Monthly Archives: August 2022

Welcoming the Universal Proxy

Kai Liekefett and Derek Zaba are partners and Leonard Wood is senior managing associate at Sidley Austin LLP. This post is based on an Ethical Boardroom publication. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

On 17 November 2021, the US Securities and Exchange Commission (SEC) adopted new Rule 14a-19 and amendments to existing rules under the Securities Exchange Act of 1934 to require the use of “universal” proxy cards in all non-exempt director election contests at publicly traded companies in the US.

The new rules contain only slight modifications from rules the SEC first proposed in October 2016. When the SEC reopened the public comment period in 2021, members of Sidley’s Shareholder Activism & Corporate Defense Practice sent a formal comment letter to the SEC regarding the proposed rules. We argued that the rules create the equivalent of “proxy access on steroids.” While comparable to the vacated Rule 14a-11, which allowed shareholders holding at least three per cent of a company’s outstanding shares for three years to put dissident directors on the company’s proxy statement, the Universal Proxy Rules confer substantially more significant rights to shareholders without any minimum ownership requirements (i.e. owning only one share for one minute will be sufficient). Unfortunately, the SEC proceeded to adopt these rules without meaningful safeguards against misuse.

The new rules will significantly change the methods by which proxy contests at public companies have been conducted for decades. Public advocates of shareholder activism have championed the adoption of the new rules. Their enthusiasm may reflect a premonition that the universal proxy rules will afford dissidents additional leverage when negotiating with boards and, ultimately, allow them to place more dissident candidates on boards. As such, we expect a significant increase in proxy contests and threats thereof once the universal proxy rules take effect for shareholder meetings after 31 August 2022. It is nothing less than the most dramatic change in the US proxy system in a generation.


Does ESG Negative Screening Work?

Robert Eccles is Visiting Professor of Management Practice at Oxford University Said Business School; Shivaram Rajgopal is Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School; and Jing Xie is Assistant Professor of Finance at Hong Kong Polytechnic University School of Accounting and Finance. 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) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff.

Negative screening is broadly the process of finding and excluding stocks of companies, whose operations are seen as “unsustainable” from an environmental, social or a governance (ESG) standpoint (The U.S. SEC does not define a poor ESG stock. The European Sustainable Finance Disclosure Regulation (SFDR), on the other hand, defines a sustainability investment as “an investment in an economic activity that contributes to an environmental objective”). A popular version of negative screening, that is widely practiced by institutional investors sensitive to ESG considerations, is to exclude stocks of firms involved in the production of alcohol, tobacco, and gaming, and fossil-fuels such as coal and gas or oil (labeled as “sin stocks” or “excluded industries”). Reasons for exclusion vary and include moral values, the belief that this will put pressure on them to change or even put them out of business, or the conviction that the industry’s prospects are grim.

There is a relatively long literature suggesting that stock returns of sin stocks, traditionally covering alcohol, gaming, and tobacco, outperform the market (see Salaber 2007; Fabozzi, Ma, and Oliphant 2008; Hong and Kacperczyk 2009; Statman and Glushkov 2009; Durand, Koh, and Tan 2013). Hong and Kacperczyk (2009) identify firms in the alcohol, tobacco, and gaming industries as sin firms. Fabozzi, Ma, and Oliphant (2008) identify sin stocks as those classified in the six industries of alcohol, tobacco, defense, biotech, gaming, and adult services. Statman and Glushkov (2009) and Durand, Koh, and Tan (2013) define sin firms as ones operating in alcohol, tobacco, gaming, defence and weaponry industries. Following prior literature (e.g., Hong and Kacperczyk, 2009), we define a sin stock as a firm involved in the alcohol, gaming and tobacco industries. In addition, we also classify firms operating in weapons (gun industry) and carbon-intensive industries (i.e., coal and gas and oil) as sin stocks (Teoh et al., 1999). The intuition is that the investors who are willing to hold these screened investments expect a higher rate of return because of the social opprobrium attached to them and the exclusions they are facing from other investors which reduces the pool of capital available to them. However, relatively little is known about whether such negative screening by institutions impacts the valuation and fundamentals (e.g., operating, investing, and financing activities) of these companies. That is the question we study in this paper.


SEC Reverses Aspects of Proxy Voting Advice Regulations

Marc Treviño and Bob Downes are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Treviño, Mr. Downes, Aaron Levine, Natasha Rygnestad-Stahl, and Jordan Voccola.


On July 13, the SEC voted 3 to 2 (Commissioners Peirce and Uyeda dissenting) to adopt amendments to the rules governing proxy voting advice provided by proxy advisory firms. The 2022 Final Rule rescinds two sections of the rules governing proxy voting advice adopted by the SEC in July 2020. The 2022 Final Rule rescinds Rule 14a-2(b)(9)(ii) and includes conditions to exemptions from the proxy rules’ information and filing requirements that required proxy advisory firms to (1) make their advice available to the companies subject to their advice at or before the time that they made the advice available to the proxy advisory firm’s clients and (2) provide their clients with a mechanism by which they could reasonably have been expected to become aware of any written statements regarding the proxy advisory firm’s proxy voting advice by registrants subject of the advice. The 2022 Final Rule also rescinds Note (e) to Rule 14a-9, which set forth examples of material misstatements or omissions related to proxy voting advice, specifically providing that failure to disclose material information regarding proxy voting advice could be misleading. The SEC has also rescinded certain supplemental guidance released in 2020, which was prompted, in part, by the adoption of the rescinded rules.

The 2022 Final Rule will be effective on September 19, 2022.


In July 2020, the SEC adopted final rules regarding proxy voting advice provided by proxy advisory firms or proxy voting advice businesses (“PVABs”) (the “2020 Rules”). [1] The 2020 Rules comprised the following:

  • Rule 14a-2, which required PVABs to:
    • disclose conflicts of interest;
    • adopt and publicly disclose policies and procedures to provide proxy voting advice to registrants at or prior to dissemination to clients and to provide timely notice to clients of registrants’ responses;
  • Note (e) to Rule 14a-9, which clarified the applicability of the proxy rules’ antifraud provisions to proxy advice and added examples of when failure to disclose material information (e., the proxy advisor’s methodology, sources of information or conflicts of interest) regarding proxy voting advice could be considered misleading under Rule 14a-9; and
  • The definition of “solicitation,” which was amended to expressly include proxy voting advice and conditioned the availability of exemptions from the proxy rules’ information and filing requirements on proxy advisors meeting the above requirements.


SEC Proposes Narrowing Grounds for Excluding Shareholder Proposals

Richard Alsop, Harald Halbhuber, and Lona Nallengara are partners at Shearman & Sterling LLP. This post is based on a Shearman memorandum by Mr. Alsop, Mr. Halbhuber, Mr. Nallengara, Meaghan Jerrett, Alexa Major, and Ryan Robski.

On July 13, 2022, the Securities and Exchange Commission (the “SEC”) proposed revisions to Rule 14a-8 under the Securities Exchange Act of 1934 to amend certain substantive bases on which U.S. public companies can exclude shareholder proposals from their proxy statements. The proposed amendments would make it harder for companies to exclude shareholder proposals based on the following three substantive bases for exclusion: substantial implementation, duplication and resubmission.


Under Rule 14a-8, a company must include an eligible shareholder’s proposal in its proxy statement and bring it up for a vote at its shareholder meeting if the proposal meets certain procedural and substantive requirements. The rule has become a fundamental component of shareholder engagement, allowing shareholders to raise important topics for consideration at the annual meeting and to successfully advance certain corporate governance objectives, but has also created a corresponding burden for companies that are subject to numerous proposals that never achieve majority support.

First adopted in 1942, Rule 14a-8 has been the subject of various revisions, with the most recent significant amendments adopted in 1983. More importantly, Rule 14a-8 has been the subject of extensive SEC staff interpretive guidance through no-action letters that have served to define the scope of the procedural and substantive requirements and a number of Staff Legal Bulletins that have served, in part, to crystallize the Staff’s current thinking. [1]


Back to Basics: Board Committees

Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on their Deloitte/Society for Corporate Governance memorandum.

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) Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and 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.

Topics such as cybersecurity, human capital, climate, and political contributions that are associated with the seemingly limitless umbrella of “environmental, social, and governance” (ESG) are becoming standing items on many board agendas. This growing and ever-evolving list of issues that companies are expected to effectively manage is causing many boards to consider what it may mean for their oversight role and how to maintain and/or enhance oversight effectiveness. For many boards, this means taking a fresh look at their committee structure and practices to determine whether they are keeping pace with the board’s expanding and changing responsibilities and priorities or whether any changes may be warranted, such as adding new committees; revising committee charters; reallocating oversight delegation across the board and its committees; or modifying committee meeting formats (e.g., frequency or length).

This post presents findings from a May 2022 survey of Society for Corporate Governance members representing nearly 180 public companies. The intent of the survey was to understand current board committee structure, composition, and related practices, and how some of these practices have evolved over the past year.


Respondents, primarily corporate secretaries, in-house counsel, and other in-house governance
professionals, represent public companies of varying sizes and industries. [1] The findings pertain to these companies and where applicable, commentary has been included to highlight differences among respondent demographics. The actual number of responses for each question is provided.

Access results by company size and type.


Amendments to Form 13F

Stephen P. Wink is partner and Naim Culhaci is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Wink, Mr. Culhaci, Jackie Rugart, and Matthew Lee.

On June 23, 2022, the Securities and Exchange Commission (SEC) adopted certain amendments to Form 13F (the Adopting Release) that will become effective at the beginning of 2023.

Eliminating Paper Filing and Mandating Electronic Filing for Confidential Treatment Requests

Pursuant to Section 13(f) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 13f-1 promulgated by the SEC thereunder, institutional investment managers (Managers) that exercise investment discretion over at least US$100 million of “section 13(f) securities” (i.e., in general terms, US exchange-listed equity securities and options) are required to publicly disclose their positions in section 13(f) securities as of the end of each calendar quarter on a Form 13F filing that is due 45 days after the end of such quarter.

Pursuant to Section 13(f) of the Exchange Act and the Freedom of Information Act, the SEC permits Managers to submit “confidential treatment requests” whereby they can seek permission from the SEC to omit for up to one year from their Form 13F filings certain positions that constitute “confidential, commercial or financial information” by demonstrating to the SEC that prematurely disclosing the position to the public on Form 13F would reveal ongoing investment strategy to competitors and cause substantial harm to competitive position.


SEC Expects to Issue Final Clawback Regulations by October ’22

Mike Kesner and John Ellerman are partners at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback (discussed on the Forum here) by Jesse Fried.

Introduction and Background

The U.S. Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. One of Dodd-Frank’s key executive compensation provisions requires that all listed companies adopt and disclose a policy for the recoupment of incentive compensation, from its current and former executive officers, in the event a company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities law (colloquially referred to as a “clawback” policy). The amount subject to clawback is “equal to any incentive compensation received during the three-year period preceding the restatement in excess of what would have been paid the executive officers under the accounting restatement.”

In July 2015, the Securities and Exchange Commission (SEC) issued proposed rules requiring that listed companies adopt and disclose a clawback policy as required under Dodd-Frank. The proposed rules lay dormant, however, until October 2021, when the SEC reopened the comment period for the original rules along with 10 new policy questions—the most significant of which was the extension of clawbacks to corrections of errors in prior financial statements that are not material enough to require the reissuance of those statements.

On June 9, 2022, the SEC reopened a new 30-day comment period along with a memorandum prepared by the SEC’s Department of Economic and Risk Analysis (DERA). DERA’s memorandum provided detailed information on (1) the increase in voluntary adoption of compensation recovery policies by companies and (2) estimates of the number of additional restatements that would be subject to the clawback rules if the proposed rules were to include restatements due to material noncompliance (“Big R” restatements) and corrections of errors (“little r” restatements). The memorandum opines that many existing clawback policies do not comply with the Dodd-Frank requirements and most “little r” restatements do not affect net income; therefore, they are unlikely to result in a sharp increase in clawback activity. The memorandum also states that extending clawbacks to “little r” restatements will help improve the accuracy of financial reporting, especially among smaller issuers.


Chancery Decision Expands the Court’s Approaches on Director Independence

Gail Weinstein is Senior Counsel, and Steven J. Steinman and Brian T. Mangino are Partners at Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Matthew V. SoranRandi Lally, and Mark H. Lucas, and is part of the Delaware law series; links to other posts in the series are available here.

Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani.

The Goldstein v. Denner (May 26, 2022) litigation arose out of the $11.6 billion cash acquisition of Bioverative, Inc. (which had recently been spun off from Biogen, Inc.) by Sanofi, S.A. The Delaware Court of Chancery held, at the pleading stage of litigation, that certain directors and officers of Bioverative may have breached their fiduciary duties in connection with the sale process. The plaintiff claimed that the defendant directors and officers sold the company (in a single-bidder process) too quickly after the spinoff; at a price far below the company’s stand-alone value (as indicated by the company’s projections prepared in the ordinary course of business); at a time when the universe of potential buyers was limited (due to tax-related restrictions following the Spinoff not expiring for another few months); and with materially inaccurate and misleading disclosure to the stockholders.

The sale process was led by an outside director, “D,” an activist investor, who allegedly was acting in accordance with his “usual playbook” of pressuring a public company into putting him on the board, then recruiting his “supporters” onto the board, and then forcing a near-term sale of the company. In this case, allegedly, he had “supercharged” the process by having the hedge fund he controlled (the “Fund”) buy a significant stake in the company after Sanofi first approached him about its in interest in acquiring the company, and then waiting until the expiration period for disgorgement of short-swing profits under Section 16(b) of the Exchange Act to inform the board of Sanofi’s interest and initiate the sale process.

In an opinion that clarifies, and arguably expands, the court’s current approaches on important topics, Vice Chancellor Laster found, at the pleading stage of litigation, that it was “reasonably conceivable” (the standard for survival of claims at the pleading stage) that all of the defendant directors and officers committed unexculpated breaches of their fiduciary duties in connection with the sale process. The court reserved judgment for a future decision on the claim that D’s Fund aided and abetted D’s alleged fiduciary breach.


Weekly Roundup: July 29-August 4, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 29-August 4, 2022.

Board Effectiveness and the Chair of the Future

Regulatory Instability for Proxy Advisory Firms

A New Chapter in Cyber

The Single-Owner Standard and the Public-Private Choice

Sale of Portfolio Company is Subjected to Entire Fairness Review

Putting Financial Reporting Standards Into Practical Perspective

The Expanded Role of the Compensation Committee

West Virginia v. EPA Casts a Shadow Over SEC’s Proposed Climate-Related Disclosure Rule

Share Repurchases on Trial: Large-Sample Evidence on Market Outcomes, Executive Compensation, and Corporate Finances

Delaware Approves Permitting Exculpation of Officers from Personal Liability

Corporate Human Capital Disclosures: Early Evidence from the SEC’s Disclosure Mandate

Corporate Human Capital Disclosures: Early Evidence from the SEC’s Disclosure Mandate

Elizabeth Demers is Professor of Accounting at the University of Waterloo School of Accounting & Finance; Victor Xiaoqi Wang is Assistant Professor of Accountancy at California State University Long Beach; and Kean Wu is Associate Professor of Accounting at the Rochester Institute of Technology Saunders 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) by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here), both by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and 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.

Human capital is a critically important source of corporate value creation in the modern economy, yet disclosures related to what executives commonly refer to as their “most important asset” have been extremely limited relative to those of other asset classes. This was supposed to change in November 2020 when the SEC’s amendment to Regulation S-K took effect. The new rules require that filers provide expanded discussion related to the firm’s human capital (HC) as part of Item 1 (i.e., the business description section) of their 10-K filing. The new rules are principles-based, however, so they allow for a tremendous amount of discretion without stipulating any specifics as to what companies should disclose. Early critics expressed concern that this approach would lead to too much heterogeneity in HC disclosures, that it was fraught with the potential for “greenwashing,” and that it would otherwise not yield the comparable quantitative data that investors need to properly assess corporate performance.

Our study provides the first comprehensive descriptive evidence required to assess the efficacy of the new regulation that has been subject to widescale criticisms in the investment community. We use textual analysis to extract the linguistic features and numerical intensity of HC disclosures for more than 3,000 unique public companies (i.e., all 10-K filers with corresponding financial data available), each reporting for the first time under the new regulation.

A number of interesting, stylized facts emerge from our analysis. First, consistent with anecdotal accounts, we provide systematic evidence that there is tremendous cross-sectional variation in the amount, numerical intensity, tone, readability, and similarity of HC disclosures both in absolute terms, and when benchmarked against the rest of the contents of the firm’s Item 1 disclosures. Although this may seem like good news from a regulatory perspective to the extent that it suggests that firms are not providing totally uninformative boilerplate disclosures, a less sanguine interpretation of the evidence is that the low level of similarity—even for firms within the same industry—will make it harder for investors to compare HC performance across firms.


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