Monthly Archives: January 2019

BlackRock Investment Stewardship Engagement Priorities for 2019

Michelle Edkins is the Managing Director and Global Head of BlackRock Investment Stewardship. This post is based on a publication prepared by BlackRock Investment Stewardship.

BlackRock, as a fiduciary investor, undertakes all investment stewardship engagements and proxy voting with the goal of protecting and enhancing the long-term value of our clients’ assets. In our experience, sustainable financial performance and value creation are enhanced by sound governance practices, including risk management oversight and board accountability.

2019 Engagement Priorities

We are committed to providing transparency into how we conduct investment stewardship activities in support of long-term sustainable performance for our clients. Each year we prioritize our work around engagement themes that we believe will encourage sound governance practices and deliver the best long-term financial performance for our clients. Our priority themes for 2019 are a continuation and evolution of those identified last year and are set out below. We hope that highlighting our priorities will help company boards and management prepare for engagement with us and provide clients with insight into how we are conducting stewardship activities on their behalf. Some governance issues are perennial, such as board quality and performance, although the areas of focus may change over time. These will always be a core component of the Investment Stewardship team’s work. Other priorities are evolving and are informed by regulatory and other market developments.

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Deregulating Wall Street

Matthew Richardson is the Charles E. Simon Professor of Applied Economics; Kermit Schoenholtz is the Henry Kaufman Professor of the History of Financial Institutions and Markets; and Lawrence J. White is the Robert Kavesh Professor of Economics, all at New York University Stern School of Business. This post is based on their recent article, published in the Annual Review of Financial Economics.

When a large part of the financial sector is funded with fragile, short-term debt and is hit by a common shock to its long-term assets, there can be en masse failures of financial firms and disruption of intermediation to households and firms. Such disruptions became particularly intense in the fall and winter of 2008–2009, following the collapse (or near collapse) of some of the largest financial institutions. In this period of extraordinary financial strain, the economy and financial markets tumbled in the United States, Europe, and elsewhere.

In the aftermath of this disaster, governments and regulators cast about for ways to prevent—or render less likely—its recurrence. The existing regulatory framework was wholly unsuited to dealing with systemic risk: the widespread failure of financial institutions and freeze-up of capital markets that impair financial intermediation. In the United States, this recognition led to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

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The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018

Kosmas Papadopoulos is Managing Editor at ISS Analytics. This post is based on an ISS Analytics memorandum by Mr. Papadopoulos. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Appearances can be very deceiving. Case in point: The high-level summary numbers of voting results over the last nineteen years seem to indicate that little has changed regarding proxy voting behavior among investors owning U.S. companies. A simple analysis of median vote support levels for management and shareholder proposals seems to reveal stasis—support levels remain at approximately the same levels they were back in the early to middle 2000s.

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Board Evaluation Disclosure

Glenn Davis is Director of Research and Brandon Whitehill is a Research Analyst at the Council of Institutional Investors. This post is based on their CII Research and Education Fund memorandum.

Strengthening board effectiveness is a high priority for many companies and their shareholders. Whether independently or with the help of outside advisors, many boards regularly conduct evaluations to assess their strengths and identify areas for improvement. Robust evaluation processes provide an important conduit for change as companies require new skills, perspectives and strategies over time. For this reason, investors increasingly regard the review process and its disclosure as key opportunities to enhance board effectiveness and shareholder value.

Proxy statements do not always fully convey the rigor or results of these processes. In 2014, CII published a report highlighting best practices in board evaluation disclosure with examples from predominantly foreign companies. [1] At that time, the prevalence and quality of board evaluation disclosure abroad, particularly in Canada and Europe, surpassed the United States. “While most major U.S. companies have a self-assessment process for the board in place,” the 2014 report explained, “their proxy materials often merely state this fact without elaborating on what the process entails.”

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Corporations are People Too (And They Should Act Like It)

Kent Greenfield is Professor of Law and Dean’s Distinguished Scholar Boston College Law School. This post is based on his recent book, published by Yale University Press. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

The question of constitutional rights for corporations has bedeviled judges and scholars for over 200 years. The question seems to arise every generation or so, and we are in the midst of another burst of attention on the issue. Cases such as Citizens United v Federal Election Comm’n (corporations can spend unlimited amounts in elections), Masterpiece Cakeshop v. Colorado Civil Rights Comm’n (corporations can assert religious interests of their shareholders), and Sorrell v. IMS Health (restrictions on corporate sale of data is a restriction on speech), direct the public’s attention to the question of whether and when businesses can assert the protections of constitutional rights.

The Court’s analysis of the issue has been mostly piecemeal, with little theoretical advancement since John Marshall’s pronouncement in Dartmouth College v Woodward two hundred years ago. According to Marshall, corporations should receive those rights “which the charter of its creation confers upon it either expressly or as incidental to its very existence.” The constitutional question, then, depends on a matter of corporate governance theory—what rights are “incidental” to the existence of corporations?

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Cross-Border M&A—2019 Checklist for Successful Acquisitions in the United States

Adam O. Emmerich and Robin Panovka are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum. 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.

M&A in 2018 began with a bang, with more than $350 billion of deals in January 2018—a January level not seen since 2000—and much chatter that M&A volume for the year could hit an all-time record. As it turned out, 2018 was a tale of two cities, with M&A continuing at a torrid pace during the first half of the year, and falling off markedly during a second half of geopolitical tension and market volatility. Overall, M&A volume for 2018 reached a very robust $4 trillion, but fell short of overtaking deal volume in 2007 and 2015. M&A being lumpy and unpredictable as ever, 2019 has opened with a number of notable deals, not least the sale of Celgene to Bristol-Myers Squibb for $95 billion, somewhat defying gloomy predictions for the year.

As for cross-border deals, interestingly, a record $1.6 trillion (39%) of last year’s deals (including six of the 10 largest deals) was cross-border M&A, despite growing trade tensions and anti-globalist rhetoric.

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Shareholder Activism in Germany

Amadeus Moeser is an associate at Sidley Austin LLP. This post is based on his recent Sidley memorandum. 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).

Once an exception, activist investors have proven that shareholder activism can thrive in Germany. An increasing number of foreign and domestic activists have been shaking up German boardrooms over the last years. Even though there has been a decline of activist campaigns in 2018 (11 as of December 2018 compared to 20 in 2017 and 17 in 2016,) the overall trend regarding shareholder activism is going up. Since the activists have become familiar with the legal framework and cultural idiosyncrasies in Germany, the targets are becoming larger and the tactics more aggressive. During the last few years, several DAX 30 companies like Deutsche Bank, Adidas, E.ON, ThyssenKrupp and Volkswagen had to deal with activist engagements. In December 2018, Elliott disclosed a stake in Bayer. In 2018, 27% of the targets were large cap (18% in 2017) and 9% midcap (6% in 2017). While the measures of the activists haven’t changed much, the campaigns have lately been triggered by different factors. Activists increasingly target conglomerates, which are perceived negatively. The criticism has also often focused on long-established business strategies and the unwillingness of companies to reform them. Another relatively new reason to get involved in companies are reasons that can be summarized as ESG. Especially executive compensation and compliance issues have been popular. There have also been incidents of short-selling in Germany.

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Family Firms and the Stock Market Performance of Acquisitions and Divestitures

Raffi Amit is the Marie and Joseph Melone Professor at The Wharton School of the University of Pennsylvania; Emilie Feldman is Associate Professor of Management at The Wharton School of the University of Pennsylvania; and Belén Villalonga is Professor at New York University Stern School of Business. This post is based on their recent paper.

Family firms are a widely prevalent form of ownership, accounting for anywhere from a third to a half of public and private companies in the United States and around the world. Investors often ascribe higher valuations to family firms than to non-family firms, especially when founders serve as CEOs, in part due to expectations that owner-manager agency conflicts will be mitigated by the involvement of founding families with strong incentives to monitor. These favorable expectations about family firms extend to those companies’ corporate strategies, in that family firm acquisitions and divestitures have been shown to generate higher shareholder returns than non-family firm acquisitions and divestitures. These findings impart a unilateral perspective to investors’ evaluations of acquisitions and divestitures, implying that shareholders observe whether the focal firm that undertakes a given acquisition or divestiture is a family or a non-family firm, and adjust their expectations accordingly as to how much value that transaction will create for the focal firm.

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Updated Hedging Disclosure Rules

John Newell is Counsel and Manager of Public Company Practice at Goodwin Procter LLP. This post is based on a Goodwin memorandum by Mr. Newell.

The Securities and Exchange Commission (SEC) has adopted final rules that will require companies to disclose any practices or policies regarding the ability of employees and directors to engage in certain hedging transactions with respect to a company’s equity securities. The final rules will apply to proxy statements and information statements for the election of directors during fiscal years that begin on or after July 1, 2019 (July 1, 2020 for emerging growth companies and smaller reporting companies). In the adopting release, the SEC clearly states that the final rules “should not be construed as suggesting companies need to have a practice or policy regarding hedging, or a particular type of practice or policy. These amendments relate only to disclosure of hedging practices or policies.”

The final rules add a new paragraph to the corporate governance disclosure requirements contained in Item 407 of Regulation S-K, and implement a mandate contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The SEC initially proposed the hedging policy disclosure rules on February 9, 2015, and we summarized the proposed rules in an earlier client alert.

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2018 Review of Shareholder Activism

Jim Rossman is Head of Shareholder Advisory at Lazard. This post is based on a Lazard memorandum by Mr. Rossman. 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).

1. A New High-Water Mark for Global Activist Activity

  • A record 226 companies were targeted in 2018, as compared to 188 companies in 2017
  • $65.0bn of capital deployed in 2018, up from $62.4bn in 2017
  • In spite of significant market volatility, Q4 2018 was the most active Q4 on record both by campaign volume and capital deployed
  • Against the backdrop of a robust M&A market, 33% of 2018 activist campaigns were M&A related

2. Broadening Use of Activism as a Tactic

  • A record 131 investors engaged in activism in 2018, reflecting the continued expansion of activism as a tactic
  • 40 “first timers” launched activist campaigns in 2018, as compared to 23 “first timers” in 2017
  • Nine of the top 10 activists (by current activist positions [1]) invested more than $1bn in 2018 (60 new campaigns in aggregate)
  • Elliott continued to be the most prolific activist, with 22 new campaigns launched in 2018

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