Monthly Archives: November 2018

CFO Pay Stagnancy

Hailey Robbers is a Senior Research Analyst at Equilar, Inc. This post is based on an Equilar memorandum by Ms. Robbers.

When it comes to executive compensation, the focus is often placed on the chief executive officer (CEO), yet the buck doesn’t necessarily need to stop there. For example, the means by which companies incentivize and reward their chief financial officer (CFO) is often overlooked. While not as high-profile as the CEO, companies must be cognizant that the CFO is an integral part of the business, and thus, must be compensated as such. As a way to attract and keep executive financial talent, companies are tasked with finding the right balance between the appropriate compensation for retention, while simultaneously not over-paying for a lackluster performance.

Over the past five years, CEOs in the Equilar 500 have seen their compensation steadily increase and pay mix trends change rather drastically. Options granted to CEOs have increasingly decreased in prevalence, while awards tied to performance have taken center stage, and rightly so. In contrast, CFO compensation trends have stayed relatively stagnant, with the most prominent increase in total compensation taking place this past fiscal year and changes in CFO pay mix contained to only a few sectors.


What the Tesla Settlement Means for Other Companies

Nicolas GrabarDavid Lopez, and Matthew C. Solomon are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Grabar, Mr. Lopez, and Mr. Solomon.

There have been plenty of press reports about the SEC’s settlement with Elon Musk arising from his tweeting about taking Tesla private. But the concurrent settlement with Tesla itself provides interesting lessons for disclosure and governance at public companies.

Tesla agreed to pay a $20 million penalty and agreed to several “undertakings” to strengthen its governance and controls including a requirement that it add two independent directors to its Board. And, under his own settlement, Musk agreed to step down for three years as chairman of the Board of Directors, although he is allowed to continue as CEO.


The 2018 U.S. Spencer Stuart Board Index

Julie Hembrock Daum is a Consultant, Laurel McCarthy is a Senior Associate, and Erin Van Gessel is a Board Practice Analyst at Spencer Stuart. This post is based on a Spencer Stuart memorandum by Ms. Hembrock Daum, Ms. McCarthy, Ms. Van Gessel, and Ann Yerger.

In response to a variety of pressures—including an increasingly complex business environment with an unprecedented pace of change and disruption; a growing number and variety of business risks; and intensifying investor focus on the composition, diversity and quality of the boardroom—S&P 500 boards are reshaping, slowly. The 2018 U.S. Spencer Stuart Board Index (SSBI), our 33rd annual analysis of boardroom trends, finds that boards are adding directors with new skills, qualifications and perspectives. But change remains gradual, due to persistent low boardroom turnover.


Private Equity Indices Based on Secondary Market Transactions

Michael S. Weisbach is Ralph W. Kurtz Chair in Finance at The Ohio State University Fisher College of Business, and Research Associate at the National Bureau of Economic Research. This post is based on a recent paper by Professor Weisbash; Brian Boyer, Associate Professor at the Brigham Young University Marriott School of Management; Taylor Nadauld, Associate Professor at the Brigham Young University Marriott School of Management; and Keith VorkinkAssociate Dean and Driggs Professor of Finance at the Brigham Young University Marriott School of Management.

In recent decades, private equity has become an important asset class for institutional investors. A 2017 survey of institutional investors finds that 88% are invested in private equity, with nearly a third having an allocation greater than 10%. A typical private equity investment begins with capital commitments at the fund’s creation and ends with the final distribution, which is often 12 to 15 years after the initial capital commitment. The return on the fund is determined by the returns on the individual portfolio companies in which the fund invests, and is therefore only fully observable following the fund’s final distribution. The underlying value of these portfolio companies fluctuates with firm-specific and economy-wide news in a manner similar to that of public equities, but these fluctuations are usually not fully reflected in the valuations that funds report to their investors. Moreover, since returns are measured at such irregular, infrequent intervals, it can be quite challenging to estimate standard performance parameters such as factor alphas and betas.


Lessons from the CBS-NAI Dispute, Part V: “Independent” Directors at Controlled Corporations

Victor Lewkow, Christopher E. Austin, and Paul M. Tiger are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lewkow, Mr. Austin, Mr. Tiger, and Max A. Wade, 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Stock exchange rules and state corporate law often rely on the “independence” of a company’s board of directors as a mechanism for policing potential conflicts of interest that might arise between and among the company’s various constituencies. While stock exchange rules tend to focus on the ongoing independence of directors from management to prevent management from behaving opportunistically at the expense of stockholders, state corporate law also focuses on the independence of directors from a particular stockholder in the context of a transaction with that stockholder and from other directors in the context of derivative actions against such other directors.


The SEC’s New Shareholder Proposal Guidance

Brian BrehenyMarc Gerber, and Richard Grossman are partners at Skadden, Arps, Slate, Meagher & Flom LLP.  This post is based on a Skadden memorandum by Mr. Breheny, Mr. Gerber, Mr. Grossman, and Hagen J. Ganem.

On October 23, 2018, the Division of Corporation Finance (Staff) of the U.S. Securities and Exchange Commission (SEC) published Staff Legal Bulletin No. 14J (SLB 14J), which provides important guidance concerning shareholder proposals. Specifically, SLB 14J addresses:

  • board analyses that may be provided in the context of certain “ordinary business” or “relevance” no-action requests;
  • the “micromanagement” prong of the “ordinary business” exclusion; and
  • application of the “ordinary business” exclusion to certain proposals addressing senior executive or director compensation.

Board Analyses

At this time last year, the Staff published Staff Legal Bulletin No. 14I (SLB 14I), which invited companies to assist the Staff by including in no-action requests a discussion of the board’s analysis of whether a proposal is “otherwise significantly related” to a company’s business, in the case of a “relevance” no-action request under Rule 14a-8(i)(5), or focuses on sufficiently significant policy issues with a nexus to the company’s business operations, in the case of an “ordinary business” no-action request under Rule 14a-8(i)(7). As described in our July 2018 post, although a number of companies attempted to utilize this guidance by including some discussion of the board’s analysis in their no-action requests, virtually all of these attempts were unsuccessful. In the course of the post-proxy season engagement between the Staff and various shareholder proposal constituencies, many questioned whether the potential benefits of including a board analysis in a no-action request were illusory.


Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale University and Joshua Mitts is Associate Professor of Law at Columbia Law School. This post is based on a recent paper by Professor Macey and Professor Mitts. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Appraisal proceedings drag financial economics from the classroom into the courtroom. In Delaware, by statute, shareholders are “entitled to an appraisal by the Court of Chancery of the fair value” of their shares. Del. Code. Ann. tit. 8, § 262 (a) (2018). In that proceeding, courts are required to take into account “all relevant factors.” Id. § 262 (h) (2018); Golden Telecom, Inc. v. Glob. GT LP, 11 A.3d 214 (Del. 2010). By law, courts will look at “accepted financial principles relevant to determining the value of corporations and their stock” when engaged in the exercise of determining fair value. DFC Glob. Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346, 349 (Del. 2017). Under this standard, sometimes a single market valuation metric such as the deal price or the pre-bid market price will provide the most reliable evidence of fair value. In such cases, “giving weight to another factor will do nothing but distort that best estimate. In other cases, ‘it may be necessary to consider two or more factors.’” Blueblade Capital Opportunities LLC v. Norcraft Companies, Inc., 2018 WL 3602940, at *2 (Del. Ch. July 27, 2018).


Investment Bank Liability for M&A Services

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.


To err is human but there is often no divine or other forgiveness for investment banks in Delaware litigation when their misconduct rises to the level of aiding and abetting the board’s breach of fiduciary duty to its shareholders. In this article, we consider recent Delaware case law on investment banker liability that has resulted in judgments against bankers and has caused them to make contributions to shareholders when some of these matters settle even when they deny liability.

Delaware has ruled that investment banks are not in privity with the shareholders, their obligations being limited solely to those who engage them. In the 1990 Shoe-Town decision, the Court of Chancery ruled that the investment bank hired by management “owed no fiduciary duty to the shareholders.” [1] The Court distinguished this case from the Wells decision in New York (which had ruled that the investment banks liable to shareholders) “because the investment advisor in that case was hired by a special committee charged solely with determining the fairness of the transaction for the shareholders.” [2] In 1996, the Delaware Superior Court ruled similarly in Stuchen v. Duty Free Int’l, Inc. [1996 WL 33167249 (Del. Super. Apr. 22, 1996) at *12.]


The Limits of Mutual Fund Obligation to Shareholders

Robert Skinner and Amy Roy are partners at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

In a victory for the mutual fund industry, a federal district court in New York rejected the attempt of fund shareholders to assert a breach of contract claim against the fund for a purported violation of an investment policy contained in part of the fund’s prospectus. In doing so, Judge George B. Daniels of the U.S. District Court for the Southern District of New York in Edwards v. Sequoia Fund, Inc. [1] declined to follow the Ninth Circuit’s 2015 decision in Northstar Financial Advisors, Inc. v. Schwab Investments, [2] holding that the terms of the concentration policy contained in Sequoia Fund, Inc.’s Statement of Additional Information (“SAI”) cannot form the basis of a contractual obligation to the Fund’s shareholders. Judge Daniels further ruled that even if shareholders could assert a breach of contract claim, the plaintiffs failed to allege a violation of the Fund’s concentration policy. The court held that a fund does not act contrary to SEC guidance by concentrating in a particular industry where the investments exceed the 25% concentration threshold merely as the result of a passive increase in the share value of fund holdings, as opposed to the acquisition of additional shares.


Decoding Quant ESG

Mike Chen is Portfolio Manager, George Mussalli is Chief Investment Officer and Head of Equity Research, and Yosef Zweibach is Head of Business Strategy & Investor Relations at PanAgora Asset Management, Inc. This post is based on a PanAgora memorandum by Mr. Chen, Mr. Mussalli, and Mr. Zweibach. 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) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Interest in ESG investing has exploded in recent years. However, despite increased demand for this type of strategy, asset owners still have many questions regarding ESG and best practices for constructing optimal investment portfolios. These questions include: What exactly is ESG investing? Do I sacrifice alpha if I invest in ESG portfolios? How does quant ESG work and what are the advantages to a quant approach? In this post, PanAgora seeks to answer many of these commonly asked questions. Our main conclusions are as follows:

  • Originally viewed by the investment industry as incompatible with alpha generation, evidence shows that ESG considerations can actually enhance both a portfolio’s economic performance and its ESG profile.
  • ESG considerations capture many of the return and risk drivers not captured through traditional financial metrics, and are relevant for the valuation of today’s corporations.
  • The quantitative investment approach is well-suited to take advantage of the large and growing collection of datasets. Investors would be well served to utilize quantitative methods to evaluate companies’ ESG footprints, as well as for portfolio construction and output measurement.
  • All asset owners should consider ESG portfolios in their investment allocation, whether via integration into their larger portfolio or via the impact approach.


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