Monthly Archives: October 2022

The Current Landscape in Executive Compensation as Reflected in the 2022 Proxy Season

John Ellerman and Don Kokoskie are Partners and Ira T. Kay is Managing Partner and Founder at Pay Governance LLC. This post is based on their Pay Governance memorandum.


Pay Governance LLC provides counsel and advice to the Board of Directors’ Compensation Committees of more than 400 prominent publicly-traded companies. We frequently are requested to attend meetings of the Compensation Committee to provide our insights and advice regarding trends and developments as well as to render technical advice and services in executive compensation. Our ongoing client work and internal research as well as the Compensation Committee meetings we have attended during the 2022 proxy season give us a comprehensive view of the prevailing issues for Compensation Committees and how these issues are shaping the design and implementation of viable and effective compensation strategies.

The 2022 proxy season has occurred during a period of economic uncertainty for many companies. Companies are struggling with a declining stock market, supply chain shortages, high interest rates, inflation, and energy uncertainty. These economic factors have been coupled with an unprecedented regulatory push from the Securities and Exchange Commission (SEC). Additionally, institutional investors and proxy advisory firms have become more demanding in their relationships with and requirements of U.S. companies, including the proper role of other stakeholder objectives vis-vis those of investors. All these factors have influenced the issues around executive pay discussed by Compensation Committees.

The purpose of this discussion paper is to summarize the most prominent issues being discussed in the Committee meetings. Most of these issues have emerged as definitive trends in executive compensation, and we expect many of them will carry over into 2023 and the years beyond.


Activists anticipate the coming recession

Jason Booth is Vice President of Activism Editorial at Insightia, a Diligent Brand. This post is based on his Insightia memorandum. 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.

Activists often describe themselves as bottom-up stock pickers whose investments will outperform irrespective of wider economic trends. But with inflation and interest rates surging, geopolitical instability, supply chain disruption, and volatile energy prices, activists are tailoring their investment targets and demands to reflect the changing macro environment.

Demands for cost-cutting and debt reduction are on the rise, as well as greater scrutiny of merger and acquisition (M&A) deals, especially in the U.K and Europe, where weak currencies have cut into earnings forecasts.

Yet, in the longer term, U.S. activists in particular look to be taking advantage of the strong dollar to make big overseas investments with an eye to a market rebound in 2023.


A Look Back at the 2022 Proxy Season

Brigid Rosati is Managing Director of Business Development; Rajeev Kumar is Senior Managing Director; Kilian Moote is Managing Director; and Michael Maiolo is a Senior Institutional Analyst at Georgeson. This post is based on a Georgeson memorandum by Ms. Rosati, Mr. Kumar, Kilian Moote and Michael Maiolo. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.


Period Presented & Data Sources

For the 2022 proxy season, this report is based upon annual meeting results proxy year 2022, for companies within the Russell 3000 Index. Prior season data is for companies within the Russell 3000, for the full proxy season, running from July 1 — June 30 for each period presented, unless otherwise noted. For example, 2021 proxy season data is for the period from July 1, 2020 — June 30, 2021. As data for all years is based on Russell 3000 Index constituents as of proxy season 2022, such information may include minor inconsistencies compared to previous reports relating to the 2021 and 2020 proxy seasons, due to changes to index membership over time.

Shareholder proposal submission data and annual meeting results discussed herein have been sourced from ISS Corporate Solutions and supplemented by our own research through additional sources, including various proponents’ shareholder proposal submission data.


The Hottest Front in the Takeover Battles: Advance Notice Bylaws

Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor at George Washington University Law School. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian A. Bebchuk; and Toward a Constitutional Review of the Poison Pill (discussed on the Forum here) by Lucian A. Bebchuk and Robert J. Jackson Jr.

A hot new front is opening in the timeless fights for corporate control between supine boards and activist shareholders: advance notice bylaws that impose onerous conditions on stockholder nominations of new directors.

The battle is joined by an extreme version of such bylaws adopted by the board of Masimo Corporation, a $7 billion medical device maker led by billionaire founder Joe Kiani, after Politan Capital, a hedge fund run by veteran activist Quentin Koffey, disclosed an 8.8% stake, and Koffey expressed interest in board representation.

The Masimo bylaws purport to require that investors seeking to nominate directors to its board disclose the identities of any limited partners and plans for nominations at other companies. The board-adopted bylaw would erect a formidable obstacle to Politan’s efforts to restore discipline to a company plagued by a classic corporate problem: a powerful founder-CEO who built a once-strong company uses its cash to fund wayward corporate projects and lavish personal perks from private security to private jet travel.

The Masimo bylaw would fortify a governance battlefield already stacked against Politan, as Masimo has a staggered board as well as a poison pill. What’s more, Kiani is both chair and CEO and there is no lead independent director, and a golden parachute pays Kiani nine-figures if two of the five incumbent directors are voted out.

But even amid that arsenal, the Masimo advance notice bylaws, which are now being litigated in the Delaware Court of Chancery, resemble the “nuclear option” and offers a case study in how rational governance devices can become unduly weaponized. Historically, advance notice bylaws were intended to serve the valid purpose of administration of shareholder meetings. Without them, chaos would result from stockholders unexpectedly nominating directors from the floor. Order was maintained by requiring notice 30 days in advance.

Over time, however, incumbents gradually increased the length of the required notice, from 60 days, then 90, then 120, and several companies today demand notice over six months before an annual meeting. The required content of the notice has also expanded from originally naming the names to now calling for each nominee to complete an extensive questionnaire and for them and the nominating shareholder to provide all the information that would be required by federal securities law in a proxy statement filed with the SEC.

State corporate law grants companies and corporate boards leeway in this area, but it’s not unbridled. Delaware courts, for instance, permit an incumbent board to pose reasonable questions of nominating shareholders and nominees to assist it in preparing disclosure materials and making recommendations on how to vote.

But they draw a red line at attempts by boards to interfere with the stockholder franchise, which includes the right to vote and the right to nominate. Courts police against subterfuge by rejecting advance notice bylaws purporting innocently to require relevant information but having the clear purpose and certain effect of depriving shareholders of the opportunity to nominate directors of their choice and exercise their right to vote for directors.

Within this framework, the Masimo bylaws almost certainly cross the line, particularly in its call for a nominating shareholder to disclose its limited partners. After all, it is standard, valid practice for investment funds of all kinds to hold the identities of their investors in the strictest confidence. Limited partners opt for that status for many business and legal reasons and investment advisors have similar interests in protecting their investor lists.

Ask any investment fund—from private equity firms such as Apollo to public index funds such as BlackRock—for a list of their top twenty investors and you will be told no. Such investment funds and advisors routinely pledge such confidentiality to their investors, often formally expressed in covenants in their investment contracts. Conditioning a shareholder director nomination on disclosing its investors is therefore tantamount to denying them the opportunity to nominate anyone.

Nor does there appear to be any value to the company or its other shareholders in requiring the disclosure of a nominating shareholder’s limited partners. Limited partners are passive investors by business definition and legal classification. They do not control the nominating shareholder’s investments or strategies. Those choosing to operate differently would be obliged to make full disclosure of the facts under existing federal securities laws, making such advance notice bylaws redundant.

Equally prohibitive is conditioning such nominations on the disclosure of planned director nominations at other companies. That calls for revealing investment plans and strategies that are invariably the product of substantial, costly research and analysis. Maintaining the confidentiality of such efforts is essential to the successful deployment of capital. Compelling its disclosure undermines the business model, providing a Draconian deterrent to nominate a director. Again, it is not obvious why such other investments would generally be important to a company’s other shareholders.

A law professor known for his strong opposition to activist investors recently published an article lamenting that poison pills, another formidable defense, have proven ineffective at stopping activists and extolling the Masimo advance notice bylaws as the new weapon of choice that just might do so. The argument proves the point: bylaws such as the Masimo board adopted are Draconian showstoppers.

Advance notice bylaws will continue to be used in battles for corporate control. But they cannot be used to end them. The front is just heating up.

Activists Face an uphill battle

Jason Booth is Vice President of Activism Editorial at Insightia, a Diligent Brand. This post is based on his Insightia memorandum. 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 recent proxy season was a challenging one for shareholder activists, despite institutional investors and proxy voting advisers backing more dissident nominees.

Activists won at least one board seat at 29% of campaigns that went to a vote or settled this proxy season, according to Insightia’s Activism module, compared to at 54% and 34% of campaigns throughout the 2020 and 2021 proxy seasons, respectively. Most of the wins were at smaller companies, while activists had less luck against bigger companies with resources to mount a vigorous defensive.

Besides stronger defenses, other reasons for the continued slowdown in activism include stock market volatility and growing economic uncertainty that has made valuing and targeting companies more difficult, according to industry players who spoke with Insightia.


Chancery Court Upholds Amendment Prolonging Company’s Dual-Class Structure

Gail Weinstein is senior counsel, and Steven Epstein and Andrea Gede-Lange are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Ms. Gede-Lange, Mr. Soran, Mr. Colosimo, and Mr. Chrisope, 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 The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here)  and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

In City Pension Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk, Inc. (July 29, 2022), stockholders of The Trade Desk (“TTD”) challenged an amendment to the certificate of incorporation of TTD that effectively extended the duration of the company’s dual-class stock structure—which, in turn, effectively extended the duration of the voting control held by TTD’s co-founder/CEO/chairman of the board, who owned 98% of TTD’s high-vote Class B common stock, representing control over 55% of the combined vote of the stockholders. The plaintiff alleged that the controller, TTD’s board of directors, and certain officers breached their fiduciary duties in approving the charter amendment and recommending it to the stockholders (who voted to approve it).

The TTD board was comprised of the controller and seven outside directors. The amendment was approved by a special committee of the board comprised of three of the outside directors. The transaction, involving a conflicted controller, was subject to the entire fairness standard of review unless the prerequisites for business judgment review as set forth in MFW had been met. Vice Chancellor Fiorvanti concluded, at the pleading stage of litigation, that the MFW prerequisites were satisfied; and the case thus was dismissed.


A Graphical Look at U.S. Shareholder Proposals in 2022

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services, Inc. This post is based on an ISS Corporate Solutions publication by Trey Poore, Associate Director at ISS Corporate Solutions. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

Despite a steady decrease  in the portion of environmental and social proposals receiving less than majority support from 2017 through 2021, 2022 bucked the trend likely due to  some institutional investors viewing them as overly prescriptive as explained here, for example, by BlackRock.


Is Your Board Effective?

Rich Fields leads the Board Effectiveness practice and Rusty O’Kelley co-leads the Board and CEO Advisory Partners in the Americas at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum.

Is Your Board Effective?

Directors and executive leaders want their boards to be effective—that’s undeniable. But what makes a board not just competent, but a truly high-performing, value-enhancing board? That definition is much more elusive.

At too many companies, effectiveness is only evaluated in the past tense, and sometimes only after something has gone wrong. If the question is “why wasn’t the board effective?,” there can be real reputational or legal culpability.

Instead, boards should focus in the present and future tense: Is the board effective? Does it understand and execute its responsibilities, staying focused on truly strategic items and fostering an environment conducive to value creation? Does it have the right mix of backgrounds, skills, and experiences to thrive? And will it remain effective in the future, given anticipated challenges and opportunities?


Weekly Roundup: October 14-20, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 14-20, 2022

There Is No “C” in “ESG”: An Illustration of ESG’s Biggest Risk

Chancery Court Decision Illuminates Contours of Director Oversight Liability

Insider Trading Disclosure Update

The Cobalt Conundrum: Net Zero Necessity vs Supply Chain Concerns

Considerations for Dual-Class Companies Contemplating M&A Transactions

2025 climate action plan – Driving portfolio companies towards net zero 2050

Quarterly Review of Shareholder Activism – Q3 2022

Chancery Court Finds Conflicted Controller Spinoff Met MFW Prerequisites

IPO Readiness: IPO Equity Awards

2022 Annual Corporate Directors Survey

2022 Annual Corporate Directors Survey

Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Leah Malone is Managing Director at the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.


In 2022, as both the ongoing direct impacts and unexpected side effects of the COVID-19 pandemic continue to mount, the landscape of the business world is shifting yet again. An ongoing war in Ukraine, rising global inflation, fears of recession, and the near-constant drumbeat of catastrophic environmental news and predictions are changing the geopolitical context. In the US, market turmoil, social upheaval, political polarization, looming midterm elections, and uncertain regulatory developments make the landscape feel like uncharted territory. When the path is uncertain, boards are a source for constancy and guidance.

Against this backdrop, business leaders are confronting a new trust crisis. While surveys show that the public trusts business over other institutions like the government, media, and NGOs, the picture isn’t perfect. In fact, business leaders vastly overestimate this sentiment. A recent PwC survey shows that while 87% of business executives believe consumers highly trust their company, only 30% of consumers actually do. Trust is hard won and easily lost, and stakeholders are coming to expect more from companies. This lands at the feet of the board of directors as the stewards of the company.

Their role on the board of a public company demands that directors keep their eyes on the horizon, plotting the course amid sometimes choppy waters. As shareholder and consumer expectations rise, our survey of more than 700 public company directors shows that board oversight and board practices are shifting in response. Above all, boards are becoming much more transparent. They are engaging with shareholders and providing more disclosure than ever, with the hope that it will build and maintain trust.


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