Former Fellows of the Program (e.g., Scott Hirst (BU), Robert Jackson (NYU), Marcel Kahan (NYU), Kobi Kastiel (Tel-Aviv), Yaron Nili (Wisconsin), and Holger Spamann (Harvard)) teach in many leading law schools in the U.S. and abroad.

Interested candidates should submit a CV, transcripts, a writing sample, and a cover letter to the coordinator of the Program, Ms. Jordan Figueroa, at [email protected]. The cover letter should describe the candidate’s experience, reasons for seeking the position, career plans, and the period during which they would like to work with the Program.

Statement by Commissioner Peirce and Commissioner Roisman on Chair Gensler’s Regulatory Agenda

Hester M. Peirce and Elad L. Roisman are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in this post are those of Ms. Peirce and Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Last Friday, the Office of Information and Regulatory Affairs released the Spring 2021 Unified Agenda of Regulatory and Deregulatory Action (“Agenda”), which includes the SEC Chair’s Agenda. [1] While there are important and timely items on the list, including rules related to transfer agents and government securities alternative trading systems, the Agenda is missing some other important rulemakings, including rules to provide clarity for digital assets, allow companies to compensate gig workers with equity, and revisit proxy plumbing. Perhaps the absence of these rules is attributable to the regrettable decision to spend our scarce resources to undo a number of rules the Commission just adopted.

The Agenda makes clear that the Chair’s recent directive to SEC staff to consider revisiting recent regulatory actions taken with respect to proxy voting advice businesses was not an isolated event, but just the opening salvo in an effort to reverse course on a series of recently completed rulemakings. [2] On the agenda are proposals to further amend Rule 14a-8 and Rule 14a-2(b) under the Securities Exchange Act of 1934 (together, the “Proxy Updates”); [3] Rule 13q-1 (the “Resource Extraction Payments Rule”); [4] the rules pertaining to the accredited investor definition and the integration framework (together, the “Harmonization Rules”), [5] and our whistleblower rules. [6] Not only are the Commission’s most recent amendments to each of these rules less than a year old; they have only been effective for a range of three to seven months. As far as we can tell, the agency has received no new information which would warrant opening up any of these rules for further changes at this time. We are disappointed that the Commission would dedicate our scarce resources to rehashing newly completed rules.


Wachtell Lipton’s Spin-Off Guide

Deborah Paul and Victor Goldfeld are partners and Sabrina Khan is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Ms. Paul, Mr. Goldfield, Ms. Kahn, Greg Ostling, Greg Pessin, and Rachel Reisberg.

A spin-off involves the separation of a company’s businesses through the creation of one or more separate, publicly traded companies. Spin-offs have been popular because many investors, boards and managers believe that certain businesses may command higher valuations if owned and managed separately, rather than as part of the same enterprise. An added benefit is that a spin-off can often be accomplished in a manner that is tax-free to both the existing public company (referred to as the parent) and its shareholders. Companies have also been able to tap the debt markets to lock in low borrowing costs for the business being separated and monetize a portion of its value. While spin-offs continue to be an important option that companies evaluate when assessing separation alternatives, the total global volume of completed spin-offs decreased from $179 billion in 2019 to $94 billion in 2020 as the COVID-19 pandemic took hold. Although the decrease was significant, 2020 volume was comparable to the $73 billion in volume in 2018.


Vanguard Insights on Evaluating Say on Climate Proposals

John Galloway is global head of investment stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

“Say on Climate” proposals encourage companies to disclose climate-related risks, targets, and transition plans in line with the reporting framework created by the Task Force on Climate-related Financial Disclosures (TCFD), a framework that Vanguard supports. By enabling shareholders to vote on these disclosures, companies gather important feedback on how their climate strategies relate to the goals of the Paris Agreement and meet shareholder expectations. While robust disclosure alone is not a guarantee of a credible transition plan, it is a key component that will enable investors to make informed decisions.

In recent months, we have seen an increase in the number of Say on Climate proposals presented to shareholders at company annual meetings. The specific form of these Say on Climate proposals varies by region and in specific details, but generally includes three requests:

  • Annual disclosure of greenhouse gas emissions and progress on goals
  • Disclosure of the company’s strategic plan for reducing future emissions and managing climate-related risks, and
  • The right for shareholders to cast recurring votes on the company’s climate plan or report

Some companies have put forth Say on Climate votes as management proposals, while others have publicly opposed shareholder proposals on the topic. And in some cases, a company has come to an agreement with an activist group on future plans, which has led the group to withdraw the proposal.


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