Monthly Archives: July 2019

Individual Director Assessments

Rusty O’Kelley is Global Leader of the Board Advisory & Effectiveness Practice at Russell Reynolds Associates and Matteo Tonello is Managing Director of ESG Research at The Conference Board, Inc. This post is based on their article, recently published in Directors & Boards.

Individual director assessments in the United States need an overhaul.

The annual board performance assessment, when conducted, tends to rely on director surveys and other self-evaluation tools. But more importantly, companies continue to forgo, or at least forgo reporting, a systematic process that extends beyond the collective performance of the board or its committees to also evaluate the contribution of individual directors, according to a a recent review of disclosure documents filed by companies in the Russell 3000 index.

Only 14.2% of the Russell 3000 companies report having instituted such an annual process at the individual director level, a share that has barely grown since 2016 (13.2%); in the S&P 500, the percentage remains shy of 30%.

That’s a problem, especially in an ever-changing, business-risk environment.

Performance assessment is an indispensable human capital management tool for today’s business organizations. It fosters accountability, encourages self-improvement, informs the talent development process, and ultimately ensures the alignment of skills with the company’s long-term strategy. And it’s just as critical at the top leadership level, including the leadership of the board of directors.


Rulemaking Petition on More Restrictive SEC Buyback Rules

David A. Katz, Victor Goldfeld, and Jenna Levine are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum. Related research from the Program on Corporate Governance includes Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here) and  Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here).

Continuing the trend of public attacks on corporate share repurchases in the current political environment, a group of 19 organizations, including the AFL-CIO and Public Citizen, has submitted a rulemaking petition to the SEC requesting elimination of the existing safe harbor protecting public companies from liability for market manipulation under the Exchange Act for compliant stock repurchases. The petition calls for replacing the existing Rule 10b-18 with a more comprehensive regime. Public company stock buybacks typically avail themselves of the protections of Rule 10b-18 in order to protect against claims that the repurchases violate federal securities laws relating to market manipulation. Although stock repurchases made outside of Rule 10b-18 may not violate the securities laws, they do not have the benefit of the safe harbor.


The Bad Actor Disqualification Act and Expected Impact on SEC Settlements

Robin Bergen, Matthew Solomon, and Joon Kim are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Ms. Bergen, Mr. Solomon, Mr. Kim, and Alexander Janghorbani.

Last month, Representative Maxine Waters, Chair of the House Financial Services Committee, introduced a discussion draft of the “Bad Actor Disqualification Act of 2019” (the “Proposed Act”). Similar to proposed legislation Rep. Waters introduced in 2015 and 2017, the effect of the Proposed Act, if passed, would be to dramatically increase the burdens on institutions seeking waivers from disqualifications under the federal securities laws, including those for Well-Known Seasoned Issuers (“WKSI”), certain exemptions from registering securities offerings, and protection from fraud claims predicated on forward-looking statements. Indeed—given that the Proposed Act would require that all waiver applications be open to public comment and hearing and vote by the Securities and Exchange Commission (“Commission” or “SEC”), and that the Commission be barred from considering the “direct costs” of a denial to the applicant, but rather only the interests of the public, investors, and market integrity—the effect may be to essentially eliminate waiver applications and grants in all but the most severe cases. The Proposed Act targets “the largest financial institutions on Wall Street,” which, unsurprisingly given their business models, request and receive a disproportionate share of waivers. However, by its terms the Proposed Act applies more broadly to all issuers and is not limited to financial institutions.


Statement on Short-Term/Long-Term Management & Periodic Reporting System

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Bill [Hinman] thanks a lot. I’m going to highlight three items to try and kick us off here. First, a thank you to Bill, Coy, Shelley and the other staff from the Division of Corporation Finance for the work you did in hosting today’s roundtable and on a day to day basis. This event demonstrates the commitment of the Division to important issues that have a direct impact on our Main Street Investors and your commitment to fair and transparent markets.

I also want to thank our panelists. As I look across here if I was investing my money for the long term, this would not be a bad investment committee.

You are giving up your time to share your vast experience with us. You represent a variety of viewpoints from long term investors to issuers, from preparers of SEC reports to consumers of that information. So thank you very much for giving us your time.


Comment Letter Regarding Earnings Releases and Quarterly Reports

Ariel Fromer Babcock is Managing Director and Sarah Keohane Williamson is the Chief Executive Officer of FCLTGlobal. This post is based on a comment letter submitted by FCLTGlobal to the Securities and Exchange Commission. 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); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (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).

By some accounts, public markets are out of fashion.

Detractors point to the long-term trend towards fewer initial public offerings (IPOs) in developed economies, especially the U.S., and the growth of private pools of capital over the past decade, which has largely deprived retail investors of the most significant growth investment opportunities of the past decade. But public markets continue to be essential to wealth creation, innovation and capital stability, and ensuring they remain an attractive venue is essential to our economic growth.

Investment managers and executive teams too often cite quarterly reporting and quarterly earnings guidance as a key source of short-term pressure in the public market and a principal reason many companies opt not to list.

Transitioning away from the quarterly treadmill toward conversations centered on long term capital deployment and growth can simplify investor communications and reduce the reporting burden on corporations while simultaneously strengthening companies’ longer-term shareholder bases by giving investors the relevant information they need to make their investment decisions in a format that is digestible while also alleviating one source of short-term pressure, improving the accuracy of valuations, and ensuring public markets remain a compelling option for growing corporations in need of stable capital.

Quarterly guidance leads to short-term business decisions which ultimately cause long-term harm.


Defining Corwin’s Limits

Jason Halper and Nathan Bull are partners and Victor Bieger is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Bull, Mr. Bieger, Ellen Holloman, and Jared Stanisci. This post is part of the Delaware law series; links to other posts in the series are available here.

In its October 2015 decision in Corwin v. KKR Financial Holdings, LLC, the Delaware Supreme Court held that, under most circumstances, approval of a transaction by a majority of fully informed, uncoerced stockholders invokes deferential business-judgment-rule review, notwithstanding that absent such approval a heightened level of scrutiny would apply. Where Corwin applies, the result is virtually always dismissal of the action since overcoming the business judgment rule requires allegations that the transaction constitutes corporate waste—an extremely difficult bar to clear even at the pleadings stage. But, as we have cautioned, the Delaware Supreme Court has effectively tempered the force of Corwin by signaling, in a pair of 2018 decisions, its receptiveness to arguments that merger-related disclosures contained misstatements or omissions, thereby rendering the stockholder votes “uniformed” and allowing plaintiffs to escape the impact of Corwin.

The adequacy of merger-related disclosures is now frequently a threshold battle in post-closing litigation, and the latest example is the Court of Chancery’s decision in Chester County Employees’ Retirement Fund v. KCG Holdings, Inc., 2019 WL 2564093 (Del. Ch. June 21, 2019). KCG involved a stockholder challenge to a 2017 all-cash acquisition by Virtu Financial, Inc. (a FinTech firm focusing on high-frequency trading and market-making) of then-competitor KCG Holdings, Inc. The merger was approved by more than 75% of the disinterested KCG stockholders—setting up a pleadings-stage motion to dismiss based on Corwin by the KCG directors. But the plaintiff argued, and the court agreed, that Corwin was not applicable because the complaint adequately alleged that there were material misstatements and omissions in the proxy statement soliciting approval of the merger.


Weekly Roundup: July 12-18, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of 12-18, 2019.

Walmart’s Failure to Maintain a Sufficient Anti-Corruption Compliance Program

Conflicted Mutual Fund Voting in Corporate Law

Statement on Opportunity Zones

Staff Statement on LIBOR Transition

Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting

Petition for Rulemaking to Revise Rule 10b-18

Heather Slavkin Corzo is Director of Capital Markets Policy for the AFL-CIO. This post is based on a rulemaking petition submitted by AFL-CIO and others to the Securities and Exchange Commission. Related research from the Program on Corporate Governance includes Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here) and  Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here).

Petitioners signed below respectfully submit this petition for rulemaking pursuant to Rule 192(a) of the Commission’s Rules of Practice.

In 1982, the Securities and Exchange Commission (“SEC” or “Commission”) finalized Rule 10b-18, 17 C.F.R. § 240.10b-18, (“Rule 10b-18” or “the Rule”). Rule 10b-18 provided companies with a “safe harbor” to undertake stock repurchase (or “buyback”) programs without being subject to liability for manipulation under the Securities and Exchange Act of 1934. Stock repurchase programs have grown in size and importance since Rule 10b-18 went into effect. In particular, the use of the practice skyrocketed after the enactment of President Trump’s Tax Cuts and Jobs Act. The tax bill provided significant tax benefits to large corporations, such as a lower corporate tax rate and an incentive to repatriate offshore cash, and led to a 64 percent increase in stock repurchases while real wages for workers remained flat. Indeed, analysts estimate that in 2018 corporations used nearly 60 percent of their corporate tax cut to repurchase stock. In other words, at a time when wages for average workers have failed to keep up with inflation, corporations have used the corporate tax break to collectively pay $1 trillion to executives, boards of directors, and large share sellers. Instead firms could dedicate this capital to worker wages, training, hiring, and other investments necessary for innovation and growth.


Designing Business Forms to Pursue Social Goals

Ofer Eldar is an associate professor at the Duke University School of Law. This post is based on his recent article, forthcoming in the Virginia Law Review.

In recent years, there have been efforts to encourage firms to pursue social goals. This imperative, however, is very vague. What range of permissible non-pecuniary goals should companies be encouraged to pursue? This question reflects a much re-hashed debate regarding the role and purpose of corporations. Many studies view this topic as a matter of corporate governance. That is, the key question is whether policies that seek to create social impact—often referred to as “CSR” (for corporate social responsibility)—maximize shareholder value in the long term. If the answer is yes, then it is a win-win situation for all because such policies are assumed to benefit society.

In a new article, Designing Business Forms to Pursue Social Goals (forthcoming, Virginia Law Review), I argue that rather than focusing on shareholder value, the pressing question should be, “Does the pursuit of social missions by for-profits actually benefit the intended beneficiaries?” Even if CSR policies are associated with shareholder value, it does not follow that they achieve their putative purpose of helping stakeholders and society at large. Without a mechanism for ensuring that CSR actually benefits the stakeholders, companies can easily use it to enhance their reputations and increase their profits, without providing tangible public benefits.


Comments on the Climate Risk Disclosure Act of 2019

Mindy Lubber is CEO and President at Ceres. This post is based on her testimony before the U.S. House of Representatives, Committee on Financial Services, Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

Thank you for the invitation and opportunity to appear before you today [July 10, 2019]. I am the CEO and President of Ceres, a nonprofit organization working with many of the most influential investors and companies to build sustainability leadership within their own enterprises and to drive sector and policy solutions throughout the economy. Through our membership networks of more than 100 plus companies and 160 investors, we work with these private sector leaders to tackle the world’s biggest sustainability challenges, including climate change, water scarcity and pollution, and deforestation. We believe today’s hearing is timely and necessary and we appreciate your attention to these challenges. Congressional action is crucial to ensure capital markets are transparent and fair and protect investors from material risks, such as those from climate change, whether those risks arise in short, medium or long term timeframes. We thank this subcommittee for focusing on the importance of corporate environmental, social and governance (ESG) disclosures. My remarks will primarily be confined to a discussion of the Climate Risk Disclosure Act of 2019, although I will touch generally on the critical importance of other types of ESG disclosure requirements.


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