Monthly Archives: July 2022

What Do Elevated Shareholder Expectations Mean for Large Company Boards and Compensation Programs?

Todd Sirras is a Managing Director; Austin Vanbastelaer is a Senior Consultant and Justin Beck is a Consultant at Semler Brossy. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Vanbastelaer, Mr. Beck, Alexandria Agee, Sarah Hartman, and Kyle McCarthy.

Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) and The Illusory Promise of Stakeholder Governance (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; and Does Enlightened Shareholder Value add Value (discuss on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel and Roberto Tallarita.

Large companies are receiving lower shareholder support for Say on Pay proposals than ever before. Average Say on Pay vote support for S&P 500 companies declined for a fifth consecutive year in 2022. Meanwhile, the average vote for Russell 3000 companies not in the S&P 500 (“R3000x”) stayed constant over the same five-year period. The 2.6 percentage point gap between average vote support in the S&P 500 (87.5%) and the R3000x (90.1%) in 2022 is the widest since Say on Pay voting began in 2011.

Importantly, this observation is driven by lower support more broadly across the index rather than just a materially higher failure rate or a few isolated cases that drag the average down. A third of S&P 500 companies received lower than 90% support thus far in 2022, compared to an average of 24% over the prior five years.

Vote results between the two indices have diverged due to a fractured governance landscape and differentiated expectations for “good” governance at large- and small-cap companies. Institutional investors and proxy advisors are signaling increased expectations through policy expansion. Their company evaluations now consider a broader set of financial metrics beyond total shareholder return, and their stewardship priorities now focus heavily on environmental, social, and governance (ESG) topics. These are often introduced and applied most firmly to large companies. In some cases, investors have added proxy voting policies on ESG topics that apply only to companies in the S&P 500.

This evolving landscape makes it more difficult to anticipate an individual shareholder’s vote, which creates ambiguous expectations for large-cap companies, given the number of diverse institutional investors that hold stakes in the largest US companies. A combination of the pandemic, dynamic sociopolitical environment, and common large non-annual CEO awards in the tech and IPO space have impacted how investors interpret the appropriateness of CEO pay magnitude relative to performance and the broader stakeholder experience.


Statement by Chair Gensler on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership

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.

Today, the Commission unanimously voted to re-propose amendments to Rule 15b9-1 regarding when broker-dealers are required to register with the Financial Industry Regulatory Authority (FINRA). These amendments would cause some of the most active participants in our equity and fixed-income markets to be required to register with FINRA. I was pleased to support these amendments because, if adopted, they would modernize and improve market oversight for regulators.

Rule 15b9-1 was first put in place in 1965 and expanded in 1976, 46 years ago. The rule set forth an exemption designed for certain exchange floor members and other regional, specialized broker-dealers, allowing them not to register with the National Association of Stock Dealers (NASD), the predecessor to FINRA. The exemption applied to broker-dealers who typically were registered with the single exchange where they operated and met certain other criteria.

Nearly half a century later, our markets have drastically changed. The floor-based trading environment that existed when this exemption was adopted has given way to complex, high-volume, and cross-exchange electronic trading. Yet such complex and often high-frequency activity, made possible by highly-sophisticated technology, is regulated by a rule nearly as old as the first-ever cell phone. [1] Several currently-exempt firms have monthly trading volume valued in the tens of billions of dollars that is not subject to direct FINRA oversight. [2] Thus, today’s proposal updates and narrows the circumstances in which broker-dealers do not need to register with FINRA.

Currently, many broker-dealers conduct significant cross-exchange or off-exchange activity using the latest technology. Compared with the oversight that individual exchanges conduct on their own members, FINRA has the expertise for cross-market oversight. Thus, required FINRA membership for many of these currently-exempt firms would help enhance robust and consistent oversight. Furthermore, requiring firms to join FINRA helps to ensure that these firms report their activities in U.S. treasury markets.

In 2015, the Commission proposed changes to Rule 15b9-1. Informed by public comment, and in light of current markets, we have updated and re-proposed these amendments.

By extending FINRA oversight to potentially dozens of broker-dealers, the proposed amendments would strengthen oversight of firms trading securities across several markets, helping to protect investors and maintain fair, orderly, and efficient markets.

I’d like to thank the staff for their diligent work in preparing these amendments, including:

  • Michael Bradley, Haoxiang Zhu, David Saltiel, Andrea Orr, David Shillman, Eric Juzenas, Meredith Macvicar, David Michehl, Vince Vuong, Roni Bergoffen, Nicholas Shwayri, Mark Sater, and Marilyn Parker in the Division of Trading and Markets;
  • Cuyler Strong, Laura Tuttle, Jessica Wachter, Amy Edwards, Patti Vegella, Lauren Moore, Charles Woodworth, and Amy Edwards in the Division of Economic and Risk Analysis;
  • Ronesha Butler, Cynthia Ginsberg, Maureen Johansen, Dan Berkovitz, Meridith Mitchell, Malou Huth, and Robert Teply in the Office of the General Counsel.
  • Connie Kiggins and Carrie O’Brien from the Division of Examinations; and
  • Kristin Pauley and Armita Cohen from the Division of Enforcement.


1 back)

2See Exemption for Certain Exchange Members, Securities Exchange Act Release No. 34-95388 (July 29, 2022) (e.g., pp. 26-27) (“For example, of the estimated 66 broker-dealers that were exchange members but not FINRA members as of the end of 2021, 47 initiated orders in listed equities in September 2021 that were executed on or off an exchange. These firms’ September 2021 off-exchange listed equities dollar volume executed was approximately $789 billion, which was approximately 9.8% of total off-exchange volume of listed equities executed that month. Moreover, these firms’ September 2021 listed equities dollar volume executed on exchanges of which they are not a member was approximately $592 billion.”), available at back)

Regulatory Instability for Proxy Advisory Firms

David N. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

The latest developments in the SEC regulation of proxy advisory firms are good news for ISS and Glass Lewis, but they are a disappointment for proponents of conscientious and consistent rulemaking. The 2020 updates to proxy advisory rules were the result of a thorough process that was conducted by Commission staff across ten years and two politically distinct administrations, yet the framework implemented by the 2020 rules has been substantially gutted in the span of just a few months—without ever having taken effect. This unwelcome instability in the regulatory environment casts unfortunate doubt on the SEC’s commitment to being a nonpartisan, market-oriented regulator. It is likely to create uncertainty regarding future rulemaking, as to proxy advisory services specifically and as to potentially controversial areas in general.

The 2020 Rules

As we have previously observed, the SEC’s 2020 proxy advisory rulemaking effort met with a predictable mix of responses. There was opposition from the proxy advisory firms and the Council of Institutional Investors, and there was approval and support from public companies and other market participants who share the concern that proxy advisory firms wield disproportionate power and influence in the proxy voting process.

From the standpoint of regulatory stability, the important feature of the 2020 rule amendments was that they were a decade in the making. The outsized role of proxy advisory firms was first addressed in a 2010 SEC concept release on the proxy voting process, and a 2014 Staff Legal Bulletin warned investment advisors that their fiduciary duties precluded over-reliance on proxy advisory firms. In 2018, the SEC held a roundtable on the proxy process and in 2019 issued interpretation and guidance that confirmed the applicability of the federal proxy solicitation rules to proxy voting advice by proxy advisory firms and elaborated the SEC’s position regarding the responsibilities of investment advisers that chose to rely on proxy advisory firms. Continued work by Commission staff under the leadership of Chair Jay Clayton led to the adoption of rules and guidance in 2020 that represented the most significant steps the SEC had taken to date in regulating the provision of proxy voting services by proxy advisory firms. The prevailing view among market participants—other than proxy advisors and some of their clients—was that the 2020 rule amendments made meaningful improvements to the proxy voting process that would promote accountability and increase transparency regarding the advice of proxy advisory firms.


Board Effectiveness and the Chair of the Future

Dan Konigsburg is Global Corporate Governance Leader, Jo Iwasaki is Corporate Governance Advisory Lead, and William Touche is a senior audit partner at Deloitte. This post is based on a Deloitte memorandum by Mr. Konigsburg, Ms. Iwasaki, Mr. Touche, and Yasmine Chahed.

In popular conception, the term “chair of the board” has an honorific ring to it—a title conferred after a long career of hard work and achievement. In truth, this view downplays the mission-critical work chairs do and the importance of the role. First-hand accounts from board chairs around the world, without exception, describe a position as demanding as it is personally rewarding.

Chairs today play a critical role in the success or failure of their organizations; they serve as a trusted sounding board and guiding hand for the CEO and other board members. Huge forces are redefining the role in real time: unforeseen events, such as the pandemic and geopolitical disruption, adding to the inexorable challenges of digital transformation, climate change, heightened regulation, and investor scrutiny.

To get a better sense of how the position is changing and what the chair of the future can expect, Deloitte held interviews, roundtable discussions, and surveyed more than 300 board chairs in 16 countries. [1]

In these conversations, several striking—and somewhat unexpected—points of commonality emerged. As global chairs navigate a new world of challenge and opportunity, our survey revealed these five fundamental areas of change:

1) Organizational governance needs more chair input

Some fundamental qualities that make for successful chair and board relationships with management have not changed. As ever, the chair and CEO benefit from a high level of mutual trust. And chairs need to understand the company and be willing to work hard and give generously of their time and experience.

What has changed is the depth and breadth of that involvement. Chairs increasingly need to act as a guiding hand on topics ranging from resilience to technology and culture. The pandemic also proved that when organizations are forced to change due to unforeseen events, they can succeed by focusing on innovation, digital transformation, improved efficiency, and speed.


Weekly Roundup: July 22-28, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 22-28, 2022.

A Board’s Guide to Oversight of ESG

Diversity Leaders Open New Doors for Equity Investors

Trends and Updates from the 2022 Proxy Season

Recent ESG Litigation and Regulatory Developments

Can We Trust the Accounting Discretion of Firms with Political Money Contributions? Evidence from U.S. IPOs

Global M&A Industry Trends: 2022 Mid-Year Update

The Complex, Contentious, and Changing Nature of Financial Reporting Standards

Comment by Commissioners Peirce and Uyeda on the Financial Accounting Foundation Draft Strategic Plan

Delaware M&A Developments

H1 2022 Review of Shareholder Activism

Top 5 SEC Enforcement Developments

The Proposed SEC Climate Disclosure Rule: A Comment from the RealClear Foundation

Remarks by Chair Gensler at Center for Audit Quality “Sarbanes-Oxley at 20: The Work Ahead”

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks at the Center for Audit Quality “Sarbanes-Oxley at 20: The Work Ahead.” 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 for the kind introduction. It’s good to be with the Center for Audit Quality. As is customary, I’d like to note I am speaking on behalf of myself and not on behalf of the Commission or the SEC staff.

As I open my remarks today, I’d like to discuss a speech from a different summertime conference—one that took place 133 years ago.

In June 1889, the statistician Carroll D. Wright spoke at the Convention of Commissioners of Bureaus of Statistics of Labor in Hartford, Connecticut. [1] (To be clear, I wasn’t there.)

Mr. Wright, the first U.S. Commissioner of Labor, used his opening remarks to warn against the abuse of numbers for personal gain.

“Figures will not lie,” he said, but “liars will figure.” [2]

I think of this maxim often—not only because my grandfather Ellis Tilles, an immigrant from Lithuania, often said the same thing, but also because it speaks to so much about the history of finance.

Forty years after that statistics conference, in 1929, the stock market crashed. Our country learned all too well what happens when liars figure, eroding trust.

Finance, ultimately, is about trust. In the depths of the Great Depression, Congress and President Franklin Delano Roosevelt tried to restore that trust, through the first federal securities laws. They started with requirements for public companies raising money from the public.

Specifically, these companies had to provide full, fair, and truthful disclosure to the public. Investors needed facts and figures they could trust—figures without the liars.

Sarbanes-Oxley Act of 2002

Nearly 70 years after those first securities laws were established, our system, frankly, was breaking down.

The energy conglomerate Enron was then the seventh-largest company in the U.S. [3] Then, in December 2001, it collapsed—the largest bankruptcy in U.S. history.


The Proposed SEC Climate Disclosure Rule: A Comment from Bernard Sharfman and James Copland

James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy and Bernard S. Sharfman is Senior Corporate Governance Fellow at the RealClearFoundation. This post is based on their comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID  (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel and Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by James R. Copland and Bernard S. Sharfman. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

We respectfully submit this letter as a means to bring to the Commission’s attention deficiencies that we have found in its proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors (“the Proposed Rule”). In our view, the Proposed Rule fails to comply with Congress’s demand that agency actions not be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” as interpreted by the Supreme Court to require an agency to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choices made.” Nor does the Proposed Rule comport with the “unique obligation” Congress has given the SEC to “to consider or determine whether an action . . . will promote efficiency, competition, and capital formation.” The Proposed Rule also runs afoul of the Constitution’s commitment to federalism and separation of powers, both by substantially interfering with corporate governance, a creature of state law, without an express Congressional mandate, and by resolving a “major question” of policy clearly within the province of the legislative branch. Because the Proposed Rule’s disclosure requirements are not “purely factual and uncontroversial,” they also implicate the First Amendment’s prohibition against government-compelled speech. Although our analysis can apply more broadly to much of the Proposed Rule, we are providing comments clarifying this critique in significant detail as to two Sections of Part II of the Proposed Rule: Section G: GHG Emissions Metrics Disclosure (“Section G”) and Section D: Governance Disclosure (“Section D”).

I. Section G: GHG Emissions Metrics Disclosure

Our analysis of Section G focuses on how the Proposed Rule fits within the statutory requirements laid down by Congress in the Administrative Procedures Act (“APA”) and the securities laws. We divide our analysis into three Parts. Part A focuses on the Proposed Rule’s required disclosures for Scope 1 and 2 emissions, which are not limited by a materiality standard. Part B focuses on the required disclosures for Scope 3 emissions, which purportedly do face a materiality requirement. Part C focuses on deficiencies in the Proposed Rule’s articulation of “investor demand” purporting to justify the need for Section G disclosures.


Top 5 SEC Enforcement Developments

Haimavathi Marlier, Jina Choi, and Michael Birnbaum are partners at Morrison & Foerster LLP. This post is based on a Morrison & Foerster memorandum by Ms. Marlier, Ms. Choi, Mr. Birnbaum and Robert McEntee.

In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important SEC enforcement developments from the past month, with links to primary sources. The past month has been another busy one for both SEC enforcement and regulation, including record-breaking penalties and the first Reg BI enforcement action. Here, we examine the following:

  • The SEC’s clawback of profits under SOX Section 304 absent allegations of misconduct;
  • The SEC’s crackdown on allegedly hidden robo-advisor fees;
  • How the SEC is enforcing the “best interest” standard under Reg BI;
  • The SEC’s imposition of penalties for allegedly failing to include a whistleblower carve-out in employment agreements; and
  • Whether there exists a duty to correct a response to a voluntary SEC information request.

1. The SEC Claws Back Profits from a CEO Without Charging Individual Misconduct

On June 7, 2022, the SEC filed charges against New Jersey-based Synchronoss Technologies, Inc. and seven employees, including the former CFO and General Counsel, over long-running accounting improprieties from 2013 to 2017. The company settled scienter-based fraud charges and agreed to pay a civil penalty of $12.5 million. The former General Counsel settled charges for misleading auditors in two transactions and causing the company’s violations of certain reporting provisions under Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 (“Exchange Act”). Although several former and current employees of the company settled with the SEC, the former CFO and Controller are litigating in federal district court in the Southern District of New York.

The SEC also took the somewhat unusual step of pursuing clawbacks from the company’s former CEO for violations of Section 304 of the Sarbanes-Oxley Act of 2022 (“SOX”), despite not charging him with misconduct. Section 304 does not require that the CEO engage in misconduct to trigger its reimbursement requirement. Under this section, CEOs and CFOs can be required to reimburse the company for certain compensation received in years which the issuer was required to prepare an accounting restatement due to the issuer’s “material noncompliance” with its financial reporting requirements under the federal securities laws. The former Synchronoss CEO agreed to reimburse the company for more than $1.3 million in stock sale profits and bonuses and to return previously granted shares of company stock.


H1 2022 Review of Shareholder Activism

Mary Ann Deignan is Managing Director; Rich Thomas is Managing Director and Head of European Shareholder Advisory; and Christopher Couvelier is Managing Director at Lazard. This post is based on a Lazard memorandum by Ms. Deignan, Mr. Thomas, Mr. Couvelier, Emel Kayihan, Antonin Deslandes, and Leah Friedman.

Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System (discussed on the Forum here) by Leo E. Strine, Jr.

Observations on Global Activism Environment H1 2022

Activity Slows vs. Q1 but Remains Robust

  • Despite a challenging investing environment in 2022, activity remains elevated—Q2 was the second most active quarter in the past five quarters
  • Global campaign activity for Q2 (53 campaigns) down 27% vs. Q1, in line with Q1/Q2 pattern of recent years
  • Regionally, the decline was most acute in the U.S., where activity materially declined by 50%
  • By contrast, Europe saw a strong Q2 with a 33% increase over Q1 levels

Technology Repositions as the Most Active Sector

  • Technology companies accounted for 1 out of every 4 activist targets in Q2, resulting in Technology being the most targeted sector in H1
  • Software, Services and Internet were the most active subsectors
  • Primary activist objectives in Technology campaigns are in line with key themes across other sectors, with M&A, strategy and capital allocation dominating the narrative 

First Timers Break Records and Diversify the Field

  • First time activists accounted for 37% of all activists launching campaigns in H1, the highest level in recent years
  • In addition, campaigns were more dispersed across the universe of activists, with the top 5 most prolific activists accounting for 19% of all campaigns in H1, which is below the concentration levels observed over the past 5 years
  • The H1 top activists feature a broad range of investor types including established global players, regional and sector focused funds, and increasingly active ESG specialists and occasional activists


Financial Regulation, Corporate Governance, and the Hidden Costs of Clearinghouses

Paolo Saguato is Assistant Professor of Law at George Mason University Antonin Scalia Law School. This post is based on his recent article, published in the Ohio State Law Journal.

Recent financial market events have splashed onto the front pages of newspapers the often-overlooked plumbing found in those markets: the clearinghouses that handle trillions of dollars’ worth of securities and derivatives trades. During the Robinhood and GameStop events, the National Securities Clearing Corporation, a securities clearinghouse, played a critical role when it required Robinhood to provide collateral to guaranty its open positions. And recently, FTX US Derivatives, a cryptocurrency exchange, brought further attention to the clearing business and the critical risk mitigation and containment function it provides to the financial system when it applied to the Commodity Futures Trading Commission to offer clearing services for non-intermediated margined crypto derivatives.

Given the magnitude of the trades crisscrossing clearinghouses every day, these vital market infrastructures warrant more scrutiny than they have received. My article calls for policymakers to focus on the existing governance and financial structure of clearinghouses and urges them to seriously address a critical open issue in their organization: the misaligned incentives across clearinghouses’ main stakeholders—particularly their shareholders and their members—and how that misalignment might affect clearinghouses’ risk profile and financial resilience.

Clearinghouses are, in fact, corporations with a unique financial structure. Clearing members are financial institutions that access clearing services. While such members are the ultimate risk bearers of the business, they lack any formal governance rights over the firm. Instead, clearinghouses are controlled by their shareholders, who are large publicly-listed for-profit financial infrastructure groups. These shareholders retain all governance rights, yet have extremely limited financial skin in the game.


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