Monthly Archives: September 2019

Q2 2019 Gender Diversity Index

Amit Batish is Content Manager and Ryan Lau is an Associate Editor at Equilar Inc. This post is based on an Equilar memorandum by Mr. Batish, Mr. Lau, Kofi Boadu, Jacob Doty, Louisa Lan, and Paul Richardson.

The Equilar Gender Diversity Index (GDI) has now increased for a seventh consecutive quarter. The percentage of women on Russell 3000 boards increased from 19.3% to 20.2% in Q2 2019. This acceleration once again moved the needle, pushing the GDI to 0.40, where 1.0 represents parity among men and women on corporate boards across the Russell 3000.


Bank Governance, Bank Risk, and Optimal Executive Compensation

Sanjai Bhagat is Provost Professor of Finance at the University of Colorado Boulder Leeds School of Business and Brian J. Bolton is Associate Director at the Global Board Centre at IMD Business School. This post is based on their recent article, forthcoming in Journal of Corporate Finance. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and Executive Compensation as an Agency Problem, both by Lucian Bebchuk and Jesse Fried; Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); and The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here).

Corporate governance continues to be a focus of not just the financial media but the popular media, as well. The scandals at Wells Fargo and Equifax are just the most recent in the long line of scandals involving large well-known public U.S. corporations. Going back in time—the financial crisis of 2008 was triggered by the implosion of the big banks. Further back in time, at the turn of the new millennium, the scandals in Enron, WorldCom, Tyco, and Qwest led to their demise.

After each set of these scandals, policymakers raised questions about the effectiveness of corporate governance mechanisms in these companies. This led to the inevitable call for more regulation and laws to constrain and regulate corporate behavior, to wit, the Sarbanes Oxley Act of 2002 and the Dodd-Frank Act of 2010. Have these two rather extensive set of laws addressed the governance concerns of corporate America? The recent Wells Fargo and Equifax episodes would suggest otherwise; these are particularly noteworthy because they are both in finance industries, which Dodd-Frank 2010 was explicitly designed to address. We think a more fruitful approach to addressing the corporate governance concerns is to focus on possible common themes underpinning the Enron, WorldCom, Tyco, Qwest, the big banks circa 2008, Wells Fargo, and Equifax scandals. We propose, on the basis of our more recent research, that misaligned CEO incentive compensation is a common theme underpinning the above corporate scandals.


Analysis of the Business Roundtable Statement

Morton Pierce is a partner at White & Case LLP. This is based on his White & Case memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Business Roundtable recently issued a much commented upon Statement on the Purpose of a Corporation (the “Statement”). The Statement purports to redefine the purpose of a corporation as a commitment to all of its stakeholders, including customers, employees, suppliers, communities and, finally, shareholders. Much has already been written speculating on the timing and motivation for the Statement. A more fundamental question is whether it is legally correct or necessary.

In Delaware, where many US public companies are incorporated, the law provides that the business and affairs of a company are entrusted to the oversight of its board of directors. Those directors have a fiduciary duty to act in the best interests of the shareholders. That reflects the basic fact that shareholders own a company, and the directors, and the CEOs those directors choose, are acting on behalf of the shareholder owners.


SEC Testimony: Oversight of the Securities and Exchange Commission: Wall Street’s Cop on the Beat

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on SEC testimony before the U.S. House of Representatives Committee on Financial Services by Chairman Clayton and Commissioners Robert J. Jackson, Jr., Hester M. Peirce, Elad L. Roisman, and Allison Herren Lee, available here.

Chairwoman Waters, Ranking Member McHenry and Members of the Committee, thank you for the opportunity to testify before you today about the work of the U.S. Securities and Exchange Commission (SEC or Commission or agency). [1]

Overview—The SEC’s Mission, People and Governance

The SEC and its tripartite mission—to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation—are critical to the functioning of our economy and the well-being of millions of Americans. With a workforce of almost 4,400 staff in Washington and across our 11 regional offices, the SEC oversees, among other things: (1) approximately $96 trillion in securities trading annually on U.S. equity markets; (2) the disclosures of approximately 4,300 exchange-listed public companies with an approximate aggregate market capitalization of $33 trillion; and (3) the activities of over 26,000 registered entities and registrants including, among others, investment advisers, broker-dealers, transfer agents, securities exchanges, clearing agencies, mutual funds and exchange-traded funds (ETFs), who employ over one million people in the United States. The agency also has oversight of self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB) and the Public Company Accounting Oversight Board (PCAOB).


Taking Corporate Social Responsibility Seriously

Howell E. Jackson is the James S. Reid, Jr., Professor of Law at Harvard Law School and Chair of the Harvard Corporation’s Advisory Committee on Shareholder Responsibility. This post is based on an article originally published in the Harvard Gazette.

Over the past few decades, Harvard like many other major universities has established a variety of mechanisms to get community input on how the university’s endowment should vote its proxies on issues related to the environment and social responsibility. In recent years, many endowments, like Harvard’s, have increasingly come to rely on external managers to invest their assets and no longer retain direct shareholdings of public corporations or the right to vote proxies. To address this change, the Harvard Corporation recently turned to its Advisory Committee on Shareholder Responsibility (ACSR) to assist in drafting new proxy voting guidelines to be shared with external managers. At the same time, the Harvard Management Company also reaffirmed the University’s commitment to engagement initiatives on these issues. As outgoing faculty chair of the ACSR, I recently discussed these changes in an interview with the staff of the Harvard Gazette. That interview appears below along with links to the new Harvard proxy voting guidelines and related documents.


2019 ISS Global Policy Survey Results

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on his Institutional Shareholder Services publication.

Key Findings

  • Board Gender Diversity: Majorities of both investors (61 percent) and non-investors (55 percent) agreed with the view that board gender diversity is an essential attribute of effective board governance regardless of the company or its market. Approximately 27 percent of investors tended to favor a market-by-market approach to reviewing board gender diversity, while 24 percent of non-investors tended to favor an analysis conducted at the company level.
  • Director Overboarding: Investors and non-investors diverged on the question of measurement of director overboarding. A plurality of investor respondents (42 percent) indicated four public-company boards as the appropriate maximum limit for non-executive directors. A plurality of investor respondents (45 percent) also responded that two total board seats is an appropriate maximum limit for CEOs (i.e., the CEO’s “home” board plus one other board). A plurality of non-investors responded that a general board seat limit should not be applied to either non-executives (39 percent) or CEOs (36 percent), and that each board should consider what is appropriate and act accordingly.
  • Board Chair Independence: Concerning the U.S. market, survey participants were asked to identify factors that suggest the need for an independent chair in the context of a shareholder proposal. Investor respondents cited poor responsiveness to shareholder concerns as the most commonly chosen factor that strongly suggested the need for an independent board chair. Additional factors included governance practices that weaken or reduce board accountability to shareholders (such as a classified board, plurality vote standard, lack of ability to call special meetings and lack of a proxy access right). Concerning European markets, 62 percent of investors supported the policy position of a potential vote against the election of a non-independent chair solely based on the principle that the board chair should be independent. Most investor and non-investor respondents, 89 percent and 70 percent, respectively, indicated that they would apply the same approach in European markets where companies are more likely to combine the roles of CEO and Chair as in markets where separating the roles is the norm.
  • Climate Change Risk Oversight: Sixty percent of investor respondents supported the idea that all companies should be assessing and disclosing climate-related risks and taking actions to mitigate such risks where possible, while 35 percent of investor respondents indicated that climate disclosure and action may depend on company-specific factors, including the business model, industry, and location of operations. Only 5 percent of investors indicated that the possible risks related to climate change are too uncertain to incorporate into a company-specific risk assessment model.


Letter to Delaware State Bar Association: Limiting Multi-Class Voting Structures

Ken Bertsch is Executive Director and Jeff Mahoney is General Counsel of the Council of Institutional Investors (CII). This post is based on a comment letter that CII submitted to the Corporation Law Section of the Delaware State Bar Association. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel, the keynote presentation on The Lifecycle Theory of Dual-Class Structures, and the posts on The Perils of Dell’s Low-Voting StockThe Perils of Lyft’s Dual-Class Structure and the Perils of Pinterest’s Dual-Class Structure (discussed on the Forum herehere, and here).

September 13, 2019

Henry E. Gallagher, Jr. Council Chair
Corporation Law Section of the Delaware State Bar Association
1201 North Market Street, 20th Floor
Wilmington, DE 19801

Dear Mr. Gallagher:

We are writing on behalf of the Council of Institutional Investors (CII) to request that the Delaware State Bar Association propose to the Delaware General Assembly that Delaware General Corporation Law (DGCL) be amended to limit the authority of Delaware corporations listed on national securities exchanges to adopt multi-class common stock structures with differential voting rights (“multi-class voting structures”). [1]

A proposed new Section 212(f) of the DGCL is attached as Annex A to this letter. Pursuant to that language, no multi-class voting structure would be valid for more than seven years after an initial public offering (IPO), a shareholder adoption, or an extension approved by the vote of a majority of outstanding shares of each share class, voting separately, on a one-share, one-vote basis. Such a vote would also be required to adopt any new multi-class voting structure at a public company. The prohibition would not apply to charter language already existing as of a legacy date.

The reasons for our request are explained below.


Sustainability in Corporate Law

Stavros Gadinis is professor of law and Amelia Miazad is founding Director and Senior Research Fellow of the Business in Society Institute at Berkeley Law School. 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).

Over a quarter of total assets under management is now invested in socially responsible companies. This marks an astounding repudiation of Wall Street’s get-rich-fast mentality, as well as a direct challenge to corporate law’s reigning mantra of profit maximization. Yet, this new direction has gained followers not only among progressive academics and policy makers, but also among conservative corporate law scions and financial industry leaders. It has particularly benefited from the support of large asset managers like Blackrock, State Street, and Vanguard. And, if one is to judge by the 181 CEO signatures on the Business Roundtable’s recent Statement of Purpose Letter, companies may be listening. How can we understand the business world’s recent focus on stakeholders and environmental and social issues? And how can we reconcile it with shareholder primacy, the reigning mantra in corporate law?


The Fearless Boardroom

Laurie Hays is Managing Director for Special Situations at Edelman. This post is based on an Edelman memorandum by Ms. Hays.

Societal and governance issues pelting boards of directors—from the rise of the #MeToo movement, activist investors and impact funds are starting to redefine the traditional relationship between directors and the CEO. Boards once pals with leadership while keeping to the tradition of not meddling are now assessing potential structural changes needed to create a more productive—and safer—relationship.

With directors’ personal reputations at stake, as well as personal liability, they are strengthening monitoring programs, asking tougher questions and engaging in more vigorous debate on topics boards used to avoid, such as sexual harassment by the CEO. The upshot: The question now is not what did the board know but why didn’t the board know?

“The danger of the CEO getting directors in trouble as their personal activities have come into focus has grown exponentially,” observes Charles Elson, director of the Center for Corporate Governance at the University of Delaware.


Investment Advisers, Fiduciary Duties, and Voting Obligations

Jason M. Daniel is a partner at Akin Gump Strauss Hauer & Feld LLP. This post is based on his Akin Gump memorandum.

On August 21, 2019, the Securities and Exchange Commission (SEC) voted 3 to 2 to adopt new interpretive guidance (the “Voting Interpretation”) applicable to investment advisers regarding their proxy voting responsibilities as a fiduciary. [1] While the Voting Interpretation provides guidance that would be helpful for registered investment advisers in crafting their proxy voting policies, the Voting Interpretation is intended to apply to all investment advisers irrespective of their registered status. The following is a summary of the Voting Interpretation and a checklist to aid in updating compliance manuals to address these issues.

The Voting Interpretation restates and expands previous staff guidance [2] regarding the scope of the voting obligations and considerations for the retention of proxy advisory firms in a manner consistent with the SEC’s final interpretation of investment adviser fiduciary duties [3] (the “Fiduciary Interpretation”) adopted in the summer of 2019. Contemporaneously with the adoption of the Voting Interpretation, the SEC also adopted a separate interpretation that proxy advisory firms are making a “proxy solicitation” when they recommend votes to their clients and are subject to the antifraud requirements of Regulation 14A under the Securities Exchange Act of 1934. [4]


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