Monthly Archives: November 2016

Towards a New Solution to Retail Investors’ Apathy

Kobi Kastiel is a Research Director of The Project on Controlling Shareholders at the Harvard Law School Program on Corporate Governance, and Yaron Nili is Assistant Professor at University of Wisconsin Law School. This post is based on their recent article, forthcoming in the Delaware Journal of Corporate Law. Related research from the Program on Corporate Governance includes Frozen Charters by Scott Hirst (discussed on the Forum here).

Corporate law scholars have taken investors’ rational apathy for granted for decades, considering it a necessary evil once ownership is no longer closely held. The traditional explanation is well known: diversified retail investors, who individually hold small fractions of a firm’s equity capital, often lack the financial incentives to monitor management, as they know that their vote probably will not affect the outcome. Since the process of informing and expressing one’s preferences is costly, these investors often choose to refrain from any involvement in the governance of the corporation. For such a shareholder, it is simply economically rational to stay uninformed and not to vote at all.

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Thoughts for Directors

Steven B. Stokdyk and Joel H. Trotter are global Co-Chairs of the Public Company Representation Practice Group at Latham & Watkins LLP. This post is based on an article by Mr. Stokdyk, Mr. Trotter, and Catherine Bellah Keller.

Boards and management regularly use key performance indicators or metrics to oversee their businesses. These metrics typically cover financial and operating matters and are specific to each company and within industries. Metrics may be financial or operational, qualitative or quantitative, absolute or relative, or focused on short- or long-term performance.

Metrics are critical to understanding and managing trends in the business and are often used to determine compensation. As metrics may garner close attention from analysts and investors, boards should understand how their companies’ metrics are chosen, developed and reported.

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The Law and Brexit VIII

Thomas J. Reid is Managing Partner of Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Additional posts on the legal and financial impact of Brexit are available here.

As we move to a monthly schedule for the publication of our Brexit series, we finally have some idea as to the schedule for the Brexit process. The British Prime Minister indicated in her party conference speech that the UK will begin the exit process and two year negotiation period by the end of March 2017. While this finally provides some clarity on timetable, there remains considerable uncertainty over the terms of Brexit. At the recent meeting of EU heads of state in Brussels, the signals from both sides continue to point towards a so-called ‘hard’ Brexit meaning, inter alia, materially restricted access to the EU market for UK providers of goods and services.

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Lower Performance for Target Pay? Pay for Performance Alignment in Times of Declining Performance

Jeff Joyce is a Partner and Brian Lane is a Principal at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Joyce, Mr. Lane, and Perla Cruz. 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).

Ensuring alignment between pay and performance is challenging enough when a business is performing well. But what about during times of an industry or economic downturn, waning company performance, a shift in strategic business focus, or a period of investment when performance expectations are not as high as in recent years? Today, institutional investors and proxy advisors are hyper-focused on pay-for-performance alignment and, by extension, the rigor of performance goals. Any indication of declining incentive goals year-over-year can bring heightened scrutiny, negative commentary, and can increase the likelihood of an “against” Say-on-Pay (SOP) vote recommendation from proxy advisors. What alternatives exist for a company facing the prospect of performance expected to be lower than the prior year? What should be considered in setting incentive plan goals and what can be expected from shareholder watchdogs who closely examine performance goals and alignment with shareholders?

A recent study by Institutional Shareholder Services of over 2,000 companies indicated that 31% of short-term incentive goals and 22% of long-term incentive goals were lowered from FY2014 to FY2015. As these findings highlight, many companies find themselves in the position of how best to address performance goals that are lower year-over-year while ensuring that shareholder interests are not neglected.

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A New Model for SEC Enforcement: Producing Bold and Unrelenting Results

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent remarks at the New York University School of Law Program on Corporate Compliance and Enforcement. The views expressed in this post are those of Ms. White and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning and thank you, Dean [Trevor] Morrison for that very kind introduction. It is a pleasure to be here today [Nov. 18, 2016] and I want to thank the NYU Program on Corporate Compliance and Enforcement and the NYU Pollack Center for Law and Business for co-sponsoring this program. These programs provide important forums for sophisticated dialogue on critical white collar enforcement issues, which have an increased prominence post-financial crisis. I am honored to join your list of distinguished speakers.

Consistent with the core missions of these programs, I will talk to you today primarily about the SEC’s enforcement program, but also more broadly, about how best to punish and deter white-collar wrongdoing. As you know, the SEC is the primary regulator and enforcer of the federal securities laws. How we go about our job is thus critical to the protection of investors and the integrity of our capital markets. After nearly four years as Chair of the SEC, following almost nine years as U.S. Attorney for the Southern District of New York, where the criminal prosecution of white collar wrongdoing was—and still is—a major priority, this seemed like the right time to speak here about this important topic. And, as you might guess, after spending much of my career in law enforcement, I have strong views about the importance of strong enforcement in the white collar space and what it takes to achieve that.

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Embraer SA Pays $205 Million to the SEC and DOJ to Settle FCPA Violations

Mark Mendelsohn and Alex Oh are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss publication by Mr. Mendelsohn, Ms. Oh, David Brown, Farrah Berse, and Peter Jaffe.

On October 24, 2016, U.S. authorities announced that Brazilian aircraft manufacturer Embraer SA agreed to pay more than $205 million to resolve violations of the Foreign Corrupt Practices Act’s anti-bribery, books and records and internal control provisions. According to the U.S. Department of Justice and Securities and Exchange Commission, Embraer made more than $83 million in profits by using sham consulting agreements to funnel bribes totaling almost $6 million to foreign officials in the Dominican Republic, Mozambique and Saudi Arabia. In addition, Embraer violated the FCPA’s books and records provisions by mischaracterizing the purpose of the payments, and violated the internal controls provisions by failing to implement adequate controls for the retention of third-party sales representatives and agents.

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The U.S. Legal and Regulatory Environment Under a Trump Administration

This post is based on a publication by Skadden, Arps, Slate, Meagher and Flom LLP.

Election Day brought an end to a long period of uncertainty that caused market fluctuations and delayed business planning decisions. As we navigate the post-election landscape, many questions remain regarding the potential policy direction of a Trump administration, including policies that could affect long-standing trade agreements, U.S. investments at home and abroad, the power and reach of regulatory agencies, and the balance of the U.S. Supreme Court. Until the new administration’s appointees are announced and confirmed, any forward-looking analysis is inherently uncertain. In addition, a Republican-controlled legislative branch may pursue policy priorities that are not entirely in accordance with those of the president-elect. Despite the unknowns, we offer this snapshot of the changes our clients may encounter. We will provide a more detailed account of these and other topics in our annual Insights publication, scheduled for release in January 2017.

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How Strong Stakeholder Bonds Can Help Firms Avoid a Crisis

Sinziana Dorobantu is Assistant Professor of Management and Organizations at NYU Stern School of Business. This post is based on a forthcoming article by Professor Dorobantu; Witold Henisz, the Deloitte & Touche Professor of Management in Honor of Russell E. Palmer, former Managing Director at The Wharton School, The University of Pennsylvania; and Lite Nartey, Assistant Professor in the Sonoco International Business Department at the Darla Moore School of Business.

Why is it the case that apparently isolated events (e.g., a court decision or a negative report from an environmental organization) sometimes escalate into crises while other times they go almost unnoticed? In new research to be published in the Administrative Science Quarterly, entitled Not All Sparks Light a Fire: Stakeholder and Shareholder Reactions to Critical Events in Contested Markets, we argue that variations in stakeholders’ perceptions of an organization and in their reactions to the initial event explain why, in some instances, negative news spark a social movement opposing the organization escalating into a bigger crisis, while in others they pass almost unnoticed. We analyzed a dataset of more than 51,000 media-reported events describing the interactions between 2,293 diverse stakeholders (including local communities, government representatives, NGOs, suppliers, etc.) and 19 publicly-traded gold mining firms operating 26 mines around the world, to find that:

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Weekly Roundup: November 11–November 17, 2016


More from:

This roundup contains a collection of the posts published on the Forum during the week of November 11–November 17, 2016.



Changes and Challenges in the SEC’s ALJ Proceedings


Do Underwriters Compete in IPO Pricing?













Glass Lewis Comments to the SEC on Regulation S-K

Robert McCormick is Chief Policy Officer at Glass, Lewis & Co. This post is based on a recent letter from Glass Lewis to the SEC by Mr. McCormick, Julian Hamud, Crystal B. Milo, and Starlar Burns.

A significant amount of Glass Lewis’ U.S. proxy research is derived from the disclosure required under Subpart 400 of Regulation S-K. Accordingly, we are well situated to recognize the benefits to investors produced through the information provided under Subpart 400 and to identify opportunities for improvements. Glass Lewis is generally supportive of the current format of Subpart 400, and believes investors and registrants would be best served through targeted enhancements of the document rather than any substantial reorganization. In our view, the goal of the Commission should be to augment and simplify investor access to material information without placing an undue burden on registrant.

In providing our recommendations, we seek to promote clear and concise disclosure of material information, which we believe will allow investors to make better informed decisions with regard to companies’ corporate governance practices. Our recommendations encourage uniformity, clarity, and an increased dialogue between investors and registrants. Finally, as a guiding principle, we believe that disclosures should be readily understandable to investors regardless of their level of sophistication, with an emphasis on plain explanations, visual representations of data and a minimum of overly broad boilerplate language.

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