Monthly Archives: February 2021

Recent Proxies Highlight COVID-Related Incentive Actions for September FYE Companies

Melissa Burek is founding partner, Eric Hosken is a partner, and Bonnie Schindler is a principal at Compensation Advisory Partners. This post is based on a CAP memorandum by Ms. Burek, Mr. Hosken, Ms. Schindler, and Whitney Cook. 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).

Compensation Advisory Partners’ analysis of approximately 100 S&P Composite 1500 companies found that annual incentive plan modifications are the most frequent recent executive pay action taken in response to COVID-19. The analysis is part of CAP’s ongoing efforts to track executive compensation and human capital actions related to COVID-19. Forty-two percent of the companies—which have fiscal year ends near September 30 and recently filed their proxies—made COVID-19-related changes to their incentive plans. Of the companies that made incentive changes, 60 percent made annual incentive changes, 14 percent made long-term incentive changes, and 26 percent changed both incentive plans. The most prevalent annual incentive actions were 1) adding or exercising discretion, 2) adding or changing the performance measures, and 3) adjusting the performance period.

Annual incentive changes are the most prevalent actions taken recently by public companies impacted by COVID-19, according to a Compensation Advisory Partners analysis of proxy filings of 101 S&P Composite 1500 companies with fiscal year ends (FYEs) near September 30. The CAP analysis—which is part of our ongoing efforts to track executive compensation and human capital actions related to COVID-19—shows that 42 percent—or 42 companies—made COVID-19-related changes to their executive incentive plans. Of the 42 companies, 60 percent made annual incentive changes, 14 percent made long-term incentive changes, and 26 percent changed both types of plans.


How Boards Can Prepare for Activism’s Next Wave

Chris Ruggeri is a Principal, Deloitte Transaction and Business Analytics, Deloitte & Touche LLP; Joel Schlachtenhaufen is a Principal, M&A Services Deloitte Consulting LLP; and Annie Adams is Senior Manager, M&A Services Deloitte Consulting LLP. This post is based on a Deloitte memorandum by Mr. Ruggeri, Mr. Schlachtenhaufen, Ms. Adams, Maureen Bujno, and Bob Lamm. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).


As we begin to see the light at the end of the tunnel of a pandemic that upended all of our lives and disrupted almost every business, activist investors are getting in gear, and the pieces are expected to be in place for continued growth in merger and acquisition activity through 2021. Political unrest, accelerating social change, and renewed emphasis on corporate purpose beyond shareholder primacy will continue to shape the future and inject uncertainty. Our world is literally changing before our eyes, and we have to ask ourselves, how will this affect shareholder activism in 2021 and beyond, and what will the impact be on M&A activity? And how have the events of 2020 changed what board directors need to do to be prepared for M&A generally and to deal with activists that might emerge?

The 2020 slowdown set the stage


The Capital Markets Tug-of-War Between US and China

Alissa Kole is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Kole. Related research from the Program on Corporate Governance includes Alibaba: A Case Study of Synthetic Control, (discussed on the Forum here); and China and the Rise of Law-Proof Insiders (discussed on the Forum here), both by Jesse M. Fried and Ehud Kamar.

For the first time in modern history, Sino-American tensions are spilling in the capital market space, with the final announcement of de-listing of three Chinese telecoms from the New York Stock exchange earlier this month. This delisting, as well as the regulatory measures that underpin it, culminate a long debate on the future of foreign, notably Chinese issuers, on American exchanges. Much is at stake: over 700 Chinese companies are traded on US stock and bond markets, the vast majority in the less regulated over-the-counter market.

Whether Chinese issuers should be listed on American exchanges and how dozens of them were able to do so in direct and American Depository Receipts (ADRs) listings was explored at length in “China Hustle”, a 2017 documentary that highlighted the laissez-faire attitude of successive American administrations and the Securities and Exchange Commission (SEC) to Chinese issuers, which it has so far rarely investigated, much less enforced.

In fact, Chinese issuers are not the only ones that have received unwanted interest after they tapped into foreign capital markets where institutional investors deploy billions of dollars of savings. When Saudi Aramco, the Saudi national oil company, contemplated its listing two years ago, a number of institutional investors protested when the London Stock Exchange announced that it would relax its listing standards, to attract the mega IPO.


New Tactics and ESG Themes Change the Direction of Shareholder Activism

Richard J. Grossman and Neil P. Stronski are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).


  • Activism is likely to rebound as the business world recovers from COVID-19 disruptions.
  • Some activists are raising permanent capital, giving them new leverage, and activist approaches have become more acceptable to many institutional investors.
  • Even high-performing companies may face pressure on ESG issues.
  • The best defense is a solid relationship with and understanding of your shareholders, coupled with a plan for dealing with activists if they emerge.

Shareholder activism levels decreased in 2020 amid the upheaval and uncertainty brought on by COVID-19. But activists did launch a number of high-profile campaigns and there was an uptick of activism in the second half of the year; and more than 80 CEOs were replaced during activist campaigns.

Today, even well-performing companies may find themselves targets of activist campaigns on environmental and social issues, as new funds have been formed to specialize in these areas. Moreover, established activists have established new types of investment vehicles that could strengthen their hands. Preparing for the possibility of an activist campaign should therefore be on the board agenda at most public companies.


Underwriters Do Not Use Green Shoe Options to Profit from IPO Stock Pops

Robert Evans is a partner at Locke Lord LLP. This post is in response to a post on the Forum by Professor Patrick M. Corrigan of Notre Dame Law School.

Professor Corrigan offers a new theory about why some IPO stocks pop and others suffer steep drops—underwriters are to blame. His “principal trading theory” maintains that, contrary to accepted wisdom, overallotments and green shoe options in IPOs are used to maximize trading payoffs for underwriters. His theory is wrong. Matt Levine, in his Bloomberg column, Money Stuff, agrees.

As a matter of market practices and because of the SEC’s Regulation M, underwriters must complete their sales, including overallotments, before the IPO stock starts trading in the market. They cannot, for these reasons, hold back and sell more shares at higher prices in the aftermarket.

Establishing a new and vibrant trading market where one never existed is a challenging task. The investors that a company doing an IPO and its underwriters seek as shareholders have lots of competing ways to invest their money. Even in the same industry as the IPO company, there are competitors with established trading markets a track record of being a public reporting company.

Transforming a privately-held venture into a NYSE- or Nasdaq-traded company involves considerable art as well as science. Underwriters are asking the investors to take on some of the risk of that launch into the unknown of public trading. The dynamics of supply and demand for the shares can influence the success or failure of the company’s entering into the public markets.


Weekly Roundup: February 19-25, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 19-25, 2021.

ESG and the Biden Presidency

Perspective from 2020 Conversations with Audit Committee Chairs

Bloomberg Activism Screening Model

The Corporate Governance Machine

Recent Trends in Officer Liability

Activism In Context: Where We’ve Been, Where We’re Going

Guidance on Enhancing Racial & Ethnic Diversity Disclosures

Robinhood and GameStop: Essential Issues and Next Steps for Regulators and Investors

Board Effectiveness: A Survey of the C-Suite

Crisis-Resilient Boards: Lessons from Vale

Volatile Transitions: Navigating ESG in 2021

Atomic Trading

QualityScore: Methodology Guide

2020: An Overview

Corporate Adolescence: Why Did ‘We’ not Work?

Corporate Adolescence: Why Did ‘We’ not Work?

Donald Langevoort is a Professor of Law at the Georgetown University Law Center and Hillary A. Sale is Professor of Law at the Georgetown University Law Center and an Affiliated Faculty Member at Georgetown University McDonough School of Business. This post is based on their recent paper.

In academic and public commentary, entrepreneurial finance is usually portrayed as a quintessential American success story, an institutional structure whereby expert venture capitalists with strong reputational incentives channel much-needed equity to deserving entrepreneurs, then subject them to intense monitoring to assure they stay on the path to hoped-for success in the form of an initial public offering or public company acquisition. Yet, in recent years there have been gross embarrassments and allegations of outright criminality, at companies like Uber, Theranos, and the subject of our paper, WeWork. In short, we argue, fiduciary deficits and rent-seeking behaviors abound and the costs are borne not just by the venture capitalists or other investors.

Although we do not quarrel with the historical record of success, we are focused on the changes in the market for start-up capital that may well have contributed to the recent bouts of rent-seeking and extreme. Indeed, our title’s reference to corporate adolescence underscores the ever-lengthening period of time that high-tech start-up companies have before undergoing the so-called rites of passage to public adulthood. We argue that the private privileges allow for a build-up of bad choices and testy behaviors commonly observed in human adolescents, e.g., risk-taking and rule-breaking, thereby embedding in the firm’s habits and culture problems that may later be hard to fix.


2020: An Overview

Josh Black is Executive Vice President and Editor-in-chief at Insightia. This post is based on an article from The Activist Investing Annual Review 2021.Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

At the peak of proxy season 2020, many activists halted or dialed back campaigns where they feared a sudden change of shareholder perspectives or of irrecoverable value destruction. That led to a sluggish year—a 10% decline in companies publicly subjected to activist demands, a median Total Follower Return of 2%, and about a 16% decline in board seats won worldwide thanks mainly to fewer settlements.

Since then, however, activists have acted ruthlessly to shake up both their own operations and the management of portfolio companies. If 2019 was the year that ended the secular expansion of activist investing, 2020 was a reminder to focus on first principles—subpar valuations due to fixable problems with a quick path to change. All would agree; leadership matters in a pandemic.

Hindsight 2020

Chiding activists for their lack of optimism is easy after the fact. Central bank support leading to a broad market recovery helped put a shine on activist portfolios. The market’s response to stocks in a process of transition has since become exuberant and funds that doubled down on their convictions were rewarded handsomely.

Also unexpected, control slate victories for Starboard Value and Bow Street Capital helped the number of board seats won at contested meetings in the U.S. to the highest level for at least six years. There were shareholder meetings in Europe and Japan that were so unexpectedly close that rematches against weakened incumbents are inevitable. By the fourth quarter, activists had started to think big about ways of demonstrating underperformance and about whole industries that need to adapt, including media, energy, and active fund management.


QualityScore: Methodology Guide

Sam Osea is Associate Vice President and Sean McPhillips is Senior Associate at ISS ESG, the responsible investment arm of Institutional Shareholder Services, Inc. This post is based on their ISS memorandum.


ISS ESG Governance QualityScore (GQS) is a data-driven scoring and screening solution designed to help institutional investors monitor portfolio company governance. At both an overall company level and along topical classifications covering Board Structure, Compensation, Shareholder Rights, and Audit & Risk Oversight, scores indicate relative governance quality supported by factor-level data. That data, in turn, is critical to the scoring assessment, while historical scores and underlying reasons prompting scoring changes provide greater context and trending analysis to understand a company’s approach to governance over time.

With the continued and growing focus on investor stewardship and engagement, alongside the global convergence of standards and best practices, governance plays an increasingly prominent role in investment decisions. As an extra-financial data screening solution, the Governance QualityScore methodology delivers several key benefits.

Employs robust governance data and attributes. Governance attributes are categorized under four topical categories: Board Structure, Shareholder Rights & Takeover Defenses, Compensation/Remuneration, and Audit & Risk Oversight. Governance QualityScore calls upon a library of more than 230 governance factors across the coverage universe, of which up to 127 are used for any one company (defined by region). Governance QualityScore highlights both potentially shareholder-adverse practices at a company, as well as mitigating factors that help tell a more complete story. The underlying dataset is updated on an ongoing basis as company disclosures are filed, providing the most-timely data available in the marketplace.


More than 1,200 Empirical Studies Apply the Entrenchment Index of Bebchuk, Cohen and Ferrell (2009)

This post relates to a Program on Corporate Governance study published by Lucian Bebchuk, Alma Cohen and Allen Ferrell, What Matters in Corporate Governance, available here and discussed on the Forum hereLucian Bebchuk is James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Alma Cohen is Professor of Empirical Practice, Harvard Law School. Allen Ferrell is Harvey Greenfield Professor of Securities Law, Harvard Law School.

In a study issued by the Harvard Law School Program on Corporate Governance, Bebchuk, Cohen, and Ferrell (2009) put forward a corporate governance index – the Entrenchment Index (E-Index). This post provides an update on the considerable influence that the study has had on subsequent research. According to Google Scholar citations data, as of the end of 2020, the study was cited by more than 2,900 research papers; a list of these papers is available here. Furthermore, a review of these research papers has identified more than 1,200 studies that have applied the E-index and used it in their empirical analysis.

A list of 1,260 empirical studies using the E-index in their empirical analysis is available here.

The list of studies applying the E-Index includes empirical studies published in:

  • Leading journals in finance such as The Journal of Finance, The Journal of Financial Economics, and The Review of Financial Studies;
  • Leading journals in economics such as the Journal of Political Economy and the Review of Economics and Statistics;
  • Leading journals in law and economics such as the Journal of Law and Economics and Journal of Law, Economics, and Organization; and
  • Leading journals in accounting, such as the Journal of Accounting and EconomicsJournal of Accounting and Public Policy, and The Accounting Review. 

The Bebchuk, Cohen & Ferrell study was first circulated in 2004 and was published in 2009 in the Review of Financial Studies. The study identified six corporate governance provisions as especially important, demonstrated empirically the significance of these provisions for firm valuation, and put forward an “Entrenchment Index,” the E-Index, based on these six provisions.

The study is available here.

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