Monthly Archives: March 2020

Closing the Gender Pay Gap

Doreen E. Lilienfeld is a partner and Matthew Behrens is an associate at Shearman & Sterling LLP. This post is based on their Shearman memorandum.

From Wall Street to the soccer pitch, public interest in addressing the gender pay gap is greater than ever. While the press covers the U.S. Women’s World Cup team’s struggles to earn equal pay for equal (or, rather, superior) work, ESG-focused investors are demanding more granular disclosure of companies’ efforts to close the gender pay gap. Companies that fail to address gender pay inequality may not only see reputational damage, but may find themselves at a competitive disadvantage as talent migrates to those companies that prioritize fair pay and opportunities for career advancement. Companies that do not keep up face the risk of potential legal action, as well as shareholder and consumer backlash.

This post analyzes recent developments in the gender pay gap debate and offers practical advice to companies confronting deficiencies in this area.

The Gender Pay Gap as an Opportunity Gap

Here are the facts: In 2019, the median pay for women is 21% less than the median pay for men or, put another way, women earn only 79 cents for every dollar earned by a man. [1] When factoring in race, the gap grows even larger. For each dollar earned by a white man, a white woman earns 80 cents while American Indian, Alaska Native, black and Hispanic women earn just 74 cents. By its nature, a “median pay” comparison is derived without regard to job type, seniority, location, experience or other similar factors. When applying an “equal pay” measure that controls for the same position and qualifications, the gap shrinks substantially — such that white women earn 98 cents for every dollar earned by a white man while non-majority women with similar educational and other qualifications earn 97 cents for every dollar earned by a white man. [2]


Regulation and Investor Expectations: The UK 2020 AGM Season

Peter Reilly is Senior Director, Corporate Governance at FTI Consulting and Aniel Mahabier is CEO of CGLytics. This post is based on a joint FTI Consulting and CGLytics paper authored by Mr. Reilly based on data from CGLytics, with contributions from Jonathan Neilan, Melanie Farrell of FTI Consulting and Michael Murgatroyd of CGLytics.

Executive Summary

Ever since the financial crisis of 2008, the level of scrutiny on Boards of Directors and companies has grown, with the focus on corporate governance becoming particularly pronounced over the past five years. The 2018 iteration of the new UK Code included a number of substantive changes.

The growing capabilities of institutional investors and the broadening of the definition of governance from the Financial Reporting Council has dictated that 2019 was a year of significant change in a number of key areas.

FTI and CGLytics conducted an analysis of key areas of the new UK Code to determine the extent of that impact on UK and Irish companies. While the embedding of workforce engagement practices and disclosure has been subject to slower developments, guidance on pensions and Chair tenure have immediately influenced company and investor thinking—the result of which has been significant reductions in pensions for executive Directors in the FTSE and a sharp drop in average Chair tenure on both the FTSE and the ISEQ. However, despite the extent of change among Chairs, the level of gender diversity in those positions remains very low. The paper also includes wider potential risks for companies as the 2020 AGM season approaches.


The Crisis and the Activists and Raiders

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.

For the past two weeks a number of activists and takeover raiders have sought to take advantage of the COVID-19 crisis by launching attacks on companies they view as vulnerable. Unlike the bedrock American companies drained by the crisis, there is ample dry powder in the coffers of some funds and companies to support the continuance of activist attacks and takeover raids. The threat of such attacks and raids is affecting all companies—mega-cap and small-cap. Now more than ever, this shows how the lack of regulation leaves a void encouraging short-termism, activism and takeover raids. This regulatory void adversely affects American companies and, today, most importantly, their employees.

My previous requests for regulatory changes to level the playing field were ignored on the Federal level. While some asset managers and institutional investors have embraced The New Paradigm I prepared for the World Economic Forum, others have not. The World Economic Forum, with its long support for stakeholder governance, sustainable long-term investment and elimination of inequality, has done its part. The Business Roundtable has done its part. The Federal government needs to do its part to address some of the underlying issues.


Can Investors Time Their Exposure to Private Equity?

Gregory Brown is professor of finance and director of the Frank Hawkins Kenan Institute of Private Enterprise at University of North Carolina Kenan-Flagler Business School. This post is based on a recent paper authored by Prof. Brown; Robert S. Harris, C. Stewart Sheppard Professor of Business Administration at University of Virginia Darden School of Business; Wendy Hu, Senior Researcher at Burgiss; Tim Jenkinson, Professor of Finance at the University of Oxford Saïd Business School; Steven N. Kaplan, Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at University of Chicago Booth School of Business; and David T. Robinson, Professor of Finance and the J. Rex Fuqua Distinguished Professor of International Management at Duke University Fuqua School of Business.

Private equity markets are highly cyclical. The aggregate amount of capital committed to the sector varies substantially from peak to trough, and many have observed that periods of high fundraising activity are followed by periods of low absolute performance for the asset class (see Harris, Jenkinson, and Kaplan, among others). This raises an important question: is it possible to market-time the allocations to private equity to avoid the cyclicality of performance?

While this question is of immense practical interest to the investor community, it also reflects the deeper economic forces at work in the sector. Creating time-varying exposure to the asset class is potentially complicated by two sets of agency frictions that are especially important in this institutional setting. The first potential agency friction arises inside the organizational structure of the investor (the limited partner, or LP, in the fund) itself. LPs can suffer from internal agency problems that prevent them from committing to so-called `disciplined’ capital allocation strategies. A second potential friction arises from the nature of delegation in the asset class. Unlike public markets in which assets (e.g. stocks) can typically be purchased or sold almost immediately, limited partners who commit capital to private equity funds face significant delays and uncertainty surrounding the timing of purchases and sales, which are controlled by the general partner (see Gredil; Robinson and Sensoy). Consequently, there is substantial ‘commitment risk’ when the investor has pledged capital but does not control the timing of when the money is put to work or returned.


The Impact of COVID-19 on Executive Compensation

Greg Arnold and Todd Sirras are managing directors at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy memorandum.

Businesses of all sizes in every sector of the economy are feeling the impact of COVID-19 to one degree or another. The initial economic impact COVID-19 (outside of the immediate local effects in China) was focused on multi-national corporations with large operations or supply chains in China, but the expanded reach of the disease and its expected spread has reduced economic activity across all sectors of the economy.

As the scale and severity of COVID-19 continues to expand, companies are wrestling with a host of business continuity and human resource challenges. Global pandemics are a true “black swan” for corporate activity, creating tremendous uncertainty and making business-as-usual planning irrelevant for a period of time. Executive compensation is by no means the most important current challenge facing Boards, but it is critical that the focus on pay and performance is responsive to the environment.


Weekly Roundup: March 20-26, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 20-26, 2020.

Virtual Annual Meetings and Coronavirus

Human Capital Management Disclosure

Key Issues for Directors Relating to COVID-19

Friend or Foe? The Convergence of Private Equity and Shareholder Activism

Federal Forum Selection Charter Provisions Validated by Delaware Supreme Court

2019 ESG Proxy Voting Trends by 50 U.S. Fund Families

New ESG Disclosure Obligations

Testing Compliance

The Impact of COVID-19 on Performance-Based Compensation Programs

Shareholder Proposals 2019—ESG No-Action Letter Trends and Strategies

Skye Mineral: Minority Investor “Blocking Rights” and Actual Control

Institutional Investor Survey 2020

Worldwide Regulatory Response to Short Selling Following COVID-19 Market Crisis

Kill Zone

2020 U.S. Climate Proxy Voting Guidelines

2020 U.S. Climate Proxy Voting Guidelines

This post is based on a publication by Institutional Shareholder Services, Inc. Related research from the Program on Corporate Governance includes Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).


Many investors, companies, policymakers, and other stakeholders increasingly recognize that the environmental threats of climate change pose significant economic and business risks. Following the 2015 Paris Agreement, most governments are now committed to curb carbon emissions to avoid average global warming of more than 2 degrees Celsius compared to pre-industrial levels. Climate change is today among the top issues for many institutional investors who face the risk of asset loss in a low-carbon future, and who seek to better understand how various potential scenarios could affect short-, medium-, and long-term business sustainability and investment performance.

Kill Zone

Sai Krishna Kamepalli is a Research Professional; Raghuram Rajan is the Katherine Dusak Miller Distinguished Service Professor of Finance; and Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance, all at the University of Chicago Booth School of Business. This post is based on their recent paper.

There is a growing worry that digital platforms (multi-sided markets that offer digital services to customers, often for free, in exchange for data) might be gaining market power, distorting competition, and slowing innovation. A specific concern is that such platforms might acquire any potential competitors, dissuading others from entering, and thus preventing innovation from serving as the competitive threat that is traditionally believed to keep monopoly incumbents on their toes. In a sense, such platforms create a “Kill Zone” around their areas of activity. Yet, this decline in the raw numbers could be driven by other concurrent factors. Most importantly, the idea that acquisitions discourage new investments is at odds with a standard economic argument; if incumbents pay handsomely to acquire new entrants, why should entry be curtailed? Why would the prospect of an acquisition not be an extra incentive for entrepreneurs to enter the space, in the hope of being acquired at hefty multiples?

In this paper we argue that this standard economic argument relies critically on the value at which firms are acquired being adequate compensation for innovation. This may not hold in the context of acquisitions by digital platforms, because the economics of digital platforms differ significantly from the neoclassical economics of firms taught in standard textbooks.  To show this, we build a simple model of platform competition that contains the key novel ingredients present in this space: First, they are two-sided in that one side faces advertisers while the other side provides customers a service, which is often priced at zero. As a result, there isn’t any price competition on the customer side. Second, there are important network externalities on the customer side of the market. Third, some customers face switching costs.


Worldwide Regulatory Response to Short Selling Following COVID-19 Market Crisis

Theodore N. Mirvis, Adam O. Emmerich, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum authored by Mr. Mirvis, Mr. Emmerich, Mr. Niles, John L. Robinson, and Adam L. Goodman.

In the past month, in addition to its human impact, fallout from the COVID-19 pandemic and the oil shock have wreaked havoc on the global economy and financial markets; the S&P 500 is on track for its worst month since 1987, market-wide circuit breakers have been triggered twice in three days, volatility has spiked, and markets that are normally deep and liquid have come close to total seizure.

These developments are not remotely the consequence of short selling run amok without proper regulatory supervision. However, current conditions highlight long-term failures in securities regulatory regimes around the world to properly address short selling, and financial regulators around the world have reacted with decisive curbs on short selling: South Korea, France, Italy, Belgium, Spain, Greece and other countries have all banned short selling for periods ranging from one to six months. More important, from the perspective of long-term regulatory reform, the European Securities and Markets Authority (ESMA) has not only sanctioned these regulatory actions in Europe, but also lowered the disclosure threshold for short positions to 0.1% of a company’s net share capital. The ESMA wrote that:


Institutional Investor Survey 2020

Kiran Vasantham is Director of Investor Engagement and David Shammai is Corporate Governance Director—Cross Border at Morrow Sodali. This post is based on their Morrow Sodali memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

This is the fifth consecutive year that we have conducted a global institutional investor survey and reported the findings and our observations. In this publication we focus on the ESG risks and opportunities that investors factor into their investment decisions with our report exploring these themes in greater detail.

As anticipated, it was clear that 2019 marked a turning point in incorporating ESG factors into mainstream investing as investors recognize the growing risks of non-financial factors. This correlates with the top risks facing the world in 2020 as reported by the World Economic Forum which found that for the first time, environmental issues are the dominant concern. The rate of ESG-oriented investing has risen significantly, and we continue to see mainstream institutional investors, both active and passive, shifting capital in this direction. Whilst maintaining the overall structure of the survey, we decided to explore these themes in more-depth.

The survey findings were resounding. Respondents unanimously agreed that ESG risks and opportunities played a greater role for them in 2020 when investing and engaging with companies. Unsurprisingly climate change was at the top of the ESG agenda. Whilst understanding the physical and transitional climate-related impacts were formerly limited to high-emitting sectors such as energy and industrials, this is no longer the case. All companies, regardless of their sector, should expect to be questioned on how they are managing and responding to these risks and opportunities. Boards and companies should also be prepared to face investor scrutiny on how they approach and report on their exposure to ESG-related issues.


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