Recent Shareholder Activism Trends

George Casey, Scott Petepiece, and Lara Aryani are partners at Shearman & Sterling LLP. This post is part of the 19th Annual Corporate Governance Survey publication prepared by Shearman & Sterling LLP, by Mr. Casey, Mr. Petepiece, Ms. Aryani, and Vita Zhu. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

After years of growth in shareholder activist activity, the onset of COVID-19 across the world caused a decline in shareholder activism campaigns in the spring and summer of 2020. Economic recovery in the second half of the year coincided with the end-of-year proxy season and gave rise to a renewed appetite for activist campaigns in Q4 that continued through the first half of 2021. While uncertainty remains, particularly on a regional basis due to variations in vaccination rates and the impact of new variants of COVID-19, we expect to see renewed vigor in shareholder activism to continue through the second half of 2021 and into 2022.

Shareholder Activism in 2020

While shareholder activism declined sharply in the spring and summer of 2020, the overall number of campaigns was lower but did not result in a significant year-over-year decline. This was in large part due to the fact that the two annual proxy seasons book-ended the market turbulence of 2020, such that many of the activist campaigns were initiated either before COVID-19 in Q2 or after the economic recovery at the end of the year. The rebound of activism continued through the first half of 2021, with activist campaigns in the U.S. accelerating at a higher pace—large-cap United States companies experienced an approximately 30% increase in the number of activist campaigns in the first half of 2021 compared to 2020 (see chart below). Notwithstanding this renewed push, activism levels remain muted compared to the 2017–2020 averages (see chart below). Nevertheless, we expect the growing momentum to continue into the second half of 2021 and into 2022.


Death by Committee? An Analysis of Corporate Board (Sub-) Committees

Renée B. Adams is Professor of Finance at the University of Oxford; Vanitha Ragunathan is a Senior Lecturer in Finance at the University of Queensland; and Robert Tumarkin is a Senior Lecturer in Finance at the University of New South Wales. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

There is a long history of governance reforms that target corporate boards by mandating specific committee structures and director-type requirement. The Securities and Exchange Commission and the New York Stock Exchange first advocated for separate audit committees following the McKesson & Robbins scandal of 1938 (Birkett, 1986). In the 1970s, in response to widespread bribery by U.S. corporations in foreign countries, the SEC recommended that firms maintain an independent director majority on audit and nominating committees, and the NYSE updated its listing standards to require that firms maintain audit committees (Dundas and George, 1980). Several high-profile corporate failures in the early 1980s brought about the Treadway Commission, whose report was a factor when the major national exchanges recommended audit committee independence (Reeb and Upadhyay, 2010). In the early 2000s, the boards of Enron, Worldcom, Tyco and Parmalat, among others, were blamed for corporate malfeasance. Intending to prevent similar governance failures in the future, the Sarbanes-Oxley Act of 2002 (SOX) and the revised NYSE and NASDAQ listing standards were put in place.

Clearly, regulators believe that board structure is an important determinant of corporate governance. This has not been lost on economic and legal researchers who, for example, have found that independent audit committees can improve governance outcomes. However, corporate scandals have demonstrated a remarkable resilience to governance reforms. While reforms may appear to simply codify board characteristics, they do so by altering the nature of authority within the board.


SEC Staff Issues New Shareholder Proposal Guidance

Marc Gerber is partner and Ryan Adams and Blake Grady are associates at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Gerber, Mr. Adams, Mr. Grady, Brian Breheny, Raquel Fox, and Richard Grossman.

On November 3, 2021, the Division of Corporation Finance (Staff) of the U.S. Securities and Exchange Commission (SEC) published Staff Legal Bulletin No. 14L (SLB 14L), which explicitly rescinds Staff Legal Bulletin Nos. 14I, 14J and 14K (SLB 14I, 14J and 14K) (issued in 2017, 2018 and 2019, respectively), and effectively resets the Staff’s approach to the “ordinary business” and “relevance” exclusions for shareholder proposals to the pre-November 2017 approach.

The rescinded Staff Legal Bulletins introduced and expounded on the concept of a board analysis to support no-action requests to exclude shareholder proposals relating to the company’s “ordinary business” or lacking “relevance.” SLBs 14J and 14K also provided guidance concerning the micromanagement prong of the “ordinary business” exclusion.

The new SLB 14L also restates (with technical updates) portions of the rescinded guidance relating to the use of images in shareholder proposals and proof of ownership letters. In addition, SLB 14L provides guidance on the use of email with respect to shareholder proposals.


Chancery Court Highlights Importance of Delivering Nomination Notices Ahead of Advance Notice Deadlines

Andrew M. Freedman, Lori Marks-Esterman, and Ron S. Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Freedman, Ms. Marks-Esterman, Mr. Berenblat, and Theodore Hawkins, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Chancery Court’s decision in Rosenbaum v. CytoDyn Inc., No. 2021-CV-0728-JRS (Del. Ch. Oct. 13, 2021) provides fresh insight into how courts are likely to view advance notice bylaws in the context of a shareholder activist’s nomination of a dissident slate of directors. The case arose following a push by a group of investors to nominate directors and institute changes at CytoDyn, Inc. (“CytoDyn” or the “Company”), a pharmaceutical firm in the process of developing a new drug. Litigation commenced after CytoDyn’s Board of Directors (the “Board”) rejected the investors’ director slate because of disclosure deficiencies in their Nomination Notice. Following a trial, Vice Chancellor Slights ruled that the Board properly rejected the director slate because the investor plaintiffs had “play[ed] fast and loose in their responses to key inquiries embedded in [the Company’s] advance notice bylaw.” The Court also rebuked the plaintiffs for submitting their Nomination Notice “on the eve of the deadline,” leaving no time to fix the disclosure problems highlighted by the Board.

We have written extensively about how defense law firms have been devising onerous advance notice nomination procedures and 100-plus page nominee questionnaires intended to make it more expensive for shareholders to nominate and easier for companies to allege deficiencies on frivolous technicalities. However, in this case, the Court cited legitimate substantive omissions from the investor group’s Nomination Notice and questionnaires, serving as a reminder that shareholders seeking to nominate directors should obtain guidance from advisors specializing in shareholder activism.


Sustainability and Investing Lessons Learned in the Pandemic Era

Daniel C. Roarty is Chief Investment Officer of Sustainable Thematic Equities at AllianceBernstein L.P. This post is based on his AllianceBernstein memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

The coronavirus pandemic has prompted massive changes for countries, societies, people and businesses. Interconnected environmental, social and governance issues have reinforced the role of sustainable investing strategies as an indispensable part of investor allocations for a post-COVID-19 world.

When the history of COVID-19 is written, the pandemic period will be seen as more than just a health and economic crisis. Both contributed to a social reckoning, with a growing focus on inequality around the world, while the intensifying global climate crisis has added new and unpredictable threats.

Taken together, these four pandemic-era trends have fueled a conceptual change in the purpose of investing. Before the pandemic, traditional investing viewed economic and social issues as largely distinct spheres; companies existed to enrich their owners—the shareholders. Now, those spheres are intertwined. You can’t fully understand the economics of a business without understanding how a company interacts with customers and society. Powerful social forces affect businesses and are fundamental to gaining investment insight into a company’s growth path and return potential. Here are four lessons that we think will endure long after the world has healed from COVID-19.


2021 Board Effectiveness: A Survey of the C-Suite

Paul DeNicola is Principal and Leah Malone is Director at the Governance Insights Center, PricewaterhouseCoopers LLP, and Paul Washington is Executive Director of the ESG Center at The Conference Board, Inc. This post is based on their PwC/Conference Board memorandum.

It’s rare for corporate directors to receive candid feedback from their company’s management teams. The nature of the board of directors’ oversight role makes it an uncomfortable proposition. But the view of the boardroom from the C-suite can be illuminating—and surprising. That is why PwC and The Conference Board asked more than 550 public company C-suite executives to share their perspective on their boards’ overall effectiveness, their strengths and weaknesses, and their readiness to tackle some of the biggest challenges facing companies today.

The results were clear: most executives say board performance is falling short of the mark.

This isn’t to say that executives were uniformly negative in their assessment. Many agreed that directors had a firm grasp of core matters such as the company’s strategy, the risks and opportunities before it, and the priorities of its shareholders.

Yet most executives had a less positive view of overall performance. Asked to rate the effectiveness of their boards, just 29% of executives gave directors a grade of good or excellent. Most (55%) said that they were doing a fair job overall, and a small minority (16%) graded their effectiveness as poor.


Weekly Roundup: November 19-25, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 19-25, 2021.

ESG Global Study 2021

How GPs Can Compete for Capital Through ESG

Regulated Funds

Stock Investors’ Returns are Exaggerated

The World Targets Change

2021 Annual Corporate Directors Survey

The Economics of Deferral and Clawback Requirements

The Sustainability Board Report 2021

Securities Enforcement Quarterly

Core Earnings: New Data and Evidence

2021 Annual Corporate Governance Review

US Deputy Attorney General Signals Aggressive DOJ Focus on Corporate Crime

US Deputy Attorney General Signals Aggressive DOJ Focus on Corporate Crime

Ted Diskant and Julian L. Andre are partners at McDermott Will & Emery LLP. This post is based on their MWE memorandum.

At an October 28, 2021, speech before the American Bar Association’s Annual National Institute on White Collar Crime, US Deputy Attorney General (Deputy AG) Lisa Monaco re-emphasized the priority placed by current leadership within the US Department of Justice (DOJ) on prosecuting white-collar crime at both the individual and corporate level. Deputy AG Monaco also announced three new actions that DOJ will be taking—effective immediately—to strengthen the way DOJ responds to corporate crime.

While Deputy AG Monaco emphasized that DOJ will continue to focus on individual accountability in white-collar criminal investigations and prosecutions, all of the changes announced focus on the manner in which corporations will be expected to behave—and will be evaluated—in the context of a DOJ investigation.

  • First, to be eligible for any cooperation credit, corporations will now be required to provide DOJ “with all non-privileged information about individuals involved in or responsible for the misconduct at issue.” It will no longer be sufficient for companies to limit such disclosures to those individuals who were “substantially involved” in the misconduct.
  • Second, in evaluating a corporate resolution, prosecutors are now directed to consider “the full range” of prior state or federal “criminal, civil and regulatory” misconduct by a company, rather than limiting such consideration to misconduct of the same type or that is factually related to the misconduct at issue.
  • Third, corporations will once again be regularly subject to the prospect of independent monitorships as part of corporate resolutions. Prosecutors will be free to require monitorships as a condition of resolutions “whenever it is appropriate to do so to satisfy [DOJ] that a company is living up to its compliance and disclosure obligations.”


2021 Annual Corporate Governance Review

Hannah Orowitz is Senior Managing Director of ESG, Brigid Rosati is Managing Director of Business Development and Corporate Strategy, and Rajeev Kumar is Senior Managing Director at Georgeson LLC. This post is based on a Georgeson memorandum by Ms. Orowitz, Ms. Rosati, Mr. Kumar, Ed Greene, Aaron Miller and Michael Maiolo.

Shareholder Proposals

The 2021 proxy season produced unprecedented results, including record high proposal submission levels, average support levels and passage levels, among other notable results related to shareholder proposals. These results reveal that investors’ heightened focus on ESG risks and opportunities is having a meaningful impact on voting decisions, such as:

  • A total of 71 shareholder proposals passed, compared to 45 in 2020 and 50 in 2019
  • 33 environmental and social proposals passed, [1] the highest number on record and an 83% increase compared to the 2020 proxy season
  • Over one third of environmental shareholder proposals voted upon passed; average support across voted proposals exceeded 39%
  • Average support for social proposals increased to 32.6%, compared to approximately 27% average support in both the 2020 and 2019 seasons
  • Record-breaking support for shareholder proposals focused on political spending, plastic pollution, greenhouse gas emissions, deforestation and board and workforce diversity, as well as management-supported proposals relating to climate change, diversity, equity and inclusion (DE&I) and human rights
  • A sizeable increase in negotiated settlements (withdrawals) of shareholder proposals compared to the 2020 and 2019 proxy seasons


Core Earnings: New Data and Evidence

Ethan Rouen is an Assistant Professor of Business Administration at Harvard Business School; Eric C. So is the Sloan Distinguished Professor of Management at the MIT Sloan School of Management; and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration at Harvard Business School. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

Financial statements contain a wealth of information about a firm’s net income, an estimate of the net value flow during a period. Investors commonly seek to distinguish the component of earnings that stems from a firm’s central business activities (“core earnings”) from those components that result from ancillary business activities or transitory shocks. This exercise is essential for interpreting and forecasting firm performance.

The behavior of sell-side analysts and managers attests to the importance of distinguishing core and non-core earnings. Analysts regularly report and forecast firms’ earnings on a non-GAAP basis (“street earnings”) by excluding from GAAP earnings items deemed transitory or not reflective of the central business activities. Similarly, managers commonly report non-GAAP “pro forma” earnings that exclude items they consider unimportant for understanding firm performance. A concern with these metrics is that managers and analysts choose in a biased fashion which items to include or exclude. For example, pro forma earnings often exclude stock-based compensation expenses, which result from central business activities and are recurring. Excluding these measures help to paint a rosier picture of firm performance.


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