Monthly Archives: January 2019

The Board, CEO Misconduct, and Corporate Culture

Laurie Hays is Managing Director for Special Situations at Edelman. This post is based on an Edelman memorandum by Ms. Hays.

More than 400 business executives and employees including prominent CEOs have been accused of misconduct including sexual harassment in the last 18 months. In many instances, the resulting crises have fallen squarely in the lap of boards of directors. Clearly, it is time for boards to play a more active role overseeing corporate culture and conduct.

Investors increasingly view corporate culture as a risk factor. A new survey by Edelman finds that investors recognize the impact of a healthy culture and engaged employees on corporate performance. Nearly two-in-three investors surveyed believe maintaining a healthy company culture and enforcing a corporate code of conduct at all levels of the company impact their trust significantly in that company.


Compensation Season 2019

Adam J. Shapiro, David E. Kahan and Michael J. Schobel are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Shapiro, Mr. Kahan, Mr. Schobel, Jeannemarie O’Brien and Andrea Wahlquist.

Boards of directors and their compensation committees will soon shift attention to the 2019 compensation season. Key considerations in the year ahead include the following:

Dodd-Frank Act Regulations

Final Hedging Disclosure Rules. New Item 407(i) of Regulation S-K requires a company to describe any employee or director hedging policies or to state that it does not have any such policies. The required disclosure covers equity securities of the company, any parent or subsidiary of the company, and any other subsidiary of the parent. Companies must comply with the new rule in proxy statements for the election of directors during fiscal years beginning on or after July 1, 2019. Now is an opportune time for a company to review and update its existing hedging policy or to consider adopting a hedging policy if it does not have one.


Top Priorities for Boards in 2019

Steve W. Klemash is Americas Leader; Rani Doyle is Executive Director; and Jamie C. Smith is Associate Director, all at the EY Center for Board Matters. This post is based on their EY memorandum.

In today’s world of unrelenting disruption and innovation, a company’s board plays a more active role than ever before in overseeing strategy and risk management amid digital and emerging technologies, industry convergence and workforce transformation, shifting consumer attitudes, increased climate risk, diminishing trust in organizations, political polarization, rising income inequality and various other megatrends shaping the business environment.

As a result, the board agenda is packed and the roles and expectations of directors continue to grow. To help boards navigate the challenges ahead, the EY Center for Board Matters presents five priorities for 2019, along with actionable questions for boards to consider.


Quarterly Reporting—What’s Next?

Nicolas GrabarJeffrey D. Karpf, and David Lopez are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Grabar, Mr. Karpf, Mr. Lopez, and Elena Vespoli. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Stock Market Short-Termism’s Impact by Mark Roe (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

[On December 18, 2019], the SEC published a release requesting comment on the quarterly reporting system. The release is thoughtful and concise, but it mostly asks questions, so it provides little indication of what action the agency might consider taking.

Two major flaws are regularly attributed to the reporting practices of public companies: complexity and short-termism. The release engages with these criticisms, but we doubt this is the start of a process that will eventually result in significant regulatory change.


Weekly Roundup: January 4-10, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 4–10, 2019.

REIT M&A in 2019

Shareholder Resolutions and IPOs

SEC Enforcement Action for Non-GAAP Financial Measures

Oral Argument on Scheme Liability

NACD Public Company Governance Survey

Blockholder Heterogeneity, Multiple Blocks, and the Dance Between Blockholders

Climate Change and Proxy Voting in the U.S. and Europe

Mutual Fund Voting on Corporate Political Disclosure

The Government Shutdown’s Effect on Deals

Investor Demand for Internal Control Audits of Large U.S. Companies

Talking Governance with Donna Anderson

Talking Governance with Donna Anderson

Michael Flaherty and Patricia Figueroa are Senior Vice Presidents at Gladstone Place Partners, LLC. This post is based on their Gladstone Place memorandum.

Donna Anderson leads the policy formation process for proxy voting at T. Rowe Price, an active mutual fund manager with more than $1 trillion of assets under management. Barely a decade ago, the proxy voting process for public company annual meetings was largely seen as a back-office, box-ticking function. Now, with investment assets growing and with investors across the globe pressing companies and boards to promote long-term strategic policies focused on benefitting the environment, society and governance, heads of governance such as Anderson are in an increasingly important and powerful position. She sat down with GPP’s Michael Flaherty and Patricia Figueroa [in December 2018].

GPP: T. Rowe has separated the ESG oversight duties, with you owning the governance part and your colleague owning the environment and social parts (Anderson previously oversaw all three). Why did you separate those out?

Anderson: My colleague you reference is Maria-Elena Drew, who joined T. Rowe Price in 2017 in the new role of director of research for Responsible Investing. She is based in our London office. We do view environmental and social factors as related but very separate disciplines from governance factors. One reason for that is that there’s a natural cadence to the corporate governance year because there’s a proxy vote. There is a certain amount of time-based screening and analysis that takes place naturally. The other major differentiator is everything that I need is a required public disclosure, and on the E and S side, the work is still very much around identifying and obtaining the data you need, then determining what’s relevant.


Investor Demand for Internal Control Audits of Large U.S. Companies

Robert Carnes is assistant professor at the Warrington College of Business at the University of Florida; Dane M. Christensen is assistant professor of accounting at the Lundquist College of Business at the University of Oregon; and Phillip T. Lamoreaux is assistant professor at the  W. P. Carey School of Business at Arizona State University. This post is based on their recent article, forthcoming in The Accounting Review.

If regulation did not require large U.S. companies to have internal control audits, would investors demand this external assurance? In other words, would investors demand, or value, internal control audits for large companies if they were voluntary?  This is the question we explore in our article, Investor Demand for Internal Control Audits of Large U.S. Companies: Evidence from a Regulatory Exemption for M&A Transactions, forthcoming in The Accounting Review.

When politicians signed the Sarbanes-Oxley Act of 2002 (SOX) into law, they effectively mandated a new form of external assurance that previously had not been supplied in the market. Specifically, section 404(b) of SOX requires auditors of large U.S. public companies to opine on the quality of their clients’ internal controls over financial reporting. This costs U.S. companies, in aggregate, several billion dollars every year. The intended benefit of internal control audits is to “increase market efficiency by improving investor confidence in the reliability of a company’s financial disclosure and system of internal control over financial reporting” ( However, because financial statement audits already provide investors with (a) assurance over company financial reports and (b) a legal claim against auditors, it is unclear whether investors demand, or value, additional assurance over a company’s internal controls. Because SOX 404(b) went into effect at the same time for all large U.S. public companies (i.e., accelerated filers), quantifying the value that investors place on internal control audits for these large companies has proven difficult.


Looking Ahead: Key Trends in Corporate Governance

Holly J. Gregory is a partner at Sidley Austin LLP. This post is based on an article by Ms. Gregory, recently published in Practical Law The Journal​.

Charting the course of a public company requires navigating continual changes in technologies, business models, and competitive conditions and assessing corporate opportunities and risks in a dynamic and uncertain political, social, and business environment. Corporate boards and management teams must also adapt to changing expectations and pressures with respect to corporate governance processes and relations with influential shareholders and other key constituents.

This post provides an overview of the major trends and developments that are likely to influence corporate governance issues and areas for board focus in 2019 and beyond, including:

  • Continuing durability of the role of the board and duties of directors.
  • Heightened scrutiny of shareholder primacy and shareholder influence.
  • Reform of proxy voting and regulation of proxy advisors.
  • Continuing convergence of ideas on corporate governance practices.
  • Shifting focus of private ordering to environmental, social, and governance (ESG) issues.
  • Continuing demand for shareholder engagement and attention to activist investors.


The Government Shutdown’s Effect on Deals

Andrew R. BrownsteinRichard K. Kim, Nelson O. Fitts, and Viktor Sapezhnikov are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

While M&A activity continues, the pending U.S. federal government shutdown may affect the timetable and process for completing announced transactions. Set forth below is our current understanding of the operations of the agencies most critical to the merger process and certain contingency plans they have made that impact M&A transactions. These operations and plans may change if the shutdown continues for an extended period of time.

SEC Filings and Review

The SEC’s EDGAR filing system will remain operational during the shutdown and will accept filings, including proxy and registration statements, and limited SEC staff will be available to process requests for EDGAR access codes and password resets, answer questions about fee-bearing EDGAR filings and other emergency questions regarding EDGAR submissions. The SEC staff, however, will not provide interpretative advice, issue no-action letters, review filings (including proxy or registration statements) or process requests for effectiveness of registration statements, regardless of when filed.


A Regulatory Classification of Digital Assets

M. Todd Henderson is Michael J. Marks Professor of Law at the University of Chicago and Max Raskin is Adjunct Professor at the New York University School of Law. This post is based on their recent article, forthcoming in Columbia Business Law Review.

Cryptocurrency is back in the news with bitcoin and other digital assets plummeting and volatility roaring back after a year of relative calm. The exuberance of a bull market is giving way to the discovery that some in the industry have been swimming naked, and are only now being uncovered as the tide goes out. On the regulatory side, the Securities and Exchange Commission has stepped up its enforcement actions against actors who profited during the bull market and are alleged to have violated federal securities laws. But there has been no systematic effort to categorize digital assets for regulatory purposes.

Markets are built on trust. Buyers and sellers have to trust each other or mutually beneficial trades will not happen. Where brokers or other intermediaries are used, the amount of trust needed increases significantly. A complex market, like an equity or digital asset market, needs more than individual trust—it needs a trust infrastructure where market participants understand and will adhere to a basic set of rules of acceptable behavior. Such clear rules allow good actors to differentiate themselves from bad ones, thus raising the overall quality of the market. In the absence of such rules, cheaters and fraudsters will flourish, causing good actors to flee and market confidence to erode. Investor confidence, liquidity, and market integrity are all interrelated.


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