Monthly Archives: January 2021

Sustainability and ESG: The Governance Factor and What It Means for Businesses

Elizabeth Robertson, Scott Hopkins and Simon Toms are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Robertson, Mr. Hopkins, Mr. Toms, Adam M. Howard, Greg P. Norman, and Abigail B. Reeves. 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Governance Factor: Beyond the Board

Corporate governance has long been a focal point for large corporates, listed companies and regulated entities, with numerous studies connecting good corporate governance with higher profitability. However, as the March 2021 effective date of the EU’s Sustainability-Related Disclosure Regulation approaches, corporate governance is becoming increasingly important to companies of all sizes. This is, in part, due to investee companies needing to follow good governance practices, as a baseline, in order to be classified as a “sustainable investment.” [1]

Corporate governance is not only facing increased scrutiny by investors and stakeholders but also regularly attracts adverse media attention. Directors wishing to safeguard themselves and the businesses they serve when discharging their duties should, therefore, be mindful of good corporate governance strategies and consider implementing strategies beyond the yardstick of the law.

This post explores several recommendations for companies seeking to improve their corporate governance framework, including:

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Thank You, Chairman Clayton

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.

Under Chairman Jay Clayton, who concluded his tenure at the Securities and Exchange Commission in late December, the SEC experienced an era of great productivity and rational reform. He furthered the historic mission of the SEC while maintaining nonpartisan credibility and independence in a highly charged political environment. Chairman Clayton affirmed the Commission’s tripartite purpose—to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation—throughout his time in office, rightly emphasizing in public statements that these three elements should be viewed as correlated rather than as contradictory.

During his tenure, Chairman Clayton spoke frequently of the Commission’s role in “looking out for” the long-term interests of the 52% of American households who participate in the capital markets. Reforms such as Regulation Best Interest and the amendments to the rules relating to proxy advisory firms increased protections for retail investors and improved the quality of their institutional relationships by requiring better disclosure, fewer conflicts of interest, and heightened fiduciary obligations. In the coming years, Main Street investors will reap the benefits of not only the heightened protections, but also the expanded market opportunities, that will result from SEC initiatives taken under Chairman Clayton’s leadership.

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Letter to CEOs

Larry Fink is Founder, Chairman and CEO of BlackRock, Inc. This post is based on Mr. Fink’s annual letter to CEOs.

BlackRock is a fiduciary to our clients, helping them invest for long-term goals. Most of the money we manage is for retirement—for individuals and pension beneficiaries like teachers, firefighters, doctors, businesspeople, and many others. It is their money we manage, not our own. The trust our clients place in us, and our role as the link between our clients and the companies they invest in, gives us a great responsibility to advocate on their behalf.

This is why I write to you each year, seeking to highlight issues that are pivotal to creating durable value—issues such as capital management, long-term strategy, purpose, and climate change. We have long believed that our clients, as shareholders in your company, will benefit if you can create enduring, sustainable value for all of your stakeholders.

I began writing these letters in the wake of the financial crisis. But over the past year, we experienced something even more far-reaching—a pandemic that has enveloped the entire globe and changed it permanently. It has both exacted a horrific human toll and transformed the way we live—the way we work, learn, access medicine, and much more.

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ESG and Sustainability: Key Considerations for 2021

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 their Wachtell 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);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Heading into 2021, corporate, investor and stakeholder focus on ESG will continue to accelerate, with climate change, workplace diversity, employee welfare, human capital management and supply chain sustainability and resilience remaining forefront issues. Just earlier this week, BlackRock’s Chairman and CEO issued a letter to CEOs calling on companies to (1) “disclose a plan for how their business model will be compatible with a net zero economy,” including how such plans are incorporated into long-term strategy and reviewed by the board, and (2) expand disclosures on talent strategy to fully reflect long-term plans to improve diversity, equity, and inclusion. The World Economic Forum (WEF) also announced this week that 61 of the world’s largest companies have committed to disclosing against the core ESG metrics developed by the WEF and its International Business Council, a key further step in the ongoing convergence of ESG disclosures. Hedge fund TSR activist attacks will also increasingly leverage ESG and sustainability-related themes, as will the new breed of ESG impact activist funds.

The fact that ESG-oriented funds recorded unprecedented inflows and outperformed in many respects in 2020 amidst the Covid-19 pandemic demonstrates the possibility of doing well by doing good. At the same time, the pandemic exposed the significant social, economic and reputational costs of not addressing ESG issues, notably systemic racism, employee safety, health and well- being and supply chain resilience. Below is a review of the trends we expect to see in 2021 as investors and other stakeholders scrutinize how companies create and preserve long-term value:

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S&P 500 CEO Compensation Increase Trends

Aubrey Bout is managing partner and Brian Wilby is a consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

  • CEO median actual pay among S&P 500 companies increased 1% in 2019.
  • Overall, CEO pay in 2020 will potentially decline by 3% to 4% due to lower bonuses and many companies underperformed during the unprecedented COVID-19 pandemic disruption.
  • Historical CEO pay increases have been supported by historical total shareholder return (TSR); in fact, annualized pay increases have been 9 percentage points lower than TSR performance.
  • We expect median CEO target pay increases in early 2021 to be in the low single digits due to some companies providing “supplemental grants” for performance equity that was lost during COVID-19.
  • Individual CEO pay increases will continue to be closely tied to overall company performance and peer group compensation increases; it is notable that S&P 500 TSR was +18% in 2020, primarily driven by large-cap technology companies.
  • Performance share plan usage seems to have peaked with 94% of S&P 500 companies employing them, while restricted stock has cemented its position with 69% prevalence.
  • Stock options have continued their steady decline but are still prevalent at 50% of companies.
  • There could be an uptick in stock option and restricted stock usage in 2021 due to the COVID-19 pandemic and companies struggling to set long-term goals in their performance share plans.

Introduction and Summary

CEO pay continues to be discussed extensively in the media, in the boardroom, and among investors and proxy advisors. CEO median total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) increased at a moderate pace in the first part of the last decade—in the 2% to 6% range for 2011-2016. CEO pay accelerated with an 11% increase in 2017, likely reflecting sustained robust financial and total shareholder return (TSR) performance, before returning to 3% in 2018 and 1% in 2019, more in line with historical rates. Our CEO pay analysis is focused on historical, actual TDC, which reflects actual bonuses based on actual performance; this is different from target TDC or target pay opportunity, which uses target bonus and is typically set at the beginning of the year.

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The Congressional Review Act and the Biden Administration’s Approach to Financial Regulation

Paul Rose is the Robert J. Watkins/Procter & Gamble Professor of Law and Christopher J. Walker is the John W. Bricker Professor of Law at The Ohio State University Moritz College of Law. This post builds on their recent report (discussed on the Forum here).

Within hours of taking office, President Biden moved aggressively to begin to dismantle much of the Trump administration’s regulatory legacy—issuing a series of executive orders that either changed regulatory policy directly or directed federal agencies to do so. Indeed, the Biden administration’s work to reform the regulatory state started weeks before inauguration, with its concerted efforts to nominate and appoint leaders to run the federal agencies that would implement its regulatory agenda. Competent and loyal agency leadership, coupled with tailored presidential directives, will go a long way toward reshaping the regulatory state to better conform to the Biden administration’s vision.

But it won’t be enough. Much of the Trump administration’s regulatory legacy has been codified in regulation, including an aggressive issuance of “midnight rules” promulgated in the final months of the Trump presidency. As Dick Pierce explains, there are three main ways to reverse a prior administration’s rule. First, the agency could engage in a new notice-and-comment rulemaking to rescind (and perhaps replace) the rule. That approach requires substantial agency resources and could take months if not years to finalize. Second, the agency could just refuse to defend the rule in litigation, letting courts vacate and set it aside. This is Professor Pierce’s preferred approach. But it, too, has limitations. Especially in the financial regulation space, those who supported the rule would no doubt try to intervene to defend it. And, unless there is no reasonable ground to defend the rule, there are deeper rule-of-law questions implicated by the government’s failure to defend a rule—questions that far exceed the ambitions of this post. Third, Congress and the president could utilize the Congressional Review Act (CRA) to repeal the rule.

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Weekly Roundup: January 21-28, 2021


More from:

This roundup contains a collection of the posts published on the Forum during the week of January 21-28, 2021.

Coordinated Engagements


New LBO Practices May Be Warranted Based on the Nine West Decision


Proposed SEC Rule 144 Amendments


Delaware Supreme Court Affirms AmerisourceBergen Ruling that Company Must Produce Documents


Primary Direct Listings: A Hybrid Approach to a Traditional IPO Alternative


ESG Disclosures: Guiding Principles and Best Practices for Investment Managers


NYSE Proposes to Permanently Amend Stockholder Approval Rules



Corporate Governance, Business Group Governance and Economic Development Traps


Key Takeaways—2020 Board Index


The Future of Audit Oversight


The ESG/TSR Activist “Pincer Attack”


The Changing Face of Activism



Team Production Theory Across the Waves



SEC Enforcement and Public Companies


Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse

Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse

David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Phillip Quinn is Assistant Professor of Accounting at the University of Washington Foster School of Business; and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Prof. Larcker, Mr. Quinn, Mr. Tayan; Daniel Taylor, Associate Professor of Accounting at the Wharton School of the University of Pennsylvania; and Bradford Lynch, PhD Student at The Wharton School.

We recently published a paper on SSRN, Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse, that provides evidence that some executives use 10b5-1 trading plans to engage in opportunistic, large-scale selling of company shares.

Federal securities law prohibits corporate executives from trading company securities while aware of material nonpublic information (MNPI). Because executives are regularly exposed to MNPI, those who wish to sell a portion of their holdings to diversify their personal wealth are at risk of violating insider trading laws if they trade in advance of this information becoming public.

In 2002, the Securities and Exchange Commission adopted Rule 10b5-1, which outlines procedures that, if followed, provide an affirmative defense against allegations of illegal insider trading. To qualify for protection under Rule 10b5-1, executives enter into a nonbinding contract that instructs a third-party to execute trades on their behalf according to a written plan––known as a 10b5-1 plan. The plan must be adopted at a time when the executive is not aware of MNPI. Through the plan, the executive specifies a set of instructions or schedule by which trades are to be made, such as the number or value of shares to be transacted, the frequency of transactions, price limits, etc. (See Exhibit 1 for examples of 10b5-1 plans.) Once it is in place, the plan can be modified so long as the executive is not aware of MNPI at the time of the modification. The plan and any associated trades can also be cancelled at any time, regardless of whether the executive is in possession of MNPI. The latter aspect of 10b5-1 plans is particularly controversial, as it has the effect of allowing executives to set up routine sales, and then pause or cancel sales if they know the company will be announcing news that will push the stock price higher.

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SEC Enforcement and Public Companies

G. Jeffrey Boujoukos is partner and leader of the securities enforcement practice, Susan Resley is partner, and Laurie Cerveny is corporate partner at Morgan Lewis & Bockius LLP. This post is based on a Morgan Lewis memorandum by Mr. Boujoukos, Ms. Resley, Ms. Cerveny, and Justin Chairman.

Most media accounts suggest that the incoming Biden administration will usher in a more “aggressive” SEC enforcement posture, with renewed emphasis on investigating potential fraud and controls deficiencies at public companies. SEC Enforcement may face some short-term headwinds to this approach. A dramatic increase in tips, complaints, and referrals during the pandemic, as well as COVID- 19-related delays that may extend the 24-month average lifetime of SEC enforcement investigations, will likely require the SEC to selectively allocate stretched resources in 2021.

Where are the limited resources likely to go beyond the more standard accounting, revenue recognition, and disclosure cases that the SEC regularly investigates and prosecutes?1 Recent enforcement activity points to several areas of interest to the SEC, and provides a valuable window for public companies into the SEC’s methods and priorities, including:

  • Coronavirus-Related Public Disclosures—Enforcement’s First Case
  • Enforcement’s EPS Initiative—Harnessing the Data
  • Executive Perquisites—Continued Enforcement Focus
  • Insider Trading—A Zero Tolerance Policy
  • Buybacks and Rule 10b5-1 Plans—A New Enforcement Theory and Likely Rulemaking in 2021
  • Cyber Intrusions—The Current SEC Playbook
  • Whistleblowers—2020 Was a Record Year

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Former CFTC Chair Gary Gensler to be Nominated as SEC Chair

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

Reuters has reported that former CFTC Chair Gary Gensler will be President-elect Biden’s choice for SEC Chair. According to the article, in light of his “reputation as a hard-nosed operator willing to stand up to powerful Wall Street interests”—notwithstanding his former life as an investment banker—the appointment is “likely to prompt concern” among some that he will promote “tougher regulation.” The NY Post attributed his nomination to the most recent Democratic wins in the Senate, which allowed selection of “the more progressive candidate. Only two weeks ago, people close to the Biden transition team had penciled in centrist Robert Jackson Jr….as the SEC frontrunner because he was seen as more likely to win confirmation by a GOP-controlled Senate.” Jackson is a former Democratic SEC Commissioner appointed in 2017. Gensler is an MIT professor and has been leading the Biden transition planning for financial industry oversight.

The WSJ reported that “Mr. Gensler’s nomination would please liberal Democrats who cheered the former regulator’s tough approach to rule-making during the Obama administration, when he spearheaded the overhaul of derivatives markets mandated by the 2010 Dodd-Frank Act and oversaw enforcement actions against investment banks accused of manipulating benchmark interest rates.” As head of the CFTC, he implemented extensive new swaps trading rules and, according to the Washington Post, “gained a reputation as a tough regulator by issuing hefty fines over the Libor currency manipulation scandal.”

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