Monthly Archives: November 2019

Policy Overhaul—Executive Compensation

The Council of Institutional Investors Policies Committee is chaired by Aeisha Mastagni. The complete CII Policies on Corporate Governance are available here. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

On September 17, 2019, members of the Council of Institutional Investors overhauled CII’s policy on executive compensation. That policy is part of CII’s broader, member-approved Policies on Corporate Governance. Among other things, the changes suggest public companies dial back the complexity of their executive compensation plans. The newly revised policy appears below.

Section 5.1: Core Objectives of Executive Pay

Executive compensation should be designed to attract, retain and incentivize executive talent for the purpose of building long-term shareholder value and promoting long-term strategic thinking. CII considers “the long-term” to be at least five years. Executive rewards should be generally commensurate with long-term return to the company’s owners. Rewarding executives based on broad measures of performance may be appropriate in cases where doing so logically contributes to the company’s long-term shareholder return.

Executive compensation should be tailored to meet unique company needs and circumstances. A company should communicate the board’s basis for choosing each specific form of compensation, including metrics and goals. This may include industry considerations, business lifecycle considerations and other company-specific factors. Companies should explain how the components of the package tie to the company’s core objectives and fit together to a collective end.


Performance Metrics: Accelerating the Stakeholder Model

Connor Doyle is a Research Analyst at Equilar, Inc. This post is based on his Equilar memorandum.

On August 19, the Business Roundtable made waves in the corporate governance community by publishing its Statement on the Purpose of a Corporation. By shifting away from a model that emphasizes shareholder return over all other considerations, the Business Roundtable asserted that companies should embrace the “Stakeholder Model,” meaning that corporations should balance the needs of all stakeholders in a business: shareholders, employees, customers and the communities in which a business operates.

While this declaration has no enforcement mechanism of its own, it represents a significant rethinking of the way corporations operate in a capitalist framework. The Roundtable proposal requires corporate participation to become effective, and while the announcement caused a stir in the corporate governance world, it came at a time when institutional investors and activists had already demanded that boards pay closer attention to subjects like diversity, environmental impact and corporate responsibility. This begs the question, does the Roundtable statement represent a fundamental departure from corporate governance trends, or does this announcement fall in line with a movement away from the shareholder model towards one that emphasizes the needs and concerns of all stakeholders?


Weekly Roundup: November 22–27, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 22–27, 2019.

Delaware Dismissal of Excessive Director Pay Case

Form 20-F for Fiscal Year 2019: What Foreign Private Issuers Should Keep in Mind

Proxy Advisory Firms—The SEC Drops the Other Shoe

Robovoting and Proxy Vote Disclosure

Does Money Talk? Market Discipline Through Selloffs and Boycotts

Measures of Corporate Effectiveness and the Management Top 250 Rankings

The Proxy War Against Proxy Advisors

Proposed Amendments to Regulate Proxy Voting Advice and to Modernize the Shareholder Proposal Rule

Keith Higgins is chair of the securities and governance practice and Paul M. Kinsella is partner at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

Reform of proxy advisory firms and the shareholder proposal process has been on the business community’s agenda for some time. On November 5, 2019, the SEC proposed amendments to regulate proxy voting advice (the “Proxy Release”) [1]  and amendments to modernize the process for shareholder proposals under Exchange Act Rule 14a-8 (the “Shareholder Proposal Release”). [2] The SEC issued the releases in separate 3-2 votes, with Chairman Clayton and Republican Commissioners Peirce and Roisman forming the majority in both instances and Democratic Commissioners Jackson and Lee dissenting. This Alert summarizes key aspects of the two rule proposals.


Background. The rule proposals reflect the SEC’s ongoing focus on reforming the proxy process. They follow the SEC’s recent guidance clarifying the applicability of the federal proxy rules to proxy voting advice and the proxy voting responsibilities of investment advisers (as discussed in this prior Alert), roundtables on the proxy process in 2018 and proxy advisory services in 2013, and the publication of a concept release on the U.S. proxy system in 2010.


The Proxy War Against Proxy Advisors

Michael T. Cappucci is Senior Vice President at Harvard Management Company. This post is based on a recent paper by Mr. Cappucci.

“Proxy war” – a war instigated by a major power which does not itself become involved.
Oxford English Dictionary

On November 5, 2019, the U.S. Securities and Exchange Commission (“SEC”) released for public comment a proposal for a series of rule amendments, which, if adopted, have the potential to significantly change the way proxy advisory firms provide voting advice and shareholders vote proxies (the “Proposed Amendments”). The release comes on the heels of separate SEC guidance on the use of proxy advisors issued in August 2019, which itself was a follow-up to a roundtable discussion convened in November 2018. Prior to these recent actions by the SEC, separate bipartisan bills had been introduced in the US House and US Senate that would have subjected proxy advisors to additional regulation and oversight.


Measures of Corporate Effectiveness and the Management Top 250 Rankings

Rick Wartzman is head of the KH Moon Center for a Functioning Society, a part of the Drucker Institute, and Kelly Tang is senior director of research at the Drucker Institute.

After the Business Roundtable announced last August that the CEOs of many of America’s largest companies were making a “fundamental commitment to all of our stakeholders”—and would no longer stand behind the notion that shareholders’ interests should be placed ahead of everyone else’s—the reaction from many quarters was swift: That sounds great. But how are we going to be able to tell if any of this is real?

“As every member of the Business Roundtable assuredly knows, accomplishing anything depends on defining terms, setting goals, and measuring progress,” Gallup observed. “Simply, the members of the Roundtable need new metrics.”


Does Money Talk? Market Discipline Through Selloffs and Boycotts

Nickolay Gantchev is Associate Professor at the Southern Methodist University Cox School of Business; Mariassunta Giannetti is Professor of Finance at the Stockholm School of Economics; and Rachel Li is Assistant Professor at the University of Alabama Culverhouse College of Business. This post is based on their recent paper. 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).

Market discipline is viewed by policy makers as essential to achieve a more environmentally and socially sustainable economy. For instance, almost half of the respondents to a recent institutional investor survey consider environmental, social, and governance factors in their investment decision-making (See This suggests that investors have ethical and social standards and may be willing to vote with their wallets and spurn firms that fall short of their expectations on ethical norms and environmental and social (E&S) principles. Similarly, customers are concerned with more than just product quality or prices and may be willing to pay a cost if firms meet their E&S preferences.

However, little is known about whether small investors and customers can impose market discipline with their product purchases and trading of firms’ shares. This is an important question because market discipline may or may not be effective for several reasons. First, for market discipline to be effective, expectations on the combined impact of investors’ and customers’ actions must be large enough to affect firm valuations and trigger changes in corporate behavior.


Running the Risks: How Corporate Boards Can Oversee Environmental, Social And Governance Issues

Veena Ramani is Senior Program Director, Capital Markets Systems and  Hannah Saltman is Manager, Governance at Ceres. This post is based on their Ceres report. 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).

As the risks from environmental, social and governance (ESG) issues such as climate change, water scarcity and human rights become more apparent, and with growing investor attention and action on ESG issues, it is increasingly important for corporate boards to understand how these issues affect business strategy and performance. Impacts from these issues can be financial, material, and can spread across multiple areas of a business. No longer off in the future or merely hypothetical, many of these impacts are being felt now across almost every sector of the economy.


Robovoting and Proxy Vote Disclosure

Paul Rose is the Robert J. Watkins/Procter & Gamble Professor of Law at The Ohio State University Michael E. Moritz College of Law. This post is based on his recent paper.


Recent research has estimated that the recommendations of proxy advisory firms dictate as much as 25 percent of proxy voting outcomes, with the potential to particularly impact smaller companies. As concern over the power of proxy advisors has led the SEC to consider additional regulation, proxy advisors have suggested that such concerns are unfounded.  ISS CEO Gary Retelny recently stated, for example, that “[t]he biggest misconception is that our institutional investors, which exceed 1,500 globally, just follow ISS blindly.  Nothing could be further from the truth.”  However, as detailed in a November 2018 report from American Council for Capital Formation (ACCF), a significant number of asset managers are indeed automatically voting in-line with the recommendations and policies of the two major proxy advisors–referred to as “robovoting” or “autovoting”–rather than actually evaluating the merits of individual proposal before casting their vote.

Accepting the fact that proxy advisors play an important role in reducing costs for asset managers who must vote shares consistent with their fiduciary duties to beneficial owners, the lack of diligence with which many managers use the services of the advisors is cause for concern, particularly when many of the governance recommendations of proxy advisors are based on thin (or no) empirical evidence. Also of concern is whether investment advisers are providing transparent disclosure regarding their use of those proxy advisors, and whether that disclosure is matched by how reliant they are on proxy advisors’ recommendations. Despite public statements that these advisors are merely data aggregators and independent providers of information, it appears that some institutional investors have become overly reliant on the recommendations of proxy advisors, often outsourcing analysis and voting decisions to the two largest firms in the market without adequate disclosure of that reliance.

Proxy Advisory Firms—The SEC Drops the Other Shoe

Nicolas Grabar, Arthur H. Kohn, and David Lopez are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Grabar, Mr. Kohn, Mr. Lopez, Sandra Flow, and Elizabeth Bieber.

On November 5, a divided Securities and Exchange Commission (“SEC”) proposed new rules about proxy advisory firms.

The proposed rules would, if adopted, have three principal effects:

  • Before a proxy advisory firm distributes its recommendations for a particular shareholder vote to its clients, it would be required to give a company an opportunity to comment on the recommendations. The proposed rules provide specific choreography for this interaction between the firm and the company.
  • In the proxy voting advice that a proxy advisory firm distributes to its clients, the firm would be required, if the company so requests, to include a hyperlink to a company statement responding to the firm’s recommendations.
  • The proxy voting advice would also be required to include disclosures on conflicts of interest, including between the proxy advisory firm and the company. The firm would also have a strong incentive, under revised antifraud provisions, to include disclosure on its methodology and sources.

The proposed rules would also codify the view that proxy voting advice, as it is currently provided by ISS and Glass Lewis, constitutes a proxy solicitation. This view underpins the SEC’s attempt to regulate the proxy advisory firms, and it is hotly contested, including in a lawsuit filed by ISS in late October.


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