Monthly Archives: November 2018

The Double-Edged Sword of CEO Activism

Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan; David Larcker, Director of the Corporate Governance Research Initiative at the Stanford Graduate School of Business and senior faculty member at the Rock Center for Corporate Governance at Stanford University; Stephen Miles, Founder and Chief Executive Officer of the The Miles Group, LLC; and Kim Wright-Violich, Managing Partner at Tideline.

We recently published a paper on SSRN, The Double-Edged Sword of CEO Activism, that examines CEO activism among publicly traded companies.

CEO activism—the practice of CEOs taking public positions on environmental, social, and political issues not directly related to their business—has become a hotly debated topic in corporate governance. According to the New York Times, “Chief executives across the business world are increasingly wading into political issues that were once considered off limit.” The article cites gun control and climate change as examples of advocacy positions taken by CEOs in recent years, and references a study by Edelman as evidence that this trend is viewed positively by the public. According to that study, 64 percent of global consumers believe that CEOs “should take the lead on change rather than waiting for government to impose it,” and 56 percent say they have “no respect for CEOs that remain silent on important issues.” A separate survey by Weber Shandwick and KRC Research arrives at a similar conclusion, finding that “more Americans are aware of CEO activism, view it favorably, and see its potential to influence public policy.”


Comment Letter: Fiduciary Duty Guidance for Proxy Voting Reform

Keith Johnson heads the Institutional Investor Services Group at Reinhart Boerner Van Deuren s.c.; Susan N. Gary is an Orlando J. and Marian H. Hollis Professor of Law at the University of Oregon; and Cynthia Williams holds the Osler Chair in Business Law at Osgoode Hall Law School, York University. This post is based on their Comment Letter in advance of the SEC’s Proxy Process Roundtable.

Investor proxy voting practices have entered the public spotlight in 2018 as Congress and the Securities and Exchange Commission (“SEC”) consider changes to the rules which govern proxy voting. However, an accurate recognition of the investor fiduciary duties which provide the legal context for exercise of proxy voting rights has been largely missing from the debate.

We believe that any reform discussions should be anchored on an up-to-date understanding of how fiduciary principles fit the 21st century. This includes a balanced application of the fiduciary duties of (a) prudence (including the obligation to investigate and verify material facts), (b) loyalty to beneficiaries (with its obligation to treat different beneficiary groups impartially), and (c) reasonable management of costs. These are legal duties which establish expectations for proxy voting processes at asset owners, investment managers and proxy advisors.


Shareholder Voting in the United States: Trends and Statistics on the 2015-2018 Proxy Season

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to Proxy Voting Analytics (2015-2018), a Conference Board report authored by Dr. Tonello and developed in partnership Rutgers Center for Corporate Law and Governance and in collaboration with FactSet and IRGS Analytics.

A study by The Conference Board and Rutgers Center for Corporate Law and Governance (Rutgers CCLG) finds that voting support on proposals regarding companies’ sustainability practices has been steadily rising over the last few years, even though such proposals are still rarely approved. The main impetus comes from issues that have taken center stage in recent proxy seasons, such as the disclosure of corporate political contributions and lobbying activities, investigating the impact of climate change on the business, and the efforts to fill existing gender pay gaps.


Do Private Equity Funds Manipulate Reported Returns?

Gregory W. Brown is Professor of Finance at University of North Carolina Kenan-Flagler Business School; Oleg Gredil is Assistant Professor at the Tulane University A. B. Freeman School of Business; and Steven N. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

In our article, Do Private Equity Funds Manipulate Reported Returns? we examine the evidence on performance manipulation by buyout and venture funds. Our study is motivated by the potential incentive for general partners (GPs) of a fund to exaggerate performance to attract limited partners (LPs) to a follow-on fund. We consider if there is evidence consistent with funds manipulating their self-reported net asset values (NAVs) around the time commitments are raised for a next fund. We utilize data provided by Burgiss that includes cash flows and NAV reports for a sample of 2,071 buyout and venture funds. These data are sourced (and cross-verified) from over 200 institutional investors that represent approximately $750 billion in committed capital to private equity. We supplement these data with an independent database of private equity firms provided by StepStone. The StepStone database contains a nearly exhaustive record of institutional private equity fundraising between 1971 and 2016. This combination of data sources allows us to examine the relation between private equity (PE) performance reporting and fundraising success with a high degree of confidence in the data.


A Series of Avoidable Missteps: Fiduciary Breaches in Connection with the Sale of a Company

Gail Weinstein is senior counsel and Steven Epstein and Matthew V. Soran are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Soran, Robert C. SchwenkelDavid L. Shaw, and Andrew J. Colosimo. This post 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 Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Avago Technologies Wireless (USA) Manufacturing Inc. acquired PLX Technologies, Inc. for $6.50 per share in cash. After the $300 million merger closed, certain former PLX stockholders sued for damages, alleging that the PLX directors had breached their fiduciary breaches, aided and abetted by both Potomac Capital Partners II, L.P. (a hedge fund that is an activist stockholder and had three designees on the PLX board) and the PLX board’s financial advisor (the “Banker”). Before trial, the claims against the Banker were settled and those against the directors were dismissed or settled; the trial thus proceeded only against Potomac.

In the post-trial decision, In re PLX Technology Inc. Stockholders Litigation (Oct. 16, 2018), the Delaware Court of Chancery held that Potomac had aided and abetted a breach of fiduciary duties by the PLX directors that was predicated on the board having succumbed to Potomac’s pressure to effect a quick sale of PLX. (The court suggested in dicta that the Banker likely also had aided and abetted the breach.) Further, however, the court held that the plaintiffs did not prove that damages had flowed from the breach; thus, judgment was entered in favor of Potomac.


The Role of the Lead Independent Director

Marion Plouhinec is Corporate Governance Analyst at Legal & General Investment Management Ltd. This post is based on her LGIM memorandum.

Often referred to as “Lead Independent Director” (LID), “senior independent director” or sometimes “independent deputy chair”, the LID plays an essential and indispensable role on the board. Legal & General Investment Management (LGIM) expects all companies to appoint a LID, whether or not such a role is incorporated within national corporate governance codes.

Where the board chair is not independent, including when the role is combined with that of the Chief Executive Officer (CEO), a LID’s presence on the board is vital to ensure there is an independent counter-balance to the chair.


Retail, Remedies, Resources and Results: Observations From the SEC Enforcement Division 2018 Annual Report

Robin Bergen and Matthew Solomon are partners and Alexis Collins is a senior attorney at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Ms. Bergen, Mr. Solomon, Ms. Collins, Anne Titus Hilby, and Adam Motiwala.

On November 2, the SEC’s Enforcement Division released its annual report detailing the facts and figures of its enforcement efforts in fiscal year 2018. At first blush, this year’s report looks strikingly similar to those from recent years, as the headline numbers in most categories are nearly indistinguishable from 2015, 2016, and 2017. This consistency may be surprising given that 2018 is the first such report reflecting exclusively the enforcement priorities of the Commission since it was reconstituted under Chair Jay Clayton.

But a closer examination of the report, including the components feeding into the top-line facts and figures and commentary by Division co-directors Stephanie Avakian and Steven Peikin, reveals a clear shift in priorities by the Division. These range from a philosophical shift in its mission to the reallocation of resources during a hiring freeze. We address here the most notable of these subtle but important changes.


The Effects of CEO Ownership on Total Shareholder Return

Jessica Phan is a Senior Research Analyst at Equilar, Inc. This post is based on an Equilar memorandum by Ms. Phan. 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), and The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

As Amazon and Apple hit the $1 trillion valuation mark, there has been some speculation as to which company will be next. Despite reaching a market cap of $1 trillion, Apple and Amazon are very different in terms of CEO ownership stakes. Apple’s Tim Cook owns less than 1% of Apple stock, whereas Jeffrey Bezos of Amazon has 16.3% ownership stake.

The amount of ownership stake a CEO has can possibly provide insight into specific goals and directions that a company is heading. For example, different ownership stakes for the CEO may alter the compensation make-up. A CEO with lower ownership percentage may have compensation hinge more on non-stock-related performance metrics, while those with higher ownership may have compensation more tied to total shareholder return (TSR) and stock price. Among notable companies in the running to hit the $1 trillion valuation mark include Exxon Mobile Corporation, Microsoft, Alphabet and Facebook. Of the multiple companies approaching $1 trillion in valuation, only a couple of CEOs have more than 1% ownership.


Weekly Roundup: November 16-22

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 16–22, 2018.

The Proxy Process Roundtable

The Perils of Dell’s Low-Voting Stock

Drafting Considerations from the MAC Decision

Implementing Internal Controls in Cyberspace—Old Wine, New Skins

Women in the Boardroom and Cultural Beliefs about Gender Roles

The Standard of Review for Dell’s IPO

Bull or Bear? How the Market Reacts to Data Breach News

Today’s Independent Board Leadership Landscape

“Reasonable Efforts” Clauses in Delaware: One Size Fits All, Unless…

“Reasonable Efforts” Clauses in Delaware: One Size Fits All, Unless…

Peter Atkins and Edward Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum 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 M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV.

Akorn Found

In Vice Chancellor J. Travis Laster’s recent opinion in Akorn, Inc. v. Fresenius Kabi AG[1] he discusses (on pages 212-216) the general subject of “efforts” clauses in contracts governed by Delaware law. The court’s discussion appears to conclude that, for Delaware contract law purposes, at least among “efforts” clauses that expressly incorporate a “reasonableness” component, one size fits all. That is, the commitment in all cases is “to take all reasonable steps” to address the specified obligation—and word variations among a set of “efforts” clauses do not count. [2]

Below, we (a) review the general subject of “efforts” clauses (including the principal variations) and the approach taken in Delaware, (b) consider the meaning of Delaware’s “all reasonable steps” standard (referred to in this memo as the “all reasonable efforts standard”), (c) consider whether that standard is satisfactory as the default standard (that is, if used without any contractual elaboration or modification of the “reasonable efforts” clause) and (d) discuss potential drafting approaches to improving alignment of the contracting parties’ “reasonable efforts” commitments with their intent and risk concerns.


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