Monthly Archives: January 2022

Key Proxy Statement Disclosure Trends: Board Evaluation

Rich Fields is leader of the Board Effectiveness Practice at Russell Reynolds Associates, and Iain Poole is managing director at Argyle. This post is based on their RRA/Argyle memorandum.

The board evaluation process is evolving at many companies. Before, the entirety of the process was a written form where board members literally checked boxes rating the board and committees on a five-point Likert scale. This “old way” wasted board member time and generated little or no insight.

Pressure to modernize has come from all corners. Directors and corporate executives want their boards to be as effective as they can be—and demand evaluation processes that are worth their time. Shareholders and other stakeholders recognize that without honest and thorough feedback on the full board, committees, and individual directors, evaluation processes will not improve board and company performance. Many companies have answered the call, adopting “new way” processes that gather, synthesize, and share insightful, actionable feedback about board, committee, and director effectiveness. Companies that invest the time to rigorously assess their own performance should get credit from shareholders and other important stakeholders for having done so. Effective proxy statement disclosure about evaluation practices need not be complex or controversial; as the range of leading and effective examples in the complete publication demonstrate, there are many ways to tell shareholders that the Board is committed to its own excellence. We hope that these examples inspire companies with effective practices to let the world know—and remind companies stuck in “old way” practices that there is a better way.


What Drives Racial Diversity on U.S. Corporate Boards?

Vicki L. Bogan is Associate Professor of Finance and Geller Family Faculty Fellow; Ekaterina Potemkina is a PhD student; and Scott E. Yonker is Associate Professor of Finance at Cornell University SC Johnson College of Business. This post is based on their recent paper. 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).

Over the past two decades, the concept of “board diversity” has been synonymous with female representation on boards. Since 1999, nearly 20 governments around the world have instituted gender quotas. Recently however, the notion of corporate board diversity has been expanded. In September of 2020, a California law was signed that mandated boards of California-based firms include “diverse” individuals, those who are racial minorities or those identifying as LGBTQ+. The NASDAQ proposed a “comply or explain” rule in December of 2020 (approved by the SEC in August 2021) that encouraged listed firms to have both women and “diverse” individuals (defined by race or sexual identity). While there is substantial research about the evolution and effects of mandated gender diversity, few academic studies exist that focus on the dimension of race. In our new working paper, What Drives Racial Diversity on Corporate Boards?, we uncover recent trends in board racial diversity and analyze factors that drive the lack of diversity.

For our analysis, we use a comprehensive database covering the race and ethnicity of directors of U.S.-based firms listed on either the NYSE or NASDAQ exchanges (about 3,100 firms per year) from the first quarter of 2013 through the end of September 2021. We uncover a persistent lack of racial diversity on U.S. corporate boards. At the beginning of our sample, less than 10% of board seats of U.S. public companies were held by racial minorities but minorities were estimated to be about 25% of the U.S. population. By 2019, this figure had changed very little. Racial minorities held only about 12% of board seats with over 40% of all U.S. boards still including only white directors. Then in 2020, a dramatic shift occurred. About 25% of all new 2020 board appointments went to racial minorities and so far in 2021 (through 9/30/2021) the share has increased to 40%. Directors from underrepresented minority groups (URM, hereafter), particularly black directors have driven this surge. These data indicate that until recently minorities largely have been left out of the boardroom.


SEC Proposes Major Rule Changes on Trading Plans and Corporate Buybacks

Nicolas Grabar and Lillian Tsu are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

On December 15, 2021, the SEC issued for public comment two separate proposals that will, if adopted, significantly affect how corporate directors, officers and employees trade securities of their companies and how companies repurchase their own shares.

  • One proposal, approved unanimously by the SEC Commissioners, principally addresses the use of “10b5-1 plans”—trading plans that are designed to qualify for an affirmative defense against insider trading under Rule 10b5-1(c)(1). [1]
  • The other, approved on a 3-2 vote, addresses corporate repurchases of equity securities. [2]

The comment period for both proposals is unusually brief: 45 days from publication in the Federal Register, so probably in mid-February. It seems very possible that the proposals could be adopted later in 2022, but the proposing releases do not address how long after that they might become effective. When they take effect, they will require substantial changes in how companies and their directors, officers and employees conduct transactions in company securities.

This post walks through the two proposals in turn and concludes with some general takeaways and possible issues for comment.


M&A/PE Quarterly

Gail Weinstein is senior counsel, and Steven Epstein and Philip Richter are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Steven J. Steinman, Warren S. de Wied, and Brian T. Mangino.

Notwithstanding Record M&A Deal Activity, Significant Drop-off in Deal Values in Recent Months

While global deal activity measured by number of deals has remained at record or near-record levels throughout 2021, average deal value has declined steeply over the second half. Average deal value fell to $109.5M in October 2021, from a high of $187M in July 2021 (reflecting a month-over-month decline trend starting in August). The median P/E ratio reflected in deal values fell to15.3x earnings for the three months ending October 2021, from almost 26x for 4Q 2020. These statistics suggest a continuing very robust deal market, but possibly with a pullback from this year’s record level.


Climate, Diversity and Control: 2022 ISS Proxy Voting Guidelines

Pamela Marcogliese is partner, Elizabeth Bieber is counsel, and Jennifer Frolik is staff attorney at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields 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).

Institutional Shareholder Services (“ISS”) released its policy updates and voting guidelines for shareholder meetings beginning in 2022. Unsurprisingly, much of the focus continues to be on responding to investor views on climate and diversity initiatives and certain governance considerations such as unequal voting structures. Below, we outline the key changes to ISS’ voting guidelines that companies should consider as they begin to prepare for the upcoming proxy season.

Climate Considerations

Management and Shareholder Proposals on Say on Climate

This year, ISS codified the framework developed over the last year relating to Say on Climate proposals. Both management and shareholder proposals will be evaluated on a case-by-case basis. In order to increase transparency, ISS has set out non-exhaustive lists of criteria for evaluating both shareholder and management proposals, many of which are focused on the robustness of the company’s disclosure and the availability of metrics or targets.

In 2021, there were two management Say on Climate proposals at U.S. companies, which were likely the result of negotiated withdrawals of shareholder proposals or other stakeholder pressures. These proposals were not approved by shareholders. Given the escalating investor focus on climate and climate-related issues, we expect the number of management proposals to increase in the years ahead, in part due to continued external pressures and negotiations. Companies that propose a management Say on Climate vote (whether as part of negotiations for withdrawal or a shareholder proposal or otherwise) will need to be mindful that these votes are unlikely to be viewed as check-the-box exercises and will come with increased scrutiny by ISS and investors (as well as other stakeholders), expectations for change based on voting results, and potential reputational impact.


Analysis of Proxy Advisors’ Recommendations During the 2021 Proxy Season

Kyle Isakower is Senior Vice President of Regulatory and Energy Policy at the American Council for Capital Formation. This post is based on his ACCF report.


For nearly a decade, the U.S. Securities and Exchange Commission (SEC) has examined and considered various regulatory reforms around the widespread use and influence of proxy advisors, third-party arbiters whom institutional investors often rely on to determine how to exercise their voting authority amid the thousands of votes they cast each proxy season.

Responding to significant concerns raised by a wide variety of market participants around the accuracy and influence of proxy advisor recommendations over both management and shareholder proposals, the SEC under former Chairman Jay Clayton took a series of actions to provide greater oversight of proxy advisors after soliciting comment on and convening a roundtable on the proxy process.

Effective September 10, 2019, the Commission approved new guidance to investment advisers detailing their proxy voting responsibilities and confirming that it is their fiduciary duty to conduct due diligence with respect to their use of proxy advisors. On the same date, the Commission released additional guidance on the applicability of the proxy rules to proxy advisors, which interpreted proxy advisor recommendations as a “solicitation” and therefore subjected advisor recommendations to anti-fraud provisions in the SEC’s proxy rules.


Board Memo 2022: Sustainability and Beyond

Pamela Marcogliese and Sebastian Fain are partners and Elizabeth Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum. 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).

As 2022 approaches, companies are confronting an ever-expanding list of internal and external pressures on their business from a strategic, operational, governance, stakeholder and regulatory perspective. Well-advised boards of directors and management teams will need to prepare for and navigate traditional as well as evolving areas of focus in order to successfully execute on the company’s strategy. As you consider the opportunities ahead, while anticipating the inevitable challenges, we invite you to review the themes we expect to be prevalent in 2022 and beyond.

Environmental, Social and Governance will continue to permeate board agendas in 2022

ESG considerations are continuing to increase in importance and are permeating additional areas of the board’s oversight framework. In 2021, more and more companies released sustainability reports tied to and benchmarked against global reporting frameworks. Many companies also re-evaluated their ESG agendas and improved the disclosure of their strategic ESG priorities in their sustainability reports and stakeholder engagement, including with respect to the calculation, verification and oversight of ESG-related metrics.


Preparing for the Shareholder Proposal Season

Marc Gerber is partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on his Skadden memorandum.

On November 16, 2021, Skadden held a webinar titled “Preparing for the Shareholder Proposal Season.” The panelists were Gianna McCarthy, Director of Corporate Governance for the Office of the New York State Comptroller (New York State Comptroller); Jessica McDougall, Director, BlackRock Investment Stewardship (BlackRock); and Skadden M&A and corporate governance partner Marc Gerber. The key takeaways from the presentation are summarized below.

Overview of 2021 Proxy Season

Mr. Gerber provided a brief overview of the 2021 shareholder proposal season, in particular noting the increase in support this year for environmental and social (E&S) proposals. Ms. McDougall noted that BlackRock had revised its approach to shareholder proposals starting in 2021 and will more likely support proposals if it believes that management could better manage, disclose or otherwise accelerate its progress in addressing a material issue. Ms. McCarthy then noted that the New York State Comptroller’s support for shareholder proposals and for directors in 2021 remained fairly constant with the prior year, although she believes that investors will be more likely to vote against directors in the upcoming proxy season when there are diversity or environmental concerns.

SEC Guidance and Rule Amendments

Mr. Gerber summarized the amendments to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, which were adopted by the Securities and Exchange Commission (SEC) in September 2020, noting that they will be effective for annual meetings held in 2022.


Buyouts: A Primer

Tim Jenkinson is Professor of Finance at the University of Oxford Said Business School; Hyeik Kim is a Ph.D Candidate in Finance at The Ohio State University; and Michael Weisbach is Professor and Ralph W. Kurtz Chair in Finance at The Ohio State University. This post is based on their recent paper.

This paper provides an introduction to buyouts and the academic literature about them. Buyouts are initiated by “buyout funds”, which are limited partnerships raised from mostly institutional investors. Buyout funds have grown substantially and currently raise more than $400 billion annually in capital commitments. The funds earn returns for their investors by improving the operations of the firms they acquire and exiting them for a profit.

Intellectually, the buyout sector provides a plethora of questions to study. There are theoretical questions: How should funds be set up and managers compensated? To what extent does private contracting allow for more efficient resource allocations than a reliance on public markets? There are questions related to portfolio theory and capital markets: Private equity is a huge part of most institutional portfolios, how much capital should be allocated to this asset class, and how should it be split between various subsectors (buyouts, VC, real estate, etc)? How does one go about measuring the risk and return of a fund that makes only around 10 investments, many of which have only one cash outflow and one cash inflow over a 12 to 15 year period? To what extent do LPs and/or GPs have measurable skills? Corporate finance questions abound: How much value is created by the highly leveraged financial structure of most buyouts? What do GPs do to their portfolio firms to increase their values? Do they transfer wealth from other parties (workers, governments), or do they improve the efficiencies of operations? And perhaps the most important questions concern management and leadership, since at the end of the day, most of the increases in the value of the portfolio firms are likely to come from better managerial decisions. How do private equity funds decide on the managerial teams of their portfolio firms? What do they do to motivate and monitor these teams?


Weekly Roundup: January 7–13, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 7–13, 2022.

New Rules for Mandatory Trading Suspension of US-Listed Chinese Companies

Four ESG Myths About Emerging-Market Corporates

Compensation Season 2022

Towards a Global ESG Disclosure Framework

Preparing An Annual Report on Form 20-F: Guide for 2022

Comment Letter on DOL ESG Proposed Rulemaking

Japan’s Coming Wave of Reform

Corporate Political Spending is Bad Business: How to Minimize the Risks and Focus on What Counts

Board Practices Quarterly: Diversity, Equity, Inclusion: One Year Later

CEO Leadership Redefined

Financing Year in Review: A Robust Recovery

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