Monthly Archives: November 2019

CEO Chairman. Two Jobs, One Person

Joseph Mandato is a Managing Director at DeNovo Ventures and William Devine leads the Corporation in Society practice at William Devine Esquire. This post was authored by Mr. Mandato and Mr. Devine.

Do recent events at Boeing and WeWork mean that American corporations can no longer afford to give the CEO job and the board chairman job to the same person?

To recap: during Dennis Muilenburg’s just-concluded tenure as both CEO and chairman of Boeing, Co., the nation’s 28th largest corporation attempted to contain costs and speed regulatory approval by outfitting its flagship airliner with a flawed flight control system. It then failed to tell pilots and the FAA about the flaws, despite apparently knowing about them.

These choices resulted in two plane crashes, the grounding of almost 500 planes worldwide, company losses that will exceed $7 billion, and the loss of 346 lives. Apparently seeing a connection between these results and the decision to let one man try to perform two jobs, the board removed Muilenburg as board chairman.

Meanwhile, during the last three and a half years of Adam Neumann’s just-concluded tenure as both CEO and chairman of WeWork, the office subleasing start-up’s financial reports regularly showed it spending two dollars for every dollar earned. The corporation’s commitment to this burn rate during those years resulted in operating losses that exceed $4 billion.

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Index Funds and the Future of Corporate Governance: Presentation Slides

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Scott Hirst is Associate Professor at Boston University School of Law and Director of Institutional Investor Research at the Harvard Law School Program on Corporate Governance.

This post is based on their recent presentation slides. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the Forum here and here); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

We recently placed on SSRN a revised version of our study, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy. That revision expands our work to engage in detail with points raised by commentators taking issue with our view of index fund stewardship and updates our empirical work. In addition, we have just placed on SSRN a set of presentation slides that provide an overview of our study.

These slides build on and update the slides we presented at the 2019 ECGI Annual Meeting in Barcelona in which our study was awarded the ECGI’s Cleary Gottlieb Steen Hamilton Prize.

The slides begin by describing the agency-costs theory of index fund incentives that we put forward. Our agency-costs analysis shows that index fund managers have strong incentives to (i) underinvest in stewardship and (ii) defer excessively to the preferences and positions of corporate managers.

The slides then present an overview of our empirical findings regarding the range of stewardship activities that index funds do and do not undertake. We discuss four dimensions of the Big Three’s stewardship activities:

  • the limited personnel time they devote to stewardship regarding most of their portfolio companies;
  • the small minority of portfolio companies with which they have any private communications;
  • their focus on divergences from governance principles and their limited attention to other issues that could be significant for their investors; and
  • their pro-management voting patterns.

The slides also present an overview of our empirical evidence regarding five ways in which the Big Three may fail to undertake adequate stewardship:

  • the limited attention they pay to financial underperformance;
  • their lack of involvement in the selection of directors and lack of attention to important director characteristics;
  • their failure to take actions that would bring about governance changes that are desirable according to their own governance principles;
  • their decision to stay on the sidelines regarding corporate governance reforms; and
  • their avoidance of involvement in consequential securities litigation.

We explain that this body of evidence is, on the whole, consistent with the incentive problems that our agency-costs framework identifies. Finally, the slides conclude by discussing the policy implications of the theory and evidence we put forward.

The presentation slides are available here. Comments on the slides or the underlying study are most welcome.

2020 Policy Guidelines—United States

Courteney Keatinge is Senior Director, Environmental Social & Governance Research and Kern McPherson is Vice President, Research & Engagement at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

Glass Lewis’ Policy Guidelines provide an overview of our approach to governance and proxy research. Updated guidelines are now available for the following markets:

  • Canada
  • China
  • Continental Europe
  • Israel
  • Shareholder Initiatives
  • Taiwan
  • United Kingdom
  • United States

In developing our policies, we consider a diverse range of perspectives and inputs, with ongoing analysis of regulatory developments, academic research and evolving market practices as a starting point. We incorporate insights gained from discussions with institutional investors, trade groups and other market participants, as well as meetings of the Glass Lewis Research Advisory Council. Further, our engagement meetings with over 1,500 public companies each year help shape our guidelines by adding essential market- and industry-specific context.

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Remarks by SEC Chairman Clayton to the SEC’s Small Business Capital Formation Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s remarks at the Meeting of the SEC’s Small Business Capital Formation Advisory Committee, 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.

Thank you Carla [Garrett], members of the Small Business Capital Formation Advisory Committee, Martha [Miller], and the staff in the Office of the Advocate for Small Business Capital Formation. [1] It is nice to join you again for today’s meeting.

I am pleased that you will devote today’s meeting to a discussion of the concept release on harmonization of securities offering exemptions. [2] Taking a critical look at our offering exemptions is important for investors and issuers alike.

First, I believe that our private markets are not providing opportunities to our Main Street investors to the same extent, including quality, they provide our institutional investors. Our markets are far different today than they were 35 or more years ago. Then, our private capital markets were a minor component of our economy for both companies and investors. Today, in terms of the amount of capital raised, investment opportunities, returns and other key metrics, our private capital markets often are seen as more attractive for companies and professional investors than our public markets.

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The 2019 CPA-Zicklin Index of Corporate Political Disclosure and Accountability

Bruce F. Freed is President and Dan Carroll is Vice President for Programs at the Center for Political Accountability; and William S. Laufer is the Julian Aresty Professor at The Wharton School of the University of Pennsylvania. This post is based on a CPA publication by Mr. Freed, Mr. Carroll, Mr. Laufer, and Karl Sandstrom. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); and Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

More publicly held U.S. companies are adopting the strongest measures of transparency and accountability over their corporate political spending. These findings emerge from the 2019 CPA–Zicklin Index, an annual non-partisan scorecard released on October 24, 2019 by the Center for Political Accountability (CPA) and the Zicklin Center for Business Ethics Research at The Wharton School of the University of Pennsylvania. This year’s Index takes on added importance as companies have to grapple with today’s polarized, hyper-sensitive political environment.

Three major findings stand out in the 2019 Index:

  • The largest year-to-year increase in Trendsetter—top scoring—companies. The number stands at 73, up from 57 last year.
  • A doubling in the number of companies with improved scores of 50 points or more, from eight last year to 16 this year; and
  • 60 companies had substantive conversations with CPA about adopting or strengthening political disclosure and accountability policies.

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Civil Rights and Shareholder Activism: SEC v. Medical Committee for Human Rights

Sarah C. Haan is Associate Professor of Law at Washington and Lee University School of Law. This post is based on her recent paper, forthcoming in the Washington and Lee Law Review.

In the fall of 1971, SEC v. Medical Committee for Human Rights was billed as one of the most important cases of the Supreme Court’s new term. Though nominally an administrative law case, it was highly anticipated because of its potential to define the scope and meaning of “corporate democracy.”  The case was an appeal of a decision of the D.C. Circuit that had sided with a socially-progressive shareholder (Medical Committee for Human Rights, a civil rights organization) over Dow Chemical Company, one of the country’s largest public companies.

My new paper, Civil Rights and Shareholder Activism: SEC v. Medical Committee for Human Rights, recounts the history of this litigation, which began in 1968 with the submission of a Rule 14a-8 shareholder proposal seeking to end Dow’s practice of manufacturing napalm. It ended in 1972, when the Supreme Court declared the controversy moot. Justice William O. Douglas, the former New Deal chairman of the SEC, dissented—noting, presciently, that the issues raised by the case were likely to recur. Of course, history has vindicated Justice Douglas’s prediction.

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How Corporate Lawbreakers Get a Leg Up at the Justice Department

Nick Schwellenbach is a senior investigator at the Project On Government Oversight (POGO). This post is based on his POGO publication.

The Project On Government Oversight (POGO) revealed in August that top political appointees at the Justice Department’s headquarters in Washington, DC, overruled career federal prosecutors who sought to bring a felony charge against biotech giant Monsanto for illegally spraying a highly toxic pesticide in Hawaii. This happened after attorneys for Monsanto, including a former head of the department’s criminal division, appealed for a review. When such appeals—which happen behind closed doors—are successful, they have played a part in what is widely seen as the Justice Department’s lenient approach to corporate crime.

As POGO wrote, this wasn’t the only case where appeals from corporate defense attorneys to department headquarters—often referred to as Main Justice—played a role in overruling or delaying prosecutors’ decisions.

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Le Club des Juristes Commission Shareholder Activism Report

Michel Prada is former Chairman of the Autorité des Marchés Financiers (AMF) and Benjamin Kanovitch is a partner at Bredin Prat. This post is based on a le Club des Juristes Commission report. 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), Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here), and Against All Odds: Hedge Fund Activism in Controlled Companies by Kobi Kastiel.

2018 was a record year for shareholder activism, and the rise of activists, in Europe and France specifically, has become an industry issue.

The Commission’s aim is not to take sides in the economic, political and sometimes philosophical debate between supporters and opponents of shareholder activism, or to take a position on any particular activist campaign, present or past. Instead, the aim is to identify behaviors that may damage transparency, fairness and the proper functioning of the market, and to examine, in legal terms, rules and best practices that could be applied to activist campaigns.

The work done by the Club des Juristes Commission consisted of arranging interviews with some thirty stakeholders in the area of shareholder activism, representatives of issuers and investors, and market intermediaries and qualified professionals, in order to benefit from their experience and obtain their opinions about possible future legal arrangements. To supplement the analysis, a survey was carried out among approximately 200 CFOs and heads of investor relations working for listed companies.

This post, after reviewing the current state of shareholder activism and identifying the areas that require improvement, proposes a series of recommendations regarding :

  • transparency rules governing activist campaigns;
  • the strengthening of dialogue between issuers and investors; and
  • the role of the AMF and ESMA.

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Understanding the Impact of America’s Clampdown on Proxy Advisors

Amy Freedman is Chief Executive Officer, Michael Fein is Executive Vice President, Head of US Operations, and Ian Robertson is Executive Vice President, Communication Strategy at Kingsdale Advisors. This post is based on a their Kingsdale memorandum.

In 2003, the SEC put forward a rule that required institutional investors to disclose their votes and provide an explanation as to why they voted the way they did. This paved the way for the rapid growth and influence of proxy advisors such as Institutional Shareholder Services, Inc. (ISS) and Glass Lewis, & Co. (Glass Lewis), which quickly became a cost- and time-effective resource for funds seeking to rationalize their vote decisions.

The SEC has once again shifted the paradigm by recently declaring that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” and issuing guidelines for investment advisors to follow when voting for their clients. When the SEC started its process, it was clearly interested in reforms that would “rebalance” the role of the proxy advisors and “protect the interests of the broader shareholder universe.” Politicians had previously advanced this agenda by introducing bills—such as House Bill 4015, introduced in 2017 and passed in 2018, and Senate Bill 3614, introduced in fall 2018—requiring proxy advisors to register with the SEC, among other things. While none of these bills became law, they have helped to fan the flames of public attention on an issue most average investors know nothing about.

It is estimated that ISS and Glass Lewis have more than 97% market share in the proxy advisory space (Egan-Jones, Segal Marco Advisors, and ProxyVote Plus make up the balance) with many investors subscribing to more than one. Establishing a proxy advisory firm takes not only a significant financial investment but also a tremendous knowledge base, so it is unlikely a new entrant or even one of the smaller players will shift this balance any time soon.

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What Does the Growth of Impact Investing Mean?

Michael J. Preston is a partner and Michael James is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

The amount of money being committed to impact investing strategies around the world has grown to $502 billion, managed by 1,340 organisations based in every continent and investing globally on behalf of family offices, banks, foundations and pension funds, according to analysis by the Global Impact Investing Network (GIIN).

In a white paper published in April 2019, the GIIN estimated that over 800 asset managers now account for about 50% of assets focused on impact investing, while 31 development finance institutions manage just over a quarter of industry assets and several large investment firms manage over $1 billion each.

Impact investing is a nascent strategy and continues to rapidly develop and define itself, but it generally refers to investments made with the intention of generating positive, measurable social and environmental impacts, often with the aid of active involvement from the investor. Unlike philanthropic investing, impact investment also seeks to generate a competitive financial return. It can also be distinguished from so-called ESG (environmental, social and governance) or SRI (socially responsible investing) strategies, which typically sit within a broader investment decision-making framework and provide negative screens based on ethical or other values-based considerations.

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