Yearly Archives: 2019

Statement on Retirement of Chief Justice Strine

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Tuesday, July 9, 2019
,
More from: ,

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent statement, 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. Leo Strine, Chief Justice of the Delaware Supreme Court, is a Senior Fellow of the Harvard Law School Program on Corporate Governance. Posts about his recent studies issued by the Program are available here, here, and here.

Yesterday, Chief Justice Leo Strine announced his retirement after more than twenty years on the Delaware Court of Chancery and Supreme Court of Delaware, two of the most important courts for our markets and our investors.

Chief Justice Strine deserves our thanks for bringing his unparalleled combination of energy, intellect, experience, legal knowledge and pragmatism to the bench. His contributions have extended well beyond the courtroom and the Commission has benefited substantially from his willingness to engage with us on a range of topics important to our investors and our markets. Finally, and critical to the work of the SEC, it is clear to me that the interests of our Main Street investors have always been at the front of Chief Justice Strine’s mind.

Thank you for your service Chief Justice Strine.

Protecting Main Street Investors: Regulation Best Interest and the Investment Adviser Fiduciary Duty

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Tuesday, July 9, 2019
, , , , , , , , , ,
More from: ,

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent speech in Boston, Massachusetts, 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.

Good evening and thank you for being here. [1]

As many of you know, in June, the Securities and Exchange Commission adopted a package of rules and interpretations that will enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers. Importantly, they bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations. These actions do not attempt to favor one type of service or relationship. Rather, they are designed to increase investor protection while preserving access for Main Street investors—both in terms of choice and cost—to a variety of investment services and products.

Our rules and interpretations benefit from and build upon the Commission’s extended history of broker-dealer and investment adviser regulation, the substantial experience and expertise of our staff, our analysis over many years of prior efforts to modernize and improve regulation in this area, and the many thoughtful comments and other feedback we received on our proposals. [2] Without question, these actions, individually and collectively, will significantly benefit Main Street investors.

READ MORE »

Model Stewardship Code for Long-Term Behavior

Posted by Bhakti Mirchandani, FCLTGlobal, on
Tuesday, July 9, 2019
, , , , , , , , ,
More from: , , , ,

Bhakti Mirchandani is Managing Director at FCLTGlobal. This post is based on a FCLTGlobal memorandum by Ms. Mirchandani, Steve Boxer, Evan Horowitz, and Victoria Tellez. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the forum here) by Lucian Bebchuk and Scott Hirst; and The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

A good stewardship code helps clarify the responsibilities of institutional investors, laying out core principles to foster a shared understanding among stakeholders including regulators, investors, and investees.

To ensure that stewardship codes put primary emphasis on long-term value creation, FCLTGlobal has worked with its members to identify seven principles of long-term ownership that could be incorporated into new or revised stewardship codes. These codes represent the highest common denominator of high-quality codes around the world, using principles that are equally applicable for asset owners and asset managers. Given FCLTGlobal’s mission of focusing capital on the long term, our interest is in the subset of stewardship that is concerned with fostering an ownership mindset to promote long-term value. Valuable work has been done by International Corporate Governance Network (ICGN) and others on the broader universe of issues that can be addressed via stewardship codes. [1]

READ MORE »

The Job Rating Game: Revolving Doors and Analyst Incentives

Posted by Elisabeth Kempf (University of Chicago), on
Tuesday, July 9, 2019
, , , , , , , ,
More from:

Elisabeth Kempf is Assistant Professor of Finance at the University of Chicago Booth School of Business. This is based on her recent article, forthcoming in the Journal of Financial Economics.

Investment banks frequently hire analysts from rating agencies. A widespread concern is that this “revolving door” encourages leniency among rating analysts who hope to exchange optimistic credit ratings for well-paying future jobs. For example, a prominent narrative of the financial crisis is that conflicts of interest due to the revolving door contributed to inflated credit ratings, which in turn enabled the financial meltdown: “You are rating someone and then you want to go work for them and make much more money—the notion that you would be critical of some entity and then hope they hire you goes against what we know about human nature” (former Representative Barney Frank in an interview with the Wall Street Journal).

Theoretically, it is not obvious whether the revolving door between rating agencies and investment banks will reduce or improve ratings accuracy. On the one hand, if analysts get hired as an explicit quid pro quo for favors to their future (or potential) employers, then they may indeed be encouraged to be lenient (Stigler (1971); Peltzman (1976); Eckert (1981)). On the other hand, if analysts are also hired for their expertise, they will have a greater incentive to invest in their qualifications or to signal their expertise during their employment at the agency (Che (1995); Salant (1995); Bar-Isaac and Shapiro (2011)). While previous work on revolving doors in the context of rating agencies has focused on capture concerns, my article, forthcoming in the Journal of Financial Economics, sheds light on the magnitude of potential positive incentive effects.

READ MORE »

Fiduciary Violations in Sale of Company

Posted by Amy Simmerman and David Berger, Wilson Sonsini Goodrich & Rosati, on
Tuesday, July 9, 2019
, , , , , , , , , ,
More from: , , , , ,

Amy Simmerman and David Berger are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Ms. Simmerman, Mr. Berger, Ryan Greecher, Brad Sorrels, and Nate Emeritz. This post is part of the Delaware law series; links to other posts in the series are available here.

On June 21, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery issued an opinion addressing a number of significant issues relating to the proper conduct of an M&A process. [1] In denying all defendants’ motions to dismiss, the court first held that the selling company had failed to disclose certain material information to stockholders in seeking their approval of the deal, and as a result, the deferential standard of review set forth by the Delaware Supreme Court in Corwin did not apply to the transaction. As described in more detail below, the court further held, for purposes of a motion to dismiss, that the stockholder plaintiff adequately had alleged that the board breached its fiduciary duty of loyalty in managing various aspects of the sale process. The court also refused to dismiss the plaintiff’s aiding and abetting and civil conspiracy claims against the selling company’s longtime financial advisor that was also its largest stockholder, as well as against the acquiror of the company. The case provides a valuable reminder about potential pitfalls in M&A events and areas of potential risk in resulting stockholder litigation.

The Decision

The various claims in this case are based on a core set of allegations arising out of the plaintiff’s second amended complaint. Those allegations included the following:

READ MORE »

Emerging Technologies, Risk, and the Auditor’s Focus

Posted by Julie Bell Lindsay, Anita Doutt, and Catherine Ide, Center for Audit Quality, on
Monday, July 8, 2019
, , , , , , , , ,
More from: , , ,

Julie Bell Lindsay is Executive Director, Anita Doutt is CAQ Professional Practice Fellow, and Catherine Ide is Senior Managing Director of Professional Practice and Member Services at the Center for Audit Quality. This is based on their CAQ memorandum.

Introduction

Emerging technologies are altering the financial reporting environment substantially, and this change is accelerating. For example, artificial intelligence (AI), robotic process automation, and blockchain are changing the way business gets done, and auditors are leading by transforming their own processes.

In this evolving environment, it is more important than ever for the key players in financial reporting—auditors, audit committees, and management—to have a strong grasp of roles and responsibilities. As the use of emerging technologies in the financial reporting process increases, it becomes less likely auditors can design traditional substantive tests (e.g., test of details or substantive analytical procedures) that, by themselves, would provide sufficient appropriate audit evidence that respond to identified assertion-level risks. [1] This evolution in the sufficiency and source of audit evidence puts further emphasis on management’s internal control over financial reporting.

What are key technology risks to watch for? What are auditors focusing on when it comes to the impact of emerging technologies on business?

How are auditors evaluating whether management is properly assessing the impact of emerging technologies on internal control over financial reporting?

This post sheds light on these questions, with an eye on key technology developments: the internet of things (IoT), AI, and smart contracts. This resource builds on the Center for Audit Quality’s 2018 publication Emerging Technologies: An Oversight Tool for Audit Committees. [2]

READ MORE »

Do the Securities Laws Promote Short-termism?

Posted by James J. Park (UCLA), on
Monday, July 8, 2019
, , , , , ,
More from:

James J. Park is Professor of Law at UCLA School of Law. This post is based on his recent paper. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here); and The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here).

Over the last several years, some of the most prominent representatives of Corporate America have argued that the pressure of quarterly reporting creates incentives for public corporations to focus on meeting the short-term expectations of the market rather than developing businesses that prosper over the long-term and make positive contributions to society. The scrutiny of quarterly reporting gained momentum in the fall of 2018 when President Trump asked the SEC to consider whether it should only require annual or semi-annual reporting to reduce the burden of quarterly scrutiny on public companies. The SEC responded to the Presidential request by asking for comments on the question of whether the “existing periodic reporting system . . . foster[s] an inefficient outlook among registrants and market participants by focusing on short-term results. . . .”

The proposal to eliminate quarterly reporting connects to a heated debate about whether short-termism, where public companies take “actions that are profitable in the short-term but value-decreasing in the long term,” is a significant problem. Over the last several years, legal scholars have generally focused on activist hedge funds as the primary driver of short-termism. Much of the debate has focused on the implications of such activism for corporate law.

READ MORE »

Caremark Liability for Regulatory Compliance Oversight

Posted by Gail Weinstein, Warren S. de Wied, and Philip Richter, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Monday, July 8, 2019
, , , , , , , ,
More from: , , , , , ,

Gail Weinstein is senior counsel, and Warren S. de Wied and Philip Richter are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. de Wied, Mr. Richter, Brian T. Mangino, Andrea Gede-Lange, and Randi Lally. This post is part of the Delaware law series; links to other posts in the series are available here.

In Marchand v. Barnhill (“Blue Bell”) (June 18, 2019), the plaintiff-stockholder claimed that the directors of Blue Bell Creameries USA, Inc., an ice cream manufacturer (the “Company”), breached their fiduciary duty of loyalty under Caremark by having failed to oversee and monitor the Company’s food safety operations. The suit was brought after an outbreak of listeria contamination in the Company’s ice cream led to the sickening and (in three cases) the death of consumers who ate the ice cream—as well as the recall of all of the Company’s products, the shuttering of all of the Company’s plants, and, ultimately, a liquidity crisis that led the Company to accept a dilutive private equity deal.

“Caremark claims” are claims that directors breached the fiduciary duty of loyalty by not making “a good faith effort to oversee the company’s operations.” These claims, which if successful can result in personal liability for directors, are known to be (as the Supreme Court reiterated in Blue Bell) “among the most difficult of corporate claims” to pursue successfully—because a required element of a claim for breach of the duty of loyalty is “bad faith” (i.e., intentional wrongdoing) by directors. Caremark established that, with respect to a board’s oversight obligation, only a “sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to [personal] liability [of directors].”

READ MORE »

Comment Letter Regarding SEC Interpretation of 14a-8(i)(7) Ordinary Business Exclusion

Posted by Ken Bertsch & Jeffrey Mahoney, Council of Institutional Investors, on
Sunday, July 7, 2019
, , , , , , , , , , ,
More from: , ,

Ken Bertsch is Executive Director and Jeff Mahoney is General Counsel of the Council of Institutional Investors (CII). This post is based on a comment letter that CII submitted to the Securities and Exchange Commission Division of Corporation Finance. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk.

We are writing on behalf of the Council of Institutional Investors (CII), a nonprofit, nonpartisan association of public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of $4 trillion. Our member funds include major long-term shareholders with a duty to protect the retirement savings of millions of workers and their families. Our associate members include a range of asset managers with more than $35 trillion in assets under management. [1]

We are writing to express concern about evolving SEC Division of Corporation Finance staff (Staff) views on the “ordinary business” exclusion of shareholder proposals (Rule 14a-8(i)(7)).

The Securities and Exchange Commission (SEC or Commission) has indicated that it may consider a proposal to raise ordinary business matters (1) based on the proposal’s subject matter, or (2) the degree to which the proposal seeks to “micromanage” a company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” Our concern relates to recent no-action letters from the Staff that rely on the second prong of this exclusion—the “micromanagement” or “too-complex-for-shareholders” grounds for omission. We note that the Staff discussed this prong in Staff Legal Bulletin No. 14J, in October 2018. [2]

READ MORE »

The State of Play on Clawbacks and Forfeitures Based on Misconduct

Posted by Jonathan Ocker, Justin Krawitz, and Ben Gibbs, Pillsbury Winthrop Shaw Pittman LLP, on
Sunday, July 7, 2019
, , , , , , , ,
More from: , , ,

Jonathan M. Ocker is partner, Justin Krawitz is a senior associate, and Benjamin T. Gibbs is an associate at Pillsbury Winthrop Shaw Pittman LLP. This post is based on their Pillsbury memorandum. Related research from the Program on Corporate Governance includes Excess-Pay Clawbacks by Jesse Fried and Nitzan Shilon (discussed on the Forum here) and Rationalizing the Dodd-Frank Clawback by Jesse Fried (discussed on the Forum here).

Clawback policies have been common for some time. However, because implementation of the proposed Dodd-Frank clawback rules may never be finalized, companies are beginning to implement or update executive compensation recoupment and forfeiture rules on their own based on investor sentiment, good governance principles, and recent events at CBS (and other #MeToo moments), Nissan, Equifax and other examples of supervisory failure.

Takeaways

  • Companies should determine whether clawbacks are mandatory or discretionary, whether fault is required in the case of financial restatements, and whether clawbacks should extend beyond financial restatements.
  • Companies should revisit whether the definition of “cause” used in forfeiture provisions in their severance and employment agreements and equity plans should cover reputational harm and adverse publicity to the employer.
  • Companies should consider implementing clawback policies to improve their ISS Equity Plan Scorecard scores if their stock plans are up for shareholder approval.

READ MORE »

Page 46 of 95
1 … 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 … 95