Monthly Archives: May 2019

Corporate Board Practices in the S&P 500 and Russell 3000: 2019 Edition

Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post relates to Corporate Board Practices in the Russell 3000 and S&P 500: 2019 Edition, an annual benchmarking report published by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with Debevoise & Plimpton, Russell Reynolds Associates, and The John L. Weinberg Center for Corporate Governance at the University of Delaware.

According to a new report by The Conference Board and ESG data analytics firm ESGAUGE, in their 2018 SEC filings 50 percent of Russell 3000 companies and 43 percent of S&P 500 companies disclosed no change in the composition of their board of directors. More specifically, they neither added a new member to the board nor did they replace an existing member. In those cases where a replacement or addition did happen, it rarely affected more than one board seat. Only one-quarter of boards elected a first-time director who had never served on a public company board before.

These findings provide some important context to the current debate on gender diversity and board refreshment, underscoring the main reasons why progress remains slow: average director tenure continues to be quite extensive (at 10 years or longer), board seats rarely become vacant and, when a spot is available, it is often taken by a seasoned director rather than a newcomer with no prior board experience.


Update on U.S. Director Pay

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 Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here)

In recent years, non-executive director compensation has received attention in the U.S. Increased board workloads, shifts in director compensation structure (away from meeting fees and towards slightly larger base retainers, for instance), a few instances of shareholder litigation in relation to excessive director pay, and a few voluntary submissions of management proposals asking for shareholder approval of their non-employee director compensation programs have all contributed to the activity.

Upon review of current trends in director pay, we observe a reasonable increase in total director compensation, across all market segments, and we continue to see differentiation by industry group. Although director pay increases have outpaced rank-and-file employee increases (but sharply trail increases to CEO pay), outside evidence suggests that increasing commitment by directors to their oversight roles, along with increasing investor expectations and in some industries regulatory demands, justify the increases in compensation.


Coordinating Governance and Stewardship Between Institutional Investors and Asset Managers

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The decision by Vanguard to grant proxy voting responsibilities to the external managers of certain Vanguard funds is a road map for the stewardship and proxy voting relationship between institutional investors, such as pension funds and endowments, and the external asset managers they employ. In announcing its decision, Vanguard said:

We believe proxy voting is a great way to integrate investment stewardship responsibilities with investment management practices. Our external managers are well-positioned to take on proxy voting responsibilities in a manner that supports shareholder value creation over the long term.


Stress Testing the Banking Agencies

Matthew Turk is Assistant Professor of Business Law and Ethics at Indiana University’s Kelley School of Business. This post is based on his recent article, forthcoming in the Iowa Law Review.

One of the major regulatory innovations that has emerged over the decade following the financial crisis is the development of regulatory stress tests for large financial institutions. Within the past few years, however, the role of stress tests has come under attack from a wave of reforms which call for the current programs to be rolled back in substantial part or eliminated in full. These initiatives have emerged from both Congress (see here and here) and the Trump Administration (here and here).

My recent article, Stress Testing the Banking Agencies, charts a path forward by undertaking a comprehensive analysis of the promise and limits of regulatory bank stress testing. It then presents a proposal that would address concerns on both sides of the reform debate but has yet to receive consideration: reorienting the stress testing process so that it is used to assess the rules promulgated by federal financial regulators, rather than banks’ compliance with those rules.


Delaware M&A Appraisal After DFC, Dell and Aruba

Gregory V. Gooding, William D. Regner, and Shannon Rose Selden are partners at Debevoise & Plimpton LLP. This post is based on their Debevoise 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

With its April 16, 2019 opinion in Verition Partners Master Fund Ltd. v Aruba Networks, Inc., [1] and following its late 2017 decisions in DFC Global [2] and Dell, [3] the Delaware Supreme Court has completed a trio of decisions that are likely to reshape the law and practice of public company merger appraisal in Delaware. In each case, the Delaware Supreme Court overturned an appraisal award of the Court of Chancery for failing to give sufficient weight to the parties’ negotiated merger price. While the Supreme Court made clear that deal price is not the exclusive—or even presumptive—measure of fair value for appraisal purposes, and that the appraisal statue obligates the Court of Chancery to “take into account all relevant factors,” [4] the overall thrust of these cases is to make deal price the starting (and in many cases the ending) point for appraisal analysis in transactions between unaffiliated parties where the target company has a robust trading market and the deal results from an unconflicted and reasonable sale process.

The deals giving rise to the appraisal actions underlying this trio of Supreme Court decisions—and the appraisal analyses undertaken by the Court of Chancery—were each decidedly different:


Operating Principles for Impact Management

Irina Likhachova is Senior Operations Officer at the International Finance Corporation (IFC). This post is based on the IFC Operating Principles for Impact Management, prepared by Ms. Likhachova, Neil Gregory, Diane Damskey, Christian Rosenholm, Ellen Maginnis, and Ariane Volk. 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) and  Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Making History

On April 12, 2019, 60 global investors came together to adopt and launch the Operating Principles for Impact Management—a market standard for impact investing in which investors seek to generate positive impact for society alongside financial returns in a disciplined and transparent way. These investors collectively hold over $350 billion in assets invested for impact, which they commit to manage in accordance with the Principles.

Operating Principles for Impact Management: A new market standard for impact investing

Impact investing has emerged as a significant opportunity to mobilize both public and private capital into investments that target measurable positive social and environmental impact alongside financial returns. A growing number of investors are incorporating impact investments into portfolios. Many are adopting the Sustainable Development Goals (SDGs), and other widely recognized goals such as the Paris Climate Agreement (COP21) as a reference point to illustrate the relationship between their investments and impact goals.


L&G Active Ownership Report

Sacha Sadan is Director of Corporate Governance at Legal & General Investment Management Ltd. This post is based on his LGIM memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Active ownership means working to bring about real, positive change to create sustainable value for our clients. Our annual Corporate Governance report details how we achieved this in 2018.

“There is now even more interest from clients, regulators and governments in corporate stewardship.”
—Sacha Sadan, Director of Corporate Governance


Statement on Financial Disclosure

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Let me begin by thanking the Staff in the Division of Corporation Finance, including Division Director Bill Hinman, for their hard work in developing today’s release and for helpful briefings throughout this process.

Today’s proposal governs the financial information firms give investors relating to mergers and acquisitions, among other things. The proposal provides several necessary updates to our rules. But I’m concerned that the proposal treats mergers as an unalloyed good—ignoring decades of data showing that not all acquisitions make sense for investors. Thus, while I vote to open this proposal for public comment, I urge investors to help us engage more carefully and critically with longstanding evidence that corporate insiders use mergers as a means to advance their private interests over the long-term interests of investors.


Aiming Toward the Future

Wesley Bricker is Chief Accountant for the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the 2019 Baruch College Financial Reporting Conference, available here. The views expressed in this post are those of Mr. Bricker and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I. Introduction

Thank you, Dean Huss, for the kind introduction. I’m grateful for the opportunity to visit Baruch College’s Zicklin School of Business and speak at the annual financial reporting conference for the fourth time. Many students who were starting their collegiate work here when I first spoke at this conference are now members of the graduating class.

I could use other examples in tracking changes to make the same point: the world stops for no one. Financial reporting is not exempt from change. This conference also provides an opportunity to talk about current issues in financial reporting and to peer into the future together and explore the role of financial reporting in a rapidly changing society. I’ll use a four-year timeframe to describe changes.


When Dual-Class Stock Met Corporate Spin-Offs

Geeyoung Min is an Adjunct Assistant Professor at Columbia Law School and Young Ran (Christine) Kim is Associate Professor at the University of Utah College of Law. This post is based on their recent article, forthcoming in the UC Irvine Law Review. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here) by Lucian Bebchuk and Kobi Kastiel.

A corporate spin-off creates a new spun-off public company (“SpinCo”) by distributing the new company’s stock to the shareholders of a parent company (“ParentCo”) in the form of dividends proportional to their stock ownership. In this process of dividing one company into two or more stand-alone companies, the corporate spin-off offers potentially unchecked discretion for managers over corporate governance. First, because the SpinCo stock is internally distributed to ParentCo’s shareholders, the SpinCo’s various features including governance arrangements are not subject to market-pricing checks as in an Initial Public Offering (“IPO”). Second, current corporate law consistently treats a spin-off as a way to distribute dividends falling within managers’ discretion. ParentCo’s managers can solely decide whether, when, and how to make dividends through the form of a spin-off without shareholder approval. An important assumption for the lack of shareholder approval in a spin-off is that there are no fundamental changes to shareholder rights before and after the spin-off. Furthermore, the same assumption of mere change in forms of ownership also functions as a basis for tax-free benefit for spin-offs.


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