Monthly Archives: January 2020

Shareholder Activism in 2020: New Risks and Opportunities for Boards

James E. Langston is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on his Cleary memorandum. 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); 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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

The era of stakeholder governance and corporations with a purpose beyond profits is taking hold, with corporate directors expected to answer to more constituencies and shoulder a greater burden than ever before. At the same time, investors—both in the US and abroad—continue to expect corporations to deliver superior financial performance over both the short and long term.

This convergence of purpose and performance will not only shape discussions in the boardroom, but also the complexion of shareholder activism. As the nature of the activist threat has evolved it has created additional obstacles for directors to navigate. But at the same time, this environment has created additional opportunities for boards to level the activist playing field and lead investors and other stakeholders into this new era.


NACD Public Company Board Governance Survey

Friso van der Oord is Director of Research and Editorial at NACD. This post is based on a NACD Survey.

Key Findings

  • Public companies face a conundrum navigating two divergent business forces. Directors identify growing business-model disruptions (52%) and a slowing global economy (51%) as the top trends most likely to impact their organization over the next 12 months. While not contradictory, these divergent trends create a challenge for many companies: how to balance a growth and disruption mind-set to stave off competition with preparations for the impact of a potential recession.
  • Public companies must also confront growing friction between the need to (digitally) innovate and the effective management of cyber risks. Sixty-one percent of directors report that they would be willing to compromise on cybersecurity to achieve business objectives, while 28 percent prioritize cybersecurity above all else.
  • For most companies, current strategies will become irrelevant in the next five years. Sixty-eight percent of responding directors report that their company can no longer count on extending its historical strategy over the next five years. Future growth will likely depend on the adoption of a different business model and an entirely new set of assumptions about what success will look like.


Statement by PCAOB Board Member Robert Brown, Jr. on The Role of Investors in the Revisions to PCAOB Quality Control Standards

J. Robert Brown, Jr. is a Board Member at the Public Company Accounting Oversight Board. This post is based on his recent statement at the PCAOB Open Board Meeting.

I. Introduction

Today [Dec. 17, 2019], the Board votes on a Concept Release concerning standards of quality control (QC) for firms that audit public companies and SEC-registered broker-dealers. The importance of this step cannot be overstated. We depend upon, and benefit from, quality control in most things that we do. We need quality control over the food we eat, the medicines we take, the automobiles we drive, and the planes we board. As we all know, when quality control fails, the result could be disastrous.

The same is true with respect to financial reporting. Reliable financial reporting is critical to advancing the public interest and ensuring confidence in our capital markets. Trusted, reliable financial reporting depends on rigorous, independent auditing, which in turn relies on an effective QC system.

The critical importance of an effective QC system to audit quality makes these standards uniquely important to investors and the public. Quality control relates to a firm’s audit practice as a whole and is intended to, among other things, ensure that audits are appropriately staffed by highly trained personnel who are capable of assessing relevant risks and have the necessary resources to conduct audits. Quality control does more than provide a set of upfront assurances. Firms monitor the results to ensure audit quality, sometimes in real time.


Weekly Roundup: January 17-23, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 17-23, 2020.

BlackRock Nudges Companies Toward a Common Standard (SASB + TCFD)

2020 Global and Regional Corporate Governance Trends

Recent Developments in Charges of Insider Trading

The 2020 Boardroom Agenda

The Global Sustainability Footprint of Sovereign Wealth Funds

Termination of Merger Agreement and Material Adverse Effect

Building Long Term Value: A Blue Print for CFOs

HLS Forum Sets New Records in 2019

SEC Proposes Amendments to Auditor Independence Framework

Standard for Classifying a Minority Stockholder as a Controlling Stockholder

Lower Bar for Criminal Insider Trading Charges

Worker Participation: Employee Ownership and Representation

Compensation Season 2020

Compensation Season 2020

Jeannemarie O’Brien, Andrea Wahlquist, and Adam Shapiro are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Ms. O’Brien, Ms. Wahlquist, Mr. Shapiro, David E. Kahan, Michael J. Schobel, and Erica E. Bonnett. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

While the past year witnessed only modest changes to the rules governing compensation arrangements, practices and trends continued to evolve. We note below various developments worthy of consideration in the year ahead.

Limits on Compensation Deductions Clarified. The IRS issued proposed regulations in December with respect to the 2017 statutory change that significantly expanded the scope of the $1 million annual limitation on the deductibility of compensation paid to specified executives under §162(m) of the tax code. The proposed rules clarify, among other things, that the limitation on deductibility will apply to executives of successor entities in M&A transactions if the executives were previously covered by these limits. In addition, the proposed regulations may extend the application of §162(m) to cover executives of private companies with publicly-traded debt and executives of foreign private issuers. For a more detailed discussion of the proposed regulations, see our December 19, 2019 memorandum. Companies should carefully track their covered employees, avoid unnecessary classification of employees as executive officers and take care to preserve arrangements that are grandfathered for §162(m) purposes.

Worker Participation: Employee Ownership and Representation

Irene Bucelli, Silvia Gatti, and Federica Soro are senior research analysts at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum. Related research from the Program on Corporate Governance includes Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr., (discussed on the Forum here).

In the past thirty years, more and more attention has been paid to the effects of employee participation on company performance. What might be the effect of it on long-term company performance? How could increased employee influence affect corporate strategy and decision-making?

There are two main forms through which employees can participate directly to the life of a publicly traded company: through ownership of the company’s shares, and through representation on the board of directors.

Employee ownership usually results from “direct participation plans”, which provide a streamlined (and often discounted, tax-efficient) means for workers to invest in the company, with clearly established caps and conditions. Employee representation on the board of directors means that employees themselves, or a body representing employees, can appoint a representative to sit on the board of directors.


Lower Bar for Criminal Insider Trading Charges

Greg Andres, Angela Burgess, and Neil MacBride are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

On December 30, 2019, the United States Court of Appeals for the Second Circuit affirmed the convictions of four individuals charged with disclosing and trading on nonpublic government information, adding a new twist to decades of judicial precedent on the definition of insider trading. See United States v. Blaszczak. [1] The court held that the “personal-benefit” test for insider trading established by the Supreme Court in Dirks v. SEC [2] does not apply to wire and securities fraud under Title 18 of the U.S. Code. Additionally, the court held that confidential government information constitutes “property” for the purposes of federal fraud statutes. The ruling will make it easier for the government to prosecute insider trading even when there is no clear benefit to the source who provided the information.


Towards a Common Language for Sustainable Investing

Barbara Novick is Vice Chairman and co-founder at BlackRock, Inc. This post is based on a Public Policy Viewpoint issued by Blackrock. Related letters, one sent by BlackRock CEO Mr. Larry Fink to CEOs, and one sent by BlackRock, Inc. to its clients, are available on the Forum here and here.

Introduction: The need for a common language

Interest in “sustainable Investing”—incorporating various environmental, social, and governance (“ESG”) related concerns or objectives into investment decisions—has soared in the past several years. By one measure, assets under management (AUM) in ESG mutual funds and exchange-traded funds (ETFs) globally has grown from $453B in 2013 to $760B in 2018, with estimates of continued significant growth in the coming decade. [1] These figures do not even include the growing private funds investing directly in sustainable infrastructure and other assets.

As investor interest in sustainable investment products has increased, the area has rightly taken on greater focus for policy makers and a broad set of stakeholders as well. Two policy considerations quickly come to the fore. First, a well-regulated sustainable finance ecosystem is needed to support broader sustainability-related policy initiatives at the global level, most pointedly to mobilize the massive amount of capital needed to address climate change. Second, and by no means unrelated, is the concern that robust standards exist to mitigate the risk of “greenwashing”—the risk that either through confusing or outright misleading investment approaches, asset owners cannot make informed choices about the actual sustainability characteristics of their investments.


Standard for Classifying a Minority Stockholder as a Controlling Stockholder

Francis J. Aquila, Melissa Sawyer, and John L. Hardiman are partners at Sullivan & Cromwell LLP. This post is based on their Sullivan & Cromwell 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).


In a December 30 decision, the Delaware Court of Chancery in In Re Essendant, Inc. Stockholder Litigation, No. 2018-0789 (Del. Ch. Dec. 30, 2019), held that plaintiffs, a putative class of target Essendant’s stockholders, failed to plead facts sufficient to show that buyer Sycamore Partners (“Sycamore”), a private equity firm, was a controlling stockholder. In so holding, the Chancery Court dismissed plaintiffs’ claims that Sycamore breached an alleged fiduciary duty to Essendant stockholders by pressuring the Essendant Board to accept Sycamore’s inadequate offer and that the Board aided and abetted such a breach. In addition, the Court dismissed plaintiffs’ claims that the Essendant Board breached its duty of loyalty by accepting Sycamore’s offer because they failed to plead facts sufficient to show that the Board was “dominated and controlled by Sycamore”—a minority stockholder. The Court of Chancery’s decision reaffirms well-established Delaware law that a minority stockholder is a controlling stockholder only if it “exercises control over the business affairs of the corporation” [1] such that “as a practical matter, it [is] no differently situated than if it had majority voting control.” [2]


SEC Proposes Amendments to Auditor Independence Framework

Lisa Stimmell and Richard Blake are partners, and Courtney Mathes is a practice support lawyer at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum.

On December 30, 2019, the U.S. Securities and Exchange Commission (SEC) announced that it was proposing several amendments to “codify certain staff consultations and modernize certain aspects of its auditor independence framework.”

The auditor independence framework, set forth in Rule 2-01 of Regulation S-X, requires, among other things, auditors to be independent of their audit clients “both in fact and in appearance.” Rule 2-01(b) sets forth the general auditor independence standard [1] and Rule 2-01(c) provides a non-exclusive list of relationships and circumstances, including certain financial, employment, and business relationships, in which an accountant would not be considered “independent” from an audit client.


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