Monthly Archives: November 2018

Statement of Record for SEC Roundtable on the Proxy Process

Katherine Rabin is CEO of Glass, Lewis & Co. This post is based on Ms. Rabin’s letter to U.S. Securities and Exchange Commission Chairman Jay Clayton in advance of the SEC’s Proxy Process Roundtable.

Glass Lewis appreciates the opportunity to submit this statement for the record as part of the SEC Roundtable on the Proxy Process, scheduled to be held on November 15, 2018 (“Roundtable”).

Founded in 2003, Glass Lewis is a leading, independent governance services firm that provides proxy research and vote management services to more than 1,300 institutional investor clients throughout the world. While, for the most part, investor clients use Glass Lewis research to help them make proxy voting decisions, these institutions also use Glass Lewis research when engaging with companies before and after shareholder meetings. Further, through Glass Lewis’ Web-based vote management system, Viewpoint®, Glass Lewis provides investor clients with the means to receive, reconcile and vote ballots according to custom voting guidelines and record-keep, audit, report and disclose their proxy votes. From its offices in North America (San Francisco, New York and Kansas City), Europe (Limerick, London, and Karlsruhe) and Australia (Sydney), Glass Lewis’ 360+ employees provide research and voting services to institutional investors globally that collectively manage more than US $35 trillion.


The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers

Steven Davidoff Solomon is Professor of Law at UC Berkeley School of Law. This post is based on a recent paper authored by Professor Davidoff Solomon; Robert P. Bartlett, Professor of Law at UC Berkeley School of Law and Faculty Co-Director of the Berkeley Center for Law and Business; Matthew D. Cain, Visiting Research Fellow at the Harvard Law School Program on Corporate Governance; and Jill Fisch, Saul A. Fox Distinguished Professor of Business Law and Co-Director, Institute for Law and Economics at the University of Pennsylvania Law School.

In The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers, we examine the effect of the Supreme Court’s decision in Morrison v. National Australia Bank. Morrison has been described as a “steamroller,” substantially paring back the ability of private litigants to sue foreign companies for securities fraud. In Morrison, the Supreme Court held that Section 10(b), the general antifraud provision of the Securities Act of 1934, does not apply extraterritorially in a private cause of action brought under Rule 10b-5. Rather, the Court stated that “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Morrison is widely understood as reducing the litigation risk for foreign issuers, and the decision has been characterized as potentially “encourage[ing] non-U.S. issuers to continue to list their shares on U.S. exchanges and strengthen U.S. capital markets.”


What Happened at the SEC’s Proxy Process Roundtable?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

At last week’s proxy process roundtable, three panels, each moderated by SEC staff, addressed three topics:

  • proxy voting mechanics and technology—how can the accuracy, transparency and efficiency of the proxy voting and solicitation system be improved?
  • shareholder proposals—exploring effective shareholder engagement, experience with the shareholder proposal process, and related rules and SEC guidance
  • proxy advisory firms—can the role of proxy advisors and their relationship to companies and institutional investors be improved?

The first panel, on proxy plumbing, was characterized by the panelist who began the discussion as “the most boring, least partisan and, honestly, the most important” of the three topics. (But it was surprisingly not boring.) The last panel, on proxy advisory firms, was characterized by Commissioner Roisman as the “most anticipated,” but the expected fireworks were notably absent—except, perhaps, for the novel take on the subject offered by former Senator Phil Gramm. Here are the Commissioners’ opening statements: Chair Clayton, Stein and Roisman.


Today’s Independent Board Leadership Landscape

Steve W. Klemash is America’s Leader, Jamie C. Smith is Associate Director, and Kellie C. Huennekens is Associate Director, all at EY Center for Board Matters. This post is based on their EY memorandum.

Board leadership structures have evolved dramatically over the past 20 years. Today, 92% of S&P 1500 companies have independent board leadership, up from just 10% in 2000. This change corresponds to a rise in independent directors, as well as the continuing separation of chair and CEO roles.

Today, 60% of S&P 1500 companies have separate individuals serving as chair and CEO, more than doubling the 27% that separated the roles in 2000. But while the shift towards independent board leadership is clear, the form that leadership takes, and the responsibilities assigned to those leaders, differ among companies.

We reviewed S&P 1500 companies and found that, among the various independent leadership structures, independent board chairs have been experiencing the fastest increase since 2000. We also found marked differences between the levels of authority commonly assigned to the different independent leadership roles, as well as emerging disclosure and engagement trends that raise the profile and highlight the strength of independent board leaders.


Are CEOs Paid Extra for Riskier Pay Packages?

Ana Albuquerque is Associate Professor of Accounting at Boston University Questrom School of Business. This post is based on a recent paper authored by Professor Albuquerque; Rui Albuquerque, Associate Professor of Finance at the Boston College Carroll School of Management; Mary Ellen Carter, Associate Professor at the Boston College Carroll School of Management; and Flora Dong, Assistant Professor at Pennsylvania State University. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here) and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

In a recent paper, my co-authors and I provide empirical evidence that CEO compensation does not fully reflect riskiness in pay packages. Our evidence derives from an examination of the fundamental prediction in the static moral hazard model of Grossman and Hart (1983) that the mean pay and the volatility of pay are positively associated through the participation constraint. Firms providing incentive pay as a way to reduce principal-agent conflicts need to compensate the CEO for the additional risk borne by the CEO through incentive pay. This paper is the first to provide a test of this fundamental hypothesis using U.S. data, providing us an advantage over other cross-country studies as we can hold constant the institutional characteristics of the contracting environment.


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

Craig A. Newman is a partner and Maren J. Messing is an associate at Patterson Belknap Webb & Tyler LLP. This post is based on a Patterson Belknap memorandum by Mr. Newman and Ms. Messing.

[On October 24, 2018], Cathay Pacific Airlines Ltd., the Hong Kong-based international airline, disclosed that a hacker had broken into its computer system and accessed personal information for as many as 9.4 million travelers, representing the world’s largest reported airline data breach to date. Following the announcement, the airline’s shares sank the lowest that they’ve been in almost 9 years—tumbling nearly 7% and losing more than $200 million of in market value.

There is nothing extraordinary about Cathay Pacific’s stock drop—data breaches have often been accompanied by a hit to the company’s stock price. Yet, what happens next is the more consequential question: is a company’s stock price affected by a data security incident over a longer period of time?


The Standard of Review for Dell’s IPO

Jeffrey L. Kochian and Stuart E. Leblang are partners and Jason Sison is an associate at Akin Gump Strauss Hauer & Feld LLP. This post is based on their Akin Gump memorandum. Related research from the Program on Corporate Governance includes The Perils of Dell’s Low-Voting Stock, by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Dell Technologies Inc. (Dell) has been planning to eliminate its tracking stock (Class V common; NYSE: DVMT) through a merger with a wholly-owned subsidiary that effectively converts the outstanding DVMT shares into a new class of publicly traded Dell common stock. Each DVMT share (which collectively track about half of VMware Inc. [1]) will be cancelled and converted into the right to receive, at the election of the holder, either: (1) 1.3665 shares of Dell Class C common stock, which will be listed on the New York Stock Exchange, or (2) $109 in cash, without interest (subject to a $9 billion cap) (the DVMT Exchange). [2]

However, many tracking stock holders have been reluctant to support the DVMT Exchange. [3] On October 15, activist shareholder Carl Icahn released an open letter to DVMT shareholders disclosing that he had increased his stake from 1.2 percent (as of June 30) to 8.3 percent and that he will do everything in his power “to stop this proposed DVMT merger” including, possibly, offering “a competing partial bid that provides partial liquidity without forcing a merger.” [4]


Women in the Boardroom and Cultural Beliefs about Gender Roles

David McLean is Associate Professor of Finance and Anderson Faculty Fellow at the McDonough School of Business at Georgetown University; Christo A. Pirinsky is an Associate Professor at the Department of Finance of the UCF College of Business; and Mengxin Zhao is a Financial Economist at the U.S. Securities and Exchange Commission. This post is based on their recent paper.

In our study, we ask whether cultural beliefs about gender roles can help explain variation in the representation (or lack thereof) of women in corporate leadership roles. Female corporate leadership varies a good deal across firms, both internationally, and in the U.S. As examples, during the period 2000-2016, in an international sample of 42 countries, on average 9.2% of corporate board members are female (excluding country-years that require female board membership), while the 25th and 75th percentiles are 0% and 17%. Similar effects exist within the U.S, where on average 10.2% of corporate board members are female, and the 25th and 75th percentiles are 0% and 16.7%. In this paper, we ask whether some of this variation can be explained by regional differences in cultural beliefs towards the role of women in society.

We measure cultural beliefs about gender roles using two country-level surveys conducted by the University of Michigan (The World Values Survey) and Hofstede (1980). We create a comprehensive country-level gender-egalitarian index that is based on the standardized values of the two surveys, and test whether it explains variation in female corporate leadership.


Implementing Internal Controls in Cyberspace—Old Wine, New Skins

Keith Higgins is chair of the securities and governance practice and Marvin Tagaban is an associate at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

On October 16, 2018, the SEC issued a Section 21(a) investigative report (the “Report”), [1] cautioning public companies to consider cyber threats when designing and implementing internal accounting controls. The Report arose out of an investigation focused on the internal accounting controls of nine public companies that were victims of “business email compromises” in which perpetrators posed as company executives or vendors and used emails to dupe company personnel into sending large sums to bank accounts controlled by the perpetrators. In the investigation, the SEC considered whether the companies had complied with the internal accounting controls provisions of the federal securities laws. Although the Report is in lieu of an enforcement action against any of the issuers, the SEC issued the Report to draw attention to the prevalence of these cyber-related scams and as a reminder that all public companies should consider cyber-related threats when devising and maintaining a system of internal accounting controls.


A Brief Survey of Environmental, Social, and Governance Disclosure in Canada

Ravipal S. Bains is an associate at McMillan LLP. This post is based on a McMillan memorandum by Mr. Bains. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

  • Regulators, investors, and other stakeholders have increased their expectations of board oversight and disclosure on environmental, social and governance (ESG) matters.
  • Quality of ESG disclosure will be a factor in recommendations by proxy advisory firms.
  • Enhancing ESG disclosure (particularly, climate-related risks) should be a management priority.

As 2018 draws to a close, certain recent developments, including new policy prescriptions from regulators, guidance from stakeholders, and adoption of environmental accounting frameworks, call for a review of the landscape of environmental, social, and governance (ESG) disclosure in Canada. Management and boards should also tailor future efforts to address these developments and this post offers certain suggestions to do so.


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