Monthly Archives: November 2019

The Stewardship Implications of Passive Investing: Mobilizing Large Asset Managers as Stewards of Capital Markets

Jackie Cook is Director of Manager Research and Jasmin Sethi is Associate Director of Policy Research at Morningstar, Inc. This post is based on their Morningstar memorandum. 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).

A defining trend of global financial markets over the past 10 years has been growing investor preference for low-cost investment products with broad market exposure.

The shift in assets from actively managed instruments to passive investing strategies is re-shaping both the asset management industry and the structure of corporate shareholding.

Because of the economies of scale in index investing, the asset management industry is becoming more concentrated and the largest players own and control a greater portion of the global securities market.

Furthermore, index-tracking investing removes much of the flexibility of portfolios to diversify away from risky corners of the market while potentially affording the space for longer-term business strategies and investment horizons.


Company Hedging Policies: Observations from New Proxy Disclosures

David Gordon is a managing director, and Dina Bernstein and Andrew R. Lash are consultants at Frederic W. Cook & Co., Inc. This post is based on a FW Cook memorandum.

On December 18, 2018, the Securities and Exchange Commission (SEC) approved final rules requiring the disclosure of hedging policies in annual proxy statements. The rules, which became effective for proxy statements filed in fiscal years beginning on or after July 1, 2019, implement a Dodd-Frank mandate.

We reviewed the first 40 proxies that included the newly required disclosure (covering the period from August 23, 2019 to October 4, 2019) and observed the following about the companies we examined:

  • 100% have hedging policies in place;
  • 62% have hedging policies that cover directors and all employees;
  • 58% disclose policies that prohibit both transactions in company stock with a hedging function and derivative transactions generally; and
  • 60% include their hedging disclosure only in the Compensation Discussion & Analysis (CD&A) section of the proxy


Remarks by SEC Commissioner Hester Peirce before the 51st Annual Institute on Securities Regulation

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent Remarks before the 51st Annual Institute on Securities Regulation, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Meredith [Cross], for that kind introduction. It is an honor to be with you here today. I must begin with my standard disclaimer that the views I represent are my own views and not necessarily those of the Commission or my fellow Commissioners.

It is hard to believe that 2019 is almost over. When I think back on the year, one defining theme is broken windows. Why is 2019 the “Year of the Broken Window”? I live in an condominium building with a lobby that has three sides of floor to ceiling windows. Three times this year, I have come down into the lobby to find one of these large windows broken. The first time was the routine, upset resident taking a soul-satisfying, hand-crushing whack at a window. The second two incidents though were a bit less commonplace. One morning, I came down around 7 a.m. to find a van nose-first in the lobby. Rather than rounding the semicircular driveway in front of the building, the van headed straight into the lobby. Texting while driving? Medical emergency? Brake failure? I am not sure which, but I did feel bad for the driver, who, although apparently uninjured, was obviously unhappy. Misery loves company, however, and this driver got company. A couple months later, I once again came down in the morning to find a shattered window. No vehicle this time. It had already been cleared out of the lobby. From the condo rumor mill, I gleaned that an early morning car chase had ended with one of the vehicles in my building’s lobby.


A Guidebook to Boardroom Governance Issues

Katherine HendersonAmy Simmerman are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Ms. Henderson, Ms. Simmerman, Brad Sorrels, Ryan Greecher, David Berger, and Lisa Stimmell.

In recent years, we have seen boards and management increasingly grapple with a recurring set of governance issues in the boardroom. This publication is intended to distill the most prevalent issues in one place and provide our clients with a useful and practical overview of the state of the law and appropriate ways to address complex governance problems. This publication is designed to be valuable both to public and private companies, and various governance issues overlap across those spaces, although certainly some of these issues will take on greater prominence depending on whether a company is public or private. There are other important adjacent topics not covered in this publication—for example, the influence of stockholder activism or the role of proxy advisory firms. Our focus here is on the most sensitive issues that arise internally within the boardroom, to help directors and management run the affairs of the corporation responsibly and limit their own exposure in the process.

The Purpose of the Corporation and the Role of Stakeholders

Corporate purpose, along with the related question of whether and how a board of directors should consider non-stockholder interests—such as environmental, social, and governance (“ESG”) issues—has become a major source of debate among policymakers, lawyers, academics, institutional investors, and even jurists in recent years. This debate challenges the dominance of stockholder primacy ideology, which has effectively constrained corporate boards since at least the mid-1980s.


Designing Proposals with your Unique Investors In Mind

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.

When designing proposals and considering governance topics such as board composition and tenure, it’s surprising how many issuers leave a key box unchecked when deciding on what they put forward. Working with their counsel and bankers, boards work hard to ensure a proposal aligns with the expectations of the regulators and conforms to market standards, and even gets a thumbs-up from ISS and Glass Lewis. However, in the process, they often forget to ask what their unique shareholder base wants.

With an increase in both the number and size of internal governance teams at institutional investors, more prescriptive policies being developed—such as those on ESG issues and diversity—and a decreasing willingness to farm out vote decisions to the proxy advisors, it is incumbent on issuers to ensure they not only understand, but also take into consideration, the voting policies of their shareholders to ensure vote success.


Weekly Roundup: November 1–7, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 1–7, 2019.

The Proxy 2019 Season Hints at New Challenges

Stewardship: The 2020 Vision

Conflicted Controllers, the “800-Pound Gorillas”: Part I—Tornetta

2019 Annual Corporate Governance Review

Fiduciary Duties of Proxy Advisors Under the Investment Advisors Act

New Guidance on Excluding Shareholder Proposals

Index Funds and the Future of Corporate Governance: Replying to Critics

The Basis for ISS’ Lawsuit Against the SEC

Conflicted Controllers, the “800-Pound Gorillas”: Part II—BGC

Remarks of Chairman Jay Clayton to the SEC Investor Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s remarks to the SEC Investor 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.

I would like to thank the Committee members and the panelists for engaging on the topics on today’s agenda. I am disappointed not to participate in the meeting today. The topics on your agenda today—(1) Whether Investors Use Environmental, Social, and Governance (ESG) Data in Investment/Capital Allocation Decisions, and (2) our Concept Release on Harmonization of Securities Offering Exemptions—are of great interest to me.

As a coincidence, yesterday, I had a very constructive meeting with Valdis Dombrovskis, Executive Vice President of the European Commission, and today, I am attending a Financial Stability Board meeting. Each meeting has a significant focus on the first topic on today’s agenda.

For various reasons, including that the Commission is actively engaged on the agenda topics, I would like to share some of my view on those matters. In addition, I have identified some other potential areas of focus for this Committee that I believe would contribute to the Commission’s work. [1]


Statements of Commissioner Hester Peirce on Proposed Amendments to Improve Accuracy and Transparency of Proxy Voting Advice, and on Proposed Amendments to Modernize Shareholder Proposal Rule

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent statements at an open meeting of the SEC, available here and here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. Thank you to the Chairman, Commissioner Roisman, the staff in the Divisions of Corporation Finance and Economic and Risk Analysis, and other staff throughout the building for today’s effort to address weaknesses in the existing proxy process. I am looking forward to hearing the views of commenters in response to today’s proposal.

Both in this proposal and the next one we will consider nuanced and technical areas of our regulations, and there are several competing—and important—interests that must be balanced. In taking the lead on this set of issues, Commissioner Roisman has put his considerable talent into forging what I believe to be a workable solution for all parties.

Proxy voting advice businesses play a valuable role in the proxy process. Today’s proposal recognizes that fact with proposed transparency and accountability measures. Firms that provide proxy voting advice offer valuable help to investors and their advisers, who are faced with many voting decisions. Today’s proposed amendments should help to ensure that proxy voting advice businesses disclose conflicts of interest which might color their recommendations. The proposals also respond to concerns that issuers have raised with us about their difficulty in timely flagging and responding to factual errors contained in proxy voting recommendations. The proposals seek to ensure that all registrants, not just the biggest firms, have the opportunity to identify these factual inaccuracies in time for them to be corrected.


Does Trados Matter?

Abraham Cable is Professor of Law at University of California Hastings College of the Law. This post is based on his recent paper, forthcoming in The Journal of Corporation Law. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Agency Costs of Venture Capitalist Control in Startups by Jesse Fried and Mira Ganor.

Delaware courts are producing a growing cannon of corporate law recognizing the distinctive business environment of Silicon Valley. Trados is a prominent example. In a recent paper, I ask Silicon Valley lawyers whether the high-profile case actually affects their advice to clients. The answer? A resounding sort of.

In Trados, the Delaware Chancery Court criticized a board controlled by venture capital funds holding preferred stock. The board approved a merger that, in accordance with customary Silicon Valley stock terms, resulted in a modest payout to investors holding preferred stock but no consideration to common shareholders. Though the court ultimately found in favor of the defendant directors, the court sharply criticized the board’s process and lack of regard for common holders. According to the court, the board “did not understand . . . their job,” “refused to recognize the conflicts they faced,” and engaged in a “vigorous and coordinated effort” to “recharacterize their actions retrospectively.” The only saving grace for the board was their expert witness, who convinced the court that the common stock in fact had no substantial value.


Conflicted Controllers, the “800-Pound Gorillas”: Part II—BGC

Gail Weinstein is senior counsel, and Brian T. Mangino and Andrew J. Colosimo are partners at, Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum authored by Ms. Weinstein, Mr. Mangino, Mr. Colosimo, Steven Epstein, Matthew V. Soran, and Randi Lally, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

In the past quarter, two important Court of Chancery decisions—Tornetta and BGC—have highlighted the “reflexive skepticism” with which the Delaware courts approach transactions involving conflicted controllers.

  • In Tornetta, a case of first impression according to the court, Vice Chancellor Slights held that unless a board’s decision on executive compensation for a controlling stockholder-CEO complies with the protections outlined in the seminal MFW decision, the entire fairness standard of review (which is the strictest standard) applies to the court’s evaluation of a stockholder challenge to the compensation. The court so decided notwithstanding that, until now, a) business judgment review has applied to compensation decisions made by independent directors and b) MFW-compliance has been required for business judgment review of conflicted controller transactions only in the context of transactions that are “transformational” for the corporation.
  • In BGC, Chancellor Bouchard applied what seems to be a more stringent standard than in the past for evaluating whether putatively independent directors can be presumed to be capable of acting independently from a controller in the context of evaluating demand (“Demand futility” means that a stockholder who wishes to bring claims against a controller need not first make a demand on the board—for the board to bring the claims on behalf of the corporation—if doing so would be “futile” because the directors’ conflicts or lack of “independence” suggest that they might not be capable of making the decision impartially.) The Chancellor appeared to focus on the sense of owingness that a director could feel toward a controller if the director’s general status or positions of importance in the company or the community were a result of his or her connection with the controller.


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