Monthly Archives: June 2021

Vanguard’s Insights on Shareholder Proposals Concerning Diversity, Equity, and Inclusion

John Galloway is global head of investment stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Risks to shareholder value associated with diversity, equity, and inclusion (DEI) remain a top engagement priority for Vanguard with our funds’ portfolio companies. Increased focus—from companies, regulators, investors, and employees—on racial and ethnic discrimination has heightened scrutiny of public companies’ DEI-related risks and opportunities, as have the COVID-19 pandemic and challenging economic conditions.

Vanguard has long advocated for diversity of experience, personal background, and expertise in the boardroom. In 2020, Vanguard continued to call for enhanced board diversity across dimensions of gender, race, ethnicity, age, and national origin. [1] We reiterated our expectations that boards make progress in their diversity strategy and that where progress falls behind market norms and expectations, the Vanguard funds may vote against company directors. We also outlined our views on diversity beyond the boardroom and our expectations of a board’s role in overseeing DEI risks within the workplace. [2] We illustrated the case for getting it right and the risks of getting it wrong.


Benchmarking of Pay Components in CEO Compensation Design

Yaniv Grinstein is a Professor of Finance at the Arison School of Business, IDC Herzliya; Beni Lauterbach is the Raymond Ackerman Family Chair in Israeli Corporate Governance and a Professor of Finance at the Graduate School of Business Administration, Bar-Ilan University; and Revital Yosef is a Post-Doctoral Fellow at the Graduate School of Business Administration, Bar-Ilan University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, Executive Compensation as an Agency Problem and Paying for Long-Term Performance (discussed on the Forum here), all by Lucian Bebchuk and Jesse Fried.

A central issue in executive compensation is the methodology employed by boards of directors and compensation committees to determine chief executive officer (CEO) pay. In this study, we focus on the practice of compensation benchmarking, in which a given firm compares CEO compensation with the compensation packages of peer CEOs at comparable companies. Previous empirical research has established that peer pay and benchmarking play an important role in determining total CEO compensation.

We extend the benchmarking research by analyzing the benchmarking of the components of CEO pay. Motivated by the description of benchmarking practices in compensation committee reports, we examine the following three questions: Is each pay component benchmarked separately and differently than other pay components? Is the structure of compensation (weight of each pay component in total pay) benchmarked as well? And, is pay component benchmarking a better description of benchmarking practices in US public firms than total pay benchmarking?

We employ two research strategies (and samples) to answer our research questions, and focus primarily on the benchmarking of three major pay components: Salary, equity-based compensation, and non-equity performance pay. First, we read the compensation-committee reports (Form DEF 14A) of S&P 500 firms in fiscal year 2013 and find that approximately 89% of firms explicitly state that they benchmark at least one pay component. Further, about 75% of firms declare that they benchmark all three major pay components. These figures indicate that these firms examine separately the distribution of salary, equity-based compensation, and non-equity-based compensation among peers to determine the level of each pay component to their CEO. We also examine whether companies target CEO compensation structure (weight of each pay component in total CEO compensation), and find that approximately 30% of firms explicitly declare in their proxy statement that they benchmark the compensation mix.


The Biden Administration’s Executive Order on Climate-Related Financial Risks

Natalie L. Reid and David W. Rivkin are partners and Alison M. Hashmall is counsel at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Ms. Reid, Mr. Rivkin, Ms. Hashmall, Gregory J. Lyons, Caroline Novogrod Swett, and Josie Dikkers.

Key takeaways:

  • Last month, President Biden issued an Executive Order (the “Order”) that directs federal agencies to take wide-ranging actions regarding climate-related financial risks.
  • While the Order is directed to agencies across the federal government, there are particular directives that will be especially relevant for the banking industry. In particular, Treasury Secretary Yellen is directed to issue a report that assesses the efforts by FSOC member agencies to integrate consideration of climate-related financial risks into their policies and programs and to recommend actions for mitigating such risk, including through “new or revised regulatory standards.”
  • The Order builds on actions financial regulators are already taking with respect to climate change and may result in greater consideration of various climate-related regulatory initiatives.

Last month, President Biden issued an Executive Order (the “Order”) that directs federal agencies to take wide-ranging actions regarding climate-related financial risks. The Order aims to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk” across the federal government. It notes that these risks include both physical risks, such as supply chain disruptions from increased extreme weather, and transition risks, which result from a global shift away from carbon-intensive energy sources and industrial processes. The Order states that the failure of financial institutions to appropriately and adequately account for and measure these risks threatens U.S. companies, markets and financial institutions.


How to Accelerate Board Effectiveness Through Insight and Ongoing Education

Steve Klemash is EY Americas Center for Board Matters Leader and Jamie Smith is EY Americas Center for Board Matters Investor Outreach and Corporate Governance Specialist. This post is based on their EY memorandum.

Today’s business environment is continuously resetting the bar for effective board oversight. New business models, impacted by new technologies and consumer behaviors, are emerging, while industry boundaries disappear. At the same time, sustainability risks and social awareness are increasing, driving a reprioritization of stakeholder and corporate values. These developments underscore the need for boards to evolve and learn by incorporating the appropriate external perspectives into their agendas to stay ahead of the curve and position the board as a strategic asset.

How can the board of the future keep pace? To help boards stay agile and relevant, board education practices should adapt to reflect the rapidly evolving external developments and strategy, risks and talent oversight needs. We frequently hear from boards who have a growing interest in tailored education and onboarding sessions for individual directors, committees and boards. We offer the following considerations for boards as they challenge how to strengthen their effectiveness in this area.

Tailor board education to company and individual needs

A robust, future-focused board education plan that is codeveloped by board and committee leaders and informed by the views of management and external advisors is key to advancing board effectiveness. Annually, board leadership in consultation with the CEO and other members of management should consider establishing a formal and customized learning plan for the board, its committees and individual directors. Such learning plans should have qualitative and quantitative goals and objectives. They should flex and adapt to changing market dynamics and regulatory developments, with a focus on meeting the unique learning needs of individual directors, committees and the board. While board and committee sessions should address current and future-focused topics, individual directors may need more baseline learning to bring them up to speed. Individual directors should play a proactive role in communicating their education needs to board leaders.


Competition Laws, Governance, and Firm Value

Ross Levine is the Willis H. Booth Chair in Banking and Finance at University California Berkeley Haas School of Business; Chen Lin is the Stelux Professor in Finance at the University of Hong Kong; and Wensi Xie is Assistant Professor in Finance at the Chinese University of Hong Kong Business School. This post is based on their recent paper.

Policymakers increasingly call for strengthening antitrust laws. For example, the U.S. House Judiciary Committee’s Antitrust Subcommittee concluded a 16-month investigation in October 2020 by stressing the need to bolster antitrust laws, policies, and enforcement. In recent months, authorities in China, the European Union, Japan, and the United Kingdom have also signaled their intent to strengthen antitrust laws. The push for more stringent antitrust laws raises questions about the impact of such reforms on firms. In a recent paper, we provide what we believe is the first analysis of how changes in antitrust laws shape corporate valuations.

Economic theory offers conflicting predictions about the impact of antitrust laws that intensify competition on firm value. The agency view holds that because competition tends to force inefficient firms out of business, intensifying competition spurs firms to reduce inefficiencies. In particular, competition can induce firms to address inefficiencies associated with agency problems that allow managers to shirk, empire-build, tunnel, and engage in other actions that extract private benefits from the firms at the expense of shareholder value. Similarly, competition can generate information about managerial performance that shareholders use to mitigate agency problems. In contrast, other theories highlight how competition can reduce firm value. Intensifying competition tends to reduce market power, squeeze cash flows, and lower profits, putting downward pressure on valuations. Furthermore, by squeezing cash flows, competition lowers firm value by constraining firms from exploring long-run growth opportunities. These conflicting theoretical predictions about the impact of competition laws on firm value help motivate our empirical examination.


General Solicitation and General Advertising

Bradley Berman is counsel and Gonzalo Go and Nicole Cors are associates at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Berman, Mr. Go, Ms. Cors, and Anna T. Pinedo.


Rule 502(c) (“Rule 502(c)”) of the Securities Act of 1933, as amended (the “Securities Act”), prohibits an issuer from offering or selling securities by any form of general solicitation or general advertising when conducting certain offerings exempt from registration under the safe harbors provided under Regulation D of the Securities Act. Many have felt that, over the years, this prohibition has impaired capital formation and that it would be more appropriate to regulate actual sales rather than offers. In order to address this, Congress passed the Jumpstart Our Business Startups Act (the “JOBS Act”) directing the Securities and Exchange Commission (the “SEC”) to relax the prohibition against general solicitation and general advertising for certain offerings made in reliance on Rule 506 of the Securities Act (“Rule 506”). The amendments to Rule 506 adopted by the SEC became effective in July 2013. The amendments implemented a bifurcated approach, allowing for private placements to be conducted in reliance on Rule 506(b) without general solicitation and general advertising and for certain exempt offerings to be conducted using general solicitation or general advertising in reliance on Rule 506(c). However, as an additional investor protection measure, an issuer relying on the Rule 506(c) exemption and using general solicitation must limit sales to accredited investors and must take reasonable steps to verify that all purchasers of the securities are accredited investors. [1]


Introducing the “Technergy” ESG Reporting Strategy

Dan Romito is Consulting Partner, ESG Strategy & Integration, at Pickering Energy Partners. This post is based on a Pickering Energy Partners memorandum by Mr. Romito and Addison Holmes. 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).

Across the existing spectrum of ESG ratings, guidelines, and frameworks, higher quality environmental scores are commonly associated with technology companies while lower relative scores are typically linked to energy companies. This is not necessarily a novel statement, but it does highlight a critical inefficiency. We feel ESG-ratings agencies and, in some cases, reporting frameworks, currently miss the mark in their respective evaluation environmental impact for both sectors. Digitalization, artificial intelligence, and big data are evolutionary trends affecting every sector; however, these trends mean something inherently different for energy. Long-term success for the energy space is contingent upon developing greener technologies and adopting advanced data analytics, yet ratings agencies provide less of an opportunity for energy companies to showcase these explicit talents.

As a result, the narrative conveyed by ESG ratings data fails to outline the longer-term economic reality for most capital-intensive businesses, particularly energy. Empirically speaking, the data indicates environmental impact metrics for the energy and technology sectors are actually converging, but existing ratings data does not reflect this. As paradigm shifts within the global economy materialize, technology and energy are becoming increasingly interlaced. As big data and technological advances continue to represent a greater proportion of the overall global economy, think about the respective “inputs” the technology world will require just to keep the lights on.


2021 Say on Pay Failures Partly Due to Covid-19 Related Pay Actions

Todd Sirras is Managing Director, Justin Beck is Consultant, and Austin Vanbastelaer is Senior Consultant at Semler Brossy LLP. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Beck, Mr. Vanbastelaer, Alexandria AgeeSarah Hartman, and Kyle McCarthy. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, and Executive Compensation as an Agency Problem, both by Lucian Bebchuk and Jesse Fried.

2021 Say On Pay Results

37 Russell 3000 companies (3.1%) failed Say on Pay thus far in 2021, 14 of which are in the S&P 500. 15 companies failed since our last report and are highlighted in bold later in this post. Our evaluation of the likely reasons for failure indicates that ten of the thirty-seven failed Say on Pay votes are due in part to Covid-19 related actions.


Do UK and EU Companies Lead US Companies in ESG Measurements in Incentive Compensation Plans?

John Ellerman and Mike Kesner are partners, and Lane Ringlee is managing partner at Pay Governance LLC. This post is based on their Pay Governance 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).

In January 2021, Pay Governance conducted a comprehensive survey of the use of Environmental, Social, and Governance (ESG) metrics in incentive compensation as reported by 95 participating US companies. The survey documented the prevalence of this emerging trend and explored the types of metrics used, the ways in which they were measured, the types of incentive plans incorporating such metrics, and other important incentive design details. The survey revealed that only 22% of the US companies included ESG metrics in their 2020 incentive plans, whereas 29% of the same companies reported they were planning on including ESG measurements in their 2021 incentive plans. In summarizing the data and citing our conclusions about the survey results, Pay Governance stated that there appeared to be significant hesitancy among US companies to adopt such metrics, as companies considered which metrics and goals would be the most meaningful and consistent with their business objectives. Despite the reluctance on the part of many US companies in moving forward on this issue, we noted that “the inclusion of ESG in incentive plans is perhaps one of the most significant changes in executive compensation in over a decade.” [1]

In our desire to further study this issue, Pay Governance examined the use of ESG metrics in the incentive compensation plans of a select sample of companies in the United Kingdom (UK) and European Union (EU). Our research confirmed that UK and EU companies are well ahead of the US in the inclusion of ESG metrics in incentive plans, and their approach to measuring and rewarding ESG achievements could be a harbinger of strategies used by US companies over the next several years.


Sidley Sends Formal Comment Letter on the SEC’s Universal Proxy Proposal

Kai H.E. Liekefett, Derek Zaba, and Beth E. Berg are partners at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Liekefett, Mr. Zaba, Ms. Berg, Holly J. Gregory, and Leonard Wood. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here); The Case for Shareholder Access to the Ballot by Lucian Bebchuk (discussed on the Forum here); and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

On June 7, 2021, we sent a formal comment letter regarding the recent proposal of the U.S. Securities and Exchange Commission (SEC) to adopt a universal proxy (File No. S7-24-16) under the Securities Exchange Act of 1934 (as amended, the Exchange Act) (the Proposed Rule). We summarize our comments in this post (our full 20-page comment letter, including citations, can be reviewed here.

Since proxy contests are the context in which universal proxy cards would be used, we believe that our experience affords us with relevant perspectives on legal, procedural, and practical considerations. We have been involved in over 85 proxy contests in the past five years, more than any other law firm representing companies. In 2020, Sidley was ranked as the No. 1 legal advisor to companies in proxy contests by number of representations in the league tables maintained by Bloomberg, FactSet, Refinitiv (formerly Thomson Reuters), and Activist Insight.


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