Yearly Archives: 2017

Say on Pay Laws, Executive Compensation, CEO Pay Slice, and Firm Value around the World

Posted by Ricardo Correa, Federal Reserve Board, and Ugur Lel, University of Georgia, on
Wednesday, January 18, 2017
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Ricardo Correa is Chief of the International Financial Stability Section, Division of International Finance, U.S. Federal Reserve Board; Ugur Lel is Nalley Distinguished Chair in Finance and Associate Professor of Finance at University of Georgia Terry College of Business. This post is based on their recent article. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

In our study Say on Pay Laws, Executive Compensation, Pay Slice, and Firm Valuation around the World, which was recently published in the Journal of Financial Economics, we examine changes in CEO compensation and in firm valuation around the adoption of say on pay (SoP) laws in a large cross-country sample of firms. SoP laws aim to more closely align the interests of executives with those of shareholders—a key tenet of corporate governance—by providing shareholders with the ability to vote on their firms’ compensation policies on a periodic basis. The main purposes of these laws are to limit the seemingly excessive levels of CEO pay, tighten the link between firm performance and CEO pay, and improve disclosure on executive compensation. Between 2003 and 2012, 11 developed countries passed SoP laws, and several countries are either contemplating or have recently adopted such laws, notably Switzerland and France.

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Acquisition Financing: the Year Behind and the Year Ahead

Posted by Eric M. Rosof, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 17, 2017
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Eric M. Rosof is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Rosof, Joshua A. Feltman, Gregory E. Pessin, Michael S. Benn, and John R. Sobolewski.

If 2008 through 2010 were years of tumult and recession in U.S. financing markets, and 2011 through 2015 years of recovery and growth, marked by ever-lower yields and record-setting financing activity even in the face of new compliance regimes, 2016 felt like a tipping point. After hitting record lows in the first half of the year, interest rates at last experienced a sustained rise, and the U.S. election results opened the door to major regulatory and legislative changes, including the potential roll-back of portions of Dodd-Frank and the potential roll-out of consensus-fueled fiscal stimulus.

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Private Ordering Post-Trulia

Posted by Sean J. Griffith, Fordham Law School, on
Tuesday, January 17, 2017
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Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on a recent paper by Professor Griffith, and is part of the Delaware law series; links to other posts in the series are available here.

One year ago, in its January 2016 Trulia opinion, the Delaware Court of Chancery announced that nuisance settlements would no longer be welcome in Delaware. A lingering question, however, was whether they would be welcome elsewhere. A year later, the data now suggests that they are. Indeed, merger litigation remains extremely common, and claims are frequently brought in an alternative jurisdiction. The implication, unfortunately, is that Trulia alone is not sufficient to solve the “deal tax” problem.

In Private Ordering Post-Trulia: Why “No Pay” Provisions Can Fix the Deal Tax and Forum Selection Provisions Can’t, I map the evolution of merger litigation post-Trulia. I find that Trulia succeeds inside but fails outside of Delaware. The question thus becomes what more can be done to contain nuisance litigation in the wake of M&A transactions. I focus on private ordering solutions. After exploring the failure of the Exclusive Forum provision to cope with the assessment of the deal tax in alternative fora, I demonstrate how the No Pay provision promises a more effective cure for what ails merger litigation.

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Proxy Access Reaches the Tipping Point

Posted by Holly J. Gregory, Sidley Austin LLP, on
Monday, January 16, 2017
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Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk, and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In late December 2016, proxy access reached the tipping point in terms of adoption by large companies—just over 50% of S&P 500 companies have now adopted proxy access. Through the collective efforts of large institutional investors, including public and private pension funds, and other shareholder proponents, shareholders are increasingly gaining the power to nominate a portion of the board without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders will have yet another tool to influence board decisions.

As a follow-up to our previous reports on proxy access, this update reflects recent developments on the topic, including:

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Delaware Supreme Court Rules on Director Independence

Posted by Edward B. Micheletti and Edward P. Welch, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, January 16, 2017
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Edward B. Micheletti and Edward P. Welch are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Micheletti, Mr. Welch, and Keenan Lynch, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently issued an important decision on the subject of director independence. In Sandys v. Pincus, No. 157, 2016 (Del. Dec. 5, 2016), the Delaware Supreme Court held that certain directors of Zynga, Inc. (Zynga or the company) were not independent because of personal and professional connections to Mark, J. Pincus, the company’s founder and controlling stockholder, and Reid Hoffman, an outside director. The Sandys opinion and the Supreme Court’s reasoning underlying its specific decisions concerning director independence should be carefully considered by boards of directors of companies faced with stockholder derivative lawsuits, particularly for companies that have a controlling stockholder.

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Corporate Donations and Shareholder Value

Posted by Hao Liang, Singapore Management University, and Luc Renneboog, Tilburg University, on
Monday, January 16, 2017
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Hao Liang is Assistant Professor of Finance at Singapore Management University, and Luc Renneboog is Professor of Corporate Finance at Tilburg University. This post is based on their recent paper.

More and more companies strive for a reputation of “giving back to society” by the means of donation. A 2014 survey among 261 leading firms worldwide (CECP, 2014) concludes that the amount of corporate philanthropy totals $25 billion, with a median of $18 million per company which is equivalent to 1.01% of pre-tax profits, 0.13% of revenues, or $644 of per employee. At the industry level, industrial and energy companies are at the bottom with donations of only 0.76% of pre-tax income, which stands in marked contrast with the healthcare and consumer discretionary sectors as top contributors with 1.58% and 1.25% of pre-tax income, respectively. The main beneficiaries are educational organizations capturing 28% of the total donations, followed by health & social services with 27%. The amount of donations keeps growing; it has augmented by about 40% over the past decade.

Corporate philanthropy usually concerns voluntary donations of corporate resources to charitable causes. As corporate philanthropy consists of pro-social behavior, it is considered as part of corporate social responsibility (CSR) that involves explicit pro-social spending. We can partition donations on the basis of the type of beneficiary: charitable and political donations, but can also dissect total charitable donations on the basis of the type of payment: cash and in-kind donations. An important mechanism for distributing donations is through a corporate foundation/trust; a good third of corporate donations are made via a corporate foundation.

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Effectively Administering a Relative TSR Program—Learning and Best Practices

Posted by Steve Pakela, Pay Governance LLC, on
Sunday, January 15, 2017
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Steve Pakela is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Pakela, Brian Lane, and Brian Scheiring. 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).

Relative TSR is a performance metric most often used in LTI performance plans. Its use as a metric has nearly doubled over the past 5 years and is now used by approximately 50% of companies spanning all sizes and industries. While the appeal of this metric for shareholders and directors alike is its alignment with shareholder value creation and the absence of having to establish long-term performance goals, there are other nuances and considerations that can make the administration of these plans much more complex than other types of arrangements. Over the years, our experience in designing and assisting companies with administering relative TSR plans has led to a series of best practices that are the focus of this article. These practices are less about contemporary design issues, and more about ensuring the appropriate provisions and methodologies are in place to enhance the governance of relative TSR plans from the time of grant to the calculation of payouts. They include:

  • understanding the implications of award valuation on the number of shares granted;
  • understanding the nuances of the TSR definition;
  • selecting a method for calculating relative TSR performance;
  • recognizing peer group changes that occur during the performance period; and
  • enhancing plan governance.

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SEC Guidance on “New GAAP” Transition Disclosures and Non-GAAP Measures

Posted by Ellen Odoner, Weil, Gotshal & Manges LLP, on
Saturday, January 14, 2017
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Ellen Odoner is a partner in the Public Company Advisory Group of Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Goltser, Catherine T. Dixon, and P.J. Himelfarb.

At three significant year-end conferences, members of the SEC’s senior accounting and legal staff reinforced previously delivered guidance on several key financial reporting issues relevant to preparation of upcoming earnings releases, the 2016 Form 10-K and subsequent filings. We expect that the announced departures of SEC Chair Mary Jo White, Division of Corporation Finance Director Keith Higgins and Division of Enforcement Director Andrew Ceresney will not diminish the career staff’s promised close scrutiny in the new year of how well companies are following this guidance. Whether or not the Enforcement Division’s vigorous pursuit of accounting, internal controls and auditor independence cases will continue under the next administration is somewhat more difficult to predict, however, and will bear watching.

The financial reporting guidance discussed in this post is drawn from staff remarks delivered at Practising Law Institute’s 48th Annual Institute on Securities Regulation held on November 2-4, the Fall Meeting of the ABA Committee on Federal Regulation of Securities held on November 18-19, and the AICPA National Conference on Current SEC & PCAOB Developments held on December 5-7, 2016. We also cover staff guidance for the next round of conflict minerals disclosure, which was delivered at the PLI conference. Throughout this post we provide practical tips in “What to do Now?” sections.

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Shareholder Challenges Pay Practice at Apple, Inc.

Posted by Joseph E. Bachelder, McCarter & English LLP, on
Friday, January 13, 2017
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Joseph E. Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on a column by Mr. Bachelder which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this post.

An Apple Inc. shareholder has proposed the following resolution be adopted at the 2017 annual shareholders’ meeting:

“Resolved: shareholders recommend that Apple Inc. engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.”

In a no-action letter issued Oct. 26, 2016, the SEC concurred with the shareholder, Dr. Jing Zhao, that the proposed resolution be included in Apple’s proxy statement for the 2017 meeting. [1]

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Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts

Posted by Todd Gormley, Washington University in St. Louis, and David A. Matsa, Northwestern University, on
Friday, January 13, 2017
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Todd Gormley is Associate Professor of Finance at Washington University in St. Louis Olin Business School; and David A. Matsa is Associate Professor of Finance at Northwestern University Kellogg School of Management. This post is based on their recent article. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang.

There is not one conflict between managers and shareholders. Various different underlying frictions create many manager-shareholder agency conflicts. Understanding the relevance of these various conflicts and how they vary across firms is crucial for designing incentive and governance structures that mitigate the impact of these conflicts on shareholder value and potentially the aggregate economy. For example, if a manager fails to make risky investments out of a reluctance to exert costly effort and a desire to pursue the “quiet life”, then shareholders might wish to increase the manager’s ownership stake to better align their interests and encourage risk taking. On the other hand, if the manager forgoes these investments because of risk aversion and the potential impact of failure on his or her income and wealth, then increasing the manager’s ownership stake in the firm will only worsen the agency conflict. Understanding the source of the agency conflict also has important implications for a firm’s optimal leverage and cash management policies.

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