Monthly Archives: December 2022

Executive Compensation Considerations in the 2023 Reporting Season

Brian Breheny, Raquel Fox and Joseph Yaffe are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Prepare for New Pay-Versus Performance Disclosures

On August 25, 2022, the SEC adopted final rules requiring public companies to disclose the relationship between the executive compensation actually paid to the company’s named executive officers (NEOs) and the company’s financial performance. The final rules implement the “Pay Versus Performance” disclosure requirements mandated by Section 953(a) of the DoddFrank Wall Street Reform and Consumer Protection Act enacted in 2010 (Dodd-Frank Act).


Item 402(v) of Regulation S-K contains the “Pay Versus Performance” disclosure requirements. The new requirements consist of three components: (i) a pay-versus-performance table that includes metrics from the previous five fiscal years such as CEO and NEO compensation “actually paid,” cumulative total shareholder return (TSR) for the company and its peer groups, financial performance measures and the company’s net income; (ii) a description of the relationship between compensation “actually paid” and the company’s performance metrics; and (iii) a tabular list of important financial measures that the company selected to link the compensation “actually paid” with the performance metrics. The three components are described in detail below.


Roadmap for Inclusive Green Finance Implementation – Building Blocks to Implement IGF Initiatives and Policies

Dirk A. Zetzsche is Professor and ADA Chair in Financial Law at the University of Luxembourg and Director of the Center for Business & Corporate Law at Heinrich Heine University in Duesseldorf; Ross Buckley is ARC Laureate Fellow and KPMG Law – KWM Professor of Disruptive Innovation, UNSW Sydney; and Douglas W. Arner is Kerry Holdings Professor of Law at the University of Hong Kong. This post is based on their new report presented at the COP27. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) both by Lucian A. Bebchuk 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.; Stakeholder Capitalism in the Time of Covid (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

Our “Roadmap for Inclusive Green Finance Implementation presents a series of recommendations for financial regulators to promote inclusive sustainable growth by financial regulation. The report was drafted with the Working Group on Inclusive Green Finance of the Alliance for Financial Inclusion (AFI), a policy alliance of central banks and financial regulators from nearly 80 developing economies, and launched on November 16, 2022, at COP27 in Sharm-el-Sheikh, Egypt. The IGF Roadmap presents six “building blocks” to assist regulators to further sustainable finance and will guide sustainability-oriented financial regulation in the AFI member countries in the years to come.

I. On Inclusive Green Finance

We focus on IGF in the context of individuals and micro, small and medium enterprises (MSMEs), two groups to which financial inclusion offers the broadest benefits. So conceptualized, IGF is a coherent ‘holistic’ policy supporting both financial inclusion (as a social and economic goal) and environmental goals. IGF involves more than just access to financial services, regulators must focus on how those services will be used and how they will benefit individuals and MSMEs, as well as society and the environment at large.

We argue that Inclusive Green Finance (IGF) can help mitigate, and build resilience to, the negative impacts of climate change and biodiversity loss. We identify IGF as a subset of sustainable finance and identify policy tools to further advance it, summarize the related challenges, and provide recommendations for IGF policy implementation.


Determining Whether Your Corporate Compliance Program is “Good Enough”

Rich Kando and Sean Dowd are Managing Directors, and Robert Coffey is Director at AlixPartners. This post is based on their AlixPartners memorandum.

I. Introduction

Business leaders of companies operating outside of the financial services industry (“corporates”) are more frequently asking their legal and/or compliance departments a variation of the following question: “Is our company’s compliance program good enough?”. This is a simple question with a complicated answer, and there is no one-size-fits-all approach. However, there are certain attributes, based on previous Department of Justice (“DOJ”) resolutions and our historical compliance experience, that are necessary for a compliance program to be “good enough.” “Good enough” sets a floor that corporates will want to meet or exceed as their compliance programs mature.

This question is discussed more often because of (1) the September 2022 release of additional guidance from the DOJ regarding corporate criminal enforcement policies and (2) recent actions by the DOJ against corporates. We evaluate these two items as well as how to enhance corporates’ compliance program to be “good enough” leveraging the framework outlined in a June 2020 DOJ publication regarding the evaluation of corporate compliance programs (the “DOJ Compliance Guidance”).


Big Three Power, and Why it Matters

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School. Scott Hirst is Associate Professor of Law at Boston University. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In three recent articles – The Agency Problems of Institutional Investors (co-authored with Alma Cohen), Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy, and The Specter of the Giant Three – we analyzed the stewardship choices of the three largest index fund managers, commonly referred to collectively as the “Big Three.” Our articles identified, analyzed, and documented two agency distortions that afflict these choices. These articles have attracted a number of responses and challenges, including from high-level officers of the Big Three and a significant number of prominent academics.

In our new article, Big Three Power and Why it Matters, which we recently posted on SSRN, we reply to these responses and challenges. In the course of our analysis, we present updated evidence on the substantial voting power of the Big Three and explain why it is likely to persist and, indeed, further grow. We also demonstrate that, due to their voting power, the Big Three have considerable influence on corporate outcomes through both what they do and what they fail to do.

We show that the attempts by responders to our earlier work to downplay either Big Three power and/or the problems with their incentives do not hold up to scrutiny. Our new article concludes by discussing the substantial stakes in this debate—the critical importance of recognizing the power of the Big Three, and why it matters.

Below is a more detailed account of the analysis in our new article.


Risk oversight and the board: navigating the evolving terrain

Maria Castañón Moats is Leader, Paul DeNicola is Principal, and Stephen Parker is a Partner, at the Governance Insights Center, at PricewaterhouseCoopers LLP. This post is based on their PwC memorandum.

We’re living in an era of unforeseen events that give rise to risks, including geographic conflicts and a “black swan” event—something so unpredictable that it’s not on anyone’s radar—a global pandemic with far-reaching economic and social consequences. While a company can’t always anticipate what might be around the corner, strong risk oversight by the board can help the company respond with more rigor and agility. The number and types of risks the board oversees continue to grow, even as their nature changes. Some become more likely as businesses are more interconnected. Some are likely to impact just a certain area of the business. Others could severely impact the entire brand.

The last few years have reinforced the need for companies to recognize the possibility of what once seemed like unlikely events. How can organizations and their boards use this lesson to improve their risk oversight processes? Keeping an open, yet skeptical, mind is a big piece of it. Given the collective experience of most boards—and the fact that directors sit outside of the day-to-day running of the business—they are well-suited to bring this open-mindedness and willingness to explore the “what-if” scenarios. Taking a long view on risks aligned to the strategic plan at the board level allows company leadership to focus on the day-to-day management of those risks.


Annual Meeting and Corporate Governance Trends in 2023

Brian BrehenyRaquel Fox and Joseph Yaffe are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Consider New DGCL Amendments Permitting Officer Exculpation

Effective August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law (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).

Explanation of the Officer Exculpation Amendment

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.


How Companies Are — and Aren’t — Leading on Climate Policy

Yamika Ketu is a Senior Associate, and Todd Miller is a Manager of Governance at Ceres. The post is based on a Ceres memorandum by Ms. Ketu, Mr. Miller, Steven M. Rothstein, Anne Kelly, Heather Green and Adam Vaccaro. 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) 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 (discuss on the Forum here) by Leo Strine; Stakeholder Capitalism in the Time of COVID,(discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.


In July 2021, Ceres issued a groundbreaking report to assess climate policy lobbying among America’s largest companies. The Practicing Responsible Policy Engagement report found that, even as the largest U.S. companies were increasingly integrating sustainable and climate-friendly practices into their own operations, corporate America was largely failing to use its influence to advocate for the economy-wide policies necessary to address the climate crisis and achieve businesses’ climate goals.

Now, after a year that has brought more harrowing evidence of the effects of climate change as well as significant debate over federal climate policy, our new assessment suggests important and noteworthy progress in this area. Half of the S&P 100 companies we analyzed advocated for climate policies over the past three years that align with the Paris Agreement.

The number is a meaningful touchstone, indicating that companies are increasingly prioritizing smart climate lobbying, even if it lags behind other internal corporate efforts to acknowledge climate risk and act to address it. And this promising data has seemed to come to life in the headlines, as corporate support for climate policies at the federal and state levels continues to grow.


Preparing your 2022 Form 20-F

Michael Willisch and Michael Kaplan are Partners and Connie Milonakis is Counsel at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

This client update highlights some considerations for the preparation of your 2022 annual report on Form 20-F. As in previous years, we discuss both disclosure developments and continued areas of focus for the U.S. Securities and Exchange Commission (SEC). In addition, we highlight certain U.S.-related enforcement matters and other developments of interest to foreign private issuers (FPIs).

Disclosure developments and SEC focus areas relevant to your 2022 Form 20-F

Recent disclosure developments

Nasdaq board diversity rules

Nasdaq’s new board diversity rules, approved by the SEC on August 6, 2021, require Nasdaq-listed companies, including FPIs, to have diverse board members or explain why they do not. In addition, the rules require companies to disclose information regarding the diversity of their boards annually using a prescribed matrix.

Under the rules, FPIs must have at least two board members who are female or have (i) one female director and (ii) one director who is LGBTQ+ or an “underrepresented individual” in their home country jurisdiction or explain why they do not have the requisite number of “diverse” board directors. Companies with five of fewer board members must have at least one member who is diverse. Subject to the phase-in of the rules discussed below, disclosure of noncompliance must be disclosed in the 20-F or on the FPI’s website (provided that, if disclosed on the website, the FPI must post the disclosure concurrently with its 20-F and submit a URL link through the Nasdaq Listing Center within one business day).

In addition to the disclosure regarding diversity objectives, the new rules will require FPIs (including those that do not have the requisite number of diverse directors) to publicly disclose information on the directors’ voluntary self-identified gender, racial characteristics and LBGTQ+ status in a prescribed matrix.


Abandoned and Split But Never Reversed: Borak and Federal Court Derivative Litigation

Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School and Mohsen Manesh is Professor at University of Oregon School of Law. This post is based on their recent paper.

J.I. Case Company v. Borak is perhaps unique in contemporary Supreme Court jurisprudence. Although the Court has “abandoned” the 1964 precedent, Borak has never been formally reversed, and it continues to generate circuit splits, most recently concerning the enforceability of a forum selection provision.

Borak held that shareholders enjoy a private right of action under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 14(a), as implemented by Rule 14a-9, broadly prohibits any material misrepresentation or omission in connection with the solicitation of proxy votes from public company shareholders. However, neither the statutory provision nor its implementing rule expressly empowers shareholders to enforce the ban on false or misleading proxy solicitations. Nonetheless, Borak held a private right of action is implied.

Suffice it to say that Borak has not gracefully aged. In the six decades since, the Court has repeatedly distanced itself from Borak, even making it clear that the case would be decided differently today. Still, while chipping away at its doctrinal foundations, the Court has never had the occasion to expressly overrule the beleaguered precedent.

Surprisingly then, despite its “derelict” status, the Seventh Circuit Court of Appeals recently relied on Borak in ruling that a corporation may not cutback against wasteful, frequently meritless shareholder litigation through a forum selection provision in its governing documents, specifically one that requires all derivative lawsuits to be brought in the state courts where the corporation is chartered. In Seafarers Pension Plan v. Bradway, a divided Seventh Circuit panel reasoned that because federal courts enjoy exclusive jurisdiction over all Exchange Act claims, limiting derivative lawsuits to state court would effectively bar shareholders from bringing a Borak claim in a derivative action. Consequently, the divided panel held, over the dissent of Judge Easterbrook, that the enforcement of a corporate forum provision to preclude derivative Borak claims would violate shareholders’ rights under the Exchange Act and the underlying state corporate law authorizing forum provisions.


EU Corporate Sustainability Reporting Directive – disclosure obligations for EU and non-EU companies

Musonda Kapotwe and Peter Pears are Partners and Marcel Hörauf is Counsel at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Kapotwe, Mr. Pears, Mr. Hörauf, Sam Eastwood, Dr. Johannes Weichbrodt, and Oliver Williams. 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) 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 Stakeholder Capitalism in the Time of Covid (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

On 10 November 2022, the EU Parliament adopted the Corporate Sustainability Reporting Directive (“CSRD“). The EU Council is expected to adopt the CSRD on 28 November 2022, after which it will be published in the Official Journal. The CSRD will then enter into force 20 days after publication and EU member states will have 18 months to integrate it into national law.

The CSRD will create new, detailed sustainability reporting requirements and will significantly expand the number of EU and non-EU companies subject to the EU sustainability reporting framework. The required disclosures will go beyond environmental and climate change reporting to include social and governance matters (for example, respect for employee and human rights, anti-corruption and bribery, corporate governance and diversity and inclusion). In addition, it will require disclosure regarding the due diligence processes implemented by a company in relation to sustainability matters and the actual and potential adverse sustainability impacts of an in-scope company’s operations and value chain.


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