Monthly Archives: October 2017

Insights from PwC’s 2017 Annual Corporate Directors Survey

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a publication from the PwC Governance Insights Center.

Against the backdrop of a new administration in Washington and growing social divisiveness, US public company directors are faced with great expectations from investors and the public. Perhaps now more than ever, public companies are being asked to take the lead in addressing some of society’s most difficult problems. From seeking action on climate change to advancing diversity, stakeholder expectations are increasing and many companies are responding.

In part, this responsiveness is driven by changes in who owns public companies today. Institutional investors now own 70% of US public company stock, much of which is held in index funds. [1] Many of these passive investors believe that seeking improvements in corporate governance is one of the only levers they have to improve company performance. And these shareholders are exerting their influence with management teams and the board through their governance policies, direct engagement and proxy voting.

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Amending Corporate Charters and Bylaws

Albert H. Choi is Professor and Albert C. BeVier Research Professor of Law at University of Virginia Law School; Geeyoung Min is Adjunct Assistant Professor and Postdoctoral Fellow in Corporate Law and Governance at Columbia Law School. This post is based on their recent paper, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power and Letting Shareholders Set the Rules, both by Lucian Bebchuk; and Frozen Charters by Scott Hirst (discussed on the Forum here).

Over the past decade or so, courts have been willing to apply the “contractarian” theory to the organizational documents of corporations: charters (certificates or articles of incorporation) and bylaws. The notion that the charters and bylaws can be thought of as “contracts”—between a corporation and its shareholders and among the shareholders—dates back to the seminal work by Jensen and Meckling and the idea that the corporate organization can be viewed as a “nexus of contracts.” What is new and controversial, however, is the fact that the courts have been willing to apply these ideas to cases where the directors unilaterally have amended bylaws without shareholders’ express ex post approval. With respect to corporate charters, state statutes require an express shareholder approval and do not allow either the directors or the shareholders to unilaterally modify the charter. For bylaws, however, while preserving the right of unilateral modification for the shareholders, corporate statutes allow directors to unilaterally amend the bylaws, either as a matter of default or when the shareholders grant such power through a provision in the charter. While the precise scope of this authority remains somewhat uncertain, recent cases have meaningfully expanded the directors’ freedom.

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Creatures of Contract: A Half-Truth About LLCs

Mohsen Manesh is Associate Professor at University of Oregon School of Law. This post is based on a recent article authored by Mr. Manesh, and is part of the Delaware law series; links to other posts in the series are available here.

“The half truths of one generation tend at times to perpetuate themselves in the law as the whole truth of another, when constant repetition brings it about that qualifications, taken once for granted, are disregarded or forgotten.” [1] Chief Justice Cardozo, then sitting on the New York Court of Appeals, wrote these eloquent words in the early 20th century to describe the doctrine of consideration in contract law. But today, these words might well be applied to the most popular form of business entity, the limited liability company (“LLC”).

The half-truth is this: that LLCs are “creatures of contract.” Courts reflexively use this maxim to describe LLCs, the contract being, of course, the LLC agreement that governs the rights and obligations of the parties that own and manage the entity. [2] The judicial reflex to use this maxim is especially pronounced in Delaware, where today LLCs outnumber corporations by more than two to one. [3] Undoubtedly, Delaware courts have been spurred in part by the state’s LLC statute, which, like the LLC statute of many other jurisdictions, baldly asserts as its guiding policy “to give the maximum effect to the principle of freedom of contract and to the enforceability of [LLC] agreements.” And because Delaware LLC law, like its corporate law, enjoys an outsized influence in the business world, courts in other jurisdictions have now predictably embraced the “creatures of contract” mantra, too.

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Is Say on Pay All About Pay? The Impact of Firm Performance

Jill E. Fisch is Perry Golkin Professor of Law at the University of Pennsylvania Law School; Darius Palia is Professor of Finance at Rutgers University; and Steven Davidoff Solomon is Professor of Law at UC Berkeley School of Law. This post is based on a article authored by Professor Fisch, Professor Palia, and Professor Davidoff Solomon, forthcoming in the Harvard Business Law Review.

In Is Say on Pay All About Pay? The Impact of Firm Performance, we seek to answer the question whether “say on pay” votes really focus on executive compensation. As policymakers evaluate the decision whether to retain say on pay, it is worth examining more carefully the information that shareholders convey through their vote on executive compensation, a question we examine in this article. We find that, although pay plays a role in voting results, the say on pay vote is largely a means for shareholders to express dissatisfaction with firm performance.

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2018 Benchmark Policy Consultation

This post is based on a publication from Institutional Shareholder Services, Inc. (ISS). ISS is making available for public comment 13 discrete voting policies for 2018. The policy comment period closes on Nov. 9. The following post consists of three draft policies for the United States region.

US Policy—Director Elections—Non-Employee Director Compensation

Background and Overview

Non-employee director (NED) compensation has come into the corporate governance spotlight in recent years. ISS’ 2017 Board Practices Study indicated that median NED pay at S&P 1500 firms has steadily increased every year since 2012 and stood at approximately $211,000 in 2016. As director pay has risen, investors have shown a growing interest in the magnitude of boardroom compensation and the structure of pay packages. Some investors have gone a step further by challenging director pay in proxy contests and legal actions. Many companies have responded to this pressure and unfavorable judicial rulings by adding annual compensation limits to their director equity award program or introducing proposals that seek shareholder approval of the director compensation program.

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SEC Enforcement Against Initial Coin Offering

Steve Gatti, Megan Gordon, and Daniel Silver are partners at Clifford Chance. This post is based on a Clifford Chance publication by Mr. Gatti, Ms. Gordon, Mr. Silver, Philip Angeloff, Benjamin Berringer, and Allein Sabel.

On September 29, 2017, the United States Securities and Exchange Commission (“SEC”) brought its first enforcement action arising from an Initial Coin Offering (“ICO”). This action is the latest sign that the SEC will be carefully scrutinizing the ICO market and transactions involving ICOs.

What Is An ICO

An ICO is a fundraising event, effected using distributed ledger technology, in which a “token” or “coin” is offered to a participant in return for either cash (fiat currency) or cryptocurrency, such as Ether or Bitcoin. A token entitles its holders to various rights, which typically include the right to use a service to be developed and offered by the issuer. The proceeds of the token sale are used to fund a venture or a project undertaken by the ICO sponsors.

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FSB TCFD Guidance on Climate-Related Financial Disclosures: Regulatory and Market Responses

Linda M. Lowson is Chief Executive Officer of the Global ESG Financial Regulatory Academy and Editor-in-Chief of an ABA special publication on Climate Change and Sustainability Financial Reporting.This post is based on a recent publication by Ms. Lowson.

This post summarizes and comments upon a representative sampling of responses (through September 15, 2017) from financial regulators, issuers, institutional investors, credit rating agencies, and voluntary sustainability reporting frameworks, to the draft Guidance issued on December 14, 2017, and to the final Guidance published on June 29, 2017, by the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD). This Guidance consists of a Recommendations Report, an Annex (Implementation Guide), and a Technical Supplement (on Scenario Analysis) (collectively, the “TCFD Guidance” or the “Guidance”). These responses to the Guidance collectively represent a strong indication of what to expect regarding market uptake and implementation of this Guidance, and portend potential future financial regulatory developments.

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A Mechanism for LIBOR

Brian Coulter is Adjunct Professor at the Western University Richard Ivey School of Business, Joel Shapiro is Associate Professor of Finance and Peter Zimmerman is a DPhil Candidate in Financial Economics at the University of Oxford Saïd Business School. This post is based on a recent article by the authors published in the Review of Finance.

The London Interbank Offered Rate (LIBOR) is intended to reflect the average rate at which banks can borrow in the unsecured market. It is computed by taking a trimmed mean of the daily reported borrowing rates of the banks on a panel. But panel banks may have incentives to manipulate LIBOR to profit off of their exposure to the benchmark. Manipulating one of the rates by even a fraction of a basis point can bring substantial gains: the market for derivative and loan products that use LIBOR rates has been estimated at greater than $300 trillion.

Over recent years, it has come to light that several banks and their employees have been complicit in the manipulation of LIBOR. This ongoing scandal has already resulted in fines over $9 billion. This has pushed regulators to decide that the benchmark must be based on transactions rather than reports. However, the recent drying-up of the interbank unsecured market has convinced regulators that there are not enough transactions to continue with LIBOR. On 27 July Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA), indicated that the replacement of the sterling LIBOR benchmark with the Sterling Overnight Index Average (SONIA) rate would occur by 2022. The US is likely to replace the US dollar LIBOR benchmark with a new rate based on repo transactions.

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Not All TSR Incentive Plans are Created Equal

Charlie Pontrelli is Project Manager at Equilar, Inc. This post is based on an Equilar publication by Mr. Pontrelli, available hereRelated research from the Program on Corporate Governance includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

Over the past few years, relative total shareholder return (TSR) has continued to be the most widely used executive long-term incentive (LTI) plan metric, even though its usage is leveling off to some degree at the CEO level as other incentive plan metrics become more popular. That said, due to its clear connection to shareholder value, TSR will likely remain a fixture among executive incentive plans for years to come.

Of course, all uses of relative TSR are not created equal. Because companies are becoming more sophisticated when it comes to their pay design, the ways in which they structure incentive plans is also becoming more varied and complex. This blog aims to take a deeper look at how exactly the metric is being used. The data herein will examine the prevalence of weighted metrics vs. modifiers, performance targets and performance leverages. On the whole, this combination of charts demonstrates the variety of practices when it comes to implementing relative TSR LTI plans. All the data comes from a study of Fortune 100 company incentive plans that Equilar completed this year.

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Post Vote Update: Revisiting the P&G-Trian Contest

Colin Ruegsegger is a Senior Analyst at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. Ruegsegger. 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).

Frequently touted for its absolute scale, it seems fitting that the knock-down, drag-out fight between Trian and P&G is slated to continue into extra rounds. Indeed, P&G is the largest firm to ever face a proxy contest, and the cash reportedly invested by the two sides tops all prior campaigns.

As widely reported, management’s quick conclusion against Nelson Peltz’s candidacy at the annual meeting was almost immediately contested by Trian as too close to call. Preliminary results, filed with the SEC on October 16, 2017, appear to support Trian’s perspective, with votes in favor of Mr. Peltz trailing votes in support of Mr. Zedillo—the incumbent director subject to Trian’s solicitation—by just 0.63% of votes cast for the contested board seat. The current differential represents just 0.2% of the total outstanding shares at the Consumer Packaged Goods company. Neither candidate received the affirmative support of a voting majority.

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