Monthly Archives: December 2022

Corporate Governance & Executive Compensation Survey

Richard Alsop, Doreen Lilienfeld, and Gillian Moldowan are Partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling piece by Mr. Alsop, Ms. Lilienfeld, Ms. Moldowan and Lona Nallengara and is part of the 20th Annual Corporate Governance Survey publication of Shearman & Sterling LLP.

The Survey consists of a review of key governance characteristics of the Top 100 Companies, including a review of key ESG matters.

Board Size and Leadership

The average size of the board of the Top 100 Companies has decreased from 12.5 directors in 2015 to 11.8 directors in 2021, and 46 of the Top 100 Companies have split the CEO and board chair positions.

Director Independence

Over the last 10 years, the number of companies at which the CEO is the only non-independent director has increased significantly.


Glass Lewis 2023 Policies Guidelines – United States

Brianna Castro is Senior Director of North American Research; Courteney Keatinge is Senior Director of Environmental, Social & Governance Research; and Maria Vu is Senior Director of Compensation Research at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

Guidelines Introduction

Summary of Changes for 2023

Glass Lewis evaluates these guidelines on an ongoing basis and formally updates them on an annual basis. This year we’ve made noteworthy revisions in the following areas, which are summarized below but discussed in greater detail in the relevant section of this document:

Board Diversity

Gender Diversity

We are transitioning from a fixed numerical approach to a percentage-based approach for board gender diversity, as announced in 2022.

Beginning with shareholder meetings held after January 1, 2023, we will generally recommend against the chair of the nominating committee of a board that is not at least 30 percent gender diverse at companies within the Russell 3000 index. For companies outside the Russell 3000 index, our existing policy requiring a minimum of one gender diverse director will remain in place.

Additionally, when making these voting recommendations, we will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending that shareholders vote against directors when boards have provided a sufficient rationale or plan to address the lack of diversity on the board, including a timeline to appoint additional gender diverse directors (generally by the next annual meeting).


Why Cryptoassets Are Not Securities

Jai Massari is Cofounder and CLO of Lightspark and Visiting Lecturer at Berkeley Law. This post is based on her Lightspark piece.

FTX’s collapse reiterates the need for comprehensive U.S. regulation of crypto markets. This regulation must have a solid legal foundation, a key pillar of which is a workable framework to distinguish cryptoassets[1] that are securities from those that are not. A new paper provides this framework, by showing why fungible cryptoassets are not themselves securities under existing U.S. federal securities laws. But also why ICOs and similar token sales should be regulated as securities offerings.

In 2014 the sponsors of the Ethereum Network sold 60 million ether tokens to fund the development of the network, which launched a year later. Because of similarities with a traditional common stock IPO, the ether “initial coin offering,” or ICO, raised a fundamental question: are cryptoassets securities under U.S. federal securities laws? The answer to this question, which we have been debating ever since, determines not only whether and how cryptoassets can be sold to the public but also whether we must hold and trade them under the existing rules and market structure developed over the past 80 years for securities.

The Securities and Exchange Commission’s primary theory on whether a cryptoasset is a security appears to be based upon whether the blockchain project associated with a cryptoasset is, at any point in time, “sufficiently decentralized.”[2] If so, the cryptoasset is not a security. This theory was first proposed by the SEC staff in 2018 to address ICOs, which were then all the rage, and was followed by more detailed staff guidance in 2019. But the theory has not aged well. It is impractical—if not impossible—to apply to today’s real life blockchain projects. It is not supported by existing judicial precedent, including the now crypto-famous Howey Supreme Court case.[3] And it has resulted in market distortions that harm both market participants and long-term innovation in the crypto industry.

An intriguing new paper, The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities,[4] points us to the right path. The paper analyzes the relevant caselaw and concludes there is scant legal basis to treat fungible cryptoassets as securities, and it sets out analytical approach that is far more satisfying. The paper separates capital raising transactions by blockchain project sponsors or other insiders in which a cryptoasset may be sold—which are typically securities transactions—from the treatment of the cryptoasset, which is not a security. This analytical framework addresses the now apparent challenges created by the SEC staff’s approach and appropriately focuses the SEC’s regulatory jurisdiction on capital raising transactions.


Enforcement Authorities Urge Integration of Corporate Compliance Programs in 2023

John C. Kocoras and Joseph M. Yaffe are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

The fundamental components of effective corporate compliance programs have not changed significantly in recent years.[1] However, United States enforcement authorities are trying to reinvigorate companies’ attention to those programs.

U.S. Department of Justice leaders expressed particular concern this year about whether companies have appropriately integrated their compliance departments. In March 2022, the assistant attorney general for the U.S. Department of Justice’s Criminal Division — a former corporate chief compliance officer — described his perception of compliance professionals’ environments: “I know the resource challenges. The challenges you have accessing data. The relationship challenges. The silo-ing of your function.” He warned companies: “Support your compliance team now or pay later.”[2]

The United States deputy attorney general repeated these concerns in September 2022, explaining that “resourcing a compliance department is not enough; it must also be backed by, and integrated into, a corporate culture that rejects wrongdoing for the sake of profit.”[3] The remarks accompanied her release of a memorandum that federal prosecutors must follow when evaluating the strength of a company’s compliance program in determining how to resolve an investigation.[4] The memorandum challenges companies to ensure that compliance programs have the highest levels of company attention, are resourced appropriately and do not operate in silos.[5]

The emphasis on compliance program integration warrants close attention in 2023. Summarized below are four actions companies should consider to help ensure that their compliance programs are optimized and effectively positioned to respond to government review, along with the business functions that typically should participate. This is of course not an exhaustive list of aspects of compliance programs that warrant attention, but rather suggestions on elements that would likely benefit from a fresh look.


Cybersecurity Disclosures What Progress has been made?

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.

Disclosures on cybersecurity practices for the S&P 500 and the remainder of the Russell 3000 are inching forwards in the face of increased expectations to be introduced by the Securities and Exchange Commission (SEC) in early 2023, though not in every instance. To determine progress, ISS Corporate Solutions assessed data on the Governance Quality Scores (GQS) of companies against a series of 11 cyber security GQS questions, including: “How often does senior leadership brief the board on information security matters?” and “Is the company externally audited or certified by top information security standards?” Data was analysed most recently as of Oct 2, 2022.

Our observations of many of the GQS questions, companies’ disclosure practices have increased marginally in advance of the coming SEC regulations.

Key Takeaways

  • Increases in disclosures include:
    • companies indicating clear approaches to identifying and mitigating information security risks
    • senior leadership briefing boards on information security, only a minimal increase
    • information security training programs
    • the number of companies with independent information security committees in the S&P 500
    • the number of companies with an information security risk insurance policy
  • The number of companies with at least one director with information security experience increased marginally in the S&P 500, though it decreased in the Russell 3000, excluding the S&P 500

A number of companies have moved from general disclosure to a clear approach in terms of disclosing how they identify and mitigate information security risks, with those demonstrating a clear approach increasing by around 2 percentage points in both indexes.


The Flaw in Anti-ESG Logic: Financial Interests of Companies Like Meta Don’t Always Align with Those of Its Shareholders

Frederick Alexander is the CEO of the Shareholder Commons. This post is based on the class action filed against the directors of Meta Platforms (formerly Facebook, Inc.), and is part of the Delaware law series; links to other posts in the series are available here.

In the last few months, there has been an organized effort to falsely argue that companies and institutional investors are inappropriately prioritizing social and environmental responsibility over financial returns. The effort includes state treasurers from Texas, West Virginia, and Florida, as well as anti-ESG activist and fund manager Vivek Ramaswamy.

These critics charge that when companies and institutional investors address systemic concerns (by seeking to reduce carbon emissions or increase inclusivity, for example), they are ignoring financial returns, and instead pursuing a climate or racial justice agenda. In order to protect investors, they argue, it should be illegal for investors to account for any systemic concern, even if the concern relates to profit. 

This argument has a number of flaws. The most obvious is the conflation of motives with methods. It is smart, and in no way duplicitous, for individuals motivated by concerns about the climate to persuade executives and investors that companies can increase profits over the long term by taking steps that reduce emissions, even if doing so is expensive in the short-term. Finding common ground upon which to increase investor returns while preserving social and environmental systems is just a good idea, not a scandal.


ESG and Incentive Compensation Plans: Are Investors Satisfied?

Matthew Behrens is Counsel and Giulia La Scala is an Associate at Shearman & Sterling LLP. This post is based on a Shearman & Sterling piece by Mr. Behrens, Ms. La Scala, Doreen Lilienfeld and Gillian Moldowan and is part of the 20th Annual Corporate Governance Survey publication of Shearman & Sterling LLP. 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.

The “stakeholder” view of corporate governance, which argues that corporate decision-makers have a responsibility to consider the impact of corporate activities not only on shareholders but on society as a whole, has long been debated, with some scholars even finding arguments in the writings of Adam Smith that companies may weigh competing stakeholder claims.[1] Recent years, however, have witnessed the “stakeholder” view no longer confined to the ivory halls of academia, but present in the wood-paneled board rooms of institutional investors and the fluorescent-light-drenched offices of government regulators. For those that would argue that issuers are embracing this view, the continuing growth of ESG metrics in incentive compensation plans has become a primary piece of evidence. For example, this year our survey data shows that 60 of the Top 100 Companies disclose that they incorporate ESG metrics into their incentive compensation programs, which is a 19% increase from last year.

Notwithstanding their seeming embrace of the “stakeholder” view, U.S. issuers are facing increasing pressure to prove that their claims of stakeholder focus are grounded in fact and evidenced by action. To that end, disclosures around ESG metrics in incentive plans are increasingly being challenged as vague or lacking the transparency necessary for outsiders to gain a true understanding of the issuer’s ESG goals and management’s performance against those goals.[2] Notwithstanding this desire for more detailed compensation-related ESG disclosure, issuers face the ongoing challenge of how to define meaningful and objective metrics. Further, as work continues on the establishment of a global set of standards for ESG reporting similar to financial reporting (particularly with respect to climate reporting), questions remain as to whether such a standard would in fact be beneficial.

This article summarizes the current status of incentive compensation disclosures and the challenges to those disclosures, as well as focusing on the work being done to establish a more transparent reporting regime. Finally, the article offers considerations for issuers looking to provide more meaningful disclosure around the use of ESG metrics or considerations in their incentive compensation programs.


SEC Proposes New Rule to Require Investment Advisers to Conduct Additional Oversight of Service Providers

James E. Anderson, Anne C. Choe, and Rita M. Molesworth are Partners at Willkie Farr & Gallagher LLP. This post is based on a Willkie memorandum by Mr. Anderson, Ms. Choe, Ms. Molesworth, Justin L. Browder, Adam Aderton, and Aliceson (Kristy) Littman.

Executive Summary

On October 26, 2022, by a 3-2 vote, the Securities and Exchange Commission proposed to require SEC-registered investment advisers to conduct both documented due diligence before hiring, and continued oversight of, third-parties when outsourcing certain functions necessary to the adviser’s provision of investment advice. Proposed Rule 206(4)-11 appears to be the latest SEC effort to expand registered investment advisers’ obligations through prescriptive rules under the Advisers Act. If adopted, the proposals would require advisers to:

  • conduct due diligence before outsourcing and to monitor service providers’ performance and reassess whether to retain them periodically;
  • make and/or keep books and records related to the due diligence and monitoring requirements;
  • amend Form ADV to collect census-type information about advisers’ use of service providers, including their relationship to the adviser and the type of services rendered; and
  • conduct due diligence and monitoring of third-party record keepers and to obtain reasonable assurances that they will meet certain standards of service.

I. Overview

Many advisers employ a layered approach to serving their clients, providing some services themselves and outsourcing others. Commonly outsourced functions include data and record management, software services, the creation of specific indexes or trading models and tools, trading desks, accounting and valuation services, risk management, artificial intelligence tools developed for trading, and cybersecurity.[1] Advisers often also outsource more clerical, administrative, or essential needs found in many types of businesses, including email, real estate leases, and licenses for off-the-shelf software. Outsourcing generally has expedited and aided investment advisers in providing services to their clients in efficient and cost-effective ways.

The SEC’s proposal seeks to address the risk of third-party service failures that would impair an adviser’s ability to perform required advisory functions by mandating documented due diligence and continued oversight of third parties providing “core advisory services.” The proposal would require investment advisers to conduct detailed diligence before engaging in an outsourced core advisory service, provide disclosure related to these services, conduct periodic monitoring of third-party providers to ensure their reliability, and maintain detailed recordkeeping related to functions necessary for providing investment advisory services.


The Evolution of ESG Disclosure for Biotech Companies

Julia Forbess is a Partner and Ron C. Llewellyn is Counsel at Fenwick & West LLP. This post is based on their Fenwick 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) by Lucian A. Bebchuk, Roberto Tallarita, and Kobi Kastiel; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here); and Stakeholder Capitalism in the Time of Covid (discussed on the Forum here) by Lucian A. Bebchuk, Roberto Tallarita, and Kobi Kastiel.


In 2022, many smaller biotech companies appear to be making progress toward addressing the environmental, social and governance (ESG) risks and opportunities affecting them and their industry. As a follow-up to our report Biotech’s ESG Crossroads, released earlier this year, we re-examined the ESG disclosure practices of 48 of the 50 public biotech companies that we previously researched (the subject companies).[1]

While ESG disclosures still remain relatively brief and largely qualitative, we noted a substantial increase in ESG reporting in 2022 by the subject companies that may signal the growing realization by biotech companies of the importance of ESG to their stakeholders. This guide reviews the trends in ESG reporting for these companies in 2022 and provides suggestions for how biotech companies can initiate or enhance their ESG reporting.

2022 ESG Disclosure Trends

When we first looked at ESG reporting for biotech companies in 2021, relatively few companies had reported any ESG data. Overall, just 30% of the subject companies publicly disclosed ESG information as a unified set of risks and opportunities under an umbrella term such as “ESG,” “sustainability” or “corporate social responsibility.” Furthermore, only nine, or 18%, and five, or 10%, of the companies had provided disclosure in their proxy statements or standalone reports, respectively, with three companies providing disclosure in both documents.

In contrast, since the beginning of 2022 through September 30, at least 26, or approximately 54%, have provided ESG disclosure in their proxy statements and eight companies, or approximately 17%, provided ESG disclosure in standalone reports. Five of the companies reviewed in 2022 provided ESG disclosure in both documents.

We focused our 2022 analysis on ESG disclosure contained in proxy statements or standalone reports, as these are the platforms where companies generally provide the most extensive disclosures. Overall, 29, or approximately 60%, of the subject companies provided ESG disclosure on either platform in 2022, more than double the number providing ESG disclosure on either platform — 11, or approximately 22% — in 2021.


The Director’s Guide to Shareholder Activism

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 The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian 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.


We take an expansive view of shareholder activism. For many people, the phrase may conjure images of hedge funds waging proxy battles as they try to win control of their target’s board. That’s a part of activism, to be sure. But, for the purposes of this document, the term refers to the efforts of any investor to leverage their rights and privileges as an owner to change a company’s practices or strategy.

In this sense, shareholder activism may include an institutional investor’s engagement with companies around governance matters or a retail investor’s shareholder proposal, as well as a hedge fund’s proxy fight.

Introduction: Shareholder activism today

The nature of shareholder activism, the key players, their preferred methods, and their typical targets all tend to shift along with investment and business trends. They are influenced by market pressures, stores of capital, and hot topics in governance. But during bull and bear markets, during recessions and times of growth, activists continue to look for opportunity, and companies continue to find themselves in the crosshairs.

The role of the board in an activist environment is an important one. Directors can help ensure the company anticipates which activists might target the company, and which issues they might raise. By being familiar with activism trends, they can encourage management to proactively address common issues that are attracting attention. In many cases, these issues deserve careful attention and should be reflected in company strategy. The board also plays a key role in shareholder engagement, and in responding to activist requests and demands. What do boards of directors need to know to navigate this environment? What can they learn from shareholders, and how can they leverage the benefits and insights activists can provide?

Activist campaigns

The number of activist campaigns reached a recent high in 2018, with shareholders launching 141 campaigns in the US. That figure fell significantly in 2020 as the COVID-19 pandemic took hold, but rebounded in 2021 with free-flowing capital. Activity in the first half of 2022 continued at a brisk pace, with a 20% jump in the number of campaigns over the same time period in 2021—although most of that activity was attributed to the first quarter of the year.


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