Monthly Archives: May 2018

Board Performance Evaluations that Add Value

Professor Geoffrey Kiel is a Specialist Advisor and James Beck is Managing Director at Effective Governance Pty Ltd. This post is based on an Effective Governance publication by Prof. Kiel and Mr. Beck.

Annual board evaluations are now commonplace for both for-profit and non-profit organizations, with specific board evaluation recommendations forming a key component in nearly every major corporate governance standard, review or report internationally.

Recent data on US boards from the global consulting firm Spencer Stuart shows that 98% of S&P 500 boards conduct a board evaluation of some type, although only about a third review the board as a whole, individual directors and committees as part of the process. [1] In the UK, the majority of boards on the FTSE 150 conduct board reviews, with 60.7% conducting their evaluations internally, while 38% of boards used an external facilitator. [2] Encouragingly, PwC reports that in 2017 68% of public company directors in the US say that the board has taken action based on the results of their last board review, which was an increase on the 49% from PwC’s survey in 2016. [3]


Weekly Roundup: May 11-17, 2018

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This roundup contains a collection of the posts published on the Forum during the week of May 11-17, 2018.

Independent Directors: New Class of 2017

The Demand Review Committee: How it Works, and How it Could Work Better

Upcoming Uptick in Bank M&A Activity?

Discovery Trends in Litigation Finance Arrangements

Delaware’s Unwarranted Assumption in DCF Pricing

Failure to Disclose a Cybersecurity Breach

Failure to Disclose a Cybersecurity Breach

Matthew C. Solomon and Pamela L. Marcogliese are partners and Rahul Mukhi is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Solomon, Ms. Marcogliese, Ms. Mukhi, and Kal Blassberger.

On April 24, 2018, Altaba, formerly known as Yahoo, entered into a settlement with the Securities and Exchange Commission (the “SEC”), pursuant to which Altaba agreed to pay $35 million to resolve allegations that Yahoo violated federal securities laws in connection with the disclosure of the 2014 data breach of its user database. The case represents the first time a public company has been charged by the SEC for failing to adequately disclose a cyber breach, an area that is expected to face continued heightened scrutiny as enforcement authorities and the public are increasingly focused on the actions taken by companies in response to such incidents. Altaba’s settlement with the SEC, coming on the heels of its agreement to pay $80 million to civil class action plaintiffs alleging similar disclosure violations, underscores the increasing potential legal exposure for companies based on failing to properly disclose cybersecurity risks and incidents.


Do Institutional Investors Drive Corporate Social Responsibility? International Evidence

Hannes Wagner is Associate Professor of Finance at Bocconi University. This post is based on article, forthcoming in the Journal of Financial Economics, authored by Professor Wagner; Alexander Dyck, Professor of Finance at the University of Toronto; Karl Lins, Professor of Finance at the University of Utah; and Lukas Roth, Associate Professor of Finance at the University of Alberta.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

In making investment decisions, shareholders today are asked to assess, and can easily track, not only measures of a firm’s financial performance, but also metrics covering a firm’s environmental and social (E&S) performance—two components of corporate social responsibility. Yet, whether E&S performance is beneficial to the average shareholder remains controversial.

In our article, we take a different tack to shed light on the importance of environmental and social performance to shareholders. We test for a relation between share ownership and firms’ E&S performance. It is hard to dismiss the hypothesis that E&S investments are beneficial to shareholders if they are a driving force behind firms’ E&S choices.


CII Comment Letter to MSCI On Unequal Voting Structures

Ken Bertsch is Executive Director at the Council of Institutional Investors (CII). This post is based on a letter from CII to the MSCI Equity Index Committee.

Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

May 9, 2018

MSCI Equity Index Committee
7 World Trade Center
250 Greenwich Street
New York, NY 10007

Dear Members of the MSCI Equity Index Committee:

I am writing in response to MSCI’s Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes (Expanded Consultation), which generally contemplates incorporating the proportion of total voting power in the hands of non-strategic shareholders of listed securities into each security’s float-adjusted market cap contribution to MSCI’s developed and emerging market indexes. I want to compliment MSCI on the care and thought it has brought to this proposal.


The Unresolved Quandary of Disclosure of Executive Illness

Allan Horwich is Professor of Practice at Northwestern Pritzker School of Law and partner at Schiff Hardin LLP. This post is based on a recent article by Professor Horwich, published in the Securities Regulation Law Journal.

Since at least the mid-1990s the question of disclosure by public companies about the health of their executives has been the subject of scholarly commentary and the business press. Interest in this issue was revived with the recent death of the CEO of CSX Corporation, Hunter Harrison. He joined CSX in March 2017. Press reports soon raised questions about his health. The first health-related disclosure by the company, however, was on December 14, 2017, when CSX announced that Harrison had taken medical leave due to unexpected complications from a recent illness. The price of CSX stock dropped 7%. He died the next day.


An Early Look at US 2018 Proxy Season Trends

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Kosmas Papadopoulos, Managing Editor at ISS Analytics.

The U.S. proxy season is in full swing, with about 4,000 general meetings (or approximately 60% of annual meeting volume covered by ISS research) taking place in the months of April, May, and June. As we reach the end of April, investors are making voting decisions about the highest volume of meetings, which take place in May (not to mention all other markets in the Americas, Europe, and Asia that are also in peak season). As a meaningful number of meetings have already taken place, we take a look at some emerging trends forming in the beginning of proxy season 2018. While we have a long way to go for a complete picture to develop, the trends we observe now can serve as indicators of potential changes in the governance landscape.


Delaware’s Unwarranted Assumption in DCF Pricing

Arthur H. Rosenbloom is Managing Director of Consilium ADR LLC, and Gilbert E. Matthews is Senior Managing Director and Chairman of the Board of Sutter Securities, Inc. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.

Every valuator’s kit bag includes income-based approaches such as discounted cash flow or the direct capitalization of earnings, by which to determine fair value or value using other standards.

Delaware fair value proceedings have predominantly adopted the erroneous assumption that capital expenditures should equal the sum of depreciation and amortization in determining terminal value. The assumption makes sense only if one assumes the non-real-world scenario of both no growth and no inflation, as we demonstrate in more detailed fashion in the next section of this article.


Discovery Trends in Litigation Finance Arrangements

Alan R. Glickman and William H. Gussman, Jr. are partners and Hannah Thibideau is an associate at Schulte Roth & Zabel LLP. This post is based on a Schulte Roth & Zabel publication by Mr. Glickman, Mr. Gussman, and Ms. Thibideau which originally appeared in Bloomberg Law.

The last few years have seen a sharp rise in the use of third party litigation funding for plaintiffs and their counsel. That trend has given rise to questions as to these arrangements, including their legality, practicality, terms, and—importantly for investors wishing to remain behind the scenes—the extent to which the arrangements must be disclosed.

As more lawsuits are funded by third parties, courts have been faced with novel discovery questions. Those include whether and to what degree discovery is appropriate with respect to the parties involved in the litigation funding, the specific funding arrangements, and the information provided to funders to aid in their assessment of the potential investment. Currently there are few rules that specifically address disclosure of litigation funding arrangements, leaving courts to deal with disclosure questions on a case-by-case basis. The results sometimes have been conflicting.


Upcoming Uptick in Bank M&A Activity?

David Ingles and Sven Mickisch are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Ingles and Mr. Mickisch.

On March 14, 2018, the U.S. Senate approved the Economic Growth, Regulatory Relief and Consumer Protection Act, a bipartisan bill that would repeal or modify certain provisions of the Dodd-Frank Act and eliminate or ease a number of regulatory burdens on superregional, regional and large community banks. Under the act, which was adopted in 2010, bank holding companies (BHCs) with more than $50 billion in total consolidated assets were deemed systemically important financial institutions (SIFIs) and were made subject to stricter oversight and more burdensome regulatory requirements, including the Federal Reserve Board’s enhanced prudential standards. The Senate’s proposed legislation, which would have to be approved by the House of Representatives before being signed into law by President Donald Trump, would increase the total assets threshold for BHC SIFI designation from $50 billion to $250 billion and would relax certain reporting and supervision requirements applicable to banks with total assets of less than $10 billion. With the expectation of lower compliance costs and more flexibility in managing capital, many of the BHCs benefiting from this legislation can be expected to take a renewed interest in M&A as a means of enhancing shareholder value.


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