Yearly Archives: 2020

An Alternative Paradigm to “On the Purpose of the Corporation”

Posted by Peter A. Atkins, Kenton J. King, and Edward B. Micheletti, Skadden, Arps, Slate, Meagher & Flom LLP, on
Thursday, June 4, 2020
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Peter A. Atkins, Kenton J. King, and Edward B. Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Messrs. Atkins, King, Micheletti, and Cliff C. Gardner. 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).

Recently a definition of corporate purpose has been proposed and elaborated on in a post on this Forum titled “On the Purpose of the Corporation” (the Corporate Purpose Memo). This post offers commentary on various aspects of the Corporate Purpose Memo, including three key takeaways:

  • The Corporate Purpose Memo’s proposed universal definition of corporate purpose for publicly traded business (for-profit) corporations—which rests on directors addressing ESG (environmental, social and governance) and stakeholder interests by “reasonably balanc[ing] the interests of all constituencies” without giving primacy to the shareholder constituency—rejects the basic fiduciary responsibility of directors of Delaware business corporations (and directors of corporations in other states that tend to follow Delaware law) under existing law to measure their actions by what is in the best interests of shareholders as a whole (the shareholder primacy governance model).
  • Moreover, in reaching for this new corporate purpose definition—prompted by the perceived need to push back those who “advocate a narrow scope of corporate purpose that is focused exclusively on maximizing shareholder value”—the Corporate Purpose Memo ignores the reality that the shareholder primacy governance model as it has evolved in fact embraces the ability of directors of Delaware business corporations to consider a broad array of ESG/stakeholder issues.
  • Directors of Delaware companies who chose to address ESG/stakeholder-oriented decisions pursuant to the stakeholder interests balancing act contemplated by the proposed new purpose definition—untethered from their overarching fiduciary responsibility to shareholders to act in their best interests—run the risk of losing the valuable protection of the business judgment rule.

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First Impression Bias: Evidence from Analyst Forecasts

Posted by Thomas Ruchti (Carnegie Mellon University), on
Thursday, June 4, 2020
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Thomas Ruchti is Assistant Professor of Accounting at Carnegie Mellon University Tepper School of Business. This post is based on a paper forthcoming in the Review of Finance by Professor Ruchti; David Hirshleifer, the Paul Merage Chair in Business Growth at the University of California at Irvine Paul Merage School of Business; Ben Lourie, Assistant Professor of Accounting at the University of California at Irvine Paul Merage School of Business; and Phong Truong, Assistant Professor of Accounting at the Pennsylvania State University Smeal College of Business.

In a seminal paper, Asch (1946) finds that if a person is described as “intelligent, industrious, impulsive, critical, stubborn, [and] envious,” people form a more positive impression of that person than when the descriptors are provided in the reverse order. Subsequent psychological research confirms that information received first tends to overshadow information received later, and that first impressions have a lasting effect on perceptions and future behavior (Anderson, 1981). This first impression bias causes a decision maker, assessing the outcomes of some process, to place undue weight on early experiences (Anderson, 1965). If the first impression is particularly positive, then assessments about the future tend to be unduly positive; the reverse is the case if the first impression is negative.

In our recent paper, we provide the first investigation of whether this bias exists in a field setting with finance professionals. We test whether an analyst’s first impression of a firm biases the analyst’s later forecasts and related behaviors. It is not immediately obvious whether this would occur, since analysts have pecuniary incentives to make accurate forecasts. On the other hand, forecasting future outcomes is a challenging and inherently subjective endeavor.

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Temporary NYSE COVID-19 Exception From Shareholder Approval Requirements Under the “20% Rule”

Posted by Jeffrey MacDonald, Catherine Clarkin, and Sarah Payne, Sullivan & Cromwell LLP, on
Thursday, June 4, 2020
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Jeffrey MacDonald is an associate and Catherine Clarkin and Sarah Payne are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. MacDonald, Ms. Clarkin, Ms. Payne, Robert Buckholz, John Mead, and Robert W. Reeder III.

Summary

In light of the impact of the COVID-19 pandemic, the New York Stock Exchange LLC (“NYSE”) filed notice of a proposed rule change on May 14 with the Securities and Exchange Commission (“SEC”), which became effective immediately. [1] Specifically, Section 312.03T (the “Temporary Rule”) of the NYSE Listed Company Manual (the “Manual”) provides a limited temporary exception from the application of the shareholder approval requirements in Section 312.03 of the Manual—also known as the “20% Rule”—and a limited attendant exception from the requirements of Section 303A.08 of the Manual (Shareholder Approval of Equity Compensation Plans). [2] The Temporary Rule is substantially similar to Nasdaq Listing Rule 5636T, which was filed by The Nasdaq Stock Market LLC on May 4, 2020 (the “Nasdaq Rule”). [3] Like the Nasdaq Rule, any securities issued in reliance on the exception must be issued by the later of June 30, 2020 and 30 calendar days following the date of the binding agreement governing the issuance, in each case, after the company has submitted a certification of its compliance with the requirements of the Temporary Rule and received approval from NYSE. Unlike the Nasdaq Rule, the Temporary Rule requires that a company certify that the proceeds of any issuance made pursuant to the Temporary Rule will not be used to fund any acquisition transaction and does not include a “safe harbor” provision waiving the requirement to obtain NYSE prior approval for transactions that meet specified conditions. The SEC is soliciting comments on the Temporary Rule for 21 days following publication in the Federal Register. [4]

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Broadridge Virtual Shareholder Meetings (“VSMs”): Preliminary Statistics

Posted by Maryellen Andersen, Broadridge, on
Wednesday, June 3, 2020
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Maryellen Andersen is Vice President of Corporate & Institutional Relations and a Corporate Governance Officer at Broadridge.

After steady annual increases over the past decade, the number of VSMs jumped significantly in the first five months of 2020. [1] This is due to several factors related to the COVID-19 pandemic, including: social distancing guidelines from federal, state, and local authorities that dissuade groups of people from gathering; company travel restrictions on management, directors, and staff; and temporary permission to hold “virtual-only” shareholder meetings by several states that otherwise restrict them. Apart from factors related to the pandemic, the number of VSMs was expected to increase modestly year-over-year as familiarity with them grows among companies and shareholders, and as the greater shift toward digital communications unfolds.

Broadridge’s VSM service supports applicable rules and regulations for conducting shareholder meetings and provides functional choices for issuers and shareholders to utilize, consistent with best practices. [2] The platform provides a means for shareholders to vote at the meeting and, when meetings have shareholder proposals, proponents may present them by living voice. Participants can submit questions to management during the meeting, through a ‘question box.’ Many issuers utilize a function to enable validated shareholders to also submit questions in advance of their shareholder meetings.

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Competition Laws, Norms and Corporate Social Responsibility

Posted by Ross Levine (University of California, Berkeley), on
Wednesday, June 3, 2020
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Ross Levine is the Willis H. Booth Chair in Banking and Finance at the University of California, Berkeley Haas School of Business. 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 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).

Investors and companies increasingly focus on corporate social responsibility (CSR). For example, Larry Fink, the CEO of BlackRock, the world’s largest asset manager, argued in 2020 that, “… a company cannot achieve long-term profits without embracing … the needs of a broad range of stakeholders,” such as customers, employees, suppliers, and the communities where the company operates. In 2019, the Business Roundtable, a group of U.S. CEOs, committed to investing in their employees, dealing fairly and ethically with suppliers, and protecting the environment. Moreover, about 1500 international companies with almost $90 trillion of assets were signatories to the United Nations-supported Principles for Responsible Investing. While many companies express support for CSR, CSR activities differ markedly across firms and countries, raising questions about what determines CSR.

In this paper, we focus on one potential determinant of CSR activities—product market competition—and evaluate differing views about the impact of competition on CSR. One set of views holds that competition spurs CSR. For example, the stakeholder value maximization view argues that intensifying competition induces firms to (1) strengthen relationships with customers, workers, suppliers, and local communities to repel other firms that are increasingly trying to compete for those stakeholders and (2) CSR strengthens those relationships by signaling the firm’s commitment to honor implicit agreements to ensure worker well-being, provide safe products to customers, fulfill informal agreements with suppliers, and protect the environment. A related view, the product differentiation view, also stresses the positive effects of competition on CSR. It stresses that an intensification of competition spurs firms to differentiate their products to obtain greater pricing power and cushion the adverse ramifications of competition on profits. Boosting CSR is one strategy for accomplishing that differentiation.

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Congress Legislative Developments—Potential Delisting of Foreign Companies from U.S. Securities Exchanges

Posted by Michael Borden, Peter Roskam and Justin Becker, on
Wednesday, June 3, 2020
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Michael E. Borden and Peter Roskam are partners and Justin Becker is an associate at Sidley Austin LLP. This post is based on their Sidley memorandum.

On May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act, by unanimous consent. The key effect of S. 945 is that it prohibits certain companies from listing and trading their securities on any U.S. securities exchanges or through any other method regulated by the U.S. Securities and Exchange Commission (SEC) if the Public Company Accounting Oversight Board (PCAOB) is prevented from reviewing the companies’ audits.

After the bill passed, on the same day, a bill with the same language was introduced in the U.S. House of Representatives by Rep. Brad Sherman, D-Calif., chairman of the House Financial Services Committee’s subcommittee on Investor Protection, Entrepreneurship and Capital Markets. Significantly, Rep. Sherman’s subcommittee has jurisdiction over this bill in the House, which could increase the likelihood of its enactment.

Text of both bills, statements by Sens. John Kennedy, R-La., and Chris Van Hollen, D-Md., cosponsors of the Senate bill, and statements by Rep. Sherman, demonstrate that the legislative intent was to address Chinese companies listed on U.S. securities exchanges.

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Compensation Impacts of COVID-19 on Performance-Based Incentive Awards

Posted by Gregory T. Grogan, Jeannine McSweeney, and Eric Wolf, Simpson Thacher & Bartlett LLP, on
Tuesday, June 2, 2020
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Gregory T. Grogan and Jeannine McSweeney are partners and Eric Wolf is Counsel is Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Grogan, Ms. McSweeney, Mr. Wolf, Andrew Blau, Bradley Goldberg, and David E. Rubinsky. 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).

The coronavirus disease 2019 (“COVID-19”) outbreak continues to impose significant and unprecedented economic harm and uncertainty for companies across numerous sectors. As companies continue to evaluate the impact of the pandemic on stock market volatility and company performance, an important issue to be addressed from both a private and public company perspective is how to address the impact of the pandemic on performance-based compensation; specifically, establishing new performance-based compensation awards for 2020, adjusting existing performance goals for both annual and long-term incentive compensation and revisiting the form and vesting terms for equity-based compensation. This post discusses selected issues that companies may face and strategies that companies may take to continue to retain top talent, with the ultimate goal of ensuring alignment between the goals of companies and the incentives of their key employees during this challenging period.

Granting New Equity and Cash Performance-Based Incentive Awards 

Structuring new equity and cash bonus programs to implement realistic performance goals during a period of extreme market volatility and uncertainty is a timely issue for public companies whose boards and compensation committees are currently preparing new compensation programs. Three possible approaches are to: (1) maintain the status quo, (2) delay grants or delay setting performance targets or (3) set flexible performance targets.

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Sharpening the Tools at Hand: New Rulings Provide Sensible Balance to Section 220 Litigation

Posted by Gregory V. Varallo, Andrew Blumberg, and Alla Zayenchik, Bernstein Litowitz Berger & Grossmann LLP, on
Tuesday, June 2, 2020
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Gregory V. Varallo is a partner and Andrew Blumberg and Alla Zayenchik are associates at Bernstein Litowitz Berger & Grossmann LLP. This post is based on their BLB&G memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Section 220 of the General Corporation Law of the State of Delaware is the statute allowing shareholders of a Delaware corporation to seek books and records for various purposes, including to investigate potential corporate wrongdoing, among other things. When properly utilized, stockholder use of the Section 220 remedy should help avoid litigation where corporate records can correct misconceptions about how and why questionable events took place, resulting in a higher quality of the claims that are actually pursued to litigation.

Over the last decade or more, the courts of Delaware at first suggested, and then nearly insisted, that plaintiffs utilize the statute to conduct pre-filing investigations prior to bringing cases challenging fiduciary misconduct in transactions and other contexts. The response has been the widespread use of Section 220 among Plaintiffs’ counsel to conduct pre-filing investigations.

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The Forum Attracts Numerous Citations from Academics and Practitioners

Posted by Tami Groswald Ozery (Harvard Law School), on
Monday, June 1, 2020

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Tami Groswald Ozery is a co-Editor of the Forum and a Fellow at the Harvard Law School Program on Corporate Governance.

Posts published by the Harvard Law School Forum on Corporate Governance have had considerable influence on the discourse and literature in the field of corporate governance, as measured by citations of Forum posts. Since the Forum was established in 2006, Forum posts have been cited more than 1400 times, and such citations have appeared in more than 800 articles.

The list of articles citing Forum posts is available here and includes the following noteworthy aspects:

Established in 2006 by Professor Lucian Bebchuk and the Harvard Law School Program on Corporate Governance, the Forum has become the leading online resource and the central outlet for the exchange of ideas and debate in the field of corporate governance. In an article about the Forum that was featured in the Harvard Law Bulletin a few years ago, former Chief Justice Leo Strine observed that “[i]t is amazing to see the [Forum] become required reading among the intelligentsia … of corporate governance.”

The success of the Forum has been made possible by the contribution of numerous authors, as well as by the engagement of the Forum’s ever-growing readership. As we celebrate another record-breaking year, we are deeply grateful for the support of our contributors and readers and look forward to continued fruitful engagement!

Finding the Proper Balance of Legal and Consulting Advice for Compensation Committees

Posted by Ena Kaur, Jeremy Erickson, and, Jonathan M. Ocker, Pillsbury Winthrop Shaw Pittman LLP, on
Monday, June 1, 2020
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 Jeremy D. Erickson is counsel, Ena Kaur is an associate, and Jonathan M. Ocker is a partner at Pillsbury Winthrop Shaw Pittman LLP. This post is based on their Pillsbury memorandum.

Takeaways

  • Executive compensation counsel taking minutes of compensation committee meetings and working with the compensation consultant to make sure the meetings go smoothly with informed decisions translates into a better proxy and a winning say-on-pay vote.
  • Equity plan proposals are more likely to win shareholder approval and less likely to attract proxy trolls when executive compensation counsel and the compensation consultant collaborate in advance on the appropriate plan modifications and disclosures, determining whether the equity plan with its proposed modifications will pass shareholder advisor tests.

Executive compensation counsel and compensation consultants are useful resources for compensation committees when developing and approving compensation arrangements. A compensation committee can maximize the benefit provided by both advisors by setting up a collaborative process with executive compensation counsel, the compensation consultant, and internal company professionals. The following examples show how integrating both advisors into the decision-making process can benefit a compensation committee.

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