Monthly Archives: September 2021

Statement by Chair Gensler on Proposal to Enhance Reporting of Proxy and Executive Compensation Votes

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on September 29, 2021. I want to welcome members of the public who are listening in.

This is my first open meeting as Chair of this remarkable agency. While there will be times when we vote on rulemakings via seriatim, I like open Commission meetings. I think open meetings can bring greater transparency to our work, and the public benefits when we can open up our deliberations to them. I hope it will be the first of many during my tenure.

Today [Sept. 29, 2021], the Commission will consider a staff recommendation to propose amendments to Form N-PX to enhance the information that investment companies report about their proxy votes. The proposal also would require certain institutional investment managers to report how they vote proxies relating to certain executive compensation matters. These votes have come to be known as “say on pay.”


Statement by Commissioner Peirce on Proposal to Enhance Reporting of Proxy and Executive Compensation Votes

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I want to offer my thanks to the staff of the Divisions of Investment Management and Economic and Risk Analysis and the Office of the General Counsel. I enjoyed our discussion about the proposal before us today and your thoughtful consideration of my comments. I know how much work goes into a proposal like this one, which makes it all the more difficult that I cannot support it.

One aspect of the proposal being considered today involves a statutorily mandated disclosure on “say-on-pay” votes. In a nutshell, Section 14A(d) of the Exchange Act, which the Dodd-Frank Act amended, requires every manager to report at least annually how it voted on say-on-pay matters. Regardless of whether I agree with section 951 of Dodd-Frank, it is the law, and the Commission is right in wanting to implement it.

If I had had my preference, the say-on-pay proposal would be up for Commission consideration as a standalone rulemaking. Instead, it has been joined with a wholly discretionary proposal involving a number of alterations to Form N-PX.


Statement by Commissioner Roisman on Proposal to Enhance Reporting of Proxy and Executive Compensation Votes

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent public statement. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Chair Gensler, and thank you to the staff in the Division of Investment Management (the “Division”) for your hard work on the recommendation we are considering today, to propose amendments to disclosures that asset managers make with regard to their proxy voting. [1] As no recommendation gets to the Commission without scrutiny from our Division of Economic and Risk Analysis and Office of General Counsel, I would like to thank the staff in these groups for their work as well. Finally, thank you to everyone who engaged with my team and me on the matters we are considering today.

Before us is a proposal to amend our rules in two ways. First, the proposed amendments would effectuate a requirement under Section 951 of the Dodd-Frank Act that we expand reporting of say-on-pay votes. I have no objection to these proposed changes. I have before expressed my strong belief that when Congress requires this agency to act, we must act. [2] This part of the proposal is a reasonable means of following Congress’s instructions. As any proposal, I am sure this one will benefit from being published for notice and comment, and I look forward to hearing how commenters believe we can improve it.


The Vanguard 2021 Semiannual Report

John Galloway is global head of investment stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship.

Regional roundup

Topics and trends that shaped the global governance landscape in the first half of 2021

Good governance has never been more important. Boards of directors and company leaders continued to face challenges in the first half of the year. The pandemic disrupted operations and global supply chains and forced companies to make strategic decisions about capital allocation and executive compensation. Social issues remained in the spotlight as we saw an increase in shareholder proposals on a range of diversity, equity, and inclusion topics. Climate change proposals increased in volume, driven by Say on Climate proposals requesting that investors provide feedback on companies’ transition plans. We also engaged with company leaders on corporate political activity, human rights, and other important governance matters.

Vanguard’s Investment Stewardship team engaged with 734 companies in 29 countries and voted on 137,826 proposals at 10,796 companies in the six months ended June 30, 2021. Those engagements were made on behalf of investments that represented nearly $1.9 trillion in equity assets under management.


The Deterrent Effect of Insider Trading Enforcement Actions

Robert H. Davidson is Associate Professor of Accounting and Information Systems at Virginia Polytechnic Institute and State University, and Christo A. Pirinsky is Associate Professor of Finance at the University of Central Florida College of Business. This post is based on their recent paper, forthcoming in the Accounting Review. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

This study examines whether exposure to an insider trading enforcement action deters corporate insiders’ future opportunistic trading. A priori, the answer is not clear. While it is illegal for insiders to trade based on material private information, this can be difficult to establish in court. Further, many insiders continue to earn large profits from their trades, which raises questions about the effectiveness of existing regulations.

To address this question, we examine whether the enforcement of insider trading laws for illegal trades in the stock of one firm affects affiliated corporate insiders’ trading behavior in other firms unaffected by the enforcement. We then compare the trades of these ‘exposed’ insiders to the trades of their peers in these non-enforcement firms to assess whether insiders trade differently following exposure to an enforcement event. The evaluation of insider trading away from the enforcement firm alleviates concerns that our results are attributable to omitted factors related to the enforcement event or firm.

We find that the profitability of insiders’ trades decreases significantly following exposure to an enforcement event. The effect is significant when insiders buy or sell equity and is economically meaningful. For example, we estimate that after the enforcement event, treated insiders earn 7.9% lower abnormal returns over the 180 days from purchases than do control insiders in the same firm. Exposure to enforcement is also associated with smaller trade size. Our results suggest that insiders strategically assess the costs and benefits of their trades. Next, we examine whether exposure to enforcement is associated with future illegal insider trading. We find that the future conviction rate of exposed insiders is substantially lower than the conviction rate of unexposed insiders, suggesting that enforcement may deter illegal insider trading. Of the 4,544 insiders present at firms at the time of an enforcement event, only one is convicted of illegal trading in the future.


Proxy Season Climate-Related Voting Trends Report

Chris Miller is Vice President and Jelmer Laks is an Associate with ISS Governance Research, Institutional Shareholder Services, Inc. This post is based on their ISS 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); 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 current geological age, viewed as the period during which human activity has been the dominant influence on climate and the environment.”

Key Takeaways

  • The 2021 U.S. proxy voting season marked an escalation of shareholder engagement on climate-related issues as well as an expansion of tactics.
  • Many investors are moving beyond requests for disclosure to voting against directors for
    perceived failures of climate risk mitigation
  • The 2021 season saw the advent of the Say-On-Climate proposal, an attempt to secure a
    dedicated ballot item that would enable investors to express views on a company’s management of climate-related risks on a recurring basis.
  • The number of climate-related shareholder proposals as well as levels of support have grown over the past 3 years.
  • The recent IPCC AR6 Synthesis report and 2021 US Proxy Season trends outlined in this report demonstrate that the days of regarding climate disclosure and risk as “non-financial” niche issues targeted by a relatively small number of activists and NGOs are over.


Remarks by Chair Gensler Before the Small Business Capital Formation Advisory Committee

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his remarks before the Small Business Capital Formation Advisory Committee. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you, Carla [Garrett]. It’s good to be with this Committee again. I’d like to thank the members for their time and willingness to represent the interests of America’s small businesses. As is customary, I’d like to note I’m not speaking on behalf of the Commission or the SEC staff.

I look forward to your readouts from today’s discussion on late-stage, private rounds of financing, as well as the pathways to our public markets.

Last time we gathered, I spoke about my father, Sam Gensler, a small business owner who never had more than a few dozen employees. He didn’t tap the capital markets like many small business owners today.

As a society, the U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world. Our companies, including small businesses, rely on our capital markets more than companies in other countries do.

Consider this: The U.S. capital markets represent 38 percent of the globe’s capital markets. [1] This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share. [2]

Furthermore, corporate bonds, a $10 trillion market, [3] is about the same size of commercial bank lending in this country. [4]


Remarks by Commissioner Peirce Before the Small Business Capital Formation Advisory Committee

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the SEC Small Business Capital Formation Advisory Committee Meeting. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Carla [Garrett] and thank you to the Committee members and today’s panelists. Welcome to Andrea [Seidt] to the Committee. I am particularly happy to have a fellow Ohioan involved. Thanks to Mike [Pieciak] for serving on the Committee. I am looking forward to today’s discussions on small business capital formation trends at this stage in the pandemic, and the changing dynamics of pre-IPO financing and going public. Two trends to be featured today—SPACs and the significant increase of institutional investor participation in late stage private capital raising rounds—demonstrate the hunger for growth opportunities in our markets. Making it possible for retail investors to get access to some of this early growth remains an important matter for the Commission’s consideration.

The desire to expand private investment opportunities to more individuals was on full display at our May 2021 Small Business Forum. The Forum’s Report, [1] which was released this morning, includes valuable policy recommendations by the participants, many of which have been discussed by this Committee. The Report includes some frustratingly non-committal responses by the Commission. History teaches us that the Commission’s non-committal responses with regard to Forum recommendations could translate into no action at all. Now is not the time for a full response to all of the Forum’s recommendations, but I will address a few of them and urge this Committee to continue pushing the Commission to show more of a commitment to facilitating small business capital formation.


Delaware Supreme Court Announces New Demand Futility Test

William SavittRyan A. McLeod, and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

In what promises to be a landmark decision, the Delaware Supreme Court last week reframed the rules governing derivative litigation. United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021).

A Facebook stockholder sued current and former directors to recover costs the company had incurred in connection with a proposed stock reclassification. The Court of Chancery dismissed the suit, finding that the plaintiff had failed to establish that at least half of the current directors were incapable of independently evaluating whether to pursue the suit.

The Delaware Supreme Court affirmed. Writing for the unanimous Court, Justice Montgomery-Reeves adopted a new test to determine when a stockholder will be permitted to press corporate claims over the board’s opposition. The Court emphasized that “the demand-futility analysis provides an important doctrinal check that ensures the board is not improperly deprived of its decision-making authority.” The essential inquiry is thus whether “there is reason to doubt that the directors would be able to bring their impartial business judgment to bear on a litigation demand” by a stockholder. When a corporation’s charter exculpates directors from liability for breach of care claims, such claims “no longer pose a threat that neutralizes director discretion.” Accordingly, the Court held that directors are not disabled from impartially considering a demand simply because the proposed complaint alleges that they breached their duty of care.


The Upcoming Bebchuk-Edmans Debate on “The Promise of Stakeholder Capitalism: Real or Illusory?”

The London Business School Centre for Corporate Governance and the Financial Times will host next week a virtual debate on stakeholder capitalism between Professors  Lucian Bebchuk and Alex Edmans. The debate will be moderated by Gillian Tett of the Financial Times.

Titled “The Promise of Stakeholder Capitalism: Real or Illusory?,” the virtual debate will be held on Tuesday, October 5 2021 at 12:00-13:20 EST. Readers are welcome to watch the debate and  can register to the Zoom session here.

Bebchuk will present the view that, due to the structural incentives of corporate leaders, the promise of stakeholder capitalism is largely illusory and external regulations would thus be necessary to address stakeholder concerns. By contrast, Edmans will argue that if and when stakeholder capitalism is done the right way, it can deliver substantial benefits for shareholders and society.

After they make their initial presentations, Bebchuk and Edmans will subsequently challenge each other on their positions. Gillian Tett will then moderate the Q&A with questions of her own as well as fielding questions from the audience.

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. His recent co-authored articles on stakeholder capitalism include “Will Corporations Deliver Value to All Stakeholders?” and “The Illusory Promise of Corporate Governance” (with Roberto Tallarita) as well as “For Whom Corporate Leaders Bargain” (with Kobi Kastiel and Roberto Tallarita).

Alex Edmans is Professor of Finance, and Academic Director of Centre for Corporate Governance, at London Business School. He is also the author of the book “Grow the Pie: How Great Companies Deliver Both Purpose and Profit.”

Ms. Gillian Tett is Chair of the Editorial Board and Editor-at-Large (US) of the Financial Times, and Co-Founder of Moral Money, which focuses on the world of socially responsible business, sustainable finance, impact investing and ESG trends.

For registration to the Zoom event, please visit here.

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