Monthly Archives: January 2020

IAC Recommendation Concerning SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals

This post is based on a recommendation by the Investor Advisory Committee of the SEC, chaired by Anne Sheehan. John Coates is a Professor at Harvard Law School and a member of the IAC and contributed to the recommendation.

This recommendation addresses recent SEC actions regarding the proxy system, including two guidance documents and two rule proposals (the PA/SP actions). The Investor Advisory Committee (IAC) shares the Commission’s interest in revisiting the voting system as practices and participants have evolved over time. Periodically reviewing whether SEC oversight is aligned with market practices helps assure that investors are well protected. The PA/SP actions, when viewed together, will affect the rights and opportunities of investors to engage effectively in the governance of the companies in which they invest.

The IAC has long urged the Commission to address a variety of problems in the proxy system, and there are valuable elements in the PA/SP actions, such as improved disclosure on proxy advisor conflicts of interest. While we appreciate the Commission’s effort to seek a productive balance in a changing environment for corporate governance and shareholder engagement, we are concerned the PA/SP actions may collectively shift the balance in a manner that does not serve investor interests.

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2019 Year-End Securities Enforcement Update

Mark K. Schonfeld is a partner, Tina Samanta is of counsel, and Amy Mayer is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Schonfeld, Ms. Samanta, Ms. Mayer, Jaclyn Neely, Zoey G. Goldnick, and Erin E Galliher.

I. Introduction: Themes and Notable Developments

A. Behind and Beyond the Enforcement Numbers

This year, the SEC’s review of the performance of the Enforcement Division has de-emphasized the statistics and focused more on qualitative measures of its performance. As Chairman Clayton noted in his December testimony to the Senate Banking Committee, “purely quantitative measures alone cannot adequately measure the effectiveness of Enforcement’s work, which can be evaluated better by assessing the nature, quality and effects of each of the Commission’s enforcement actions with an eye toward how they further the agency’s mission.”

With that said, this fiscal year saw a spike in the number of enforcement actions—the number of standalone enforcement actions increased to 526 from 490 the prior year, and the amount of financial remedies obtained also increased to $4.3 billion from $3.9 billion the prior year. However, an unstated reason to avoid focus on statistical metrics could be that looking behind the numbers reveals that the increase is attributable to a one-time Mutual Fund Share Class Disclosure Initiative, a group of cases in which investment advisers were encouraged to self-report issues associated with the selection of fee-paying mutual fund share classes when a lower or no-cost share class of the same fund was available. Consequently, the apparent increase is more likely an anomaly than a trend.

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Navigating the ESG Landscape

Sandra Flow is partner, Caroline Hailey is senior attorney, and Ahsan Sayed is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary 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); Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee, by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

Investors and other stakeholders continue to focus on environmental, social and governance (ESG) issues at public companies, both as a driver of financial performance and as a factor of social importance.

The ESG landscape continues to evolve, both in the United States and in Europe, and boards should continue to consider ESG issues, particularly in connection with overall company strategy, and monitor new developments closely.

Investor Focus on ESG Matters

Much of the focus on ESG matters in recent years has been driven by large asset management firms and pension funds that have sought to influence corporate governance and strategy on ESG matters. Firms such as BlackRock have indicated their intention to act as leaders in this area by incorporating ESG criteria into their portfolio management strategies on an ongoing basis. This includes adjusting fund allocation based on ESG criteria, including downgrades or removals from ESG indices based on negative press or crises that are indicative of poor ESG governance.

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Weekly Roundup: January 24-30, 2020


More from:

This roundup contains a collection of the posts published on the Forum during the week of January 24-30, 2020.





SEC Year-End Guidance


Companies’ Anti-Fraternization Policies: Key Considerations


S&P 1500 2019 Bonus Expectations and a Look to 2020


Female Directors in California-Headquartered Public Companies


The Decline in Secured Debt


Sustainability in the Spotlight



ESG Performance and Disclosure: A Cross-Country Analysis


Board Composition and Shareholder Proposals




2019 Sustainability Report


Audit Committee Perspectives on Audit Quality and Assessment: A PCAOB Report



2019 Review of Shareholder Activism

2019 Review of Shareholder Activism

Jim Rossman is Head of Shareholder Advisory, Kathryn Hembree Night is Director, and Quinn Pitcher is an analyst at Lazard. This post is based on a Lazard publication. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Key Observations on the Activist Environment in 2019

1.  Activist Activity Returns to Multi-Year Trend After Record 2018

  • 187 companies targeted by activists, down 17% from 2018’s record but in line with multi-year average levels
    • Aggregate capital deployed by activists (~$42bn) reflected a similar dip relative to the ~$60bn+ level of 2017/2018
  • A record 147 investors launched new campaigns in 2019, including 43 “first timers” with no prior activism history
  • Elliott and Starboard remained the leading activists, accounting for more than 10% of global campaign activity

 2. Activism’s Continued Influence Outside the U.S.

  • Activism against non-U.S. targets accounted for ~40% of 2019 activity, up from ~30% in 2015
    • Multi-year shift driven both by a decline in S. targets and an uptick in activity in Japan and Europe
  • For the first time, Japan was the most-targeted non-U.S. jurisdiction, with 19 campaigns and $4.5bn in capital deployed in 2019 (both local records)
  • Overall European activity decreased in 2019 (48 campaigns, down from a record 57 in 2018), driven primarily by 10 fewer campaigns in the K.
    • Expanded activity in continental Europe—particularly France, Germany and Switzerland—partially offset this decline

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Tectonic Forces to Watch in Corporate Litigation

William Savitt is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Savitt and is part of the Delaware law series; links to other posts in the series are available here.

Corporate litigation in Delaware continues to reflect the judicial trend toward honoring the decisions of informed stockholders and independent directors, thus limiting those decisions from costly after-the-fact legal attack. While the boundaries of stockholder ratification and director independence continue to be refined on a case-by-case basis, the broader conceptual trend—to give the last word on corporate action to independent directors and the stockholders who elect them—has taken firm root. Novel issues now rumbling under and through the judicial system implicate a different set of relationships—not between stockholders and directors, but between corporations and society at large. To meet these challenges, directors should assess new risks and opportunities from multiple perspectives—operations, strategy, corporate governance, litigation, finance, tax and compensation policy, and investor relations.

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Audit Committee Perspectives on Audit Quality and Assessment: A PCAOB Report

Erin Dwyer is Deputy Director, Office of External Affairs at the Public Company Accounting Oversight Board. This post is based on a publication authored by PCAOB Staff.

Executive Summary

As part of the Public Company Accounting Oversight Board’s (PCAOB) strategic goal of enhancing transparency and accessibility, we are committed to engaging more directly and more often with public company audit committees. In 2019, we had conversations with the audit committee chairs of almost all of the U.S. issuers whose audits we inspected and offered them the opportunity to speak with our inspections teams. Once our 2019 inspections are complete, we expect to have spoken with nearly 400 audit committee chairs. By contrast, historically, we have reached out to a small percentage of audit committee chairs during our inspections process. In 2018, for example, we spoke with 88 audit committee chairs.

We view an engaged and informed audit committee as an effective force multiplier in promoting audit quality and were grateful for the opportunity to speak with so many audit committee chairs. Continuous dialogue with audit committees on areas of mutual importance helps us to advance our mission and may assist audit committees in fulfilling their duties. To that end, our conversations focused broadly on audit quality, with specific discussions around such topics as audit committee perspectives of the auditor, new auditing and accounting standards, and technology and innovation.

Audit committee chairs provided informative and valuable feedback on these topics and were appreciative of the opportunity to engage directly with the PCAOB. They expressed particular interest in learning more about the PCAOB’s inspections process. Audit committee chairs also often asked for additional tools, resources, and learning opportunities from the PCAOB, and many were interested in learning about what we heard from their peers during these calls.

To that end, in this post we share:

  • What we frequently heard from audit committee chairs and perspectives from them on what is working well to help improve audit quality;
  • An overview of our inspections process; and
  • Staff responses to frequently asked questions (FAQs) during the conversations.

Please note that the PCAOB does not require or necessarily endorse what we heard from audit committee chairs, but we share their perspectives in an effort to provide transparency into the process and as part of the reporting out of what we heard.

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2019 Sustainability Report

Ronda Lenci is Corporate Sustainability Manager; Lisa E. Williams is Designer; and Jan Spano is Director, Enterprise Strategy Management at the California State Teachers’ Retirement System (CalSTRS). This post is based on a recent CalSTRS publication by Ms. Lenci, Ms. Spano, Ms. Williams, Noelle Ploof, Ellen Maurizio, and Renee Evarts. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

This CalSTRS Sustainability Report provides an overview of the relative data and assessment of the material topics covering July 1, 2018, through June 30, 2019, and later into calendar year 2019, where noted. This report has been prepared in accordance with the Global Reporting Initiative Standards: Core option.

Stakeholder Engagement & Material Topic Identification

We believe it is essential to include the voices of our members and other stakeholders in conversations related to fund sustainability.

CalSTRS staff has developed a comprehensive strategy to communicate with our stakeholders, including financial entities, groups representing our members, the California Governor’s administration, legislators, employers, members, labor representatives, our employees, suppliers, contractors and the media.

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Foundational Principles in an Evolving Governance Environment

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, William Savitt, Sabastian V. Niles, Ryan A. McLeod, and Anitha Reddy.

We are increasingly asked for advice about directors’ responsibilities in light of the rise in support of stakeholder governance, ESG, and corporate sustainability. These topics are at the top of the corporate governance agenda as a result of recent high-profile developments, including: (1) the Business Roundtable’s adoption of stakeholder purpose, (2) the World Economic Forum’s renewed strong endorsement of ESG and sustainability, (3) BlackRock’s decision to consider sustainability in its investment and voting decisions, (4) the SEC’s growing focus on disclosure of significant risks, and (5) the increase in direct and derivative litigation against directors.

In a series of memoranda, we have assessed the legal duties of directors and—equally important—evolving expectations of investors and the public regarding director conduct: Risk Management and the Board of Directors; Some Thoughts for Boards of Directors in 2020; Stakeholder Governance—Issues and Answers; and Delaware Supreme Court Reaffirms Core Principles of Exculpation and Director Independence. Here, we distill these assessments to a core set of operative principles:

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Challenging Times: The Hardening D&O Insurance Market

Carl E. Metzger is a partner and Brian H. Mukherjee is counsel at Goodwin Procter LLP. This post is based on their Goodwin memorandum. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

Directors and officers (D&O) liability insurance has always been an important tool to protect public companies and their management against claims by shareholders for violations of the securities laws, including claims for inadequate disclosures in public filings and allegations of securities fraud. D&O insurance, however, is becoming increasingly challenging to purchase and maintain. Premiums and deductibles have been increasing, sometimes dramatically, and some insurers are cutting back on the number of companies they insure, causing the supply of insurance to lag behind demand. This alert looks at this current “hardening” D&O insurance market and suggests key steps that clients can take to mitigate its negative consequences.

What is Causing the Hardening Market?

Insurers are reporting that they have seen record numbers of securities claims over the last several years [1] and a related record number of payouts under their policies. Insurers point to factors such as a significant number of IPOs in recent years that have attracted securities litigation, including in state court. (The ability of shareholders to sue in state court on offering prospectus claims has come as a result of a 2018 Supreme Court case, Cyan). Other factors cited by insurers include increased settlement values, [2] litigation caused by adverse events such as cyber-attacks, weather or product liability claims (referred to as “event-driven” litigation) and a growing number of plaintiff shareholder law firms eager to bring claims.

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