Monthly Archives: April 2017

Age Diversity Within Boards of Directors of the S&P 500 Companies

Annalisa Barrett is a clinical professor of finance in the University of San Diego School of Business and the founder and CEO of Board Governance Research LLC; and Jon Lukomnik is Executive Director of the Investor Responsibility Center Institute (IRRCi). This post is based on an IRRCi publication by Professor Barrett and Mr. Lukomnik.

This post examines age diversity within the boards of the companies in the S&P 500. At a time when board refreshment of public companies and director diversity, or lack thereof, is a key concern of companies, investors and others, the dispersion of age within the board has largely been ignored. Therefore, this analysis examines the age diversity of boards with analyses by industry, company size (market capitalization), and company age (years since the company’s initial public offering). We also consider the number of age groups (defined by decades) represented on each board.


Poisoned Chalice? An Analysis of Investor Voting on Golden Parachutes

Nick Dawson is Managing Director and co-founder of Proxy Insight. This post is based on a Proxy Insight publication by Mr. Dawson. Related research from the Program on Corporate Governance includes Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).

Data from Proxy Insight finds that investor voting on Golden Parachutes is not what it seems, with some investors voting in favor of controversial proposals, despite their voting policies saying otherwise.

So far this year, many of the proposals most firmly opposed by shareholders have related to “golden parachutes”—large payments made to a company’s top executives if they lose their position after a takeover. This is at least partly because merger approvals, which require a vote on golden parachute plans, are one of the reasons a company might call a special meeting.

These special meetings dominate the agenda and bring issues like golden parachutes to the fore, even though they are relatively rare compared to, for example, Say on Pay votes.

U.S. companies have been required to submit golden parachute proposals to a shareholder vote since 2011 under the Dodd-Frank act. When a company calls a meeting for the approval of a merger, the law demands that executive compensation plans be disclosed and an advisory shareholder vote on those plans be taken.

A Contentious Issue

Golden parachutes can be divisive to say the least. Their supporters argue that they make it easier to hire and retain top executives, especially in industries where mergers are common. Proponents also believe that, by softening any concerns about dismissal, these payments help executives to remain impartial if the company does become the subject of a takeover or merger. On top of this, it is suggested that the cost of paying out golden parachutes can form a barrier to help discourage takeovers.

Those who oppose golden parachutes, on the other hand, have answers to each of these points. They argue that executives are already offered ample compensation and should not be further rewarded simply for being let go.

Such critics also point out that executives have an inherent fiduciary responsibility to act in the best interests of the company and its shareholders. A company’s executives should not need additional financial incentives to keep them objective. As for the cost of compensating such executives, opponents argue that this is tiny compared to all the other costs of a merger and is unlikely to form an effective anti-takeover mechanism.

Golden Parachutes and Governance

Whether or not something is considered good governance is often, at least in part, defined by the policies of major investors. When it comes to compensating executives after a merger, we have analyzed the policies of ten key investors and found that they mostly take a balanced position.

For example, BlackRock’s policy says “When determining whether to support or oppose an advisory vote on a golden parachute plan, BlackRock normally support the plan unless it appears to result in payments that are excessive or detrimental to shareholders.”

In all the cases we looked at where an investor’s policies take a case-by-case position, there were specific, defined issues that could lead to a vote against the recommendations. The issues most commonly included are:

  • Benefits paid that exceed three times salary and bonus.
  • Single-trigger plans.
  • Tax gross ups.

Single-trigger plans are golden parachutes that do not require the termination of the executive in order to pay out. This means an executive may keep their job in the newly-combined company and still receive compensation, so it is not hard to see why investors take a dim view of these provisions.

Tax gross ups are increases to payouts in order to compensate individuals for money lost in tax.

For example, if an executive is promised a payout of $1,000,000 and the applicable tax rate is 20%, the company would increase the payment to $1,250,000. After the 20% ta x has been paid, the executive is left with the promised $1,000,000 in full. Critics of tax gross ups argue that if an executive is fortunate enough to receive a multi-million-dollar payout, it should not also be the company’s responsibility to foot their tax bill.

The Voting Data

Using data from Proxy Insight, it is possible to compare the policies of investors with their actual voting record.

While investors typically oppose the principle of golden parachutes, caveats in their policies of ten result in much higher support for the issue than might be expected.

This is highlighted in Table 1, where 8 out of 10 investors supported more than half of all golden parachute resolutions they voted on, indicating that there are at least some investors paying lip service to good governance through their policies, yet taking a very different approach in practice.

This could help to explain the fact that, despite their divisive nature and tendency to provoke a fair amount of shareholder opposition, golden parachute proposals still rarely fail. Of the 438 golden parachute proposals that Proxy Insight has collected, all but 30 proved to be successful with the average level of support for these being 83%.

As public opinion on executive pay has turned increasingly sour, fund managers have sought to appease critics with assurances that they will hold companies to account. The votes, however, show a tendency to defer to management.

The data in Table 1 also highlights just how divisive golden parachutes can be. The average level of support for management among the ten investors we analysed is 90%, but the average level of support for golden parachutes is only 68%.

Two examples of investors taking a stand against golden parachutes were particularly striking. Firstly, Vanguard are normally very passive, supporting management 95% of the time. However, when it came to golden parachutes they are far more aggressive, supporting only 40% of proposals. Even more militant are T. Rowe Price. They normally support management 93% of the time, but voted in favor of golden parachutes just 14% of the time.

2017 will likely see further escalation of investor backlash against executive pay generally. As this process continues, it will be interesting to keep an eye on golden parachutes to see if wider discontent will result in even more aggressive opposition to executive compensation proposals.

Table 1: Investor Voting on Golden Parachute Proposals

Investor Votes For (%) Votes Against (%)
AllianceBernstein LP 70 30
BlackRock 93 7
BNY Mellon 66 34
Dimensional Fund Advisors, Inc. 68 27
Fidelity Management & Research 68 31
Goldman Sachs Asset Management LP 73 17
Northern Trust 99 1
SSgA Funds Management, Inc. (State Street) 90 7
T. Rowe Price 14 83
Vanguard Group 40 59

Source: Proxy Insight

Saba Software Inc.—Eluding Corwin Dismissal

S. Michael Sirkin is partner and Nick Mozal is an associate at Ross Aronstam & Moritz LLP. This post is based on a Ross Aronstam & Moritz publication and is part of the Delaware law series; links to other posts in the series are available here.

On March 31, 2017, the Delaware Court of Chancery issued a decision in In re Saba Software, Inc. Stockholder Litigation that was the first of its kind. In its October 2015 decision in Corwin v. KKR Financial Holdings, LLC, the Delaware Supreme Court held that the fully informed, uncoerced approval of a merger by a majority of disinterested stockholders would restore the presumption of the business judgment rule. Saba marks the first time the Court of Chancery has denied a Corwin-based motion to dismiss, and it did so on both disclosure and coercion grounds. Despite an unusual set of factual allegations, the decision offers important lessons about what a stockholder plaintiff can do to escape Corwin, and also about the continuing vitality of the enhanced scrutiny standard of review in a post-closing damages action.


How Directors Can Use Sustainability to Drive Value

Steven B. Stokdyk and Joel H. Trotter are partners at Latham & Watkins LLP. This post is based on a Latham publication by Mr. Stokdyk, Mr. Trotter, and Catherine Bellah Keller.

Boards frequently encounter sustainability and other environmental, social and governance (ESG) issues in the oversight of a company’s operations, management, financial reporting and public disclosure. Investors increasingly highlight the importance of ESG issues through investment strategies, shareholder proposals and public statements. Industry groups also monitor companies’ ESG efforts, and the Securities and Exchange Commission (SEC) has focused public attention on the issue in recent years.

Boards considering ESG issues, particularly sustainability initiatives, will confront several questions: What are the relevant measures and how should the company define them? What are the potential benefits and costs? The particular needs of the company and perspectives of key constituencies will drive these considerations and may differ from company to company.


Regulating Robo Advice Across the Financial Services Industry

Tom Baker is William Maul Measey Professor at the University of Pennsylvania Law School, and Benedict C.G. Dellaert is Professor of Business Economics at Erasmus University Rotterdam. This post is based on their recent paper.

The growth of investment robo-advisors, web-based insurance exchanges, on-line credit comparison sites, and automated personal financial management services creates significant opportunities and risks for consumers that regulators across the financial services spectrum have yet even to assess, let alone address. Because of the scale that automation makes possible, these services have the potential to provide quality financial advice to more people at lower cost than humans, and to do so with greater transparency. But the fact that this potential exists hardly guarantees that it will be realized.


Balancing Concessions to Activists Against Responsiveness to the Broader Shareholder Base

Ethan A. Klingsberg and Arthur H. Kohn are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg, Mr. Kohn, Elizabeth Bieber, and Rolin Bissell. 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.

Quick settlements with activist hedge funds to recompose boards and adjust strategic plans have resulted in hundreds of new directors and changes to stand-alone plans in the S&P 500 over the last two years. The arguably outsized influence of these activists, which often own less than 5% of their targets’ public floats, led one of the leading hosts of index funds, State Street, to issue publicly a position paper earlier this year in opposition to this “quick settlement” trend. [1] Underlying State Street’s concern is the view that incumbent directors frequently settle to avoid the painful scrutiny and distraction of proxy contests while failing to take into account the sentiments of their companies’ broader shareholder bases. The views of State Street and the other major index funds matter not only because these “passive”-strategy funds regularly control up to 40% of the public floats of listed companies, but also because that figure is likely to continue to rise steeply, along with similar increases in the interest of these funds in (as well as the number of personnel at these funds scrutinizing) governance, board composition and processes, and strategic shifts at publicly traded companies. As a result, targets of activist campaigns are increasingly struggling with balancing the benefits of a quick and comprehensive settlement with activist hedge funds against the desirability of assuring that there is broad shareholder support, especially among long-term institutional holders, for making concessions to the activists.


Reforming Culture for the Long Term

William C. Dudley is President and Chief Executive Officer of the Federal Reserve Bank of New York. This post is based on Mr. Dudley’s remarks at the Banking Standards Board in London, United Kingdom. The views expressed in this post are those of Mr. Dudley and do not necessarily reflect those of the Federal Open Market Committee or the Federal Reserve System.

This morning [March 21, 2017], I would like to highlight three issues that are critical to improving culture within the financial services industry:

  • First, defining and clarifying purpose, because clear goals are necessary if one is to assess performance;
  • Second, measurement of how firms and the industry are performing; and
  • Third, whether incentives encourage behaviors consistent with the goals one wishes to achieve.

I will then conclude by offering some thoughts on why good culture is critical to success in financial services. [1]


Product Market Competition in a World of Cross-Ownership: Evidence from Institutional Blockholdings

Jie (Jack) He is Associate Professor at the University of Georgia Terry College of Business and Jiekun Huang is an Assistant Professor of Finance at the College of Business at the University of Illinois Urbana-Champaign. This post is based on a recent article by Professor He and Professor Huang, forthcoming in the Review of Financial Studies.

Over the past few decades, publicly traded firms have become increasingly interconnected through common stock ownership. For example, the fraction of U.S. public firms held by institutional blockholders that simultaneously hold at least 5% of the common equity of other same-industry firms has increased from below 10% in 1980 to about 60% in 2014. This increasing trend of institutional cross-ownership of same-industry firms suggests that treating firms as independent decision-makers in the product market may no longer adequately capture real strategic interactions among them. In fact, ample anecdotal evidence suggests that large common blockholders can exert influence on the corporate decisions and product market strategies taken by their cross-held firms. Given the tremendous growth in same-industry institutional cross-ownership and the fact that such ownership is still largely unregulated (as opposed to the heavy regulations on direct same-industry ownership such as horizontal mergers), understanding the economic consequences of same-industry institutional cross-ownership, especially its implications for product market dynamics, is important for both academics and policy makers.


U.S. Board Practices

Rob Yates is Vice President at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Yates, Rachel Hedrick, and Andrew Borek.

This year’s Board Practices Study focuses not only on longstanding issues traditionally covered, but on those which have driven increased shareholder interest in the boardroom over the past several years. Governance continues to evolve, but investor focus in recent years has been particularly pointed as new concerns have emerged, and the ways in which companies address those concerns adapts to meet market demands. Particular focus has been placed on the role of the board as a representative of shareholders at a company, and how the board’s structure and practices promulgate this responsibility. As always, this study provides a snapshot of these facets of public company boards in the S&P 1500 for investors and issuers to compare and contrast.


Columbia Pipeline: Directors’ Self-Interest Does Not Exclude “Cleansing” Under Corwin

Gail Weinstein is Senior Counsel and Warren S. de Wied is a Partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. de Wied, Philip RichterSteven EpsteinRobert C. Schwenkel, and Scott B. Luftglass. This post is part of the Delaware law series; links to other posts in the series are available here.

In Columbia Pipeline Group, Inc. Stockholder Litigation (March 7, 2017), Vice Chancellor Laster granted the defendants’ motion to dismiss a putative class action challenging the $13 billion sale of Columbia Pipeline Group, Inc. to TransCanada Corporation. The plaintiffs alleged that all of the Columbia Pipeline directors and certain officers had breached their duty of loyalty by having engineered a self-interested plan (when they were directors and officers of the company’s former parent) to spin the company off and then to sell the post-spin company in order to trigger their change-in-control benefits. In what has become an increasingly familiar pattern for disposition by the Court of Chancery of post-closing challenges to M&A transactions (not involving a controller who has extracted a personal benefit), the court: (i) found that the stockholders had approved the transaction in a fully informed vote; (ii) held that, as a result, under Corwin, the business judgment rule standard of review applied; and (iii) dismissed the case.


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