Yearly Archives: 2019

Employee-Manager Alliances and Shareholder Returns from Acquisitions

Posted by Ronald W. Masulis (University of New South Wales), Cong Wang (The Chinese University of Hong Kong), and Fei Xie (University of Delaware), on

Monday, February 4, 2019

Behavioral finance, Employees, Equity-based compensation, Incentives, Management, Mergers & acquisitions, Ownership structure, Shareholder value, Shareholder voting, Takeovers
More from: Cong Wang, Fei Xie, Ronald Masulis

Ronald Masulis is Scientia Professor of Finance at University of New South Wales Australian School of Business; Cong Wang is Professor of Finance at The Chinese University of Hong Kong, Shenzhen and the associate director of Shenzhen Finance Institute; and Fei Xie is Associate Professor of Finance at the Alfred Lerner College of Business & Economics at University of Delaware. This post is based on their recent article, forthcoming in the Journal of Financial and Quantitative Analysis.

In our recent article titled Employee-Manager Alliances and Shareholder Returns from Acquisitions, forthcoming in the Journal of Financial and Quantitative Analysis, we examine the potential for management-worker alliances when employees hold substantial voting rights due to their equity ownership, and how such alliances affect the agency relationship between managers and shareholders in the context of corporate acquisition decisions.

Employee equity ownership can provide workers with substantial cash flow and voting rights. The cash flow rights give workers residual claims to firm profits, partially aligning their interests with shareholders. Employee voting rights, on the other hand, can be a key factor in determining the likelihood of a firm becoming a takeover target as well as the outcome of such control contests (Gordon and Pound (1990), Chaplinsky and Niehaus (1994), and Rauh (2006)). Together, employee ownership of cash flow rights and voting rights makes them an important force that can affect corporate governance and firm policies.

State Street and Corporate Culture Engagement

Posted by Ning Chiu, Davis Polk & Wardwell LLP, on

Monday, February 4, 2019

Boards of Directors, Corporate culture, Disclosure, Engagement, Index funds, Institutional Investors, Management, Oversight, SSgA
More from: Ning Chiu, Davis Polk

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Chiu. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

State Street’s letter to board members advises companies that this year they intends to focus on corporate culture as one of many key intangible value drivers. Through engagement, they have found that “few directors can adequately articulate their company’s culture or demonstrate how they assess, monitor and influence change when necessary.”

When engaging with directors and management on corporate culture, State Street will expect to understand the following:

Can the director(s) articulate the current corporate culture?
What does the board value about the current culture? What does it see as strengths? How can the corporate culture improve?
How is senior management influencing or effecting change in the corporate culture?
How is the board monitoring the progress?

To assist companies, State Street provides a Framework for Assessing and Monitoring Corporate Culture that outlines three key exercises that they “suggest” that senior management with oversight from the board undertake:

CEO Pay Trends Around the Globe

Posted by Andrew Ludwig, Equilar Inc., on

Sunday, February 3, 2019

Canada, Compensation disclosure, Compensation ratios, Equity-based compensation, Europe, Executive Compensation, International governance, Management, Say on pay, Surveys
More from: Andrew Ludwig, Equilar

Andrew Ludwig is a Senior Research Analyst at Equilar Inc. This post is based on his Equilar memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Since the passage of Say on Pay under the Dodd-Frank Act in July 2010, greater attention has been paid to executive compensation in an effort to bring transparency and oversight to the total compensation of executives of U.S. public companies. In 2018, the SEC expanded the Dodd-Frank Act further with Section 953(b), requiring companies to disclose the ratio of the total compensation of the chief executive officer to that of the median employee on an annual basis.

This past May, Equilar and The New York Times released the 12th annual 200 Highest-Paid CEOs study. The study not only included 2017 total CEO compensation but also the change in pay from the previous year and an interactive table, allowing users to explore the list and sort by the pay ratio disclosed in each of the companies’ 2018 proxies. While these regulations pertain solely to the United States, they do not govern foreign companies. As a result, a new study from Equilar analyzed how the compensation of CEOs of medium-sized companies in Europe and Canada compares to those in the U.S.

From Justice Kennedy to Justice Kavanaugh—Is a Shift in Securities Law Underway?

Posted by Salvatore Graziano, Michael Mathai, and Kate Aufses, Bernstein Litowitz Berger & Grossmann LLP, on

Sunday, February 3, 2019

Exchange Act, Institutional Investors, SEC, Securities Act, Securities litigation, Securities regulation, Shareholder rights, State law, Supreme Court, U.S. federal courts
More from: Kate Aufses, Michael Mathai, Salvatore Graziano, Bernstein Litowitz

Salvatore Graziano is partner and Michael Mathai and Kate Aufses are associates at Bernstein Litowitz Berger & Grossmann LLP. This post is based on their BLB&G memorandum.

The change in the makeup of the Supreme Court may portend significant changes in investor rights in years to come. Which way will Kavanaugh lean on securities law?

On October 6, 2018, Justice Brett M. Kavanaugh was sworn in as the newest Associate Justice of the Supreme Court, assuming the seat recently vacated by retiring Justice Anthony Kennedy. During his 30-year tenure on the Court, Justice Kennedy joined both pro-investor and anti-investor decisions, though on balance, he tended to side against plaintiff investors in federal securities cases. By contrast, during Justice Kavanaugh’s twelve years as a judge on the DC Circuit Court of Appeals, he appears to have taken a decidedly more negative view of federal investor protections than Justice Kennedy did. The change in staffing on the high court may portend significant changes in investor rights in years to come.

Pay Ratio Disclosure at the S&P 500

Posted by Maureen O’Brien, Segal Marco Advisors, on

Saturday, February 2, 2019

Compensation disclosure, Compensation ratios, Executive Compensation, Institutional Investors, Management, Regulation S-K, Say on pay, Securities regulation, Shareholder voting
More from: Maureen O’Brien, Segal Marco

Maureen O’Brien is Vice President and Corporate Governance Director at Segal Marco Advisors. This post is based on her Segal Marco memorandum. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

A coalition of institutional investors with $3.3 trillion in assets under management and advisement identified best practices for pay ratio disclosure in a letter to S&P 500 index companies. 2018 is the first year in which publicly traded U.S. companies are required to report the ratio of pay between the CEO and the median worker. As explained by the letter, pay ratio disclosure provides key insights for investors on companies’ approaches to human capital management and for casting advisory proxy votes on executive compensation plans (“say-on-pay”).

The first year of pay ratio reporting revealed a range of approaches to disclosure of pay ratio information by firms, including discussion of companies’ overall employee compensation philosophy. The letter notes: “We believe that a company’s workforce is an asset to be invested in, not a cost to be minimized. Investments in employee compensation can motivate employees to be more productive and engaged in their work.”

SEC Staff Letter on Administrative Services

Posted by Jessica Forbes, Stacey Song, and Joanna D. Rosenberg, Fried, Frank, Harris, Shriver & Jacobson LLP, on

Saturday, February 2, 2019

Investment advisers, Investment Advisers Act, No-action letters, Rule 206, SEC, SEC enforcement, Securities regulation
More from: Jessica Forbes, Joanna Rosenberg, Stacey Song, Fried Frank

Jessica Forbes and Stacey Song are partners and Joanna D. Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum.

On December 20, 2018, the staff (the “Staff”) of the Securities and Exchange Commission (“SEC”) granted conditional no-action relief to Madison Capital Funding LLC (“Madison”), an investment adviser registered with the SEC, from certain requirements under Rule 206(4)-2 (the “Custody Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) in connection with Madison’s administrative agent services for its loan syndication business. [1] This post provides a summary of the relief granted.

The Custody Rule

The Custody Rule imposes certain requirements on registered investment advisers with custody of client funds or securities. “Custody” is defined to include actual custody (i.e., physically holding client funds or securities), as well as constructive custody (i.e., having authority to obtain possession of them, such as having a general power of attorney or serving as the general partner of a pooled investment vehicle client). [2] The definition also provides that an investment adviser has custody if its related person has custody of client funds or securities in connection with advisory services the adviser provides to clients. [3]

Spotlight on Boards

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on

Friday, February 1, 2019

Board oversight, Boards of Directors, Corporate culture, Disclosure, ESG, Institutional Investors, Management, Risk management, Sustainability
More from: Martin Lipton, Wachtell Lipton

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. Today, boards are expected to:

Recognize the heightened focus of investors on “purpose” and “culture” and an expanded notion of stakeholder interests that includes employees, customers, communities, the economy and society as a whole and work with management to develop metrics to enable the corporation to demonstrate their value;
Be aware that ESG and sustainability have become major, mainstream governance topics that encompass a wide range of issues, such as climate change and other environmental risks, systemic financial stability, human capital management, worker retirement, supply chain labor standards and consumer and product safety;

The Latest on Proxy Access

Posted by Holly J. Gregory, Rebecca Grapsas and Claire Holland, Sidley Austin LLP, on

Friday, February 1, 2019

Boards of Directors, Institutional Investors, Management, Proxy access, Proxy voting, Securities regulation, Shareholder nominations, Shareholder proposals, Shareholder voting
More from: Claire Holland, Holly Gregory, John Kelsh, Kai Haakon Liekefett, Rebecca Grapsas, Thomas Kim, Sidley Austin

Holly J. Gregory is partner, Rebecca Grapsas is counsel, and Claire H. Holland is special counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Ms. Grapsas, Ms. Holland, John P. Kelsh, Thomas J. Kim, and Kai H.E. Liekefett. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here) and Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge by Bo Becker, Daniel Bergstresser, and Guhan Subramanian (discussed on the Forum here).

Pressure from large institutional investors, including public and private pension funds, and other shareholders has led to the widespread adoption of proxy access by large U.S. public companies in the past few years. Proxy access is now mainstream at S&P 500 companies (71%) and is nearly a majority practice among Russell 1000 companies (48%). Proxy access gives shareholders the power to nominate a number of director candidates for inclusion in the company’s proxy materials.

As a follow-up to our Sidley Corporate Governance Report titled Proxy Access—Now a Mainstream Governance Practice from February 2018, this post provides an overview of the state of proxy access in the U.S. as of the end of 2018. Topics covered include:

The rapid rise of proxy access at U.S. companies since 2015
Management and shareholder proposals relating to proxy access
Institutional investor support for proxy access
Proxy advisory firm policies on proxy access
Typical parameters of proxy access provisions
The fact that proxy access has never been used in the U.S. (though a second attempt is pending)
Practical guidance for companies considering whether and when to adopt proxy access

Potential Changes to Fund of Funds Arrangements

Posted by Thomas Hiller, Brian McCabe, and Edward Baer, Ropes & Gray LLP, on

Friday, February 1, 2019

Exchange-traded funds, Investment advisers, Investment Advisers Act, Investor protection, Risk management, SEC, SEC rulemaking, Section 12(d), Securities regulation
More from: Brian McCabe, David Geffen, Edward Baer, Thomas Hiller, Ropes & Gray

Thomas Hiller and Brian McCabe are partners and Edward Baer is counsel at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Hiller, Mr. McCabe, Mr. Baer, and David Geffen.

On December 19, 2018, the SEC issued a release (the “Release”) proposing new Rule 12d1-4 and related amendments under the 1940 Act intended to enhance and streamline the regulation of funds that invest in other funds (“fund of funds arrangements”). The Release noted that the current combination of statutory exemptions, SEC rules and exemptive orders has created a regime in which substantially similar fund of funds arrangements are subject to different conditions. The Release’s proposals are intended to replace the existing regime in order “to create a more consistent and efficient regulatory framework for fund of funds arrangements.” Nonetheless, if Rule 12d1-4 is adopted as proposed, we expect that many existing fund of funds arrangements would need to be restructured.