Monthly Archives: September 2018

Study of the German Corporate Governance Code Compliance

Posted by Christian Strenger (HHL Leipzig Graduate School of Management), on
Tuesday, September 18, 2018
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Christian Strenger is Academic Co-Director at the Center for Corporate Governance at HHL Leipzig Graduate School of Management; Johannes Beyenbach is a Research Associate at the Center for Corporate Governance at HHL Leipzig Graduate School of Management; Marc Steffen Rapp is Professor of Business Administration and head of the Management Accounting Research Group at Philipps-Universität Marburg; and Michael Wolff is a Professor at the University of Göttingen. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

Scope of the Study

The aim of the study is to analyze the compliance behavior of the largest listed German firms with the German Corporate Governance Code in 2017 (subsequently the “Code”). The Code was introduced in February 2002 and provides three types of provisions that encompass the German governance environment:

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SEC Ratification for Defective Administrative Proceedings

Posted by R. Daniel O’Connor, Daniel V. Ward and David Nasse, Ropes & Gray LLP, on
Tuesday, September 18, 2018
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R. Daniel O’Connor and Daniel V. Ward are partners and David Nasse is counsel at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

The Securities and Exchange Commission (“SEC” or “Commission”) has issued an order clearing the way for cases to proceed before its own administrative law judges (“ALJs”), notwithstanding a Supreme Court decision issued earlier this year that declared the SEC’s prior appointment of ALJs to be unconstitutional. Respondents in nearly 200 SEC proceedings with pending cases will now be granted the opportunity to have their case reheard by a different ALJ. Through the ratification order, the Commission has also attempted to comply with the Appointments Clause of the Constitution. Whether this post hac ratification passes constitutional muster, however, remains to be tested in the courts.

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Corporate Governance Oversight and Proxy Advisory Firms

Posted by Ike Brannon and Jared Whitley, Capital Policy Analytics, on
Monday, September 17, 2018
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Ike Brannon is the President of Capital Policy Analytics (CPA) and a Fellow at the Jack Kemp Foundation; and Jared Whitley is a senior communications consultant at CPA. This post is based on an article by Mr. Brannon and Mr. Whitley, recently published in Regulation magazine.

The Securities and Exchange Commission requires that investment management funds submit proxy votes for all companies in which they own shares. Because of the vast number of stocks held by the typical institutional investor, hedge fund, or mutual fund, most of these investors draw on the research of a proxy advisory firm, which provides them some guidance in their task and allows them to focus on managing their portfolio.

But while their clients want to maximize returns, the objectives of proxy advisory firms may not be completely aligned with theirs. The opacity with which these firms operate makes it difficult for investment management companies—and individual shareholders—to discern that alignment.

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Corporate Law Should Embrace Putting Workers On Boards: The Evidence Is Behind Them

Posted by Ewan McGaughey (King's College, London), on
Monday, September 17, 2018
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Ewan McGaughey is Senior Lecturer in Private Law at King’s College, London. This post is based on his recent article, forthcoming in the Seattle University Law Review.

When the Dean of Harvard Law, Robert Clark, wrote his classic text on Corporate Law in 1986, he said that if you only wanted to grasp the basics, “you must, at the very least, also gain a working knowledge of labor law.” That neglected truth might become much more significant soon, because a growing number of lawmakers are proposing federal rights for employee representation on corporate boards. The Accountable Capitalism Act, which is getting a lot of attention, would require 40% of boards in $1bn companies are employee-elected, and those companies would also get a federal charter. The Reward Work Act, which caught less attention, would require one third employee-elected boards in all listed companies.

On this forum, four posts have been sceptical about the merits of ending the shareholder monopoly on corporate governance. Summarizing a forthcoming article of mine called “Democracy in America at work: the history of labor’s vote in corporate governance“, this post sets out a positive case: (1) the evidence shows worker voice is embedded in American tradition and would expand economic prosperity, (2) worker voice now represents best corporate governance practice in the majority of OECD countries, and (3) there is no credible defense for “shareholder primacy”, because asset managers are voting on “other people’s money”: those people are usually employees saving for retirement.

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Limiting the Reach of the FCPA

Posted by Jonathan Kolodner, Lisa Vicens, and Jen Kennedy Park, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, September 17, 2018
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Jonathan Kolodner, Elizabeth Vicens, and Jen Kennedy Park are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Kolodner, Ms. Vicens, Ms. Kennedy Park, and Olivia Renensland.

On August 24, 2018, in a rare, 73-page decision interpreting the Foreign Corrupt Practices Act (“FCPA”), the Second Circuit in United States v. Hoskins largely rejected a Department of Justice (“DOJ”) interlocutory appeal and limited the FCPA’s reach, holding that foreign nationals who cannot be convicted as principals under the FCPA also cannot be held liable for conspiring to violate or aiding and abetting a violation of the statute. The decision, written by Judge Pooler (joined by Chief Judge Katzmann and Judge Lynch, who also wrote a concurring opinion), concluded that, due to affirmative legislative policy and extraterritoriality concerns, the FCPA’s application was limited to the three specific categories of individuals and entities identified in the statute, namely, U.S. issuers and U.S. “domestic concerns” (and their officers, employees, and agents, even if foreign), and anyone who engages in any act in furtherance of a corrupt payment while in U.S. territory. To the extent that Hoskins, a U.K. citizen working for a French company, did not fall within any of these three categories, the Court stated that he could not be charged as a co-conspirator of, or with aiding and abetting, someone who did.

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Streamlined SEC Disclosure Requirements

Posted by James J. Moloney, Elizabeth Ising and Hillary H. Holmes, Gibson, Dunn & Crutcher LLP, on
Sunday, September 16, 2018
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James J. Moloney Elizabeth Ising, and Hillary H. Holmes are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Moloney, Ms. Ising, Ms. Holmes, Michael Titera, Michael A. Mencher, and Maya J. Hoard.

This post provides an overview of changes to existing disclosure requirements recently adopted by the Securities and Exchange Commission (the “Commission”). On August 17, 2018, the Commission adopted several dozen amendments (available here) to existing disclosure requirements to “simplify compliance without significantly altering the total mix of information” (the “Final Rules”). In Release No. 33-10532, the Commission characterized the amended requirements as redundant, duplicative, overlapping, outdated or superseded, in light of subsequent changes to Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), International Financial Reporting Standards (“IFRS”) and technology developments. The Final Rules are largely consistent with the changes outlined in the Commission’s July 13, 2016 proposing release, available here (the “Proposed Rules”). They form part of the Commission’s ongoing efforts in connection with the Disclosure Effectiveness Initiative relating to Regulations S-K and S-X and the Commission’s mandate under the Fixing America’s Surface Transportation (“FAST”) Act to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary. The Commission adopted the amendments addressed in the Proposed Rules with few exceptions. The Final Rules will become effective 30 days from publication in the Federal Register. In the short term, issuers and registrants will need to revise their disclosure practices and compliance checklists in light of the amendments before filing a registration statement or periodic report following effectiveness of the Final Rules.

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Remarks to the SEC Investor Advisory Committee

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Saturday, September 15, 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 public statement, 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, Anne (Sheehan). Good morning everyone.

I want to welcome, or should I say welcome back, Commissioner Elad Roisman. This is Commissioner Roisman’s first Investor Advisory Committee meeting. Elad was confirmed just last week and he joins us as the 98th Commissioner of the SEC. We met many years ago when Elad first worked at the Commission and I am certain he will again make a lasting contribution to our work.

Turning to today’s [Sept. 14, 2018] business, I am delighted that the Committee will focus this morning on our proxy voting infrastructure. We recently announced that the staff will hold a roundtable on the proxy process later this fall. [1] It is clear to me that accuracy, transparency, and efficiency in the proxy system both instill—and are critical to—confidence in our shareholder governance processes. In 2010, the Commission issued a concept release that solicited feedback on the proxy system. [2] A lot has changed in our markets since then, and I commend you for taking the time this morning to discuss how the proxy voting infrastructure could be modernized and improved.

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Statement on Shareholder Voting

Posted by Robert J. Jackson, Jr., U.S. Securities and Exchange Commission, on
Saturday, September 15, 2018
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Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [September 14, 2018], the Office of the Chairman and the Division of Investment Management suddenly raised questions about long-resolved issues regarding shareholder voting. [1] Because the Investor Advisory Committee’s critical work in this area is ongoing, it’s important to clarify the path ahead for those interested in giving shareholders real access to the levers of corporate democracy.

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First, the law governing investor use of proxy advisors is no different today than it was yesterday. The Commission has long recognized that proxy advisors—the companies that develop recommendations regarding how investors should vote on corporate questions—serve an important role in the shareholder-voting process, and today’s statements do nothing to change that. [2]

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SEC No-Action Letters Related to Proxy Advisory Firms

Posted by Cydney Posner, Cooley LLP, on
Saturday, September 15, 2018
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

You may recall that, in July, SEC Chair Jay Clayton announced that the SEC will be holding a Roundtable to discuss the proxy process, currently expected to be held in November. (See this PubCo post.) Among the potential topics identified was the role of proxy advisory firms and the question of whether investment advisers and others rely excessively on proxy advisory firms for information aggregation and voting recommendations. In anticipation of that roundtable, the staff of the Division of Investment Management has today issued a statement announcing that, in light of subsequent developments, the staff has withdrawn two frequently disparaged no-action letters, Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004), which provided staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms.

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Would a Shift to Semiannual Reporting Really Affect Short-Termism?

Posted by Cydney Posner, Cooley LLP, on
Friday, September 14, 2018
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Stock Market Short-Termism’s Impact by Mark Roe (discussed on the Forum here).

You remember, of course, that last month, the president, on his way out of town for the weekend, tossed out to reporters the idea of eliminating quarterly reporting. (See this PubCo post.) The argument is that the change would not only help to deter “short-termism,” it would also save all public companies substantial time and money. But how meritorious is that idea? According to this article in the WSJ, if a change from quarterly reporting to semiannual reporting were actually implemented, smaller companies could experience significant cost savings, but large companies—not so much.

While it may be debatable whether a shift from quarterly to semiannual reporting would have any real effect on short-termism, there’s not much question, the article asserts, that it would save time and costs, at least for some companies. The article maintains, however, that

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