Yearly Archives: 2021

Inclusion of ESG Metrics in Incentive Plans: Evolution or Revolution?

Posted by John Ellerman, Mike Kesner, and Lane Ringlee, Pay Governance LLC, on
Tuesday, March 30, 2021
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John Ellerman and Mike Kesner are partners, and Lane Ringlee is managing partner at Pay Governance LLC. 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).

Environmental, Social, and Governance (ESG) issues are some of the most prominent facing Corporate America: shareholders and other stakeholders have significantly increased the focus on a corporation’s social responsibilities, including promoting a fair and diverse workplace, providing employees with a living wage, and improving the environment. Large institutional investors are demanding enhanced disclosure of employee demographics and diversity efforts as well as a full discussion of the near- and long-term steps that will be taken to attain net-zero emission goals.

Given the intense focus on ESG, Pay Governance LLC conducted a survey of companies in January 2021 to document how companies have been responding to the focus on ESG and whether it is resulting in a change in the design of incentive compensation plans. We had several goals in mind in conducting the survey.

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Energizing the M&A Market Post-Crisis

Posted by Jennifer F. Fitchen and Brent M. Steele, Sidley Austin LLP, on
Tuesday, March 30, 2021
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Jennifer F. Fitchen and Brent M. Steele are partners at Sidley Austin LLP. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

During these unprecedented times, all of us have had to acclimate to new ways of working, adapting creatively to the changed environment. Economic activity, including M&A dealmaking, has inevitably been depressed by the COVID-19 crisis, especially in Q2 2020—but industries and businesses have found novel solutions to the problems they face. By Q4, M&A was again beginning to surge.

In this post, we examine the creative deal structures that are being employed with much greater frequency throughout the M&A market. Based on interviews with 150 US corporates and private equity firms, this post analyzes the ways in which M&A is moving forward in spite of the pandemic.

Q2 2020 saw a marked downturn in M&A activity relative to pre-crisis transaction levels. But, since then, dealmaking has bounced back strongly. While a full-scale recovery may not be achievable in the immediate future, there are many reasons to be positive.

The increased use of creative deal structures will be an important part of that story, helping buyers and sellers to overcome some of the risk aversion holding M&A back in the currently volatile and uncertain environment—and enabling more confident parties to pursue emerging opportunities. Indeed, we are already witnessing such an increase, reflected in the rising number of joint venture transactions and the boom in the launch of special purpose acquisition vehicles (SPACs).

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State Street Global Advisors’ Annual Asset Stewardship Report

Posted by Benjamin Colton and Robert Walker, State Street Global Advisors, on
Monday, March 29, 2021
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Benjamin Colton and Robert Walker are Global Co-Heads of Asset Stewardship at State Street Global Advisors. This post is based on their SSgA memorandum.

In 2020, we voted in over 19,000 meetings and engaged with over 2,400 companies. In all, our engagement activities encompassed companies representing 78% of our 2020 equity AUM.

In this post, we provide highlighted insights from our voting and engagement activities, as well as core campaign, sector and thematic takeaways.

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Directors’ Career Concerns: Evidence from Proxy Contests and Board Interlocks

Posted by Shuran Zhang (Hong Kong Polytechnic University), on
Monday, March 29, 2021
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Shuran Zhang is Assistant Professor of Finance at Hong Kong Polytechnic University. This post is based on her recent paper. Related research from the Program on Corporate Governance includes Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge by Bo Becker, Daniel Bergstresser, and Guhan Subramanian (discussed on the Forum here).

Proxy contests often focus on directorial positions, where activist shareholders nominate an alternative slate of directors in an attempt to replace incumbent board members. Given shareholders’ limited ability to vote out directors in uncontested elections (e.g., Cai, Garner, and Walkling, 2009), proxy contests remain a powerful mechanism for director removal. In recent years, activists have become increasingly successful in accessing the US boardroom. According to FactSet, activists obtained board seats in 73% of proxy contests in 2014. At the firm level, prior research shows that proxy contests create shareholder value for target firms (e.g., Dodd and Warner, 1983; Mulherin and Poulsen, 1998; Fos, 2017). At the director level, however, proxy contests can impose significant career costs on individual directors. Existing evidence suggests that, following proxy contests, directors suffer losses of board seats not only at target firms but also at nontarget firms (Fos and Tsoutsoura, 2014). Despite the adverse effects of proxy contests on directors’ careers, little is known about whether or how directors respond to proxy contests. To mitigate potential career consequences, directors may change their behavior and initiate policy changes at other firms where they also hold board seats, that is, interlocked firms.

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Integrating ESG Into Corporate Culture: Not Elsewhere, but Everywhere

Posted by David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, on
Monday, March 29, 2021
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David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. 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).

A prominent securities regulator recently observed that “ESG no longer needs to be explained.” ESG is firmly ensconced in the mainstream of corporate America, a frequent topic in boardrooms, C-suites, investor meetings, and regulators’ remarks. Perhaps less obvious is that ESG has yet to be mainstreamed, as it were, in internal corporate governance and operations at the individual company level. In order to be a meaningful factor in effectuating corporate purpose, ESG—or, more accurately, EESG (including Employees as well as Environmental, Social, and Governance)—must be integrated throughout corporate affairs, not just in the boardroom.

The internal mainstreaming of EESG is the next step in its remarkable journey from activist wishlists to board and regulatory agendas. The good news is that this should not be difficult for most organizations to accomplish, so long as corporate leaders recognize that engaging with EESG considerations is not something that happens “elsewhere,” but “everywhere.” When EESG is integral to the culture and values of a company, it will naturally be incorporated in the work that is done throughout governance and operations, including strategic planning, risk management, compensation, communications, and disclosure. This approach to EESG is beneficial in a number of important ways: It is conducive to long-term value creation and responsive to investor interests; it improves efficiency and transparency while demonstrating commitment to EESG goals; and it can help forestall legal liability and reputational harm.

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SEC’s Regulation FD Action Highlights Risks Associated with Private Calls to Analysts

Posted by Caitlyn Campbell, McDermott Will & Emery LLP, on
Sunday, March 28, 2021
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Caitlyn Campbell is partner at McDermott Will & Emery LLP. This post is based on her McDermott Will & Emery memorandum.

On Friday, March 5, 2021, the US Securities and Exchange Commission (SEC) announced a rare litigated action against a large public company and three of its investor relations employees for alleged violations of Regulation FD (Fair Disclosure).

Overview of Regulation FD

In 2000, the SEC adopted Regulation FD to address issuers’ selective disclosure of material nonpublic information and to promote the full and fair disclosure of information. The rule provides that when an issuer, or a person acting on its behalf, discloses material, nonpublic information to certain entities or individuals (in general, securities market professionals and shareholders who may trade on the basis of the information), the issuer must also publicly disclose that information. In its release announcing the new rule, the SEC expressed its concern that “many issuers [were] disclosing important nonpublic information, such as advance warnings of earnings results, to securities analysts or selected institutional investors or both, before making full disclosure of the same information to the general public.” The SEC noted that this practice leads to a loss of investor confidence in the integrity of the markets because investors perceive that certain market participants have an unfair advantage.

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Tailoring Executive Pay for Long-Term Success

Posted by Matt Brady, Matt Leatherman, and Victoria Tellez, FCLTGlobal, on
Sunday, March 28, 2021
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Matt Brady is associate director of research, Matt Leatherman is director, and Victoria Tellez is senior research associate at FCLTGlobal. This post is based on an FCLTGlobal memorandum by Mr. Brady, Mr. Leatherman, Ms. Tellez, and Ariel Babcock. 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).

Short-term incentives motivate short-term behavior. Corporate boards can drive long-term performance by making changes to remuneration that encourage long-term behavior by executives while avoiding common pitfalls. Similarly, investors can support long-term executive remuneration plans through their votes and engagement.

Financial incentives motivate behavior—indeed, financial incentives may work too well. Executive pay is focused on a short time horizon—with recent data pegging average duration of executive compensation plans for CEOs of MSCI All Country World Index (ACWI) constituents at 1.7 years. [1] This short-term focus can have far-reaching consequences, yet setting out to make remuneration longer-term is no simple task.

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Race & Ethnicity and the Role of Asset Stewardship

Posted by Cyrus Taraporevala, State Street Global Advisors, on
Saturday, March 27, 2021
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Cyrus Taraporevala is President and CEO of State Street Global Advisors. This post is based on his opening remarks at a recent session of the Harvard Law School Program on Corporate Governance Virtual Roundtable Series.

Thank you for that very kind introduction, Lucian (Bebchuk). It’s wonderful to be with you at Harvard—even if virtually—at this remarkable and important institution.

I also want to acknowledge everyone joining today. Hopefully it won’t be long before we can see each other in person again.

Obviously, the past 12 months have been extraordinary—and certainly, there is no lack of weighty topics we at State Street Global Advisors have been engaged on as an asset manager for a long time, such as Climate and Governance.

Today [March 25, 2021], I’d like to focus on just one topic from within our broad Asset Stewardship set of topics—to discuss the important role of racial and ethnic diversity in our Asset Stewardship program—and provide some insight into our engagements with companies on this issue and why we’ve taken the approach we have, and our plans going forward.

But first I want to say a few words about this moment, how we got here, and how it fits in to the evolving role asset managers have been playing, especially in recent years.

The Changing Role of Asset Stewardship

As a long-term investor in more than 10,000 public companies across the world, we have a somewhat unique view into all the factors that drive a business’s long-term value—across sectors and geographies.

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Global Institutional Investors on the IFRS Foundation’s Sustainability Standards

Posted by Lindsey Stewart, KPMG, on
Saturday, March 27, 2021
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Lindsey Stewart is Senior Manager of Investor Engagement at KPMG LLP. This post is based on his KPMG 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) 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).

Executive summary

The IFRS® Foundation’s September 2020 consultation on sustainability reporting proposes setting up a Sustainability Standards Board (SSB) to set standards and drive global consistency.

We reviewed the comment letters of a selection of 20 of the largest and most influential investor respondents to the Consultation—18 global institutional investors with close to $24 trillion of assets and two major investor associations. The responses provide a uniquely detailed and current view of the investor community’s environmental, social and governance (ESG) reporting needs.

Among the investor community, there is an appetite across the board for a globally accepted, mandatory standard for sustainability reporting. There is also broad recognition that the IFRS Foundation is an appropriate body to co-ordinate such standard setting activity. Additionally, investors frequently emphasise the need for the IFRS Foundation to act quickly and to advance, rather than replace, the work done by existing owners of voluntary disclosure frameworks.

We focused on three other key areas of the consultation that yielded some interesting—and at times divergent—responses from investors: materiality, scope and assurance.

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Board Refreshment

Posted by Maria Castañón Moats, Paul DeNicola, and Leah Malone, PricewaterhouseCoopers LLP, on
Friday, March 26, 2021
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Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Leah Malone Director at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Every year, as part of PwC’s Annual Corporate Directors Survey, we ask directors to evaluate the performance of their peers, and whether any of the members of their board should be replaced. The share of respondents who say one or more of their fellow directors should go has been rising, and in 2020 it reached 49%. Given the importance of collegiality to a well-functioning board, that may seem surprisingly high.

But it’s nothing compared to what C-suite executives told us when we asked them the same question. More than four in five (82%) said at least one of their company’s board members should be replaced. And 43% said two or more directors need to go.

These insights, drawn from our recent study Board effectiveness: A view from the C-suite, are bound to be discomfiting to many directors. Candid feedback from management teams on board performance is rare. But it’s extremely valuable, especially when it confirms what many directors already recognize—namely that board composition and refreshment deserve a closer look.

Here are the actions boards can take now to focus their efforts.

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