Monthly Archives: October 2022

Assessing the Executive Pay Landscape Ahead of 2023

Amit Batish is Director of Content at Equilar, Inc. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; and Paying for Long-Term Performance (discussed on the Forum here) by Lucian A. Bebchuk and Jesse M. Fried.

As 2022 nears its close, companies across Corporate America are preparing for 2023 and what’s developing to be one of the most anticipated proxy seasons in recent years. In August 2022, the United States Securities and Exchange Commission (SEC) officially adopted its “Pay Versus Performance” rules, following several rounds of comments and proposals. The new rules require public companies to disclose information reflecting the relationship between compensation actually paid to a company’s named executive officers (NEOs) and the company’s financial performance.

The implementation of the SEC’s requirements—combined with constant pressure from investors and other key stakeholders to align executive pay with corporate performance—are compelling companies to begin the preparation of their proxy statements much earlier than usual. Nevertheless, companies will often rely on trends from the previous year in preparation of their disclosures.  In this post, Equilar examines 2022 Say on Pay voting trends and the prevalence of pay for performance disclosures over the last five fiscal years to provide a sense of the current executive compensation landscape.

The concept of pay for performance has long been advocated by investors, particularly given the influence they have on pay packages. Following the 2008 financial crisis, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in an effort to improve accountability in the financial system. As part of Dodd-Frank, several statutes were designed specifically targeted at executive compensation, including those related to Say on Pay and pay for performance.  Since its adoption in 2011, Say on Pay has played a critical role in providing investors a platform to voice discontent over executive compensation misalignment with performance. However, despite the influential voice investors hold, the vast majority of executive pay packages are approved by shareholders.

According to Equilar research, an overwhelming 97.5% of the Equilar 500—the 500 largest U.S. companies by revenue—passed Say on Pay in 2022.  Nonetheless, a shifting trend is emerging—28.9% of Equilar 500 companies passed their Say on Pay vote with 95% support or greater, down 29.5% from 40.1% in 2018. While investors have grown more critical and weary of pay packages in recent years, 72.7% of Equilar 500 companies still passed their Say on Pay votes by a margin of 90% or greater in 2022, with under 3% of companies of failing in four of the last five years (2021 being the lone exception when 3.2% of companies failed).


Racial Rhetoric or Reality? Cautious Optimism on the Link Between Corporate #BLM Speech and Behavior

Lisa M. Fairfax is a Presidential Professor at the University of Pennsylvania Carey School of Law. This post is based on her recent paper, published in the Columbia Business Law Review. 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. 

In the wake of the murders of George Floyd, Breonna Taylor, and other unarmed Black people at the hands of police, the summer of 2020 saw a dramatic rekindling of the #BlackLivesMatter movement as cities in America and worldwide erupted in protests and calls to dismantle racist and discriminatory policies and practices both in the criminal system and throughout all levels of society.

In a move that took many by surprise, corporations and their brands responded to these calls with a virtual flood of black squares, #BlackLivesMatter signs, and corporate statements professing to support the Black community, expressing a rejection of racism, intolerance, bias, and bigotry, and pledging to help eradicate racist policies and practices both within their own institutions and the broader society. Original research done by this author reveals that by August 2020, 86% of Fortune 100 companies and 66% of Fortune 500 companies released such statements. For example, Harley-Davidson insisted: “Racism, hate or intolerance have no place at Harley-Davidson. We stand in solidarity with our Black colleagues and riders, as we condemn acts of racism and bigotry of any kind . . . . United we will ride.” Netflix stated: “To be silent is to be complicit.” Johnson & Johnson declared “we must do more. And we must do it now.”


Boardroom recap: The 2022 proxy season

Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Matt DiGuiseppe is Managing Director at the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

The 2022 proxy season saw a marked increase in the number of shareholder proposals and lower support for both say on pay and directors. What do boards need to be focused on as they head into the fall?

Looking back on the 2022 proxy season, the story on shareholder proposals stands out. Overall, support for shareholder proposals fell for the first time in years, although pockets of strong support in the areas of climate and human capital deserve attention. Support for say on pay also continued to fall, as investors appear to be taking a more critical posture. [1] Finally, overall support for director elections also retreated. [2] As boards undertake their annual governance reviews and make the decisions that will feature in the 2023 proxy statement, considering these results can lead to a smoother season next year.


Making It Plain: SSGA Asset Stewardship Approach

Benjamin Colton is Global Head of Asset Stewardship, and Michael Younis is Vice Presidents in Asset Stewardship at State Street Global Advisors. This post is based on their SSgA memorandum.

At State Street Global Advisors, we use a risk-based approach to identifying issues that we believe have the most material impact on the long-term value of our clients’ assets. We elevate outcome-oriented stewardship priorities each year based on factors such as market trends, financial materiality and portfolio impact.

As near-permanent holders of capital, it is our responsibility as fiduciaries to consider elements that may impact long-term value creation. Our asset stewardship program includes:

Corporate Engagement

  • Engaging with companies on key challenges and opportunities pertinent to their region and industry
  • Educating their boards and management on best practices

Proxy Voting

  • Leveraging the exercise of our voting rights, which provides a meaningful shareholder tool that we believe protects and enhances the long-term economic value of the holdings in our client account

Corporate Engagement

We engage with companies to drive improved standards and disclosure around financially material risks and opportunities. Our experience in asset stewardship has provided us with important lessons on constructively engaging with companies.

Engagement versus Divestment

In our view as long-term holders of the companies in which we invest on behalf of our clients, divestment is not an adequate option for investors. Rather than divesting from companies, we believe that engaging with companies to optimize their operations and disclosures is the optimal strategy for mitigating risks posed to our clients’ investments, as well as capturing potential opportunities that may exist.

Our focus begins with governance, as we believe that strong, independent and effective boards of directors can better address the issues affecting long-term strategy. We use sustained, multi-year engagements to drive improved disclosure and standards and seek the long-term preservation of the value of the companies in which we invest.

We believe that our portfolio companies are best suited to understand what issues are most impactful for their business and, therefore, base our priorities for each portfolio company upon ongoing dialogue with company management and boards. Importantly, State Street Global Advisors does not maintain a firmwide divestment policy.

Figure 1 explains our approach to engagement.

Proxy Voting on Sustainability-Related Issues

As environmental, social and governance (ESG) factors have risen in importance to the broader market, State Street Global Advisors has seen a rise in shareholder proxy proposals related to sustainability issues. We consider sustainability-related shareholder proposals on a case-by-case basis and analyze many different factors to determine our approach. As such, we only vote in favor of sustainability-related shareholder proposals when we believe it is reasonable and will maximize long-term shareholder value for our clients.

With this in mind, we will only consider supporting sustainability-focused shareholder proposals if they address an environmental or social topic deemed to be financially material to a particular sector. Figure 2 outlines our proxy voting approach, which is meant to help mitigate risks and support business practices that create long-term value. Also see our CEO’s letter on our 2022 Proxy Voting Agenda.

With respect to sustainability-related proposals, see our voting record in Figure 3. For environmental and social proposals, we consider financial materiality, a company’s level of disclosure and a company’s commitments for improvement, among other criteria.

Investor Choice

We are supportive of giving our clients greater choice around how their shares are voted. Today, clients invested through our separately managed account structures have the option to retain proxy voting authority over the securities held in their accounts that we manage for them. We are continuing to explore the possibility of providing investor choice to more products and client types.

Our Goal: To Be Constructive Partners With a Pragmatic Approach

As a long-term shareholder, we will continue to serve as a consistent voice to portfolio company boards and management teams. While we do believe there are benefits in boards considering the voices of long-term shareholders when weighing significant decisions relating to capital allocation and long-term strategy, it is the board’s role — and not investors’ — to determine that strategy.

For example, we believe it is appropriate for us as investors to share what metrics related to climate risk aid us in understanding companies’ exposure to climate transition risk. Conversely, we believe it is not productive for shareholders to micromanage strategy or dictate which assets should be divested. We have publicly shared our concerns of the unintended consequences of inappropriate investor pressure to divest fossil fuel assets.

Another example of how we approach our engagements with companies from a risk rather than an operational lens is our discussions with a pharmaceutical company that received a shareholder proposal asking it to suspend the manufacture of a specific product that was alleged to have carcinogenic properties. We did engage with the company to understand how it was managing the reputational, legal, and financial risks associated with this product. Ultimately, we did not support the proposal because we believe it is the responsibility of regulators — not investors — to determine what products are safe for human health and appropriate for consumer use.

With many portfolio companies improving their shareholder engagement practices and approach to long-term financially material issues, our support for incumbent directors in contested elections has steadily increased over the last five years, reaching a new high in 2022, as seen in Figure 4. We will continue to serve as a constructive partner to our portfolio companies and a consistent voice to their boards and management teams.

We are pleased to report that 2021 was a significant year for our corporate engagement activities, including 878 comprehensive engagements across 42 countries:

For further information on our 2022 stewardship activities, see our Q1 2022 Activity Report:

The complete memorandum is available here.

Perspectives on the Current Activism Landscape

Kai H. E. Liekefett and Derek Zaba are Partners, and Leonard Wood is a Senior Managing Associate at Sidley Austin LLP. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, and Wei JiangDancing with Activists (discussed on the Forum here) by Lucian A. 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.

The activism landscape in a post-pandemic world continues to evolve. This year has been characterized by a sharp increase in campaigns relative to recent years, a heightened focus on M&A transactions and increased presence of environmental, social and governance (ESG) themes. Amid all of this evolution, the recent implementation of the universal proxy card regime represents a step function change in activism campaigns, the impact of which is only beginning to be felt.

Post-Pandemic Rebound

Activism significantly rebounded in 2022, with total campaigns through Q3 up 39% over the same period last year, already nearly reaching the total for full-year 2021. In the United States, total campaigns have already surpassed the total for full-year 2021, with Q3 campaigns up 133% compared to last year. In addition, the increase appears to be accelerating, with Q3 seeing a 52% increase in global activism campaigns over the prior year, continuing the trend in both Q1 and Q2. Technology companies have recently been the most frequent targets, accounting for 22% of all activism campaigns launched in Q3. [1]

The increase in activism is due to several factors. Market conditions have been favorable for activists and characterized by a stock market that severely punishes any missteps, significantly lower valuations, and increased volatility. These factors have facilitated the increase in activist engagements, particularly in sectors that have been hit hardest by the market downturn. In addition, activist funds have larger amounts of capital to deploy than in recent years and any remaining constraints on activism from the pandemic have dissipated, creating a perfect storm for activism.

These factors have also made the acquisition of a meaningful stake in large-cap companies within reach for many small- and mid-sized activists who are looking for downside protection and lower volatility in the months ahead. Large-cap companies are on pace this year for seeing the highest number of demands for board seats.


Shareholders’ Rights & Shareholder Activism Trends and Developments

Eleazer Klein, Michael Swartz, and Adriana Schwartz are Partners at Schulte Roth & Zabel LLP. This post is based on a piece by Mr. Klein, Mr. Swartz, Ms. Schwartz, and Brandon Gold.

Trends and Developments

Shareholders’ Rights and Shareholder Activism in the USA

Shareholders of public companies must navigate a complex landscape that includes both government regulation and the by-laws of the companies whose shares they hold. Two recent opinions from the Delaware Chancery Court underscore the importance for shareholders of careful timetable management and adherence to advance notice by-laws when making nominations. In addition, rules proposed by the U.S. Securities and Exchange Commission (SEC) concerning the reporting of beneficial ownership have the potential to introduce considerable compliance challenges and impede communication between shareholders. And both developments underscore the ease with which shareholders can “foot fault”, whether with regard to company by-laws or SEC regulations.


The ESG Fiduciary Gap

Vivek Ramaswamy is the Executive Chairman at Strive Asset Management. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian Bebchuk, and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian 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; 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; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

The largest fiduciary breach and the most significant antitrust violation of our time may be hiding in plain sight: a small group of large asset managers are using a vast base of client funds to advocate for social agendas unrelated to those clients’ long-run financial interests.

The largest three U.S. passive asset managers—BlackRock, State Street, and Vanguard, sometimes called “the Big Three”—manage approximately $20 trillion of capital on behalf of clients and exert staggering social influence on American companies. They collectively own more than 20% of the S&P 500, and, as of 2017, constitute the largest shareholder in almost 90% of those companies.

These asset managers are, first and foremost, fiduciaries for their clients. As fiduciaries, they owe their clients the duty of care and the duty of loyalty. These duties are taken from trust law, and center around a fundamental principle called the “sole interest rule.” As explained in the Restatement (Third) of Trusts, the “sole interest rule” requires fiduciaries to act “solely” and “exclusively” in the interest of the persons to whom their fiduciary duties are owed.


Shareholder Activism in 2022

Eleazer Klein is a Partner and Brandon S. Gold and Abraham Schwartz are Associates at Schulte Roth & Zabel LLP. This post is based on a piece by Mr. Klein, Mr. Gold, Mr. Schwartz, Adriana Schwartz and Mario Kranjac. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here); Dancing with Activists (discussed on the Forum here) both by Lucian A. Bebchuk, Alon Brav, and Wei Jiang; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo Strine.

This year, shareholder activism continued its post-COVID surge, with an increase in both the number of campaigns launched and the size of companies targeted. But while overall activity increased year-over-year, there was a decrease in the number of proxy fights, with more campaigns settling. It remains to be seen whether the onset of the universal proxy regime will reverse this (one-year) trend. Companies haven’t been waiting to find out, as the corporate weaponization of advance notice bylaws continued in 2021 and, based on recent events, seems poised to expand further in 2022. The continued slowdown in M&A activity is another trend to watch, as activist activity over the last two proxy seasons was impacted by an increase in M&A-related campaigns. On the topic of uncertainty, it is also worth noting that the effects of the SEC’s recently proposed amendments to Schedule 13D may have somewhat of a chilling effect on activist activity. Finally, ESG activism continued its march forward, but while it boasted a banner year in terms of aggregate activity, its success at the ballot box was questionable this year.


State Regulation of ESG Investment Decision-making by Public Retirement Plans

Joshua Lichtenstein and Michael Littenberg are Partners, and Reagan Haas is an Associate at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Lichtenstein, Mr. Littenberg, Ms. Haas, and Jonathan Reinstein.


The growing divide in the ESG regulatory landscape between states became clear with the passage of legislation in Maine and Texas in 2021, which adopted contradictory ESG policies for state pension fund investments. Maine enacted legislation prohibiting investment by the Maine Public Employees Retirement System in the 200 largest publicly traded fossil fuel companies, as determined by the carbon in their reserves. Additionally, the law requires the retirement sys- tem to divest from these restricted companies by January 1, 2026. Similar legislation has been proposed in California, Hawaii, Massachusetts and New Jersey, among others, in recent months.

Conversely, the approach Texas took last year (which several other states have considered since) is to prohibit the state from entering into banking and financial contracts with financial companies that boycott firearms or energy companies. Several months ago, state officials in Texas began warning financial institutions that their boycotting activities endanger these companies’ ability to do business with the state, which ultimately culminated in the publication of a list of companies considered to be boycotters. Some government entities have started preemptively excluding targeted financial institutions from bond deals to avoid having to switch underwriters once the states finalize their list of restricted institutions. The state treasurers of Louisiana, Missouri and South Carolina each recently announced certain divestitures based on the ESG views of a manager.

This divide has deepened as more than a dozen states introduced new initiatives over the last year seeking to either divest state pension funds from gun and ammunition, oil and gas, and/or coal companies or, conversely, to require state pension fund divestment from companies that boycott fossil fuel companies. At least one state, Indiana, has considered measures both to divest from fossil fuel companies and to divest from fossil fuel boycotters. In August, the State Board of Administration (SBA), the governing body of the Florida Retirement System Defined Benefit Pension Plan, revised the plan’s investment policy statement to say that investment decisions must be based only on pecuniary factors, and these do not include the consideration of the furtherance of social, political, or
ideological interests. Moreover, the SBA may not sacrifice investment return or take on additional investment risk to promote any non-pecuniary factors when making investments or proxy votes.

Beyond legislation on divestment and state contracts, states are deploying task forces, investigations and report committees to encourage or discourage ESG investing. Additionally, some pension funds are adopting their own ESG investment and proxy voting policies, notwithstanding what their state mandates say. For example, only two weeks after the Texas fossil fuel boycott divestment bill took effect, the Teacher Retirement System of Texas announced that it would consider material ESG factors in its investment decisions.


How Much Do Investors Care About Social Responsibility?

Scott Hirst is Associate Professor of Law at Boston University; Kobi Kastiel is Associate Professor of Law at Tel Aviv University and Senior Fellow of the Harvard Law School Program on Corporate Governance; and Tamar Kricheli-Katz is a Professor of Law at Tel Aviv University. This post is based on their recent paper. 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 (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.

Perhaps the most important corporate law debate over the last several years concerns whether directors and executives should manage corporations to maximize value for investors, or to also take into account the interests of other stakeholders or society (see, e.g., Hart and Zingales, 2017; Bebchuk and Tallarita, 2020; Rock, 2021). But this raises several important questions that have received much less attention: Do individual investors themselves wish to maximize returns, or are they willing to forgo returns for social purposes? And more broadly, do market participants, such as investors and consumers, differ from donors in the ways in which they prioritize monetary gains and the promotion of social goals?

Our recent paper, How Much Do Investors Care about Social Responsibility?, attempts to answer these important questions with new empirical evidence from an experiment conducted on 279 Americans with investing experience that involved real monetary gains for participants. The experiment investigated the tradeoffs that individuals make between their own financial interests, and four different social interests—gender diversity, income equality, environmental protection, and faith-based values.


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