Monthly Archives: March 2021

Tailoring Executive Pay for Long-Term Success

Matt Brady is associate director of research, Matt Leatherman is director, and Victoria Tellez is senior research associate at FCLTGlobal. This post is based on an FCLTGlobal memorandum by Mr. Brady, Mr. Leatherman, Ms. Tellez, and Ariel Babcock. 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).

Short-term incentives motivate short-term behavior. Corporate boards can drive long-term performance by making changes to remuneration that encourage long-term behavior by executives while avoiding common pitfalls. Similarly, investors can support long-term executive remuneration plans through their votes and engagement.

Financial incentives motivate behavior—indeed, financial incentives may work too well. Executive pay is focused on a short time horizon—with recent data pegging average duration of executive compensation plans for CEOs of MSCI All Country World Index (ACWI) constituents at 1.7 years. [1] This short-term focus can have far-reaching consequences, yet setting out to make remuneration longer-term is no simple task.


Race & Ethnicity and the Role of Asset Stewardship

Cyrus Taraporevala is President and CEO of State Street Global Advisors. This post is based on his opening remarks at a recent session of the Harvard Law School Program on Corporate Governance Virtual Roundtable Series.

Thank you for that very kind introduction, Lucian (Bebchuk). It’s wonderful to be with you at Harvard—even if virtually—at this remarkable and important institution.

I also want to acknowledge everyone joining today. Hopefully it won’t be long before we can see each other in person again.

Obviously, the past 12 months have been extraordinary—and certainly, there is no lack of weighty topics we at State Street Global Advisors have been engaged on as an asset manager for a long time, such as Climate and Governance.

Today [March 25, 2021], I’d like to focus on just one topic from within our broad Asset Stewardship set of topics—to discuss the important role of racial and ethnic diversity in our Asset Stewardship program—and provide some insight into our engagements with companies on this issue and why we’ve taken the approach we have, and our plans going forward.

But first I want to say a few words about this moment, how we got here, and how it fits in to the evolving role asset managers have been playing, especially in recent years.

The Changing Role of Asset Stewardship

As a long-term investor in more than 10,000 public companies across the world, we have a somewhat unique view into all the factors that drive a business’s long-term value—across sectors and geographies.


Global Institutional Investors on the IFRS Foundation’s Sustainability Standards

Lindsey Stewart is Senior Manager of Investor Engagement at KPMG LLP. This post is based on his KPMG 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) and 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).

Executive summary

The IFRS® Foundation’s September 2020 consultation on sustainability reporting proposes setting up a Sustainability Standards Board (SSB) to set standards and drive global consistency.

We reviewed the comment letters of a selection of 20 of the largest and most influential investor respondents to the Consultation—18 global institutional investors with close to $24 trillion of assets and two major investor associations. The responses provide a uniquely detailed and current view of the investor community’s environmental, social and governance (ESG) reporting needs.

Among the investor community, there is an appetite across the board for a globally accepted, mandatory standard for sustainability reporting. There is also broad recognition that the IFRS Foundation is an appropriate body to co-ordinate such standard setting activity. Additionally, investors frequently emphasise the need for the IFRS Foundation to act quickly and to advance, rather than replace, the work done by existing owners of voluntary disclosure frameworks.

We focused on three other key areas of the consultation that yielded some interesting—and at times divergent—responses from investors: materiality, scope and assurance.


Board Refreshment

Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Leah Malone Director at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Every year, as part of PwC’s Annual Corporate Directors Survey, we ask directors to evaluate the performance of their peers, and whether any of the members of their board should be replaced. The share of respondents who say one or more of their fellow directors should go has been rising, and in 2020 it reached 49%. Given the importance of collegiality to a well-functioning board, that may seem surprisingly high.

But it’s nothing compared to what C-suite executives told us when we asked them the same question. More than four in five (82%) said at least one of their company’s board members should be replaced. And 43% said two or more directors need to go.

These insights, drawn from our recent study Board effectiveness: A view from the C-suite, are bound to be discomfiting to many directors. Candid feedback from management teams on board performance is rare. But it’s extremely valuable, especially when it confirms what many directors already recognize—namely that board composition and refreshment deserve a closer look.

Here are the actions boards can take now to focus their efforts.


The Long-Term Effects of Short Selling and Negative Activism

Peter Molk is Associate Professor of law at the University of Florida Levin College of Law and Frank Partnoy is the Adrian A. Kragen Professor of law at the University of California Berkeley School of Law. This post is based on their recent paper. 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).

First, the punch line of our new empirical study: activist short selling, which we call “negative activism,” has real and lasting long-term effects. On average, the share prices of targeted companies fall by more than 20% after four years. Accounting returns plummet. Targets are more likely to be sued and investigated by regulators. The numbers are staggering.

Meanwhile, GameStop-style attacks have led some short sellers to flee the market, and targets are being placed on others. Regulators are debating new short selling restrictions. Investors are focused on the mechanics of short selling. Some public company executives are eager to deter short selling. Members of Congress are attacking short sellers, often without evidence.

Many readers of this Forum are familiar with the two main results in the literature on “positive” activism. Its announcement is associated with a short-term share price increase in the range of +7%, and this price increase is reflected in long-term improvements in shareholder value. Scholars have replicated these findings repeatedly during the past decade, generating a lively and important debate that continues today. The early literature spawned an entire field of study, and the threat of positive shareholder activism has become a front-of-mind reality for practitioners, board members, and market participants.


Weekly Roundup: March 19–25, 2021

More from:

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

Equality Metrics

Delaware Court Enjoins Poison Pill Adopted in Response to Market Disruption

Gensler and SEC’s 2021 Examination Priorities Highlight ESG and Climate Risk

Poison Pills After Williams: Not Only for When Lightning Strikes

Speech by Commissioner Roisman on ESG Regulation

Corporate Officers Face Personal Liability for Steering Sale of the Company to a Favored Buyer

Common Ownership and Competition in the Ready-to-Eat Cereal Industry

Are Women Underpriced? Board Diversity and IPO Performance

Activist Shareholder Proposals and HCM Disclosures in 2021

Protests from Within: Engaging with Employee Activists

Behavioral Psychology Might Explain What’s Holding Boards Back

The Distribution of Voting Rights to Shareholders

Remarks by Commissioner Crenshaw at Asset Management Advisory Committee Meeting

Caroline Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the Asset Management Advisory Committee Meeting. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. As always, thank you to the Committee for your time, dedication, and thoughtfulness on important asset management issues that affect investors and market integrity. Thank you also to the staff of the Division of Investment Management.

I commend you for continuing your work on issues related to Environmental, Sustainability, Governance (ESG); private securities; and diversity and inclusion. And I look forward to today’s discussions on these important issues.

There has been a lot of discussion about ESG as of late, so today’s agenda, which includes a discussion about the ESG Subcommittee’s recommendations, is timely. [1] I’ve said this before and I’ll say it again: investors are using ESG-related information to make investment decisions and to allocate capital more than ever before. They are increasingly looking for sustainable investments, albeit investors have different thoughts about what “sustainability” means and how ESG factors inform their investment decisions. [2]


The Distribution of Voting Rights to Shareholders

Vyacheslav Fos is Associate Professor of Finance and Clifford G. Holderness is Professor of Finance at Boston College Carroll School of Management. This post is based on their recent paper.

Our new paper, The Distribution of Voting Rights to Shareholders, is the first comprehensive study of the distribution of voting rights to shareholders. Using over 100,000 distributions of voting rights to shareholders, we find a wide array of evidence that firms and stock exchanges change when they notify investors of the voting record date based on the proposals involved and that sophisticated investors are often notified before retail investors. Trading volume is higher than normal both before and immediately after the record date. Stock prices decline significantly when they go from cum vote to ex vote. These changes in notification, trading volume, and stock prices are correlated both with how controversial votes are and how they ultimately turn out.

The right to vote is one of only three distributions made to shareholders. The other two distributions, cash dividends and rights offers, have been studied for years, with well in excess of 100 papers studying ex day changes with cash dividends alone. Moreover, the most common of the three distributions for most firms is the right to vote because it must occur prior to each shareholder meeting. Finally, voting is central to how shareholders control agency costs and influence key corporate decisions. Our findings show that the distribution of votes is far from straightforward mechanical event.


Behavioral Psychology Might Explain What’s Holding Boards Back

Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Leah Malone Director at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.


The mythology of corporate boards goes something like this: put a group of high-achieving, experienced, strategic-minded, and diverse individuals in a room together. Add commitment and a lot of hard work. What you get is a top-notch board with a healthy culture and effective oversight. In practice, no boardroom culture is perfect. Every director has witnessed derailed discussions, dismissed opinions, side conversations, directors who dominate, and those who seem to be biting their tongue.

Boards are spending a great deal of time thinking about composition issues like director expertise and diversity. But what they might be missing is the importance of group dynamics—the human element. After all, each director brings his or her own habits, preferences, past experiences, and individual biases. These all impact the board’s culture and decision-making.

Boards can’t achieve a truly strong board culture without taking these dynamics into account. Here, we lay out how boards can spot the issues that may be holding them back. This requires directors to step back and ask some frank questions like: which topics get traction in the boardroom and which get ignored? Who is listened to, and who is dismissed? Why? We give you warning signs for spotting troublesome behavior. We also provide practical tools that your board (and C-suite) can use to improve boardroom culture and elevate the board’s performance.


Protests from Within: Engaging with Employee Activists

David Larcker is Professor of Accounting at Stanford Graduate School of Business; Brian Tayan is a researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business; and Stephen A. Miles is founder and chief executive officer of The Miles Group. This post is based on their 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); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (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).

We recently published a paper on SSRN, Protests from Within: Engaging with Employee Activists, that examines the rise of employee activism and its implications on corporate mission, management, and investment.

In recent years, we have seen a growing trend of stakeholder issues becoming prominent in discussions of corporate governance. This phenomenon is broadly known as ESG (environmental, social, and governance) and is characterized by pressure on companies to increase the attention they pay to and the investment they make in initiatives to advance the interests of all stakeholders—not just shareholders—including employees, suppliers, customers, and society.

One source of this pressure comes from an unexpected constituent: the company’s own employee base. To a greater extent than in the past, workers are pressuring employers to take policy stances and advocate on behalf of social, environmental, or political issues not necessarily directly related to the company’s core business. The issues involved are extremely broad and include environmental sustainability; reducing waste, pollution, or carbon emissions; workplace equality; diversity and inclusion; human rights violations; immigration policy; government defense contracting; gun control; free speech; and protesting statements of policymakers or politicians. Employee activism is related in spirit to unionization efforts—the crucial difference being that unionization efforts focus on improved working conditions for employees (through wage increases, benefits, safety, etc.) while activism encourages broader social and political activity which may or may not benefit an individual employee.


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