Yearly Archives: 2018

What Does the CEO Pay Ratio Data Say About Pay?

Posted by Ben Burney, Exequity, LLP, on
Tuesday, September 4, 2018
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Ben Burney is Senior Advisor at Exequity, LLP. This post is based on an Exequity memorandum by Mr. Burney. 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).

Our analysis finds company size as measured by employee count is the primary driver of the CEO Pay Ratio; company revenue and market capitalization are secondary drivers. Deeper analysis uncovers industry trends that may provide companies additional context as they compare their CEO Pay Ratios to those of their peers. Ultimately, despite some interesting trends uncovered, analysis of the CEO Pay Ratio data provides little actionable intelligence for companies and questionable, if any, value for investors. More concerning, we find potential avenues for critics of executive pay to manipulate the data to serve their interests or constituencies. The purpose of this post is to provide guidance on what the data says—and what it doesn’t.

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Shareholder Collaboration

Posted by Jill E. Fisch (University of Pennsylvania) and Simone M. Sepe (University of Arizona), on
Tuesday, September 4, 2018
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Jill E. Fisch is Perry Golkin Professor of Law at the University of Pennsylvania Law School and Simone M. Sepe is Professor of Law and Finance at the College of Law at the University of Arizona. This post is based on a recent paper by Professor Fisch and Professor Sepe.

Legal and economics scholars have developed and debated theories of the firm since the groundbreaking work of Ronald Coase in 1937. Two models have come to dominate that discourse. Under the management-power model, the firm is a hierarchical organization, and decision-making power authority belongs to corporate insiders (officers and directors). The competing shareholder-power model de-emphasizes authority in favor of accountability and contemplates increasing shareholder decision-making power to hold insiders accountable. Both models share two key assumptions. First, they view managerial moral hazard as the central problem of corporate law. Second, they assume that insiders and shareholders are engaged in a competitive struggle for corporate power.

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The MFW Framework and Extensive Preliminary Discussions

Posted by Gail Weinstein, Andrew J. Colosimo, and Warren S. de Wied, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Monday, September 3, 2018
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Gail Weinstein is senior counsel, and Andrew J. Colosimo and Warren S. de Wied are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Colosimo, Mr. de Wied, Randi Lally, Mark H. Lucas, and Maxwell Yim. This post 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

MFW provides for judicial review of a merger between a controller and the controlled company under the deferential business judgment rule standard (rather than “entire fairness”) if, among other things, “from the outset of negotiations” (the so-called “ab initio requirement”), the controller conditioned the transaction on approval by both an independent special committee and a majority of the minority stockholders. Olenik v. Lodzinski (July 20, 2018) is notable for providing a substantial discussion of the difference between “negotiations” and “preliminary discussions” for purposes of determining whether this requirement has been met. The factual context involved an all-stock merger between two companies (one of them, a financially troubled company) that had a common purported controller; a lead negotiator for the acquiring company who was the CEO and had a financial interest in the controller; and an equity split that provided the acquiring company with a smaller equity interest in the resulting entity than was supported by the contribution analysis prepared by the special committee’s banker.

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Climate-Related Disclosures and TCFD Recommendations

Posted by Cynthia Williams, York University and Ellie Mulholland, Commonwealth Climate and Law Initiative, on
Sunday, September 2, 2018
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Cynthia Williams is the Osler Chair in Business Law at the Osgoode Hall Law School at York University; and Ellie Mulholland is Director of the Commonwealth Climate and Law Initiative (CCLI). This post is based on a CCLI memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Companies, investors and regulators are increasingly recognising that climate change is not just a social or environmental problem. It is a business problem too. The physical impacts of climate change and the economic impacts of the transition to a zero-carbon economy present foreseeable, and often material, financial risks to the performance and prospects of companies. These non-diversifiable risks affect nearly all industries and sectors within mainstream investment horizons. [1] So much so, that in 2015 Bank of England Governor and head of the G20 Financial Stability Board Mark Carney declared that climate-related financial risk threatens the very stability of the global financial system. [2]

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Board Refreshment: Finding the Right Balance

Posted by Kosmas Papadopoulos, ISS Analytics, on
Saturday, September 1, 2018
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Kosmas Papadopoulos is Managing Editor at ISS Analytics. This post is based on an ISS Analytics memorandum by Mr. Papadopoulos.

For the better part of this decade, governance practitioners and investors have paid significant attention to the issue of board refreshment. Their primary concern is that a stale board—one that has not added new members for many years—may become complacent, whereby a lack of independence, new perspectives, and diversity could pose significant risks in relation to long-term performance and effective oversight of management.

The argument that board renewal practices help companies better manage risk and performance is validated by the data. In this article, we find that companies with a balanced board composition relative to director tenure tend to show better financial results and have a lower risk profile compared to their peers. At the same time, companies whose directors’ tenure is heavily concentrated (whether mostly short-tenured or mostly long-tenured) exhibit poorer performance and have a higher risk profile. Therefore, as an extension beyond practicing basic board refreshment, companies may gain significant benefits by maintaining a balance of experience and new capacity on the board.

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The Appraisal Landscape

Posted by Gail Weinstein, David L. Shaw, and Scott B. Luftglass, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Friday, August 31, 2018
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Gail Weinstein is senior counsel, and David L. Shaw and Scott B. Luftglass are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Shaw, Mr. Luftglass, Robert C. Schwenkel, Brian T. Mangino, and Andrea Gede-Lange, 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Two new Delaware appraisal decisions—Blueblade Capital Opportunities, L.P. v. Norcraft Inc. (July 27, 2018) and In re Appraisal of Solera, Inc. (July 30, 2018)—should further discourage appraisal claims in the context of arm’s-length mergers. In Norcraft, the Court of Chancery relied on a DCF analysis, while looking to the deal price as a “reality check,” and found fair value to be 2.5% above the deal price. In Solera, the Court of Chancery relied on the deal-price-less-synergies and found fair value to be 3.4% below the deal price. Notably, while the court in neither case determined fair value to be equal to the deal price (the approach strongly embraced by the Delaware Supreme Court in its seminal Dell decision issued in late 2017), in both cases the result was close to the deal price (in our view, reflecting the impact of Dell).

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Weekly Roundup: August 24–30, 2018

Posted by Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, August 31, 2018

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This roundup contains a collection of the posts published on the Forum during the week of August 24–30, 2018.

High-Quality Sales Processes and Appraisal Proceedings

Posted by Jason Halper, Ellen Holloman, and Joshua Apfelroth, Cadwalader, Wickersham & Taft LLP, on Friday, August 24, 2018
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Awakening Governance: ACGA China Corporate Governance Report 2018

Posted by Jamie Allen and Li Rui (Nana Li), Asian Corporate Governance Association, on Saturday, August 25, 2018
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The CFIUS Reform Bill

Posted by Michael Gershberg and Justin Schenck, Fried, Frank, Harris, Shriver & Jacobson LLP, on Sunday, August 26, 2018
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Does Transparency Increase Takeover Vulnerability?

Posted by Lifeng Gu (The University of Hong Kong) and Dirk Hackbarth (Boston University), on Monday, August 27, 2018
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Performance Awards and Say on Pay

Posted by Elizabeth Carroll, Equilar, Inc., on Monday, August 27, 2018
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Fintech as a Systemic Phenomenon

Posted by Saule T. Omarova (Cornell University), on Tuesday, August 28, 2018
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Lazard’s 2Q 2018 13F Filing Analysis

Posted by Jim Rossman, Lazard, on Tuesday, August 28, 2018
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Securing Financial Stability: Systematic Regulation of Systemic Risk

Posted by Steven L. Schwarcz (Duke University), on Wednesday, August 29, 2018
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Gender Quotas in California Boardrooms

Posted by Tomas Pereira, Equilar, Inc., on Wednesday, August 29, 2018
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The Race to the Bottom in Global Securities Regulation

Posted by Sharon Hannes and Ehud Kamar (Tel Aviv University), on Thursday, August 30, 2018
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Supreme Court Nominee and the Derivative Suit

Posted by Justin T. Kelton, Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP, on Thursday, August 30, 2018
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Remarks on Capital Formation at the Nashville 36|86 Entrepreneurship Festival

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Thursday, August 30, 2018
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Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at 36|86 Entrepreneurship Festival in Nashville, Tennessee, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you Charlie for that kind introduction. I am delighted to participate in the 36|86 Entrepreneurship Festival here in Nashville, Tennessee. I would like to speak for about 25 minutes about key capital formation initiatives at the SEC. [1] After my remarks, I will be joined by Bill Hinman, the Director of the SEC’s Division of Corporation Finance, for a fireside chat that will be moderated by [Tennessee] Governor Bill Haslam. Thank you for joining us today [August 29, 2018], Governor Haslam.

The 36|86 Entrepreneurship Festival is a fitting place to discuss the Commission’s capital formation priorities. While many people visit Nashville because of its rich history and legendary music scene, Bill and I are here today as fans of the Music City’s vibrant ecosystem for startups. Nashville’s array of incubators, accelerators, co-working spaces, and startup competitions, in combination with active angel investor and venture capital communities, provide fertile ground for startups to get traction and then thrive. Nashville was ranked 6th out of the top 40 U.S. cities for entrepreneurs and startups in 2018, [2] and 7th among U.S. cities creating the most tech jobs in 2017. [3] Sixth and seventh are pretty darn impressive for a city with the 25th largest population.

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Supreme Court Nominee and the Derivative Suit

Posted by Justin T. Kelton, Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP, on
Thursday, August 30, 2018
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Justin T. Kelton is a Partner at Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP. This post is based on an Abrams Fensterman memorandum by Mr. Kelton.

In an opinion from 2008, Judge Kavanaugh, writing for the U.S. Court of Appeals for the District of Columbia, offered a rare glimpse into his views on the demand requirement in derivative litigation under Delaware law, and hinted in dicta that he may be open to reevaluating the legal standard for reviewing a dismissal of derivative claims based on a lack of demand. Given Judge Kavanaugh’s nomination to the Supreme Court, this post summarizes his analysis on this critical issue.

Judge Kavanaugh Affirms Dismissal Based on Lack of Demand, and Confirms Substantial Hurdles Faced by Plaintiffs In Derivative Actions.

In Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. ex rel. Fed. Nat. Mortg. Ass’n v. Raines, 534 F.3d 779, 782 (D.C. Cir. 2008), abrogated by Lightfoot v. Cendant Mortg. Corp., 137 S. Ct. 553, 196 L. Ed. 2d 493 (2017), [1] plaintiffs, who were shareholders of Fannie Mae, brought a derivative action against the company’s directors arising out of the company’s misapplication of accounting standards, and the board’s approval of certain executives’ severance compensation.

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The Race to the Bottom in Global Securities Regulation

Posted by Sharon Hannes and Ehud Kamar (Tel Aviv University), on
Thursday, August 30, 2018
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Sharon Hannes is Professor of Law and Dean and Ehud Kamar is Professor of Law at Tel Aviv University Buchmann Faculty of Law. This post is based on a paper by Professor Hannes and Professor Kamar forthcoming in the Research Handbook on Representative Shareholder Litigation. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Lucian Bebchuk, Oren Bar-Gill, and Michal Barzuza.

In a forthcoming article, we tell the story of our class action against Teva Pharmaceutical Industries as an illustration of the global race to laxity in the regulation of capital markets.

Teva is an Israeli company traded in Israel and the United States. It is the largest generic drug maker in the world. Its market value at the end of 2012 was 37 billion dollars—higher than, say, Deutsche Bank’s. This was the time at which we filed a shareholder class action in the Tel Aviv District Court to compel Teva to disclose executive pay on an individual basis, as required under Israeli law and US law. Teva settled the case with us by agreeing to disclose this information. To ensure other companies did the same, Israel adopted a rule affirmatively requiring this disclosure of all Israeli companies traded abroad. These companies comprise Israel’s entire technology sector and half of all public firms by market value.

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