Monthly Archives: August 2019

Stakeholder Governance and the Fiduciary Duties of Directors

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; Karessa L. Cain is a partner; and Kathleen C. Iannone is an associate. This post is based on their Wachtell Lipton publication.

There has recently been much debate and some confusion about a bedrock principle of corporate law—namely, the essence of the board’s fiduciary duty, and particularly the extent to which the board can or should or must consider the interests of other stakeholders besides shareholders.

For several decades, there has been a prevailing assumption among many CEOs, directors, scholars, investors, asset managers and others that the sole purpose of corporations is to maximize value for shareholders and, accordingly, that corporate decision-makers should be very closely tethered to the views and preferences of shareholders. This has created an opportunity for corporate raiders, activist hedge funds and others with short-termist agendas, who do not hesitate to assert their preferences and are often the most vocal of shareholder constituents. And, even outside the context of shareholder activism, the relentless pressure to produce shareholder value has all too often tipped the scales in favor of near-term stock price gains at the expense of long-term sustainability.


Firearms and the Proxy Season

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 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).

As you know, topics related to corporate social responsibility have ascended to the forefront for many stakeholders, and CSR is sometimes viewed to comprise issues related to firearms safety. With the renewed national debate on gun safety, and in light of apparent continued government gridlock, will investors, customers, employees and other stakeholders turn to companies to “do something”? Will they begin to apply more pressure to companies involved with firearms, including retailers and banks, to reexamine their relationships with the gun industry? For the 2019 proxy season (unlike 2018), we did not find any shareholder proposals directly addressing gun safety (although some did indirectly) that were submitted for shareholder votes. Will current events reignite the topic of gun safety as a subject for shareholder proposals in 2020?


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

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. Antonio Weiss is a senior fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. This post is based on an op-ed by Chief Justice Strine and Mr. Weiss that was published today in The New York Times, which is available here. 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) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Growing inequality and stagnant wages are forcing a much-needed debate about our corporate governance system. Are corporations producing returns only for stockholders? Or are they also creating quality jobs in a way that is environmentally responsible, fair to consumers and sustainable? Those same corporations recognize that things are badly out of balance. Businesses are making record profits, but workers are not sharing in those gains.

This discussion is necessary. But an essential player is missing from the debate: large institutional investors. For most Americans, their participation in the stock market is limited to the money they have invested in mutual funds to finance retirement, usually in 401(k) accounts through their employers. These worker-investors do not get to vote the shares that they indirectly hold in American public companies at those companies’ annual meetings. Rather, the institutions managing the mutual funds do.


Weekly Roundup: August 16–22, 2019

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This roundup contains a collection of the posts published on the Forum during the week of August 16–22, 2019.

Recent Application of Caremark: Oversight Liability

Audit Committee Disclosure in Proxy Statements—2019 Proxy Review

What the Capital One Hack Means for Boards of Directors

Technology and Life Sciences IPOs

Relative Performance Evaluation in CEO Compensation: A Talent-Retention Explanation

SEC Proposal to Modernize Reg S-K

How Do Venture Capitalists Make Decisions?

Securities Class Action Filings—2019 Midyear Assessment

The Future or Fancy? An Empirical Study of Public Benefit Corporations

Institutional Investors’ Proxy Voting Responsibilities and Use of Proxy Advisory Firms

Statement on Proxy-Advisor Guidance

Statement Regarding Proxy Voting and Proxy Voting Advice

Statement Regarding Proxy Voting and Proxy Voting Advice

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent statement at the Open Meeting on Commission Guidance and Interpretation Regarding Proxy Voting and Proxy Voting Advice, available here. The views expressed in the post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you, Chairman Clayton. I would like to take this opportunity to welcome Commissioner Lee to her first open meeting. I look forward to working with you and am happy that we will all benefit from your insight and passion for this agency and its mission.

As with most of our meetings, there are many “Thank Yous” to go around because so many people worked hard to get us to where we are today. Before discussing the substance of the releases the Commission will vote on this morning, I would like to make sure that I recognize each of you individually.

I would like to begin by thanking Chairman Jay Clayton. Since his earliest days leading the SEC, he has prioritized the interests of Main Street investors and improving our capital markets for all Americans. [1] I am honored that he has entrusted me with leading the Commission’s wholesale evaluation [2] of the proxy process, [3] a topic that I have been passionate about for many years.


Statement on Proxy-Advisor Guidance

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent 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.

I want to begin by expressing my appreciation to Division Directors Dalia Blass and Bill Hinman, and the terrific Staff in the Divisions of Investment Management and Corporation Finance, for their hard work in advance of today’s meeting. I’m also deeply grateful to my colleague Elad Roisman, whose work in this area is an exceptional example of effective, thoughtful leadership.

The guidance before us today addresses advice investors use in corporate voting. By informing and empowering investors ahead of corporate elections, that advice can help hold insiders accountable for how they run America’s public companies. I’m concerned that today’s guidance may alter the competitive landscape for the production and use of that advice—without addressing whether doing so might make it harder for investors to oversee management. I therefore respectfully dissent.


Institutional Investors’ Proxy Voting Responsibilities and Use of Proxy Advisory Firms

David A. Katz, Sabastian V. Niles, and Elina Tetelbaum are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz, Mr. Niles, Ms. Tetelbaum, Trevor S. Norwitz, Andrew R. Brownstein, and Adam O. Emmerich.

Yesterday [August 21, 2019], the Securities and Exchange Commission approved new guidance in two releases from the Division of Corporation Finance and the Division of Investment Management concerning the fiduciary responsibilities of investment advisers (like fund managers) with respect to proxy voting, the use of proxy advisory firms (like ISS and Glass Lewis), assessing such advisory firms’ “care and competency” with respect to potential factual errors, incompleteness, or methodological weaknesses that may materially affect voting recommendations, and addressing the applicability of proxy solicitation and anti-fraud rules to proxy advisory firms and their vote recommendations.

Consistent with past statements by SEC Chair Jay Clayton and Commissioner Elad Roisman, today’s guidance goes beyond the 2014 staff-level interpretations regarding proxy voting and, importantly, reflects Commission-level approval. As noted by the Commission, the guidance and articulated policies (provided in question and answer formats) do not create new obligations or require rulemaking. These pronouncements increase pressure on investment advisers and proxy advisory firms in terms of what is expected of them, and should alter the behavior of those that are not already following this guidance. The SEC is encouraging investment advisers and proxy advisory firms to review their policies and practices in light of the new guidance in advance of next year’s proxy season.


So Long to Shareholder Primacy

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

In a press release issued [August 19, 2019], the Business Roundtable announced the adoption of a new Statement on the Purpose of a Corporation, signed by 181 well-known, high-powered CEOs. What’s newsworthy here is that the Statement “moves away from shareholder primacy” as a guiding principle and outlines in its place a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. Yup, that Business Roundtable. According to the press release, the Business Roundtable has had a long-standing practice of issuing Principles of Corporate Governance. Since 1997, those Principles have advocated the theory of “shareholder primacy—that corporations exist principally to serve shareholders”—and relegated the interests of any other stakeholders to positions that were strictly “derivative of the duty to stockholders.” The new Statement supersedes previous statements and “more accurately reflects [the Business Roundtable’s] commitment to a free market economy that serves all Americans. This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity, and we are continuing to challenge ourselves to do more.” Fasten your seatbelts, disciples of Milton Friedman; it’s going to be a bumpy night.


Legal Implications of The Business Roundtable Statement on Corporate Purpose

Betty M. Huber is counsel, and Joseph A. Hall and Louis Goldberg are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Huber, Mr. Hall, Mr. Goldberg, William H. Aaronson, Neil Barr, and Margaret E. Tahyar.

The Business Roundtable has endorsed stakeholder capitalism in its highly publicized Statement on the Purpose of a Corporation. The Statement of Purpose breaks from what has long been the dominant model in the United States, which conceptualizes a corporation’s sole or primary purpose to be that of maximizing shareholder value. A handful of BRT members declined to sign the Statement of Purpose. Under the Statement of Purpose, each signatory commits to (1) delivering value to its customers, (2) investing in its employees, (3) dealing fairly and ethically with its suppliers, (4) supporting the communities in which it works, and (5) generating long-term shareholder value.

The Statement of Purpose, available here, at just under a page in length, incorporates some of the environmental, social and governance, or ESG, concepts that have taken root, first in Europe and more recently in the United States. It includes the concept of a “social license to operate,” or the need for acceptance of a corporation’s business practices and operations by customers, employees, suppliers and the general public, in addition to shareholders. The Statement of Purpose is for the moment mainly symbolic since legislatures and courts, not trade associations, define the scope of a director’s fiduciary duties.


Statement at Open Meeting on Commission Guidance and Interpretation Regarding Proxy Voting and Proxy Voting Advice

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent statement at an Open Meeting on Commission Guidance and Interpretation Regarding Proxy Voting and Proxy Voting Advice, 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.

Congress assigned to the Commission the responsibility to regulate the proxy solicitation process in 1934. Voting proxies is important. When we meet with market participants, we consistently hear about the importance of engagement, and the voting process is a key component of that engagement. This is made clear in many ways, including that our proxy rules regulate how proxies can be solicited and what information must be disclosed. Those rules impose significant anti-fraud liability on statements which, at the time and in the light of the circumstances under which they are made, are false or misleading with respect to any material fact. No other country comes close in terms of providing and enforcing this level of investor protection around the proxy voting process. Further, in the context of a share-for-share merger subject to a shareholder vote, we impose additional liability under the Securities Act of 1933 on registrants and officers and directors for the information in the associated registration statement.

In the past two decades, the proxy process has become one of increasing complexity, and also importance, to investors, issuers, and investment advisers. Commission rule changes, state law changes, corporate governance practices, technology and other factors have all increased the significance of shareholder voting in our public capital markets. This is one reason why the Commission and its staff have prioritized our work in this area. During this time, investment advisers have assumed a much greater role in our marketplace and, consequently, a greater role in the area of shareholder-company engagement. For example, there are now over 13,000 SEC-registered investment advisers with over $84 trillion in assets under management, and over 8,000 of these investment advisers provide services to retail investors. [1]


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