Monthly Archives: July 2021

Weekly Roundup: July 9-15, 2021

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This roundup contains a collection of the posts published on the Forum during the week of July 9–15, 2021.

Shareholder Proposal No-Action Requests in the 2021 Proxy Season

Chair Gensler’s Remarks at the Asset Management Advisory Committee Meeting

A Private Fund’s Guide to ESG Compliance

SEC Enforcement Action Highlights Need for Internal Communications About Cybersecurity Problems

CEO Compensation: Evidence From the Field

Venture Capital’s “Me Too” Moment

Say on Pay: Approval Slides as CEO Pay Rises

What Companies Need to Know About Modern Ransomware Attacks and How to Respond

Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds

Supreme Court’s Vacation of Class Certification Order in Decades-Long Class Action

New OECD Corporate Governance Reports and the G20/OECD Principles of Corporate Governance

Serdar Celik is Acting Head and Daniel Blume is a Senior Policy Analyst in the Corporate Governance and Corporate Finance Division of the Organization for Economic Co-operation and Development (OECD). This post is based on two OECD reports issued on June 30, 2021, by the OECD Corporate Governance Committee, chaired by Mr. Masato Kanda of Japan. Related research from the Program on Corporate Governance includes Learning and the Disappearing Association between Governance and Returns by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here); and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

The Organisation for Economic Co-operation and Development (OECD) has just issued two major new reports—The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis, and the 2021 edition of the OECD Corporate Governance Factbookthat will serve as key references for the OECD’s upcoming review and revisions to the G20/OECD Principles of Corporate Governance.

The G20/OECD Principles, since their first issuance by the OECD in 1999 and subsequent revisions in 2005 and 2015, are now recognized as the leading global standard to guide policy makers and regulators in devising effective institutional, legal and regulatory frameworks for the corporate governance of listed companies. Endorsed not only by the 38 members of the OECD but also by the G20 and Financial Stability Board, more than 50 jurisdictions worldwide now adhere to this OECD recommendation.

However, as the new OECD report on The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis makes clear, both the COVID-19 pandemic and longer-term trends suggest that governments’ corporate governance frameworks will need to make further adaptations to ensure that capital markets may serve their intended purpose of allocating substantial financial resources to support long-term investments underpinning economic growth and innovation. READ MORE »

Compensation Disclosures and Strategic Commitment: Evidence from Revenue-Based Pay

Matthew J. Bloomfield is Assistant Professor of Accounting at The Wharton School of the University of Pennsylvania. This post is based on his recent paper, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive CompensationExecutive Compensation as an Agency Problem; and Paying for Long-Term Performance (discussed on the Forum here), all by Lucian Bebchuk and Jesse Fried.

Some firms appear to structure their executives’ incentives as strategic weapons, designed to soften competition from industry rivals. In particular, firms incorporate revenue-based pay into their executives’ pay plans when doing so is most effective at making rivals back off. This approach to executive compensation is consistent with the theory of “strategic delegation,” and suggests that executive compensation plans play a key role in firms’ strategic positioning.


How should performance be measured and rewarded? It’s a question that has fascinated economists, educators, consultants, and bosses for decades. Within the economics literature, the dominant perspective is that of a moral hazard framework, first formalized by Holmstrom (1979). Employees (“agents”) want to do whatever is in their best interest—shirk their difficult/unpleasant duties and/or extract personal benefits, all the while garnering as much compensation as possible. In contrast, bosses/owners (“principals”) want the agent to engage in productive activity to maximize firm profits/value—something the agent will only do insofar as it boosts their compensation. Viewed from this perspective, the purpose of a performance measurement system is to differentiate between productive and unproductive activity, so that productivity can be rewarded and encouraged. As such, the best compensation plan is that which elicits productive/profitable behavior as efficiently and effectively as possible. This framework has proven very powerful. In addition to being simple and intuitive, the moral hazard framework has demonstrated remarkable ability to explain observed compensation practices, both for rank-and-file employees, and for top-level managers and chief executive officers (“CEOs”). However, this framework does not fully explain the gamut of observed compensation practices.


Supreme Court’s Vacation of Class Certification Order in Decades-Long Class Action

Jason Halper is partner, and Adam K. Magid and Matthew Karlan are special counsel at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Magid, Mr. Karlan, and Nicholas Caros. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here); and Price Impact, Materiality, and Halliburton II by Allen Ferrell and Andrew Roper (discussed on the Forum here).

On June 21, 2021, the United States Supreme Court issued a decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, [1] vacating a decision of the Second Circuit that affirmed certification of a securities fraud class action against The Goldman Sachs Group, Inc. The Court directed the Second Circuit to consider the “generic” nature of Goldman’s alleged misrepresentations in assessing whether Goldman had successfully rebutted the fraud on the market presumption of reliance for purposes of plaintiff’s claim under Section 10(b) of the Securities Exchange Act of 1934, and therefore, whether class certification is appropriate. In an opinion by Justice Amy Coney Barrett, the Court held that courts at class certification must consider “all evidence relevant to price impact,” which is a prerequisite to invoking the fraud-on-the-market presumption afforded to plaintiffs in an efficient market, “regardless whether that evidence overlaps with materiality or any other merits issue.” Because the Second Circuit’s opinion left “sufficient doubt” as to whether it had “properly considered the generic nature of the alleged misrepresentations,” the Court vacated and remanded the case to the lower court. A 6-3 majority of the Court also held that a defendant seeking to rebut the fraud-on-the-market presumption of reliance (also known as the Basic presumption) bears the burden of persuasion to show, by a preponderance of the evidence, that a misrepresentation did not in fact lead to a distortion of the price of a security.


First Independent Report on Proxy Voting Advisory Firm Best Practices

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

All six of the world’s leading proxy voting advisors have met best practice industry standards for service quality, integrity, and communications, according to a first-ever assessment by an impartial international panel composed of investors, company executives, and academics. However, in its debut annual report released July 1, the Independent Oversight Committee (IOC) also called on the six to adopt a battery of improvements in practice and disclosure. Find the annual report at Best Practice Principles (BPP) Oversight Committee | Best Practice Principles for Shareholder Voting Research (

The industry of firms offering shareholder voting analysis and research has drawn rising stakeholder attention to the roles they play in the market, the IOC annual report asserts. Depending on their business model, services provide institutional investors with research, data, and/or advice they can use to make informed voting decisions at listed companies around the world. Since voting today involves how investors manage risk, value, and opportunity more than routine compliance, their ballot choices—and the research inputs they use to reach them—bear more directly than ever before on the future governance and strategic directions, and the electoral fate of board directors, of publicly-traded companies worldwide. With such relevance comes elevated expectations and scrutiny. Certain issuers, and regulators such as the Trump-era SEC and current Australian Treasury, have called on the proxy voting analysis and research industry to step up transparency and accountability. ESMA, the European Securities and Markets Authority, has been especially proactive in encouraging private and public sector solutions.


Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds

Huazhi Chen is Assistant Professor of Finance at the University of Notre Dame’s Mendoza School of Business; Lauren Cohen is the L.E. Simmons Professor in the Finance & Entrepreneurial Management Units at Harvard Business School; and Umit G. Gurun is the Ashbel Smith Professor at the University of Texas at Dallas. This post is based on their recent paper.

Information acquisition is costly for investors—the exact cost of which depending on timing, location, a person’s private information set, etc. To this end, delegated portfolio management is the predominant way in which investors are being exposed to both equity and fixed income assets. With over 16 trillion dollars invested, the US mutual fund market, for instance, is made up of over 5,000 delegated funds and growing. While the SEC has mandated disclosure of many aspects of mutual fund pricing and attributes, different asset classes are better (and worse) served by this current disclosure level. Investors have thus turned to private information intermediaries to help fill these gaps.

In our paper, we show that for one of the largest markets in the world, US fixed income debt securities, this has led to large information gaps that have been filled by strategic-response information provision by funds. The reliance on (and by) the information intermediary has resulted in systematic misreporting by funds. This misreporting has been persistent, widespread, and appears strategic—casting misreporting funds in a significantly more positive position than is actually the case. Moreover, the misreporting has a real impact on investor behavior and mutual fund success.

Specifically, we focus on the fixed income mutual fund market. The entirety of the fixed income market is similarly sized to equites (e.g., 40 trillion dollars compared with 30 trillion dollars in equity assets worldwide). However, bonds are both fundamentally different as an asset cash-flow claim, along with having different attributes in delegated portfolios. While equity funds hold predominantly the same security type (e.g., the common stock of IBM, Tesla, etc.), each of a fixed income funds’ issues differ in yield, duration, covenants, etc.—even across issues of the same underlying firm—making them more bespoke and unique. While the SEC mandates equivalent disclosure of portfolio constituents for equity and bond mutual funds, this data is more complex in both processing and aggregating to fund-level measures for fixed income.


What Companies Need to Know About Modern Ransomware Attacks and How to Respond

Antonia M. Apps and Adam Fee are partners and Matthew Laroche is special counsel at Milbank LLP. This post is based on their Milbank memorandum.

Ransomware is an escalating and evolving cybersecurity threat facing organizations around the world. In 2020, ransomware attacks increased seven-fold by year end, with over 17,000 devices detecting ransomware each day. [1] As an added challenge, ransomware is more sophisticated than ever before with modern variants designed to inflict immense damage and perpetrators demanding higher payouts. In the past few months alone, ransomware has caused catastrophic disruptions to the business activities of, among others, Colonial Pipeline, food processing giant JBS USA Holdings Inc., and Ireland’s national health care system. [2] Successful attacks cost businesses millions of dollars, including disruption to business, personnel cost, device cost, network cost, lost opportunity, reputational harm, and a potential payment of a ransom. [3] Cybercriminals are demanding and making more and more money, with the average ransomware payout per event growing from approximately $115,000 in 2018 to more than $300,000 in 2020; and the highest ransom paid more than doubling from $5 million between 2015 and 2019 to $11 million in 2021. [4] Governments, law enforcement, and regulatory bodies have taken notice, with companies facing pressure to effectively prepare for and respond to ransomware attacks. [5]

Given the current threat environment, it is critical that companies seeking to manage their cybersecurity risks have some understanding of how ransomware has evolved to become one of the most damaging cybersecurity threats today. Companies are facing increased legal, regulatory, and political scrutiny in the wake of these attacks, which in turn requires companies to have appropriate management structures and controls in place, with board oversight, in order to anticipate and address the significant harms that can be caused from a ransomware attack. Below we examine the key features of modern ransomware that companies should be considering, including how ransomware actors are now targeting specific companies, threatening to post their victims’ most sensitive data online, and collaborating with other cybercriminals to increase the sophistication of attacks. After exploring modern ransomware, we then recommend guidelines for companies responding in the immediate aftermath of an attack so that companies are best positioned to contain the incident, resume normal business operations, and appropriately assess legal and regulatory risks.


Say on Pay: Approval Slides as CEO Pay Rises

Samar Feghhi is a Research Analyst at Equilar, Inc. This post is based on her Equilar memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein; 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.

Over the past year, COVID-19 has been the driving force behind shifting trends in corporate governance. With large unemployment rates at the beginning of the pandemic (13.8% in May 2020), a declining stock market and vast uncertainty, it has been a historical time to track whether the world’s most powerful executives would feel similar effects to the rest of the population. At the start, it seemed that they would. Executive compensation took a slight hit with CEO pay cuts and changes to long-term incentive plans, but the overarching question remained unanswered: Were these changes significant enough to align with the world’s hardships, or were companies more focused on retaining their highest-paid employees? With 2021 Say on Pay votes well underway, data surrounding executive compensation approval may provide an answer to this question and display if COVID-19 increased the disconnect between the boardroom and shareholders.

Equilar’s early look at 2021 Say on Pay results highlighted that out of the 43 companies in the Equilar 500 with disclosed votes, around 20% received under 70% approval (considered a failure by proxy advisory firm ISS). As of May 20, 247 Equilar 500 companies held their annual meetings with 8.9% in the under 70% mark and 3.6% receiving under 50%, or a failed vote.


Venture Capital’s “Me Too” Moment

Sophie Calder-Wang is Assistant Professor of Real Estate at The Wharton School of the University of Pennsylvania; Paul A. Gompers is Eugene Holman Professor of Business Administration at Harvard Business School; and Patrick Sweeney is a Research Associate at Harvard Business School. This post is based on their recent paper.

Over the last seventy years, female labor market participation has increased significantly. Women’s representation in highly compensated occupations such as law, medicine, consulting, and investment banking has steadily improved. Yet, the gender diversity in venture capital has lagged significantly behind: On average, only about 8% of venture capital investors hired are women over the past three decades.

In this study, we examine the impact of the gender discrimination lawsuit Pao v. Kleiner Perkins on gender issues in the venture capital industry. We have two main findings: First, we show that the Pao trial causes a significant increase in the hiring of women investors in venture capital from 2015 to 2019. We find significantly stronger effects in states with greater awareness of the trial, as measured by Google search trends. Second, we find that the increased hiring of women investors in venture capital is an important driver leading to more funding allocated to companies started by women founders.

Ellen Pao, a junior venture capital partner, filed a discrimination lawsuit in 2012 against Kleiner Perkins Caufield & Bayers, one of the oldest venture capital firms in the Silicon Valley. It went to trial in February 2015, and a jury in San Francisco rejected her gender discrimination claim on March 27, 2015. The Pao trial was closely followed by many major media outlets such as the New York Times, the Wall Street Journal, Financial Times, and Forbes. It also drew significant attention from many US-based venture capital firms.


Delaware Supreme Court Provides Guidance Regarding D&O Liability Insurance Coverage

Nicole A. DiSalvo and Daniel S. Atlas are associates at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court has issued two decisions over the past year that provide important guidance about directors’ and officers’ (D&O) liability insurance coverage. In RSUI Indemnity Company v. Murdock, the Supreme Court affirmed decisions holding that losses due to the fraudulent actions of an officer or director of a Delaware corporation are insurable under Delaware law. As part of its analysis, the Supreme Court conducted and affirmed a choice-of-law analysis to determine that Delaware law applied even though the D&O policy was negotiated and issued in another state. In In re Solera Insurance Coverage Appeals, the Supreme Court reversed a lower court ruling, holding instead that an appraisal action was not a “Securities Claim”—and therefore, not a covered claim—under the at-issue D&O policy.

RSUI Indemnity Company

In November 2013, David Murdock—Dole Food Company, Inc.’s CEO, director and 40% stockholder at the time—engaged in a going-private transaction, resulting in class action litigation and an appraisal action in the Court of Chancery in which former Dole stockholders challenged the fairness of the transaction and alleged breaches of fiduciary duty by Mr. Murdock and Dole’s president, COO and general counsel, Michael Carter. The court held in its post-trial opinion that Mr. Murdock and Mr. Carter breached their fiduciary duty of loyalty and “engaged in fraud” by, among other things, intentionally depressing Dole’s premerger stock price. [1]


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