Yearly Archives: 2018

CEO Gender and Corporate Board Structures

Posted by Melissa B. Frye (University of Central Florida) and Duong T. Pham (Georgia Southern University), on
Wednesday, January 10, 2018
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Melissa B. Frye is an Associate Professor of Finance at the University of Central Florida and Duong T. Pham is an Assistant Professor of Finance at Georgia Southern University. This post is based on a recent article by Professor Frye and Professor Pham, forthcoming in the Quarterly Review of Economics and Finance.

In our article, CEO Gender and Corporate Board Structure (forthcoming in the Quarterly Review of Economics and Finance), we investigate the relationship between the gender of the CEO and corporate board structures. In recent years, women have made strides in cracking the glass ceiling in leadership positions in corporate America. Female CEOs have been appointed not only in female-friendly industries such as healthcare and consumer products but also in fields that are traditionally dominated by their male counterparts such as energy, utilities or automotive. The number of female CEOs leading S&P 500 companies reached a record high in 2016 with 27 women at the helm of these firms. However, women CEOs only make up 5.4% of the total S&P 500 CEO positions.

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Pay-for-Performance Mechanics

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Wednesday, January 10, 2018
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Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Mishra.

Following the implementation of mandated advisory shareholder votes on executive compensation under the Dodd-Frank Act of 2010, investors have regular opportunities to opine on executive pay programs. Investor feedback on the issue of pay-for-performance has indicated a preference for a focus on long-term alignment, board decision-making, and pay relative both to market peers and company performance. As a result, ISS’ approach to evaluating pay-for-performance comprises an initial quantitative assessment and, as appropriate, an in-depth qualitative review to determine either the likely cause of a perceived long-term disconnect between pay and performance, or factors that mitigate the initial assessment.

The initial quantitative screens are designed to identify outlier companies that have demonstrated significant misalignment between CEO pay and company performance over time. The screens measure alignment on both a relative and absolute basis, and over multiple time horizons. The screening process applies to constituents of the Russell 3000E Index, a collection of the largest 3,500 (approximate) equity securities traded on U.S. stock exchanges. Beginning with annual meetings on or after Feb. 1, 2018, the quantitative screen includes a new financial performance assessment that measures on a long-term basis the relative alignment between CEO pay and key financial metrics. Before this 2018 model change, the financial performance assessment was limited to ISS’ qualitative evaluation.

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Compensation Season 2018

Posted by Jeannemarie O’Brien, Adam J. Shapiro, and Andrea K. Wahlquist, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 9, 2018
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Jeannemarie O’Brien, Adam J. Shapiro, and Andrea K. Wahlquist are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Ms. O’Brien, Mr. Shapiro, Ms. Wahlquist, and David E. Kahan.

Boards of directors and their compensation committees will soon shift attention to the 2018 compensation season. Key considerations in the year ahead include the following:

Tax Cuts and Jobs Act Implications.

The new tax law has significantly altered the compensation design landscape. Notable implications of the new tax law include:

No Performance-Based Exception to §162(m). The new law eliminates the performance-based exception to the $1 million per-executive annual limit on the deductibility of compensation for certain public company executives under §162(m) of the tax code. This change will result in a significant increase in disallowed tax deductions. Nevertheless, we expect that companies will accept this result as a necessary consequence of the competitive marketplace for talent. Ultimately, it remains within the business judgment of the board of directors to set compensation at the levels and in the manner that it determines to be appropriate to attract and retain the executives the board believes will best serve the needs of the corporation.

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Analysis of SEC Ruling on Apple Shareholder Proposal

Posted by Arthur H. Kohn, Sandra Flow, and Mary E. Alcock, Cleary Gottlieb Steen & Hamilton LLP, on
Tuesday, January 9, 2018
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Arthur H. Kohn and Sandra Flow are partners, and Mary E. Alcock is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Kohn, Ms. Flow, Ms. Alcock, and Elizabeth K. Bieber. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

On November 1 2017, the Securities and Exchange Commission (“SEC”) released guidance (Staff Legal Bulletin No. 14I (“SLB 14I”)) clarifying the scope and application of the ordinary business and economic relevance grounds for excluding a shareholder proposal under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from a company’s proxy statement. [1] On November 20, Apple Inc. became the first corporation to attempt to use this guidance in a request for no-action relief from the staff of the SEC’s Division of Corporation Finance (the “Staff”), in response to governance activist Jing Zhou’s proposal that Apple create a board committee focused on human rights (the “Proposal”). On December 21, 2017, the Staff responded, denying Apple’s request to exclude the Proposal from its proxy materials.

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Managing the Family Firm: Evidence from CEOs at Work

Posted by Andrea Prat (Columbia University), on
Tuesday, January 9, 2018
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Andrea Prat is Richard Paul Richman Professor of Business at Columbia Business School and Professor of Economics at Columbia University. This post is based on a recent paper by Professor Prat; Oriana Bandiera, Professor of Economics at the London School of Economics; Renata Lemos, Economist at the World Bank and Research Associate at the London School of Economics; and Raffaella Sadun, Thomas S. Murphy Associate Professor of Business Administration at Harvard Business School.

Family Firms: An Obstacle to Growth? 

Family firms are often seen as an engine of growth. For instance, the exceptional economic success of many European countries in the post-War period was characterized by the wide presence of family firms across the Continent. Particularly in countries like Germany and Italy, family ownership came to be seen as the best guarantee of economic and social development. However, the consensus that family firms are good for growth has come under scrutiny in recent years.

An emerging body of evidence indicates that family management is actually detrimental for performance. Exploiting a remarkable natural experiment, Bennedsen et al (2007) estimate a 4% profitability loss for Danish firms due to having a family manager rather than a professional one. Lippi and Schivardi (2014) find that family firms have worse executive selection (because they prefer to hire a less qualified family manager rather than an external professional manager) and this accounts for a 6% productivity loss as compared to conglomerate-owned firms. Given the magnitude of the estimated effect, family ownership might be a serious obstacle to productivity growth in Europe.

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Raising the Stakes on Board Gender Diversity

Posted by Brianna Castro, Glass, Lewis & Co., on
Monday, January 8, 2018
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Brianna Castro is an analyst covering the U.S. market for Glass, Lewis & Co. This post is based on a Glass Lewis publication by Ms. Castro and Starlar Burns.

2017 has seen interest in board composition intensify. Investors have long scrutinized individual directors’ qualifications; however, increasingly they are asking how those individuals complement each other, and whether the overall board reflects a diverse mix of backgrounds, skills and qualifications. Investors want to know how boards ensure that they are recruiting directors whose expertise aligns with company strategy, and numerous investment firms have updated their proxy voting policies to punish boards that lack diversity.

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Delaware Court Ruling on Dual-Class Recapitalization Involving Controlling Stockholders

Posted by David J. Berger, Wilson Sonsini Goodrich & Rosati, on
Monday, January 8, 2018
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David J. Berger is a partner at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Berger, Amy Simmerman, Katherine Henderson, and Brad Sorrels, 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 The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here), and The Geography of MFW-Land, by Itai Fiegenbaum.

On December 11, 2017, the Delaware Court of Chancery issued a decision that will be important for companies looking to implement measures to extend or make changes to dual-class voting structures and for companies with controlling stockholders. The decision addressed stockholder fiduciary duty challenges to a recapitalization undertaken by NRG Yield, Inc. (the “Company”), which, prior to the recapitalization, had a dual-class stock structure and a controlling stockholder. The court held that the transaction was conflicted because it was specifically designed to benefit the controlling stockholder. Despite this conflict, the court dismissed the litigation because of the process employed by the Company in adopting the recapitalization.

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Does Size Matter? Bailouts with Large and Small Banks

Posted by Eduardo Dávila (New York University) and Ansgar Walther (University of Warwick), on
Monday, January 8, 2018
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Eduardo Dávila is Assistant Professor of Finance at New York University Stern School of Business and Ansgar Walther is Assistant Professor of Finance at the University of Warwick. This post is based on their recent paper.

 

The differential treatment of large financial institutions has drawn substantial interest in recent financial regulatory discussions. In particular, several regulatory measures put in place after the 2008 financial crisis have singled out large banks as subjects of increased regulatory scrutiny. At the same time, the U.S. banking industry has experienced a secular increase in concentration: The total number of U.S. banks has dropped from 25,000 in the 1920’s, to 14,000 in the 1970’s, to less than 6,000 as of today, while the top 10 bank holding companies now control more than 50% of total bank assets. These developments suggest that concerns about too-big-to-fail banks are now more important than ever before.

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Ineffective Stockholder Approval for Director Equity Awards

Posted by Joseph Penko, Robert Saunders, and Audrey Murga, Skadden, Arps, Slate, Meagher & Flom LLP, on
Sunday, January 7, 2018
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Joseph Penko and Robert Saunders are partners and Audrey Murga is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Penko, Mr. Saunders, Ms. Murga, Regina Olshan, Neil Leff and Joseph Yaffe, and is part of the Delaware law series; links to other posts in the series are available here.

On December 13, 2017, the Delaware Supreme Court issued an opinion, In re Investors Bancorp, Inc. Stockholder Litigation, Case No. 169, holding that, except under limited circumstances, the court will not apply the deferential “business judgment rule” in reviewing challenges to director compensation awards granted pursuant to stockholder-approved equity plans. Instead, such awards are subject to an “entire fairness” standard of review. The ruling increases the likelihood that a plaintiff will defeat a motion to dismiss and potentially embroil the company in costly litigation and discovery.

Public companies should work with their compensation consultants to conduct a peer review of their director compensation programs in order to determine whether their director compensation, including equity grants, are reasonable. Companies should carefully document this process and consider the extent to which it may be beneficial to describe the process in their annual proxy disclosure. In light of the Delaware Supreme Court’s opinion, companies also may wish to consider whether to provide for grants of director compensation awards pursuant to a stockholder-approved formula plan, or via grants of awards specifically approved by stockholders.

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Damage Quantification in Delaware for Breaches of Contract in Post-Merger Litigation

Posted by Arthur H. Rosenbloom (Consilium ADR), on
Sunday, January 7, 2018
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Arthur H. Rosenbloom is Managing Director of Consilium ADR LLC. This post is based on his recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Despite vigorous attempts, through judicial decisions, [1] and legislative provision on forum selection and fee shifting provisions [2] to limit the number of post-merger litigation filings, the fact remains that in 2016, almost a third of the mergers and acquisitions (“M&A”) in Delaware resulted in such filings. [3]

This paper: (i) describes the kinds of contractual breaches giving rise to post-closing M&A related litigation; (ii) examines contractual provisions that act to expand or reduce the amount of damages; (iii) determines whether tort based claims should be treated differently than those sounding in contract; (iv) reviews Delaware opinions meeting discrete screening criteria and; (v) presents the conclusion that Delaware courts, (or indeed any court) should make findings of fact on whether the damage caused by Target’s breach was transient or permanent in nature measured by whether the breach resulted in permanent damage to Target’s current or future cash flows. In my view, courts should award damages on a dollar-for-dollar in basis for transient damages and on a price earnings (“P/E”) multiple or discounted cash flow (“DCF”) basis where damages are non-transient. Further, I describe which of the holdings in the cases studied could have benefited from that distinction.

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