Monthly Archives: September 2020

Investment Stewardship 2020 Annual Report

Michelle Edkins is Managing Director, Hilary Novik-Sandberg is an Associate and Victoria Gaytan is a Vice President at BlackRock Investment Stewardship. This post is based on a BlackRock memorandum by Ms. Edkins, Ms. Novik-Sandberg, Ms. Gaytan, and Sandra Boss.

Our fiduciary responsibility

BlackRock Investment Stewardship’s (BIS) activities are a crucial component of our fiduciary duty to our clients. Investment stewardship is how we use our voice as an investor to promote sound corporate governance and business practices to help maximize long-term shareholder value for our clients, the vast majority of whom are investing for long-term goals such as retirement. In addition to direct dialogue with the companies in which our clients invest, we help shape norms in corporate governance, sustainability, and stewardship through active participation in private sector initiatives and the public policy debate. In the reporting year from July 1, 2019 to July 30, 2020, we responded formally to seven policy consultations and spoke at more than 180 events to advance sound governance and sustainable business practices.

Promoting sound corporate governance is at the heart of our stewardship program. We believe that high-quality leadership and business management is essential to delivering sustainable financial performance. That is why we focus on board quality, effectiveness, and accountability across the broad universe of companies globally that our clients are invested in. Engagement and voting are the two most frequently used instruments in BIS’ stewardship toolkit.


The Enduring Wisdom of Milton Friedman

Steven N. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business. This post is based on his piece, originally published in ProMarket. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Milton Friedman wrote his famous piece about corporate social responsibility 50 years ago. The wisdom of the piece has been influential, productive, and remains true today.

It is important to understand what Friedman actually said and meant: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” I interpret “profits” to mean long-term shareholder value, which is the value of the company. That captures the fact that total shareholder value can increase if a company takes actions that reduce profits in the short-term, but increase them by more in the medium and longer-term. That is surely what Friedman meant.


2020 AGM Season Review

Domenic Brancati is CEO of UK/Europe and Daniele Vitale is Head of Governance in UK and Europe at Georgeson. This post is based on their Georgeson memorandum.

Key Figures


No Damages in Dispute Over Failed Anthem/Cigna Merger

Mark Metts is partner and Katy Lukaszewski and Stephen Chang are associates at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Metts, Ms. Lukaszewski, Mr. Chang, Paul L. Choi, Jim Ducayet, and Jennifer F. Fitchen, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here), and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

On August 31, 2020, Vice Chancellor J. Travis Laster of the Delaware Chancery Court issued his long-awaited resolution of the prolonged litigation involving the failed merger of Anthem, Inc. and Cigna Corporation—two of the nation’s largest health insurance companies. As Vice Chancellor Laster found and detailed in the 311-page opinion, no party won this protracted battle, no merger was consummated, and no damages were awarded to either side. [1]  See In re Anthem-Cigna Merger Litigation, Case No. 2017-0114-JTL, at 305-06 (Del. Ch. 2020).

The Merger. On July 23, 2015, Anthem and Cigna entered into a merger agreement, with Anthem agreeing to pay over $54 billion, a 38.4% premium over Cigna’s market capitalization. The proposed business combination would have created the nation’s largest healthcare insurer, combining the second- and third-largest insurance companies in the country. The merger agreement included certain “Efforts Covenants,” which included (1) the Reasonable Best Efforts Covenant obligating the parties to use their reasonable best efforts to satisfy all conditions of closing to consummate the merger and (2) the stricter Regulatory Efforts Covenant requiring the parties to take any and all actions necessary to avoid any legal impediments to the merger that a governmental entity might raise.


SEC’s Proposed Reporting Threshold for Institutional Investment Managers

Daniel Taylor is associate professor of accounting at the Wharton School of the University of Pennsylvania. This post is based on a comment letter to the U.S. Securities and Exchange Commission by Mr. Taylor; Mary Barth, the Joan E. Horngren Professor of Accounting, Emerita, at Stanford Graduate School of Business; Travis Dyer, assistant professor of accounting at Cornell University SC Johnson College of Business; and Wayne Landsman, KPMG Distinguished Professor of Accounting at the University of North Carolina Kenan-Flagler Business School. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

We appreciate the opportunity to comment on the Securities and Exchange Commission’s (the “Commission”) proposed Reporting Threshold for Institutional Investment Managers. Herein we provide comments and analysis relating primarily to the Request for Comments in Sections II.D III.B of the proposed rule (“Proposal”).

Part I of this letter provides comment on the central premise of the Proposal. The Commission estimates that the Proposal would exempt 89% of institutional investors from filing Form 13F (“affected filers”) and provide an average annual cost savings of approximately $21,000 per affected filer. These cost savings are economically small in that they amount to 0.004% (0.008%) of assets under management for the average (median) affected filer, and 0.02% of assets for the smallest filer. This small cost savings needs to be weighed against the potentially large costs to investors and others created by eliminating a public disclosure that they heavily use.

Part II of this letter comments on various aspects of Section II of the Proposal, “Discussion and Economic Analysis.” We believe the analysis in Section II is incomplete for two reasons. First, the Proposal does not contain any formal economic analysis, and does not attempt to quantify either the extent of use of Form 13F or the benefits that it provides to investors and other stakeholders. To help fill this void, we analyze the usage patterns of the EDGAR system, and specifically the frequency of Form 13F downloads from EDGAR.


The Withdrawal of the Boulder Letter

Phillip Goldstein is the co-founder of Bulldog Investors. This post is based on his comment letter to the SEC Division of Investment Management.

I. Any Limitation on Voting Rights of a Shareholder of a CEF Violates Sections 16 and 18 and the ICA.

The May 27, 2020 Statement did not disavow the Boulder Letter’s reasoning or its conclusion that a CEF would violate Section 18(i) of the Investment Company Act of 1940 (the “ICA”) by opting into a state control share statute (“CSS”). The May 27th Statement solicited comments on, among other things, the following point:

Apart from 18(i), which turns on the meaning of “equal voting rights,” please explain whether the ability to opt-in to and trigger a control share statute would have a practical or functional impact on a fund’s compliance with other provisions of the federal securities laws, such as section 12(d)(l)(E) of the Act, which requires pass-through or mirror voting for certain fund of funds arrangements, or rule 13d-l under the Securities Exchange Act of 1934, which places a limitation on the ability of certain shareholders from voting based on the size of their holding. If relevant, please provide an analysis of any practical or functional differences between how the principle of equal voting rights may apply in those different regulatory contexts.


The Broadening Basis for Business Judgment

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

The Securities and Exchange Commission recently revised the periodic disclosure requirements of Regulation S-K, the latest installment in the SEC’s ongoing effort to improve the quality of public disclosures. In many instances, the new rules replace prescriptive requirements with flexible guidelines intended to elicit company- and industry-specific information that is material to investors’ understanding of the company’s business. The SEC’s move toward a principles-based disclosure framework centered on materiality can be understood as part of a trend in the United States and Europe toward increasing the scope of board and management discretion. For most of their history, U.S. public corporations were widely understood to be profit-driven enterprises governed by a rule-based corporate law regime designed to protect and advance the financial interests of shareholders. There is now a growing transatlantic view that corporations should be better understood as purpose-driven entities working toward “sustainable profitability” and guided by ethics, social responsibility, and values, all as defined by the board of directors in its business judgment. While the business judgment rule in the United States will continue to protect decisions made in good faith by unconflicted directors, one consequence of expanding the purpose of the corporation would be that directors’ decisions need no longer be targeted to the singular goal of maximizing shareholder returns.


Taming the Corporate Leviathan: Codetermination and the Democratic State

Jens Dammann is the Ben H. and Kitty King Powell Chair in Business and Commercial Law at the University of Texas at Austin School of Law and Horst Eidenmueller is a Statutory Professor for Commercial Law at the University of Oxford Faculty of Law. This post is based on their recent paper.

Letting workers elect some percentage of corporate directors, an approach known as codetermination, has long been viewed as a historical quirk primarily confined to the social-democratic societies of Western Europe. By and large, U.S. corporate law scholars assume that the traditional U.S. model, under which shareholders are the sole masters of the corporation, is bound to prevail. Nations that had already introduced codetermination might fail to abolish it, because of path dependence or inertia, but other countries would not follow suit. Even scholars who argued that corporate boards ought to take into account the interests of constituents other than shareholders typically did not envision allowing anyone but shareholders to elect a corporation’s directors.

More recently, however, the broad consensus supporting this shareholder-centric model of corporate governance has begun to fray. Two prominent senators and contenders for the 2020 Democratic presidential nomination, Elizabeth Warren and Bernie Sanders, advocate giving the employees of large corporations a voice in corporate governance.


Considering Resilience When Assessing FY2020 Incentive Plan Performance

John D. England and Mike Kesner are partners at Pay Governance LLC. This post is based on their Pay Governance memorandum.


/rəˈzilyəns/ noun

  1. the capacity to recover quickly from difficulties; *
  2. the ability of a substance or object to spring back into shape; *
  3. actions taken to survive the pandemic and to thrive

*from the Oxford Dictionary of English

The pandemic continues to wreak havoc on the economy despite trillions of dollars in federal support. Infection rates and COVID-19-related deaths continue to mount, and unemployment remains at levels not seen since the “Great Recession.” The reversal in the U.S. economy has been stunning. In early 2020, most companies set annual and long-term incentive goals following a year of record financial results and predictions of a strong future. The pandemic has made those goals unachievable, and participants face FY2020 payouts that are a fraction of prior levels—especially if payouts are formulaically generated. This is all at a time when management teams are working frantically to serve the needs of customers, employees, and shareholders.

As a country, we have never been in this place before, not during the financial crisis of 2008-2009, and not after 9/11. There is no modern precedent upon which to rely.


Shareholder Proposal No-Action Requests in the 2020 Proxy Season

Marc Gerber is partner, Hagen Ganem is counsel and Ryan Adams is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

In October 2019, for the third consecutive year, the Staff of the Division of Corporation Finance (Staff) of the U.S. Securities and Exchange Commission (SEC) issued guidance concerning companies’ ability to exclude shareholder proposals from their proxy statements by addressing the significance of a proposal through a board analysis. That guidance also discussed the ability to exclude proposals on the basis of micromanagement. The 2020 proxy season witnessed a small but potentially meaningful uptick in the number of successful no-action requests containing a board analysis, as well as limits on the success of micromanagement arguments.

During the summer of 2020, the Staff informally indicated that it was not planning on issuing further guidance on these topics this year. As a result, taking stock of the guideposts provided by no-action letters from the 2020 proxy season is critically important as calendar year companies anticipate the wave of shareholder proposals they are likely to receive over the coming months.


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