Yearly Archives: 2019

Five Takeaways From the 2019 Proxy Season

Posted by Steve W. Klemash and Jamie C. Smith, EY Center for Board Matters, on
Thursday, August 8, 2019
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Steve W. Klemash is Americas Leader and Jamie C. Smith is Associate Director at the EY Center for Board Matters. This post is based on their EY 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).

As the spotlight on board diversity intensifies, the pace at which women are joining boards is accelerating, and a growing number of companies are disclosing the board’s racial and ethnic diversity. At the same time, against a backdrop of increased focus on companies’ efforts to create long-term value, enhanced proxy disclosures on corporate sustainability highlight how companies are protecting the environment, considering their social impact, investing in their people and promoting diversity and inclusion.

Investor outreach, often involving directors, has become a mainstay of leading governance practice among top companies. Overall, investors show notable support for directors and executive pay programs. A growing support for many environmental and social shareholder proposals highlights further opportunity for engagement.

This post provides five key takeaways for boards as they reflect on this proxy season and evolving governance developments. [1]

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Employer Losses and Deferred Compensation

Posted by David I. Walker (Boston University), on
Thursday, August 8, 2019
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David I. Walker is Professor of Law at the Boston University School of Law. This post is based on his recent paper.

Companies and their employees may choose whether to structure pay as cash or other currently includable and deductible compensation or as deferred compensation, including equity-based pay, which will be included in income and deducted in the future. It is well understood that taxes affect the attractiveness of deferred compensation relative to current compensation and that deferred compensation is relatively more attractive when employee tax rates are expected to be lower in the future than today, when employer tax rates are expected to be higher in the future, and when an employer can earn a greater after-tax rate of return on any compensation that is deferred.

In recent years, well over half of U.S. public companies have reported having a net operating loss (NOL) carryforward, reflecting deductions (including prior year NOLs) in excess of gross income. If significant, these NOLs reduce employer effective marginal tax rates (MTRs) and could make deferred compensation relatively more attractive by improving employer after-tax returns on deferred amounts and/or by reducing the value of current employer deductions relative to future employer deductions.
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Spotlight on Boards

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Thursday, August 8, 2019
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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.

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a major public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. So too, legislation like the Accountable Capitalism Act introduced by Senator Elizabeth Warren in 2018, and the position paper on the problems of shareholder capitalism and the merits of industrial policy by Senator Marco Rubio in 2019.

A very significant June decision by the Delaware Supreme Court interpreting the Caremark doctrine that limits director liability for an oversight failure to “utter failure to attempt to assure a reasonable information and reporting system exists” prompts this update. Our memo discussing the decision is available here. The Court said to “satisfy their duty of loyalty,” “directors must make a good faith effort to implement an oversight system and then monitor it” themselves. Without more, the existence of management- level compliance programs is not enough for the directors to avoid Caremark exposure.

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Diversified Portfolios Do Not Reduce Competition

Posted by Barbara Novick, BlackRock, Inc., on
Wednesday, August 7, 2019
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Barbara Novick is Vice Chairman at BlackRock, Inc. This post is based on a Policy Spotlight issued by Blackrock.

In 1990, Professor Harry Markowitz was awarded the Nobel Prize in Economics for his groundbreaking work on the importance of portfolio diversification to achieving better risk-adjusted returns, which serves as the basis of modern portfolio theory. [1] The value of diversified investing is now being challenged by a small group of academics who claim that ownership of diversified portfolios may create anti-competitive effects.

According to their theory, when investors own more than one company in a concentrated industry (‘common ownership’ or ‘horizontal shareholding’), these companies are less likely to compete. Investment funds and pension plans—including those using active or index strategies—are equally implicated by this theory, as these investors own broadly diversified investment portfolios, which often entail owning more than one company per sector. The plausibility of the theory (as discussed below) and the methods and data used to measure this purported effect have been vigorously criticized by academics and practitioners. For example, the foundational paper in this area, sometimes called the ‘airlines paper’ is based on incorrect data (see Policy Spotlight, Common Ownership Data is Incorrect). [2] Nonetheless, this theory has received media attention and some focus in competition circles.

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California Dreaming?

Posted by Darren Rosenblum (Pace University), on
Wednesday, August 7, 2019
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Darren Rosenblum is professor at the Elisabeth Haub School of Law at Pace University. This post is based on his recent article, forthcoming in the Boston University Law Review.

In 2013, California followed the transnational trend and passed a voluntary quota for women on corporate boards. While many developed economies had already adopted hard quotas, California passed a much softer one. Over the following years, shocking tales of sex inequality and harassment surfaced in California’s marquee industries, Hollywood and Silicon Valley. As a result, the state hardened its quota in 2018. Affirmative action controversies dominated the debate over the quota. The low regard for California’s overall corporate law did not help inspire respect.

While firms consistently telegraph respect for inclusion, their actions convey another story: men hold approximately 80% of corporate board positions and 95% of CEO positions. More men named James hold CEO positions than all women combined.

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France’s First Binding “Non” on Say-On-Pay

Posted by Irene Bucelli, Glass, Lewis & Co., on
Wednesday, August 7, 2019
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Irene Bucelli is an analyst at Glass, Lewis & Co. This post is based on her Glass Lewis 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).

The 2019 season marked French shareholders’ second opportunity to cast retrospective binding votes on executive compensation—and for the first time, shareholder votes prevented the payment of a bonus award, as well as the implementation of a new pay policy.

Many markets offer a say-on-pay vote these days, but under Sapin II legislation, which came fully into effect in 2018, French shareholders get several “says” on remuneration arrangements. The variable payments due to each executive are subject to a series of “ex-post” binding votes (one for each executive) and there is an annual “ex-ante” binding vote on the intended remuneration policy for the current year. Shareholders also get forward-looking advisory votes on severance arrangements.

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Appraisal Update: Unaffected Market Price Makes a Comeback

Posted by Roger Cooper and Mark McDonald, Cleary Gottlieb Steen & Hamilton LLP, on
Tuesday, August 6, 2019
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Roger A. Cooper and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

After the Delaware Supreme Court’s recent Aruba decision, [1] many commentators predicted that, going forward, the Court of Chancery would not rely on the target’s unaffected market trading price to determine fair value in appraisal cases, other than as a “check” on other valuation methodologies. It may therefore come as a surprise that in a decision issued last Friday, the Court of Chancery determined fair value to be equal to the target’s unaffected trading price. See In re: Appraisal of Jarden Corporation, Consolidated C.A. No. 12456-VCS (Del. Ch. July 19, 2019). Although still subject to appeal, this decision is also notable because the fair value determination came out 18% below the deal price despite the petitioners having some success in attacking the target board’s sale process, which involved no pre- or post-signing market check.

The Decision

This case involves the acquisition of Jarden Corporation (“Jarden”), a consumer products company holding a diversified portfolio of over 120 brands, by Newell Rubbermaid, Inc. (“Newell”) on April 15, 2016. At closing, the non-dissenting stockholders of Jarden received cash and Newell stock worth $59.21. Petitioners, who acquired almost 2.5 million shares of Jarden stock after the deal was announced, instead elected to seek statutory appraisal of their shares.

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The Bond Villains of Green Investment

Posted by Cristina Banahan, on
Tuesday, August 6, 2019
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Cristina Banahan is a Sustainability Advisor. This post is based on her recent article, forthcoming in the Vermont Law Review. 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).

Green bonds are critical to addressing climate change. The most recent Intergovernmental Panel on Climate Change report shows that unless dramatic corrective action is taken in the next decade, humanity could see mass migrations, food scarcity, and instability as early as 2040. To mitigate greenhouse gas emissions and prevent the most serious harms requires unprecedented levels of investment from the private sector and regulatory agility from government entities. Green bonds from public, private, and multilateral organizations are critical because they can serve to finance the large-scale infrastructure changes needed to transition to a zero-emissions economy. Government regulation of the green bond sector is critical to its success because regulations provide stakeholders with certainty as to the applicable legal standards and investor expectations. Furthermore, government regulation could help implement the lessons learned from past financial faux pas in the investment and issuer arenas. To apply the lessons of the past and ensure the prosperity of the green bond market in the future, governments should consider implementing a green standards committee as a simple and efficient way of meeting the financing challenges posed by climate change.

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A Roadmap for President Trump’s Crypto-Crackdown

Posted by John Reed Stark, John Reed Stark Consulting LLC, on
Tuesday, August 6, 2019
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John Reed Stark is President at John Reed Stark Consulting LLC. This post is based on his memorandum.

Last week, at 8:15 PM EST on July 11th, 2019, in a thunderous tweet-storm, President Donald Trump officially lambasted Bitcoin and all other cryptocurrencies:

Not surprisingly, the cryptocurrency market, which tends to feed on attention, celebrated President Trump’s tweets. In fact, many in the cryptocurrency community brazenly spun President Trump’s tweets as validation that cryptocurrencies have finally arrived as a staple of global finance. Coinbase CEO Brian Armstrong tweeted to his 300K+ followers:

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The Case for Quarterly and Environmental, Social, and Governance Reporting

Posted by Sandra J. Peters, CFA Institute, on
Monday, August 5, 2019
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Sandra Peters is head of the Financial Reporting Policy Group at CFA Institute. This post is based on a publication prepared by the CFA Institute Financial Reporting Group.

Debate has been ongoing for some time now over whether reducing the periodic reporting requirements for companies from quarterly to semiannually could save them time and money. Some people have suggested that reducing the frequency of financial reporting would dissuade short-termism, as companies would no longer focus on meeting analysts’ expectations on a quarterly basis at the expense of long-term performance. This issue has also been debated in many regions of the world. More recently, the US Securities and Exchange Commission (SEC) requested public comment on this topic. For this reason, CFA Institute conducted a survey of its global membership on the topic as well as a roundtable discussion. This report contains our key findings.

Investors Strongly Support Quarterly Reporting

The majority of survey respondents state that investors heavily rely on earnings releases because they are generally issued before quarterly financial reports. Respondents, however, indicate that quarterly reports remain more important to investors than earnings releases. These quarterly reports provide a structured information set that follows accounting standards and regulatory guidelines and include incremental financial statement disclosures and management discussion and analysis. In addition, quarterly reports offer greater investor protections as they are certified by the officers of the company, subject companies to greater legal liability, and are reviewed by company auditors.

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