Monthly Archives: August 2020

Update on Special Purpose Acquisition Companies

Ramey Layne, Brenda Lenahan, and Sarah Morgan are partners at Vinson & Elkins LLP. This post is based on a Vinson and Elkins publication by Mr. Layne, Ms. Lenahan, Ms. Morgan, Zach Swartz, K. Stancell Haigwood, and Layton Suchma.

Special Purpose Acquisition Companies (“SPACs”) continue to be increasingly popular vehicles for entities or individuals to raise capital to pursue merger opportunities, and for private companies seeking to raise capital, obtain liquidity for existing shareholders and become publicly traded.

This post provides an update to SPAC structures and transactions since a 2018 post (Special Purpose Acquisition Companies: An Introduction) and provides an expanded discussion of considerations for De-SPAC transactions and a description of recent SEC positions.

SPAC IPO Activity and Structure

Since the beginning of 2016, each year has set a record in terms of total number of SPAC IPOs and the amount of capital raised in those IPOs. Through June 30, 2020, the year was on pace to exceed the prior year once again and, through the date of this article, the amount of capital raised in SPAC IPOs in 2020 has already eclipsed all of 2019. Since the beginning of 2020 through July 22, 2020, 48 SPAC IPOs have been completed, raising almost $18 billion in proceeds, with another $5.4 billion of SPACs on file to complete IPOs this year. SPACs have remained popular notwithstanding the COVID-related market disruption, perhaps because of the flexibility of SPACs to pivot to attractive industries based on changing market fundamentals, and in part because SPAC IPO investors have the downside protection of redemption decisions.


Establishing Meaningful and Rigorous Financial Goals

Mike Kesner and John R. Ellerman are partners at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried; and Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried.


In developing annual incentive plans, the review and approval of meaningful financial performance targets can be a challenging task for the Board of Directors’ compensation committee. The frequent source of these financial performance targets is the company’s annual budgeting process. These performance targets are also often the basis for providing earnings guidance to the investment community. Absolute financial targets are the most difficult to establish and are the most common type of goal used in annual incentive plans. Many companies use relative financial performance goals such as relative total shareholder return (TSR) in their compensation program, but they are more frequently found in long-term incentive plans.


Trends in U.S. Director Compensation

Matthew Friestedt, Marc Treviño, and Melissa Sawyer are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Friestedt, Mr. Treviño, Ms. Sawyer, and Heather L. Coleman.


Over the last 10 years, average U.S. public company director compensation has increased steadily, in part due to changes in board composition and governance that have increased the number and significance of board leadership positions held by non-executive directors. Over the same period, the average number of hours of work performed by directors has also increased, while the average number of board meetings and size of boards have remained stable. Future director compensation may be influenced by many variables, including the effects of the COVID-19 pandemic and dynamic regulatory change in certain industries. So when setting director pay, companies should remain flexible. While peer company benchmarking can be informative, no single approach to director compensation works for every company.

Recent Director Compensation Data

Total Compensation. The total average compensation for S&P 500 non-employee directors from May 16, 2018 through May 15, 2019 was $304,856, as calculated by Spencer Stuart. The total mean compensation for Russell 3000 companies was $167,013, based on 2019 disclosure documents. The total average director compensation reflects a steady increase when compared to previous years. In 2014, the total average director compensation for S&P 500 companies was $263,748, and in 2009 it was $212,750. Even when accounting for inflation, total average director compensation has increased since 2009; similarly, the average annual additional director cash retainer increased every year except from 2018 to 2019.


Emerging ESG Disclosure Trends Highlighted in GAO Report

Holly J. Gregory and Heather Palmer are partners and Leonard Wood is an associate at Sidley Austin LLP. This post is based on their Sidley memorandum. 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 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).

On July 6, 2020, the U.S. Government Accountability Office (GAO) released a report evaluating the state of public company disclosures related to environmental, social, and governance (ESG) issues. [1] The report, titled “Disclosure of Environmental, Social, and Governance Factors and Options to Enhance Them,” examines why investors seek ESG disclosures, how public companies disclose ESG factors, the U.S. Securities and Exchange Commission’s (SEC) role in oversight of ESG disclosures, the role of nongovernmental “standard setters,” and options to improve and regulate ESG disclosures.

The GAO report surveys practices and perspectives familiar to those well versed in contemporary ESG developments while underscoring trends that may be expected to characterize the ESG disclosure landscape in the coming year and beyond. Specifically, investors will continue to pressure public companies to provide more detailed disclosure about their ESG initiatives and results of those initiatives to enable investors to track and eventually compare performance. Investors are concerned with “gaps and inconsistencies in companies’ disclosures that limit their usefulness” and comparability, suggesting that investors and other constituencies will continue to press public companies to fill those gaps and attain greater conformity in their methods of disclosure. Notwithstanding investor interest in greater conformity in standards for disclosure, voluntary disclosure under standards developed by nongovernmental “standard setters” rather than mandated SEC disclosure will be the likely platform for expanded corporate disclosures regarding ESG, at least in the near term.

This post summarizes key findings of the GAO report, discusses the implications of the report’s findings and emerging trends in ESG disclosures, and provides practical guidance for companies navigating the changing ESG disclosure landscape.


Seeing Through the Regulatory Looking Glass: PCAOB Inspection Reports

J. Robert Brown, Jr. is a Board Member at the Public Company Accounting Oversight Board. This post is based on his recent remarks to the Corporate Disclosure Policy Council and the Capital Markets Policy Council of the CFA Institute.

Thank you, Sandy [Peters] for the kind introduction.

It is a pleasure to have an opportunity to speak with you today. CFA Institute members have always been a key constituency for the Public Company Accounting Oversight Board (PCAOB) because of your thoughtful and practical perspectives on the capital markets, investors, and the approach taken by regulators. We learn a great deal from you, and I hope, after this talk, we will learn even more.

Before I continue, I want to remind you that the views I share today are my own and do not necessarily reflect the views of the PCAOB, my fellow Board members, or the staff of the PCAOB.

All of us spend a tremendous amount of time focusing on quality. We all want to purchase high-quality goods and services. We strive for quality time with our family and friends, perhaps even more so in an era of COVID-19. Quality is also critical to the financial reporting process. The independent audit is a big part of ensuring that the information investors receive is reliable and high quality.


The Other “S” in ESG: Building a Sustainable and Resilient Supply Chain

David M. Silk and Sabastian V. Niles are partners and Carmen X. W. Lu is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Silk, Mr. Niles, Ms. Lu, David B. Anders, and Christina C. Ma. 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 Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The current pandemic, blind spots in information flows through supply lines, the shutdowns in meat processing plants around the world, the ongoing shortages in personal protective equipment and, most recently, the scandal involving British retailer Boohoo, have all underscored the importance of resilient, sustainable, legally compliant and ethical supply chains. In addition to geographic and industry-specific challenges, issues relating to health and safety, labor practices and climate risk have become top priorities for investors, regulators and consumers. Failure to ensure proper oversight and management of supply chains can result in significant reputational and economic losses, as well as regulatory scrutiny. Companies that invest in this area also benefit from competitive advantages, faster recovery from disruptions and, for those who wish to demonstrate leadership, broader impact. For many companies, the pandemic has provided new insights into their supply networks, revealed an unsettling lack of full visibility into their supply chains, and exposed weaknesses and gaps between first-tier and lower-tier suppliers. Set forth below are some considerations for boards and management teams looking to integrate supply chain considerations into their oversight of ESG matters and to understand how their companies can build back stronger and better in the aftermath of the pandemic:


Managerial Duties and Managerial Biases

Ulrike M. Malmendier is the Edward J. and Mollie Arnold Professor of Finance at the Haas School of Business at the University of California, Berkeley; Vincenzo Pezone is Assistant Professor of Finance at the Goethe University in Frankfurt, Germany; and Hui Zheng is a PhD student at the University of California, Berkeley. This post is based on their recent paper.

One of the most striking developments in research on corporate finance and corporate governance over the last decade is the rise of behavioral finance. While earlier behavioral research had focused on psychological biases in the economic decision making of consumers or individual investors, the more recent research has provided evidence of their significant explanatory power even for top managers. Starting from virtually no published findings in finance until about 2000, Behavioral Corporate research now makes up a third to a half of the behavioral finance research in top finance and economics journals, with the majority focusing on the biases of top managers, as Malmendier (2018) documents (see Figure 3). Recent empirical work has established a significant role of managerial biases such as overconfidence, limited attention, or the sunk-cost fallacy in shaping investment, merger, and financing decisions (see, e.g., the overview in Günzel and Malmendier, 2020).

There is still one limitation to this existing research: Much of it focuses exclusively on the traits and biases of the chief executive officer (CEO). There are good reasons for this focus, namely, the central role of CEOs as the top decision makers and, more mundanely, data availability. In practice, however, other top managers, and especially other members of the C-Suite, significantly influence corporate decisions as well, and we know little about their biases and the interaction of their views and the CEO’s views.


Weekly Roundup: August 7–13, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 7–13, 2020.

Statement by Commissioner Lee on Proposed Summary Shareholder Report

Assessing Your Company’s Response to COVID-19

SEC Roundtable: “Emerging Markets, Including China”

ESG and Corporate Purpose in a Disrupted World

Facing the COVID-19 Challenge in Corporate Boardrooms

Alibaba: A Case Study of Synthetic Control

Shareholder Complaints Seek to Hold Directors Liable for Lack of Diversity

Exercising Business Judgment Through COVID-19

Audit Committee Priorities in the Current Quarter and Beyond

Does Joining the S&P 500 Index Hurt Firms?

Comment Letter to DOL

Comment Letter to DOL

Jeffrey P. Mahoney is General Counsel at the Council of Institutional Investors. This post is based on a CII letter to the Department of Labor. 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 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).

I am writing on behalf of the Council of Institutional Investors (CII), a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $4 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families, including public pension funds and defined contribution plans with more than 15 million participants—true “Main Street” investors through their funds. Our associate members include non-U.S. asset owners with about $4 trillion in assets, and a range of asset managers with more than $40 trillion in assets under management.

The purpose of this letter is to provide you with our perspectives on the Department of Labor (DOL) “proposed amendments to the ‘Investment duties’ Regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), to confirm that ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk adjusted economic value of a particular investment or investment course of action” (Proposed Rule).


Does Joining the S&P 500 Index Hurt Firms?

Benjamin Bennett is Assistant Professor at the Tulane University A.B. Freeman School of Business; René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University; and Zexi Wang is an Assistant Professor at the Lancaster University School of Management. This post is based on their recent paper.

For investors wanting to hold common stocks, the best-known investment textbooks show that it is hard to do better than investing in a low cost indexed fund. However, little is known about whether firms benefit from being included in the S&P 500 index. Joining the S&P 500 index can have both positive and negative effects on a firm. Being added to the index is like joining a prestigious club. A firm gains prestige by joining the club, but at the cost of becoming compared to other firms in the club. On the positive side, the increased demand for the stock from passive investors may increase the value of the stock and the firm gains prestige. On the negative side, the increase in holdings by passive investors implies that more investors ignore firm fundamentals when they make decisions about their holdings of the firm’s stock, so that the stock price may become less informative and governance may become worse. Further, active investors, managers, and board members become more likely to assess the firm relative to other firms in the index even though the index addition itself does not directly change the firm’s fundamentals.


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