Monthly Archives: August 2019

A More Strategic Board

Maureen Bujno is a managing director in Deloitte LLP’s Center for Board Effectiveness, and Benjamin Finzi and Vincent Firth are managing directors at Deloitte Consulting LLP. This post is based on a Deloitte memorandum by Ms. Bujno, Mr. Finzi, Mr. Firth, Kathy Lu, and Mark Lipton.


To be a CEO today is to have one of the most complex and demanding—not to mention visible—jobs in the world. Beyond the scope of their business, CEOs and the organizations they lead have increasingly significant and more transparent influence at multiple levels—societal, cultural, environmental, political—affecting vast numbers of stakeholders, including shareholders, employees, customers, and citizens. Meanwhile, the world around them is in constant motion.

Given the weight of responsibility that rests on their shoulders, it’s no wonder that CEOs, when observed from a distance, are often depicted in near-heroic terms. It’s also not surprising that CEOs, when engaged in more intimate conversations about their role, are often keenly interested in finding help to validate their models of the business environment and to develop their vision of the future.

But where can CEOs find the sounding board they need without falling short of the extraordinary abilities that people find reassuring to attribute to them? One possible answer lies in the recognition that CEOs also have bosses: the boards who hire them, evaluate them, set their pay, and sometimes fire them. In fact, as one CEO told us, “The board relationship is really the most critical factor in [a CEO’s] success.”


Compensation Committees and ESG

Robert Newbury is Director, and Don Delves and Ryan Resch are managing directors at Willis Towers Watson. This post is based on their Willis Towers Watson 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).

Environmental, social and governance (ESG) issues are increasingly important to boards and their compensation committees, especially human capital management, as a critical part of the “S” in ESG.

Compensation committees realize it directly relates to their mission, long-term strategy and success, and they’re being more proactive.

Here are three recent examples. We chose to not identify two of the companies.

  • At Royal Dutch Shell plc., the company committed to use ESG as an executive compensation performance measure in an effort to reduce its net carbon footprint 20% by 2035 and 50% by 2050. Executives’ pay will be linked, in part, to this target, through an energy transition measure within their 2019 long-term incentive award.
  • Board members of a power generation company asked for more insights after a social responsibility report found a gender pay gap existed based on the ratio of average female pay to average male pay. The analysis examined demographics by level, pay gaps by level and job family, and promotion and pay increase trends by gender. Findings reinforced that the company was paying men and women in jobs of equal value at similar levels. However, the check also uncovered that more men worked at higher levels of the organization, and an inclusion and diversity strategy was needed to encourage a better gender balance at all levels of the organization.
  • An integrated oil and gas company wanted better insights on key human capital metrics in support of the organization’s people strategy so management proposed a series of measures in a dashboard that could be updated quarterly for review at each committee meeting (e.g., demo-graphics, promotion/turnover rates, talent pipeline, wellness, safety and productivity/ returns. The dashboard for the compensation committee provides greater context for each performance measure (i.e., historical trends and/or relative benchmarking against other organizations) and includes a mixture of leading and lagging indicators.


Board Oversight of Corporate Political Activity and CEO Activism

Holly J. Gregory is partner at Sidley Austin LLP. This post is based on her Sidley publication. Related research from the Program on Corporate Governance includes The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here); Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson (discussed on the Forum here); and The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert Jackson, James David Nelson, and Roberto Tallarita, (discussed on the Forum here).

The US Supreme Court’s decision in Citizens United v. Federal Election Commission overturned restrictions on corporate political contributions in the form of disclosure requirements and spending limits, articulating a company’s right to engage in political activity as free speech (558 U.S. 310 (2010)). Companies and their executive leadership have long played a role in US politics through quiet lobbying activities and contributions. However, in the current political environment, CEOs are engaging publicly on sensitive social and political issues that they may have avoided in the past, including issues that are not directly related to the company’s business.

Issues that have given rise to “CEO activism” include:

  • Hate speech evidenced in the protests in Charlottesville, Virginia.
  • The “zero-tolerance” immigration policy and family separations at the southern border.
  • The current administration’s policy on climate change.
  • State and municipality adoption of anti-LGBTQ+ laws and policies.
  • Gun violence and its perceived link to National Rifle Association policies.

How a CEO responds to sensitive social and political issues on the company’s behalf will vary, and there is a risk that constituents may be offended when a corporate leader takes a stand, especially when the link between the issue and the company’s business interests is unclear. However, failure to take a position on certain issues may also expose a company to criticism.


Closing the Information Gap

Stephen Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance. This post is based on an article by Dr. Davis published in the Ethical Boardroom.

It wasn’t long ago that Lord Boothby could describe a corporate director’s job this way: “No effort of any kind is called for. You go to a meeting once a month in a car supplied by the company. You look both grave and sage and, on two occasions, say ‘I agree’, say ‘I don’t think so’ once and, if all goes well”, you get a hefty annual fee.

Those days are mostly gone—though not entirely. Board meetings at Nissan Motor under (now-ousted) chief Carlos Ghosn met for an average of 19 minutes, according to a special committee investigation, just about enough time for directors to slip in their “I agree” on each agenda item before adjourning. But at most companies, thanks chiefly to years of shareholder pressure, crony is out, professional is in.

We would expect such new-style boards to advance performance, oversight, risk management, ethical behavior and alignment with investor interests. After all, those are the outcomes for which advocates of change were fighting for so long. But there turns out to be one inconvenient hitch, which is becoming ever more evident: the independent board model isn’t truly workable, at least not without a crucial reboot.


UK Guidance on Corporate Cooperation Credit

Stuart Alford and Nathan H. Seltzer are partners and Christopher M. Ting is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum authored by Mr. Alford, Mr. Seltzer, Mr. Ting, and Harriet Elizabeth Slater.

On 6 August 2019, the UK Serious Fraud Office (SFO) issued its much-anticipated Corporate Cooperation Guidance (the Guidance) outlining, in substantial detail, the steps that the SFO expects corporations to undertake in order to be eligible for cooperation credit when the SFO makes charging decisions, including in relation to whether a deferred prosecution agreement would be appropriate in lieu of full criminal prosecution.

In many respects, the Guidance is unsurprising and provides the types of investigative best practices that sophisticated companies and their advisers are already familiar with—particularly companies familiar with US regulators’ expectations regarding cooperation credit.

However, the Guidance raises strategic questions for companies navigating cross-border investigations. In particular, companies will still need to assess: READ MORE »

Weekly Roundup: August 23–29, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 23–29, 2019.

Why Isn’t Your Mutual Fund Sticking Up for You?

Stakeholder Governance and the Fiduciary Duties of Directors

Board Diversity Study

Relative Performance and Incentive Metrics

Mutual Fund Excessive Fee Claims and Market Conditions

CEO Incentives Shown to Yield Positive Societal Benefits

Appraisal Claim Waivers and Deal Covenants

An Implied Private Right of Action Under the Investment Company Act

Shareholder Governance and CEO Compensation: The Peer Effects of Say on Pay

Compensation Committees & Human Capital Management

Joint Statement on Proposed Changes to Regulation S-K

M&A at a Glance

M&A at a Glance

Ariel J. DeckelbaumScott A. Barshay, and Robert B. Schumer are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum authored by Messrs. Deckelbaum, Barshay, Schumer, Jeffrey D. Marell, Angelo Bonvino, and Taurie M. Zeitzer. Related research from the Program on Corporate Governance includes Why Have M&A Contracts Grown? Evidence from Twenty Years of Deals, and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

M&A activity in the U.S. and globally generally weakened in July. The only bright spots were an increase in the number of deals globally, by 6.9%, to 2,893 deals and an increase in certain sponsor-related and crossborder activity (see below). Meanwhile, the U.S. saw an 8.0% decrease in the number of deals, to 676 deals. The total value of deals* fell in the U.S. by 57.4%, to $138.63 billion, and globally by 34.9%, to $322.40 billion. Finally, average deal value decreased in the U.S. by 53.6%, to $205.1 million, and globally by 39.1%, to $111.4 million. Figure 1. The average value of the five largest announced U.S. public mergers decreased significantly by 72.3%, to $5.28 billion. Figure 4.

Strategic vs. Sponsor Activity

Strategic versus sponsor activity was a bit more mixed. The number of strategic deals decreased in the U.S. by 6.4% to 528, but increased globally by 5.4% to 2,487. Figure 1 and Annex Figures 1A-4A. However, strategic deal volume as measured by dollar value decreased significantly in the U.S. by 71.8% to $78.77 billion and globally by 48.2% to $209.92 billion. The number of sponsor-related deals decreased in July 2019 by 13.5% to 148 in the U.S. but increased by 17.0% to 406 globally, respectively. Sponsor-related volume by dollar value increased by 31.7% to $59.85 billion in the U.S. and by 24.4% to $112.47 billion globally. Figure 1 and Annex Figures 1A-4A.


A New Understanding of the History of Limited Liability: An Invitation for Theoretical Reframing

Ron Harris is a Professor of Legal History at the Buchmann Faculty of Law at Tel-Aviv University. This post is based on his recent paper.

In this paper, I will investigate the historical development of limited liability—widely considered the cornerstone of the business corporation. I challenge the common, linear narratives about how limited liability evolved, and argue that corporations, the stock markets, and the corporate economy enjoyed a long and prosperous history well before limited liability in its modern sense became established. This radically different historical understanding calls for the economic theory of limited liability to be revisited. It also opens up a new set of conceptual, empirical, and theoretical research questions, and points to new possibilities for viable liability regimes in the future.

Limited liability is viewed by many eminent corporation law scholars as a defining attribute of the business corporation. Notable contemporary observers, including the Presidents of Columbia and Harvard, viewed limited liability corporation as the greatest single discovery of modern times, surpassing steam and electricity. Such statements about the historic importance of limited liability as a game-changing invention were theoretically substantiated with the emergence of economic analysts of corporation law in the 1960s and beyond.


Rights and Obligations of Board Observers

Daniel E. Wolf is a partner at Kirkland & Ellis LLP. This post is based on his Kirkland & Ellis memorandum.

A recent Federal appellate court decision on potential liability of board observers under the securities laws is a useful reminder that the legal status, rights and obligations of board observers remain unsettled and therefore attention should be paid to those issues at the outset of an observer arrangement.

While shareholders in a company will often negotiate to take board seats as a means to monitor their investment, in many instances investors will also or instead request the right to appoint a board observer. While the details may differ, observers do not have voting rights but typically have the right to attend board meetings, receive board materials and participate in board discussions.


Joint Statement on Proposed Changes to Regulation S-K

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

We support sending out for public comment the recently proposed revisions to Regulation S-K, the central repository for non-financial statement disclosure. We’re especially grateful to our colleagues in the Division of Corporation Finance, Director Bill Hinman, Betsy Murphy, Felicia Kung, Lisa Kohl, Elliott Staffin, Sandra Hunter Berkheimer, and Shehzad Niazi for their careful and diligent work on this proposal.

We want to start by noting that the proposal is commendable for adding disclosure on the critical topic of human capital. This reflects an understanding of what American families have known for generations: companies that invest in their workers perform better over time. [1]

We write to encourage comment in two critical areas where we believe the proposal should be improved. Specifically, we are concerned about the shift toward a principles-based approach to disclosure and the absence of the topic of climate risk. We urge commenters to come forward to help ensure that our rules produce the comparability and transparency that American investors deserve.


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