Yearly Archives: 2022

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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Shaun Bisman is a Principal and Jared Sorhaindo is an Associate at Compensation Advisory Partners. This post is based on their CAP memorandum. 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).

ISS recently published its 2022 policy updates, which will go into effect for annual meetings held on or after February 1, 2022 (and, in some instances, February 1, 2023). This post discusses key updates made to ISS’ compensation and Environmental, Social and Governance (ESG) voting policies.

Executive Compensation-Related Update

Burn Rate

For stock plan valuations, ISS has changed its burn rate calculation, which will be in effect for meetings on or after February 1, 2023. The burn rate will be referred to as the “Value-Adjusted Burn Rate” and will be calculated as follows:

The calculation currently in effect is:

Note: The volatility multiplier is used to provide a more equivalent valuation between stock options and full-value shares and is based on a company’s historical stock price volatility.

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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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Kei Okamura is Director of Japan Investment Stewardship at Neuberger Berman LLC. This post is based on his Neuberger Berman memorandum.

Issues of corporate governance, capital management and sustainability have been on the radar in Japan for the past decade, but soon the pace of change could accelerate. The difference is a revised Corporate Governance Code and the upcoming overhaul of the Tokyo Stock Exchange, which aim to reinforce the role of sound governance and capital efficiency in enhancing shareholder value and are expanding their scope to issues such as diversity and climate change. In this post, we assess the potential implications, and explain why companies’ ability to adapt to the new Code could be crucial to their success moving forward.

Introduction

Over the next 12 to 24 months, Japanese companies will embark on a historic overhaul of the ways they address corporate governance, capital management and financially material environmental and social risks to seek long-term sustainable growth opportunities. These issues have been on the radar since the early 2010s, when former Prime Minister Shinzo Abe placed corporate governance reforms at the heart of the nation’s growth strategies, known as “Abenomics.” What is different this time around, however, is the Japan Corporate Governance Code, which was revised in June 2021 to place greater emphasis on the role that corporate boards and their committees should play in enhancing shareholder value. The scope of the Code was also expanded to include sustainability issues such as gender diversity and climate change. Further, the Code now includes an enforcement element that targets nearly 60% of the country’s 3,800 listed companies, which will have to adhere to the Code on a “comply or explain” basis to become members of the Tokyo Stock Exchange’s (TSE) coveted Prime section, which is expected to go online in April 2022. Concurrently, the government is reportedly considering an overhaul of existing greenhouse gas (GHG) emissions and climate change risk-related disclosure rules for companies.

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ISS 2022 U.S. Policy Updates

Posted by Rajeev Kumar, Georgeson, on
Monday, January 10, 2022
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Rajeev Kumar is Senior Managing Director at Georgeson. This post is based on a Georgeson memorandum by Mr. Kumar, Hannah Orowitz, and Brigid Rosati.

On December 7, 2021, Institutional Shareholder Services (ISS) published updates to its U.S. benchmark proxy voting policies. Unless specified otherwise, the new policies are applicable to all U.S. company meetings held on or after February 1, 2022. This year, ISS’s key policy updates relate to the issues of board composition and board accountability.

The policy updates are summarized below.

Board Composition—Gender Diversity

ISS has an existing policy to generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at S&P 1500 or Russell 3000 companies where the company lacks women directors on its board. Against the backdrop of investors increased diversity expectations and NASDAQ’s board diversity rules, ISS is expanding its current policy requiring at least one female director to all companies, not just those in the S&P 1500 or Russell 3000 indicies, starting with meetings on or after Feb. 1, 2023.

Board Composition—Racial/Ethnic Diversity

ISS’s policy to require at least one ethnically/racially diverse director for U.S. companies in the Russell 3000 and S&P 1500 indices that was announced last year will go into effect beginning with meetings on or after Feb. 1, 2022. In the absence of racially or ethnically diverse board members, ISS will generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis).

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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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Robert H. Sitkoff is the John L. Gray Professor of Law at Harvard Law School and Max M. Schanzenbach is the Seigle Family Professor of Law at the Northwestern University Pritzker School of Law. This post is based on their comment letter to the U.S. Department of Labor. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).

We are writing in response to the proposed rulemaking [RIN 1210-AC03–Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights] by the Department of Labor (the “Department”) on prudence and loyalty in selecting plan investments and exercising shareholder rights (the “Proposal”).

This response is based on our expertise in environmental, social, and governance (“ESG”) investing, especially ESG investing by trustees and other fiduciaries. We have undertaken several years of scholarly study of ESG investing by fiduciaries. Our article, “Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee,” 72 Stanford Law Review 381 (2020) (“ESG Investing by a Trustee”), is the leading scholarly study on the topic. We enclose copy of ESG Investing by a Trustee as Exhibit A. In a consulting capacity for Federated Hermes, Inc., we have prepared several white papers and videos and conducted training sessions on ESG investing for trustees and other fiduciary investors. We have also lectured widely in scholarly and industry venues on ESG investing by trustees and other fiduciaries.

We previously commented on the Department’s 2020 rulemaking on financial factors in selecting plan investments (the “2020 Rule”). [1] Our comments were critical of the position taken in the preamble and some substantive aspects of the regulatory text that implied that ESG investing was inherently suspect. We note that the final rule was substantially altered in multiple respects responsive to our criticisms. READ MORE »

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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Nicolas Grabar and Jorge U. Juantorena are partners and Julian Cardona is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Grabar, Mr. Juantorena, Mr. Cardona, and Daniel Oyolu.

This post summarizes considerations that will affect the preparation of the annual report of a foreign private issuer on Form 20-F for the year ended December 31, 2021.

During 2021, there were only limited changes to Form 20-F and the applicable rules. However, extensive changes adopted in previous years have become mandatory during the course of 2021, after being optional for an initial period. Part I of this post reviews all these changes.

In Part II, we review Form 20-F disclosure topics that are attracting particular attention in SEC public statements and recent comment letters. Part III addresses rule changes in other areas that could have a bearing on the annual report on Form 20-F.

Please see additional details and references to sources in the endnotes.

I. Recent Changes to Form 20-F

Form 20-F is the form used for an annual report (“Annual Report”) of a foreign private issuer (“FPI”) filed with the U.S. Securities and Exchange Commission (the “SEC”). In recent years, the SEC has amended Form 20-F and related disclosure requirements on several occasions. These amendments had varying transition provisions, and issuers were generally permitted to adopt them early, but all will be mandatory for the first time in an Annual Report for calendar 2021. In summary:

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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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Martha Carter is Vice Chairman & Head of Governance Advisory, Morgan McGovern is Vice President, and Matt Filosa is Senior Managing Director at Teneo. This post is based on their Teneo 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).

The International Financial Reporting Standards (IFRS) Foundation, an organization responsible for setting global accounting standards, launched the International Sustainability Standards Board (ISSB). The ISSB will work to establish a singular, global ESG disclosure framework for corporates.

The Value Reporting Foundation (VRF)—which includes the Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC)—and the Climate Disclosure Standards Board (CDSB) have officially merged with the IFRS Foundation. The IFRS’ Technical Readiness Working Group (TRWG) issued a prototype framework for both general ESG and climate corporate disclosures. The ISSB will have a global presence in all regions—the Americas, Asia-Oceania, Europe and the Middle East—with primary offices in Frankfurt and Montréal and support from the San Francisco and London offices.

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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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Adam J. Shapiro, David E. Kahan, and Michael J. Schobel are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Shapiro, Mr. Kahan, Mr. Schobel, Jeannemarie O’Brien, Andrea K. Wahlquist, and Erica E. Bonnett. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

U.S. companies continue to demonstrate resilience following another year in which the pandemic imposed itself on world events. Although 2021 did not deliver a full reopening, corporate activity thrived in spite of ongoing uncertainty around “return to work,” building on momentum and lessons learned from 2020. As the impact of the pandemic subsides, company culture, talent retention and business objectives will shape the long-term workplace landscape. We identify below some of the key factors that may shape the 2022 compensation season.

Steady Rise of ESG. ESG-related goals are increasingly prevalent in annual incentive programs, with a meaningful year-over-year increase from 2020 to 2021. Over the next few years, we expect that use of these metrics will continue to increase and take on greater relevance. With so much attention on ESG objectives, it is vital for companies to carefully consider the goals that they establish and the manner in which they disclose those goals. Making well-intentioned commitments that go unfulfilled can backfire. And changing course or modifying goals midstream will receive heightened scrutiny from investors and the proxy advisory firms. A well-designed ESG goal should reward the achievement of a realistic, meaningful objective in a manner that is readily comprehensible by company constituents.

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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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Christian DiClementi is a Senior Vice President and Lead Emerging Market Debt Portfolio Manager, and and Patrick O’Connell is a Senior Vice President and Director of Fixed Income Responsible Investing Research at AllianceBernstein. This post is based on their AllianceBernstein 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).

As one of the fastest-growing bond sectors, emerging-market (EM) corporate debt has become too big to ignore. With US$2.7 trillion outstanding across more than 600 companies, it’s now larger than the entire EM sovereign sector and is equal to the US-dollar and euro high-yield markets combined. For bond investors who’ve had a tough time finding opportunities for attractive yield and potential return, that’s good news.

Unfortunately, many investors hesitate to buy EM corporates because they’re holding onto outdated notions about these issuers—especially when it comes to environmental, social and governance (ESG) risks. In our view, investors need to cut through the confusion around ESG in EM to access a rising sector with a compelling risk/reward profile.

Below, we debunk the four most common ESG misconceptions about EM corporates—from wanton pollution to hopeless complexity.

Myth #1: EM companies are bad actors when it comes to the environment.

The first common misconception is that EM companies are all old-industry bad actors. It’s true that EM corporations were once heavy polluters, but that’s no longer the case. In just the last five years, the EM corporate bond universe has shifted away from traditional polluters such as oil and gas producers toward more ESG-friendly sectors. These include the utilities sector, where many companies are transitioning to renewable energy sources, and the consumer sector, including healthcare and some e-commerce enterprises (Display).

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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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Michael Levitt and Sarah Solum are partners and Jeremy Barr is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Levitt, Ms. Solum, Mr. Barr, Calvin Lai, Arun Balasubramanian and Tracy Zhang. Related research from the Program on Corporate Governance includes Alibaba: A Case Study of Synthetic Control (discussed on the Forum here) by Jesse M. Fried and Ehud Kamar.

On December 2, 2021, the US Securities and Exchange Commission (SEC) issued new rules which further implement requirements and clarified the timing related to the potential mandatory trading suspension of Chinese companies listed on US stock exchanges beginning in 2024.

The SEC’s new rules were adopted pursuant to the Holding Foreign Companies Accountable Act, enacted by the US Congress in December 2020. This law requires the SEC to prohibit the trading of securities of companies on a US national securities exchange if the US PCAOB is not permitted for 3 consecutive years to inspect the audit work papers for such issuer’s auditor with a branch or office in a non-US jurisdiction because of a position taken by an authority in such non-US jurisdiction. China currently prohibits audit firms located in China and Hong Kong from providing the PCAOB access to audit work papers.

Identification of Companies

The new SEC rules provide that the SEC will identify companies (whose auditors cannot be inspected by the PCAOB) on a rolling basis promptly after submission of annual reports starting with annual reports for fiscal years beginning after December 18, 2020. Therefore, SEC determinations will begin for annual reports for the 2021 year which are due, for foreign private issuers with December 31 fiscal year ends, by April 30, 2022. These companies will be identified and listed on an SEC website—https://www.sec.gov/hfcaa—along with the number of consecutive years they have been on the list. Companies would have 15 business days to challenge (by email) inclusion on the list.

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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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John Galloway is global head of investment stewardship at Vanguard, Inc. This post is based on a publication by Vanguard Investment Stewardship.

Vanguard has explained its concerns about climate change and the financial risk it presents to long- term investors. [1] We have outlined expectations for companies where climate change is a material risk: They should have climate-competent boards, robust climate risk oversight and mitigation measures, and effective climate risk disclosure. In this post, we focus on the risks that coal production and consumption can pose to long-term investors.

The diminishing role of coal in the global economy

Governments, scientists, and NGOs around the world have made clear that burning thermal coal (or energy coal) contributes significantly to greenhouse gas (GHG) emissions and climate change. Coal burning is the most GHG-intensive way to generate electricity, [2] and coal-fired power plants are the single largest contributor of global emissions, accounting for 30% of global CO2 emissions. [3]

As governments and policymakers around the world seek to address the risk of climate change, many have focused on coal and have committed to phasing out coal power and/or not building new coal-fired power plants. [4] This focus was reaffirmed by the Glasgow Climate Pact, which calls upon countries to accelerate the “efforts towards the phasedown of unabated coal power…” [5]

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