Monthly Archives: August 2021

2021 Proxy Season Review: Shareholder Proposals on Environmental Matters

Posted by Marc Treviño, June M. Hu, and Joshua L. Levin, Sullivan & Cromwell LLP, on
Wednesday, August 11, 2021
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Marc Treviño is partner and June M. Hu and Joshua L. Levin are associates at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Treviño, Ms. Hu, Mr. Levin, Melissa Sawyer, and Elizabeth D. Lombard. 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 Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Shareholder proposals submitted on environmental matters and, in particular, climate-related proposals have increased for the second consecutive year, exceeding even the number of proposals submitted in 2018 following former President Trump’s withdrawal from the Paris Agreement in 2017 (115 in 2021 compared to 110 in 2018). The substantial majority (85) of these proposals were climate-related.

1. Increased Withdrawal Rate

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Early SEC Enforcement Trends from Chairman Gensler’s First 100 Days

Posted by Randall R. Lee, Julianne Landsvik, and Michael Welsh, Cooley LLP, on
Wednesday, August 11, 2021
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Randall R. Lee is partner, and Julianne Landsvik and Michael Welsh are associates at Cooley LLP. This post is based on a Cooley memorandum by Mr. Lee, Ms. Landsvik, Mr. Welsh, Patrick Gibbs, Luke Cadigan, and Walker Newell.

Gary Gensler was sworn in as chair of the Securities and Exchange Commission on April 17, 2021. Chairman Gensler has promised to strengthen transparency and accountability in the financial markets. Under Chairman Gensler, we expect the SEC’s Division of Enforcement—led by Gurbir Grewal, who began work at the agency on July 26—to be better resourced, highly active and more aggressive. In this post, we review enforcement activity from the first 100 days of Chairman Gensler’s term to identify preliminary indications of trends we can expect as the new regime’s enforcement initiatives gain steam.

Enforcement scrutiny of SPACs

Over the past year, US securities markets have experienced an exponential rise in the use of special purpose acquisition companies (SPACs) as an alternative to traditional initial public offerings and direct listings. SEC staff members have published a stream of investor alerts, bulletins and other warnings, which are summarized here, about potential disclosure issues surrounding SPACs. Although the number of SPAC registrants has recently slowed, Chairman Gensler and SEC staff have continued to voice concerns about the SPAC boom.

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The SEC’s Cyber Priorities and Four Ways for Companies to Reduce Regulatory Risk

Posted by Avi Gesser, Johanna Skrzypczyk, and Suchita Mandavilli Brundage, Debevoise & Plimpton LLP, on
Wednesday, August 11, 2021
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Avi Gesser is partner, Johanna Skrzypczyk is counsel, and Suchita Mandavilli Brundage is an associate at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Gesser, Ms. Skrzypczyk, Ms. Brundage, and Katie McCarty.

Earlier this year, we wrote about the SEC’s cybersecurity priorities. Since then, the SEC announced a settlement with First American Title Insurance and Services (“First American”) for violating Rule 13a-15(a) of the Exchange Act, and issued a voluntary request for information to a number of companies in connection with the SolarWinds cyber attack (“Voluntary Request”). In this post, we discuss these developments and provide an update on ways that companies can reduce their cybersecurity regulatory risk.

The First American Settlement

According to the SEC’s order, First American’s security personnel identified a security vulnerability exposing over 800 million document images during a penetration test in January 2019. Some of those exposed documents contained sensitive personal data such as customer Social Security numbers and financial information dating back to 2003. The vulnerability was not remediated or reported to information security managers according to First American’s policies. In May 2019, a cybersecurity journalist notified First American of the same vulnerability and First American issued a press statement and submitted an 8-K. According to the order, First American senior executives responsible for these public statements were not made aware that the company’s IT personnel had previously identified this vulnerability and failed to fix it, and therefore “lacked certain information to fully evaluate the company’s cybersecurity responsiveness and the magnitude of the risk” posed by the vulnerability at the time of the company’s disclosures.

The SEC accordingly found that First American failed to maintain disclosure controls and procedures designed to ensure that all available relevant information concerning the vulnerability was analyzed for disclosure in the company’s SEC filings. As part of this settlement, First American agreed to a cease-and-desist order and to pay a $487,616 penalty.

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Public Company Guide—Planning for Shareholder Engagement

Posted by David A. Bell, Ron C. Llewellyn and Katherine K. Duncan, Fenwick & West LLP, on
Tuesday, August 10, 2021
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David A. Bell is partner, Ron C. Llewellyn is counsel, and Katherine K. Duncan is partner at Fenwick & West LLP. This post is based on a Fenwick memorandum by Mr. Bell, Mr. Llewellyn, Ms. Duncan, and Ran Ben-Tzur.

Today, shareholders are increasingly demanding corporate accountability on a variety of issues, ranging from compensation and human capital management to governance and board diversity, among others. As a result, most companies will need to consider the most effective ways to engage with their key shareholders. Shareholder engagement can come in a variety of forms, including proxy statement disclosure, investor relations (IR) activities, earnings calls and road shows.

This guide focuses on direct engagement between a company and institutional shareholders outside of a contested election. Whether a company needs to engage with its key shareholders to address a specific governance or executive compensation issue or as part of an annual or ongoing program to foster good relations, it should consider certain factors such as purpose, timing, participants and legal requirements which are discussed below.

Why Should a Company Engage?

Generating Goodwill

A company may have different motivations for shareholder engagement, but chief among them should be the desire to foster a good relationship with its key investors. For many companies, those include large institutional investors, including index funds, which are long-term investors that are required to own the company’s stock. Ongoing dialogue with shareholders can help companies understand the factors driving their voting decisions while also giving shareholders a better understanding of the company’s approach towards issues such as corporate governance, executive compensation and sustainability.

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Are Enhanced Index Funds Enhanced?

Posted by Edwin J. Elton (NYU), Martin J. Gruber (NYU), and Andre B. de Souza (St. John's University), on
Tuesday, August 10, 2021
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Edwin J. Elton is Professor Emeritus of Finance and scholar in residence at NYU Stern School of Business; Martin J. Gruber is Professor Emeritus of Finance and scholar in residence at NYU Stern School of Business; and Andre B. de Souza is Assistant Professor of Economics and Finance at St. John’s University Peter J. Tobin College of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here); and Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

One of the major trends in the mutual fund industry is the rising importance of passive investing. At the end of 2020, according to the Investment Company Institute, passive exchange traded funds and index funds each accounted for 40% of the assets held by all funds holding long-term asset The growth in passive investing has come about because of the evidence that the return to investors from active funds on average underperform those from passive funds and a belief that selecting the active funds that outperform passive funds is challenging for the average investor.

One of the responses of the investment community to this challenge has been the creation of enhanced return index funds. The popularity of this type of fund can be seen by the fact that in December 2020, enhanced index funds had $1.11 trillion under management. Perhaps of more significance is that during the previous ten years, assets under management of enhanced index funds grew at an average yearly rate of 12% per year, while mutual funds grew at an average annual rate of 8% per year. Do enhanced index funds offer investors a better performing index fund or are they simply a marketing gimmick for investment companies to lure investors into funds with higher fees?

What is an enhanced index fund? An enhanced index fund attempts to outperform a specific index while holding differences in risk over time close to that of the index. These funds typically use security analysis to overweight a small number of stocks in the index, hold a small proportion of the portfolio in assets not in the index, or add some futures or options to the security holdings. Enhanced index funds differ from the typical mutual fund in that they place constraints on the weights of the securities they hold or on the risk (relative to the index) of their overall portfolio.

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Companies are Trust Leaders. Here’s What That Means for Boards

Posted by Paul DeNicola, PricewaterhouseCoopers LLP, on
Tuesday, August 10, 2021
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Paul DeNicola is a Principal in the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on his PwC memorandum.

Confidence in the institutions that form the bedrock of society is perilously low. Surveys show that many people have lost faith in government, the media, and the police, among other institutions. Meanwhile, corporations have emerged as leaders. They’re now the most trusted institution in the US according to the Edelman Trust Barometer. Maintaining this trust, and seizing the opportunities it presents, should be a priority for every company.

Of course, there will be challenges as well. Corporate strategy needs to account for this “crisis of institutional legitimacy,” as described by Blair Sheppard, PwC’s Global Leader for Strategy & Leadership, in his book Ten Years to Midnight. It’s one of the most important macro trends facing companies—and the world. As we continue our exploration of the board’s role in setting and overseeing strategy, let’s take a closer look at what directors need to know.

Shifting perceptions

The institutions that were founded to help society function were once seen as “the good guys.” They are essential to creating social stability and for a long time were trusted to provide benefits to society fairly, efficiently, and consistently. Increasingly, that’s no longer the case. Calls for change have become more common and change is needed to keep institutions relevant. However, it is institutions’ inherent slowness to adapt that gives them their stability—and the stability they provide to society—that is at odds with the need to become more agile to better meet the current needs of society. This is the central paradox facing institutions today, and around which companies must operate.

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Considering a Culturally Congruent EESG and DEI Component in Incentive Plans

Posted by John D. England, Pay Governance LLP, on
Monday, August 9, 2021
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John D. England is Managing Partner at Pay Governance LLP. This post is based on his Pay Governance memorandum. 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).

During a recent compensation committee meeting, the CEO expressed some level of frustration with the public discourse on including EESG (Employee, Environment, Social, and Governance) goals—specifically, DEI (Diversity, Equity, and Inclusion)—into executive incentive plans. “Our culture is all about equity, diversity, and inclusion,” she exclaimed. “Why should we be bonusing our culture?”

The impetus for the CEO’s cultural pushback was a compensation committee member’s suggestion that next year’s annual incentive plan include a 10-15% weighted factor with threshold, target, and maximum goals tied to the number of underrepresented employees in management and executive groupings by year end. The compensation committee member had heard that “everyone” was adding an EESG or DEI bonus factor to their incentive plans, so their company needed to do so, too.

Now, it wasn’t that the company hadn’t tracked diversity progress: it had for the past five years. It wasn’t that the succession planning process hadn’t been geared towards providing women and employees of color opportunities for mentorship and new development assignments: it had been doing so for a decade and was proud of their track record in developing and promoting diverse talent at all levels of the organization. And it wasn’t for wont of public recognition about the company being an employer of choice: a number of “Top 50…” and “100 Best…” lists named the company. All of this was accomplished, the CEO reminded the compensation committee, without taking away any of the focus on delivering financial results in the annual incentive plan because EESG and DEI was, and is, so much a part of the company’s culture.

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Labor in the Age of Finance

Posted by Sanford M. Jacoby (UCLA), on
Monday, August 9, 2021
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Sanford M. Jacoby is Distinguished Research Professor of Management, History, and Public Affairs at UCLA Anderson School of Management. This post is based on his recently published book.

My new book, Labor in the Age of Finance: Pensions, Politics, and Corporations from Deindustrialization to Dodd-Frank (Princeton University Press, 2021), is an economic history of organized labor’s engagement with shareholder activism, corporate governance, and financial regulation in the 1990s and 2000s. An epilogue carries the narrative to the present.

The proximate cause of labor’s financial turn in the U.S. was the waning of its numbers and clout in the private sector. Traditional methods for adding new members were failing in the face of a more aggressive anti-union stance by employers. Seeking countervailing power, unions developed new organizing approaches, a part of which included shareholder activism and other finance-based tactics. With the assets in their reserve funds and multiemployer pension plans, and with support from other institutional investors, labor harnessed capital to restore its strength. Outside the shareholder realm, unions added financial regulation to their political agenda. Not since the early 1900s, the previous era of financialization, had labor given so much attention to finance writ large.

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SPAC-Related Litigation Risks and Mitigation Strategies

Posted by Robert Malionek and Ryan Maierson, Latham & Watkins LLP, and Beth Junell, FTI Consulting, on
Monday, August 9, 2021
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Robert Malionek and Ryan Maierson are partners at Latham & Watkins LLP, and Beth Junell is Senior Managing Director at FTI Consulting. This post is based on a Latham/FTI memorandum by Mr. Malionek, Mr. Maierson, Ms. Junell, Colleen Smith, Todd Rahn, and Greg Wong.

Special Purpose Acquisition Companies (SPACs) have been gaining traction during the past 18 months, although more recently they have come under the spotlight for more negative reasons. Following high-profile litigation associated with certain de-SPAC deals and statements from the Securities and Exchange Commission (SEC), many investors are now starting to question SPACs as an investment vehicle of choice.

At a recent event hosted by Latham & Watkins and FTI Consulting, panelists took a deep dive into the potential litigation risks associated with SPACs, and explored the mitigation measures investors and target companies should consider before pursuing a SPAC or de-SPAC deal.

This post offers five key takeaways from the panelists’ discussion:

1. Beware SPAC Litigation is On the Rise

There has been a surge in SPAC litigation since 2020. According to recent data, the number of SPAC class actions has doubled from seven filings throughout 2020, to 14 filings from January 2021 through May 2021 [1]— and the trend continues.

The risks vary throughout the stages of the SPAC lifecycle, with common litigation scrutiny focused around breach of fiduciary duty, claims of material misstatements or omissions in proxy statements, and disclosure shortcomings, particularly in de-SPAC transactions.

There is also increased regulatory scrutiny, with the SEC averaging approximately 480 enforcement actions per year during the past five years.

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The Missing Element of Private Equity

Posted by Ariel Babcock and Victoria Tellez, FCLTGlobal, on
Sunday, August 8, 2021
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Ariel Babcock is Head of Research and Victoria Tellez is Senior Research Associate at FCLTGlobal. This post is based on their FCLTGlobal memorandum.

How Private Equity Can Drive Boardroom Diversity

Corporate boards are vital in helping companies maintain a longer-term focus while executing on shorter-term priorities. And a board’s unique stature, sitting atop the organization, allows it to shape corporate culture while guiding long-term strategy through a mix of encouragement, skepticism, and guidance. This role is consistent regardless of the ownership structure of the company—be it publicly held or privately controlled.

In 2018 FCLTGlobal embarked on in-depth research to identify the long-term habits of highly effective corporate boards. [1] We found four characteristics consistent across successful public companies:

  • they spend more time on strategy;
  • they ensure that directors have a stake in the long-term success of the company, often by encouraging board members to hold company stock through and beyond their tenure;
  • they communicate directly with long-term shareholders; and
  • they have a diverse board to bring differing perspectives and backgrounds for the benefit of the company.

Portfolio companies controlled by private equity firms have a unique structure. Their boards typically include representatives of the controlling private equity firm or firms; management of the company; outside/ independent directors (who may not be independent under the public company definition); and sometimes representatives of the limited partners, with either voting or observer status.

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