Monthly Archives: March 2017

Shareholder Engagement: An Evolving Landscape

Tom Johnson is Chief Executive Officer of Abernathy MacGregor. This post is based on an Ethical Boardroom publication by Mr. Johnson.

The significant rise of activism over the last decade has sharpened the focus on shareholder engagement in boardrooms and executive suites across the US.

Once considered a perfunctory exercise, designed to simply answer routine questions on performance or, occasionally, drum up support for a corporate initiative, shareholder engagement has become a strategic imperative for astute executives and board members who are no longer willing to wait until the annual meeting to learn that their shareholders may not support change of some sort, or their strategic direction overall.

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Pilot CEOs and Corporate Innovation

Jingjing Zhang is Assistant Professor of Accounting at McGill University Desautels Faculty of Management. This post is based on a recent article authored by Ms. Zhang, Jayanthi Sunder, Associate Professor of Accounting at the University of Arizona Eller College of Management, and Shyam Sunder, BeachFleischman Professor of Accounting at the University of Arizona Eller College of Management.

Corporate innovation is an important driver of firm value. However, given the inherently risky nature of innovation outcomes, CEOs would be reluctant to undertake innovation. Mainstream research in economics has focused on extrinsic motivation though the design of financial incentives. An alternative solution is to select CEOs with the right temperament for innovation. A recent survey of 5,000 executives in innovative companies, Dyer, Gregersen, and Christensen (2011) find that successful innovators exhibit certain behavioral attributes, suggesting the potential role of intrinsic motivation in affecting firms’ innovation success. In our recent article, Pilot CEOs and Corporate Innovation, published in the Journal of Financial Economics, we examine the relative effectiveness of the CEO’s intrinsic versus extrinsic motivation on corporate innovation. The lack of attention on intrinsic motivation is largely due to the fact that it is difficult to observe and measure the behavioral traits of successful innovators in a large-scale sample.

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The Materiality Gap Between Investors, the C-Suite and Board

Judy McLevey is former Associate Director of The Conference Board Governance Center. This post is based on a Conference Board publication authored by Ms. McLevey.

Investors, the C-suite and boards have different views about what is, or should be, considered material information. A company’s financial results would be considered material by all parties. Based on SEC rules, companies are required to provide updates on their financial results on a quarterly and annual basis (10-Q and 10-K, respectively) and also timely disclose specified material developments that occur in between quarters (8-K and/or press release). Beyond pure financial information, other examples of material news would include merger & acquisition activity, changes in control and/or management changes, significant product announcements, dividends, etc.

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The Regulatory and Enforcement Outlook for Financial Institutions in 2017

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Karp, Roberto J. Gonzalez, Michael E. Gertzman, H. Christopher Boehning, Jessica S. Carey.

Economic sanctions, anti-money laundering and cybersecurity remain at the forefront of U.S. regulatory priorities. This memorandum surveys major developments and trends in these areas in 2016 and early 2017 and provides an outlook for financial institutions in the year ahead. As discussed below, although the new administration brings considerable uncertainty, we believe the strong federal agency focus in these areas is likely to continue. And, at the state level, the New York Department of Financial Services’ attention to these areas will continue to be rigorous. Boards of directors, senior management, general counsel and compliance officers of both U.S. and non-U.S. financial institutions would be well advised to continue their vigilance in these areas. We also provide some practical suggestions for continuing to strengthen compliance in this challenging environment.

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The Heterogeneity of Board-Level Sustainability Committees and Corporate Social Performance

Rani Hoitash is Gibbons Research Professor of Accountancy at Bentley University; Udi Hoitash is Associate Professor of Accounting and Gary Gregg Research Fellow at D’Amore-McKim School of Business, Northeastern University. This post is based on a recent article authored by Mr. Hoitash, Mr. Hoitash, and Jenna J. Burke, Bentley University, forthcoming in the Journal of Business Ethics.

In our article, The Heterogeneity of Board-Level Sustainability Committees and Corporate Social Performance, forthcoming in the Journal of Business Ethics, we explore the performance impact of board-level sustainability committees.

Despite the increased prevalence of these committees on corporate boards, some critique their presence as a mere symbolic action to appease disgruntled stakeholders—ranging from representatives of local communities to employees, the environment, consumers, and suppliers. Indeed, early findings from academic research have shown these committees to have little to no performance impact. This is puzzling when combined with the finding that companies continue to adopt (Eccles et al. 2014), improve, and dedicate resources to these committees.

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Dow 30 CEOs’ Stock Value Gained $400 Million Since Election Day

Dan Marcec is Director of Content at Equilar, Inc. This post is based on an Equilar publication by Mr. Marcec which was originally published in the Equilar Knowledge Center.

As the Dow Jones Industrial Average (DJIA) crested 20,000 for the first time in history just days after Donald Trump was inaugurated as President of the United States, it’s no surprise that the value of stock ownership among the nation’s top CEOs would have increased in kind. Indeed, according to a new study from Equilar, the total stock ownership value gained by CEOs of Dow 30 companies increased $401.9 million for the period between Election Day, November 8, 2016, and February 10, 2017, the week ending three months afterward.

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Initial Lessons from the Anthem-Cigna M&A Lawsuit

Jonathan Corsico and Aric H. Wu are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Corsico, Mr. Wu, and Quinton C. Farrar. This post is part of the Delaware law series; links to other posts in the series are available here.

On February 8, 2017, U.S. District Judge Amy Berman Jackson blocked the proposed $48 billion merger of health insurers Anthem Inc. and Cigna Corp. on antitrust grounds. In the wake of this ruling, Cigna notified Anthem that it was terminating their merger agreement and, on February 14, filed suit against Anthem in the Delaware Court of Chancery for a declaratory judgment that it had lawfully terminated the agreement. Cigna’s suit seeks recovery of a $1.85 billion reverse termination fee and more than $13 billion in damages that Cigna claims represents the premium value its stockholders lost due to Anthem’s alleged breaches of the merger agreement.

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Teaming Up and Quiet Intervention: The Impact of Institutional Investors on Executive Compensation Policies

Mieszko Mazur is Assistant Professor at the IESEG School of Management; and Galla Salganik-Shoshan, Assistant Professor of Finance at Ben-Gurion University of the Negev. This post is based on article by Professor Mazur and Professor Salganik-Shoshan, forthcoming in the Journal of Financial Markets.

In a modern corporation, a single large investor no longer monopolizes active monitoring. A typical investor base in the U.S. public firm constitutes several blockholders which arguably maximize the very same objective function. These investors communicate with one another via private channels e.g., word-of-mouth and interpersonal connections, in order to coordinate their monitoring activities and exert influence on corporations to adopt governance attributes that better protect their interests.

The article examines whether institutional investors intervene in corporations with the aim of improving their incentive systems. To investigate this question, we construct metrics based on the geographic location of institutions. We conjecture that institutional investors get involved in informal interactions and that the intensity of these interactions as well as their effectiveness is commensurate with the geographic distance between them. Investors which are close to each other in physical space, are more likely to exchange ideas through casual conversation in person or over the phone in the same word-of-mouth channel. Consequently, they are more likely to share similar views, act alike, and cooperate.

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A Look at Board Composition: How Does Your Industry Stack Up?

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop and Terry Ward.

Does your board have the right makeup for the future?

Board composition is “the” issue for investors in 2017. Some industries are taking more steps to refresh their board than others—how does yours stack up? As the economic environment changes and lines between industries start to blur, companies are looking for directors with different, less traditional and even broader skills. Technology skills will be key across sectors.

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Focus on Annual Incentives: Metrics, Goals, and More

Roy Saliba is Executive Director and Head of Global Compensation Products at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Saliba.

Boards around the world are searching for the “right” performance metrics, and the “right” way to set performance goals. While much of the focus is often on long-term awards, short-term metrics and targets can pose as much or even more of a challenge. Long-term programs are often based on relative performance measures, but short-term programs are more frequently based on absolute measures, and more often than not include earnings measures.

To investors, performance award details, including the choice of metrics, the setting of target goals, and the actual achievement of results provide powerful insights into the board’s performance expectations and how the board motivates management. In designing performance awards, a company’s primary objective is to align shareholder interests with executives, or in other words, pay and performance should be aligned.

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