Remarks by Commissioner Elad L. Roisman at the Elder Justice Coordinating Council Fall 2019 Meeting

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s remarks at the Elder Justice Coordinating Council Fall 2019 Meeting, available here. The views expressed in the post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. I am truly happy to join you today at the fall 2019 meeting of the Elder Justice Coordinating Council (“EJCC”). I want to thank U.S. Department of Health and Human Services Secretary [Alex] Azar, Assistant Secretary [Lance] Robertson, EJCC Coordinator [Toni] Bacon, and the Administration for Community Living for, once again, bringing the EJCC together to discuss our shared goal of protecting elder Americans. Thank you also to the EJCC members, participants, and presenters here today for their critical roles in furthering this effort. Before I say more, let me note that the views I express today are my own and do not necessarily reflect the views of the Commission, my fellow Commissioners, or the agency’s staff.

Investor protection is central tenet to the SEC’s mission, and is an objective that factors into every decision I make as a Commissioner. With respect to America’s older investors, the need for protection is indeed a priority for me. I see too far many enforcement matters involving elder adults, who have been either victims or targets of fraud. But, these stories are not confined to my work in government. Close friends and family have been targeted. This issue is personal—and not just for me. I have spoken to many people about this topic, and have yet to meet someone who does not have a family member or person in their lives who was a victim or target of elder fraud. We all know that these crimes may take place instantaneously, but can have financial, emotional, psychological effects that devastate victims for far longer.

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Asset Management, Index Funds, and Theories of Corporate Control

Matthew Mallow is Vice Chairman at BlackRock, Inc. This post is based on his recent paper. Related research from the Program on Corporate Governance includes The Specter of the Giant Three by Lucian Bebchuk 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); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and The Future of Corporate Governance Part I: The Problem of Twelve by John Coates.

In our paper entitled Asset Management, Index Funds, and Theories of Corporate Control, we dispute the principal arguments of three papers addressing asset management, index funds and corporate control: “The Future of Corporate Governance Part I: The Problem of Twelve” by John C. Coates, IV; and “The Specter of the Giant Three” and “Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy,” both by Lucian A. Bebchuk and Scott Hirst. We show that, while these theories are thought-provoking, they conflict with each other and miss the mark on several fronts.

Coates argues that, through increased voting power and engagement activities, the growth of index funds will afford asset managers too much influence over their portfolio companies. This, he asserts, may lead to the effective control of public companies by a few individuals. Conversely, Bebchuk and Hirst, looking at essentially the same facts as Coates, posit that index fund managers because of potential conflicts and disincentives do not, and will not, adequately exercise their voting power and potential influence through engagement. They claim that this will lead to increased deference to company managements and insufficient monitoring of companies.

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Approval of Conflicted Transactions in Publicly Traded Limited Partnerships

Gail Weinstein is senior counsel and Warren S. de Wied and Steven Epstein are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. de Wied, Mr. Epstein, Andrea Gede-Lange, Brian T. Mangino, and Philip Richter, and is part of the Delaware law series; links to other posts in the series are available here.

Dieckman v. Regency (Nov. 3, 2019) reflects the potential for general partners of master limited partnerships (i.e., publicly traded limited partnerships) to be subject to scrutiny and possible liability in connection with approving conflicted transactions. More broadly, the decision underscores the critical importance of clarity in drafting and compliance with the precise terms of agreements.

The decision is the latest issued in long-standing litigation challenging the 2015 acquisition of Regency Energy Partners LP, a master limited partnership (“Regency”), by Energy Transfer Partners L.P. (“ETP”), in an $11 billion unit-for-unit merger (representing a 13.2% premium to the unaffected unit price) (the “Merger”). Both Regency’s general partner (the “General Partner”) and the general partner of ETP were indirectly owned and controlled by Energy Transfer Equity, L.P. (“ETE”). Given ETE’s control of both Regency and ETP, it was undisputed that the Merger presented a potential conflict of interest between, on the one hand, the General Partner, and, on the other hand, the common unitholders of Regency, who had no connections to ETE.

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Labor in the Boardroom

Simon Jäger is Assistant Professor of Economics at the Massachusetts Institute of Technology; Benjamin Schoefer is Assistant Professor of Economics at the University of California, Berkeley; and Jörg Heining is Senior Researcher at the Institute for Employment Research. This post is based on their recent paper.

A fundamental question societies face is whether and how to involve stakeholders, in particular workers, in corporate decision-making. Many countries, particularly in continental Europe, grant workers formal authority in firms’ decision-making (Hall and Soskice, 2001). Such shared governance or codetermination institutions include worker-elected directors on company boards. By contrast, in many liberal market economies such as the United States, firms are legally controlled solely by their owners. This consensus, along with the idea that corporations ought to primarily benefit their shareholders (Friedman, 1970), has recently been called into question. For example, the Business Roundtable issued a statement in August 2019 on “the purpose of a corporation,” arguing that companies should advance the interests of stakeholders, including employees, rather than following a model of shareholder primacy. In addition, policy proposals that would mandate worker-elected directors, as in many European countries, have been proposed in the US. For example, two federal bills introduced in 2018, the Accountable Capitalism Act and the Reward Work Act, would mandate that 40% or 1/3, respectively, of the directors of large companies be worker representatives.

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ISS and Glass Lewis Policy Updates

Holly J. Gregory and John P. Kelsh are partners and Claire H. Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Mr. Kelsh, Ms. Holland, Thomas Kim, Rebecca Grapsas, and Andrea Reed.

Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis) have updated their proxy voting policies for shareholder meetings held on or after February 1, 2020 (ISS) or January 1, 2020 (Glass Lewis). [1] This post (1) summarizes the changes in proxy voting policies that apply to U.S. companies, (2) discusses the practical implications of the changes and (3) provides guidance about preparing for the 2020 proxy season in light of these developments and related deadlines.

The Appendix below includes a comprehensive list of the various circumstances in which ISS and Glass Lewis may recommend voting against one or more directors in an uncontested election.

The key changes to ISS’ proxy voting policies for 2020 relate to:

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Diversity of Shareholder Stewardship in Asia: Faux Convergence

Gen Goto is Professor of Law at the University of Tokyo; Alan K. Koh is Assistant Professor of Law at Nanyang Business School; and Dan W. Puchniak is Associate Professor at the National University of Singapore Faculty of Law. This post is based on their recent paper, forthcoming in the Vanderbilt Journal of Transnational Law. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

In 2010, when the United Kingdom enacted the world’s first stewardship code (UK Code), the impetus behind it was clear. Institutional investors had come to hold a substantial majority of the shares in UK listed companies. However, most institutional investors lacked the incentive to use their shareholder power to monitor management. In turn, they were branded as “rationally passive” shareholders. As the theory goes, when left unmonitored by institutional investors who collectively controlled the UK’s shareholder float, the management of UK listed companies engaged in excessive risk-taking and short-termism behaviors which were identified as significant contributors to the 2008 Global Financial Crisis (GFC). Thus, the original objective, or intended function, of the UK Code was to motivate institutional investors to become responsible and engaged shareholders. Specifically, its aim was to incentivize them, through the use of soft law, to act as “good stewards” by exercising their control over listed companies through their collective voting rights. The ultimate goal was to mitigate the excessive risk-taking and short-termism by corporate management that might have otherwise led to another financial crisis.

Since the adoption of the UK Code in 2010, stewardship codes and similar initiatives have proliferated throughout Asia. Asia’s largest developed economy (Japan), Asia’s tiger economies (Hong Kong, Singapore, South Korea, and Taiwan), and two of Asia’s most important high-growth economies (Malaysia and Thailand) have all adopted stewardship codes. Asia’s largest economy (China) recently inserted provisions into its revised corporate governance code to promote shareholder stewardship among institutional investors. In addition, several of Asia’s most important developing economies (including India and the Philippines) have placed the creation of a stewardship code on their corporate governance agendas.

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ESG Reporting Best Practices

Tom Quaadman is Executive Vice President and Erik Rust is Director of the Center for Capital Markets Competitiveness, both at the U.S. Chamber of Commerce. This post is based on their Chamber of Commerce memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Policymakers have been debating here in the U.S. as well as globally on how companies should disclose Environmental, Social, or Governance (ESG) information, both to investors as well as other stakeholders. Currently, to the extent that ESG information is material under the U.S. federal securities laws, public companies are already required to include it in their filings with the Securities and Exchange Commission (SEC). However, given the progress that companies have made in regards to voluntary ESG reporting not filed with a particular regulator or government body, we believe more regulatory requirements mandating ESG disclosures are not warranted.

To advance the work made so far towards more effective ESG disclosures on a voluntary basis, the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce has developed the following best practices around standalone ESG reports. We believe that these best practices can help steer the development of a widely-approved approach to voluntary ESG reporting without the need for additional regulatory mandates. Furthermore, some disclosure variability is appropriate, because the relevance of certain ESG factors differs from industry-to-industry and company-to-company, and based on business model, geography, customer base, and other considerations. That said, these best practices can serve as a useful guide as companies continue to enhance their ESG disclosures:

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Shadow Governance

Yaron Nili is Assistant Professor of Law at the University of Wisconsin-Madison Law School; and Cathy Hwang is Associate Professor of Law at the University of Utah S.J. Quinney College of Law. This post is based on their recent paper, forthcoming in the California Law Review.

Some of the most important battles in corporate governance have been fought on the grounds of charters and bylaws: board de-staggering, poison pill, and forum selection provisions come to mind readily. In recent years, however, many battles have moved into the less visible universe of committee charters, corporate governance guidelines and other corporate internal policies—an area of governance that has been largely overlooked in research.

In our new paper Shadow Governance, we investigate these non-charter, non-bylaw shadow governance documents and show how they influence corporate decision-making. We find that shadow governance documents are important and influential. They merit a more robust conversation about their role, impact, and use within the corporate governance ecosystem.

Among our paper’s major contributions is an original, hand-collected dataset of shadow governance documents collected from the investor sites of companies listed in the S&P 1500. These documents include documents required by the SEC or by NYSE and NASDAQ listing requirements, such as board committee charters, corporate governance guidelines, and conflict minerals disclosures. We also collected a plethora of non-required documents such as sexual harassment guidelines, campaign finance disclosures, environmental sustainability statements, diversity disclosures, and more. Finally, we interviewed directors, officers, and general counsels of major American companies to add nuance and context to our findings.

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ISS Benchmark Policy Updated—Executive Summary

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on a publication by ISS.

Each year, ISS conducts a robust, inclusive, and transparent global policy review process to update the ISS Benchmark Proxy Voting Guidelines (benchmark guidelines or policies) for the upcoming year.

The policy update process begins with an internal review of emerging issues, relevant regulatory changes and notable trends seen across global, regional and individual markets. Based on information gathered throughout the year (particularly feedback from investors and companies during and after proxy seasons), ISS internal policy working groups examine various governance and other voting topics across global markets. As part of this process, the working groups also examine relevant academic research, other empirical studies, and commentary by market participants. To gain further insights from a broad range of market participants, ISS then conducts a global policy survey, convenes multiple roundtable discussions, and posts draft policy change proposals for an open review and comment period. After considering this broad input and completing the extensive review process, the final policy updates are reviewed by the ISS Global Policy Board and approved for the following year. For most markets, updated policies are announced in November of each year and apply to meetings held on and after February 1 of the following year. Different timetables apply to a small number of markets that have off-cycle main proxy seasons.

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Policy Overhaul—Executive Compensation

The Council of Institutional Investors Policies Committee is chaired by Aeisha Mastagni. The complete CII Policies on Corporate Governance are available here. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

On September 17, 2019, members of the Council of Institutional Investors overhauled CII’s policy on executive compensation. That policy is part of CII’s broader, member-approved Policies on Corporate Governance. Among other things, the changes suggest public companies dial back the complexity of their executive compensation plans. The newly revised policy appears below.

Section 5.1: Core Objectives of Executive Pay

Executive compensation should be designed to attract, retain and incentivize executive talent for the purpose of building long-term shareholder value and promoting long-term strategic thinking. CII considers “the long-term” to be at least five years. Executive rewards should be generally commensurate with long-term return to the company’s owners. Rewarding executives based on broad measures of performance may be appropriate in cases where doing so logically contributes to the company’s long-term shareholder return.

Executive compensation should be tailored to meet unique company needs and circumstances. A company should communicate the board’s basis for choosing each specific form of compensation, including metrics and goals. This may include industry considerations, business lifecycle considerations and other company-specific factors. Companies should explain how the components of the package tie to the company’s core objectives and fit together to a collective end.

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