Monthly Archives: May 2021

Engaging with Neuberger Berman

James Hamilton and Sheena VanLeuven are Directors at PJT Camberview. This post is based on a PJT Camberview memorandum that features an interview with Jonathan Bailey, Head of ESG Investing, and Caitlin McSherry, Director of Investment Stewardship, of Neuberger Berman. 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); The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

Key Takeaways

  • Neuberger Berman takes a Portfolio Manager-driven approach to voting, engagement and ESG integration across asset classes
  • NB Votes, Neuberger Berman’s proxy voting disclosure initiative, will expand this year with the goal of improving transparency and communication on voting decisions
  • Key focus areas for the 2021 proxy season include diversity disclosure such as EEO-1 reporting, political spending disclosure and pandemic-related executive compensation decisions
  • Neuberger Berman’s climate risk analysis is centered on SASB and TCFD-aligned reporting and focused on company actions to reduce emissions and mitigate physical risk from climate change

Approach to Stewardship and Engagement

James Hamilton: What are the core pillars of Neuberger Berman’s approach to stewardship and how has that evolved in recent years?

Caitlin McSherry: At Neuberger Berman, stewardship is not a separate function but an integral part of the investment process. Rather than having a distinct team dedicated to stewardship efforts such as proxy voting and engagement, we have embedded those responsibilities within our investment teams as it provides the most direct mechanism to integrate ESG into our investment processes. We have a robust approach to stewardship and individuals who are competent and able to engage on these matters across all asset classes.


The Effects of Mandatory ESG Disclosure around the World

Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management. This post is based on a recent paper by Prof. Sautner; Philipp Krueger, Associate Professor of Finance at the University of Geneva; Dragon Yongjun Tang, Professor of Finance at The University of Hong Kong Business School; and Rui Zhong, Senior Lecturer in Finance at the University of Western Australia Business School.

ESG considerations have become increasingly important for investment decisions by institutional investors. Yet, institutional investors frequently complain that the availability and quality of firm-level ESG disclosures are insufficient to make informed investment decisions. In response to the gap between the demand for ESG information by investors and the supply of information by firms, several countries have initiated mandatory ESG disclosure regulations to force firms to properly disclose information on ESG issues in traditional financial disclosures or in specialized standalone reports (e.g., in sustainability, citizenship, or CSR reports).

Though the primary purpose of mandatory ESG disclosure rules is to enhance the supply of ESG information, it is unclear whether such regulations actually improve the ESG information environment. Even more importantly, it remains largely unexplored whether any ESG-related mandatory disclosure requirements are associated with beneficial real outcomes.


Directors’ Oversight Role Today: Increased Expectations, Responsibility and Accountability—A Macro View

Peter A. Atkins, Marc S. Gerber, and Kenton J. King 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 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).

I. The Current State of Play

The subjects falling within the purview of U.S. public company board of director oversight have grown to encompass virtually any subject that an investor, stakeholder or other party raises as being potentially material to a company and, therefore, needing board attention. [1] Many issues—often under the umbrella of “environmental, social and governance” (ESG) or “stakeholder” issues—have become well known to directors and are viewed as broadly applicable to most companies. Pressure from investors and others, in various forms and with increasing intensity, has been and continues to be applied to boards to address these issues promptly and more effectively. The failure by a board to deal with any such identified subject, or a board’s perceived inadequacy in doing so, often leads to questions being raised about the board’s performance of its oversight function.

In sum, directors remain the targets when investors or others look to hold companies responsible and accountable for perceived missteps relating to a constantly growing range of oversight subjects, many of which not long ago would have surprised public company boards of directors as being their responsibility.


March to the Beat of Your Own Drummer: Amazon’s Executive Compensation Practices

Howard Berkower is partner at McCarter & English LLP. This post is based on an article by Mr. Berkower originally published in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of the article. 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).

I am honored and humbled to continue the column on executive compensation and corporate governance that Joseph E. Bachelder III wrote for the New York Law Journal for over 30 years. Joe was my esteemed colleague and dear friend at McCarter & English, LLP for more than 8 years. His keen analytic mind, encyclopedic knowledge, attention to detail, concise writing skills, dogged work ethic and relentless pursuit of excellence greatly influenced me and all that knew him. He was a wonderful teacher and mentor who was always generous with his time. Joe Bachelder is and will always be sorely missed.

Earlier this year, in connection with Amazon’s public announcement of its record-breaking annual financial results for 2020, Jeffrey P. Bezos, the company’s founder and board chair, CEO or president since its 1994 inception, announced that he would be relinquishing those positions to become Amazon’s executive chairman sometime this autumn. To say Amazon’s 2020 financial results were “record-breaking” understates the matter: assisted by the effects of the global pandemic, Amazon’s sales of $386 billion represented a 38% increase from 2019 and its net income of $21.3 billion amounted to a whopping 84% increase from 2019. What an opportune time to announce an executive transition! In this post I trace Amazon’s spectacular long-term success and examine its unique executive compensation practices.

Amazon went public in May 1997 when it raised $54 million by selling 36 million shares at $1.50 per share on a post-split basis. As disclosed in its prospectus, the company had no specific plan for its initial public offering (IPO) proceeds but was going public “to create a pubic market for its stock to facilitate future access to public equity markets,” and “to provide increased visibility and credibility in a marketplace where many of its current and potential competitors are or will be publicly held companies.” Upon completion of its IPO Amazon’s market capitalization was about $430 million and Mr. Bezos and his family controlled about 48% of the outstanding shares.


Nevada Supreme Court Holds Statutory Business Judgment Rule Applies to All Claims Against Corporate Officers and Directors

Brian T. Frawley and John L. Hardiman are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Frawley, Mr. Hardiman, C. Daniel Lockaby, and Y. Carson Zhou. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).


In a March 25, 2021 decision in Guzman v. Johnson, the Supreme Court of Nevada affirmed the District Court’s dismissal of class action claims concerning AMC Networks, Inc.’s (“AMC”) acquisition of its subsidiary, RLJ Entertainment Inc. (“RLJE”). Plaintiff claimed that, since AMC was RLJE’s controlling stockholder and RLJE directors were interested parties, Plaintiff had successfully rebutted the business judgment rule and shifted the burden of proof to the Defendant directors to show that the deal was a product of both fair dealing and fair price. The Supreme Court disagreed, ruling instead that Nevada’s statutory business judgment rule admits no exceptions, and thus the standards for corporate director and officer liability are the same regardless of the circumstances or the parties involved in the transaction. As codified in Nevada, the business judgment rule presumes directors and officers acted in good faith and on an informed basis, and allows for director or officer liability only when the plaintiff affirmatively rebuts the business judgment presumption and demonstrates that the fiduciary breach involved intentional misconduct, fraud, or a knowing violation of law. Unlike the strict, judge-made “entire fairness” test applicable to interested transactions in Delaware and a number of other states, the statutory business judgment standard in Nevada provides the “sole avenue to hold directors and officers individually liable for damages arising from official conduct.” Applying that standard, the Court found that Plaintiff pleaded no intentional dereliction of duty and affirmed dismissal of Plaintiff’s claims against RLJE directors.

The Court also dismissed fiduciary duty claims against AMC, RLJE’s controlling stockholder. Although not protected by Nevada’s business judgment rule, the Court held that Plaintiff’s controller claims against AMC were properly dismissed because the complaint failed to allege any facts showing that AMC “force[d] a merger or, more importantly, . . . improperly influenced the [Board’s] decision.”


How Should Performance Signals Affect Contracts?

Pierre Chaigneau is Associate Professor of Finance at Queen’s University Smith School of Business; Alex Edmans is Professor of Finance at London Business School; and Daniel Gottlieb is Associate Professor of Managerial Economics and Strategy at the London School of Economics. This post is based on their recent paper, forthcoming in the Review of Financial Studies. 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).

Incentive pay for top executives is increasingly based on performance measures (“signals”) other than the stock price—financial metrics such as earnings and sales, and sustainability metrics such as carbon emissions and safety. How should performance signals be incorporated into incentive pay contracts?

A simple solution is to give CEOs shares in the firm, because this perfectly aligns them with shareholder value. However, an important lesson from principal-agent models of incentive provision is that top executives should be rewarded not when shareholder value is high, but when they made the (ex ante) right decisions. This subtle difference can have major consequences. For example, an increase in shareholder value due to a booming economy should not be rewarded with higher CEO pay.

Executive pay should thus depend on shareholder value, but only insofar as it provides valuable information about the decisions made by top executives. Similarly, Nobel laureate Bengt Holmström showed that other signals should be used in incentive contracts if they provide incremental information about top executive decisions.

While Holmström tells us whether to incorporate a signal into a contract, he does not study how to do so. Our paper, How Should Performance Signals Affect Contracts? (forthcoming in the Review of Financial Studies) gives practical guidance for incorporating such signals into compensation contracts.

We point out that a signal can affect two dimensions of compensation contracts:


As Strategic Financial Institutions Mergers Thrive, Lessons from the Boston Private Merger Proxy Contest

Edward D. Herlihy and Jacob A. Kling are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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); 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); The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

The past several months have seen a significant surge in strategic bank mergers. Having shored up their balance sheets through well-timed capital raises, conservative capital management and reserves taken during the depths of the Covid-19 pandemic, many banks and financial institutions have emerged in a position of strength, and are once again looking to strategic M&A to create synergies, drive scale efficiencies to support investment in technology, and generate long-term value for their companies and stakeholders. After a moratorium on deal activity through the middle of 2020, we are now in the middle of a wave of bank consolidation which began with PNC’s $11.6 billion cash acquisition of BBVA’s U.S. banking business announced in November 2020, followed shortly thereafter by Huntington Bancshares’ $22 billion all-stock strategic merger with TCF Financial in December to create a top 10 U.S. regional bank. Merger activity has continued through the early months of 2021 and has shown no signs of abating, with a number of transformative strategic combinations announced over the past few weeks alone, including Independent Bank Corp.’s $1.15 billion all-stock acquisition of Meridian Bancorp, BancorpSouth and Cadence Bancorporation’s $6 billion all-stock merger of equals, and Webster Financial’s $10.3 billion all-stock merger of equals with Sterling Bancorp. These combinations illustrate the increasing importance of scale and accelerating digital and technological investment and the significant synergies and value creation that a well-planned and executed strategic merger can create for shareholders and other constituencies on both sides of a transaction.


Weekly Roundup: April 30–May 6, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 30–May 6, 2021.

Lazard’s Q1 2021 Review of Shareholder Activism

Corporate Governance Update: “Materiality” in America and Abroad

Proxy Preview 2021

UK Proposals to Reform Listing Rules to Attract SPACs and Technology Companies

Proxy Season: Early Highlights and Emerging Themes

How the Robinhood IPO is Different

Why is Corporate Virtue in the Eye of the Beholder? The Case of ESG Ratings

The SEC’s Latest Risk Alert Puts ESG Investing in the Crosshairs

Reform of the Public Company Accounting Oversight Board (PCAOB)

Lynn E. Turner is Former SEC Chief Accountant and Senior Advisor to Hemming Morse LLP. This post is based on an open letter to SEC Chairman Gary Gensler, authored by Mr. Turner; Mary M. Bersot; T. Grant Callery; Sarah Deans; Dr. Parveen P. Gupta; Norman J. Harrison; Michael J. Head; Amy C. McGarrity; Barbara Roper; Anne Simpson; Dr. Ashwinpaul C. Sondhi; and Robert M. Tarola.

Congratulations on your appointment to serve as Chairman of the Securities and Exchange Commission (SEC). We hope for your success in protecting investors and maintaining the resiliency and liquidity of United States public capital markets.

We, the undersigned former members of the Public Company Accounting Oversight Board (PCAOB or Board) Investor Advisory Group (IAG), write in our individual capacities to share our perspectives on the urgent need to reinstate investor input into the work of the PCAOB to restore investor trust and confidence in the quality of public company audits in the United States. We are concerned that in this regard the SEC and the PCAOB are failing to carry out their respective roles and responsibilities as set forth by Congress in the Sarbanes-Oxley Act of 2002 (SOX). [1] These failures increase risks to our financial system and require immediate attention.

In SOX, Congress stated the role and responsibility of the PCAOB is “… to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.”[2] Toward that end, SOX authorized the PCAOB to establish advisory groups to obtain input from investors and others on how best to enhance the quality of public company audits.

As former members of the IAG, we had the privilege of representing investors by sharing our views on the work of the PCAOB and its standard setting activities; however, in 2018 certain members of the PCAOB determined that the Board would no longer seek the views of its established advisory bodies and never hosted another advisory group meeting. Advisory groups are essential participants in the PCAOB’s processes for enhancing the quality of audits, and we strongly support reactivating the IAG and including it in PCAOB’s standard-setting deliberations and related regulatory processes.


Business and Politics: When Should Companies Take a Public Position?

Thomas A. Cole is a Lecturer in Law at the University of Chicago Law School and Senior Counsel and Executive Committee Chair Emeritus at Sidley Austin LLP. The views expressed in this essay are not necessarily the views of his firm, the university or its law school.

Those of us who lived through the 1960s hear a loud echo of those turbulent times in the challenges of the current decade.

The ‘60s were a time of war and protests, assassinations, racial discrimination, and the fight for civil rights and against environmental pollution. The decade began and ended with recessions. Many of our current challenges are, unfortunately, the same—with some new complexities, such as gun violence, the climate crisis, and (of course) the pandemic. On top of that, social media and a far more polarized political discourse have heightened emotions and detracted from the quality of debate.

Another difference between the ‘60s and today is the greater prominence and power of corporations, with businesses now viewed as more competent and ethical than both governments and the media. Employees and consumers are paying more attention to corporations’ policies and practices when deciding where to work and what to buy. And corporate social responsibility is broadly accepted as a legitimate pursuit of public companies, at least so long as there is a reasonable nexus to long-term shareholder value.

All of this raises several questions in the minds of those who think about corporate governance: What does this sea change mean for organizational leaders in terms of addressing social issues, particularly political ones? And what are the best practices for companies considering taking a stand?


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