Yearly Archives: 2019

Toward Fair and Sustainable Capitalism

Posted by Leo E. Strine Jr. (Delaware Supreme Court and Harvard Law School), on
Tuesday, October 1, 2019
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Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent paper.

I recently placed on SSRN a new paper, Toward Fair and Sustainable Capitalism:  A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future. The Financial Times published earlier this week an op-ed in which I provide an overview of the proposal put forward in this new paper, which was prepared in connection with this week’s A New Deal For This New Century: Making Our Economy Work For All conference in Washington, D.C.

To promote fair and sustainable capitalism and help business and labor work together to build an American economy that works for all, this paper presents a comprehensive proposal to reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans. The proposal would achieve this through a series of measured, coherent changes to current laws and regulations, including:

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A Call by Investors on US Companies to Align Climate Lobbying with Paris Agreement

Posted by Barbara Grady, Ceres, on
Tuesday, October 1, 2019
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Barbara Grady is the communications manager for the California Program at Ceres. This post is based on her Ceres memorandum. 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).

With a combined $6.5 trillion in AUM, investors urge companies to ensure corporate and trade association lobbying are consistent

On September 16, 2019, 200 institutional investors with a combined $6.5 trillion in assets-under-management announced they are calling on 47 of the largest U.S. publicly traded corporations to align their climate lobbying with the goals of the Paris Agreement, warning that lobbying activities that are inconsistent with meeting climate goals are an investment risk.

The investors said they view fulfillment of the Paris Agreement goal—to limit the global average temperature increase to well below 2°Celsius and pursue efforts to hold it at 1.5°Celsius—as an imperative.

“We are convinced that unabated climate change will negatively impact our clients, plan beneficiaries, and the value of our portfolios,” wrote the investors in a letter sent to each company in recent days.

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Managerial Response to Shareholder Empowerment: Evidence from Majority Voting Legislation Changes

Posted by Vicente Cuñat (London School of Economics), Yiqing Lü (New York University), and Hong Wu (Hong Kong Polytechnic University), on
Tuesday, October 1, 2019
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Vicente Cuñat is Associate Professor of Finance at London School of Economics; Yiqing Lü is Assistant Professor of Finance at NYU Shanghai; and Hong Wu is Assistant Professor of Finance at Hong Kong Polytechnic University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Letting Shareholders Set the Rules by Lucian Bebchuk, and The Case for Increasing Shareholder Power, by Lucian Bebchuk.

Regulators often change the rules of shareholder democracy to improve the effectiveness of shareholder voting and to influence managerial authority. These rules may affect the election of firm directors but also more direct participation channels such as the voting of shareholder proposals. Given that these are two of the main ways through which shareholders can affect firm policies, it is therefore important to assess the effectiveness of reinforcing shareholder democracy and the reaction of managers to it.

In a recent paper we explore this research question by using a quasi-natural experiment the staggered passage of amendments to the Delaware General Corporation Law (DGCL) and Model Business Corporation Act (MBCA). These changes made it more costly for management to not implement the outcome of a subset of shareholder-initiated proposals. Specifically, under the new laws, the board cannot unilaterally amend or repeal the shareholder-adopted majority voting bylaw amendments related to director elections. Several states that use the MBCA as the basis of their own state laws subsequently changed their corporate law provisions to facilitate majority voting. This regulatory change provides a suitable setting for understanding managerial behavior and the underlying incentives when regulators tilt the balance of corporate governance away from managerial authority and toward shareholder empowerment.

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2020 Proxy and Annual Report Season: Time to Get Ready—Already

Posted by Laura D. Richman and Michael L. Hermsen, Mayer Brown LLP, on
Tuesday, October 1, 2019
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Laura D. Richman is counsel and Michael L. Hermsen is partner at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Hermsen, Jennifer J. Carlson, Robert F. Gray, Jr., and David A. Schuette.

As summer closes and autumn begins, it is time for public companies to begin planning for the 2020 proxy and annual report season. Advance preparations are key to producing proxy statements and annual reports that not only comply with disclosure requirements but also serve as tools for shareholder engagement. This post highlights the following issues of importance to the upcoming 2020 proxy and annual report season:

Proxy Statement Matters

  • Hedging Disclosure
  • Pay Ratio Disclosure
  • Board Diversity
  • Trending Shareholder Proposals
  • Shareholder Proposal Guidance
  • Environmental and Social Disclosure
  • Say-on-Pay
  • Overboarded Directors
  • Proxy Voting Advice Guidance and Investment Adviser Guidance
  • Compensation Litigation and Compensation Disclosure
  • Director and Officer Questionnaires

Annual Report Matters

  • Amendments to Form 10-K Disclosure Requirements
  • Critical Audit Matters
  • Trending Annual Report Topics
  • Risk Factors
  • Inline XBRL
  • Proxy Statement Matters

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Proxy Season Say-on-Pay Review

Posted by Laura Elmore, Henry Mbom, and Brian Myers, Willis Towers Watson, on
Monday, September 30, 2019
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Laura Elmore and Brian Myers are consultants and Henry Mbom is a senior associate at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Executive Summary

2019 by the numbers so far

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Toward an Interest Group Theory of Foreign Anti-Corruption Laws

Posted by Sean J. Griffith (Fordham University) and Thomas H. Lee (Fordham University), on
Monday, September 30, 2019
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Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham University School of Law and Thomas H. Lee is Leitner Family Professor of International Law at Fordham University School of Law. This post is based on their recent article, forthcoming in the University of Illinois Law Review.

In a recent speech, the Chairman of the SEC argued that other countries’ failure to enforce foreign anti-bribery and corruption laws may put U.S. companies at a competitive disadvantage to foreign firms. Against the background of aggressive enforcement of the FCPA, Chairman Clayton remarked that “other countries may be incentivized to play, and I believe some are in fact playing, strategies that take advantage of our laudable efforts.”

The Chairman’s remarks point to a fundamental puzzle of foreign anti-corruption laws. Why would the government of one country act to prevent corruption in another? Foreign anti-bribery laws disadvantage domestic businesses vis-à-vis unregulated foreign competitors. Yet foreign anti-corruption laws have proliferated around the globe. How can this be? And now that they are widespread, are such laws not ripe for opportunistic enforcement (or, as Chairman Clayton points out, lack of enforcement) in favor of domestic interests?

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Acquisitions of Public Companies—2018 Shareholder Litigation

Posted by Ravi Sinha and Per Axelson, Cornerstone Research, on
Monday, September 30, 2019
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Ravi Sinha is vice president and Per Axelson is a senior manager at Cornerstone Research. This post is based on their Cornerstone Research memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Introduction

This post examines litigation challenging M&A deals valued over $100 million announced from 2009 through 2018, filed on behalf of shareholders of publicly traded target companies.

These lawsuits usually take the form of class actions filed in either federal or state court. Plaintiffs typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value.

Common allegations include:

  • failure to conduct a sufficiently competitive sale
  • existence of restrictive deal protections that discouraged additional bids
  • conflicts of interest, such as executive retention post-merger or change-of-control payments to executives
  • failure to disclose information about the sales process and the financial advisor’s valuation

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Proxy Advisors and Pay Calculations

Posted by Charlie Pontrelli, Equilar, Inc., on
Sunday, September 29, 2019
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Charlie Pontrelli is Research Manager at Equilar, Inc. This post is based on his Equilar memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Realizable pay is often cited in the governance community as an excellent gauge of pay for performance alignment. Ideally, if a company is performing well, realizable pay will be greater than disclosed pay. And if a company is performing poorly, realizable pay will be lower than disclosed pay.

Realizable pay calculations are typically made as of a company’s most recent fiscal year end and includes compensation granted during the preceding three- to five-year period (the “evaluation period”). It is similar to disclosed pay in that it includes salary, bonuses and other compensation actually paid during the period.

The difference between the two calculations is the way equity is valued. Disclosed equity values are made as of the grant date and realizable values are made as of the company’s most recent fiscal year end (the end of the evaluation period). Additionally, disclosed pay typically values performance awards at their target level and realizable pay may value performance awards upon actual payout if the performance period has ended.

The transformation from disclosed to realizable pay can be summarized as follows: disclosed equity awards will have appreciated or depreciated in value depending on stock price movements and company performance by the time they are measured on a realizable basis. The remainder of this study looks at how crucial it is to ensure that disclosed and realizable equity valuations are performed on an apples-to-apples basis to ensure accurate conclusions can be drawn from a comparison of these calculations.

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Notes from House Financial Services Committee Hearing

Posted by Cydney Posner, Cooley LLP, on
Sunday, September 29, 2019
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

All five SEC Commissioners testified yesterday at an oversight hearing held by the House Financial Services Committee, the first time all five have appeared since 2007, according to Chair Maxine Waters. (Here is their formal testimony.) These hearings are, of course, broken up into bite-size five-minute Q&A sessions, so there is not much opportunity for in-depth questioning. And most often, it seemed that the Representatives directed their questions to the Commissioners that were most likely to provide gratifying answers—meaning a Commissioner of the Representative’s own party. There were, however, some notable exceptions, such as Representative Katie Porter’s pointed questioning of Commissioner Hester Peirce with regard to her views on ESG disclosure. In the end, the hearing did provide some insight into the current thinking and expectations of many of these legislators and regulators.

(Based on my notes, so standard caveats apply.)

Chair Waters opened the hearing by making plain her view that the SEC was just not doing its job:

“I believe that it is important for this Committee to hear testimony from each of the Commissioners, including its Chairman, because they each hold a vote on important regulatory and enforcement matters, and they each hold unique views that the Committee should be aware of. This is especially important since the SEC is not fulfilling its mission as Wall Street’s cop. Key rules, like the Volcker rule, have been rolled back, while rules to implement other important reforms on issues like executive compensation—which Congress enacted back in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act—remain incomplete. Other regulations, such as the SEC’s so-called Regulation Best Interest, fail to protect retirement savers from unscrupulous financial advisers.”

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2019 Proxy Season Review: North America Activism

Posted by Jackie Cheung and Victor Guo, FrontLine Advisors Inc., on
Saturday, September 28, 2019
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Jackie Cheung is Senior Vice President, Governance, and Victor Guo is President at FrontLine Advisors Inc. This post is based on a Frontline report by Mr. Cheung, Mr. Guo, Dexter D. S. John, and Susy Monteiro. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

2019 has been another record year for shareholder activism in Canada. In all of 2018, we tracked 26 activism campaigns (excluding hostile bids) whereas 2019 year-to-date, we have seen an additional four campaigns, bringing the count up to 30 in total.

In 2019, management won 58% of all campaigns (versus 54% in 2018) while activists won 42% (46% in 2018). We see this as a relatively stable trend year-over-year (see Figure 1.01).

Notably, in 2019, board-related activism accounted for 53% of all campaigns versus 88% in 2018 (see Figure 1.02). The decline in board-related campaigns as a proportion of total campaigns is offset by the increase in transactional activism. Transactional activism continues to rise, representing 37% of all campaigns in 2019 compared to 8% in 2018.

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