Monthly Archives: November 2019

Views from the Steering Room: A Comparative Perspective on Bank Board Practices

Stilpon Nestor is Managing Director and Konstantina Tsilipira is an Analyst at Nestor Advisors Ltd. This post is based on their Nestor Advisors report.

Introduction

This post is based on research carried out for a European client bank. It is about board governance in large banking organisations. Using information from a sample of 32 international “best practice” banks compiled by Aktis Ltd (www.aktisintel.com) and a series of interviews with bank board leaders and senior supervisors, we examine the way bank boards organise themselves to effectively deliver their tasks: directing and controlling the organisations they lead; and taking timely, effective decisions in this regard.

The complete publication develops along three broad themes: board leadership, board interface with management and board—level strategic human resources issues. This post focuses on four specific areas within these broad themes: board composition, i.e. the profile of the people that populate the boards of best practice banks; board succession planning and nomination approaches which will determine the quality of people over time and ensure continuity; board committees, i.e. the way the board organises itself to manage areas where conflicts might arise and/or where expertise and deep dives are required; and senior management committee architecture, which reflects the changing strategic priorities and risk perspectives of major banks, determines the sources of board information and orders accountability of management to the board.

We recognise that best practice in the areas under investigation comes in many forms. Differences are due not only to jurisdictional idiosyncrasies but also to different philosophies, corporate origins and legacy. While common solutions do exist, very often we find that there is more than one way to address board governance imperatives.

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Fiduciary Duties of Proxy Advisors Under the Investment Advisors Act

Bernard S. Sharfman is Chairman of the Main Street Investors Coalition Advisory Council. This post is based on a recent letter from Mr. Sharfman to the U.S. Securities and Exchange Commission.

The SEC’s proxy process review has so far led the SEC to approve two separate releases regarding proxy advisors. The focus of this comment letter is on the guidance provided in one of those releases, Release No. IA-5325 (Release). This guidance identifies, under the Investment Advisers Act of 1940 (Advisers Act or Act), a “principles-based fiduciary duty” that requires investment advisers with delegated voting authority to closely monitor the voting recommendations and research provided them by their proxy advisors. This comment letter recommends that the SEC provide additional guidance that recognizes a corresponding “principles-based fiduciary duty” owed by proxy advisors to their clients. This fiduciary duty would arise from the SEC recognizing proxy advisors as investment advisers under the Act. This duty would require proxy advisors to “implement policies and procedures” that result in voting recommendations that are in the best interest of their clients, supporting what is required of investment advisers under Release No. IA-5325. The burden of monitoring this new fiduciary duty would fall on the SEC, not the investment advisers. The following provides the argument for this additional guidance.

The Fiduciary Duties of Investment Advisers

In general, an ‘“investment adviser” means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; ….”’

Section 206 of the Advisers Act establishes “federal fiduciary standards” “to govern the conduct of investment advisers.” As stated by the United States Supreme Court in SEC v. Capital Gains Research Bureau, Inc.:

Nor is it necessary in a suit against a fiduciary, which Congress recognized the investment adviser to be, to establish all the elements required in a suit against a party to an arm’s-length transaction. Courts have imposed on a fiduciary an affirmative duty of “utmost good faith, and full and fair disclosure of all material facts,” “as well as an affirmative obligation “to employ reasonable care to avoid misleading” his clients.

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2019 Annual Corporate Governance Review

Brigid Rosati is Director of Business Development, Hannah Orowitz is a Managing Director, and Rajeev Kumar is Senior Managing Director at Georgeson LLC. This post is based a recent Georgeson memorandum by Ms. Rosati, Ms. Orowitz, Mr. Kumar, Don Cassidy, Talon Torressen, and Ed Greene.

Executive Summary

We are pleased to announce the publication of our 2019 Annual Corporate Governance Review. For the third year in a row, Georgeson partnered with Proxy Insight to coordinate voting data and analytics.

We have expanded our review of environmental, social and governance shareholder proposals that were subject to a vote during the period July 1, 2018 through June 30, 2019.

Governance Shareholder Proposals

The number of corporate governance-related proposals submitted during the 2019 proxy season continued to trend downwards, albeit on a relatively incremental basis. Approximately 71% of these proposals reached a vote, in line with the range of 62% to 75% over each of the past five years. Overall, of the 236 proposals that reached a vote, 43 received majority support across the following categories:

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

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 Executive Compensation in Controlled Companies by Kobi Kastiel (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.

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Stewardship: The 2020 Vision

Saker Nusseibeh is Chief Executive of Hermes Investment Management. This post is based on a Hermes publication by Mr. Nusseibeh, Hans-Christoph Hirt, Leon Kamhi, and Daniel Godfrey. 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).

Stewardship has come a long way since 1983 when visionary CEO, Ralph Quartano, who ran the Post Office pension fund, stood alone in challenging the cosy remuneration packages of company management teams. Today, stewardship has become more widespread, but corporate disasters, scandals or failures, like those at BP, VW and Carillion respectively, demonstrate that much more needs to be done.

As we celebrate the 15th anniversary of our stewardship services for institutional investors at Hermes, it is a natural moment to take stock. Here, we consider the role and practice of stewardship by investors and lay out our vision of how it can fulfil that role more effectively over the next decade.

The purpose of investment is to create wealth sustainably. Success provides investors with income to spend as they get older, an ability to buy the goods and services and helps to build a world in which they are happy to live.

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The Proxy 2019 Season Hints at New Challenges

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 Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

While the 2019 proxy season did not feature any dramatic developments, an interesting element was the slight but noticeable growth of the nascent movement against the use of environmental, social, and political factors in corporate decision-making. Led by groups such as the Free Enterprise Project and Main Street Investors Coalition, shareholder proposals against progressive initiatives increased in both number and visibility. As the number of politically-oriented shareholder proposals has grown in recent years, and as progressive stances have dominated, it is not surprising that conservative-minded investors have attempted to mount a resistance. This small but potentially significant aspect of the 2019 proxy season is an early warning signal to CEOs and directors that a challenge in coming years will be to manage divisive political issues without alienating large groups of stakeholders. While companies must engage with investors and carefully consider issues raised in dialogue or through successful proxy proposals, they must do so in a manner that does not compromise corporate strategic success. This is likely to be an increasingly difficult task.

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Weekly Roundup: October 25–31, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of October 25–31, 2019.


The New Stock Market: Law, Economics, and Policy


Stakeholder Governance—Issues and Answers


Less Aggressive SEC Sanctions on Violations by Crypto Issuers



Recruiting ESG Directors


2019 Proxy Season Review


The Myth of Creditor Sabotage


The New Paradigm





Dilution, Disclosure, Equity Compensation, and Buybacks


NYC Comptroller Boardroom Accountability 3.0


Spin-offs Unraveled



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