Yearly Archives: 2020

Trump Legacy: Boom in Corporate Political Disclosure

Bruce F. Freed is President, Karl J. Sandstrom is counsel, and Dan Carroll is Vice President for Programs at the Center for Political Accountability. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert J. Jackson Jr., (discussed on the Forum here) and The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here).

How has the Trump presidency impacted corporate political disclosure and accountability? The answer might come as a surprise. It’s been a boon and a boom.

Over the past four years, more large publicly held U.S. companies than ever before have adopted sound transparency and oversight practices for their political spending. This trend has strengthened between the 2016 presidential election and next month’s, according to the 2020 CPA-Zicklin Index released this month.

The annual benchmarking of the S&P 500 companies is conducted by the Center for Political Accountability and The Wharton School’s Zicklin Center for Business Ethics Research. It rates the largest U.S. public companies for their political disclosure and accountability and includes these major findings:


Shifting Influences on Corporate Governance: Capital Market Completeness and Policy Channeling

Ronald J. Gilson is Charles J. Meyers Professor of Law and Business, Emeritus, and Curtis J. Milhaupt is Professor of Law at Stanford Law School. This post is based on their recent paper.

Corporate governance scholarship is typically portrayed as driven by single factor models, for example, shareholder value maximization, director primacy or team production. These governance models are Copernican; one factor is or should be the center of the corporate governance solar system. In this essay, we argue that, as with binary stars, the shape of the governance system is at any time the result of the interaction of two central influences, which we refer to as capital market completeness and policy channeling. In contrast to single factor models, which reflect a stable normative statement of what should drive corporate governance, in our account the relation between these two governance influences is dynamic.

Motivated by Albert Hirschman’s evocative book, Shifting Involvements: Private Interest and Public Action, we posit that all corporate governance systems undergo repeated shifts in the relative weights of the two influences on the system. Capital market completeness determines the corporate ownership structure and privileges shareholder governance and value maximization by increasing the capacity to slice risk, return, and control into different equity instruments. The capability to specify shareholder control rights makes the capital market more complete, tailoring the character of influence associated with holding particular equity securities and its reciprocal, the exposure of management to capital market oversight. Policy channeling, the instrumental use of the corporation for distributional or social ends, pushes the corporate governance gravitational center toward purposes other than maximizing shareholder value. We argue that disappointment with corporate performance—whether the result of unrealistic expectations, the choice of mechanisms incapable of delivering the desired results, or rising dissatisfaction with the prevailing balance of the two influences—is an endogenous driver of the repeated shifts in the relative weights of capital market completeness and policy channeling. The actors who experience disappointment with corporate performance and the methods chosen to shift the weights of the two influences will differ over time and across different governance systems. But the pattern is not unique to a particular corporate governance system or time period.


Pandemic Preparation: 72-Hour Response Plan to Government Inquiry

Charles J. Clark and Barry A. Bohrer are partners and Christian J. Ascunce is an associate at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.


This post provides guidance covering key questions that your organization may face as a result of a regulatory and enforcement inquiry during COVID-19, including a checklist to aid your response. Considering and approving these best practices is good; mastering and implementing them so that you may reflexively employ them is ideal. And a critical component of this is identifying outside counsel that you trust, that knows you and your business, and that can respond quickly to assist you in this high-stakes and fast-moving context.

For additional updates regarding COVID-19, see Market Trends 2019/20: COVID-19 from a Securities Law Perspective, COVID-19 Update: SEC and Nasdaq Response and Updated SEC C&DIs, SEC’s Conditional Reporting Relief and COVID-19 Disclosure Guidance: First Analysis, SEC Reporting Companies: Considering the Impact of the Coronavirus on Public Disclosure and Other Obligations: First Analysis, and COVID-19 Ramifications for Public Companies—SEC Disclosures, SEC Filings and Shareholder Meeting Logistics: First Analysis. For an overview of practical guidance on COVID-19 covering various practice areas, including securities, see Coronavirus (COVID-19) Resource Kit.


How Boards Can Calibrate Executive Compensation to The Risk of Disruption

Seymour Burchman and Blair Jones are Managing Directors at Semler Brossy Consulting Group. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Thanks to emerging digital technologies, many industries are now facing a new wave of disruption. Artificial intelligence is powering autonomous vehicles, while data analytics are reshaping financial services and other consumer industries. AI-powered advances by themselves, according to a 2019 McKinsey study, could boost annual global GDP by $13 trillion, or an additional percentage point. And the coronavirus pandemic, by promoting remote work and commerce, has accelerated this process.

Companies in many industries now face serious threats to their business models. Yet executive compensation as a whole has been surprisingly slow to adapt to the challenge. Most programs still emphasize the same basic financial metrics on growth and profitability—which tend to focus executives on current programs rather than creative projects to meet the looming disruption.

Metrics that promote innovation and transformation are still relatively weak. Many companies rely on three-year performance periods that are too long or too short to capture the strategies they are implementing—and may thereby be contributing to the steady decline in corporate investment over the past decade. Also, boards frown on using discretion and qualitative measures in pay packages, even as they want their companies to be more agile and adjust strategies frequently. A clash is inevitable.


2020 Annual Corporate Directors Survey

Paula Loop is Leader, Paul DeNicola is Principal, and Leah Malone is Director at the PricewaterhouseCoopers LLP Governance Insights Center. This post is based on their PwC memorandum.


2020 has presented unprecedented challenges for companies. While the year generally started like any other, by the end of the first quarter, the COVID-19 pandemic created an unprecedented global health emergency. Business was upturned across the globe, unemployment shot through the roof, US GDP took the greatest fall on record, and many workforces shifted to an entirely remote setting, all while communities confronted untold sickness and fatalities. America also saw a new level of social unrest, as protests for racial justice swept the nation. Against all of this, a presidential election looms.

With everyday life upended, boardrooms changed drastically. Gone were the site visits, strategy retreats, and board dinners. Gone was the boardroom itself. But the work didn’t slow, and most directors reported devoting significantly more time to their duties.

In many ways, directors believe that boards and companies have met the early challenge, even during the crisis. Boards show increased awareness and increased focus on areas that institutional shareholders have emphasized in recent years, like environmental, social, and governance (ESG) issues and shareholder engagement. They have made changes to deal with problems in company culture, and they are thinking more broadly about issues like company strategy and executive compensation. In many ways, they are responding to the current climate and to shareholder concerns. But in other ways, boards continue to be plagued by seemingly intractable problems. Directors continue to report dissatisfaction with the performance of some of their peers. Board refreshment still lags as leadership frequently avoids both the tough conversations with directors who should be replaced and the hard work of long-term board succession planning. Boardroom discussions suffer as directors, keen to maintain a collegial atmosphere, avoid sharing dissenting views. And even while making some improvements in boardroom diversity, directors aren’t always convinced of the importance of that diversity.


The PCAOB’s Revised Research and Standard-Setting Agendas

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

In late 2017, the U.S. Securities and Exchange Commission (“SEC”) appointed an entirely new Board, giving the five new members the collective opportunity to develop a PCAOB 2.0. In 2018, we issued a Strategic Plan that promised innovative oversight, including with respect to our approach to writing auditing standards. Consistent with our statutory mission, we explicitly committed, in doing so, to consider the expectations of investors.

Last month, the PCAOB published its updated research and standard-setting agendas that will be its focus of attention and resources for the next 12 to 18 months. The agendas do not, however, reflect the promises made in the Strategic Plan.

With respect to investor expectations, the revised agendas mostly disregard them. The agendas removed matters repeatedly identified by investors as important—matters that have only grown in significance in a COVID-19 environment. What remains largely overlaps with the priorities of an international standard setter. While these priorities may be good ones, the goal of global alignment and coordination should not take precedence over the expressed interests of U.S. investors.


Incorporating Human Capital Management Disclosures into a Company’s Annual Report

Maj Vaseghi and Pamela Marcogliese are partners and Elizabeth Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Vaseghi, Ms. Marcogliese, Ms. Bieber, Sarah Ghulamhussain, Lori Goodman, and Doru Gavril.

On August 26, 2020, the United States Securities and Exchange Commission (SEC) adopted final amendments under Regulation S-K as part of a Disclosure Effectiveness Initiative to modernize and improve corporate disclosures which will become effective on November 9, 2020. One of the key revisions is the addition of a new disclosure topic that will require SEC reporting companies to provide a description of their human capital resources to the extent such disclosures would be material to an understanding of the company’s business. This topic is required disclosure in annual reports on Form 10-K and certain registration statements. The final rules should be addressed with a carefully planned disclosure strategy for upcoming annual reports.

HCM and broader ESG proposals have continued to gain increased stakeholder attention in the past several years and concerns around oversight of these issues have only been amplified by COVID-19, making HCM a priority among corporate boards. We expect this trend to continue as companies develop their HCM disclosure strategies.

Institutional investor demand for attention

For the past several years, there has been heightened scrutiny by investors, proxy advisory firms, and other stakeholders calling for enhanced disclosures by companies of their HCM practices. Large institutional investors have been at the forefront of the trend in their communication, voting guidelines and stewardship principles.


Politics and Purpose in Corporate America

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); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Political engagement traditionally has been viewed as a no-win situation for a public company or a public company chief executive officer. In a sharply divided nation, taking sides on a controversial topic can instantly alienate half of a company’s stakeholders, from investors and customers to suppliers and employees. These days, however, silence can also be viewed as a political statement, which places public companies in a difficult position. While the incursion of sociopolitical issues into the business world has slowly gained momentum over the last decade, it has recently accelerated due to major societal upheavals, high-profile foreign affairs and trade issues, and an election cycle like no other, all in the unrelenting spotlight of 24/7 news and social media. At the moment, corporate America is under pressure from many directions and is widely viewed as a potentially powerful—albeit reluctant—agent of sociopolitical change.

The answer to the question of how a corporation can successfully handle political pressures may be found through a focus on corporate purpose. It is incumbent upon each company’s board of directors and management team to understand the company’s own raison d’être, to have a clear sense of the solutions it proposes for the problems of the world. A corporate purpose can inform and guide decisions as to which political issues are relevant and how they should be addressed. A clearly expressed statement of purpose can also unify leadership, employees, investors and other stakeholders behind initiatives that are aligned with the company’s role in society. The lack of such unity could undermine the effectiveness of company leadership and render political action and engagement ill-considered and self-defeating.


Proposed HSR Rule Change Would Benefit Activists

Steve Wolosky, Andrew Freedman, and Kenneth M. Silverman are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Wolosky, Mr. Freedman, Mr. Silverman, and Ron S. Berenblat. 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); and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

On September 21, 2020, the U.S. Federal Trade Commission (the “FTC”) published a notice of proposed rulemaking that would, among other things, create a new de minimis exemption under the Hart-Scott-Rodino Antitrust Improvements Act of 1986 (the “HSR Act”), which subjects proposed acquirers of an issuer’s voting securities to notification, filing and waiting period requirements. Significantly, the new exemption would make it possible for activist investors intending to influence an issuer’s business decisions to purchase up to 10% of the issuer’s voting securities without being subject to these requirements. The FTC is currently seeking comments to the proposed rule changes.


SEC Brings Enforcement Action Against Fund Manager for Single 13D Violation

Eleazer Klein is partner, and Adriana Schwartz and Clara Zylberg are special counsel at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

The SEC brought charges against a fund manager for 13D violations, in yet another reminder that it will pursue enforcement actions against filers for Schedule 13D violations even without a pattern of repeat violations.

On Sept. 17, 2020, the SEC announced the settlement of charges brought against an investment manager of certain private funds (“IM”) for failure to timely amend a statement of beneficial ownership report on Schedule 13D (Administrative Proceeding File No. 3-20020). [1]

The 13D Requirements

Section 13(d) of the Securities Exchange Act of 1934 requires a “beneficial owner”:

  • That acquires more than 5%;
  • Of a class of any voting, equity securities registered under Section 12 of the Exchange Act;
  • To file with the SEC within ten days of any such acquisition; and
  • A statement on Schedule 13D describing such acquisition and containing certain other information, including a description of any plans or proposals that the beneficial owner may have with respect to certain enumerated matters regarding the issuer.

After the initial filing of a Schedule 13D, Rule 13d-2(a) requires the Schedule 13D to be amended “promptly” in the event of any “material change” in the information set forth therein. “Promptly” is not defined under the rules but is generally understood to be within two business days. Under Rule 13d-2(a), an increase or decrease in beneficial ownership of 1% or more is deemed to be “material,” but Schedule 13D filers must keep in mind that an amendment must also be filed promptly upon any material change to any of the other information disclosed in the Schedule 13D, including, without limitation, the filer’s plans or proposals.


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