Monthly Archives: November 2017

Getting Along with BlackRock

Posted by John C. Wilcox, Morrow Sodali, on
Monday, November 6, 2017
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John C. Wilcox is Chairman of Morrow Sodali. This post is based on a Morrow Sodali publication by Mr. Wilcox.

“What is the significance of having BlackRock as our largest shareholder?” This question is being asked by corporations around the world as they prepare for annual meetings and plan to engage with shareholders.

BlackRock, with more than $5 trillion of assets under management, is the world’s largest investor. They appear at the top of the share register of listed companies around the world. They are also one of the most engaged and influential global shareholders—they provide detailed information about their policies, views and activities on their website, deliver advice to CEOs in an annual letter from Chairman and CEO Larry Fink, and are regularly seen providing insights in the business and financial media about corporate governance, sustainability, shareholder rights and board accountability.

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SEC Guidance on Ordinary Business and Economic Relevance Exclusions

Posted by Ning Chiu, Davis Polk & Wardwell LLP, on
Monday, November 6, 2017
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Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu.

Yesterday [November 1, 2017], the SEC Staff issued a new Staff Legal Bulletin (SLB) on shareholder proposals. The most striking impact it will likely have initially is on the ordinary business exclusion, Rule 14a-8(i)(7), as the SLB requires boards to undertake the responsibility to analyze proposals. It appears that the SLB is effective immediately.

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How Should a “Sustainable Corporation” Account for Natural Capital?

Posted by Richard Barker and Colin Mayer (University of Oxford), on
Monday, November 6, 2017
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Richard Barker is Professor of Accounting and Colin Mayer is Peter Moores Professor of Management Studies at University of Oxford Saïd Business School. This post is based on their recent paper.

The problem we address is that corporate accountability to shareholders is incompletely supported by existing systems of financial accounting and reporting. This is important to corporate decision-makers, to shareholders and to society more broadly, because a failure to account adequately for corporate activity is likely to correspond to a misallocation of economic resources.

In addressing this problem, we apply a conceptual analysis of the design and purpose of accounting, contrasting the “traditional” benchmark of accounting for levels and changes of financial capital (shareholders’ equity) with a system of accounting for levels and changes of natural capital, which we define as “the stock of natural ecosystems on Earth including air, land, soil, biodiversity and geological resources … (which) underpins our economy and society by producing value for people, both directly and indirectly” (NCC, 2016).

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The Impact of Executive Pay Decisions

Posted by Margaret Hylas and Barry Sullivan, Semler Brossy Consulting Group, on
Sunday, November 5, 2017
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Margaret Hylas is an ‎Associate Consultant and Barry Sullivan is Managing Director at Semler Brossy Consulting Group. This post is based on a Semler Brossy publication by Ms. Hylas and Mr. Sullivan. 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.

A mid-sized consumer products company introduced a relative total shareholder return (TSR) measure to its long-term incentive program. The company had an “all-for-one, and one-for-all” culture, so all managers in the organization carried that same relative TSR metric. After a few years of challenged market performance, several mid-level managers left the company, seeing their unvested equity values fall and having a general sense that their individual contributions were too distant to affect relative TSR.

The lesson: Board decisions on executive pay can have big impacts on the broader employee population.

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New PCAOB Auditor Reporting Standard Analysis

Posted by Michael Scanlon and Lori Zyskowski, Gibson, Dunn & Crutcher LLP, on
Saturday, November 4, 2017
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Michael Scanlon and Lori Zyskowski are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Scanlon and Ms. Zyskowski.

The Public Company Accounting Oversight Board (the “PCAOB”) recently released Staff Audit Practice Alert No. 15 (the “Practice Alert”), titled “Matters Related to Auditing Revenue From Contracts With Customers.” The Practice Alert provides guidance for auditors related to the Financial Accounting Standards Board’s 2014 Accounting Standard Update titled “Revenue from Contracts with Customers” (Topic 606) (the “Revenue Recognition Standard”), which goes into effect for annual reporting periods beginning after December 15, 2017. The Practice Alert is available here, and the Revenue Recognition Standard is available here. While the Practice Alert is directed at auditors, it sheds light on what companies can expect from their independent auditors as companies prepare for and implement the new Revenue Recognition Standard. Given the importance of revenue as one of the most important measures that investors use to assess a company’s financial performance, we expect that there will be a keen focus on implementation of this standard by independent auditors.

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Treasury Recommendations for Capital Markets

Posted by Bjorn Bjerke, Lona Nallengara, and Reena Sahni, Shearman & Sterling LLP, on
Friday, November 3, 2017
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Bjorn Bjerke, Lona Nallengara, and Reena Sahni are partners at Shearman & Sterling LLP. This post is based on a Shearman publication by Mr. Bjerke, Mr. Nallengara, Ms. Sahni, Geoffrey Goldman, Nathan Greene, and Russell Sacks.

On October 6, 2017, the US Department of the Treasury released a 220-page report on reforming the US regulatory system for the capital markets (Capital Markets Report). [1] The Capital Markets Report includes 91 recommendations directed at financial regulators and Congress, but with a focus on the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

Key Takeaways

The Capital Markets Report represents the Administration’s first formal and most detailed statement regarding capital markets reform. Many of the specific recommendations in the Capital Markets Report are not new. We have seen versions of these recommendations before—most recently as part of the Financial Choice Act of 2017 that the House of Representatives passed on June 8, 2017. [2] The recommendations align with the direction of the Choice Act and the sentiment regarding capital markets reform expressed by many Republicans in Congress. Interestingly, the Chairs of the SEC and CFTC have issued statements reflecting that their agencies worked with the Treasury Department in preparing the Capital Markets Report and are largely in support of the recommendations. [3] Although it is expected that Democrats in Congress, investor advocacy groups and some institutional investors will call into question certain of the recommendations proposed in the Capital Markets Report, the broadening support for a defined set of capital markets reforms makes movement in many of these areas more likely than ever before. One of the biggest challenges facing movement on these recommendations will be whether and how quickly the SEC and CFTC will be able to advance regulatory changes in support of the recommendations.
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Takeovers and (Excess) CEO Compensation

Posted by Isabel Feito-Ruiz (University of Leon) and Luc Renneboog (Tilburg University), on
Friday, November 3, 2017
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Isabel Feito-Ruiz is Assistant Professor in Corporate Finance at University of Leon (Spain); and Luc Renneboog is Professor of Corporate Finance at Tilburg University. This post is based on their recent paper. 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).

An executive compensation contract, especially when it comprises equity-based remuneration, ought to align the managerial objectives with those of shareholders. In our paper Takeovers and (Excess) CEO Compensation, we study if a CEO’s equity-based compensation—especially when it seems excessive—affects the choice and expected value generation in takeovers announced by European firms.

According to the optimal contracting theory, equity-based compensation of top executives may be effective in shaping long-term corporate investment policies and encourage managers to make decisions that do not hurt the return required by shareholders. Giving shareholder-oriented incentives to top management leads to better takeover decisions (this is at least what the market seems to believe). Managers pay lower premiums for target firms in takeovers and undertake more risky investments when they receive high levels of equity-compensation. Therefore, stock option-based compensation motivate managers to take on projects that maximize shareholders’ value (even in the absence of active ownership).

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Weekly Roundup: October 27–November 2, 2017

Posted by HLS Forum on Corporate Governance and Financial Regulation, on
Friday, November 3, 2017

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This roundup contains a collection of the posts published on the Forum during the week of October 27–November 2, 2017.

SEC’s Proposed Modernization of Regulation S-K

Posted by Ropes & Gray LLP, on Friday, October 27, 2017
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Coordinating Compliance Incentives

Posted by Veronica Root, University of Notre Dame, on Friday, October 27, 2017
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Post Vote Update: Revisiting the P&G-Trian Contest

Posted by Colin Ruegsegger, Glass, Lewis & Co., on Friday, October 27, 2017
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Not All TSR Incentive Plans are Created Equal

Posted by Charlie Pontrelli, Equilar, Inc., on Saturday, October 28, 2017
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A Mechanism for LIBOR

Posted by Brian Coulter (Western University), Joel Shapiro (University of Oxford), and Peter Zimmerman (University of Oxford), on Sunday, October 29, 2017
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FSB TCFD Guidance on Climate-Related Financial Disclosures: Regulatory and Market Responses

Posted by Linda M. Lowson, Global ESG Financial Regulatory Academy, on Monday, October 30, 2017
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SEC Enforcement Against Initial Coin Offering

Posted by Steve Gatti, Megan Gordon, and Daniel Silver, Clifford Chance, on Monday, October 30, 2017
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2018 Benchmark Policy Consultation

Posted by Institutional Shareholder Services, Inc., on Monday, October 30, 2017
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Is Say on Pay All About Pay? The Impact of Firm Performance

Posted by Jill E. Fisch (University of Pennsylvania), Darius Palia (Rutgers Business School), and Steven Davidoff Solomon (University of California, Berkeley), on Monday, October 30, 2017
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Creatures of Contract: A Half-Truth About LLCs

Posted by Mohsen Manesh, University of Oregon, on Tuesday, October 31, 2017
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Amending Corporate Charters and Bylaws

Posted by Albert H. Choi (University of Virginia) and Geeyoung Min (Columbia University), on Tuesday, October 31, 2017
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Insights from PwC’s 2017 Annual Corporate Directors Survey

Posted by Paula Loop, PricewaterhouseCoopers LLP, on Tuesday, October 31, 2017
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EU Financial Market Benchmark Regulation and US Impact

Posted by Martin Liebi and Alexandra Balmer, PricewaterhouseCoopers LLP, on Wednesday, November 1, 2017
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House Bill 4015 and the Proposed Regulation of Proxy Advisors

Posted by Dimitri Zagoroff, Glass, Lewis & Co., on Wednesday, November 1, 2017
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An Empirical Study of Special Litigation Committees: Evidence of Management Bias and the Effect of Legal Standards

Posted by C.N.V. Krishnan (Case Western Reserve University), Steven Davidoff Solomon (University of California Berkeley), and Randall S. Thomas (Vanderbilt University), on Wednesday, November 1, 2017
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The Art of Drafting Milestones for an Earn-Out

Posted by Barbara Borden, Jamie Leigh and Mutya Harsch, Cooley LLP, on Thursday, November 2, 2017
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The “Do’s” and “Dont’s” for Say on Pay

Posted by Carol Bowie, Teneo Governance, on Thursday, November 2, 2017
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The Continuing Support for Dual-Class Stock by Companies and Investors

Posted by Katharine Martin and Amy Simmerman, Wilson Sonsini Goodrich & Rosati, on Thursday, November 2, 2017
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The Continuing Support for Dual-Class Stock by Companies and Investors

Posted by David J. Berger, Katharine Martin and Amy Simmerman, Wilson Sonsini Goodrich & Rosati, on
Thursday, November 2, 2017
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David J. Berger, Katharine Martin and Amy Simmerman are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Ms. Martin and Ms. Simmerman. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

The reported demise of dual-class stock appears to be, to paraphrase Mark Twain, “greatly exaggerated.” The end of dual-class stock was predicted following the decisions this summer by the major indices, including FTSE Russell (who operates the Russell 3000 index) and S&P Dow Jones (who manages the Dow Jones 500 index) to ban most companies that went public with multi-class stock. The decisions by the indices came at the behest of numerous institutional investors, especially passive funds, who argued that only companies with a single class of stock should be included in the most prominent indexes. The decisions by the major indexes led many market observers to conclude that companies going public would no longer adopt multi-class stock since it created the risk that these companies would be excluded from the indexes.

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The “Do’s” and “Dont’s” for Say on Pay

Posted by Carol Bowie, Teneo Governance, on
Thursday, November 2, 2017
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Carol Bowie is Senior Advisor at Teneo Governance. This post is based on a Teneo publication by Ms. Bowie.

Advisory votes on compensation are more than half a decade old in the U.S., and the trends are clear:

  • The vast majority of companies provide for annual votes.
  • “Pay for performance” assessments underlie most investor voting.
  • Each year the overall support level averages more than 90 percent, while about only about 2 percent of companies fail to receive majority support for their pay programs.
  • Another 5 to 10 percent pass with what is deemed mediocre backing – below 70 or 80 percent support per proxy advisor policies (ISS and Glass Lewis, respectively) and in the eyes of many investors. This result triggers expectation that the compensation committee will demonstrate a substantive level of responsiveness to the relatively low vote.
  • Increasingly important, low support for say on pay can be a red flag to activist investors who closely monitor shareholder dissatisfaction at potential targets.

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