Monthly Archives: June 2019

U.S. Board Diversity Trends in 2019

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Kosmas Papadopoulos, Managing Editor at ISS Analytics.

As the U.S. annual shareholder meeting season is coming to an end, we review the characteristics of newly appointed directors to reveal trends director in nominations. As of May 30, 2019, ISS has profiled the boards of 2,175 Russell 3000 companies (including the boards of 401 members of the S&P 500) with a general meeting of shareholders in 2019. These figures represent approximately 75 percent of Russell 3000 companies that are expected to have a general meeting during the year. (A small portion of index constituents may not have a general meeting during a given calendar year due to mergers and acquisitions, new listings, or other extraordinary circumstances).

Based on our review of 19,791 directorships in the Russell 3000, we observe five major trends in new director appointments for 2019, as outlined below.


Do Firms Issue More Equity When Markets Become More Liquid?

Rogier Hanselaar is a Data Scientist at Aegon N.V.; René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University; and Mathijs A. van Dijk is Professor of Finance at the Rotterdam School of Management at Erasmus University Rotterdam. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

In our paper Do firms issue more equity when markets become more liquid?, we investigate whether variation in stock market liquidity helps to explain variation in corporate equity issuance over time.

It is well-known that the volume of both initial public offerings (IPOs) and seasoned equity offerings (SEOs) fluctuates considerably over time, but the underlying causes of these fluctuations are not well understood. Prior research has pointed at economic conditions (such as GDP growth) as well as capital market conditions (such as volatility) as potential determinants. It has also been documented that equity issuance tends to be high after the stock market has gone up and when aggregate stock market valuation (as measured by, for example, the aggregate price-earnings ratio) is high, which is often interpreted as evidence that firms successfully “time” the market when raising new equity.


Debt Default Activism: After Windstream, the Winds of Change

Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Feltman, Mr. Kleinhaus, Mr. Sobolewski, and Steven A. Cohen.

In our prior memos The Rise of the Net-Short Debt Activist and Default Activism in the Debt Markets, we discussed the phenomenon of “Debt Default Activism,” in which investors purchase debt on the thesis that a borrower may already be in default, and then seek to profit from the alleged default, by, for example, triggering a credit default swap (or “CDS”) payout or trading various interests around the negative news generated by the default allegation.

In February, the most prominent example of Debt Default Activism came to a conclusion. Aurelius, a bondholder of telecom services provider Windstream that was reported to be economically “net-short” Windstream through CDS, prevailed in litigation with Windstream over a complicated debt covenant issue.

Windstream’s “long-only” debtholders, whose rights were nominally vindicated by the decision, were not happy. They had voted overwhelmingly to waive the alleged covenant default (the court concluded that those consents were not valid) in order to avoid exactly the result that ensued: Windstream’s bankruptcy. The long-only creditors had good reason to aid Windstream’s attempt to stave off Aurelius’ challenge. With Windstream’s bankruptcy, the value of their positions plummeted, illustrating that Debt Default Activism can harm not only corporate borrowers but also their creditors.


Calling the Cavalry: Special Purpose Directors in Times of Boardroom Stress

Gregory V. Varallo is the President of Richards Layton & Finger, PA. and Frank M. Placenti leads the Corporate Governance Practice at Squire Patton Boggs LLP. This post is part of the Delaware law series; links to other posts in the series are available here.

Over the last three decades, the demands placed on public company directors have increased exponentially. In addition to ordinary course audit committee, compensation committee, compliance and business oversight work, directors are now expected to animate the company’s sustainability programs, focus a keen eye on boardroom diversity and “refreshment,” understand cyber and other enterprise risks, and assure that the company is operating in accordance with evolving standards of corporate social responsibility.

Then, often without warning, into this crowded docket parachutes an existential crisis, transformational transaction, corporate restructuring, intrusive governmental investigation or enterprise-threatening lawsuit. When these events occur, and they do with increasing frequency, even the best boards can find their time and resources strained. A Board may also find that its directors lack the specific experience and/or the legally required independence to handle the issues presented by these “special situations.”


Mootness Fees

Steven Davidoff Solomon is Professor of Law at UC Berkeley School of Law. This post is based on a recent article, forthcoming in Vanderbilt Law Review, authored by Professor Davidoff Solomon; Matthew D. Cain, Visiting Research Fellow at the Harvard Law School Program on Corporate Governance; 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; and Randall S. Thomas, John S. Beasley II Chair in Law and Business at Vanderbilt Law School. Related research from the Program on Corporate Governance includes Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani. This post is part of the Delaware law series; links to other posts in the series are available here.

In Mootness Fees, forthcoming in the Vanderbilt Law Review, we document the latest development in merger litigation, mootness dismissals. In 2016, the Delaware courts announced in In re Trulia that they would no longer approve merger litigation settlements which provided for a release and an award of attorneys’ fees if they did not achieve meaningful benefits for shareholders. Trulia, coupled with other substantive changes in Delaware law, reduced the attractiveness of merger litigation in Delaware.

Delaware’s crackdown did not put an end to merger litigation, which, as we document in prior work, had become ubiquitous however. Instead, the changes resulted in the flight of case filings from Delaware to the federal courts. These federal suits repackaged state-law fiduciary duty claims into antifraud actions under Section 14A and Rule 14a-9 thereunder. By 2017, merger litigation rates, which had dipped to 74% of deals in 2016, rose to 83%, but only 10% of litigated deals faced a challenge in Delaware versus 87% in federal court. By 2018, the numbers were even more dramatic—5% of litigated deals were challenged in the Delaware courts, but 92% gave rise to a federal court lawsuit.


NYS Common Retirement Fund’s Climate Action Plan

Thomas P. DiNapoli is New York State Comptroller. This post is based on a memorandum from the New York State Comptroller Office. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Message from the Comptroller

As Comptroller of New York State and Trustee of the Common Retirement Fund (CRF), I am deeply concerned about the impact of climate change on the Fund’s investments, as well as its impact on the economy as whole. I understand the immense investment risks posed by climate change, but also recognize the significant investment opportunities in the transition to the emerging low carbon economy.

Ensuring strong investment returns for the CRF is fundamental to providing the benefits that our more than one million members, retirees and beneficiaries rely on for retirement security. Our government employers and New York’s taxpayers are also important stakeholders for the CRF. Identifying, assessing and addressing the investment risks and opportunities associated with climate change is integral to ensuring the long-term health of the CRF and the payment of those benefits.

For years, the CRF has used a multi-faceted approach to climate change, employing investment, active stewardship and public policy advocacy strategies. Over the last 10 years, the CRF has:

  • identified and assessed its risks through scenario analysis and carbon footprinting;
  • committed to investing $10 billion in sustainable strategies, including climate solutions;
  • engaged with the largest emitters to reduce risks and assess transition readiness; and
  • advocated at the international, national and state levels for policies to reduce climate-related investment risks and create opportunities for the CRF, and the economy as a whole.


Get Us There—The Ceres Strategic Plan

Mindy Lubber is CEO and President at Ceres. This post is based on her Ceres 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).

In 1989, in response to the Exxon Valdez oil spill, a group of forward-thinking investors and environmentalists, led by pioneer Joan Bavaria, came together to form Ceres. At the time, they were at the forefront of a transformative movement in business. They understood that the most successful companies in the long term will be those that consider their impacts on the environment, employees and communities. They knew then what we say now at Ceres: sustainability is the bottom line.

Today, our research shows that nearly 400 of the 600 largest publicly traded companies in the U.S. have commitments to reduce greenhouse gas (GHG) emissions, 300 actively manage water resources and nearly 300 actively protect employees’ human rights. Companies have begun to embrace sustainability and incorporate environmental, social and governance (ESG) risks and opportunities into their decision making in ways we couldn’t have dreamed of thirty years ago.


Investors Bancorp‘s Impact on Long-Term Incentive Plans

Matthew B. Grunert and Scott C. Sanders are partners and Jackie Z. Coleman is an associate at Bracewell LLP. This post is based on their Bracewell 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 Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The trend of including director-specific limits on the size of annual equity awards to non-employee directors under long-term incentive plans (“LTIPs”) continues to pick up steam, as evidenced by our survey of LTIPs filed this proxy season for shareholder approval. Nearly 75% of LTIPs reviewed now include a director-specific limit on the size of annual non-employee director grants, with a majority of those LTIPs restricting not only the size of annual equity awards, but also capping total annual compensation to non-employee directors.

This trend’s beginnings arose from the 2017 Delaware Supreme Court decision in In re Investors Bancorp, Inc. Stockholders Litigation (“Bancorp”). In Bancorp, the court held that a shareholder-approved cap on the aggregate number of shares that could be granted to non-employee directors under the company’s LTIP did not constitute shareholder ratification of the subsequent individual awards granted to non-employee directors of Investors Bancorp. As a result, the court held that the “entire fairness standard” should apply to any review of the size of non-employee director awards, requiring the board to demonstrate that the awards were fair to the company, as opposed to permitting application of the more company-friendly “business judgment rule,” requiring a showing by the plaintiff of corporate waste.


Exchanging Views on Exchange-Traded Funds

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the FSB/IOSCO Joint Workshop on ETFs and Market Liquidity, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Welcome to all of you. We are so delighted to be able to host you at the Securities and Exchange Commission for today’s workshop on exchange-traded funds (ETFs). The discussion today is sure to be fascinating. Aside from my greeting, everything I say reflects my own views and not necessarily those of the Commission or my fellow Commissioners. [1]

It is graduation season, so if you have time to walk around the city, you might see graduates of our local schools celebrating in their caps and gowns. The big story of this graduation season was the announcement by a wealthy commencement speaker at one college that he would pay off the debt of the entire graduating class to whom he was speaking. [2] His gift is wonderful, but it may become much more difficult to find commencement speakers, as I suspect that there are few who would be able to match such generosity. The reality is that most graduates will not be the beneficiaries of such kindness from a stranger.


Defined Contribution Plans and the Challenge of Financial Illiteracy

Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law and Co-Director, Institute for Law and Economics at the University of Pennsylvania Law School; Andrea Hasler is Assistant Research Professor in Financial Literacy at the George Washington University School of Business; and Annamaria Lusardi is the Endowed Chair of Economics and Accountancy at the George Washington University School of Business. This post is based on their recent article, forthcoming in the Cornell Law Review.

Retirement saving in the United States has changed dramatically. The classic defined-benefit (DB) plan has largely been replaced by the defined-contribution (DC) plan. With the latter, individual employees’ decisions about how much to save for retirement and how to invest those savings determine the benefits available to them upon retirement.

This system relies on employees to save and invest their money for retirement, decisions that they are poorly equipped to make. A variety of studies document low levels of financial literacy in the general population. People with low financial literacy are susceptible to a number of investment mistakes, including choosing products that do not meet their needs and paying excessive fees. They are also vulnerable to fraud. Moreover, investment decision-making is complicated. The typical 401(k) plan offers participants products that many of them do not understand. Effective retirement savings also requires people to begin saving early, to reallocate their portfolios periodically as they age and, when they retire, to determine how to manage the balance in their accounts to provide income for the rest of their lives.

Although financial illiteracy is a widespread problem, the evolution of workplace pensions exacerbates the problem by imposing responsibility for financial well-being in retirement on a group of people who are particularly ill-suited to the task. We term these people “workplace-only investors,” which we define as people whose only exposure to investment decisions is by virtue of their participation in an employer-sponsored 401(k) plan or equivalent DC plan; they do not have other retirement accounts or financial investments. We view workplace-only investors as forced or involuntary investors in that their participation in the financial markets is a product of their employment and unlikely the result of informed choice. They are a sizeable share of participants in DC pension plans.


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