Monthly Archives: March 2018

Cybersecurity: The SEC’s Wake-up Call to Corporate Directors

David R. Fontaine is Chief Executive Officer of Corporate Risk Holdings LLC and CEO of Kroll, Inc., and John Reed Stark is president of John Reed Stark Consulting LLC. This post is based on an article authored by Mr. Fontaine and Mr. Stark.

The U.S. Securities and Exchange Commission’s (“SEC”) recently issued guidance for public companies on cybersecurity-related disclosures has garnered a great deal of attention for what it says about the threat and risk that cybersecurity presents for public companies—large and small (the “2018 Guidance”). With cyber-incidents capturing headlines around the world with increasing frequency, businesses and regulators have come to recognize that cyber-incidents are not a passing trend, but rather in our digitally connected economy, an embedded risk that is here to stay. Indeed, these cybersecurity risks represent a mounting threat to businesses—risks that can never be completely eliminated.

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Replacing Executive Equity Compensation: The Case for Cash for Long-Term Performance

Nitzan Shilon is Associate Professor at Peking University School of Transnational Law and a Commissioner of the Israel Securities Authority. This post is based on his recent paper. 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).

In a new paper, Replacing Executive Equity Compensation: The Case for Cash for Long-Term Performance, I reconsider the way in which corporate executives in U.S. public firms are paid for long-term performance. Paying top executives in equity (stock and stock options) is the most significant reform of executive compensation in our generation, universally welcomed not only by firms but also by academics, investors, and policy makers. Yet I argue that equity compensation is undesirable. It provides perverse incentives for managers to destroy shareholder value and behave manipulatively and recklessly. It is also economically wasteful, and its wastefulness, which is exacerbated by agency costs and cognitive biases, significantly contributes to the immense explosion of executive compensation.

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An Early Look at the State of U.S. CEO Pay

John Roe is Head of ISS Analytics and Managing Director at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Roe.

As of March 26, ISS Analytics has collected pay data for 661 “same-store” CEOs [1] within the Russell 3000. Same-store CEOs are those in place for each of the most recent full two fiscal years, and were the only CEO at their respective firms. We focus on these CEOs to gauge the sentiment of compensation committees and how their thinking evolves year-over-year, without clouding the issue with payments to executives around employment start or end events and without bespoke multiple-CEO situations.

Buoyed by a strong stock market (leading to higher annual incentive payments) and more generous stock awards, CEOs across every market capitalization range saw some of the strongest pay increases since the recovery years from the financial crisis.

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What is the Impact of Successful Cyberattacks on Target Firms?

René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at Ohio State University and National Bureau of Economic Research. This post is based on a recent paper by Professor Stulz; Shinichi Kamiya, Assistant Professor of Insurance at Nanyang Technological University; Jun-Koo Kang, Canon Professor of Finance at Nanyang Technological University; Jungmin Kim, Assistant Professor of Finance at Hong Kong Polytechnic University; and Andreas Milidonis, Associate Professor of Finance at University of Cyprus.

Despite the widespread recognition of emerging threats posed by cyber risk and its importance as a new type of risk, there is little evidence on how successful cyberattacks affect corporations. In particular, we know little about which types of firms are more likely to experience cyberattacks, and how such attacks affect target firm shareholder wealth, growth, and financial strength. We also know little about how firms change managerial risk-taking incentives and their risk management after attacks. In this study, we investigate these important issues by analyzing a comprehensive sample of data breach events caused by successful cyberattacks reported in the Privacy Rights Clearinghouse (PRC) over the period 2005 to 2014. We include as cyberattack events only malicious external actions, such as hacking and malware.

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Weekly Roundup: March 23–29, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of March 23–29, 2018.





The SEC and Virtual Currency Markets



Lessons Learned from Trian’s Campaign at Procter & Gamble


Senate Rollback of Dodd-Frank


The Buyer’s Perspective on Security Design: Hedge Funds and Convertible Bond Call Provisions


The Fragmented Regulatory Landscape for Digital Tokens


The First Wave of Pay Ratio Disclosures


Blockchain Technology for Corporate Governance and Shareholder Activism



Upcoming Volcker Rule Regulatory Changes






Emerging Trends in S&P 500 Pay Ratio Disclosures

Emerging Trends in S&P 500 Pay Ratio Disclosures

Ronald O. Mueller is partner and Maia R. Gez is of counsel at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication authored by Mr. Mueller and Ms. Gez.

As the 2018 proxy season is now gaining full speed, the first group of the required CEO-to-median employee pay ratio disclosures have made their eagerly-awaited debut. Gibson Dunn has been tracking all required pay ratio disclosures by S&P 500 and Fortune 100 companies and, while still early, there are a number of key observations and emerging trends from the filings to date.

Background. In August 2015, the SEC adopted final rules implementing Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules, set forth in Item 402(u) of Regulation S-K, require pay ratio disclosures for fiscal years beginning on or after January 1, 2017. The central components of the required disclosure are (1) the median employee’s annual total compensation, (2) the CEO’s annual total compensation, (3) the ratio of these two figures, and (4) additional narrative disclosure addressing topics such as the date and method used to identify the company’s median compensated employee. Generally, the rules permit the use of several exemptions and adjustments to the pay ratio calculation in order to reduce compliance costs for companies. In addition, as emphasized in the SEC’s September guidance, the new rules grant reporting companies wide flexibility on the method used for identifying the median employee.

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Caremark and Compliance: A Twenty Year Lookback

Donald C. Langevoort is Thomas Aquinas Reynolds Professor of Law at Georgetown Law School. This post is based on his recent article, forthcoming in the Temple Law Review, and is part of the Delaware law series; links to other posts in the series are available here.

In nearly all narratives of how compliance has grown as a legal subject and field of practice in the last two decades, the Delaware Chancery Court’s decision in In re Caremark plays a featured role. Chancellor Allen’s opinion predicted the abandonment of the Delaware Supreme Court’s older and heavily criticized approach in Graham v. Allis-Chalmers, which had limited the board of directors’ compliance oversight obligation to situations where red flags were waving in the board’s face. It said (though entirely in dicta) that the board had an affirmative obligation to assure itself in good faith that the corporation had a system of internal reporting and compliance controls to monitor for illegal activities. Since that time, compliance has grown in size, scope and stature at nearly all large corporations.

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Preparing for the Year of the “S”

Michael Flaherty is senior vice president and Josh Clarkson is vice president at Gladstone Place Partners LLC. This post is based on a Gladstone Place Partners publication by Mr. Flaherty and Clarkson. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Guns, addiction, discrimination.

While classic shareholder activists remain a front-burner concern for corporate America, companies are also grappling with a wave of environmental, social and governance (ESG) policy pressures. Within that struggle, the “S” factor is under the microscope.

So far this year, 74 percent of all shareholder proposals were aimed at environmental and social causes, a percentage nearly double that from five years ago, according to ISS Analytics, the data arm of Institutional Shareholder Services Inc.

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BlackRock Investment Stewardship’s Approach to Engagement on Human Capital Management

Michelle Edkins is the Managing Director and Global Head of BlackRock Investment Stewardship. This post is based on a publication prepared by BlackRock Investment Stewardship.

BlackRock has an industry leading global investment stewardship program that promotes corporate governance best practices at the companies in which we invest. This program is part of the investment function at BlackRock, fulfilling our fiduciary duty to protect and enhance the value of our clients’ assets.

As Larry Fink recently wrote in his 2018 annual letter to CEOs:

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Do Proxies for Informed Trading Measure Informed Trading? Evidence from Illegal Insider Trades

Kenneth R. Ahern is the Dean’s Associate Professor in Business Administration at the University of Southern California. This post is based on his recent paper.

Trading by investors who have material, non-public information is of first-order importance to liquidity providers, stock market operators, and securities market regulators. Liquidity providers, such as market makers and institutional investors, worry that an informed trader will take advantage of their lack of information. Operators of stock markets worry that the presence of informed investors will drive uninformed investors out of the market. Regulators worry that an unfair advantage by some investors will impair equal access to equity markets.

Though many market participants worry about the presence of informed trading, there is little credible evidence on the validity of existing empirical proxies to identify periods of informed trading, such as bid-ask spreads, Kyle’s lambda, and trade order imbalances. Though these proxies are theoretically grounded, they remain largely untested. This is because validating the proxies requires the rare opportunity to directly observe informed trading.

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