Monthly Archives: December 2016

Do CEO Bonus Plans Serve a Purpose?

Wayne R. Guay is Professor of Accounting and John D. Kepler is a doctoral candidate at The Wharton School of the University of Pennsylvania. This post is based on a recent paper by Professor Guay, Mr. Kepler, and David Tsui, Assistant Professor of Accounting at the University of Southern California’s Marshall School of Business. 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).

In our paper, Do CEO Bonus Plans Serve a Purpose?, we examine the financial incentives provided by executive bonuses and the role of bonus plans in managers’ compensation packages. The vast majority of U.S. executive compensation plans incorporate bonus payouts, and boards devote considerable time and expense to designing these often complex plans. However, prior academic studies present very different views regarding the importance of bonuses in CEOs’ overall incentive schemes. Although early literature argued that annual bonus plans influence CEOs’ investment, financing, and financial reporting decisions, more recent literature estimates the monetary incentives from bonuses and concludes that bonus-based incentives are approximately 50 to 100 times smaller than equity-based incentives and therefore largely irrelevant. This latter view, if correct, raises the question as to why bonus compensation is so pervasive at the CEO level and why boards devote so much time and energy to designing these plans.

We shed light on this issue by examining detailed data from public disclosures of executive bonus plans between 2006 and 2014 for the 750 largest public firms in the U.S. We find that the actual performance sensitivity of bonuses is considerably larger than estimates in prior studies, and is comparable in scale to equity incentives for many CEOs early in their tenures. The typical CEO in our sample receives about $300,000 to $450,000 in bonus for a 10 percent increase in shareholder value, which is about one-sixth to one-tenth of the corresponding equity portfolio sensitivity (about $3 million). For CEOs early in their tenures, who tend to have smaller equity portfolios, the gap between cash- and equity-based incentives is considerably narrower—annual cash-based incentives are about one-third to one-quarter of total equity portfolio incentives among these executives.

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Delaware Supreme Court Ruling in Zynga: Reasonable Doubt of Director Independence

The following post is based on a ThomsonReuters Practical Law publication, and is part of the Delaware law series; links to other posts in the series are available here.

For the second time in the last 14 months, the Delaware Supreme Court has reversed a decision by the Court of Chancery to dismiss a complaint for failure to plead demand excusal under Court of Chancery Rule 23.1. In Sandys v. Pincus (“Zynga”), the Supreme Court, in a majority opinion, held that the derivative plaintiff had pleaded enough particularized facts to raise a reasonable doubt that a majority of the directors of Zynga, Inc. could impartially consider a pre-suit demand on the board (2016 WL 7094027 (Del. Dec. 5, 2016)). In particular, the Supreme Court held that:

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U.K. Proposed Enhancements to Corporate Governance: Will the New U.S. Administration Follow?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication. Additional posts addressing legal and financial implications of the incoming Trump administration are available here.

One of the prevailing narratives of the recent Presidential election was that the same gestalt that drove the Brits to vote for Brexit also animated the pro-Trump forces and led to his presidential victory. Why then, when it comes to regulation of corporate conduct, do the two countries appear to be headed in such different directions? Or are they?

The U.K. Government’s new “Green Paper” on Corporate Governance Reform suggests, among other proposals, pay-ratio disclosure, giving employees more influence on company boards and making say-on-pay votes binding.  In the introduction, Conservative Party P.M. Theresa May articulates the purpose of these new proposals, maintaining that the government she will “lead will be unequivocally and unashamedly pro-business….But for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public. For many ordinary working people—who work hard and have paid into the system all their lives—it’s not always clear that business is playing by the same rules as they are. And when individual businesses lose the confidence of the public, faith in the business community as a whole diminishes—to the detriment of all. It is clear that in recent years, the behaviour of a limited few has damaged the reputation of the many. It is clear that something has to change. This Green Paper sets out a new approach to strengthen big business through better corporate governance.”

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A “Successful” Case of Activism at the Canadian Pacific Railway: Lessons in Corporate Governance

Yvan Allaire is Emeritus professor of strategy at Université du Québec à Montréal (UQAM) and Executive Chair of the Institute for Governance of Private and Public Organizations (IGOPP); François Dauphin is Director of Research of IGOPP and a lecturer at UQAM. This post is based on their recent paper. Related research from the Program on Corporate Governance includes: The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Pershing Square Capital Management, an activist hedge fund owned and managed by William Ackman, began hostile maneuvers against the board of CP Rail in September 2011 and ended its association with CP in August 2016, having netted a profit of $2.6 billion for his fund. This Canadian saga, in many ways, an archetype of what hedge fund activism is all about, illustrates the dynamics of these campaigns and the reasons why this particular intervention turned out to be a spectacular success… thus far.

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Weekly Roundup: December 16–December 22, 2016


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This roundup contains a collection of the posts published on the Forum during the week of December 16–December 22, 2016.
















Think Twice Before Settling With An Activist

Kai Haakon Liekefett is partner and head of the Shareholder Activism Response Team at Vinson & Elkins LLP. This post is based on a publication authored by Mr. Liekefett and Lawrence Elbaum. The opinions expressed in this article are solely those of the authors and not necessarily those of Vinson & Elkins or its clients. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The vast majority of activist situations result in a negotiated settlement between the activist and the target company. The problem is that—more often than not—settlements fail to secure long-lasting peace between the parties. This post examines why many companies have “buyer’s remorse” post-settlement and why a proxy fight is not the only alternative to settling with an activist.

The tide of shareholder activism keeps rising in the U.S. and elsewhere around the world. At the beginning of this era of shareholder activism, target companies fought back. For example, 15 years ago in 2001, more than 60% of the proxy contests in the U.S. went to a shareholder vote and only 20% settled prior to the shareholder meeting. Times have changed dramatically. In 2016 to date, only approximately 30% of the proxy fights in corporate America went the distance while 47% of them ended in settlements. And these numbers understate the prevalence of settlements because the vast majority of activist situations never reach the proxy contest phase. Many activist situations settle in private, confidential negotiations before any public agitation by the activist begins and long before the shareholder meeting.

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Proxy Advisors and Investors Prep for 2017 Proxy Season

Shirley Westcott is a Senior Vice President at Alliance Advisors LLC. This post is based on an Alliance Advisors publication. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

As 2016 draws to a close, shareholder proponents and proxy advisors have begun laying the groundwork for the 2017 proxy season. Institutional Shareholder Services (ISS) and Glass Lewis recently released their U.S. voting policy updates which address a range of issues including directors’ outside board service, restrictions on the submission of binding shareholder proposals, governance provisions at newly public companies, and gender pay parity. [1] Although the revisions are marginal for most companies, ISS has also made some technical changes to its approach to executive and director compensation, which will be detailed in an upcoming FAQ.

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Corporate Environmental Policy and Shareholder Value: Following the Smart Money

Chitru S. Fernando is the Rainbolt Chair and Professor of Finance at the Price College of Business, University of Oklahoma; Mark P. Sharfman is the Puterbaugh Chair in American Enterprise and Professor of Strategic Management at the Price College of Business, University of Oklahoma; and Vahap B. Uysal is Associate Professor of Finance at the Driehaus College of Business, DePaul University. This post is based on a recent paper by Professor Fernando, Professor Sharfman, and Professor Uysal.

The headline of Milton Friedman’s 1970 New York Times Magazine article: “The social responsibility of a business is to increase its profits” reflects a widely held view that only “socially responsible” investors benefit directly from corporate actions that are deemed socially responsible. However, not all socially responsible policies are equivalent. For example, socially responsible corporate actions that mitigate the likelihood of “bad” outcomes may reduce the risk exposure of firms to accidents, lawsuits, fines, and so forth, and thereby appeal to all investors. In contrast, investments that enhance the firm’s perceived corporate social responsibility beyond both legal requirements and risk management rationales may decrease value and be shunned by investors whose sole objective is profit maximization. However, the current literature does not focus on such nuances in socially responsible policies, nor does it provide much insight into how the form of corporate social responsibility influences the breadth and depth of ownership and firm value.

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Universal Proxy Unlikely to be Adopted (and Would Have Little Effect Anyway)

Gail Weinstein is Senior Counsel and Philip Richter is a Partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein; Mr. Richter; Robert C. SchwenkelDavid J. Greenwald; Steven Epstein; and Warren S. de Wied. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

In late October, as expected, the SEC proposed proxy rule changes that would require that “universal proxy cards” be used in contested elections of directors, giving shareholders the ability to pick and choose among all of the nominees put forth by the company’s board and by a dissident shareholder when deciding how to vote. Observers have commented that, if adopted, the proposed rule changes, by making it easier for shareholders to elect director candidates nominated by dissident shareholders, would alter the dynamics of contested director elections—increasing the prevalence of proxy contests and the leverage of activist investors. In our view, adoption of the universal proxy card mandate now appears improbable. In any event, we believe that adoption of the mandate probably would not have a significant effect on contested proxy elections or activist situations. Below, we:

  • Describe the proposed universal proxy card mandate and explain our view that it probably will not be adopted;
  • Clarify how a universal proxy card differs from “proxy access” (which continues apace);
  • Note the concerns that observers have expressed about a universal proxy card mandate;
  • Discuss our view that a universal proxy card mandate, if adopted, likely would not significantly affect contested director elections and activist situations; and
  • Note some possible effects of the universal proxy card mandate not being adopted.

The comment period for the proposed rule changes ends January 9, 2017. Thus, even if adopted, the rules would not be in effect for the 2017 proxy season.

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Friends in the Right Places: The Effect of Political Connections on Mergers

Stephen P. Ferris is Professor of Finance at University of Missouri Trulaske College of Business. This post is based on a recent article authored by Professor Ferris; Reza Houston, Assistant Professor at Indiana State University Scott College of Business; and David Javakhadze, Assistant Professor of Finance at Florida Atlantic University College of Business.

AT&T’s recent announcement to acquire media giant Time Warner draw the attention of federal authorities. In the US, the two primary agencies overseeing merger activity are the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice. Under the Hart-Scott-Rodino Act, merging parties are required to provide pre-merger notification to these agencies and the Assistant Attorney General. The primary concern of these regulatory agencies is to make sure that the merge deal does not limit market competition or creates significant barriers to entry. If a regulatory agency has concerns about the effect of a proposed merger deal it could force merger parties abandon the transaction, restructure the transaction, or agree to a consent order to change their conduct. Since 1996, the FTC has filed more than 319 cases against proposed acquisitions. The Department of Justice has filed several hundred cases over the same period. Challenges by the FTC frequently result in accepted consent orders which prevent merger parties from undertaking certain actions. Approximately half of the Department of Justice challenges against transactions have been filed in a U.S. district court, the majority of these complaints are resolved through settlements.

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