Record Low ISS S&P 500 Say on Pay Oppostion: The Trends Behind the Decline

Linda Pappas is a Principal, and Perla Cuevas and Olivia Wright are Consultants at Pay Governance LLC. This post is based on their Pay Governance memorandum.

In our prior Viewpoint, “Recap of the 2024 Say on Pay Season,” [1] we reported that Institutional Shareholder Services (ISS) opposed 7.7% of S&P 500 Say on Pay (SOP) proposals, an unprecedented low. Prior to 2024, ISS opposed about 11% of S&P 500 SOP proposals, on average, each year. In this Viewpoint, the second of our 2024 SOP series, we explore the trends that may have led ISS to recommend against SOP at a historically low rate.

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Cybersecurity and Artificial Intelligence: An Increasingly Critical Interdependency

Kathleen Hamm is the Founder and Managing Member of Pearl Advisory Group. This post is based on her speech.

I. Introduction

Thank you for that kind introduction, Neil [Strauss, VP and Senior Credit Officer, Moody’s Investors Service], and thank you for inviting me to speak with you and your colleagues at Moody’s here today.

We are living through a transformation, as the world shifts from analog to digital. Economies, markets, commercial enterprises, and governments are becoming more data-driven and technology-dependent. Companies increasingly are becoming more intertwined with technology, restructuring their operations and businesses accordingly. What is clear is that technology continues to offer the promise of a more modern world with interconnected economies and communication and financial systems.

Now the technologies of artificial intelligence are being added into this transformation. AI has the potential to accelerate the diagnosis of disease, help combat climate change and streamline manufacturing processes. Most large companies already use AI in some form in their operations and financial reporting. It helps enhance efficiency and accuracy, and boosts productivity.

But real perils exist, too. Generative AI models, which create new data in response to queries, can hallucinate or make up content. AI can accelerate the spread of disinformation and the erosion of privacy. It presents risks to cybersecurity, as well.

To many of us in this room today, it may seem like “déjà vu all over again” as Yogi Berra famously quipped … because these are some of the same risk-reward tradeoffs we faced through earlier stages of the move from analog to digital. And, at the same time, it’s exponentially different in its breadth and speed of change.

Over the next thirty minutes or so, I’d like to share my thoughts on the current state of cybersecurity and how AI is affecting the threat and response environment, in particular. I’ll also touch on public policy challenges AI presents to cybersecurity and how governments and regulators are responding. Global cooperation remains essential.

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A Few Interesting Items from the CCR Proxy Disclosure Conference

Cydney Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum.

Here are a few interesting snippets regarding shareholder proposals and Item 1.05 Form 8-K from this week’s 2024 Proxy Disclosure & 21st Annual Executive Compensation Conferences from CCR Corp. On the panels, the watchword of the day seemed to be consistency—given that some topics are increasingly required to be discussed in more than one SEC filing, location or context (e.g., cyber disclosures in the proxy and 10-K), the panelists urged the audience to make sure that the disclosures were consistent with each other and that the discussions of policies, charters and procedures were consistent with company’s conduct.

Shareholder proposals. First,  Corp Fin Director Erik Gerding observed that requests for no-action increased 41% this season; 69% percent received responses indicating that the staff would not recommend enforcement action if the company excluded the proposal from its proxy statement, a significant increase from 58% in the prior year.  However, Gerding cautioned against attributing too much significance to year-over-year comparisons; there may be all kinds of factors that contribute to the data in one year as compared with another, such as, as one panelist suggested, a slew of submissions of the same proposal from one proponent all of which can be excluded on the same basis.

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2024 Corporate Governance and Incentive Design Survey

Sam Bricker is a Senior Consultant, Tyler Papineau is a Consultant, and Edward Hauder is a Principal and Head of Research & Content at Meridian Compensation Partners. This post is based on their Meridian Compensation Partners memorandum.

As companies review their executive compensation program designs and related corporate governance policies, it can be helpful to consider current market practices and recent trends in order to inform discussions in the boardroom.

Meridian’s 2024 Corporate Governance and Incentive Design Survey offers comprehensive insights into key executive compensation and corporate governance topics relevant to companies today.

The Survey summarizes market practices at 200 large publicly traded companies across all industries (referred to herein as the “Meridian 200”). These companies have median revenues and market capitalizations of $24.8B and $41.0B, respectively, making them a representative sample of the S&P 500.

All information was gathered from annual proxy statements. Meridian has conducted a similar analysis annually since 2011, with minimal changes to the list of reviewed companies (98% of the 2024 Meridian 200 constituents were reviewed in 2023). This consistency allows us to identify emerging trends. For more details, please refer to the Profile of Survey Companies section.

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Freezeouts of Cross-Listed Issuers

Fernán Restrepo is an Assistant Professor of Law at the UCLA School of Law, and Guhan Subramanian is the Joseph H. Flom Professor of Law and Business at Harvard Law School and the H. Douglas Weaver Professor of Business Law at Harvard Business School. This post is based on their recent paper.

In recent years, the popular press and academic commentators have expressed a concern that controlling shareholders of foreign issuers with a cross-listing in the United States (and especially Chinese issuers) are exploiting U.S. investors by paying unfairly low prices in freezeout transactions – that is, transactions in which the controlling shareholder buys the remaining shares of the corporation for cash or stock. The basic idea is that freezeouts of foreign cross-listed issuers are not subject to the same rules and enforcement mechanisms that apply to U.S. companies, which facilitates the underpricing. Fried (2021), for instance, states:

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Governance of AI: A Critical Imperative for Today’s Boards

Lara Abrash is the Chair, Dr. Arno Probst is the Global Boardroom Program Leader, and Karen Edelman is Senior Editor at Deloitte LLP. This post is based on their Deloitte memorandum.

Introduction

When the gen AI tool ChatGPT exploded onto the global market in November 2022, it democratized access to the newest AI capabilities within a matter of days. [1] Now, nearly two years later, the growth in AI investment continues to rise: Gartner forecasts that worldwide IT spending will total US$5.26 trillion in 2024, an increase of 7.5% from 2023, and points to generative AI-related investments as the main reason behind this growth. [2]

As organizations prepare to move past the piloting stage to integrate AI more broadly into strategy and operations, how active are boards in overseeing their organizations’ approach to AI? Are they providing the right level of stewardship to help the organizations’ management teams balance the wide array of opportunities and risks that AI can introduce?

In June 2024, the Deloitte Global Boardroom Program surveyed nearly 500 board members and C-suite executives across 57 countries to understand how involved boards have been in AI governance. The survey explored sentiments about the current pace of adoption and the board’s role in strategic oversight of this emerging technology (see methodology). We also spoke with board directors and Deloitte subject matter specialists to understand how AI stewardship is evolving in boardrooms around the world. Of note, while the survey asked respondents about both generative AI and artificial intelligence more broadly, our interviews revealed that many business leaders are primarily focused on gen AI adoption right now.

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2024 Aggregate Share-Based Compensation

Blake Davidson is a Consultant at FW Cook. This post is based on an FW Cook memorandum by Mr. Davidson, Becca Jordan, and Austin Lee.

We are pleased to present our fifth study of aggregate share-based compensation. Our research focused on 300 companies spread across five industry groups and divided equally among small-, mid- and large-cap segments. This report covers the three-year period from 2021 to 2023, and includes the following:

  • Company-wide annual grant rates, measured based on annual share usage and fair value transfer.
    • Annual share usage is the number of shares granted during a given year as a percentage of weighted average basic common shares outstanding.
    • Fair value transfer is the aggregate grant date fair value of all long-term incentive awards granted during a given year as a percentage of company market capitalization value at grant and as a percent of revenue.
  • Overhang, measured based on potential share dilution as well as the fair value of outstanding grants.
  • Frequency and prevalence of long-term incentive plan share requests.
  • Allocation of long-term incentive pools to the CEO and other proxy officers (“Top 5”).

Analyzing FVT in relation to company market capitalization and revenue helps organizations evaluate the financial impact of their share-based compensation plans. With this data, companies can make informed decisions about structuring equity-based incentives that attract and retain top talent, while effectively managing shareholder dilution and fostering long-term financial stability. Additionally, proxy advisory firms evaluate a company’s historical grant practices and overhang levels when assessing whether to recommend shareholder approval for new share pool requests.

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(Ir)responsible Takeovers

Doron Levit is the Marion B. Ingersoll Endowed Professor of Finance and Business Economics at the University of Washington Foster School of Business, and Philip Bond is a Professor of Finance and Business Economics at the University of Washington. This post is based on their recent paper.

Investors are increasingly prioritizing the societal impact of their portfolio companies and claim to incorporate environmental and social (E&S) factors into their investment decisions. The effectiveness of responsible investment strategies in shaping corporate policies is a topic of ongoing research and debate. In practice, big changes in corporate policy are often the consequence of being acquired, and indeed, these acquisitions not only affect  shareholder value, but also generate externalities for firms’ various stakeholders. The market for corporate control is therefore a natural domain for responsible investment to make an impact, and consistent with this view, recent evidence suggest that E&S considerations indeed play a role in the dynamics of deal-making.

In our recent paper “(Ir)responsible Takeovers,”  we study how responsible investment manifests itself in the market for corporate control. Should we expect the M&A market to push firms towards social efficiency? Or will we instead see socially responsible firms expose themselves to the threat of takeovers by less-socially-minded acquirers?

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SEC Settles Charges for Defrauding Investors in “AI Washing” Scheme

Benjamin R. Pedersen and Charu Chandrasekhar are Partners, and Anna Moody is a Counsel at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Pederson, Ms. Chandrasekhar, Ms. Moody, Sofia Squatriti Muno, and Cameron Wolfe.

Key Takeaways:

  • This settlement is indicative of the SEC’s willingness to use existing federal securities laws to charge AI-related fraud cases in the absence of an AI-specific rule.
  • Despite the relatively small scale of the fraud alleged and the numerous allegations pertaining to fraud beyond AI washing, this settlement is an important reminder that public and private companies, investment advisers, and broker-dealers should implement policies and procedures to ensure the accuracy of all AI-related marketing materials and disclosures, including in pitch decks, online investment forums, and emails.
  • The SEC will pursue AI-related fraud charges based on negligence under Sections 17(a)(2) and 17(a)(3) of the Securities Act. For example, the SEC order alleged that Boro “should have known” about the misstatements made “had he exercised reasonable care as a board member.” This shows that the SEC may pursue misstatement claims under Sections 17(a)(2) and 17(a)(3) where the respondent participated in preparing allegedly false or misleading statements or “should have known” that they were false or misleading.

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Climate Lobbying: Investor Interest and Corporate Disclosures

Subodh Mishra is Global Head of Communications at ISS STOXX. This post is based on an ISS-Corporate memorandum by Daniel Feinberg, Senior Associate, Sustainability Advisor, ISS-Corporate.

Increased Investor Interest in Climate Lobbying Transparency

Climate lobbying – the alignment of a company’s climate commitment with its lobbying expenditures – has emerged as a trend in shareholder proposals in recent years. Often these proposals call for companies to “Review Public Policy Advocacy on Climate Change” or “Report on Corporate Climate Lobbying Aligned with [the] Paris Agreement.” This trend is part of a broader theme of shareholder expectations for companies to integrate climate considerations with other ESG matters (e.g., social justice – the “just transition”), rather than simply reporting on emissions reduction.

Outcomes of these proposals suggest that climate lobbying is a substantial concern among shareholders. Median support for voted proposals on this topic in the U.S. peaked at 64% in 2021 (as shown in the chart below), after which the proportion of withdrawn proposals on this topic expanded, perhaps indicating that companies reached agreements with filers to avoid undesirable voting outcomes. In 2024, 9 climate lobbying proposals went to a vote with a median support level of 28% of votes cast, indicating a continued interest in this topic among proponents and investors.

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