Yearly Archives: 2020

Investing Responsibly: Voting

Carine Smith Ihenacho is the Chief Corporate Governance Officer, Jonas Jølle is Head of Governance, and Vegard Torsnes is a Lead Governance Analyst at Norges Bank Investment Management. This post is based on their NBIM memorandum. A related video is available here: NBIM Talk: Investing responsibly.

Shareholder meetings are the main opportunity for shareholders to influence companies and hold the board to account. We use our voting rights to promote the fund’s long-term interests.

We own a small slice of more than 9,000 companies. As a minority shareholder, we are one of many contributors of equity capital to a company. We rely on the board to set the company’s strategy, oversee management performance and be accountable for its decisions. For stock companies to function effectively, most decision-making power is delegated to the board. Shareholders have the right to choose who will sit on the board and act in their best interests. Shareholders also have the right to approve fundamental changes to the company, such as amendments to governing documents, issuance of shares, and mergers and acquisitions.

The fund has come a long way since it initially avoided using its voting rights for fear of getting involved in difficult decisions. Today, the fund actively uses its voting rights at nearly all shareholder meetings. The fund has a principled approach to corporate governance that is applied consistently across the portfolio. The fund publishes all its votes the day after the meeting. In cases when we vote against the board’s recommendation, we provide an explanation. From 2021, we will publish our votes before the shareholder meeting and explain any votes against the board’s recommendation. We want to be fully transparent about how we exercise our ownership.


2021 Proxy and Annual Report Season

Laura D. Richman is Counsel, Michael L. Hermsen is Senior Counsel, and Anna T. Pinedo is Partner at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Hermsen, Ms. Pinedo, Robert F. Gray, Jr., and David A. Schuette.

Preparations are key to a successful proxy and annual report season, and autumn is not too early to begin. While work on proxy statements, annual reports and annual meetings typically kicks into high gear in the winter, advance planning will make the process go more smoothly. This is especially true for the 2021 season, as companies evaluate the ramifications of COVID-19 that need to be discussed in various contexts in annual filings with the US Securities and Exchange Commission (SEC).

Companies may also want to spend time this fall considering whether to expand proxy disclosures beyond what is required in order to address issues that are garnering increased attention, such as human capital, diversity and other environmental, social and governance (ESG) matters. This post provides an overview of key issues that companies should consider as they get ready for the 2021 proxy and annual report season (2021 Proxy Season), including:


Reporting Threshold for Institutional Investment Managers

Granville J. Martin is General Counsel at the Society for Corporate Governance. This post is based on a comment letter by the Society for Corporate Governance to the U.S. Securities and Exchange Commission. 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).

The Society for Corporate Governance (the “Society” or “we”) appreciates the opportunity to provide comments to the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) on the proposed changes to the reporting threshold for Form 13F reports by institutional investment managers (the “Proposed Rules”). We respectfully submit this letter in opposition to the Proposed Rules.

Founded in 1946, the Society is a professional membership association of more than 3,500 corporate and assistant secretaries, in-house counsel, outside counsel, and other governance professionals who serve approximately 1,600 entities, including 1,000 public companies of almost every size and industry. Society members are responsible for supporting the work of corporate boards of directors and the executive managements of their companies on corporate governance and disclosure matters.

I. Introduction

Congress enacted Section 13(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to increase the public availability of information regarding the securities ownership of institutional investors and to increase investor confidence in U.S. securities markets. When the final rules relating to the filing and reporting requirements of institutional investment managers were announced in 1979, the SEC made clear that “[t]he reporting system required by Section 13(f) is intended to create in the Commission a central repository of historical and current data about the investment activities of institutional investment managers, in order to improve the body of factual data available and to facilitate the consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence.” Accordingly, as the SEC has recognized, the goals of the Section 13(f) disclosure program are to (i) aggregate data in respect of the investment activities of institutional investment managers, (ii) improve public insight into the holdings of institutional investment managers in order to facilitate the assessment of such managers’ impact on the securities markets, and (iii) increase investor confidence in the integrity of the U.S. securities markets.


The New SEC Regulation S-K Rules

Andrew R. Brownstein, John L. Robinson, and Elina Tetelbaum are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Brownstein, Mr. Robinson, Ms. Tetelbaum, Erica E. BonnettAlbertus G.A. Horsting, and Andrea K. Wahlquist.

The SEC’s amendments to Regulation S-K will come into effect on November 9, 2020 and apply to 10-Qs, 10-Ks and registration statements filed on or after that date as applicable. November 9, 2020 is also the filing deadline for quarterly reports by large accelerated and accelerated filers with quarters ended on September 30, 2020. As we previously noted, the amendments alter requirements concerning the description of business (Item 101), legal proceedings (Item 103) and risk factors (Item 105) by, among other things, adopting a principles-based approach to disclosure. The amendments also require new descriptions, where material to an understanding of the business, of (1) a company’s “human capital resources” and (2) “any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”

We developed the below Frequently Asked Questions to provide practical guidance as companies work to revise their annual and quarterly reports in light of the new disclosure requirements.


The Impact of the Pandemic on Executive Compensation

Joseph E. Bachelder is special counsel at McCarter & English LLP. This post is based on an article by Mr. Bachelder published in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of the article.

Pandemic Consequences to Executive Pay in 2020

1. Employer actions in response to the pandemic during the first half of 2020.

During the first half of 2020, many companies took actions to reduce executives’ salaries. (For example, as indicated in the Stanford Corporate Governance Research Initiative study noted below, 424 Russell 3000 companies reduced CEO salaries during this period.) Most companies did not take steps to modify their annual and long-term incentive programs, which will generally be adversely impacted by the economic consequences of the pandemic.


2020 Climate in the Boardroom

Eli Kasargod-Staub is co-founder and executive director and Jessie Giles is research director at Majority Action. This post is based on their Majority Action report. 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); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

In the face of a global pandemic, climate-driven hurricanes, wildfires, and other extreme weather events, and the subsequent economic crisis destroying lives, livelihoods, and property, it is clear that systemic risks are the greatest threat to global economic and financial stability. To investors’ portfolios, the systemic risk of climate change is large, material, and undiversifiable–as well as undeniable. Investors and companies have been on notice since 2018 that the global economy must nearly halve carbon emissions in the next decade and reach net-zero emissions by 2050 to have just a 50% chance of limiting global warming to 1.5°C and avoiding the worst effects of a climate catastrophe.

In order to manage these systemic portfolio risks, investors must move beyond disclosure and company-specific climate risk management frameworks, and focus on holding accountable the relatively small number of large companies whose actions are a significant driver of climate change. Unfortunately, despite some recent progress, the largest systemically important carbon emitters and enablers in the U.S.–the energy, utility, automotive, and financial services sectors–remain far behind in the urgent business transformation needed to achieve a net-zero carbon future.


Virtual Shareholder Meetings in the 2021 Proxy Season

Marc S. Gerber and Richard J. Grossman are partners and Khadija Lalani is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

The COVID-19 pandemic has impacted U.S. public companies in myriad ways. The fact that the traditional proxy season—the period from April through June when a substantial number of public companies hold their annual meetings—took place at all is a credit to the collaborative efforts and flexibility of many different participants in the proxy ecosystem, including companies, boards of directors, corporate secretaries, state governments, the Securities and Exchange Commission (SEC), various service providers, proxy advisory firms and investors. The outcome was a monumental shift from a proxy season of traditional in-person annual meetings of shareholders to one largely of virtual shareholder meetings.

Considering the lack of planning time and the haste with which this systemic pivot occurred, the virtual meeting proxy season should be considered a resounding success. Companies were able to conduct their annual meetings mostly on schedule while observing the necessary restrictions and guidelines on public gatherings, thereby protecting the health of shareholders, employees, directors and other annual meeting participants. Investors were able to attend and participate in annual meetings without traveling or gathering in large groups and could even attend multiple meetings in a single day, resulting in greater shareholder attendance. That said, at least some investors remain concerned about a lack of transparency surrounding virtual shareholder meetings—particularly due to the fact that only the company was able to see the questions shareholders asked during Q&A sessions—and have called virtual meetings a “poor substitute” for in-person meetings.


Why and How Capitalism Needs to Be Reformed

Ray Dalio is co-chief investment officer and co-chairman of Bridgewater Associates.

Before I explain why I believe that capitalism needs to be reformed, I will explain where I’m coming from, which has shaped my perspective. I will then show the indicators that make it clear to me that the outcomes capitalism is producing are inconsistent with what I believe our goals are. Then I will give my diagnosis of why capitalism is producing these inadequate outcomes and conclude by offering some thoughts about how it can be reformed to produce better outcomes. As there is a lot in this, I will present it in two parts.

Part 1: Where I’m Coming From

I was lucky enough to grow up in a middle-class family raised by parents who cared for me, to be educated in a good public school, and to be able to go into a job market that offered me equal opportunity. One might say that I lived the American Dream. At the time, I and most everyone around me believed that we as a society had to strive to provide these basic things (especially equal education and equal job opportunity) to everyone. That was the concept of equal opportunity, which most people believed to be both fair and productive.


The Business Roundtable’s Purpose Statement, One Year On

Alex Heath is Executive Vice President of Social Purpose; Sara Dal Lago is Account Supervisor of Business & Social Purpose; and Meghan Laarman is Senior Account Executive of Financial Communications & Capital Markets at Edelman. This post is based on an Edelman memorandum by Mr. Heath, Ms. Dal Lago, Ms. Laarman, and Lex Suvanto. 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).

It’s been just over a year since over 180 CEOs signed on to the Business Roundtable’s (BRT) statement on the purpose of a corporation, committing to lead their companies for the benefit of all stakeholders, not just shareholders.

This statement formally set a new vision for corporate action and drew a lot of attention from media, businesses, and nonprofits alike; many wondered if this was simply an empty promise, or if it would actually spark meaningful change and concrete action. Twelve months later, how has this multi-stakeholder commitment evolved?

In the wake of the global pandemic and societal outcry against racial injustice, the spotlight is now more than ever on the business community to act in-line with multi-stakeholder principles.

The call for business action on societal issues isn’t new. From the humble beginnings of Corporate Social Responsibility through the shared value movement and up to the newly embraced stakeholder capitalism, companies have been adding value and making a positive impact on their communities and society for a long time, while external and internal expectations have evolved and shaped their ongoing actions.

So what role has the BRT’s statement of purpose played, if any?


Treasury Issues Final Rule Updating CFIUS Regulations

Malcolm “Mick” Tuesley, George Wang, and Abram Ellis are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Tuesley, Mr. Wang, Mr. Ellis, Mark Skerry, Daniel Levien, and Jennifer Ho.

On September 15, 2020, the Office of Investment Security of the U.S. Department of the Treasury (“Treasury”) published a final rule modifying the Committee on Foreign Investment in the United States’ (“CFIUS” or the “Committee”) regulations relating to its mandatory declaration provisions. The most significant amendments pertain to the mandatory filing requirements for certain foreign investments in U.S. businesses that engage in activities relating to critical technologies, a regime referred to previously as the “Pilot Program.” Under prior iterations of the regulations, a mandatory declaration for an investment in a U.S. business engaged in activities concerning critical technologies was only triggered when those activities were related to one of 27 sensitive industries specified by North American Industry Classification System (“NAICS”) code. The final rule abandons the industry-specific inquiry entirely, and instead adopts a new threshold analysis that focuses on the particular export controls that may be applicable to the critical technology utilized by the U.S. business. The rule does not, however, modify the definition of “critical technologies,” which is defined by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) and is, in part, subject to a separate ongoing rulemaking process by the Department of Commerce as explained in further detail below. [1]


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