Yearly Archives: 2018

2019 Americas Proxy Voting Guidelines Update

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Wednesday, November 28, 2018
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Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an Institutional Shareholder Services publication by Georgina Marshall, Global Head of Research & Policy at Institutional Shareholder Services.

UNITED STATES

Board of Directors—Voting on Director Nominees in Uncontested Elections

Board Composition—Diversity

Rationale for Change:

1) Investors favor gender diverse boards.

During the 2017 and 2018 proxy seasons, investors increasingly targeted companies with little or no female representation on their boards, citing reasons of equality, good corporate governance, and enhanced long-term company performance. [1] Increased investor engagement on the topic appears to have prompted many boards to add one or more women directors to their ranks over the past two years. When boards fail to respond to such engagement, a number of large investors have cast votes against directors.

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Submission for SEC Proxy Process Roundtable

Posted by Nick Dawson, Proxy Insight, on
Wednesday, November 28, 2018
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Nick Dawson is Managing Director & Co-Founder of Proxy Insight. This post is based on a Proxy Insight letter sent in advance of the SEC’s Proxy Process Roundtable.

Proxy Insight appreciates the opportunity to provide comments on issues related to the Securities and Exchange Commission’s staff Roundtable on “Proxy Process” to be held on November 15, 2018. Proxy Insight’s views are those of an independent data provider tracking the voting records and policies of over 1,700 global investors.

Based on our extensive engagement with market participants and thorough analysis of the data, we believe that much of the criticism of Proxy Voting Advisors (PVAs) is unwarranted. Most importantly, our data demonstrates that investors are clearly making voting decisions themselves rather than simply delegating to PVA house positions.

It should be stressed that Proxy Insight is not, has never been and does not intend to become a PVA, so can provide a completely objective viewpoint. Indeed, a number of our clients have suggested that we are uniquely placed to contribute to this debate without any real or perceived bias.

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Senate Bill on Proxy Advisors

Posted by Nichol Garzon, Glass, Lewis & Co., on
Tuesday, November 27, 2018
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Nichol Garzon is Senior Vice President and General Counsel at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Garzon.

Just as the SEC convenes a Staff Roundtable to look at the proxy process as a whole, including the possible regulation of the proxy advisory industry, on November 14 six U.S. Senators introduced a bill that would amend the Investment Advisers Act of 1940 to require proxy advisory firms to register as investment advisers. The bill is a continuation of the legislative process that began with U.S. Senate Banking Committee inquiries and hearings held over the summer.

It’s the first time that Senators have introduced a bill addressing proxy advisory firms. Compared to existing legislation in the House, the Senate bill takes a narrower approach, and excludes some of the more controversial aspects of HR 5311 and HR 4015. Rather than creating a new regulatory framework tailored specifically to the proxy advisory industry, the bill seeks to fold proxy advisors, broadly defined to include firms providing ratings along with actual voting recommendations, into existing regulations and disclosure requirements aimed at investment advisers.

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The Double-Edged Sword of CEO Activism

Posted by Brian Tayan (Stanford University), on
Tuesday, November 27, 2018
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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.”

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Comment Letter: Fiduciary Duty Guidance for Proxy Voting Reform

Posted by Keith L. Johnson, Reinhart Boerner Van Deuren s.c.; Susan Gary, University of Oregon; and Cynthia Williams, York University, on
Tuesday, November 27, 2018
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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.

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

Posted by Matteo Tonello, The Conference Board, Inc., on
Monday, November 26, 2018
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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.

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Do Private Equity Funds Manipulate Reported Returns?

Posted by Gregory W. Brown (University of North Carolina), Oleg Gredil (Tulane University), and Steven N. Kaplan (University of Chicago), on
Monday, November 26, 2018
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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.

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

Posted by Gail Weinstein, Steven Epstein, and Matthew V. Soran, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Monday, November 26, 2018
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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. Schwenkel, David 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.

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The Role of the Lead Independent Director

Posted by Marion Plouhinec, Legal & General Investment Management Ltd., on
Sunday, November 25, 2018
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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.

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

Posted by Robin Bergen, Matthew Solomon, and Alexis Collins, Cleary Gottlieb Steen & Hamilton LLP, on
Saturday, November 24, 2018
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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.

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