Monthly Archives: May 2018

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

Collins J. Seitz, Jr. is a Justice of the Delaware Supreme Court; and S. Michael Sirkin is a Partner at Ross Aronstam & Moritz LLP. This post is based on their recent article, published in The Business Lawyer, and is part of the Delaware law series; links to other posts in the series are available here.

In Delaware, stockholder derivative litigation follows a familiar path. The plaintiff files a complaint, alleging that demand is futile. The defendants move to dismiss under Court of Chancery Rule 23.1, arguing that the plaintiff failed to make a demand on the board of directors to bring the suit on behalf of the corporation. The motion is usually coupled with a motion to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim. If the Court of Chancery grants the motion to dismiss on either ground, the matter ends.

What happens, though, if instead of pleading demand futility, the plaintiff actually makes a litigation demand? This path appears to be traveled less frequently, and appears to be less well understood by practitioners and directors. By making a demand on the board, the would-be plaintiff concedes that demand is not futile and that a majority of the board is capable of impartially considering the demand. As a result, an aggrieved stockholder who believes that the corporation is sitting on a valuable claim faces a stark choice between making a demand and attempting to plead demand futility.


Independent Directors: New Class of 2017

Steve W. Klemash is Americas Leader, Kellie C. Huennekens is Associate Director, and Jamie Smith is Associate Director, at the EY Center for Board Matters. This post is based on their EY publication.

Companies are continuing to bring fresh and diverse perspectives into the boardroom and to enhance alignment of board composition with their forward-looking strategies.

In our second annual report, we share the results of our analysis of independent directors who were elected by shareholders to the board of a Fortune 100 company for the first time in 2017—what we refer to as the “new class of 2017.”

We looked at corporate disclosures to see what qualifications and characteristics were specifically highlighted, showcasing what this new class of directors brings to the boardroom. Our research was based on a review of proxy statements filed by companies on the 2017 Fortune 100 list. We also reviewed the same 83 companies’ class of 2016 directors to provide consistency in year-on-year comparisons.


Compensation Committee Outlook: Staying Nimble in 2018

Jannice L. Koors is Senior Managing Director, Greg Stoeckel is Managing Director, and Matt Turner is Managing Director at Pearl Meyer & Partners. This post is based on a Pearl Meyer publication by Ms. Koors, Mr. Stoeckel, Mr. Turner, Melissa Means, and Yvonne Chen.

Pearl Meyer offers its annual Top Five issues for compensation committees. Boards are considering the impact and reacting to the changes brought about by tax reform, diminishing regulation, shifts in political and cultural norms, and an ongoing acceleration of change in business environments. Individually and collectively these factors are demanding that boards be alert and nimble.

We have identified five topics—a mix of practical and forward-thinking—that can help compensation committees address near-term concerns, get ahead of the issues that are gathering steam, and think about what might emerge in the future.


SEC Rules and Guidance for Investment Advisers Standard of Conduct

Jessica Forbes is a partner and Joanna D. Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Forbes and Ms. Rosenberg.

On April 18, 2018, following a two-hour open meeting, the U.S. Securities and Exchange Commission (the “SEC”) voted 4-1 to issue the Standards of Conduct for Investment Professionals Rulemaking Package, which is roughly 1,000 pages long and comprises three releases, one of which is a proposed interpretation and two of which are proposed rules regarding the standards of conduct for investment advisers and broker-dealers (each a “Proposal” and together, the “Proposals”). In one release, the SEC proposed an interpretation of the federal fiduciary duty applicable to investment advisers and requested comment on whether registered investment advisers should be subject to three additional requirements similar to those that currently apply to broker-dealers. [1] In the second release, the SEC proposed a client relationship summary rule which would require both investment advisers and broker-dealers to provide information to retail investors prior to establishing a client relationship, and which is designed to help retail investors make a more informed choice when deciding whether to open a brokerage account or an investment advisory account. [2] In the third release, the SEC proposed Regulation Best Interest, which would establish a new standard of conduct applicable to broker-dealers when recommending securities to their retail customers. [3] In the Proposals, the SEC acknowledges that the nature of the client relationship and the models for providing advice differ between investment advisers and broker-dealers, and the Proposals do not contemplate a uniform standard of conduct or regulation applicable to investment advisers and broker-dealers, although they are designed to more closely harmonize the standards and regulations. Each Proposal is summarized below.


The Investor Stewardship Group’s Governance Principles

Anne Meyer is Senior Managing Director, Don Cassidy is Executive Vice President, and Rajeev Kumar is Senior Managing Director at Georgeson LLC. This post is based their recent Georgeson publication.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst.

In this post, we provide an overview of the Investor Stewardship Group (the “ISG”) Governance Principles and steps for public companies to consider when evaluating how the principles may be incorporated into their own disclosure and engagement priorities. The ISG’s website, including a link to the ISG Governance Principles, is available here. In January 2017, the Investor Stewardship Group (the “ISG”), a collective of large U.S.-based and international institutional investors and asset managers, announced the launch of its Framework for U.S. Stewardship and Governance (the “Framework”). The measure is an unprecedented attempt to establish a set of elementary corporate governance principles for U.S. listed companies (the “ISG Governance Principles”) as well as parallel stewardship principles for U.S. institutional investors. The Framework’s effective date was January 1, 2018, in order to provide U.S. listed companies with time to adjust to the corporate governance principles prior to the 2018 proxy season.


Rethinking Successor Criminal Liability, for the First Time

Mihailis Diamantis is Associate Professor of Law at the University of Iowa College of Law. This post is based on a recent article authored by Professor Diamantis, forthcoming in the Yale Journal on Regulation.

It’s axiomatic that the criminal justice system should punish corporations that commit crimes and not punish those that don’t. But when a criminal corporation reorganizes—whether by merging with others or spinning off lines of business—how can we tell which, if any, of the successors “committed” the predecessor’s crime? A lot turns on this question. Whether, how, and to what extent criminal liability flows through corporate reorganization affects how corporations treat past and future misconduct. Yet the answer—the doctrine of successor criminal liability—has been largely overlooked by legal scholars as a pressure point for tailoring corporate incentives. In an article forthcoming in the Yale Journal on Regulation, Successor Identity, I discuss the simplistic automaticity of successor criminal liability under current law. I propose that a better approach to successor liability would only punish successors who share compliance vulnerabilities with criminal predecessors.


Weekly Roundup: May 4-10, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of May 4-10, 2018.

The Business Case for Clawbacks

Integrated Alpha: The Future of ESG Investing

The Future of Merger Litigation in Federal Courts?

The Impact of DOL Guidance on ESG-Focused Plans

The Uncertain Role of IPOs in Future Securities Class Actions

Buying the Verdict

Beaches and Bitcoin: Remarks before the Medici Conference

Beaches and Bitcoin: Remarks before the Medici Conference

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the Medici Conference, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Vince [Molinari], for that kind introduction. I appreciate the opportunity to be here today. I must start with the standard disclaimer that my comments today reflect my own opinions and not necessarily those of the Commission or my fellow Commissioners.

Back in Washington, DC, there has been a lot of talk about regulatory sandboxes. A number of forward-looking regulators, both here and abroad, have created regulatory sandboxes. In the United Kingdom, for example, the Financial Conduct Authority operates a regulatory sandbox that “allows businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers.” [1] Abu Dhabi’s RegLab was launched in late 2016 to allow an innovator “to develop and test its FinTech proposition in a safe environment while not putting undue regulatory burden on the participant.” [2] The Monetary Authority of Singapore similarly is using a sandbox to “encourage[e] more FinTech experimentation so that promising innovations can be tested in the market and have a chance for wider adoption, in Singapore and abroad.” [3] Under Chairman Chris Giancarlo, our sister agency—the Commodity Futures Trading Commission—has launched Lab CFTC, which “is designed to be the hub for the agency’s engagement with the FinTech innovation community.” [4] And moving a bit closer to this coast, Arizona recently launched the first state-level regulatory sandbox for fintech with the objective of allowing people “to test innovative products, services, business models, and delivery mechanisms in the real market without incurring the regulatory costs and burdens that would otherwise be imposed.” [5]


Netflix Approach to Governance: Genuine Transparency with the Board

David F. Larcker is James Irvin Miller Professor of Accounting and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on their recent paper.

We recently published a paper on SSRN, Netflix Approach to Governance: Genuine Transparency with the Board, that explains the unique and innovative board practices of Netflix.

 The hallmark of good corporate governance is an independent-minded board of directors to oversee management and represent the interests of shareholders. Its primary responsibilities are to hire and replace the CEO as needed, monitor performance, review and approve strategy, and assess financial reporting and risk management. In a typical corporation, the vast majority of this work is carried out through board meetings and specialized board committees.


Materiality Matters: Targeting the ESG Issues that Impact Performance

Emily Steinbarth is a Quantitative Analyst and Scott Bennett is Director of Equity Strategy and Research at Russell Investments. This post is based on a Russell Investments publication by Ms. Steinbarth and Mr. Bennett Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

In our paper, Materiality Matters: Targeting the ESG issues that impact performance, we develop a new measure—the material environmental, social and governance (ESG) score. Drawing from the metrics developed by Sustainalytics and SASB (Sustainability Accounting Standards Board), our new material ESG score identifies and evaluates only those issues that are financially important to a company. The new material score allows us to differentiate between companies in a way that the traditional aggregated ESG score does not facilitate.

We can now distinguish between companies who score highly on ESG issues that are financially material to their business, from those who score highly on issues that are not financially material to their business. Our evidence suggests that the Russell Investments’ material ESG scores are better predictors of return compared to traditional ESG scores.


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