ISS Releases New Benchmark Policies for 2021

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

Yesterday, ISS released its new benchmark policies, effective for shareholder meetings on or after February 1, 2021. In addition to anticipated policy changes (see this PubCo post) regarding board racial and ethnic diversity, shareholder litigation rights (such as exclusive federal forum provisions) and director accountability for governance failures related to environmental or social issues, ISS also made a number of other policy changes and clarifications, not previewed during the comment period, that generally relate to changing market practices, certain shareholder proposals and policies that were announced previously but subject to a transition period.

ISS reports that, in response to its online policy survey, it received 522 responses, including from 176 investors and related organizations and 346 non-investors, of which 258 represented organizations based in the U.S. ISS also held five roundtables in the U.S. related to board and shareholder rights, compensation and environmental and social shareholder proposals. In response to its request for comment on proposed policy changes, ISS received feedback in English from 23 commenters, including institutional investors and non-investors, such as corporate issuers, non-profit organizations, special-interest trade associations, law firms and others. ISS also notes that, in April, it issued special guidance related to COVID-19 (see this PubCo post) and pandemic-related pay decisions (see this PubCo post).


Varieties of Shareholderism: Three Views of the Corporate Purpose Cathedral

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya. This post is based on a chapter in the forthcoming Research Handbook on Corporate Purpose and Personhood. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

The perpetual debate over the objective, or purpose, of the corporation shows no signs of abating. The most recent additions to this discourse leverage the disruption wrought by the Covid-19 pandemic to propound claims for or against (but usually for) stakeholderism—namely, a stakeholder-oriented corporate governance. The World Economic Forum has thus endorsed Stakeholder Principles in the COVID Era, about which it declared that the “first priority is to win the war against coronavirus” and committed to “continue to embody ‘stakeholder capitalism’”. These calls come on the heels of the Business Roundtable’s 2019 Statement on the Purpose of a Corporation, in which prominent corporate leaders proclaimed “a fundamental commitment to all of our stakeholders.”

Against this backdrop, this Chapter seeks to make three modest contributions by offering three views of the corporate purpose cathedral that bear on the role of law in it. These views underscore the difference and the tension between an individual perspective and a societal or national legal perspective to the purpose of the corporation.


Cyber: New Challenges in a COVID-19–Disrupted World

Mary Galligan is Managing Director and Deborah Golden is Principal and U.S. Cyber and Strategic Risk Leader at Deloitte & Touche LLP. This post is based on their Deloitte memorandum.

Background: The pre-COVID-19 environment

Cyber, and the challenges it presents to businesses of all types and sizes, was on the board’s agenda well before the onset of the COVID-19 pandemic. Many boards, including their committees, engaged in a wide range of activities to stay informed and vigilant on the topic. As a result, these boards had reason to believe that they were exercising an appropriate degree of oversight regarding cyber.

As in so many other areas, the pandemic and the many disruptions it has caused have created new challenges for boards to consider. In addition, an increasing focus on areas such as the use of data, privacy, and artificial intelligence (AI) ethics has further expanded the areas that boards need to address. This post discusses the nature of those changes and how boards can adapt to the new environment, supporting a resilient response to the new challenges and opportunities of cyber.

What has changed?

The changes brought about by the COVID-19 pandemic with respect to cyber are extensive. However, the most significant ones are as follows:


Risks of Back-Channel Communications with a Controller

Gail Weinstein is senior counsel and Steven Epstein and Warren S. de Wied are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. de Wied, Andrew J. Colosimo, Erica Jaffe, and Bret T. Chrisope, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

In United Food v. Mark Zuckerberg and Facebook (Oct. 26, 2020), a stockholder of Facebook, Inc. brought suit seeking damages, on behalf of the corporation, for losses Facebook incurred by pursuing and then abandoning a reclassification of its capital structure (the “Reclassification”). The Reclassification had been proposed by, and would have primarily benefitted, the company’s controlling stockholder, Mark Zuckerberg. The Reclassification was later abandoned at Zuckerberg’s request. The Delaware Court of Chancery dismissed the suit, holding that, because a majority of the directors were independent and disinterested with respect to the Reclassification, the plaintiff was not excused from first having made a demand on the board to bring the derivative litigation.

Although the suit was dismissed, and the focus of Vice Chancellor Laster’s opinion is on the issue of “demand futility,” the case nonetheless provides a reminder of the potential risks from flaws in a board process. These include the possibility of reputational damage, as well as the potential for personal liability for directors who (without disclosure to and supervision by the board) share information with a controlling stockholder about the board’s process while the board is considering a transaction in which the controller is personally interested.


Russell 3000 Database of Executive Compensation Changes in Response to COVID-19

Matteo Tonello is managing director at The Conference Board and Olivia Voorhis and Justin Beck are consultants at Semler Brossy Consulting Group LLC. This post is based on a live database and ongoing analysis conducted by Mr. Tonello, Ms. Voorhis, Mr. Beck, Blair Jones, Kathryn Neel, and Greg Arnold. 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).

The COVID-19 crisis significantly altered operational priorities and financial results for companies in nearly all sectors. In recent months, to address some of these issues, many compensation committees have been disclosing executive base salary reductions as well as changes to in-flight and go-forward incentive plans.

The Conference Board, in collaboration with Semler Brossy’s research team and ESG data analytics firm ESGAUGE, is keeping track of SEC filings (Forms 8-Ks, 10-Qs, and proxy statements) by Russell 3000 companies announcing these changes. For the live database and some helpful visualizations of key trends across business sectors and company size groups, click here.

The following are some key observations from disclosures made since March 1, 2020 and update previously disseminated findings on a smaller sample of companies. The Russell 3000 index was chosen because it represents more than 98 percent of the total capitalization of the US publicly traded equity market. (Note: The commentary below refers to disclosures as of October 9, 2020, but the database is updated bi-weekly; please review the database and visualizations for the most current information).


Joint Statement by Commissioners Lee and Crenshaw on Amendments to Regulation S-K

Allison Herren Lee and Caroline Crenshaw are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in the post are those of Commissioner Lee and Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

We want to start by thanking the staff in the Division of Corporation Finance, Office of the General Counsel, Division of Economic and Risk Analysis, and Office of the Chief Accountant who have worked on this rule. It has gone from proposal to adoption in less than one year’s time, which is not an easy task, particularly during a global pandemic. Due to the staff’s expertise, hard-work, and thoughtfulness, many of the changes adopted today will be beneficial for investors. For example, certain of the changes to Item 303 of Regulation S-K should enhance the quality of MD&A disclosures. [1] Nevertheless, there are two significant aspects of the rule that we cannot support. Therefore, we must respectfully dissent. [2]

First, the final rule eliminates certain disclosures and the tabular presentation of contractual information that currently provides investors with critical insight into supply chain and risk management. [3] More than 15 years ago, in the wake of several massive accounting scandals and pursuant to Sarbanes Oxley, the SEC issued a rule that required companies to include a table summarizing contractual obligations in annual filings. [4] The proponents of today’s rule argue that much of the information we are removing, or modernizing, is simply to eliminate duplicative disclosure of information that is readily accessible in filings required by other SEC rules or by the U.S. Generally Accepted Accounting Principles (“GAAP”). Yet one of the key categories of obligations disclosed in the table—purchase obligations—is not always required by U.S. GAAP and does not consistently appear elsewhere in filings. [5] Purchase obligation disclosures provides information about the amount and timing of payments due in future periods, providing insight into corporate supply chain risk management, financial hedging, and anticipated increases in product demand. [6] And in analyzing the impact of the COVID-19 pandemic on the cruise industry, researchers were able to use the contractual obligations tables to compare exposures and potential revenue shortfalls against near-term obligations. [7] Despite the utility of this information and over the objections of commenters, including the SEC’s own Investor Advisory Committee, [8] the final rule eliminates the contractual obligations table. At best, this obscures information investors need, and, at worst, makes some information, such as purchase obligations, inaccessible. [9] Given the relevance of these items to assessments of market performance, we disagree with the policy choice to eliminate them.


Investing in a SPAC

Eleazer Klein is a partner and Adriana Schwartz is special counsel at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

Special purpose acquisition companies (SPACs) have seen a surge in 2020. There have been several high-profile private companies, such as DraftKings and Nikola, going public by completing business combinations with SPACs and high-profile investment firms, such as Bill Ackman’s Pershing Square (for the second time) and Jeff Smith’s Starboard Value, sponsoring SPACs of their own.

A SPAC is a public shell company formed for the purpose of completing a business combination within a specified period of time with a private operating company. Combining with an already public shell allows the private company to essentially complete an IPO with an intact public shareholder base at a lower cost than a traditional IPO. It can also provide greater deal certainty in uncertain times.


Remarks by Chairman Clayton to the Economic Club of New York

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the Economic Club of New York. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, John [Williams].

It is wonderful to be back with the Economic Club of New York. You are a sophisticated, experienced, outcome-oriented, tough and fair audience, interested in economic and wage growth and improving our society more generally. Just the way it should be.

As John noted, today’s program proceeds in two parts, (1) remarks from me on our regulatory activities over the past three-plus years (time flies) and—at the end of that part—a discussion of some of the areas that I believe need continued attention and (2) a Q&A session with market and policy experts Harold Ford, Barbara Novick, Gary Cohn and Glenn Hutchins.

As a focal point for today’s review and outlook, I will use my first speech as Chairman, which was before this very body in July 2017. [1] In that speech, I set forth the eight core principles that would guide my Chairmanship. [2] Before I report with specificity on implementing those principles in practice, I want to go beyond principles. I want to dig a bit deeper, and explain how the women and men of the SEC achieved historic results over the past three and a half years. [3] The short story is we designed and pursued a granular, yet flexible three year plan; and we were blessed with a talented, driven team of mutually supportive professionals. I will go into more detail.


Acquisition Experience and Director Remuneration

Addis Birhanu is Assistant Professor in the Department of Strategy and Organization at Ecole de Management de Lyon (EM Lyon). This post is based on a recent paper by Ms. Birhanu; Philipp Geiler, Associate Professor of Economics at EM Lyon; Luc Renneboog, Professor of Finance at Tilburg University; and Yang Zhao, Senior Lecturer in Financial Data Analysis at the University of Liverpool.

The experience that executive and non-executive directors accumulate by working in specific corporate positions within and across industries is one of the most important dimensions of their human capital. Previous studies document that variance in directors’ pay is primarily driven by differences in human capital accumulated over career paths. However, we know little about if and why (executive and non-executive) directors are paid differently across and within firms for what appears to be the same stock of human capital.

We address this question by focusing on a task-specific experience, namely that of M&A experience, and investigate whether this experience is priced in the remuneration contracts of directors. Acquisition experience of directors deserves attention for the following reasons. First, takeovers are complex operations that require expertise to identify an appropriate target, undertake the required due diligence, assess the potential synergistic value contribution of the target, raise the acquisition financing, and decide on the level of integration with subsequent implementation. Second, acquisitions are strategic decisions that typically require large investments and profoundly affect a company’s growth, value creation, and long-term prospects. Third, unsuccessful acquisitions are far from rare; the combined cumulative abnormal returns (CARs) of bidder and target are negative in almost half of the acquisitions and long-term performance of merged firms does in most cases not exceed the performance of matched peer companies that did not merge. Acquisition failures are often attributed to lack of experience with the takeover process at the managerial, non-executive, and firm level. Fourth, acquisitions are one of the very few strategic decisions that require intensive communication and deliberation by both executive and non-executive directors.


Weekly Roundup: November 13–19, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 13–19, 2020.

Decision Making in 50:50 Joint Ventures

Delaware Reaffirms Director Independence Principle in Founder-Led Company

The Limits of Corwin in the Sale of a Company to a PE Buyer

Statement of Commissioners Peirce and Roisman on Andeavor LLC

ESG Management and Board Accountability

Financial Institution Regulation Under President Biden

Corporations in 100 Pages

Racial Equity on the Board Agenda

Financial Reporting and the Financial Reporting Regulators


The Rise of the General Counsel

The ESG-Innovation Disconnect: Evidence from Green Patenting

Revealing ESG in Critical Audit Matters

A Sober Look at SPACs

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