Yearly Archives: 2022

Preparing for the Shareholder Proposal Season

Posted by Marc Gerber, Skadden, Arps, Slate, Meagher & Flom LLP, on
Friday, January 14, 2022
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Marc Gerber is partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on his Skadden memorandum.

On November 16, 2021, Skadden held a webinar titled “Preparing for the Shareholder Proposal Season.” The panelists were Gianna McCarthy, Director of Corporate Governance for the Office of the New York State Comptroller (New York State Comptroller); Jessica McDougall, Director, BlackRock Investment Stewardship (BlackRock); and Skadden M&A and corporate governance partner Marc Gerber. The key takeaways from the presentation are summarized below.

Overview of 2021 Proxy Season

Mr. Gerber provided a brief overview of the 2021 shareholder proposal season, in particular noting the increase in support this year for environmental and social (E&S) proposals. Ms. McDougall noted that BlackRock had revised its approach to shareholder proposals starting in 2021 and will more likely support proposals if it believes that management could better manage, disclose or otherwise accelerate its progress in addressing a material issue. Ms. McCarthy then noted that the New York State Comptroller’s support for shareholder proposals and for directors in 2021 remained fairly constant with the prior year, although she believes that investors will be more likely to vote against directors in the upcoming proxy season when there are diversity or environmental concerns.

SEC Guidance and Rule Amendments

Mr. Gerber summarized the amendments to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, which were adopted by the Securities and Exchange Commission (SEC) in September 2020, noting that they will be effective for annual meetings held in 2022.

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Buyouts: A Primer

Posted by Tim Jenkinson (University of Oxford), Hyeik Kim (The Ohio State University), and Michael Weisbach (The Ohio State University), on
Friday, January 14, 2022
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Tim Jenkinson is Professor of Finance at the University of Oxford Said Business School; Hyeik Kim is a Ph.D Candidate in Finance at The Ohio State University; and Michael Weisbach is Professor and Ralph W. Kurtz Chair in Finance at The Ohio State University. This post is based on their recent paper.

This paper provides an introduction to buyouts and the academic literature about them. Buyouts are initiated by “buyout funds”, which are limited partnerships raised from mostly institutional investors. Buyout funds have grown substantially and currently raise more than $400 billion annually in capital commitments. The funds earn returns for their investors by improving the operations of the firms they acquire and exiting them for a profit.

Intellectually, the buyout sector provides a plethora of questions to study. There are theoretical questions: How should funds be set up and managers compensated? To what extent does private contracting allow for more efficient resource allocations than a reliance on public markets? There are questions related to portfolio theory and capital markets: Private equity is a huge part of most institutional portfolios, how much capital should be allocated to this asset class, and how should it be split between various subsectors (buyouts, VC, real estate, etc)? How does one go about measuring the risk and return of a fund that makes only around 10 investments, many of which have only one cash outflow and one cash inflow over a 12 to 15 year period? To what extent do LPs and/or GPs have measurable skills? Corporate finance questions abound: How much value is created by the highly leveraged financial structure of most buyouts? What do GPs do to their portfolio firms to increase their values? Do they transfer wealth from other parties (workers, governments), or do they improve the efficiencies of operations? And perhaps the most important questions concern management and leadership, since at the end of the day, most of the increases in the value of the portfolio firms are likely to come from better managerial decisions. How do private equity funds decide on the managerial teams of their portfolio firms? What do they do to motivate and monitor these teams?

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Weekly Roundup: January 7–13, 2022

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, January 14, 2022

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This roundup contains a collection of the posts published on the Forum during the week of January 7–13, 2022.

Insider Giving

Posted by Nejat Seyhun (University of Michigan), on Friday, January 7, 2022
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Vanguard’s Expectations for Companies with Significant Coal Exposure

Posted by John Galloway, Vanguard, on Friday, January 7, 2022
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New Rules for Mandatory Trading Suspension of US-Listed Chinese Companies

Posted by Michael Levitt, Sarah Solum, and Jeremy Barr, Freshfields Bruckhaus Deringer LLP, on Saturday, January 8, 2022
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Four ESG Myths About Emerging-Market Corporates

Posted by Christian DiClementi and Patrick O’Connell, AllianceBernstein, on Saturday, January 8, 2022
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Compensation Season 2022

Posted by Adam J. Shapiro, David E. Kahan, and Michael J. Schobel, Wachtell, Lipton, Rosen & Katz, on Sunday, January 9, 2022
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Towards a Global ESG Disclosure Framework

Posted by Martha Carter, Morgan McGovern, and Matt Filosa, Teneo, on Sunday, January 9, 2022
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Preparing An Annual Report on Form 20-F: Guide for 2022

Posted by Nicolas Grabar, Jorge U. Juantorena, and Julian Cardona, Cleary Gottlieb Steen & Hamilton LLP, on Monday, January 10, 2022
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Comment Letter on DOL ESG Proposed Rulemaking

Posted by Robert H. Sitkoff (Harvard Law School) and Max M. Schanzenbach (Northwestern), on Monday, January 10, 2022
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ISS 2022 U.S. Policy Updates

Posted by Rajeev Kumar, Georgeson, on Monday, January 10, 2022
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Japan’s Coming Wave of Reform

Posted by Kei Okamura, Neuberger Berman LLC, on Tuesday, January 11, 2022
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ISS Proxy Voting Guidelines 2022: Compensation and Diversity Updates

Posted by Shaun Bisman and Jared Sorhaindo, Compensation Advisory Partners, on Tuesday, January 11, 2022
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Corporate Political Spending is Bad Business: How to Minimize the Risks and Focus on What Counts

Posted by Leo E. Strine, Jr. (University of Pennsylvania) and Dorothy S. Lund (University of Southern California), on Tuesday, January 11, 2022
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Board Practices Quarterly: Diversity, Equity, Inclusion: One Year Later

Posted by Natalie Cooper and Robert Lamm (Deloitte LLP), and Randi Val Morrison (Society for Corporate Governance), on Wednesday, January 12, 2022
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An Essay on the Fed and the U.S. Treasury: Lender of Last Resort and Fiscal Policy

Posted by Hal Scott (Harvard Law School), on Wednesday, January 12, 2022
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CEO Leadership Redefined

Posted by Christine DiBartolo, Brent McGoldrick, and Elly DiLeonardi, FTI Consulting, on Wednesday, January 12, 2022
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SEC Releases New Proposed Rules for Rule 10b5-1 Plans

Posted by John Ellerman and Mike Kesner, Pay Governance LLC, on Thursday, January 13, 2022
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Corporate Purpose and Stakeholder Fairness Through the Lens of Behavioral Economics: Legal Implications

Posted by Eli Bukspan (IDC Herzliya), on Thursday, January 13, 2022
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Financing Year in Review: A Robust Recovery

Posted by Eric M. Rosof, Gregory E. Pessin, and Emily D. Johnson, Wachtell, Lipton, Rosen & Katz, on Thursday, January 13, 2022
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Financing Year in Review: A Robust Recovery

Posted by Eric M. Rosof, Gregory E. Pessin, and Emily D. Johnson, Wachtell, Lipton, Rosen & Katz, on
Thursday, January 13, 2022
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Eric M. Rosof, Gregory E. Pessin, and Emily D. Johnson are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Booming debt markets throughout 2021 helped drive a record-breaking year of deal-making activity. Borrowers across industries, geographies and credit ratings maintained access to financing on historically attractive terms. We mark the New Year by looking at developments driven by the roaring debt markets, and considering what lies ahead as the calendar turns.

The Financing Markets in 2021: Record Breaking

Undeterred by the second year of the pandemic, 2021 was a record breaker for financing markets. New issuance volumes for both high-yield bonds and loans set full-year records before Thanksgiving, and those record high volumes were accompanied by record low yields. Investment grade bond issuance levels were the second highest on record, eclipsed only by levels reached in 2020.

The attractive financing available in 2021 supported dealmaking at an all-time record pace, including M&A transactions such as Salesforce.com’s $27.7 billion acquisition of Slack; Jazz Pharmaceuticals’ $7.2 billion acquisition of GW Pharmaceuticals; ii-vi’s $7.0 billion acquisition of Coherent; IAC’s $2.7 billion acquisition of Meredith Corporation’s National Media Group; Herman Miller’s

$1.8 billion acquisition of Knoll; and Siris Capital’s innovative $1.5 billion double-acquisition of Equiniti Group and American Stock Transfer & Trust Company. The financing markets also supported other types of M&A activity, including XPO Logistics’ $7.8 billion spin-off of GXO Logistics and the $9.3 billion “Reverse Morris Trust” transaction between 3M’s food safety business and Neogen.

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Corporate Purpose and Stakeholder Fairness Through the Lens of Behavioral Economics: Legal Implications

Posted by Eli Bukspan (IDC Herzliya), on
Thursday, January 13, 2022
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Eli Bukspan is Professor of Law at Radzyner Law School, Reichman University (IDC Herzliya). This post is based on his recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and 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).

“ESG” (the acronym for “Environmental, Social and Governance”) is a term that either inspires a transformative feeling of hope or a cynical roll of the eyes. For some, ESG, and similar concepts including “stakeholder governance” or “stakeholder capitalism”, is merely an “illusory promise” that will ultimately harm stakeholder groups rather than help safeguard their interests – this view is expressed in the recent articles written by Bebchuk and Tallarita (here and here) and Bebchuk, Kastiel and Tallarita. According to the “shareholder supremacy” side of the debate, the proper venue for safeguarding stakeholder interests is in specific non-corporate law fields of regulation such as labor, environmental protection and tax law. To others, such as R. Edward Freeman, Colin Mayer and Alex Edmans, the corporate enterprise requires attention to nonfinancial considerations as well due to the fact that corporations serve a greater purpose in society beyond shareholder profit maximization. Broadly utilizing the insight of the “framing effect” from behavioral economics, this conflict can be contextualized as disagreement over the proper framing of corporate purpose regarding the appropriate balance between shareholder profits and stakeholder interests. This longstanding debate is here to stay and has even received a “booster”, if we may use this word in our context, over the last two years, in the form of increased activity implementing the stakeholder approach through the supervision of ESG-related financial, reputational and legal risks. Society, it seems, is gradually seeking answers to larger questions of corporate purpose because of the perceived role corporations have in shaping the future of capitalism, the future of human rights, and even the future of humanity and the planet. These trends, like islands, are slowly but surely merging to form a continent, manifesting in a novel framing corporate purpose.

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SEC Releases New Proposed Rules for Rule 10b5-1 Plans

Posted by John Ellerman and Mike Kesner, Pay Governance LLC, on
Thursday, January 13, 2022
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John Ellerman and Mike Kesner are partners at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Introduction

Rule 10b5-1, established by the Securities and Exchange Commission (SEC) in the year 2000, permits executive officers and directors of publicly traded companies to establish a trading plan for the sale or purchase of company stock and provides these individuals an “affirmative defense” against claims that shares were traded based on material non-public information (MNPI). A typical Rule 10b5-1 plan specifies the sale or purchase of a predetermined number of shares at a specified price (or prices) over the term of the plan.

Companies (i.e., issuers) may also establish Rule 10b5-1 plans for stock buybacks.

It is important to note, neither executive officers and directors nor companies are required to use a Rule 10b5-1 trading plan to execute company stock transactions, and many trades are completed without such plans.

Currently, there are no disclosure requirements when a 10b5-1 trading plan is adopted, modified, or terminated. And, although such plans must be adopted when the participant is not aware of any MNPI, under present rules there is no waiting period before a stock transaction can take place. Thus, it is possible to adopt a trading plan and sell shares on the same day, although in our experience many plans include a 30-day “cooling-off” period before the first stock transaction can be completed.

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CEO Leadership Redefined

Posted by Christine DiBartolo, Brent McGoldrick, and Elly DiLeonardi, FTI Consulting, on
Wednesday, January 12, 2022
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Christine DiBartolo and Brent McGoldrick are Senior Managing Directors and Elly DiLeonardi is Senior Director of the Strategic Communications segment at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and 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).

Society is demanding a different kind of leadership from the C-suite, especially CEOs.

People are paying close attention to what they say and what they do. This shift was happening well before 2020, but the COVID-19 pandemic and social and political unrest significantly accelerated the transformation underway.

As a firm that helps CEOs with their most complex, business-critical issues, we are often asked how CEOs and senior executives should navigate this new environment in a way that is responsive to the needs of different stakeholder groups, but doesn’t inadvertently create new risk for the business. We decided to go straight to the source and ask two of the most critical audiences, working professionals and institutional investors, about what they expect from CEOs.

Our research revealed that investors strongly believe that the job of the CEO goes beyond turning a profit, and working professionals agree. Moving forward, CEOs must take on complex societal issues, demonstrate strong corporate purpose and values, and effectively communicate and engage with their people and key stakeholders frequently.

It also shed light on some emerging differences in expectations of CEOs among various generations, which will be important to keep in mind as companies plan for the future. Baby Boomers (ages 57 to 74) have long held the majority of sitting CEO positions, but for the first time in 2020, the average age of a CEO-now 52 years-aligned with Gen X (ages 41 to 56). As Gen X steps into senior leadership positions, including the role of CEO, they will need to cater to a new generation of employees-Gen Z (ages 24 and younger)-who are motivated by personal values and focused on serving the planet through sustainable operations and their peers through diversity and inclusion efforts.

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An Essay on the Fed and the U.S. Treasury: Lender of Last Resort and Fiscal Policy

Posted by Hal Scott (Harvard Law School), on
Wednesday, January 12, 2022
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Hal S. Scott is the Emeritus Nomura Professor of International Financial Systems at Harvard Law School. This post is based on his recent article, published in the Harvard Journal of Law and Public Policy.

My recent article, An Essay on The Fed and the U.S. Treasury: Lender of Last Resort and Fiscal Policy, in the Harvard Journal of Law and Public Policy explores the evolution of my thinking on risky emergency lending, focusing primarily on non-banks. Like the famous 19th century British economist Ricardo, who recognized his views on machinery had undergone considerable change, the same can be said for my views on lender of last resort.

The Federal Reserve (the “Fed”), in 2020 during the COVID-19 pandemic, established lending facilities with potentially significant credit risk, largely within the framework of Section 13(3) of the Federal Reserve Act. While it appeared to the public that these were independent Fed programs, in fact the lending to non-banks was controlled, and was largely determined, by the Treasury statutory approval power, required by the 2010 Dodd-Frank Act amendments to Section 13(3).

While I opposed this change at the time, and later in my book Connectedness and Contagion (M.I.T. 2016), out of concern that it would put an undesirable obstacle, perhaps politically motivated, in the way of an effective Fed response to a crisis, I have since changed my view. My article argues that Treasury control of lending to non-banks is usually a fiscal decision, due to credit risk, and should be made by the elected government, not by an independent agency. And it should be the Treasury’s role, as advised by the Fed, to determine when there is significant credit risk.

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Board Practices Quarterly: Diversity, Equity, Inclusion: One Year Later

Posted by Natalie Cooper and Robert Lamm (Deloitte LLP), and Randi Val Morrison (Society for Corporate Governance), on
Wednesday, January 12, 2022
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Natalie Cooper is Senior Manager and Robert Lamm is an independent senior advisor, both at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on a Deloitte memorandum by Ms. Cooper, Mr. Lamm, Ms. Morrison, Carey Oven, and Caroline Schoenecker. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); and Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here).

This post revisits topics raised in our earlier post, published in October 2020, that explored how companies and boards were responding to events of that year surrounding systemic racism and racial inequality. Specifically, we explore how practices pertaining to diversity, equity, and inclusion (DEI) have changed in the past year in areas such as reporting, meeting agendas, and actions taken by the company, management, and/or the board. We also review additional topics related to DEI, including board recruitment, board education, and executive compensation incentives.

Our findings are based on an October 2021 survey of Society for Corporate Governance members representing more than 120 public companies. As anticipated in our inaugural issue, the findings in this area have evolved over the past year, and we expect ongoing change in corporate governance practices, as well as on a societal level, amid increasing calls for action and progress.

Findings

Respondents, primarily corporate secretaries, in-house counsel, and other in-house governance professionals, represent public companies of varying sizes and industries. [1] The actual number of responses for each question is provided. Where applicable, commentary has been included to highlight differences among respondent demographics. In some cases, additional commentary is provided to highlight comparisons to public company results of similar questions asked in our 2020 inaugural Board Practices Quarterly survey and in our 2018 Board Practices Report.

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Corporate Political Spending is Bad Business: How to Minimize the Risks and Focus on What Counts

Posted by Leo E. Strine, Jr. (University of Pennsylvania) and Dorothy S. Lund (University of Southern California), on
Tuesday, January 11, 2022
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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; and Dorothy S. Lund is Assistant Professor of Law at the University of Southern California Gould School of Law. This post is based on their recent article, published in the Harvard Business Review. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).

In our article, Corporate Political Spending is Bad Business, we explore the deep problems that corporate political spending poses for corporations and their management. In particular, we highlight the lack of legitimacy underpinning management decisions to spend treasury dollars on political causes as well as the “hypocrisy trap” for companies that donate to causes that undermine their stated values.

The legitimacy problem is easy to understand. Under the traditional division of power in U.S. corporations, managers decide how to allocate corporate assets, and shareholders are entitled to a say on those decisions only if they involve certain fundamental transactions. Thus, even as corporate political spending has soared since Citizens United, shareholders have had no real say in the matter. Corporate leaders have not chosen to seek their approval for political donations, and most have not even disclosed their contributions—despite the fact that shareholders are paying for them with their entrusted capital.

Even when it comes to traditional business decisions, academic research has focused for years on the reality that management does not always use its control of a company’s money to benefit the company and its shareholders, whether out of myopia or self-interest. In the fields of corporate finance and governance, this is referred to as an agency problem. Of course, the misalignment is especially pronounced when the decision is about which politicians or parties should benefit from corporate largesse—an issue on which shareholders have no common interest. Shareholders have diverse political views and—as we highlight—no interest in electing candidates just because they support one company’s preferred regulatory policies. The ability of corporate managers, who understandably have their own political views, to make contributions in a way that is faithful to their investors’ diverse interests and opinions is rightly suspect, and for that reason, demand is growing for shareholders to be given more information about and more say over corporate political spending.

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