Monthly Archives: October 2017

2017 Proxy Season Review: Compensation

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS publication.

In early September, ISS published its annual post-season report on compensation vote results and practices, which revealed a continuation of many trends identified last year. Shareholder support for management say-on-pay remains stronger than ever, while failures are exceedingly rare; average support for equity plan proposals was consistent with prior years. While CEO pay at larger companies has increased, the composition of CEO pay packages has trended towards more strongly performance based incentives. Interestingly, median golden parachute payments rose considerably, while golden parachute vote rates dropped and failure rates more than doubled. Shareholder proposals on compensation topics remained on the decline, and for the second consecutive proxy season no proposals received majority support.

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Weekly Roundup: September 29–October 5, 2017


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This roundup contains a collection of the posts published on the Forum during the week of September 29–October 5, 2017.

Long-Term Pay-For-Performance Alignment


Activism and Board Diversity


Corporate Debt Maturity Profiles








The Long-Term Consequences of Short-Term Incentives



Lessons from the ISS Report on the Trian/P&G Proxy Contest


The Inner Workings of the Board: Evidence from Emerging Markets


The Equifax Hack, SEC Data Breach, and Issuer Disclosure Obligations

Megan Gordon and Daniel Silver are partners and Benjamin Berringer is an associate at Clifford Chance. This post is based on a Clifford Chance publication by Ms. Gordon, Mr. Silver, and Mr. Berringer.

The recent Equifax data breach focuses attention on the necessity of adequate disclosure by public companies of material cybersecurity-related events. Both SEC Chair Jay Clayton and Stephanie Avakian, the Co-Director of the Division of Enforcement, have made clear that they would “like to see better disclosure around [cybersecurity]” [1] and could “absolutely” bring a cybersecurity disclosure enforcement action. [2] In addition, the SEC’s recent disclosures of its own breach will likely increase focus within the agency on its external enforcement efforts.

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The Inner Workings of the Board: Evidence from Emerging Markets

Ralph de Haas is Deputy Director of Research at the European Bank for Reconstruction and Development (EBRD); Daniel Ferreira is Professor of Finance at London School of Economics; and Tom Kirchmaier is a Research Economist at London School of Economics. This post is based on a recent paper by Mr. de Haas, Professor Ferreira, and Professor Kirchmaier.

The board of directors forms an integral part of a firm’s governance mechanisms. Yet, how boards perform their dual role of supervisor and advisor of corporate management is difficult to observe from outside of the company. To open this black box, we survey 130 non-executive directors in various emerging markets to obtain detailed information about the inner workings of boards. We document substantial variation in the structure and conduct of boards as well as in directors’ perceptions about the local legal environment. Further analysis indicates that directors who feel adequately empowered by local legislation are less likely to vote against board proposals. They also form boards that play a stronger role in the company’s strategic decision making. This suggests that a supportive legal environment allows directors to focus more on their advisory as opposed to their monitoring role.

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Lessons from the ISS Report on the Trian/P&G Proxy Contest

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz, focusing on rapid response shareholder activism and preparedness, takeover defense and corporate governance. This post is based on a Wachtell Lipton publication by Mr. Lipton and Mr. Niles. 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).

  • TSR comparison to peer group and S&P 500 continues to be a key factor in ISS evaluation.
  • CAGR comparison to peer group continues as a key factor.
  • Disparaging a well-known, successful activist with a history of long-term investment is a negative factor.
  • Limited director experience in the company’s industry is a negative factor.
  • Generally, and especially when faced with a possible proxy contest, it is advisable to have more than one director with industry experience.
  • Board history in dealing with business downturns and management failures is a factor.
  • Board failure to have considered external CEO candidates after a management failure is a factor.
  • That a successful new CEO is not criticized by the activist, does not overcome past board failures to deal with operational and strategic deficiencies.
  • Board should be open to considering changes in strategy even if it has recently approved changes.
  • An activist seeking one seat on the board and taking the position that it will seek to restore to the board the displaced director is a factor.

CEO and Executive Compensation Practices: 2017 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO and Executive Compensation Practices: 2017 Edition, an annual benchmarking report authored by Dr. Tonello with Paul Hodgson of BHJ Partners and James Reda of Arthur J. Gallagher & Co. For details regarding how to obtain a copy of the report, contact [email protected]. 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); and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

The Conference Board, in collaboration with Arthur J. Gallagher & Co. and MylogIQ, recently released CEO and Executive Compensation Practices: 2017 Edition, which documents trends and developments on senior management compensation at companies issuing equity securities registered with the US Securities and Exchange Commission (SEC) and, as of May 2017, included in the Russell 3000 Index.

The report has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages, the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design. Moreover, the study reviews the evolving features of short-term and long-term incentive plans (STIs and LTIs) and performance metrics in a sub-sample of mid-market companies included in the Russell 3000 index.

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The Long-Term Consequences of Short-Term Incentives

Alex Edmans is Professor of Finance at London Business School; Vivian Fang is an Assistant Professor of Accounting at the University of Minnesota; and Allen Huang is Associate Professor at the Hong Kong University of Science and Technology. This post is based on a recent paper by Professor Edmans, Professor Fang, and Professor Huang. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In our paper, The Long-Term Consequences of Short-Term Incentives, which was recently made available on SSRN, we show that short-term stock price concerns induce CEOs to take value-reducing actions. We measure short-term concerns by the amount of a CEO’s equity that is scheduled to vest in a given quarter. Vesting equity is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger and acquisition (M&A). When vesting equity increases, stock returns are more positive in the two quarters surrounding both repurchases and M&A, but more negative in the two years following repurchases and four years following M&A. These results are inconsistent with CEOs buying underpriced stocks or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and improve the conditions for equity sales. Overall, by identifying actions that carry clear value implications, this paper documents the long-term negative consequences of short-term incentives.

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Improving SEC Regulations with Investor Ordering

Scott Hirst is Research Director of the Program on Institutional Investors and Lecturer on Law at Harvard Law School. This post is based on a recent article by Dr. Hirst, forthcoming in the Harvard Business Law Review. Related research from the Program on Corporate Governance includes Universal Proxies, by Dr. Hirst, and Private Ordering and the Proxy Access Debate, by Lucian Bebchuk and Dr. Hirst.

In my forthcoming article, The Case for Investor Ordering, I show that Securities and Exchange Commission (SEC) regulations regarding corporate arrangements could be substantially improved if investors in corporations were able to choose whether those regulations apply to the corporation. For all but a few SEC regulations, such “investor ordering” would result in greater aggregate net benefits for corporations and their investors. Investor ordering also interacts with requirements for cost-benefit analysis to reduce the cost of SEC regulation, and makes SEC regulations more dynamic. Investor ordering will be most beneficial for recent and future SEC regulations, such as regulations regarding internal controls, pay ratios, say-on-pay, proxy access, and universal proxies. These considerations should guide future SEC regulation, and deregulation, towards investor ordering.

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Finding Common Ground on Shareholder Proposals

Keith F. Higgins is Chair of the Securities and Governance Practice at Ropes & Gray LLP. This post is based on a Ropes & Gray publication authored by Mr. Higgins.

The process by which shareholders are permitted to include their proposals in company proxy statements is under attack. The Business Roundtable and the Chamber of Commerce have each published reform proposals that would sharply limit these proposals. The Financial CHOICE Act, which passed the House of Representatives on a strictly partisan vote, includes provisions that are similarly, if not more, restrictive. Not surprisingly, the Council of Institutional Investors is vigorously opposing these efforts. It is an area in which agreement between the two sides has been elusive. At the risk of wading into the corporate governance equivalent of the Middle East peace talks, here are some proposals that, while they do not completely overhaul the process, might make it better without undermining the fundamental rights the shareholder proposal rule provides.

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Delaware’s Loss of Top Spot for Lawsuit Climate

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu, and is part of the Delaware law series; links to other posts in the series are available here.

The state of Delaware fell from the top-ranked position to number 11 in the most recent survey on the business-friendly environment for lawsuits in state courts, ceding ground to the state of South Dakota. Delaware had been in the highest perch for the last ten surveys, going back to 2002 (the surveys were not conducted every year).

The 2017 Lawsuit Climate Survey: Ranking the States, was conducted for the U.S. Chamber Institute for Legal Reform to explore how U.S. businesses perceive the fairness and reasonableness of the states’ liability systems. More than 1,300 in-house general counsel, senior litigators or attorneys and other senior executives at companies with at least $100 million in annual revenues who indicated they had firsthand, recent litigation experience in the states they evaluated and were knowledgeable about litigation matters participated in the survey.

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