Monthly Archives: September 2019

Proxy Season Say-on-Pay Review

Laura Elmore and Brian Myers are consultants and Henry Mbom is a senior associate at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. 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).

Executive Summary

2019 by the numbers so far


Toward an Interest Group Theory of Foreign Anti-Corruption Laws

Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham University School of Law and Thomas H. Lee is Leitner Family Professor of International Law at Fordham University School of Law. This post is based on their recent article, forthcoming in the University of Illinois Law Review.

In a recent speech, the Chairman of the SEC argued that other countries’ failure to enforce foreign anti-bribery and corruption laws may put U.S. companies at a competitive disadvantage to foreign firms. Against the background of aggressive enforcement of the FCPA, Chairman Clayton remarked that “other countries may be incentivized to play, and I believe some are in fact playing, strategies that take advantage of our laudable efforts.”

The Chairman’s remarks point to a fundamental puzzle of foreign anti-corruption laws. Why would the government of one country act to prevent corruption in another? Foreign anti-bribery laws disadvantage domestic businesses vis-à-vis unregulated foreign competitors. Yet foreign anti-corruption laws have proliferated around the globe. How can this be? And now that they are widespread, are such laws not ripe for opportunistic enforcement (or, as Chairman Clayton points out, lack of enforcement) in favor of domestic interests?


Acquisitions of Public Companies—2018 Shareholder Litigation

Ravi Sinha is vice president and Per Axelson is a senior manager at Cornerstone Research. This post is based on their Cornerstone Research memorandum and is part of the Delaware law series; links to other posts in the series are available here.


This post examines litigation challenging M&A deals valued over $100 million announced from 2009 through 2018, filed on behalf of shareholders of publicly traded target companies.

These lawsuits usually take the form of class actions filed in either federal or state court. Plaintiffs typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value.

Common allegations include:

  • failure to conduct a sufficiently competitive sale
  • existence of restrictive deal protections that discouraged additional bids
  • conflicts of interest, such as executive retention post-merger or change-of-control payments to executives
  • failure to disclose information about the sales process and the financial advisor’s valuation


Proxy Advisors and Pay Calculations

Charlie Pontrelli is Research Manager at Equilar, Inc. This post is based on his Equilar memorandum. 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).

Realizable pay is often cited in the governance community as an excellent gauge of pay for performance alignment. Ideally, if a company is performing well, realizable pay will be greater than disclosed pay. And if a company is performing poorly, realizable pay will be lower than disclosed pay.

Realizable pay calculations are typically made as of a company’s most recent fiscal year end and includes compensation granted during the preceding three- to five-year period (the “evaluation period”). It is similar to disclosed pay in that it includes salary, bonuses and other compensation actually paid during the period.

The difference between the two calculations is the way equity is valued. Disclosed equity values are made as of the grant date and realizable values are made as of the company’s most recent fiscal year end (the end of the evaluation period). Additionally, disclosed pay typically values performance awards at their target level and realizable pay may value performance awards upon actual payout if the performance period has ended.

The transformation from disclosed to realizable pay can be summarized as follows: disclosed equity awards will have appreciated or depreciated in value depending on stock price movements and company performance by the time they are measured on a realizable basis. The remainder of this study looks at how crucial it is to ensure that disclosed and realizable equity valuations are performed on an apples-to-apples basis to ensure accurate conclusions can be drawn from a comparison of these calculations.


Notes from House Financial Services Committee Hearing

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

All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative’s own party. There were, however, some notable exceptions, such as Representative Katie Porter’s pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.

(Based on my notes, so standard caveats apply.)

Chair Waters opened the hearing by making plain her view that the SEC was just not doing its job:

“I believe that it is important for this Committee to hear testimony from each of the Commissioners, including its Chairman, because they each hold a vote on important regulatory and enforcement matters, and they each hold unique views that the Committee should be aware of. This is especially important since the SEC is not fulfilling its mission as Wall Street’s cop. Key rules, like the Volcker rule, have been rolled back, while rules to implement other important reforms on issues like executive compensation—which Congress enacted back in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act—remain incomplete. Other regulations, such as the SEC’s so-called Regulation Best Interest, fail to protect retirement savers from unscrupulous financial advisers.”


2019 Proxy Season Review: North America Activism

Jackie Cheung is Senior Vice President, Governance, and Victor Guo is President at FrontLine Advisors Inc. This post is based on a Frontline report by Mr. Cheung, Mr. Guo, Dexter D. S. John, and Susy Monteiro. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

2019 has been another record year for shareholder activism in Canada. In all of 2018, we tracked 26 activism campaigns (excluding hostile bids) whereas 2019 year-to-date, we have seen an additional four campaigns, bringing the count up to 30 in total.

In 2019, management won 58% of all campaigns (versus 54% in 2018) while activists won 42% (46% in 2018). We see this as a relatively stable trend year-over-year (see Figure 1.01).

Notably, in 2019, board-related activism accounted for 53% of all campaigns versus 88% in 2018 (see Figure 1.02). The decline in board-related campaigns as a proportion of total campaigns is offset by the increase in transactional activism. Transactional activism continues to rise, representing 37% of all campaigns in 2019 compared to 8% in 2018.


Analysis of IAC Recommendations to Improve U.S. Proxy System

Steve Wolosky, Andrew Freedman, and Ron Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

On September 5, 2019, the SEC Investor Advisory Committee (“IAC”) issued a written statement (the “Statement”) to the Securities and Exchange Commission (“SEC”) making recommendations on steps the SEC should take to reform the “complex and multifaceted” U.S. proxy system. By way of background, the IAC is a committee of academics, investors, market participants and corporate and investor advocates established under the Dodd-Frank Act to advise the SEC on various regulatory priorities and to promote greater investor confidence and integrity in the securities markets. The Statement is actually a lightly modified version of a statement prepared in August by an IAC subcommittee consisting of an impressive cast of members, including a Director of CalPERS and the former General Counsel of Vanguard. The Statement was issued in response to consensus that widespread problems with the current “byzantine” proxy system relating to the accuracy, transparency, timeliness and cost-effectiveness of vote counts must be addressed in order to instill investor confidence in the system. These concerns were most recently brought front and center at the November 2018 SEC roundtable on “proxy plumbing.”


Taking Significant Steps to Modernize Our Regulatory Framework

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.

[On September 26, 2019], the Commission announced three important rulemakings.

  • Modernizing the Approval Framework for ETFs. We adopted a new rule that (1) sets forth a clear and consistent framework that will allow exchange-traded funds (“ETFs”) meeting certain standardized conditions to come to market without obtaining an individualized exemptive order, and (2) amends certain forms to enhance disclosures for investors.
  • Expanding “Testing-the-Waters” Communications to All Issuers. We adopted a new rule that will extend to all issuers the flexibility provided by the JOBS Act to communicate with institutional investors about potential IPOs and other registered offerings to better gauge market interest.
  • Enhancing Regulation in the OTC Markets. We proposed amendments to rules governing the publication of quotations for over-the-counter (“OTC”) securities designed to better protect investors from fraud and manipulation, while at the same time facilitating more efficient OTC trading in certain well-capitalized issuers.

These rulemakings share common themes. They modernize decades-old regulations, taking account of our experience, advances in communications technology and changes in the operation of our markets. Importantly, these common sense actions better align our regulations with the preferences and investor protection interests of our long-term Main Street investors, while also facilitating capital formation. I thank my fellow Commissioners and our dedicated staff for the effort, expertise and insight they brought to these important rulemakings.


The Long Term, The Short Term, and The Strategic Term

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (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).

After many years, this past summer the Business Roundtable updated its principles of corporate governance with a new Statement on the Purpose of a Corporation. In the accompanying press release, the Business Roundtable emphasized the larger societal role of corporations in America: “If companies fail to recognize that the success of our system is dependent on inclusive long-term growth, many will raise legitimate questions about the role of large employers in our society.” Superseding the decades-long period during which the Business Roundtable supported the view that “corporations exist principally to serve their shareholders,” the revised statement of purpose is oriented toward “the long-term interests” of “all of our stakeholders.”

The Business Roundtable thus joins other prominent voices in corporate America that are now disavowing long-held views of shareholder primacy. The Business Roundtable press release identifies the two sources of this trend. The first is a perceived disconnect between the short-term interests of “shareholders” and the long-term interests of “stakeholders,” a group that, writ large, could encompass all of American society. The second is a desire to stave off government intervention that could impose an overly burdensome stakeholder- centric model of corporate governance through legislation: “If companies fail to recognize that the success of our system is dependent on inclusive long-term growth, many will raise legitimate questions about the role of large employers in our society.”

The short-term/long-term, shareholder/stakeholder debate is likely to become more intense, and more political, in the near future. As the landscape of corporate governance shifts around them, companies should seek firm ground on a foundation of business success by creating and implementing a strategic plan over a time horizon that will maximize both growth and profitability. With a well- developed, well-articulated, and well-executed strategy, a chief executive can generate productivity and value, and a successful enterprise will have correspondingly wide latitude from investors and regulators alike to engage in responsible corporate stewardship in the manner, and over the timeframe, that is best suited to the corporation.


Weekly Roundup: September 20-26, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 20-26, 2019.

Stakeholder Governance—Some Legal Points

Are Early Stage Investors Biased Against Women?

Statement on Volcker Rule Amendments

Trading and Arbitrage in Cryptocurrency Markets

Reg FD Enforcement Action

Investor Stewardship Reporting and Engagement

The Fearless Boardroom

Sustainability in Corporate Law

2019 ISS Global Policy Survey Results

Bank Governance, Bank Risk, and Optimal Executive Compensation

Q2 2019 Gender Diversity Index

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