Monthly Archives: March 2021

Proxy Advisory Firms Release First Reports on Latest Best Practices

Stephen Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance.

For the first time, six of the world’s most influential shareholder voting research and analysis firms (better known as “proxy advisors”), which help institutional investors vote shares at stock-exchange-listed companies worldwide, have each publicly released reports showing how they comply with the latest industry Best Practice Principles. [1]

Proxy advisors have been a target of corporate criticism ever since Institutional Shareholder Services (ISS) pioneered the voting-recommendation industry in 1985. Through its landmark 1988 Avon Letter, [2] the US Department of Labor first declared the share ballot an asset—making it all but mandatory that ERISA-regulated funds cast them. The rule paved the way for an expanded industry of voting research and advisory firms. But for decades many institutional investors commonly handled the responsibility as a low-status compliance exercise. In 2007 Lord Paul Myners, later UK City Minister, scathingly referred to proxy staff as the “open-toed sandal brigade” beavering in the basements of investment houses. [3]

That’s not the case today. Increasingly, investors are merging the voting responsibility with investor-corporate engagement in a new discipline that has become known as stewardship. Moreover, as asserted most prominently in annual letters from BlackRock’s Larry Fink [4] and State Street Global Advisors’ Cyrus Taraporevela, [5] stewardship is now seen as a central means for mainstream investors—not just activists—to seek and protect share value. As a result, institutions have piloted a steady drift away from routine endorsements of corporate management and toward more critical stances on executive pay, director nominations, ESG, and a host of other issues.


2021 Compensation Committee

Kristin Davis and Michael Bergmann are counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Davis, Mr. Bergmann, Regina Olshan, Joseph Penko, Erica Schohn, and Joseph Yaffe.

Compensation committee (Committee) members’ duties and responsibilities generally are outlined in the Committee’s organizational charter (Charter) approved by the Board of Directors (Board) of the applicable company (Company), which should reflect requirements imposed by the securities exchanges, some of which are the result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Dodd-Frank), applicable Securities Exchange Commission (SEC) regulations and other legal limitations. All of those obligations are discussed in greater detail later in this Handbook.

The Committee is responsible for establishing and overseeing an executive compensation program for the Company. The Committee should make executive compensation decisions within the context of its members’ executive compensation philosophies and the corporate governance standards applicable to directors generally.

This post provides an overview of the most important considerations that relate to the proper discharge of the Committee’s responsibilities, including the role of advisors to the Committee. The complete publication (available here) address those considerations in more detail.


2021 Global and Regional Trends in Corporate Governance

Rusty O’Kelley III is leader of the firm’s Board & CEO Advisory Partners; Anthony Goodman is a member of the Board Consulting and Effectiveness Practice; and Laura Sanderson is a consultant at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Goodman, Ms. Sanderson, Andrew Droste, Sarah Eades Oliva, and Alvin Chiang.


This year, as in the previous five years, Russell Reynolds Associates interviewed over 40 global institutional and activist investors, pension fund managers, proxy advisors and other corporate governance professionals to identify the corporate governance trends that will impact boards and directors in 2021.

Global Trends Predicted for 2020

  1. Greater focus on the E&S of ESG
  2. Increasing importance of corporate purpose
  3. Better board oversight of corporate culture and HCM
  4. More expansive view of board diversity that includes ethnicity and race
  5. Companies facing wider forms of activism

At the time of publishing last year’s paper in January 2020, we could not have known just how painfully relevant many of the trends we predicted would turn out to be:

The COVID-19 pandemic and social justice movements have had far-reaching impacts on business and society around the world. In many ways, we are at a turning point. Corporate governance trends vary somewhat across regions, but corporations globally are experiencing a reckoning around their role in society. The expectations of the independent directors who oversee corporations have never been higher.

Global Trends Predicted for 2021

  1. Climate Change Risk
  2. Diversity, Equity & Inclusion (DE&I)
  3. Convergence of Sustainability Reporting Standards
  4. Human Capital Management
  5. Return of Activism and Increased Capital Markets Activity
  6. Virtual Board & Shareholder Meetings: Here to Stay

1. Climate Change Risk. The pandemic forced the “S” of ESG (environmental, social and governance factors) higher up the corporate agenda as companies sought to reassure stakeholders that they took the safety of their workers and communities seriously. In 2021, climate change will be back in focus.


Gender Quotas and Support for Women in Board Elections

Marina Gertsberg is Assistant Professor of Finance at Monash University; Johanna Mollerstrom is Associate Professor of Economics at George Mason University; and Michaela Pagel is Associate Professor of Finance at Columbia Business School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

In September 2018 a quota for corporate boards was passed in California (CA Senate Bill 826). It requires all publicly held firms headquartered in the state to have at least one appointed female director by the end of 2019, and two (three) female board members by the end of 2021 for boards with five (six or more) members. Following the lead of several European countries, this made California the first US state to impose a binding gender quota on boards. The stock market reacted negatively to the quota (as documented by Hwang, Shivdasani, and Simintzi, 2018; Greene, Intintoli, and Kahle, 2020), a fact which has been interpreted as evidence that shareholders oppose the mandated addition of new female directors (e.g., because of scarcity of qualified female candidates leading to higher search costs, or to suboptimal trustees being appointed, see also Ahern and Dittmar, 2012) and prefer the current composition of the board.


SEC Acknowledges that Disgorgement Principles Apply to Administrative Proceedings

Robert Cohen, Tatiana Martins, and Fiona Moran are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

In a recently issued administrative order, the SEC implicitly acknowledged that the limiting principles for disgorgement that the Supreme Court outlined in Liu v. Securities and Exchange Commission apply to administrative proceedings. This opens the door for counsel and settling parties to use the limiting principles when negotiating an administrative order at the end of an investigation.

The Backdrop of Liu

As discussed in a previous client memorandum, the Supreme Court in Liu v. Securities and Exchange Commission upheld the SEC’s authority to seek disgorgement in district court actions, provided that the award is (1) “for the benefit of investors,” that is, distributed to investors; [1] (2) based on the amount accrued to the wrongdoer without recourse to joint-and-several liability; and (3) limited to “net” profits after deducting legitimate business expenses. The Supreme Court’s decision was rooted in “equity jurisprudence” and the text of Section 21 of the Securities Exchange Act, 15 U.S.C. § 78u(d)(5), which authorizes the SEC to seek in federal court “any equitable relief that may be appropriate or necessary for the benefit of investors.” According to the Court, disgorgement is an “equitable” award when the above conditions are satisfied.


Climate Risk and the Transition to a Low-Carbon Economy

Jessica McDougall and Danielle Sugarman are Directors at BlackRock Investment Stewardship, BlackRock, Inc. This post is based on their BlackRock memorandum.

BlackRock believes that sustainability risk, particularly climate risk, is investment risk. Accordingly, sustainability is a key component of our investment approach.

As we set out in our Global Principles, we expect companies to articulate how they are aligned to a scenario in which global warming is limited to well below 2° C, consistent with a global aspiration to reach net zero greenhouse gas (GHG) emissions by 2050.

The following provides more detail on our approach to engagement on climate risks and opportunities and the transition to a low-carbon economy.

Climate Risk and the Energy Transition as an Investment Issue

Climate risk presents significant investment risk—it carries financial impacts that will reverberate across all industries and global markets, affecting long-term shareholder returns, as well as economic stability. As BlackRock’s Chairman and CEO, Larry Fink, wrote in his 2021 letter to CEOs, “there is no company whose business model won’t be profoundly affected by the transition to a net zero economy…” and we have already “begun to see the direct financial impact [of climate change] as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system.”


Biden’s “Money Cop” to Shine a Light on ESG Disclosure

Stacey H. Mitchell and Cynthia M. Mabry are partners and Kenneth J. Markowitz is a consultant at Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump memorandum by Ms. Mitchell, Ms. Mabry, Mr. Markowitz, Meaghan Jennison, and Bryan Williamson. 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).

Key Points:

  • Mandatory ESG requirements could be an early priority for SEC chair nominee Gary Gensler, with increasing calls from within the SEC to require material ESG risk disclosures.
  • The EU recently implemented mandatory ESG disclosure requirements, and the U.K. imposed mandatory climate-related financial disclosures; the U.S. may soon follow suit.
  • The international business community has taken significant steps toward the promulgation of standardized ESG disclosure metrics, with the World Economic Forum’s universal ESG reporting metric framework the latest development.

As public companies prepare their annual reports to reflect an unprecedented 2020, many are doing so mindful that investors and stakeholders continue to demand robust environmental, social and governance (“ESG”) disclosures. However, despite years of discussion and the wide availability of reporting frameworks, the disclosure of material ESG issues remains a somewhat nebulous task, leaving companies and investors alike grasping for ways to evaluate and compare ESG practices and risks. That is likely to change, though, as regulatory developments around the world and President Biden’s nomination of so-called “Money Cop” Gary Gensler to lead the country’s top securities regulator suggest that the disjointed potpourri of ESG reporting practices appears to be approaching its denouement.


SEC Division of Corporation Finance Directed to Focus on Climate-Related Disclosures

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 a Wachtell Lipton memorandum by Mr. Silk, Mr. Niles, Ms. Lu, and Ram Sachs.

The Acting Chair of the U.S. Securities and Exchange Commission (SEC), Allison Herren Lee, has issued a statement directing the Division of Corporation Finance to enhance its focus on public company disclosures concerning climate change, including by updating the SEC’s formal 2010 guidance regarding such disclosure to “take into account developments in the last decade.”

As part of this enhanced focus, the SEC staff will: (1) review the extent to which public companies have addressed the topics identified in the 2010 guidance (e.g., impact of legislation and regulation, impact of international accords, indirect consequences of regulation or business trends, physical impacts of climate change such as severe weather, etc.); (2) assess compliance with disclosure obligations under the federal securities laws; (3) engage with public companies on climate-related disclosure issues; and (4) absorb critical lessons on how the market is currently managing climate-related risks. The Acting Chair’s statement concludes with:


An Introduction to Activist Stewardship

Robert G. Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; Aeisha Mastagni is Portfolio Manager within the Sustainable Investment & Stewardship Strategies Unit at the California State Retirement System (CalSTRS); and Kirsty Jenkinson is Head of Sustainable Investment & Stewardship Strategies at CalSTRS. 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (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).

The time has come for “activist stewardship.” Simply put, this means putting the skills and techniques of activist hedge funds to work where a company’s financial performance is deteriorating and traditional engagement tools have failed to produce meaningful results to protect value and mitigate long-term risks, including recognizing the importance of environmental, social, and governance (ESG) risks. Historically, ESG issues have been the province of the engagement and stewardship group in the asset manager due to their importance in creating value over the long-term. These groups have sought to change corporate behavior through private, constructive conversations. Large asset managers, including asset owners who manage their own assets, have been rapidly increasing their commitment to engagement and, more broadly, to stewardship activities including proxy voting and advocacy work with regulators and policy makers.

Despite this growing commitment to engagement, there are some companies who remain absolutely implacable after years or even decades of efforts by their shareholders. We call them “Corporate Castles.” They are uninterested in engaging with their shareholders, let alone stakeholders. They have drawn a moat around their corporate walls and are exercising every means at their disposal to persist in their practices, even as their financial performance declines and the negative externalities they are creating in the world persist. For such companies, the traditional tools of engagement, typically used in selective and discrete fashion, are simply not effective.


Shareholder Activists Gear Up for a Busy 2021 – With New Tools and Tactics

Bruce H. Goldfarb is the President and Chief Executive Officer and Alexandra Higgins is a Managing Director at Okapi Partners.

As we near the end of the first quarter of 2021, the number of activist campaigns appears to be on track to outpace last year. In a recent poll of readers, activism research provider Insightia found that 59% of readers surveyed expected an increase in the number of companies targeted by shareholder activists this year compared to 2020.

Corporate management teams also face a very different operating environment from the one that prevailed throughout most of 2020. Last proxy season, the combination of economic disruption and the view from some market participants that the timing wasn’t right to wage a proxy campaign, slowed activism. But just as quickly as the markets recovered, activist investors started training their sights at possible targets again.

A key difference this year is that many of the changes in our economy and society that emerged in 2020—including a heightened focus on social justice, racial equality, climate change and other ESG issues—will increasingly find their way into the tactics used by activist shareholders.


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