Yearly Archives: 2018

The Effects of CEO Ownership on Total Shareholder Return

Posted by Jessica Phan, Equilar, Inc., on
Friday, November 23, 2018
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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.

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Weekly Roundup: November 16-22

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, November 23, 2018

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

The Proxy Process Roundtable

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on Friday, November 16, 2018
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The Perils of Dell’s Low-Voting Stock

Posted by Lucian A. Bebchuk (Harvard Law School) and Kobi Kastiel (Tel Aviv University), on Friday, November 16, 2018
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MFW’s “Ab Initio” Requirements for Business Judgement Rule Review

Posted by Joshua Apfelroth, Jason Halper, and William Mills, Cadwalader, Wickersham & Taft LLP, on Saturday, November 17, 2018
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Reforming the Community Reinvestment Act Regulatory Framework

Posted by Gregory W. Meeks, U.S. House of Representatives, on Saturday, November 17, 2018
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Drafting Considerations from the MAC Decision

Posted by Gail Weinstein, Steven Epstein, Matthew V. Soran, and Fried, Frank, Harris, Shriver & Jacobson LLP, on Sunday, November 18, 2018
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A Brief Survey of Environmental, Social, and Governance Disclosure in Canada

Posted by Ravipal S. Bains, McMillan LLP, on Sunday, November 18, 2018
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Implementing Internal Controls in Cyberspace—Old Wine, New Skins

Posted by Keith Higgins and Marvin Tagaban, Ropes & Gray LLP, on Monday, November 19, 2018
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Women in the Boardroom and Cultural Beliefs about Gender Roles

Posted by R. David McLean (Georgetown University), Christo A. Pirinsky (University of Central Florida), and Mengxin Zhao (U.S. Securities and Exchange Commission), on Monday, November 19, 2018
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The Standard of Review for Dell’s IPO

Posted by Jeffrey L. Kochian, Stuart E. Leblang, and Jason Sison, Akin Gump Strauss Hauer & Feld LLP, on Monday, November 19, 2018
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Bull or Bear? How the Market Reacts to Data Breach News

Posted by Craig A. Newman and Maren J. Messing, Patterson Belknap Webb & Tyler LLP, on Tuesday, November 20, 2018
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Are CEOs Paid Extra for Riskier Pay Packages?

Posted by Ana M. Albuquerque (Boston University), on Tuesday, November 20, 2018
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Today’s Independent Board Leadership Landscape

Posted by Steve W. Klemash, Jamie C. Smith, and Kellie C. Huennekens, EY Center for Board Matters, on Tuesday, November 20, 2018
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What Happened at the SEC’s Proxy Process Roundtable?

Posted by Cydney Posner, Cooley LLP, on Wednesday, November 21, 2018
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The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers

Posted by Steven Davidoff Solomon (UC Berkeley School of Law), on Wednesday, November 21, 2018
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Statement of Record for SEC Roundtable on the Proxy Process

Posted by Katherine Rabin, Glass, Lewis & Co., on Wednesday, November 21, 2018
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“Reasonable Efforts” Clauses in Delaware: One Size Fits All, Unless…

Posted by Peter Atkins and Edward Micheletti, Skadden, Arps, Slate, Meagher & Flom LLP, on Thursday, November 22, 2018
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“Reasonable Efforts” Clauses in Delaware: One Size Fits All, Unless…

Posted by Peter Atkins and Edward Micheletti, Skadden, Arps, Slate, Meagher & Flom LLP, on
Thursday, November 22, 2018
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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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Statement of Record for SEC Roundtable on the Proxy Process

Posted by Katherine Rabin, Glass, Lewis & Co., on
Wednesday, November 21, 2018
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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.

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The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers

Posted by Steven Davidoff Solomon (UC Berkeley School of Law), on
Wednesday, November 21, 2018
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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.”

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What Happened at the SEC’s Proxy Process Roundtable?

Posted by Cydney Posner, Cooley LLP, on
Wednesday, November 21, 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.

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.

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Today’s Independent Board Leadership Landscape

Posted by Steve W. Klemash, Jamie C. Smith, and Kellie C. Huennekens, EY Center for Board Matters, on
Tuesday, November 20, 2018
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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.

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Are CEOs Paid Extra for Riskier Pay Packages?

Posted by Ana M. Albuquerque (Boston University), on
Tuesday, November 20, 2018
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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.

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

Posted by Craig A. Newman and Maren J. Messing, Patterson Belknap Webb & Tyler LLP, on
Tuesday, November 20, 2018
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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?

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The Standard of Review for Dell’s IPO

Posted by Jeffrey L. Kochian, Stuart E. Leblang, and Jason Sison, Akin Gump Strauss Hauer & Feld LLP, on
Monday, November 19, 2018
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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]

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