Monthly Archives: August 2012

Proxy Access: Upcoming Votes at FRX, MDT and HRB

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, August 13, 2012
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Editor’s Note: James McRitchie is the publisher of CorpGov.net. Work on proxy access from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Bebchuk and Hirst.

As participants in the Forum know, SEC rule changes that took effect in September 2011 once again allow shareowners the right to submit and vote on “proxy access proposals” as we had done prior to an underground reinterpretation of SEC rules in 1990 and during a brief window of opportunity after AFSCME v AIG (2006). These proposals give shareowners the right to include director nominees in the company’s proxy materials. Arguably, the most innovative recent models of such proposals have now withstood the SEC “no-action” process and will soon come to a vote at Forest Labs (FRX) on August 15th, Medtronic (MDT) on August 23rd and H&R Block (HRB) on September 13th.

Download a PowerPoint presentation and/or read the paper (pdf) on these important proposals. All three proposals were introduced by long-time activist Kenneth Steiner, with the help of John Chevedden. Design of the proposal came from a team of United States Proxy Exchange (USPX) members, including James McRitchie, Glyn Holton, Brett Davidson, Steve Neiman, Daniel Rudewicz, Steven Towns and others, with helpful input from a variety of their contacts.

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Private Equity Performance

Posted by Steven Kaplan, University of Chicago, on
Monday, August 13, 2012
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Steven N. Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business.

In our recent NBER working paper, Private Equity Performance: What Do We Know?, my co-authors (Tim Jenkinson of the University of Oxford and Robert Harris of the University of Virginia) and I use a new research-quality data set of private equity fund-level cash flows from Burgiss. We refer to private equity as the asset class that includes buyout funds and venture capital (VC) funds. We analyze the two types of funds separately. The data set has a number of attractive features that we describe in detail later. A key attribute is that the data are derived entirely from institutional investors (the limited partners or LPs) for whom Burgiss’ systems provide recordkeeping and performance monitoring services. This results in detailed, verified and crosschecked investment histories for nearly 1400 private equity funds derived from the holdings of over 200 institutional investors. Using these data we reassess the performance of private equity funds, in absolute terms and relative to public markets. Our results are markedly more positive for buyout funds than have previously been documented.

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July 2012 Proxy Voting Fact Sheet

Posted by Matteo Tonello, The Conference Board, on
Sunday, August 12, 2012
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Matteo Tonello is managing director of corporate leadership at the Conference Board. This post relates to a Conference Board report authored by Dr. Tonello, Melissa Aguilar, and Thomas Singer of the Conference Board. The report is available here (registration may be required). A post about a previous proxy voting fact sheet is available here.

As say-on-pay (SOP) resolutions were being voted on during the 2012 proxy season, management nominees to boards of directors of U.S. public companies faced less opposition by investors. This and other data from nearly 2,500 annual general meetings (AGMs) held between January 1 and June 30 at Russell 3000 companies are discussed in the new edition of Proxy Voting Fact Sheet — the periodic report issued by The Conference Board in collaboration with FactSet Research. Data discussed in the report is compared with the S&P 500 and analyzed across 20 business sectors.

The report reviews the most recent statistics on:

  • Voted, omitted, and withdrawn shareholder proposals.
  • Proposal sponsors.
  • Average voting results, by topics.
  • Say-on-pay management proposals.

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Environmental, Social and Governance Investing by University Endowments

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, August 11, 2012
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The following post comes to us from Joshua Humphreys, fellow and principal investigator at the Tellus Institute, and Jon Lukomnik, executive director at the IRRC Institute. This post is based on the executive summary of a report from the IRRC Institute and the Tellus Institute by Mr. Humphreys, Christi Electris, Catie Ferrara, and Ann Solomon; the full report is available here.

With more than $400 billion in combined assets under management, US college and university endowments constitute an important segment of institutional investors involved in sustainable and responsible investing – defined here as the explicit incorporation of environmental, social and corporate-governance (ESG) issues into investment decision-making and active-ownership activities. This study provides one of the most comprehensive analyses to date of the state of ESG investing by educational endowments.

In it, we aggregate multiple survey datasets that address three broad areas of ESG investing activity: 1) the incorporation of ESG criteria into endowment management; 2) shareholder advocacy and active-ownership initiatives; and 3) the governance and transparency of ESG investment decision-making.

In addition to analyzing existing survey data, the study advances a novel interpretation about the distinctiveness of endowments’ involvement in ESG investing. What differentiates educational endowments from the adoption of sustainable and responsible investing strategies by other institutional investors, such as foundations, hospitals, public pensions, corporations, unions or faith-based investors, is the particular constellation of stakeholder relations within which the vast majority of ESG investment practices have been adopted by colleges and universities.

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FCPA Whistleblower Lawsuits Under the Dodd-Frank Anti-Retaliation Provision

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 10, 2012
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The following post comes to us from Steve Nickelsburg, partner in the litigation & dispute resolution practice at Clifford Chance LLP. This post is based on a Clifford Chance client memorandum by Mr. Nickelsburg, Steven Gatti, and Angela Stoner. Further discussion of the Foreign Corrupt Practices Act (FCPA) is available here.

In recent months, two district courts have addressed the issue whether employees who claim they were retaliated against for internally reporting violations of the Foreign Corrupt Practices Act can bring a private civil lawsuit against their former employers under the Dodd-Frank anti-retaliation provision. Although both courts decided that the anti-retaliation provision of the Dodd-Frank Act did not apply in these particular cases, the courts disagreed over whether Dodd-Frank whistleblower protections could apply to FCPA whistleblowers who report internally but not to the SEC.

The Whistleblower Provisions

The “anti-retaliation” provision of the Dodd-Frank Act, 15 U.S.C. §78u-6(h)(1)(A) prohibits employers from retaliating against a “whistleblower” for:

  • i. providing information to the Securities and Exchange Commission (“SEC” or “Commission”);
  • ii. initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or
  • iii. making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.) (“SOX”), [certain other securities laws], and any other law, rule, or regulation subject to the jurisdiction of the Commission.

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Do Private Equity Fund Managers Earn Their Fees?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 10, 2012
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The following post comes to us from David Robinson, Professor of Finance at Duke University, and Berk Sensoy of the Department of Finance at Ohio State University.

In our recent NBER working paper, Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance, we use a large, proprietary database of private equity funds to study the links between the terms of private equity management contracts and the subsequent cash flow behavior and performance of the funds. The database is the largest and most recent source of private equity compensation terms available to date, and is the first to provide information on manager ownership and to include cash flow information along with the terms of management contract.

We use these data to contrast two views of the state of managerial compensation practices in private equity. The first is that highly compensated GPs, or those with little skin in the game, extract excessive rents and have inadequate incentives, which ultimately spells poor returns for limited partners. The second view is that the management contracts we observe reflect (potentially constrained) efficient bargaining outcomes between sophisticated parties, and that management contracts reflect the productivity of GP skills and the agency problems that LP’s face.

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Dealing With Activist Hedge Funds

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Thursday, August 9, 2012
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The past ten years have seen a high and increasing level of activist campaigns. There have been more than 300 activist attacks on major companies during this period. Among the major companies that have been attacked are, P&G, McDonald’s, ITW, DuPont, Motorola, Target, Pepsi, Heinz, Kraft and Home Depot. There are more than 100 hedge funds that have engaged in activism and they frequently gain the backing of ISS and major institutional investors, some of which have investments in activist funds. SEC rules do not prevent an activist from secretly accumulating a more than 5% position before being required to make public disclosure.

Hedge fund activism requires attention and warrants similar preparation as to that we recommend for responding to a hostile takeover bid. This memo is a revision of the one I did in 2007 as a supplement to my Takeover Response Checklist. In fact, some activist attacks are designed to change management or the board of the target in order to facilitate a takeover or to force a sale of the target. Careful planning and a proactive response are critical. Failure to prepare reduces a company’s ability to control its own destiny.

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Sustainability Practices in 2012

Posted by Matteo Tonello, The Conference Board, on
Thursday, August 9, 2012
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Matteo Tonello is managing director of corporate leadership at the Conference Board, Inc. This post relates to a Conference Board report authored by Dr. Tonello and Thomas Singer of the Conference Board. For details regarding how to obtain a copy, contact [email protected].

According to a new study recently released by The Conference Board, U.S. corporations continue to lag far behind their counterparts in other developed economies—notably , the European Union and Japan—in transparency of environmental and social practices. In particular, the overall disclosure rate of this type of information by U.S. companies in the Russell 1000 is 10 percent, compared to 19 percent for a global sample of 3000 business organizations tracked by Bloomberg’s Environmental, Social, and Governance (ESG) database.

The new report, Sustainability Practices: 2012 Edition—a collaboration between The Conference Board, Bloomberg, and Global Reporting Initiative (GRI) Focal Point USA—covers a total of 72 environmental and social practices including: atmospheric emissions, water consumption, biodiversity policies, labor standards, human rights practices, and charitable and political contributions. For benchmarking purposes, Bloomberg ESG data is compared with the S&P 500 and the Russell 1000, and further analyzed across 11 business sectors and four revenue groups.

The following are some of the other major findings discussed in the paper.

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SRP-Represented Investors Responsible for 36% of Successful 2012 Shareholder Proposals

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, August 8, 2012
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Editor’s Note: Professor Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), and Scott Hirst is the SRP’s Associate Director. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University.

According to a recent news alert by the Council of Institutional Investors, 97 precatory proposals have so far received majority support at annual meetings taking place during the first seven months of 2012. As explained below, investors represented by the Shareholder Rights Project (SRP) are responsible for over one-third of the precatory proposals receiving majority support at annual meetings so far this year.

During the 2011-12 proxy season, the SRP has been representing and advising a number of institutional investors in connection with the submission of shareholder proposals. These precatory proposals urge repealing the classified board and moving to annual elections, which are widely viewed as corporate governance best practice.

Thirty-seven proposals submitted by five SRP-represented investors — Illinois State Board of Investment (ISBI), the Los Angeles County Employees Retirement Association (LACERA), the Nathan Cummings Foundation (NCF), the North Carolina State Treasurer (NCDST), and the Ohio Public Employees Retirement System (OPERS) — have already gone to a vote at 2012 annual meetings. These proposals have obtained the support, on average, of 80.89% of votes cast, and thirty-five of the proposals passed. The 35 proposals brought by SRP-represented investors that passed represent 36% of all of the shareholder proposals receiving majority support at annual meetings this year.

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Abolishing IPOs and Harnessing Private Markets in the Public Good

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, August 8, 2012
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The following post comes to us from Adam C. Pritchard, Professor of Law at University of Michigan.

In my paper, Revisiting “Truth in Securities Revisited”: Abolishing IPOs and Harnessing Private Markets in the Public Good, I explore the possibility of doing away with initial public offerings. In their place, I propose an expanded system of company registration under which companies would have to trade in private markets for a seasoning period, with mandatory disclosure, before they would be allowed to sell their shares to the public at large. I argue that such system would promote not only efficient capital formation, but also investor protection.

Under the current regime, companies can stay private until one of three triggering events occurs: 1) the company lists its shares for trading on a securities exchange; 2) the company makes a registered public offering; or 3) the company exceeds 2,000 shareholders. Typically, companies trigger public company status through an initial offering of shares, with simultaneous listing of those shares on an exchange. The decision to make an initial public offering, however, is frequently made because the company is pushing the limit on the number of shareholders as a result of prior private issues to employees and early-round investors.

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