Monthly Archives: February 2019

Frequently Overlooked Disclosure Items in Annual Proxy Statements

Michael J. Schobel is partner and Erica E. Bonnett is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

In preparing the annual proxy statement, much care and attention is appropriately given to discussion of the company’s performance highlights, utilization of governance “best practices,” key compensation program developments, and other matters that are likely to draw investor attention and scrutiny. However, it is important not to forget that the annual proxy statement is also a legal disclosure document that is subject to a myriad of technical requirements set forth in Securities and Exchange Commission (“SEC”) rules and guidance. In our experience, some of the more subtle disclosure requirements are frequently overlooked, including, in particular, the items listed below. Companies should work with legal counsel to confirm that their annual proxy statements comply with all applicable disclosure requirements.

When to Provide GAAP Reconciliation

GAAP reconciliation is not required when disclosing non-GAAP performance targets or actual results relative to performance targets in the Compensation Discussion & Analysis (“CD&A”), provided that the disclosure explains how such values are calculated from the company’s audited financial statements. However, non-GAAP financial measures that are presented in the CD&A or any other part of the annual proxy statement for any other purpose (such as to explain the relationship between pay and performance or to justify certain levels or amounts of pay) are subject to GAAP reconciliation, which may be provided in an annex to the annual proxy statement (provided that the disclosure includes a prominent cross-reference to such annex) or by including a prominent cross-reference to the pages in the company’s annual report on Form 10-K containing the reconciliation.


Should FASB and IASB Be Responsible for Setting Standards for Nonfinancial Information?

Richard Barker is Professor of Accounting and Robert G. Eccles is Visiting Professor of Management Practice at the Saïd Business School at the University of Oxford. This post is based on their recent paper.

We have written a paper by this title whose goal is to contribute, in a neutral way, to a conversation that has been going on for some time amongst a variety of actors, concerning whether mandatory reporting standards are a prerequisite for effective “sustainability” or “nonfinancial” corporate reporting. Specifically, we ask whether the existing standard-setting regime for financial reporting—that of the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)—should be extended to include setting standards for nonfinancial information. This paper was background reading for a live debate (transcript) held at The Oxford Union on December 11, 2018 between teams in Proposition and Opposition to the motion “This House believes that corporate sustainability reporting should be mandated, and standardised by FASB and IASB, for it to be most useful for investors.” Our work was informed by interviews we did with 50 experts in this field (listed in the Appendix of the paper). We are grateful to them for taking the time to share their views with us.


Synthesizing the Messages from BlackRock, State Street, and T. Rowe Price

Pamela L. Marcogliese is a partner, Elizabeth Bieber is an associate, and Brennan K. Halloran is a law clerk at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

It has become customary, over the last few years, for companies and other stakeholders to await annual letters from large institutional investors that provide insight into investor views about companies’ long-term strategy, messaging, goals and shareholder engagement, among other topics.

BlackRock and State Street recently released their letters, and shared similar views: BlackRock reiterated its focus on the need for corporate purpose and the link to successful pursuit of profit and State Street focused on the need for a meaningful corporate culture as a significant driver of intangible value. In addition, in a recent interview with Gladstone Partners, Donna Anderson, the head of T. Rowe Price’s governance policy and engagement, focused on the need to deliver financial results instead of worrying about fending off the next activist investor.


Trends in Shareholder Activism

Josh Black is Editor-in-chief of Activist Insight. This post is  based on an excerpt from the Activist Insight Monthly Half-Year Review 2018, published in association with Schulte Roth & Zabel and authored by Mr. Black, Elana Duré, Iuri Struta, Eleanor O’Donnell, Husein Bektic and Dan Davis. 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).

The Big Picture

A brief glance at activism in 2018 shows that, after a brief dip in 2017, things are back on track. The number of companies publicly targeted hit record highs in the U.S., Canada, Japan, Australia, and the U.K. Non-U.S. targets made up a record haul of 47%, passing 400 for the first time. Prior to the end-of-year volatility, high valuations in U.S. markets and disruptive forces elsewhere clearly had an impact—as well as swelling activity in Australian and Canadian basic materials industries, only 53% of companies targeted in the Brexit-hit U.K. were targeted by homegrown activists.

M&A activism flourished in a deal-friendly environment: bumpitrage and Elliott Management’s take-privates captured the most attention even as the lines between financial and environmental, social, and governance (ESG) activism continued to blur. Activists piling on top of each other at companies like Newell Brands, ThyssenKrupp, Whitbread, and United Technologies highlighted both a limited pool of ideas for well-capitalized funds, and the benefits of incremental pressure as each moved slowly but inexorably in the directions demanded of them.


Non-Answers During Conference Calls

Anastasia Zakolyukina is Associate Professor of Accounting and Neubauer Family Faculty Fellow at University of Chicago Booth School of Business; Ian D. Gow is Professor at the University of Melbourne; and David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business. This post is based on their recent paper.

“Sunlight is the best disinfectant.”
— Justice Louis D. Brandeis

Disclosure of information has long been a key element of corporate governance. While much disclosure is governed by laws, regulations, standards and the like, much of the information investors rely on is provided voluntarily by firms. Since Regulation Fair Disclosure was introduced by the United States Securities and Exchange Commission (SEC), corporate conference calls have emerged as an important channel for firms to disclose information to capital markets.


2019 Institutional Investor Survey

Kiran Vasantham is Director of Investor Engagement; David Shammai is Corporate Governance Director—Cross Border; and John C. Wilcox is Chairman of Morrow Sodali. This post is based on their Morrow Sodali memorandum.

Morrow Sodali’s fourth annual Institutional Investor Survey confirms that 2019 will be another year of transformative change in relations between companies and their shareholders. Survey results reveal that investors continue to dig deeper into the inner workings of portfolio companies. Investors aspire to engage with boards of directors regularly throughout the year, not just during proxy season. At the same time, companies should not, from our experience, take it to mean that any outreach request to any investor will be accepted. Outcomes of such requests would depend on the exact nature of the issue and may of course vary from investor to investor. Investors want more substantive information about board composition and business strategy. They want clearer explanations of the business rationale for governance and compensation decisions. They want an integrated narrative that explains environmental, social and governance practices in terms of business risk and sustainable financial performance.


2019 Proxy Season Preview

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.

Institutional investors tell us they want boards to help set the tone at the top for diversity and culture and better articulate how the company is investing in talent and transformation. They want to understand how companies are integrating business-relevant environmental and social considerations into a sustainable strategy that creates long-term value for a wide range of stakeholders. And they want to know how the board is overseeing emerging threats and opportunities amid continued market volatility and evolving risks.

Many investors are also further integrating environmental, social and governance (ESG) considerations into their stewardship programs and broader approach. For example, some asset managers are doing more to embed such factors into their investment processes and offering new ESG products and solutions; and asset owners are asking more questions around how their current and potential external managers are approaching ESG matters.


Successor CEOs

Yaron Nili is Assistant Professor at University of Wisconsin Law School. This post is based on his recent article, forthcoming in the Boston University Law Review.

Recent years have seen a push towards the separation of the roles of CEO and chairperson of the board. While many companies still maintain a combined CEO-Chair role, a majority of the S&P 1500 companies has separated the roles, and investors consistently express their concern that the dual CEO-Chair position jeopardizes the independence and effectiveness of the board.

Many of the proposals to separate the CEO-Chair role seek to install an independent chair and retain the current CEO; however, recruiting a new chairperson is only one way in which the separation of the CEO-Chair roles can occur. In my recent article, Successor CEOs, forthcoming in the Boston University Law Review, I explore a second means of separating these roles: one where the CEO-Chair relinquishes her CEO position but remains the chairperson, allowing the company to bring on a new CEO to take her place. This is what I label as the “successor CEOs” phenomenon. Take, for example, the case of Chipotle Mexican Grill. The founder and former CEO of the company, Steven Ells, served as Chairman-CEO from 2009 through 2016 but stepped away from the CEO role in late 2017 due to investor pressure; former Taco Bell chief executive, Brian Niccol, was named his successor. While Ells is no longer the CEO, he remains the chairman of the board.


Purpose, Culture and Long-Term Value—Not Just a Headline

David B. FeirsteinSarkis Jebejian, and Shaun J. Mathew are partners at Kirkland & Ellis LLP who specialize in mergers and acquisitions. The following post is based on their Kirkland memorandum. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Key Takeaways

  • Recent letters from two of the world’s largest long-term “passive” investors provide a powerful counterpoint to the seemingly never-ending short-term oriented agitation from activist hedge funds.
  • These long-term investors believe that purpose and profit are “inextricably linked” and seek to elevate “value” (not “values”) in support of long-termism over short-termism.
  • Index fund managers can either be powerful allies in promoting and protecting long-term shareholder value or at-risk “swing votes” in a proxy contest.
  • Effective “off-season” engagement should be a strategic priority.

Public company CEOs and directors have a new pen pal. Adding to Larry Fink’s annual letter to CEOs, this year Cyrus Taraporevala, State Street’s new CEO, sent his own letter encouraging boards to focus on aligning corporate culture and strategy as a driver of long-term, sustainable shareholder value.


The Board and ESG

Olivier Jan is Sustainability Leader at Deloitte Global. This post is based on his Deloitte memorandum. 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).

Discussions of environmental, social, and governance (ESG) matters have taken hold in mainstream media, government bodies, coffee shops, the food industry, clothing manufacturers, and boardrooms. With such high stakes, this is an area that organizations, and their boards, cannot afford to get wrong.

As overseers of risk and stewards of long-term enterprise value, board members have a vital oversight role in assessing the organization’s environmental and social impacts. They are also responsible for understanding the potential impact and related risks of ESG issues on the organization’s operating model. In light of these factors and stakeholder concerns, organizations are reimagining and enhancing their ESG positions. This is happening more in some regions (e.g., Europe) than in others, and it is more prevalent in certain sectors (e.g., consumer products, heavy industry). Shifting political winds also can affect these efforts. Since ESG issues began to move into the mainstream, the trend has generally been for organizations to pursue sustainable practices for the long term.


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