Yearly Archives: 2021

Leadership Change at the SEC: What Activists Could Expect

Posted by Sebastian Alsheimer and Andrew Freedman, Olshan Frome Wolosky LLP, on
Monday, February 1, 2021
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Sebastian Alsheimer is an associate and Andrew Freedman is partner at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The Biden administration confirmed this week that Gary Gensler, who led the Commodity Futures Trading Commission (the “CFTC”) from 2009 to 2014, will be nominated to head the Securities and Exchange Commission (the “SEC”). A veteran regulator and former Goldman Sachs partner, Mr. Gensler is expected to toughen the previous administration’s approach to regulation and enforcement, much like he did during his prolific and sometimes controversial tenure at the CFTC. As we expect that Mr. Gensler’s upcoming nomination hearings will put a spotlight on his philosophy and the priorities of the new administration, we highlight three areas to which shareholder activists should pay particular attention:

  1. Proxy Advisor Regulation. Under its previous Chair Jay Clayton, the SEC promulgated a sweeping set of new rules governing proxy advisory firms. Among other things, the new rules conditioned the availability of certain existing exemptions from information and filing requirements of the proxy rules upon compliance with additional disclosure and procedural requirements, forcing proxy advisors to disclose conflicts of interest to their clients and give simultaneous notice to issuers and clients of their voting recommendations. Unimpeded, these rules would impact the important role that proxy advisory firms have historically played as neutral arbiters in proxy contests, transactions subject to shareholder approval and the annual meeting process, potentially to the detriment of shareholder activists. Furthermore, the new rules clarified the SEC’s view that proxy voting advice is generally considered to be a solicitation under Rule 14a-1(l) of the Securities Exchange Act of 1934 (the “Exchange Act”) and thus subject to federal proxy rules. Institutional Shareholder Services (“ISS”) has sued the SEC in federal court to block the implementation of the new rules.

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The Short-Termism Debate

Posted by Nicolas Grabar and Fernando Martinez, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, February 1, 2021
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Nicolas Grabar is partner and Fernando A. Martinez is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. This post is based on their Cleary memorandum. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

A curious feature of the past three years has been the intertwined controversies over earnings guidance, corporate “short-termism” and the quarterly disclosure system. The discussion has been illuminating, and, while further regulatory attention now seems unlikely, the perils of neglecting the long-term will likely continue to color how analysts, regulators and investors view public companies and their disclosures.

Back in 2018, prominent voices were heard lamenting the short-term focus of public company management, arguing that earnings guidance creates a vicious cycle in which public company strategy focuses on short-term earnings targets rather than long-term, sustainable growth. Among these, Jamie Dimon, Warren Buffet and the Business Roundtable called for public companies to reconsider the practice of quarterly EPS guidance, with its “unhealthy” consequences for long-term growth.

Around the same time, discontent over the SEC’s quarterly disclosure regime also started to make headlines. Inspired by a conversation with former PepsiCo CEO Indra Nooyi, President Trump surprisingly expressed (on Twitter) an interest in quarterly disclosure practices and asked the SEC to look into shifting from a quarterly to a semi-annual disclosure regime.

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Sustainability and ESG: The Governance Factor and What It Means for Businesses

Posted by Elizabeth Robertson, Scott Hopkins and Simon Toms, Skadden, Arps, Slate, Meagher & Flom LLP, on
Sunday, January 31, 2021
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Elizabeth Robertson, Scott Hopkins and Simon Toms are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Robertson, Mr. Hopkins, Mr. Toms, Adam M. Howard, Greg P. Norman, and Abigail B. Reeves. 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 Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Governance Factor: Beyond the Board

Corporate governance has long been a focal point for large corporates, listed companies and regulated entities, with numerous studies connecting good corporate governance with higher profitability. However, as the March 2021 effective date of the EU’s Sustainability-Related Disclosure Regulation approaches, corporate governance is becoming increasingly important to companies of all sizes. This is, in part, due to investee companies needing to follow good governance practices, as a baseline, in order to be classified as a “sustainable investment.” [1]

Corporate governance is not only facing increased scrutiny by investors and stakeholders but also regularly attracts adverse media attention. Directors wishing to safeguard themselves and the businesses they serve when discharging their duties should, therefore, be mindful of good corporate governance strategies and consider implementing strategies beyond the yardstick of the law.

This post explores several recommendations for companies seeking to improve their corporate governance framework, including:

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Thank You, Chairman Clayton

Posted by David A. Katz and Laura McIntosh, Wachtell, Lipton, Rosen & Katz, on
Sunday, January 31, 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.

Under Chairman Jay Clayton, who concluded his tenure at the Securities and Exchange Commission in late December, the SEC experienced an era of great productivity and rational reform. He furthered the historic mission of the SEC while maintaining nonpartisan credibility and independence in a highly charged political environment. Chairman Clayton affirmed the Commission’s tripartite purpose—to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation—throughout his time in office, rightly emphasizing in public statements that these three elements should be viewed as correlated rather than as contradictory.

During his tenure, Chairman Clayton spoke frequently of the Commission’s role in “looking out for” the long-term interests of the 52% of American households who participate in the capital markets. Reforms such as Regulation Best Interest and the amendments to the rules relating to proxy advisory firms increased protections for retail investors and improved the quality of their institutional relationships by requiring better disclosure, fewer conflicts of interest, and heightened fiduciary obligations. In the coming years, Main Street investors will reap the benefits of not only the heightened protections, but also the expanded market opportunities, that will result from SEC initiatives taken under Chairman Clayton’s leadership.

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Letter to CEOs

Posted by Larry Fink, BlackRock, Inc., on
Saturday, January 30, 2021
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Larry Fink is Founder, Chairman and CEO of BlackRock, Inc. This post is based on Mr. Fink’s annual letter to CEOs.

BlackRock is a fiduciary to our clients, helping them invest for long-term goals. Most of the money we manage is for retirement—for individuals and pension beneficiaries like teachers, firefighters, doctors, businesspeople, and many others. It is their money we manage, not our own. The trust our clients place in us, and our role as the link between our clients and the companies they invest in, gives us a great responsibility to advocate on their behalf.

This is why I write to you each year, seeking to highlight issues that are pivotal to creating durable value—issues such as capital management, long-term strategy, purpose, and climate change. We have long believed that our clients, as shareholders in your company, will benefit if you can create enduring, sustainable value for all of your stakeholders.

I began writing these letters in the wake of the financial crisis. But over the past year, we experienced something even more far-reaching—a pandemic that has enveloped the entire globe and changed it permanently. It has both exacted a horrific human toll and transformed the way we live—the way we work, learn, access medicine, and much more.

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ESG and Sustainability: Key Considerations for 2021

Posted by David M. Silk, Sabastian V. Niles, and Carmen X. W. Lu, Wachtell, Lipton, Rosen & Katz, on
Saturday, January 30, 2021
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David M. Silk and Sabastian V. Niles are partners and Carmen X. W. Lu is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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);  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 Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Heading into 2021, corporate, investor and stakeholder focus on ESG will continue to accelerate, with climate change, workplace diversity, employee welfare, human capital management and supply chain sustainability and resilience remaining forefront issues. Just earlier this week, BlackRock’s Chairman and CEO issued a letter to CEOs calling on companies to (1) “disclose a plan for how their business model will be compatible with a net zero economy,” including how such plans are incorporated into long-term strategy and reviewed by the board, and (2) expand disclosures on talent strategy to fully reflect long-term plans to improve diversity, equity, and inclusion. The World Economic Forum (WEF) also announced this week that 61 of the world’s largest companies have committed to disclosing against the core ESG metrics developed by the WEF and its International Business Council, a key further step in the ongoing convergence of ESG disclosures. Hedge fund TSR activist attacks will also increasingly leverage ESG and sustainability-related themes, as will the new breed of ESG impact activist funds.

The fact that ESG-oriented funds recorded unprecedented inflows and outperformed in many respects in 2020 amidst the Covid-19 pandemic demonstrates the possibility of doing well by doing good. At the same time, the pandemic exposed the significant social, economic and reputational costs of not addressing ESG issues, notably systemic racism, employee safety, health and well- being and supply chain resilience. Below is a review of the trends we expect to see in 2021 as investors and other stakeholders scrutinize how companies create and preserve long-term value:

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S&P 500 CEO Compensation Increase Trends

Posted by Aubrey Bout and Brian Wilby, Pay Governance LLC, on
Friday, January 29, 2021
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Aubrey Bout is managing partner and Brian Wilby is a consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

  • CEO median actual pay among S&P 500 companies increased 1% in 2019.
  • Overall, CEO pay in 2020 will potentially decline by 3% to 4% due to lower bonuses and many companies underperformed during the unprecedented COVID-19 pandemic disruption.
  • Historical CEO pay increases have been supported by historical total shareholder return (TSR); in fact, annualized pay increases have been 9 percentage points lower than TSR performance.
  • We expect median CEO target pay increases in early 2021 to be in the low single digits due to some companies providing “supplemental grants” for performance equity that was lost during COVID-19.
  • Individual CEO pay increases will continue to be closely tied to overall company performance and peer group compensation increases; it is notable that S&P 500 TSR was +18% in 2020, primarily driven by large-cap technology companies.
  • Performance share plan usage seems to have peaked with 94% of S&P 500 companies employing them, while restricted stock has cemented its position with 69% prevalence.
  • Stock options have continued their steady decline but are still prevalent at 50% of companies.
  • There could be an uptick in stock option and restricted stock usage in 2021 due to the COVID-19 pandemic and companies struggling to set long-term goals in their performance share plans.

Introduction and Summary

CEO pay continues to be discussed extensively in the media, in the boardroom, and among investors and proxy advisors. CEO median total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) increased at a moderate pace in the first part of the last decade—in the 2% to 6% range for 2011-2016. CEO pay accelerated with an 11% increase in 2017, likely reflecting sustained robust financial and total shareholder return (TSR) performance, before returning to 3% in 2018 and 1% in 2019, more in line with historical rates. Our CEO pay analysis is focused on historical, actual TDC, which reflects actual bonuses based on actual performance; this is different from target TDC or target pay opportunity, which uses target bonus and is typically set at the beginning of the year.

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The Congressional Review Act and the Biden Administration’s Approach to Financial Regulation

Posted by Paul Rose and Christopher J. Walker (The Ohio State University), on
Friday, January 29, 2021
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Paul Rose is the Robert J. Watkins/Procter & Gamble Professor of Law and Christopher J. Walker is the John W. Bricker Professor of Law at The Ohio State University Moritz College of Law. This post builds on their recent report (discussed on the Forum here).

Within hours of taking office, President Biden moved aggressively to begin to dismantle much of the Trump administration’s regulatory legacy—issuing a series of executive orders that either changed regulatory policy directly or directed federal agencies to do so. Indeed, the Biden administration’s work to reform the regulatory state started weeks before inauguration, with its concerted efforts to nominate and appoint leaders to run the federal agencies that would implement its regulatory agenda. Competent and loyal agency leadership, coupled with tailored presidential directives, will go a long way toward reshaping the regulatory state to better conform to the Biden administration’s vision.

But it won’t be enough. Much of the Trump administration’s regulatory legacy has been codified in regulation, including an aggressive issuance of “midnight rules” promulgated in the final months of the Trump presidency. As Dick Pierce explains, there are three main ways to reverse a prior administration’s rule. First, the agency could engage in a new notice-and-comment rulemaking to rescind (and perhaps replace) the rule. That approach requires substantial agency resources and could take months if not years to finalize. Second, the agency could just refuse to defend the rule in litigation, letting courts vacate and set it aside. This is Professor Pierce’s preferred approach. But it, too, has limitations. Especially in the financial regulation space, those who supported the rule would no doubt try to intervene to defend it. And, unless there is no reasonable ground to defend the rule, there are deeper rule-of-law questions implicated by the government’s failure to defend a rule—questions that far exceed the ambitions of this post. Third, Congress and the president could utilize the Congressional Review Act (CRA) to repeal the rule.

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Weekly Roundup: January 21-28, 2021

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, January 29, 2021

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This roundup contains a collection of the posts published on the Forum during the week of January 21-28, 2021.

Coordinated Engagements

Posted by Oğuzhan Karakaş (University of Cambridge), Elroy Dimson (University of Cambridge), and Xi Li (London School of Economics), on Friday, January 22, 2021
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New LBO Practices May Be Warranted Based on the Nine West Decision

Posted by Gail Weinstein, Philip Richter, and Brad Eric Scheler, Fried, Frank, Harris, Shriver & Jacobson LLP, on Friday, January 22, 2021
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Proposed SEC Rule 144 Amendments

Posted by Jeff Karpf, Michael Dayan, and Marc Rotter, Cleary Gottlieb Steen & Hamilton LLP, on Saturday, January 23, 2021
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Delaware Supreme Court Affirms AmerisourceBergen Ruling that Company Must Produce Documents

Posted by Lori Marks-Esterman, Steve Wolosky, and Andrew Freedman, Olshan Frome Wolosky LLP, on Saturday, January 23, 2021
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Primary Direct Listings: A Hybrid Approach to a Traditional IPO Alternative

Posted by Anna T. Pinedo, Brian Hirshberg, and Carlos Juarez, Mayer Brown LLP, on Sunday, January 24, 2021
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ESG Disclosures: Guiding Principles and Best Practices for Investment Managers

Posted by Helen Marshall and Ezra Zahabi, Akin Gump Strauss Hauer & Feld LLP, on Sunday, January 24, 2021
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NYSE Proposes to Permanently Amend Stockholder Approval Rules

Posted by Eleazer Klein and Evan A. Berger, Schulte Roth & Zabel LLP , on Monday, January 25, 2021
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Annual Review of Shareholder Activism

Posted by Jim Rossman, Mary Ann Deignan, and Rich Thomas, Lazard, on Monday, January 25, 2021
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Corporate Governance, Business Group Governance and Economic Development Traps

Posted by Luis Alfonso Dau (Northeastern University), Randall Morck (University of Alberta), and Bernard Yeung (National University of Singapore), on Monday, January 25, 2021
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Key Takeaways—2020 Board Index

Posted by Julie Daum, Laurel McCarthy, and Ann Yerger, Spencer Stuart, on Tuesday, January 26, 2021
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The Future of Audit Oversight

Posted by J. Robert Brown, Jr., Public Company Accounting Oversight Board, on Tuesday, January 26, 2021
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The ESG/TSR Activist “Pincer Attack”

Posted by Andrew R. Brownstein, Steven A. Rosenblum, and Trevor S. Norwitz, Wachtell, Lipton, Rosen & Katz, on Tuesday, January 26, 2021
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The Changing Face of Activism

Posted by James E. Langston and Claire Schupmann, Cleary Gottlieb Steen & Hamilton LLP, on Wednesday, January 27, 2021
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FCLTCompass—Measuring Time Horizons Across Capital Markets

Posted by Sarah Keohane Williamson, FCLTGlobal, on Wednesday, January 27, 2021
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Team Production Theory Across the Waves

Posted by Brian R. Cheffins and Richard Williams (University of Cambridge), on Wednesday, January 27, 2021
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Former CFTC Chair Gary Gensler to be Nominated as SEC Chair

Posted by Cydney Posner, Cooley LLP, on Thursday, January 28, 2021
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SEC Enforcement and Public Companies

Posted by G. Jeffrey Boujoukos, Susan Resley, and Laurie Cerveny Morgan Lewis & Bockius LLP, on Thursday, January 28, 2021
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Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse

Posted by David F. Larcker (Stanford University), Phillip J. Quinn (University of Washington), and Brian Tayan (Stanford University), on Thursday, January 28, 2021
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Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse

Posted by David F. Larcker (Stanford University), Phillip J. Quinn (University of Washington), and Brian Tayan (Stanford University), on
Thursday, January 28, 2021
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David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; Phillip Quinn is Assistant Professor of Accounting at the University of Washington Foster School of Business; and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Prof. Larcker, Mr. Quinn, Mr. Tayan; Daniel Taylor, Associate Professor of Accounting at the Wharton School of the University of Pennsylvania; and Bradford Lynch, PhD Student at The Wharton School.

We recently published a paper on SSRN, Gaming the System: Three “Red Flags” of Potential 10b5-1 Abuse, that provides evidence that some executives use 10b5-1 trading plans to engage in opportunistic, large-scale selling of company shares.

Federal securities law prohibits corporate executives from trading company securities while aware of material nonpublic information (MNPI). Because executives are regularly exposed to MNPI, those who wish to sell a portion of their holdings to diversify their personal wealth are at risk of violating insider trading laws if they trade in advance of this information becoming public.

In 2002, the Securities and Exchange Commission adopted Rule 10b5-1, which outlines procedures that, if followed, provide an affirmative defense against allegations of illegal insider trading. To qualify for protection under Rule 10b5-1, executives enter into a nonbinding contract that instructs a third-party to execute trades on their behalf according to a written plan––known as a 10b5-1 plan. The plan must be adopted at a time when the executive is not aware of MNPI. Through the plan, the executive specifies a set of instructions or schedule by which trades are to be made, such as the number or value of shares to be transacted, the frequency of transactions, price limits, etc. (See Exhibit 1 for examples of 10b5-1 plans.) Once it is in place, the plan can be modified so long as the executive is not aware of MNPI at the time of the modification. The plan and any associated trades can also be cancelled at any time, regardless of whether the executive is in possession of MNPI. The latter aspect of 10b5-1 plans is particularly controversial, as it has the effect of allowing executives to set up routine sales, and then pause or cancel sales if they know the company will be announcing news that will push the stock price higher.

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