Yearly Archives: 2017

Canadian Responses to Proxy Access Proposals

Posted by Courteney Keatinge, Glass, Lewis & Co, on
Wednesday, November 8, 2017
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Courteney Keatinge is Director of Environmental, Social & Governance research at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Ms. Keatinge. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot, and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

After months of suspense, both Royal Bank of Canada and Toronto-Dominion have bowed to investor pressure and adopted U.S.-style proxy access. Both companies faced non-binding shareholder proposals requesting the provision at their 2017 AGMs, receiving 47% and 52% support respectively, and both companies have protested that the U.S. standards of a 3% ownership threshold and 25% nominating power are incompatible with the existing proxy access rights provided under the Canadian Bank Act. From some investors’ perspective, it’s clearly a positive that the banks have responded to the non-binding votes; however, it’s less clear whether the hybrid, faux U.S.-style proxy access they’ve now adopted actually represents an improvement on what they already had under the Bank Act.

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Tax Reform and Executive Compensation

Posted by Bentham W. Stradley and James F. Dickinson, Pay Governance LLC, on
Tuesday, November 7, 2017
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Bentham W. Stradley is Managing Partner and James F. Dickinson is Principal at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Stradley and Mr. Dickinson.

On November 2nd, the House Ways and Means Committee introduced its tax reform bill, referred to as the ‘Tax Cuts and Jobs Act.’ Our initial review of the bill identified a few provisions which could have significant implications for organizations’ compensation and incentive programs.

Elimination of 162m Exemptions for Deductibility of Performance‐Based Pay

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Do Women CEOs Face Greater Shareholder Activism Compared to Male CEOs? A Role Congruity Perspective

Posted by Vishal Gupta (University of Alabama), Sandra Mortal (University of Alabama) and Daniel B. Turban (University of Missouri), on
Tuesday, November 7, 2017
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Vishal Gupta is associate professor in the University of Alabama Culverhouse College of Commerce; Sandra Mortal is associate professor University of Alabama Culverhouse College of Commerce; Daniel B. Turban is Emma S. Hibbs/Harry Gunnison Brown Chair of Business and Economics and Professor of Management at the University of Missouri. This post is based on a recent article, forthcoming in the Journal of Applied Psychology, by Prof. Gupta, Prof. Mortal, Prof. Turban,  Seonghee Han, Assistant Professor of Finance at Pennsylvania State University at Abington, and Sabatino Silveri is Assistant Professor at the Fogelman College of Business and Economics at University of Memphis. 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 The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

This article examines whether female CEOs face more threat of shareholder activism compared to male CEOs. Over the last two decades, there has been a gradual increase in the number of women CEOs, so that women now occupy 4.8% of CEO positions among Fortune 500 firms. The ascent of women to the CEO position has stimulated considerable interest in understanding their experiences in these roles (Glass & Cook, 2016). CEOs are responsible for managing the firm on behalf of shareholders, who are generally passive owners of stock in the firm. However, some shareholders attempt to redirect managerial decisions and advise managers on how they should lead the firm. Such shareholders are considered activist investors and are generally seen as a threat by management (Gantchev, 2013). To quote Herscher (2015), “activist investors are essentially there to say they think a company is not being run as well as it could be—in a very public way”. Not surprisingly, it is widely believed that on the issues and decisions that really matter for the firm, managers and activists are almost always on opposite sides (Gramm, 2016).

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Impediments to Books and Records Demands

Posted by Christopher B. Chuff, Pepper Hamilton LLP, on
Tuesday, November 7, 2017
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Christopher B. Chuff is an associate at Pepper Hamilton LLP. This post is based on a Pepper publication by Mr. Chuff, Joanna J. Cline, Douglas D. Herrmann, and James H.S. Levine, which originally appeared in the Delaware Business Court Insider.  This post is part of the Delaware law series; links to other posts in the series are available here.

A recent decision by the Delaware Court of Chancery, Mehta v. Kaazing, C.A. No. 2017-0087-JRS (Del. Ch. Sept. 29), confirms that stockholder demands to inspect corporate books and records based on the need to value a stockholder’s shares may be validly denied if the stockholder is unable to demonstrate that it has a “present” need to value its shares. Indeed, as the court makes clear, simply reciting a proper purpose, such as valuing one’s shares or investigating mismanagement, is not enough. To justify inspection, the stockholder must set forth the circumstances underlying its need for inspection and demonstrate that the stockholder has a need to inspect corporate books and records at the present time.

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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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