Monthly Archives: December 2012

Say-on-Pay Litigation: Part Deux

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Jeremy L. Goldstein, Kim B. Goldberg, and Michael J. Schobel.

In recent months, several public companies have been subjected to lawsuits by plaintiffs alleging inadequacy of executive compensation disclosure for purposes of the non-binding advisory shareholder vote on executive compensation (“say-on-pay”) required by the Dodd-Frank Act. In some cases, the complaints regarding say-on-pay disclosure have accompanied complaints regarding disclosure of amendments to equity compensation plans requiring shareholder approval. These new lawsuits follow earlier and largely unsuccessful fiduciary duty challenges brought against directors of companies that failed their say-on-pay votes; however, in contrast to the earlier cases, these new suits are actions brought as soon as companies file their proxies and seek to enjoin the shareholder vote from taking place.


ISS Moderates Proposed Voting Policy Updates for the 2013 Proxy Season

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz, Trevor S. Norwitz, Jeremy L. Goldstein, and S. Iliana Ongun.

Institutional Shareholder Services has released its 2013 Corporate Governance Policy Updates, which represent a more moderate approach than the proposals it released for comment in October. These changes, which will generally apply for the 2013 proxy season, continue the trend of narrowing director discretion in matters traditionally considered to be within directors’ authority. In addition, ISS’ expansion into social policy matters appears often to be at odds with shareholder and corporate interests and is far more likely to benefit special interest groups. It should be noted, though, that ISS took into account many of the comments it received and in some cases moved from a one-size-fits-all approach to a more appropriate case-by-case analysis. Although it is important that boards of directors be cognizant of ISS voting policies, it is essential that, in their decision-making, directors carefully consider the best interests of the corporations they serve and not merely defer to shareholder advocacy groups.


(Why) Are US CEOs Paid More?

The following post comes to us from Nuno Fernandes, Professor of Finance at IMD Business School; Miguel Ferreira, Professor of Finance at Nova School of Business and Economics; Pedro Matos, Associate Professor of Business Administration at the University of Virginia, Darden School of Business; and Kevin Murphy, Professor of Finance at the University of Southern California, Marshall School of Business.

The high pay of U.S. CEOs relative to their foreign counterparts has been cited as evidence of excesses in U.S. executive compensation practices. This perception of a “pay divide” between the United States and the rest of the world is usually based on estimates provided by professional services firms like Towers Watson that receive a good deal of press coverage. However, attempts to understand the magnitude and determinants of the U.S. pay premium have been plagued by data limitations due to international differences in rules regulating the disclosure of executive compensation.

In our paper, Are U.S. CEOs Paid More? New International Evidence, forthcoming in the Review of Financial Studies, we use new data to compare CEO pay in 1,648 U.S. firms versus 1,615 firms from 13 foreign countries. Thanks to recently expanded disclosure rules, our sample includes publicly listed firms from both Anglo-Saxon and continental European countries that had mandated disclosure of CEO pay by 2006. It covers nearly 90% of the market capitalization of firms in these markets and, importantly, comprises firms with different corporate governance arrangements.


Money Market Funds: FSOC Proposes Reforms

Dwight C. Smith is a partner at Morrison & Foerster LLP focusing on bank regulatory matters. This post is based on a Morrison & Foerster client alert by Jay Baris.

On November 13, 2012, the Financial Stability Oversight Council (FSOC), faced with a Securities and Exchange Commission (SEC) that has been deadlocked over whether or how to address concerns about money market funds (MMFs), voted unanimously to propose three MMF reforms. The vote was the FSOC’s first exercise of its power under section 120 of the Dodd-Frank Act to recommend heightened regulatory standards to financial regulatory agencies. If finalized, today’s proposal will result in a recommendation that the SEC act on at least one of the reforms. [1]

Last August, SEC Chairman Mary Schapiro, in a controversial decision, tabled proposed rulemaking on MMFs because of the lack of support from three Commissioners of the SEC. In a letter sent in late September, Treasury Secretary Timothy Geithner urged the FSOC members at their November meeting to take up MMF reform through their section 120 powers. According to Secretary Geithner at today’s meeting, the FSOC’s decision was taken on the recommendation of Chairman Schapiro.

The proposal from the FSOC presents three options for MMF reform, two of which were before the SEC in August, and requests public comment during the 60 days following publication of the proposal in the Federal Register. The FSOC does not regard the three options as mutually exclusive and thus could recommend more than one to the SEC. The three options are as follows:


Myths and Realities of Say on Pay “Engagement”

Charles Nathan is partner and head of the Corporate Governance Practice at RLM Finsbury. This post is based on an RLM Finsbury commentary by Mr. Nathan.

Corporate America has weathered (with mixed results) two years of annual “Say on Pay” votes and is gearing up for a third. One theme which emerged during 2012 is that companies should not view the annual vote as a 60-90 day event that needs to be managed as best as possible given the hand the company has been dealt (or, in some senses, the hand it has dealt for itself). Rather, companies need to view Say on Pay as a year-round exercise in which the outcome of the annual vote can be positively affected if the company “engages” successfully with its investors on the topic of executive pay.

However, the meaning of the term “engagement” in this context is by no means obvious. And, while a number of companies have implemented sound engagement programs based on an accurate assessment of corporate governance dynamics, too many common prescriptions for engagement are based more on myth than reality.


Rethinking the Annual Meeting

John Wilcox is chairman of Sodali, a co-chair of, and former Head of Corporate Governance at TIAA-CREF. This post is based on a Sodali publication by Mr. Wilcox.

During the past decade the Annual General Meeting has become a forum for confrontation with shareholders as much as an assembly for the conduct of company business. In today’s environment, companies planning their AGMs must prepare for an array of potential disruptions that can include organized opposition to agenda items, opportunistic activism and campaigns to unseat or replace directors, often accompanied by negative media coverage and reputational damage.

Opinions vary widely as to whether confrontation at annual meetings is a sign of healthy corporate governance or a distraction from essential business goals. Regardless of its merits, controversy at AGMs has become a fact of life for listed companies around the world. How to avoid being surprised or forced into a defensive posture or losing control of the annual meeting is a serious challenge that corporate boards and managers will face once again in 2013.


Campbell, Iridium, and the Future of Valuation Litigation

The following post comes to us from Michael W. Schwartz and David C. Bryan, of-counsel and partner, respectively, at Wachtell, Lipton, Rosen & Katz. This post is based on an article published by the authors in The Business Lawyer, Vol. 67, Issue 4 (August 2012). The views expressed are those of the authors only, and should not be attributed to the firm or its clients.

Five years ago, two landmark federal court valuation decisions, VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007), and In re Iridium Operating LLC, 373 B.R. 283 (Bankr. S.D.N.Y. 2007), held that contemporaneous market evidence—rather than discounted cash flow or other after-the-fact analyses created by paid experts for purposes of litigation—should be relied upon to value corporations for purposes of litigation. While a number of decisions have since followed Campbell and Iridium, the full potential of these decisions to make business valuation litigation less costly and less susceptible to hindsight bias has yet to be realized.


Reporting on Corporate Sustainability Performance

Matteo Tonello is managing director of corporate leadership at the Conference Board. This post is based on an issue of the Conference Board’s Director Notes series by Cory Searcy, associate professor at Ryerson University, and Laurence Clement Roca. This Director Note was based on an article written by Ms. Clement Roca and Mr. Searcy; the full version, including footnotes, is available here.

A growing number of corporations are releasing stand-alone sustainability reports. To provide insight into corporate sustainability performance, many reports contain sets of performance indicators. However, questions remain about what should be reported and the indicators disclosed vary widely. This report presents an analysis of the indicators disclosed in 94 Canadian corporate sustainability reports.

Sustainability policies, plans, programs, and projects have been initiated in corporations around the world. Given the broad nature of sustainability, the breadth and depth of these initiatives varies widely. For example, initiatives as diverse as measuring a corporation’s carbon footprint, fostering diversity in the workplace, and supporting community development could all be classified under the umbrella of sustainability. These initiatives are of interest to a variety of internal and external stakeholders. Depending on the issue, these stakeholders may include employees, investors, customers, suppliers, regulators, nongovernmental organizations, and local communities, to name a few.

One important way corporations share information about their sustainability initiatives is through the release of publicly available reports. Although the titles of these reports differ, they typically include words such as “sustainability,” “responsibility,” “accountability,” or “citizenship,” and they focus on addressing the economic, environmental, and social dimensions of corporate performance through a review of both qualitative and quantitative information. (For the remainder of this issue, the term “sustainability report” is used.)


Key Issues for Directors in 2013

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.

For a number of years, as the new year approaches, I have prepared for boards of directors a one-page list of the key issues that are newly emerging or will be especially important in the coming year. Each year, the legal rules and aspirational best practices for corporate governance, as well as the demands of activist shareholders seeking to influence boards of directors, have increased. So too have the demands of the public with respect to health, safety, environmental and other socio-political issues. In The Spotlight on Boards, I have published a list of the roles and responsibilities that boards today are expected to fulfill. Looking forward to 2013, it is clear that in addition to satisfying these expectations, the key issues that boards will need to address include:


Executive Turnover Following Option Backdating Allegations

The following post comes to us from Ed Swanson, Professor and Durst Chair at the Mays Business School at Texas A&M University; Jap Efendi of the Department of Accounting at The University of Texas at Arlington; Rebecca Files of the Naveen Jindal School of Management at The University of Texas at Dallas; and Bo Ouyang of Penn State Great Valley.

In the paper, Executive Turnover Following Option Backdating Allegations, forthcoming in The Accounting Review, we investigate how the Board of Directors and the managerial labor market (two private-sector monitoring mechanisms) respond to an allegation of option backdating. Allegations have been directed at numerous well-known public companies, including Microsoft, Apple, Home Depot, Costco, and United Health. Backdating occurs when executives designate as the grant date a day earlier than the one on which the board actually made the decision to grant options. Managers typically select an earlier date when the market price was lower, so they receive options that are already “in-the-money” on the actual grant date.


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