Monthly Archives: November 2021

SEC Reopens Comment Period for Dodd-Frank Clawback Rule

Posted by Ning Chiu, Joseph A. Hall and Kyoko Takahashi Lin, Davis Polk & Wardwell LLP, on
Wednesday, November 3, 2021
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Ning Chiu, Joseph A. Hall and Kyoko Takahashi Lin are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback by Jesse Fried (discussed on the Forum here).

On October 14, 2021, the Securities and Exchange Commission announced that it is reopening the comment period for its proposed clawback rule, which has languished ever since Congress directed the SEC to adopt it in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Act directed the SEC to require stock exchanges to obligate each listed company to implement a compensation recovery policy, or “clawback” policy, that provides for the company to recoup incentive-based compensation paid to executive officers.

The SEC’s original rule, [1] proposed in 2015, included the following key elements:

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Lucian Bebchuk and the Study of Corporate Governance

Posted by Kobi Kastiel (Tel Aviv University), on
Tuesday, November 2, 2021
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Kobi Kastiel is Associate Professor of Law at Tel Aviv University. This post is based on his recent paper, which was solicited for and will appear in an upcoming issue on the most cited legal scholars that the University of Chicago Law Review will publish later this fall.

I recently placed on SSRN a new paper, titled Lucian Bebchuk and the Study of Corporate Governance. The paper was solicited for, and will appear in, an upcoming issue on the most-cited legal scholars that the University of Chicago Law Review will publish later this year.

The Essay discusses Lucian Bebchuk’s fundamental contributions to the field of corporate governance, as well as his major impact on scholarship, practice, and policy. Bebchuk is the author of more than one hundred articles, and is ranked by SSRN as the most-cited law professor in the corporate field (as well as one of the most-cited law professors in all fields). However, this ranking only tells part of the story; the Essay seeks to provide a fuller picture.

The first part of the Essay focuses on Bebchuk’s research contributions. I begin by surveying the broad range of corporate governance areas to which Bebchuk has made major contributions. By now Bebchuk’s contributions cover nearly every important area in this field, including: (i) management accountability and shareholder rights; (ii) the costs of management insulation; (iii) executive compensation; (iv) short-termism; (v) investor oversight, stewardship, and activism; (vi) controlling shareholders; (vii) dual-class structures and corporate pyramids; (viii) corporate acquisitions; (ix) corporate insolvencies; (x) jurisdictional competition; (xi) contractual freedom and private ordering; (xii) corporate political spending; and (xiii) stakeholder capitalism.

The first part of the Essay also identifies the aspects of Bebchuk’s research that have made it so consequential. In particular, I discuss Bebchuk’s methodological tools and modes of analysis and some of the overarching themes and approaches that are shared by his work in disparate areas.

The second part of the Essay focuses on Bebchuk’s impact. I first explain how Bebchuk’s work has shaped subsequent research; in particular, I discuss the many significant works by prominent scholars (such as Stephen Bainbridge, Frank Easterbrook and Dan Fischel, Jonathan Macey, Colin Mayer, and Lynn Stout) and prominent practitioners (such as Martin Lipton, Barbara Novick and Leo Strine) that have been written to engage with Bebchuk’s research in various areas. I also discuss how Bebchuk’s work has influenced research in economics and finance, as well as judicial decisions and practitioner discourse.

I then discuss how Bebchuk has had an unparalleled impact through his mentoring of many significant scholars. A key model that Bebchuk has widely used is to provide many of his mentees the opportunity to coauthor articles with him in the early stage of their academic careers. In addition to myself, fourteen other professors who have benefited from this unique experience include Oren Bar-Gill, Michal Barzuza, Howard Chang, Allen Ferrell, Jesse Fried, Andrew Guzman, Assaf Hamdani, Scott Hirst, Robert Jackson, Christine Jolls, Marcel Kahan, Holger Spamann, Charles Wang, and David Walker.

Finally, the Essay also discusses how Bebchuk’s scholarship and ideas have contributed to the development and adoption of practices and policies in the corporate governance area. For example, Bebchuk’s scholarly work on shareholder rights and the costs of management insulation has contributed to the widespread opposition among institutional investors to—and the resulting removal by many companies of—staggered boards, antitakeover provisions, and other entrenching arrangements. In addition, his influential research on executive compensation has contributed to the expansion of disclosure requirements for executive compensation, as well as to the increasing support for tightening the link between executive pay and long-term results.

Similarly, his research on the perils of dual-class share structures contributed to the initiatives of the Council of Institutional Investors and index providers to limit the use of such structures. And, Bebchuk’s research on hedge fund activism has contributed to the growing recognition of the benefits of such activism by institutional investors and policymakers.

The Essay is available for download here.

The State of U.S. Sustainability Reporting

Posted by Matt Filosa, Faten Alqaseer, and Morgan McGovern, Teneo, on
Tuesday, November 2, 2021
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Matt Filosa is Senior Managing Director, Faten Alqaseer is Managing Director & Co-Head of Diversity, Equity & Inclusion, and Morgan McGovern is Vice President at Teneo. This post is based on a Teneo memorandum by Mr. Filosa, Ms. Alqaseer, Ms. McGovern, Martha Carter, and Jeff Sindone. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; 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).

Executive Summary

The significant events of 2020 have caused companies, institutional investors and regulators to re-energize their efforts towards sustainability initiatives. Institutional investors have dramatically enhanced their focus on issues relating to climate, diversity, human capital management and board governance (collectively, “ESG”).

Under the Biden Administration, U.S. regulators are on the verge of mandating greater transparency from all companies on their sustainability initiatives. While many companies have a long history of focusing on sustainability issues, communicating those initiatives to stakeholders is a relatively new endeavor. And stakeholders are evolving their demands for company sustainability disclosure faster than ever before, especially on critical issues like climate change and diversity. There has never been a more important time to ensure that company sustainability disclosure is robust, clear and credible—while also keeping pace with the rapidly evolving demands of stakeholders.

Yet, unlike proxy statements and other company documents, there is no clear disclosure framework for company sustainability reports. And despite ongoing initiatives from the U.S. Securities & Exchange Commission and the International Financial Reporting Standards Foundation, a uniform global sustainability reporting framework seems unlikely to emerge in the near-term. So how are companies evolving their sustainability reporting to meet the increased demands from stakeholders? What should the title be? And how many pages should it include? In short, what does a “good” sustainability report look like?

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ISS’ Annual Policy Survey Results

Posted by Shaun Bisman and Han Wen Zhang, Compensation Advisory Partners, on
Tuesday, November 2, 2021
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Shaun Bisman is a Principal and Han Wen Zhang is an Analyst at Compensation Advisory Partners LLC. This post is based on their CAP memorandum.

Institutional Shareholder Services (ISS) released on October 1st the results of its annual Global Benchmark Policy survey and its new climate survey. The surveys are part of ISS’ annual policy development process. ISS will release the final policy updates by the end of the year, to be adopted for shareholder meetings during the 2022 proxy season. This post examines key findings from the 2021 Global Benchmark Policy Survey that foreshadow shareholder expectations in 2022. Overall, the survey results align with recent trends of increased shareholder interest in environmental, social, and governance (ESG) issues.

Overview of the Survey

The global benchmark policy survey covers a wide array of issues including executive compensation, board meeting practices, and governance provisions. The survey received 409 responses, of which 39% were from investors and investor-affiliated organizations, 60% from companies or corporate-affiliated organizations (“non-investors”), and the remaining 1% from non-profit and academic organizations.

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Speech by Commissioner Peirce on the Future of the SPAC Market

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Monday, November 1, 2021
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the Fordham Journal of Corporate and Financial Law Conference. 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, AJ [Harris]. It is a pleasure to be part of the Fordham Journal of Corporate and Financial Law conference. I have to start with the standard disclaimer. My views are my own and not necessarily those of the Securities and Exchange Commission or my fellow Commissioners.

A family I know recently acquired a flock of mail-order chickens to produce free-range eggs. A baker’s dozen—thirteen little chicks—have now grown up into twelve egg-producing hens. The thirteenth is still holding out for an egg-stra egg-laying incentive, I guess. Each of these hens has her own look and personality. My favorite is the chicken who desperately wants to move out of the hen house, which is actually quite a functional dwelling, and into her featherless family’s house. This would-be inside chicken, in an effort to ingratiate herself with her “peeps,” runs up to greet any family member who comes out of the house. She also has a habit of walking up onto the deck and looking longingly through the sliding glass doors when the family is sitting inside at the dining room table. If I were part of the family, I certainly would have caved by now to the hopeful bird pleading with me from the outside, but the family has not been moved by her fowl pleas.

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Speech by Commissioner Roisman on Cybersecurity

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on
Monday, November 1, 2021
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Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent remarks before the Los Angeles County Bar Association. 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.

Good afternoon. Thank you for the kind introduction and the opportunity to speak to the Los Angeles County Bar Association today. Before I begin, let me issue the standard disclaimer that the views I share are my own and do not represent those of the Securities and Exchange Commission (the “SEC”) or my fellow Commissioners.

Today I would like to speak with you about cybersecurity, a topic that is becoming increasingly important for companies and regulators as more of our registrants’ operations have moved online. The threats, strategies, and motives of cybercriminals can take many forms. To name just a few, they may be: simple account intrusions that seek to steal assets from an investor’s or customer’s accounts; ransomware attacks that seek to disable business operations in order to extract payments; and even acts of “hacktivism” that disrupt services to make a political point. Cyber events can often be hard to detect, hard to measure quickly, and can involve reporting obligations to multiple government agencies and stakeholders.

The reasons I want to talk about this today are manifold, including to emphasize the challenging position SEC registrants, in particular, face when dealing with cyber threats. I also want to stress that the SEC is only one part of the cyber regulatory landscape, but we have some specific requirements and guidance in place about areas on which to focus. Finally, I will note that I believe there is more that the Commission should contemplate in terms of cyber guidance and/or rules to ensure that companies understand our expectations and investors get the benefit of increased disclosure and protections by companies.

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Common Ownership, Executive Compensation, and Product Market Competition

Posted by Matthew Bloomfield (The Wharton School), Henry L. Friedman (UCLA), and Hwa Young Kim (UCLA), on
Monday, November 1, 2021
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Matthew J. Bloomfield is Assistant Professor of Accounting at The Wharton School of the University of Pennsylvania; Henry L. Friedman is Associate Professor of Accounting at the University of California Los Angeles Anderson School of Management; and Hwa Young Kim is a Ph.D. Student in Accounting at the University of California Los Angeles Anderson School of Management. 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);The Specter of the Giant Three 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).

Over the last twenty years, the degree of common ownership of large public companies has increased considerably. In 2015, BlackRock Inc. and Vanguard Group were both top-five owners in over half of the publicly listed firms in the U.S. and Canada (Park et al. 2019). Several recent studies have raised concerns that overlapping ownership can lead to anticompetitive product market outcomes (e.g., Azar et al. 2016, Xie and Gerakos 2018). This would happen naturally if managers take actions that are in their shareholders’ best interests and their shareholders seek to maximize the value of their market- or industry-wide portfolio. Some studies have even gone so far as to recommend that antitrust regulators should limit large institutional investors to either holding only a small stake (< 1%) in any industry or holding no more than a single firm per industry (Posner et al. 2017). While the theoretical concern is well-founded, several academics and practitioners have voiced doubts about whether common ownership actually leads to anticompetitive outcomes, largely due to the passive nature of the large common owners and the low plausibility of, for instance, asset managers influencing capital structure, payout policies, board composition, or specific company practices like airline route choices or checking account fees (Hemphill and Kahan 2018, Koch et al. 2021). In short, prior literature does not provide clear evidence of a plausible mechanism through which common ownership could affect product market outcomes in an economically meaningful way.

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