Monthly Archives: May 2020

Reconsidering Activism in France

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy and Hannah Clark is an associate. This post is based on their Wachtell Lipton 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); The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang; 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).

On April 27, 2020, France’s financial markets regulator, the Autorité des marchés financiers (“AMF”), released a report containing certain proposals and observations regarding shareholder activism. The report was issued following the AMF’s review of recent activism matters in France, including its recent €20m fine levied against Elliott Management for obstructing an investigation into a takeover bid and failing to adequately disclose its positions in connection with the 2015 tender offer by XPO Logistics for Norbert Dentressangle.

In its report, the AMF recommended lowering the mandatory reporting threshold for investors to publicly disclose their ownership from 5% to 3% of the issuer’s share capital or voting rights, as is already the case in a number of other European jurisdictions. The AMF announced that it would be modifying its guidance on “quiet periods” to clarify that issuers may provide any information necessary to respond to public statements about them by activist investors, and that it would be supporting proposals to expand the required disclosures on short-selling to include information on activist investors’ exposure to debt instruments. The AMF also requested legislation to give it additional capabilities to provide rapid responses in the activist campaign context—specifically, the AMF proposed that its ability to require additional disclosures if errors or omissions have been found in public statements be expanded from issuers to also capture investors, and that the obligations imposed on bidders and targets in takeover bid situations, including due diligence obligations for public statements, also be applied to their shareholders.


Asian Americans in the Boardroom

Douglas K. Chia is the President of Soundboard Governance LLC. This post is based on his Soundboard Governance memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

Throughout American history, there has never been a sense of urgency to increase the numbers of Asian Americans in corporate, professional, or civic leadership positions, despite their success in the upper-middle ranks of a multitude of fields, most notably medicine, engineering, and information technology. Asian Americans are still in the phase of breaking the color barrier, sometimes referred to as the “bamboo ceiling.” (e.g., Andrew Yang, Nikki Haley). Similarly, there has not been a sense of urgency to increase the numbers of Asian Americans in the boardrooms of the largest public company. Is that about to change?

Based on 2018 data from Deloitte and the Alliance for Board Diversity, the percentages of Fortune 500 company board seats held by people identified as African American/Black, Hispanic/Latino(a), and Asian/Pacific Islander were 8.6 percent, 3.8 percent, and 3.7 percent, respectively. That was up from 7.6 percent, 3.0 percent, and 2.1 percent, respectively, in 2010. Based on the latest estimates from the US Census Bureau, the percentages of people in the United States who identify as African American/Black, Hispanic/Latino, and Asian represent 13.4 percent, 18.3 percent, and 5.9 percent, respectively. [1]


Taking the Lead in Adopting Political Transparency in the COVID-19 Crisis

Bruce F. Freed is President at the Center for Political Accountability and Karl J. Sandstrom is senior counsel at Perkins Coie LLP and counsel at CPA. This post is based on their CPA memorandum.

As the country seeks to recover from the worst economic crisis since the Great Depression sparked by the Covid-19 virus, it’s time for companies to put the nation’s interest above their own bottom line. A company’s individual pursuit of profit cannot impede the collective recovery of our national economy. Our nation’s financial commitment to restoring our country’s economic health should not fall victim to private rent seeking or short-term profits. There are basic commitments our public companies need to make.

Transparency in seeking and receipt of public funds and accountability in the use of those funds must be the hallmark of acceptance of assistance. Corporations have a responsibility to their shareholders and to the public at-large to forego the immediate advantage that they may enjoy from an absence of governmental oversight in favor of a long-term commitment to responsible corporate stewardship, including complete transparency in interacting with government and government officials.


Board Members Preparedness for Major Risk Event Like COVID-19

Steve W. Klemash is Americas Leader, Jennifer Lee is Audit and Risk Specialist, both at the EY Americas Center for Board Matters, and Amy Brachio is EY Global Advisory Risk & Performance Improvement Leader. This post is based on their EY memorandum.

The unprecedented scale and pace of disruption in the market today requires a new way of thinking about risk and transformation. Technological advances are blurring industry lines and changing the nature of work. Changing social demographics and an accelerating climate crisis are calling into question how, and for whom, businesses create value. These and other developments, from cybersecurity threats to a volatile geopolitical landscape and pandemics, are putting pressure on organizations to build risk resiliency and create long-term value while sustaining trust across stakeholders—consumers, investors, regulators, employees and third parties.

Embracing the upside of risk and sustaining stakeholder loyalty and trust is fundamental to achieving competitive market advantage in this era of disruption. According to the Embankment Project for Inclusive Capital (EPIC), as little as 20% of a company’s value is now captured on its balance sheet—“a staggering decline” from about 83% in 1975—as real value today is in innovation, culture, corporate governance and trust.


The Return of Poison Pills: A First Look at “Crisis Pills”

Ofer Eldar is an Associate Professor of Law and Finance at the Duke University School of Law and Michael Wittry is Instructor of Finance at the Fisher College of Business at The Ohio State University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

The poison pill, arguably the most effective anti-takeover device, is making a comeback in the wake of the coronavirus (COVID-19) crisis. As the virus spread around the globe and through the United States in late February and early March of 2020, stock prices plummeted and market volatility dramatically increased. As a result of the ongoing crisis, many corporations have found themselves dealing with unprecedented challenges and disruptions. Companies whose operations have stalled, such as airlines and brick-and-mortar retailers, are likely to suffer from cash flow problems, potential defaults, and suppressed revenues. Moreover, intense market volatility means that stock prices may be depressed due to bad news which does not reflect underlying firm fundamentals or the true continuation value of the firm.

The sharp decline in stock prices makes corporations particularly vulnerable to takeovers and interventions by hedge fund activists. The large volume of funds accumulated in recent years by private equity firms and hedge fund investors, which have struggled in recent years to find attractive targets, further increases the likelihood of a potential acquisition wave that exploits the recent decline in firms’ market valuations.


Considerations on Non-Employee Director Compensation

Brian Scheiring is a Partner and Steve Pakela is a Managing Partner at Pay Governance LLC. This post is based on their Pay Governance memorandum.

The simplification of non-employee director pay programs over the past decade has resulted in a model that predominantly focuses on an annual cash retainer, an annual stock award, and additional board leadership retainers. As discussed in our March 23rd Viewpoint, the current COVID-19 pandemic has resulted in companies putting “Everything on the Table” regarding executive and non-employee director compensation. As companies look to reduce costs and better align executive and director compensation with their various constituents, an increasing number of companies are reducing base salaries of company executives and cash retainers for company directors. For the majority of calendar-year-end companies whose executive share grants were determined at a higher stock price prior to the COVID-19 crisis, careful consideration will need to be given to the determination of director equity awards in the coming months, given the decline in stock prices since early March.

During the Financial Crisis in 2008 and 2009, about 15% to 20% of companies reduced executive salaries and/or director cash retainers. Typically, companies who reduced executive salaries also reduced director cash retainers. So far through early April 2020, we have seen about 125 companies publicly announce reductions in director cash retainers. Many companies pay their director retainer on a quarterly basis. In some cases, we have seen companies suspend the payment, which equates to a 25% reduction in retainer; in other cases, the quarterly retainer is paid but at a reduced level. These reductions range from 10% to 50% of the full annual value. For a large majority of calendar-year-end companies, executives received 2020 long-term incentive award grants in January and February, prior to the crash of the public markets. While these awards are likely underwater and significantly below their grant value, the multi-year nature of long-term incentives provides some hope of retention and incentive value over the course of their performance or vesting period.


Chairman Clayton’s Remarks to the Special Meeting of the Investor Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the Special Meeting of the Investor Advisory Committee. 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.

Thank you, Anne (Sheehan). I really appreciate your prompt response to our request to reconvene a special meeting of the Investor Advisory Committee to focus on issuer-investor engagement in the context of the challenges posed by COVID-19, including, in particular, disclosure considerations.

Over the last several weeks, my colleagues and I have had multiple teleconferences with retail and institutional investors, investor advocates, including members of this Committee, auditors, public company executives and board members. There were two common themes in those meetings—(1) the importance of keeping markets functioning and (2) the importance of keeping investors and markets apprised about the evolving impact of, and responses to, COVID-19—in other words, the importance of timely, accurate and decision-useful information. Today, it is my hope that we focus on the information point, and I will start by sharing some personal thoughts on this point.


Corporate Immunity to the COVID-19 Pandemic

Ross Levine is Professor of Finance at the University of California, Berkeley. This post is based on a paper authored by Professor Levine; Wenzhi Ding, Research Postgraduate Student at the University of Hong Kong; Chen Lin, the Stelux Professor in Finance at the University of Hong Kong; and Wensi Xie, Assistant Professor at the Chinese University of Hong Kong Business School. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Which corporate characteristics make companies more “immune” to COVID-19? The COVID-19 pandemic has triggered remarkably heterogeneous stock price movements among firms within the same country and industry. For example, the average U.S. manufacturing firm saw stock prices fall by 29% over the first quarter of 2020 with a standard deviation of 24%.

In this paper, we examine the relationship between pre-2020 corporate characteristics and stock price reactions to COVID-19. Using data on over 6,000 firms across 56 economies during the first quarter of 2020, we consider five pre-2020 firm traits: (1) basic financial conditions, such as cash holdings, leverage, and profitability, (2) global supply chain and customer exposure to COVID-19, such as the degree to which a firms’ inputs are purchased from and products sold in countries differentially exposed to COVID-19, (3) engagement in corporate social responsibility (CSR), such as relations with employees, suppliers, customers, and the communities in which firms operate, (4) corporate governance, such as executive control of the board, antitakeover provisions, and executive compensation systems, and (5) ownership structure, such as the extent to which hedge funds, families, non-financial corporations, and institutional investors hold large stakes in firms. We believe that our study is the first to assess cross-firm stock price reactions to COVID-19 as functions of these pre-shock traits. In all of our empirical models, we include country × time and industry × time fixed effects to capture time-varying country and industry level trends.


New or Updated Non-GAAP Financial Measure for COVID-19

Matt Kaplan and Paul M. Rodel are partners and Jonathan Miu is an associate in the New York office of Debevoise & Plimpton LLP. This post is based on their Debevoise & Plimpton memorandum.

The economic disruptions resulting from the ongoing COVID-19 pandemic have had, and likely will continue to have, appreciable economic effects on the business of many companies. One question (among many) companies may consider is whether and how to reflect the impact of COVID-19 in upcoming public disclosure. Indeed, the SEC has specifically requested that companies address investor interest in how the COVID-19 pandemic has impacted company operations and financial condition, and particular focus will be brought to bear on whether and how COVID-related effects have been reflected in non-GAAP financial measures publicly and privately disclosed to investors, lenders and other parties. In unpacking the whether and how regarding non-GAAP financial measures, specific issues to consider include:

  • Whether an existing permitted category of adjustments to a current non-GAAP financial measure could accommodate a COVID-19-related adjustment?
  • If not, may and should the company create a new permitted category of adjustments to an existing non-GAAP measure, or should the company create and disclose a new non-GAAP financial measure?
  • In any case, exactly which COVID-19-related effects may appropriately be reflected as adjustments?

Although relevant considerations will vary by company, the following discussion highlights certain key considerations for evaluating whether and how to reflect COVID-19-related adjustments in such measures, including U.S. federal securities law, contractual and corporate governance considerations.


The Pandemic is the Litmus Test of Stakeholderism

Alissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Over the past years, the shareholder primacy model has received a death sentence from private and public sector leaders across the developed—and to a lesser extent—the developing world. With this, corporate boards and executives became responsible not only to shareholders for financial performance but also to stakeholders for environmental, human rights, diversity and other objectives. At the same time, institutional investors became the guardians of the corporate temple, expected to monitor companies’ behavior on an array of these—notoriously difficult to quantify—areas.

Indeed, the transition from the shareholder to the stakeholder model was a key promise of the corporate world to the society—underpinning the new the social contract—called for by the dramatic erosion of trust in enterprise over the past decade. This reformulation was embodied in commitments by prominent business bodies such as the Business Roundtable in the United States and reflected in corporate law amendments in countries such as France. The result is that directors are now responsible not only to shareholders for the bottom line but to stakeholders for the triple bottom line.


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