Monthly Archives: December 2022

New DOL Guidance on ESG and Proxy Voting

Michael Albano and Elizabeth Dyer are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Robert H. Sitkoff and Max M. Schanzenbach; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart, and Luigi Zingales.

On November 22, 2022, the Department of Labor (“DOL”) released its final rule (the “Final Rule”)[1] clarifying the application of ERISA’s fiduciary duties to the selection of investments and investment courses of action, including with respect to the consideration of environmental, social and governance (“ESG”) factors and the exercise of shareholder rights. The Final Rule, which is largely consistent with the DOL’s 2021 proposal, “clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits.”[2]

The Final Rule reaffirms a bedrock principle under ERISA’s duties of prudence and loyalty – when selecting investments and/or investment courses of action, plan fiduciaries must focus on the relevant risk-return factors and may not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan (e.g., by reducing investment returns and/or increasing investment risks). Through the years, the DOL has issued quite a bit of guidance regarding the consideration of ESG factors and the exercise of shareholder rights. While the foregoing principle has remained constant, the DOL’s guidance has varied as to the degree to which ESG factors may be considered and the responsibilities of fiduciaries in connection with the exercise of shareholder rights.[3]


Proxy Advisors Update Voting Guidelines for 2023

David A. BellDean Kristy, and Julia Forbess are Partners at Fenwick & West LLP. This post is based on a Fenwick memorandum by Mr. Bell, Mr. Kristy, Ms. Forbess, Ryan Mitteness, and Ron C. Llewellyn.

Institutional Shareholder Services (ISS) and Glass Lewis, the leading proxy advisors in the United States, have announced updates and clarifications for their voting guidelines for the 2023 proxy season. Their voting recommendations influence many institutional investors and play an important role in voting outcomes. This alert summarizes the key changes to their respective guidelines and suggests actions that companies can take to address them.


In December 2022, ISS announced its 2023 Benchmark Policy Updates, which will generally take effect for meetings on or after February 1, 2023. The most notable changes to its policy are discussed below.


ISS will recommend a vote against (or withhold from) the appropriate director(s) or other relevant voting items at high-emitting companies (currently defined as those companies on the current Climate Action 100+ Focus Group list), where the company does not:

  • provide adequate disclosure of climate-related risks, such as pursuant to the Taskforce on Climate-related Financial Disclosure (TCFD) framework, and
  • have either medium-term or Net Zero-by-2050 GHG emissions reduction targets, which should cover at least the vast majority (95%) of the company’s Scope 1 and Scope 2 emissions.


Overseeing internal investigations

Maria Moats is a Leader and Stephen Parker is a Partner at the Governance Insights Center, PricewaterhouseCoopers LLP. Kristin Rivera is a Partner and the Global Forensics Leader at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

What is the audit committee’s role?

Companies are getting more whistleblower tips and complaints. Shareholders, employees, and regulators expect companies to follow up, and resolve any issues. For many companies it is not a matter of if a significant complaint will occur—but when. And given the size of some whistleblower settlements, the incentive to speak up is growing.

Complaints often involve a possible economic loss to the company and have accounting, internal control, and disclosure ramifications. As a result, the audit committee is usually called upon to oversee or direct an internal investigation.


Good Corporate Citizenship We Can All Get Behind?: Toward A Principled, Non-Ideological Approach To Making Money The Right Way

Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. This post is based on his article forthcoming in the Business Lawyer. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and For Whom Corporate Leaders Bargain (discussed on the Forum here) both by Lucian Bebchuk and Roberto Tallarita; Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson, Jr; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson Jr, and James Nelson; 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.


A rancorous debate is raging. Must corporations just seek profits for stockholders? Or may they pursue not just the best interests of all stakeholders, but influence public policy on controversial political issues and tilt the election process toward candidates and causes they favor?

This debate has historical antecedents, as both the left and the right have long been concerned about the legitimacy of corporations using other people’s capital for political and social causes. Each understands that stockholders share only one purpose — a solid return — and have diverse political beliefs. Each understands freedom is imperiled if workplaces become subject to dictated orthodoxies. Each asks: who are CEOs to use other people’s money to advance their own idiosyncratic views of the good?

But, rather than come together to forge constructive solutions, the right and left praise corporations that take policy positions they like, while condemning as illegitimate corporations that disagree with them. That’s natural but unhelpful.


(Claw) Back to the Future

Martha Carter is Vice Chair & Head of Governance Advisory, Sean Quinn is a Senior Managing Director, and Sydney Carlock is a Managing Director at Teneo. This post is based on a Teneo memorandum by Ms. Carter, Mr. Quinn, Ms. Carlock, and Matt Filosa. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback by Jesse M. Fried.

On October 28th 2022, the SEC adopted the final compensation-related rule of the Dodd Frank Act, requiring companies to recoup compensation that was previously awarded to certain executives based on false information.

Whereas companies were able to implement other Dodd-Frank compensation-related rules without fundamentally changing their pay plans (such as the CEO pay ratio disclosure requirements), the clawback rule requires the NYSE and NASDAQ to update their listing standards and issuers to adopt a specific policy that affects the amount of compensation executives will ultimately take home. The rule was published in the Federal Register on November 28, 2022,[1] and exchanges have 90 days to publish their revised listing standards to – be effective no later than November 28, 2023.

The new clawback requirements differ considerably from the prior clawback mandate under the Sarbanes-Oxley Act of 2002 which, in addition to implementing and reporting certain accounting controls, requires the recoupment of erroneously paid compensation to the CEO and CFO for material restatements resulting from misconduct (see Appendix). We believe this rule will have a significant impact on how compensation is structured and earned, with the largest potential implications highlighted below.


Audit committee effectiveness: practical tips for the chair

Maria Castañón Moats is a Leader; Stephen Parker is a Partner; and Tracey-Lee Brown is a Director at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

Today’s boards are increasingly being asked to up their game—by regulators, investors, and proxy advisors. Audit committee workloads are growing and often include overseeing complex areas such as cybersecurity and elements of ESG. The entire board relies on the hard work of the audit committee to meet its overall objectives. But many audit committees are asking whether they have the right approach to meet these demands.

Audit committees need to find ways to meet the heavy burden of regulatory mandates, keep up with increasing stakeholder expectations, and find time for unforeseen issues. Here are some ideas for the audit committee chair to build the right audit committee and keep members performing at a high level.

Effective oversight by strong, active, knowledgeable, and independent audit committees significantly furthers the collective goal of providing high-quality, reliable financial information to investors.

–Paul Munter

Acting Chief Accountant, SEC, October 2021


The Activism Vulnerability Report – Q3 2022

Jason Frankl and Brian G. Kushner are Senior Managing Directors at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian A. Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Frankl and Kushner Leo E. Strine, Jr. (discussed on the Forum here).

Introduction and Market Update

With 2023 fast approaching, FTI Consulting’s Activism and M&A Solutions team welcomes readers to our quarterly Activism Vulnerability Report, highlighting the findings of our Activism Vulnerability Screener for 3Q22 as well as other notable trends and themes in the world of shareholder activism and engagement.

U.S. stock markets continued to struggle in 3Q22 as investors revalued positions and rebalanced portfolios in response to the U.S. Federal Reserve’s two 0.75% interest rate increases and escalating economic uncertainty during the quarter.[1] Alongside additional rate hikes of 0.75% in both October and November, investors received a welcome smidge of positive economic news in early November – October’s inflation report showed that increases in the Consumer Price Index decelerated from June’s four decade-high reading, perhaps boosting the likelihood of a smaller, 0.50% increase in the federal funds rate at the Federal Reserve’s next meeting in mid-December.[2]

The highly anticipated U.S. midterm elections were also held in early November. Though Democrats managed to keep control of the Senate, Republicans regained control of the House of Representatives.[3] Following Election Day, the S&P 500 experienced a drawdown of 2.1%. However, from November 10 onwards, the index increased by 5.8%, though major U.S. indices are still down year-to-date.[4] As of November 28, 2022, the Dow Jones Industrial Average (“DJIA”) was down 6.8% year-to-date, the S&P 500 was lower by 16.8% and the Nasdaq Composite fell by 29.4%. Over the same period, the CBOE Volatility Index (“VIX”) increased 19.0%.[5]


What Do Outside CEOs Really Do? Evidence from Plant-Level Data

John Bai is an Associate Professor at D’Amore-McKim School of Business, Northeastern University; and Anya Mkrtchyan is an Associate Professor at Isenberg School of Management, University of Massachusetts–Amherst. This post is based on their article forthcoming in the Journal of Financial Economics.


Whether a new CEO is promoted from within the firm or is hired from outside the company can have a profound impact on strategy-setting and firm performance. When debating the merits of promoting insiders, the typical assumption is that insiders have a deep understanding of a firm’s core competencies and established internal social networks. In contrast, outside CEOs are presumed to possess broader general skills and are believed to have an advantage in bringing bolder changes, as they have no emotional commitments to the firm’s status quo (e.g., Murphy and Zabojnik, 2007; Custódio et al., 2013; Parrino, 1997). However, changes initiated by an external CEO might not necessarily lead to performance improvements, since they may put significant strains on the firm’s managerial resources and organizational systems (Zhang and Rajagopalan, 2010). Hence, whether outside or inside CEOs transform companies better has been one of the most debated questions among academics, practitioners, and boards of directors.


Exculpation of Personal Liability Expanded to Include Certain Corporate Officers

Richard J. Grossman, Allison L. Land, and Marc S. Gerber are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Grossman, Ms. Land, Mr. Gerber, Alexander J. Vargas and Melanie Yeames. This post 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 Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.

Amendment to Delaware General Corporation Law: Exculpation of Personal Liability Expanded to Include Certain Corporate Officers

Effective August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”) was amended to authorize exculpation of certain senior officers of Delaware corporations from personal liability for monetary damages in connection with breaches of their fiduciary duty of care (the “Officer Exculpation Amendment”).

The Officer Exculpation Amendment Explained

Since its original adoption in 1986, Section 102(b)(7) of the DGCL has authorized exculpation of directors of Delaware corporations from personal liability for monetary damages in connection with breaches of their fiduciary duty of care. However, until the recent enactment of the Officer Exculpation Amendment, officers of Delaware corporations were not afforded the same protection­—despite often having overlapping roles and, in recent years, being susceptible to similar lawsuits. The Officer Exculpation Amendment reduces the differential treatment between directors and officers, but Section 102(b)(7) imposes additional limitations on exculpating senior officers from liability.

Now, Delaware corporations may include provisions in their certificates of incorporation that limit or eliminate the personal liability of certain enumerated officers.[1] As is the case with director exculpation, officer exculpation is limited to instances in which there has been a breach of the fiduciary duty of care. Exculpation from liability is not available under the DGCL to directors or officers for breaches of their duty of loyalty or for “acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law,” among other exclusions.

An important difference between officer and director exculpation under the DGCL is that officer exculpation is not permitted in connection with claims brought by or in the right of the corporation, including stockholder derivative claims, while director exculpation under the DGCL is not subject to that limitation. Such distinction is intended to strike a balance between reducing the inequality in treatment between directors and officers and recognizing the need for predictability and stockholders’ right to rely on the long-standing premise that officers are expected to devote their full-time attention and undivided loyalty to the corporation. As a result, the Officer Exculpation Amendment reduces (but does not eliminate) this imbalance in the treatment of directors and officers, by retaining the right of stockholders to enforce fiduciary obligations of officers and bring claims on behalf of the corporation for any breaches by officers of their duties that are inconsistent with these obligations.

In order to afford senior officers with the protection from personal liability afforded by exculpation under Section 102(b)(7), Delaware corporations must “opt-in” by including an exculpation clause in their original certificate of incorporation or by adopting an amendment to their certificate of incorporation.[2] Pursuant to Section 242(b) of the DGCL, in order to amend a corporation’s certificate of incorporation, its board of directors must approve the amendment and declare its advisability and submit the amendment to a vote of stockholders at an annual or special meeting of stockholders. Adoption of such amendment requires the affirmative vote of holders of a majority of the outstanding shares of stock entitled to vote on the proposed amendment (unless a greater number of votes, or any separate class or series of votes, is required to amend the corporation’s certificate of incorporation pursuant to the terms thereof).[3]


Dual Class Share Structures: Is the Sun Setting Too Slowly?

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services. This post is based on an ISS Corporate Solutions memorandum by Senior Editor, Paul Hodgson. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here); The Perils of Small-Minority Controllers (discussed on the Forum here); and Keynote Presentation on The Lifecycle Theory of Dual-Class Structures (discussed on the Forum here) all by Lucian Bebchuk and Kobi Kastiel.


  • The proportion of companies in the Russell 3000 excluding the S&P 1500 with unequal voting rights increased significantly since 2020
  • The proportion of companies in the S&P 1500 with unequal voting rights remained relatively flat from 2015 to 2022, with some variations
  • None of the sunset provisions in the S&P 1500 met best corporate governance standards and only around one in 10 did so in the Russell 3000 excluding the S&P 1500
  • The Russell 3000 increase in dual class shareholder structures may have been driven by new entrants to the index and SPAC transactions
  • The number of companies in the whole Russell 3000 adopting sunset provisions – which terminate a dual class share structure – increased over the whole 2015-2022 period

Dual class share structures have been traditionally used to protect newly public companies from hostile takeovers or other forms of interference. Such arrangements typically gave founders disproportionate control over the company through supervoting shares that command multiple votes, as opposed to publicly held common shares, which usually have one vote per share or sometimes no voting power at all.

To look at trends in unequal voting structures, we examined two data points from ISS Corporate Solutions Data Analytics: 1) whether a company has an unequal voting rights capital structure, and 2), if they do, whether there is any sunset clause attached to it. Sunset provisions set out how, and sometimes when, dual class share structures are terminated and all shares turned into a single class.


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