Monthly Archives: February 2021

Bloomberg Activism Screening Model

Adam Kommel is a Shareholder Activism Data Specialist, Arun Verma is the Head of Quant Research Solutions, and Ken Kohn is a Product Manager at Bloomberg LP. This post is based on a Bloomberg publication. 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).

This post investigates the results of the Bloomberg Activism Screening Model. The model’s goal is to answer a basic question: Which companies in a list of equities may become targets for activist investors? This model has been requested frequently by Bloomberg clients. Advisers to activists and targets as well as internal experts recommended the screening criteria.

The model selected 17 factors from a pool of 60 candidate factors. These factors fall into 5 categories: Returns (5), Valuation (4), Ownership (3), Governance (3) and Operations (2). Some factors are based on market data, including returns over 6 months, 1, 2, 3 and 5 years. Some are derived, including price/earnings ratio relative to peers and margins relative to peers. Others are compiled by Bloomberg, including CEO tenure and whether the company has dual-class unequal voting rights. Each criterion, scaled from 0 to 100, is applied to all the companies in a list (for this investigation, the Russell 3000 Index was used). Companies are ranked by the outcomes, with those higher on the list considered more likely to draw the interest of activists.


Perspective from 2020 Conversations with Audit Committee Chairs

Erin Dwyer is Deputy Director of the Office of External Affairs at the Public Company Accounting Oversight Board. This post is based on a publication authored by PCAOB Staff.


The Public Company Accounting Oversight Board (PCAOB) views engaged and informed audit committees as effective force multipliers in promoting audit quality and believes that the PCAOB and audit committees jointly benefit from our ongoing dialogue. Continuing with the expanded engagement we launched in 2019, we again reached out to the audit committee chairs of most of the U.S. public companies whose audits we inspected during 2020 and offered them the opportunity to speak with our inspection teams. In total, we spoke to nearly 300 audit committee chairs. In addition to the effects of the COVID-19 pandemic on the audit, we discussed three core topics during our conversations:

  • The auditor and communications with the audit committee;
  • New auditing and accounting standards; and
  • Emerging technologies.

This post summarizes the feedback we received in each topic area. Please note that the PCAOB does not necessarily endorse what we heard from audit committee chairs. Rather, we present this summary in an effort to provide greater transparency into these important conversations.


ESG and the Biden Presidency

Suzanne Smetana is Head of ESG Investment Integration at State Street Global Advisors. This post is based on her SSgA memorandum.

Executive Summary

In a dramatic change from the previous administration, we expect the administration of President Joseph Biden to implement a broad range of policy changes meant to mitigate climate risk and bring the US back into the global sustainability conversation. We will be monitoring several themes that we believe could arise under the Biden presidency:

  • Rising Calls for ESG Disclosure
  • Stricter Climate Regulations
  • Changing Operational Backdrops in Various Industries
  • Investors Increasingly Pricing ESG Criteria Into Decision-Making
  • US Department of Labor (DOL) ESG Rule

Rising Calls for ESG Disclosure

In the ESG space, some investors distinguish between broad, high-level “principles-based” disclosures, which were championed by the previous administration, [1] and “rules-based” disclosures, which are pinpointed metrics such as water usage or carbon emissions. The Biden administration could signal a shift to more rules-based disclosures, especially in climate risk, increasing the need for companies to track ESG metrics.


Executive Pay Clawbacks and Their Taxation

David I. Walker is Professor of Law and Maurice Poch Faculty Research Scholar at Boston University School of Law. This post is based on his recent paper, forthcoming in the Florida Tax Review. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback by Jesse Fried (discussed on the Forum here).

Executive pay clawback provisions require executives to forfeit previously received compensation under certain circumstances, most notably after a downward adjustment to the financial results upon which their incentive compensation was predicated. Clawback provisions are on the rise. Limited clawbacks were mandated under the Sarbanes-Oxley Act of 2002. The Dodd-Frank legislation, enacted in 2010, mandated a much more comprehensive no-fault clawback regime, and the SEC is in the process of finalizing rules to implement the Dodd-Frank clawback. Meanwhile, the fraction of S&P 1500 companies proactively adopting clawback provisions more expansive than those mandated by SOX has increased from less than 1% in 2004 to 62% in 2013.

This paper focuses on the federal income tax consequences of clawbacks, specifically on the tax treatment of repayments by executives in cases in which the compensation repaid has been included in taxable income in a prior year. This is surprisingly under-explored terrain, particularly given that individual taxes can consume as much as 50% of executive compensation.


Weekly Roundup: February 12-18, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 12-18, 2021.

Spencer Stuart S&P MidCap 400 Board Report

A New Whistleblower Environment Emerges

Retaining the C-Suite After CEO Turnover

Stakeholder Capitalism: From Balance Sheet to Value Sheet

BlackRock’s 2021 CEO Letter

CFO Signals

2021 Proxy Season: Executive Compensation Considerations

Advisers by Another Name

r/BlackRockAnnualLetter: Climate Change and ESG in the Age of Reddit

COVID-19 and Comparative Corporate Governance

A Conversation with Bill Ackman

Supreme Court Relies on “Bridgegate” Case to Vacate Second Circuit Decision

Troubling Signs from Recent M&A Case Law

Risk Factor Disclosures for the Recovery Era

Executive Compensation in the Context of the COVID-19 Pandemic

Julian Hamud is Senior Director of Executive Compensation Research at Glass, Lewis & Co. This post is based on his Glass Lewis memorandum. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried; and Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried.

The COVID-19 pandemic has not changed Glass Lewis’ approach to executive pay. We start from each company’s specific circumstances, evaluating compensation programs through the lens of pay and performance alignment, and the extent to which companies have been able to tie any program changes to this alignment going forward. It’s a pragmatic, contextual approach that applies in good times and bad.

However, the landscape for issuers and investors has shifted markedly. The many uncertainties faced by companies and their shareholders highlight the need for effective pay programs. Strong linkages between pay and performance remain crucial despite market-wide disruptions, and demonstrating this alignment to shareholders is all the more important. Moreover, the scope of topics to be considered in relation to executive pay is widening, with E&S issues drawing exponentially increased focus in 2020, and human capital management becoming particularly relevant during a time of global economic downturn.

Further, issuers would do well to consider that the pandemic has made executive pay a more salient issue for many investors. All companies, especially those seeking special support from governments or executing significant employment cuts, should consider the reputational risk associated with poor pay decisions, particularly quantum payouts. Even those companies who have managed to perform well during this time may face additional challenges in justifying high executive payouts to their shareholders.


Corporate Transparency Act: What Companies Need to Know

Carl A. Valenstein is partner and Jose T. Robles, Jr. is an associate at Morgan Lewis & Bockius LLP. This post is based on their Morgan Lewis 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).

While the Corporate Transparency Act largely applies to foreign-owned shell companies, domestic companies should carefully read the definition of “reporting company” to ensure they fall within one of the exceptions to the definition. Reporting companies should be mindful of the various penalties associated with noncompliance or providing inaccurate or misleading information to FinCEN.

What is the Corporate Transparency Act?

Congress recently passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act. The purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a national registry of beneficial ownership information for “reporting companies.” The CTA largely applies to foreign-owned shell companies and is set to take effect no later than January 1, 2022—upon the promulgation of regulations by the secretary of the US Department of the Treasury (Treasury).

Who is Required to Report Beneficial Ownership Information?

Under the CTA, a “reporting company” must report certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) within the Treasury. A “reporting company” is defined as any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with a secretary of state or similar office; or (2) formed under the law of a foreign country and registered to do business in the United States.


Risk Factor Disclosures for the Recovery Era

Valerie Ford Jacob, Doru Gavril, and Sarah Solum are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Ms. Jacob, Mr. Gavril, Ms. Solum, and Drew Liming.

It’s early 2021. With a new year comes a new Form 10-K. Among other things, your outside counsel is (hopefully) asking you to review and update your disclosures about risks related to COVID-19. That’s good advice, of course. We are still in the midst of a pandemic on a scale previously unseen in the modern era. No one knows how much longer its impact and uncertainties will persist. But this is also time to look at your COVID-19 risks through a new lens: consider whether your filings should also include risk disclosures about the post-pandemic recovery period. [1]

Not all companies were affected the same way by the pandemic. Most public companies experienced the same macroeconomic instability, workforce disruption, and distribution/supply chain upheaval and uncertainty. Beginning last spring, companies and their outside counsel scrambled to describe ever-changing risks regarding contagion, working from home, shifting consumption patterns, various shortages, and evolving government safety mandates. Soon, a new set of risk disclosures emerged, with their own lexicon of pandemic-related terms.

For a number of companies, though, the pandemic shifted consumer and competitive behaviors to create growth, both in demand from existing customers or in the number of new customers. This growth was accompanied by very positive financial or operational results. Several industries that grew during the pandemic should consider risk disclosures tailored for the “recovery era”: social media, home entertainment, video communications, collaboration tools, delivery services, online payments, e-commerce, to name a few.


Shareholderism Versus Stakeholderism—A Misconceived Contradiction: A Comment on “The Illusory Promise of Stakeholder Governance” by Lucian Bebchuk and Roberto Tallarita

Colin Mayer is the Peter Moores Professor of Management Studies at University of Oxford Saïd Business School. This post is based on his recent paper. 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 Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

There has recently been growing interest in stakeholder governance. The Illusory Promise of Stakeholder Governance by Lucian Bebchuk and Roberto Tallarita (BT) (discussed on the Forum here) is a thoughtful and carefully constructed critique of the subject. In a nutshell, BT’s critique is that “stakeholderism”—the idea of promoting the interests of the stakeholders of a firm (its customers, employees, suppliers, societies, and the environment)—is either just enlightened “shareholderism”, augmenting the value of shareholders’ investments, or it requires directors of companies to make near-impossible trade-offs. In the first case, stakeholderism as enlightened shareholderism, stakeholder governance is regarded as just good business that creates greater financial value for shareholders as well as benefits for stakeholders. By supporting their stakeholders, companies establish more loyal customers, engaged employees, reliable suppliers and sustainable environments. These generate greater revenues and lower costs for companies and therefore more profits as well as benefits for stakeholders. In this case, BT suggest that stakeholderism is no different from traditional shareholder governance.


Troubling Signs from Recent M&A Case Law

Ethan Klingsberg is partner and Victor Ma is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Have we forgotten the lessons of the Delaware cases that arose from the heyday of big-ticket LBOs by private equity preceding the financial crisis of 2007-2008? And to the extent we have, who is bearing the cost, how are plaintiffs uncovering these recent deviations from best practices, and what is to be done?

In these cases from the mid-2000s, courts consistently viewed LBOs as transactions marred by the conflicts of target company executives. Notwithstanding the presence of supermajority independent boards at the target companies, the courts regularly denied motions to dismiss breach of fiduciary duty claims in connection with LBOs. The focus was the absence of safeguards to neutralize the interests of these executives in working for the financial sponsor buyer after the closing and in having access thereafter to, as one case from that era described it, “a second bite at the apple” when the private equity firm would inevitably flip or IPO the company. [1]

A number of useful protocols grew out of these cases from the 2000s. [2] But the 2000s are now a long time ago and a new generation of gatekeepers (lawyers, bankers, and independent directors, not to mention private equity professionals and their friends in senior management of target companies) for whom those cases may be distant memories at best, are now in prominent roles. In the second half of 2020, two of the most important M&A cases involved alleged missteps that adherence to the protocols arising from the 2000s would have prevented.


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