General Statements of Regulatory Compliance and Securities Fraud Claims

Roger Cooper, Jared Gerber, and Elizabeth Vicens are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Cooper, Mr. Gerber, Ms. Vincens, Breon Peace, Matthew Slater, and Alexis Collins.

It has been a not infrequent occurrence over the past years that, after a company announces bad news or corporate mismanagement, securities class actions have been filed challenging general statements made by the company about its compliance with regulatory requirements or its own ethics policies and procedures. [On March 5, 2019], in Singh v. Cigna Corp., the Second Circuit issued yet another strong decision rejecting that tactic. In the wake of Cigna, it is now clear in the Second Circuit that generalized statements that a company has established policies to comply with regulatory requirements, and that it expects every employee to act with integrity and to comply with regulatory requirements, cannot provide a basis for a securities fraud claim—even if it turns out that during the time the company is making such public statements, the company is not complying with regulatory requirements and its employees are not acting with integrity.


The general facts alleged in Cigna will be familiar to the readers of many recent securities fraud complaints, although they are particular in their detail. During the relevant time period, Cigna, a multi-national health services organization, filed annual reports with the SEC on Form 10-K in which Cigna stated, among other things, that it had “established policies and procedures to comply with applicable requirements” and that it “expect[ed] to continue to allocate significant resources to various compliance efforts.”


New Developments in Shareholders’ Gender Pay Gap Proposals

Ryan Resch is a managing director and Ruby Tewani is a consultant at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Investors’ growing interest in the median gender pay gap (i.e., the wage difference between the median male employee and the median female employee) is the latest expression of a more granular approach to environmental, social and governance (ESG) investing. They are not only more focused on granularity, building on an initial call for public companies to disclose their gender pay gap, but are also casting a wider net to include more industries and companies. This trend continues in 2019. Arjuna Capital has once again issued shareholder proposals. What’s different from prior years is that the firm has asked 12 large, publicly-traded financial services and technology companies to disclose the median gender pay gap.

This is an interesting new development in gender pay-related shareholder proposals, as it specifically focuses on demographic representation. Previous shareholder proposals asked for information on the wage gap between male and female workers with directly comparable jobs, factoring in function, job level, geography and more (generally referred to as equal pay for work of equal value). Arjuna’s latest filings ask for the median wage gap, which is a statistically unadjusted figure. Simply put, a gap indicates that male employees as a group are occupying higher-paying positions than female employees, which does not allow female employees’ pay levels to trend upward. The gap is especially troublesome if there is a fair representation of female workers across the company, but not at the higher levels.


Activist CEOs Speak Out—Is There a Way to Do it Better?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

It feels like CEOs are stepping into it—the political fray, that is—all the time these days. And recently, there has been a lot of pressure on CEOs to voice their views on political, environmental and social issues. According to the Global Chair of Reputation at Edelman, the expectation that CEOs will be leaders of change is very high. Last year, Edelman’s Trust Barometer showed those expectations at a record high of 65 percent; “[t]his year, the call to action appears to be yet more urgent—a rise by 11 points in the public’s expectation that CEOs will speak up and lead change. Today, some 76 percent of respondents believe CEOs need to step up.” Similarly, in this year’s annual letter to CEOs, BlackRock CEO Laurence Fink focused on the responsibility of corporations to step into the breach created by political dysfunction: “Unnerved by fundamental economic changes and the failure of government to provide lasting solutions, society is increasingly looking to companies, both public and private, to address pressing social and economic issues. These issues range from protecting the environment to retirement to gender and racial inequality, among others.” In the absence of action from government, he counsels CEOs, “the world needs your leadership.” (See this PubCo post.) To be sure, a number of CEOs have jumped in to meet this challenge. But this study, The Double-Edged Sword of CEO Activism, suggests that, notwithstanding the public perception of widespread CEO activism, the incidence of CEO activism is actually relatively low. And public reaction seems to vary depending on the topic, but can, in some cases, lead to consumer backlash. Is there a better way to handle it? The authors of this article think so.


Weekly Roundup: March 15-21, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 15-21, 2019.

A Reminder About Corporate Crisis Communications

Updated Nasdaq Requirements for Direct Listings

Where’s the Greenium?

The Short-Termism Thesis: Dogma vs. Reality

Private Contracting, Law and Finance

Incentive Pay and Systemic Risk

ESG Rating and Momentum

ESG Rating and Momentum

Nimit Agarwal is an analyst and Yannick Ouaknine is Head of Sustainability Research at Société Générale S.A. The following post is based on a SG memorandum by Mr. Agarwal, Mr. Ouaknine, Aiswarya Sankar, Lorna Lucet, and Virgile Haddad. 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).

Traditionally, asset managers have used Environmental, Social and Governance ratings in a defensive way to mitigate portfolio risk, but the model ESG portfolio we have run over the past five years has consistently outperformed the index (and by 27.7% over the full period). Also note that the top rated 10% of our ESG stocks outperformed in all 11 of the 11 semi-annual periods since it was launched. So clearly ESG may not just be for defensive purposes. In this post we go one step further to see whether companies that are improving their ESG ratings also outperform. We found that not only do they outperform the index, they also outperformed our portfolio.

Since launching our model ESG portfolio in 2013 we have rebalanced it twice a year using raw data from Sustainalytics. We found that the top 10% of stocks with good ESG ratings outperformed the benchmark (STOXX600) over the five years from March 2013 to March 2018 by 27.7%. In this post, we go one step further to examine this phenomenon of improving ESG ratings (positive ESG momentum).


Incentive Pay and Systemic Risk

Rui Albuquerque is Associate Professor at Boston College Carroll School of Management; Luis M. B. Cabral is the Paganelli-Bull Professor of Economics and International Business at the New York University Stern School of Business; and José Corrêa Guedes is Professor at the Católica Lisbon School of Business & Economics at the Catholic University of Portugal. This post is based on their recent article, forthcoming in the Review of Financial StudiesRelated research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The SEC, the NYSE, and the U.S. government, accompanied by the actions of consultants, such as the Institutional Shareholder Services, recently have pushed to create, by means of relative performance evaluation (RPE), a tighter link between CEO pay and the factors under CEO control. This paper addresses the consequences of RPE for firm investment decisions and systemic risk in an industry model.

We propose a novel channel through which CEO incentive pay may have an effect on systemic risk. We consider the implications of relative performance evaluation, a practice that emerges in the equilibrium of our industry model. We show that RPE allows for a better alignment of interests between shareholders and managers, thereby reducing agency costs and rendering firms more productive; but it also leads managers disproportionately to choose investments that are correlated across firms, thus increasing systemic risk.


2018 Year-End Securities Litigation Update

Brian Lutz, Monica Loseman, and Jefferson Bell are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Lutz, Ms. Loseman, Mr. Bell, Mark Perry, Shireen Barday, and Michael Kahn.

2018 witnessed even more securities litigation filings than 2017, in which we saw a dramatic uptick in securities litigation as compared to previous years. This post highlights what you most need to know in securities litigation developments and trends for the latter half of 2018, including:

  • The Supreme Court heard oral argument in Lorenzo v. Securities and Exchange Commission, and is set to answer the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim even though it would not be actionable as a Rule 10b-5(b) claim under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).
  • The Supreme Court granted the petition for writ of certiorari in Emulex Corp. v. Varjabedian to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent (as opposed to knowing or reckless) misstatements or omissions made in connection with a tender offer.
  • We discuss recent developments in Delaware law, including case law exploring, among other things, (1) appraisal rights, (2) the standard of review in controller transactions, (3) application of the Corwin doctrine, and (4) when a “Material Adverse Effect” permits termination of a merger agreement.
  • We review case law implementing the Supreme Court’s decisions in Omnicare and Halliburton II.
  • We review a decision from the Third Circuit regarding the obligation to disclose risk factors, and a decision from the Ninth Circuit regarding the utilization of judicial notice and the incorporation by reference doctrine at the motion to dismiss stage.


The Unicorn IPO Report

Alyson Clabaugh is a Senior Product Marketing Manager and Rob Peters is a Senior Director at Intelligize, Inc. This post is based on their Intelligize memorandum.

In the process of assembling our inaugural Unicorn IPO Report, we discovered something surprising. We set out to investigate “unicorn” companies, the modern reference to private companies with valuations exceeding $1 billion (our full criteria for what constitutes a unicorn company may be found in the Methodology section of this report). While the number of unicorns has been growing over time, they are named for their scarcity. And they remain rare indeed. As 2019 began, just over 300 of them existed in the world. [1]

There’s no question, then, that these are standout operations. Which is what makes our findings—drawn from data in the Intelligize SEC compliance platform—somewhat counterintuitive. One would expect the technology unicorns, like the unicorns of myth, to be wild and independent creatures. You could say that in resisting the IPO process for so long, many of them have embodied the unicorn’s mythological ability to resist capture or taming. And yet, our examination of unicorns that went public in recent years reveals that to an unexpected degree, these singular corporations demonstrate something of a herd mentality.


Information Intermediary or De Facto Standard Setter?: Field Evidence on the Indirect and Direct Influence of Proxy Advisors

Christie Hayne is Assistant Professor at University of Illinois at Urbana-Champaign Gies College of Business and Marshall D. Vance is Assistant Professor at the Virginia Tech Pamplin College of Business. This post is based on their recent article, forthcoming in the Journal of Accounting Research.

Proxy advisory firms (PAs) are considered important and useful by some and overbearing by others. On the one hand, PAs fill an information intermediary role by processing large amounts of information and providing voting recommendations to institutional investors on matters such as executive compensation and governance. On the other hand, critics contend that PAs have outsized influence on proxy voting outcomes, which potentially allows them to exert pressure on firms to adopt PAs’ preferred practices. While these views are not mutually exclusive, examining PAs’ role(s) is important for understanding executive compensation design. If PAs primarily serve as information intermediaries, their influence on compensation practices likely occurs only indirectly through their ability to facilitate investors’ monitoring through shareholder votes. If PAs can apply pressure on firms to adopt favored compensation practices, they may be able to directly influence compensation practices. In this latter case, the effect of PA influence depends on the quality of PA recommendations.


S&P 1500 Pay-for-Performance Update: Strong Financials, Negative Shareholder Returns

Steve Kline is a director, Chris Kozlowski is a consultant, and Paige Patton is a senior analyst at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Despite strong full-year 2018 financial results, shareholder returns were dampened by investor skepticism and potential headwinds heading into 2019. This trend is no surprise given our observations through the third quarter (see “S&P 1500 pay-for-performance update: Third quarter results beg the question, “Will 2018 be the high water mark for incentive payouts?” Executive Pay Matters, December 17, 2018).

Figure 1 compares S&P1500 results in 2018 with the prior two years. While financial results across the income statement, balance sheet and cash flows are generally better than in 2017, shareholder returns declined in the fourth quarter, losing five points in 2018 following consecutive years of double-digit shareholder returns.


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