Monthly Archives: December 2019

Thoughts for Boards of Directors in 2020

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. RosenblumKaressa L. Cain, and Kathleen Iannone Tatum.

In hindsight, 2019 may come to be viewed as a watershed year in the evolution of corporate governance. After years of growing alarm about endemic short-termism, the sustainability and competitiveness of businesses over a long- term horizon, and the role of corporate policies in contributing to socioeconomic inequality, there has been an emerging consensus that the prevailing corporate governance system is broken. Initially, in the aftermath of the financial crisis of 2008, this critique was focused on short-termism as a root cause of systemic destabilization and decay. In subsequent years, the concept of sustainability gained traction, and ESG (environmental, social and governance) principles were embraced by shareholders and corporations alike as the next frontier in corporate governance best practices. This in turn laid the foundation for the latest iteration of corporate governance modernization: the advent of stakeholder governance, and the realization that the pursuit of wealth maximization for shareholders as the sole raison d’être of corporate governance has been a principal accelerant of short-termism and socioeconomic inequality.

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More Meaningful Ethics

Veronica Root Martinez is Professor of Law at the University of Notre Dame Law School. This post is based on her recent paper, forthcoming in the University of Chicago Law Review.

In the world of compliance, people often mention the importance of ethics, but focus the bulk of their efforts on the creation of a program that is likely to only ensure compliance with legal and regulatory mandates. This is, of course, unsurprising. Coming up with tangible activities related to the creation of a compliance program seems easier in many respects than creating activities associated with ethics, a more nebulous concept. And yet, firms constantly refer to their programs as ethics and compliance programs, without developing the ethics component. Unsurprisingly, the significant corporate misconduct discovered over the past five years appears to have at its core some sort of unethical conduct. Wells Fargo knew fraudulent accounts were being opened at some of its branches. General Motors knew there was something weird going on with its ignition switch. Volkswagen purposefully attempted to dodge emissions scandals. Each of these scandals invoked fundamental concerns about the strength of each firms’ ethical culture. These examples, and others like them, serve to demonstrate that organizations must do more than ensure rote compliance with legal and regulatory requirements. They must do something more.

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SEC Proposed Rule Amendments on Shareholder Proposals and Proxy Advisors: Implications for Issuers, Investors and Proxy Advisors

Abe Friedman is Partner and Head, Krystal Berrini is Partner, and Allie Rutherford is a Managing Director at PJT Camberview. This post is based on a PJT Camberview memorandum by Mr. Friedman, Ms. Berrini, Ms. Rutherford, Bob McCormick, and Eric Sumberg.

The Commissioners of the Securities and Exchange Commission (SEC) voted 3-2 on November 5 to propose amendments to rules governing shareholder proposals and proxy advisors. As proposed, the shareholder proposal rule would, among other changes, significantly raise both the ownership thresholds for shareholder proposal submissions and the vote outcome hurdles for proposal resubmissions. The proposed proxy advisor rules would label proxy research as proxy solicitation materials, require greater disclosure of conflicts and provide opportunities for issuers and activists to review and append commentary to the proxy advisors’ reports.

These proposed rules are the latest in a series of actions the SEC has taken on these two topics as part of the broader review of the Proxy Process which was begun in 2010 with the Concept Release on the U.S. Proxy System and reinvigorated in 2018 at the direction of SEC Chairman Jay Clayton.

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Trading Against the Random Expiration of Private Information: A Natural Experiment

Wei Jiang is the Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School; Robert J. Jackson, Jr. is Professor of Law at New York University School of Law; Mohammadreza Bolandnazar is a PhD Candidate in Finance at Columbia Business School; and Joshua Mitts is Associate Professor of Law at Columbia Law School. This post is based on their recent paper, forthcoming in the Journal of Finance.

For years, unbeknownst to lawmakers and the public, a small group of private investors were inadvertently given access to securities filings before they were widely released via EDGAR. A government contractor operating a platform known as the Public Dissemination Service, or PDS, distributed SEC filings to a small number of paying subscribers moments before they reached the public. In October 2014, the Wall Street Journal exposed this issue, and the issue was largely fixed under regulatory pressure.

There is no evidence that either the SEC or the government contractor acted opportunistically. Nevertheless, the episode provides a rare lab-like setting for studying how speculators trade on, and the stock market processes, private information that expires at a random time. More specifically, the incidence provides two unique features that allow us to study informed trading with a random stopping time. First, we can observe both the arrival time and the content of private information, filling the gap in direct empirical testing of trading based on private information due to the challenge that private information, by definition, is not public knowledge and thus neither the timing of its arrival nor its content are generally observable by econometricians. Second, we can accurately measure the length of time that the informed traders have the information before a filing reaches the public. Critically, the delay was beyond the control of both the filers and the speculators, and is not correlated with any economic variables of interest. Moreover, because the informed traders could form expectations about the length of the delay based on factors (notably internet traffic during given time of the day) that were exogenous to traders’ behavior, we are able to identify the causal impact of the expected delay on trading patterns as well as show how market prices incorporate private information that is based on the expected length of the delay.

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SEC Punked?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

You might recall that, earlier this month, the SEC voted to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to “modernize” the shareholder proposal rules by increasing the eligibility and resubmission thresholds. (See this PubCo post and this PubCo post.) At the SEC open meeting, in explaining his perspective on the proposals, SEC Chair Jay Clayton indicated that, following the SEC’s proxy process roundtable (see this PubCo post), the SEC had received hundreds of comment letters, but there were seven letters that were most striking to him. Clayton seemed to be genuinely moved by these letters, ostensibly submitted by various Main Street investors, a group that Clayton considers to be core to the SEC’s protective mission. (See this PubCo post.) But, according to Bloomberg, there’s something not quite right—something “fishy”—about those letters. To borrow a phrase, did Clayton get punked?

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Silicon Valley and S&P 100: A Comparison of 2019 Proxy Season Results

David A. Bell is partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick report titled 2019 Proxy Season Results in Silicon Valley and Large Companies Nationwide.

In the 2019 proxy season, 143 of the technology and life sciences companies included in the Fenwick – Bloomberg Law Silicon Valley 150 List (SV 150) and 99 of the S&P 100 companies held annual meetings that typically included voting for the election of directors, ratifying the selection of auditors of the company’s financial statements and voting on executive officer compensation (“say-on-pay”).

Annual meetings also increasingly include voting on one or more of a variety of proposals that may have been put forth by the company’s board of directors or by a stockholder that has met the requirements of the company’s bylaws and applicable federal securities regulations. [1]

This companion supplement to the Fenwick survey, “Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies,” provides insight into the results of stockholder voting at annual meetings in the 2019 proxy season, [2] allowing directors, executives and practitioners to analyze company results with relevant peers.

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The Mixed Response on SEC’s Proposed Rules on Proxy Advisory Firms

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton publication.

Last month, the Securities and Exchange Commission announced proposed rules regarding proxy advisors. SEC Chair Jay Clayton compared proxy advisory firms’ effect on shareholder engagement and the capital markets to that of other significant third-party market participants such as auditors, rating agencies, and research analysts. He emphasized that—amid the myriad investor interests and preferences extant in the marketplace—there is a common need for information material to an investment decision. The proposed rules regarding proxy advisors are designed to help investors obtain relevant information of improved quality and value.

The proposed rules generally were received favorably by companies as well as other market participants who share the concern that proxy advisory firms wield undue influence in the proxy voting process. SEC Commissioner Robert Jackson dissented from the SEC’s approval of the proposed rules, expressing the concern that the proposal “simply shields CEOs from accountability to investors.” There was swift criticism from other quarters: The Council of Institutional Investors released a statement the same day as the SEC’s announcement, taking the view that the proposed rules would be detrimental to shareholder rights. CII objected to the regulation of proxy advisory firms as proxy solicitors and argued that the proposed rules “would pressure proxy advisory firms to take a more management-friendly approach in their reports and vote recommendations.” CII accused the SEC of bowing to “pressure from CEOs” who, with a “concerted effort by lobbyists,” are resisting shareholders’ attempts to hold corporate executives accountable. Subsequently, CII has written to the SEC to request clarifications as to certain elements of the proposed rules and has also requested that the SEC extend the comment period from 60 to 120 days.

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Keynote Speech by PCAOB Chairman William D. Duhnke III at the 14th Annual Audit Conference Baruch College

William D. Duhnke III is Chairman of the Public Company Accounting Oversight Board (PCAOB). This post is based on his recent keynote speech at the 14th Annual Audit Conference Baruch College.

First, let me thank Professor Carmichael for inviting me to participate in this event. It is a pleasure to be here today with such a wide array of professionals connected to the audit profession. Between the policymakers, academics, audit firms, public company leaders, and other attendees, many of the PCAOB’s core stakeholder groups are represented here.

Currently, the PCAOB is in the middle of significant change. I’m pleased to speak to you today about the changes we have underway. As many of you know, I joined the PCAOB just under two years ago. When I joined, the SEC had just decided to reconstitute the entire five-member Board. The five new Board members joined with an understanding that we needed to take a fresh look at the organization and its strategic direction.

To help with this endeavor, we thought it was crucial to hear from those most impacted by the PCAOB’s work. Brand new to our roles, we needed specific, thoughtful input from our stakeholders on where we should take the PCAOB to best accomplish our statutory mission. Through our strategic planning outreach, hundreds of our stakeholders weighed in on the direction we should take—including investors, audit committee members, academics, auditors, other regulators, as well as our own employees. We received a clear and consistent message in response: The PCAOB was ripe for change. Not incremental change, but transformational change.

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Ending Foreign-Influenced Corporate Spending in U.S. Elections

Michael Sozan is Senior Fellow at the Center for American Progress. This post is based on his Center for American Progress report. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? 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); Corporate Governance and Corporate Political Activity: What Effect will Citizens United Have on Shareholder Wealth (discussed on the Forum here) by John C. Coates, IV; and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).

The 2020 presidential election is less than a year away, and intelligence officials warn that foreign entities remain intent on affecting its outcome. At the same time, the U.S. House of Representatives is conducting an impeachment inquiry into President Donald Trump, due in large part to his solicitation of foreign interference from Ukraine in the 2020 presidential contest.

In the midst of these threats, Americans’ trust in government is near all-time lows, with voters deeply skeptical about a political system that they believe is corrupted and dominated by corporations and wealthy special interests. This dominance has been especially prominent since the U.S. Supreme Court’s ruling in Citizens United v. Federal Election Commission unleashed a torrent of spending directed to super PACs and shadowy nonprofit organizations.

Now more than ever, bold policy solutions are needed to help ensure that no foreign government, business, or person can unduly affect the nation’s democratic self-governance.

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Weekly Roundup: November 28–December 6, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of November 28–December 6, 2019.




Shadow Governance


ESG Reporting Best Practices


Diversity of Shareholder Stewardship in Asia: Faux Convergence



Labor in the Boardroom


Approval of Conflicted Transactions in Publicly Traded Limited Partnerships



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