Monthly Archives: July 2019

Proxy Voting Outcomes: By the Numbers

Barbara Novick is Vice Chairman at BlackRock, Inc. This post is based on a Policy Spotlight issued by Blackrock.

Index funds have democratized access to diversified investment for millions of savers who are investing for long-term goals, like retirement. The popularity of index funds has, however, drawn critics who claim that index fund managers may wield outsized influence over corporations due to the size of their shareholdings in public companies. Some commentators speculate that the largest asset managers are determining the outcome of proxy votes. Central to this hypothesis is an assumption that the shareholdings of the largest asset managers are sufficiently sizeable to determine the outcome of proxy votes. An analysis of the margins by which proxy votes are won or lost demonstrates that this is rarely the case.

Director Elections

The Russell 3000 index is a broad-based index comprised of the 3,000 largest US public companies by market capitalization and thus provides a broad sample of US companies from which to analyze proxy voting activity. Assuming that a single asset manager can vote 10% of a company’s shares, Exhibit 1 shows that during the 2017-2018 proxy season, less than 1% of Russell 3000 director elections could have been decided by a 10% shareholder changing their vote. In addition, Exhibit 1 shows that in the 2017-2018 proxy season, 95% of Russell 3000 director elections were won by a margin greater than 30%. This means that even three 10% shareholders changing their votes in the same direction would not have changed the outcome.


The Importance of Climate Risks for Institutional Investors

Philipp Krueger is Associate Professor of Finance at the University of Geneva; Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management; and Laura T. Starks is the Charles E. and Sarah M. Seay Regents Chair in Finance at the University of Texas at Austin McCombs School of Business. This post is based on their recent paperRelated 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).

Climate risks have potentially large effects on investors’ portfolio companies. Some companies face direct costs related to changes in the climate, originating from extreme weather events or a general rise in sea levels. Other companies can be negatively affected from policies and regulations implemented to combat climate change. Technological innovations related to climate change also threaten the business models of some portfolio firms that operate in traditional industries. These risks to portfolio companies, which can broadly be categorized into physical, regulatory, and technological climate risks, have the potential to adversely affect the outcomes for many clients, pension beneficiaries, and shareholders of institutional investors. At the same time, climate change also provides investment opportunities for the portfolio companies and their institutional investors, for instance in the areas of renewable energy or energy storage.


What Happened at the Corp Fin Roundtable on Short-Termism?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. 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).

Corp Fin has recently focused on the issue of corporate reporting and short-termism. At the end of last year, the SEC posted a “request for comment soliciting input on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.” (See this PubCo post.) Following up, Corp Fin then organized a roundtable, held last week, to discuss the issues surrounding short-termism. The roundtable consisted of two panels: the first explored “the causes and impact of a short-term focus on our capital markets,” with the goal of identifying potential market practices and regulatory changes that could promote long-term thinking and investment. In part, this panel developed into a debate about whether short-termism was actually creating a problem for the economy at all. In that regard, several of these panelists were quick to cite the oft-cited academic study revealing that “three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report.” (See this PubCo post and this article in The Atlantic.) Could the reason be a misalignment of incentives? The second panel was centered on the periodic reporting system and potential regulatory changes that might encourage a longer-term focus in that system. Does the current periodic reporting system, along with the practice of issuing quarterly earnings releases and, in some cases, quarterly earnings guidance contribute to or encourage an overly short-term focus by managers and other market participants? On this panel, the headline topic notwithstanding, the discussion barely touched on short-termism; rather, the focus was almost entirely on regulatory burden. At the end of the day, is the SEC seriously considering making changes to periodic reporting?


Under Pressure: Directors in an Era of Shareholder Primacy

Jim Rossman is Head of Shareholder Advisory, Christopher Couvelier is Director, and Quinn Pitcher is an analyst at Lazard. This post is based on their Lazard memorandum.

The job of the public company director has never been as challenging as it is in 2019. Today’s directors must execute their core duties while juggling a cacophony of often competing voices: activist investors; increasingly vocal “traditional” owners; index and pension funds wielding the power of their vote; shareholders demanding action on environmental, social and governance issues; employees and unions; local and national political leaders; social media; and of course management itself. Where does a director’s duty reside in this complex landscape? And amid this dissonance, how should today’s director prioritize these many demands?

In pursuit of answers to these questions, Lazard recently hosted “Under Pressure: Directors in an Era of Shareholder Primacy,” an event attended by over 150 directors representing over 200 public companies around the world. The event began with a panel discussion moderated by Dennis K. Berman (Managing Director, Lazard Shareholder Advisory) and featured representatives from academia, regulators, investors and public companies:


How Much Do Directors Influence Firm Value?

Aaron Burt is Assistant Professor of Finance at the University of Oklahoma Price College of Business; Christopher Hrdlicka is Assistant Professor of Finance and Business Economics at the University of Washington Foster School of Business; and Jarrad Harford is Professor of Finance and Chair of the Department of Finance and Business Economics at the University of Washington Foster School of Business. This post is based on their recent article, forthcoming in the Review of Financial Studies.

Every company has a board of directors. Debates rage over whether they do their job; what is the ideal mix of insiders and outsiders, men and women, management and labor; and whether directors are too busy or whether busyness is an outcome of quality. But until now, we have not even been able to answer the most basic question: How much do directors actually influence the value of companies?

To be fair, this is a hard question to answer. Much about boards is unobservable. Board meetings are private, with the minutes only rarely being made public. Directors work with management outside of these meetings, making it impossible to see all the relevant interactions. Worse, we cannot simply look at arrivals and departures of directors because of the endogenous matching between a director and company.

Narrowing the question to particular events like mergers and acquisition have allowed a glimpse of director influence. Natural experiments such as mandates on the female fraction of boards or the unexpected death of a director also show boards matter. The effects of directors have even been traced to commonality in events such as switching exchange listings, or commonality in practices, such as similar tax minimization strategies. Taken together, prior studies have shown a vast array of director influence in specific instances, but they cannot answer how much do directors influence firms overall. Their answers are limited both because they utilize only a subset of events and because there is no obvious way of aggregating over the events studied.


First Successful Use of a Universal Proxy Card for a Control Slate in the United States

Steve WoloskyAndrew Freedman, and Elizabeth Gonzalez-Sussman are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Wolosky, Mr. Freedman, Ms. Gonzalez-Sussman, and Mohammad Malik. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

On July 10, 2019, shareholders at EQT Corporation (“EQT” or the “Company”) overwhelmingly voted for a control slate of directors nominated by a shareholder group led by Toby Z. Rice, Derek Rice, Will Jordan and Kyle Derham (the “Rice Team”). Interestingly, this proxy contest involved the use of a universal ballot, a first in the United States involving a control slate of directors, in which all of the company and dissident’s nominees appeared on their respective proxy cards.

EQT is the largest natural gas producer in the United States. In November 2017, the Rice Team sold the company they had founded, Rice Energy, to EQT, for approximately $6.7 billion. Unfortunately, within a year following the acquisition, EQT’s operational performance severely declined, with its shares falling 39% last year. Following a massive operational loss in the third quarter of 2018, many shareholders reached out to Toby Z. Rice for help. Despite efforts to engage with EQT privately, the Rice Team’s offers to help were rebuffed, forcing the Rice Team to call for the replacement of the CEO and nominate a control slate of directors.


A Banner Proxy Season for Political Disclosure and Accountability

Bruce F. Freed is President and Dan Carroll is Vice President for Programs at the Center for Political Accountability; and Karl J. Sandstrom is senior counsel at Perkins Coie LLP and counsel at CPA. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson Jr. (discussed on the Forum here and here), and The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert Jackson, James David Nelson, and Roberto Tallarita.

Support for corporate disclosure and accountability reached new highs in the just concluded 2019 proxy season. This was demonstrated in the number of companies agreeing to disclosure and board oversight over the full range of their political spending and in the surge in shareholder support for the Center for Political Accountability’s model resolution. All of this reinforces earlier findings about “private ordering” making political disclosure and accountability the new norm for companies.

This proxy season’s strong results were a clear affirmation of trends seen over the past several years. Much of corporate America now sees political disclosure and accountability as in its self-interest and shareholders consider it an essential feature of good governance. This is occurring as companies navigate heightened risks posed by today’s hyper-polarized political environment.

Here are the topline results for this season:


Does Revlon Matter? An Empirical and Theoretical Study

Sean J. Griffith is the T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on a recent paper authored by Professor Griffith; Matthew D. Cain, Visiting Research Fellow at the Harvard Law School Program on Corporate Governance; Robert J. Jackson, Jr., Professor of Law at New York University School of Law; and Steven Davidoff Solomon is Professor of Law at UC Berkeley School of Law. This post is part of the Delaware law series; links to other posts in the series are available here.

In Does Revlon Matter: An Empirical and Theoretical Study, we examine the effect the seminal case of Revlon v. MacAndrews & Forbes Holdings has on the takeover process. We examine this through a novel M&A dataset of 1,913 transactions from 2003-2017. Our unique dataset contains details of the private merger negotiation process before public deal announcements, including the number of bidding rounds, timing of bids, bid premiums, and indicators for single versus multiple bidding parties.

We find, essentially, that Revlon matters, at least for Delaware firms. For Delaware incorporated firms, deals within Revlon result in more protracted negotiations, more rounds of bidding, more bidders, and higher deal premiums. However, these results do not hold for states outside of Delaware that have also adopted Revlon. When we exclude Delaware-incorporated firms, we find no differences in any key variables for Revlon and non-Revlon deals. Revlon matters, but it matters only in Delaware.


Violation of DGCL Section 203 and Stockholder Enforcement Rights

Andrew G. Gordon, Jaren Janghorbani, and Ross A. Fieldston are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Gordon, Ms. Janghorbani, Mr. Fieldston, Matthew W. AbbottScott A. Barshay, and Robert B. Schumer. This post is part of the Delaware law series; links to other posts in the series are available here.

Recently in Arkansas Teacher Retirement System v. Alon USA Energy, Inc., the Delaware Court of Chancery (in an opinion by Vice Chancellor McCormick) held, on a motion to dismiss, that Delek US Holdings, Inc.’s acquisition of Alon may have violated Section 203 of the Delaware General Corporation Law, Delaware’s anti-takeover statute. The Alon board had exempted Delek from Section 203’s restrictions on business combinations, subject to a standstill provision. However, Delek later allegedly breached the standstill provision, and the court ruled that the breach may have “vitiated the Alon board’s Section 203 approval and restored the protections of Section 203.” The court further ruled that Alon stockholders had standing to directly enforce the standstill as third party beneficiaries. Finally, the court ruled that the merger was not entitled to business judgement review because the parties negotiated substantive deal terms before committing to use the procedural protections required by Kahn v. M&F Worldwide Corp. in controlling stockholder transactions, among other things.

The Alon decision recounts allegations of a less-than-pristine process for negotiating a controlling stockholder merger, as well as what the court characterized as “creative” theories of the stockholder-plaintiff in challenging that process, especially regarding Section 203 of the DGCL. Due to the high stakes involved in controlling stockholder mergers, the opinion serves as an important reminder of the types of process issues (whether real or only alleged) of which merger parties and their counsel should be mindful, and of the willingness of Delaware courts to hold parties to terms to which they have agreed.


CEO Pay Ratio: Leading Indicators of Broader Human Resource Matters?

Mike Kesner is a Retired Principal and Consultant, Tara Tays is a Managing Director, and Ed Sim is a Manager at Deloitte Consulting LLP. This post is based on their Deloitte memorandum. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried and The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

Now that the CEO pay ratio disclosure requirement has been in place for two proxy seasons, it has demonstrated to be less impactful than some proponents and others may have expected. However, pay ratio disclosure may just be the opening salvo in employee, shareholder, media, and regulators’ demands for additional employee and compensation data. For example, some major investors have asked companies to disclose additional details about the median employee, including the employee’s geographic location and whether he/she is a salaried or hourly employee, in addition to more general information about the composition of the workforce, including geographic distribution, proportion of salaried and hourly employees, and the percentage of the total workforce comprised of contract workers.

The CEO pay ratio disclosure also led to shareholder proposals requesting that the compensation committee consider the CEO pay ratio when setting executive pay levels and policies. Although these proposals garnered very little shareholder support in the 2019 proxy season, they will likely continue to be on the proxy ballot for some companies next year.


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