Monthly Archives: January 2023

SEC Strategic Plan for Fiscal Years 2022-2026

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on the Securities and Exchange Commission’s Strategic Plan for FY 2022 through FY 2026.

Our Goals

Protecting the Investing Public; Maintaining a Robust, Relevant Regulatory Framework; Supporting a Skilled and Diverse Workforce

The United States has the largest, most sophisticated, and most innovative capital markets in the world. U.S. capital markets represent about 40 percent of the global capital market. Companies and investors access the U.S. capital markets at a higher rate than do market participants in other economies with their respective markets. For example, debt capital markets account for 80 percent of financing for non-financial corporations in the United States. By contrast, outside the United States, nearly 80 percent of lending to such firms comes from banks. U.S. capital markets continue to support American competitiveness on the world stage because of the strong investor protections the SEC offers.

The United States cannot take its remarkable capital markets for granted. New financial technologies continue to change the face of finance for investors and businesses. Global markets are inextricably linked, with money flowing between them in microseconds. While more retail investors than ever before are accessing U.S. markets, other countries are developing competitive markets.

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ISS Updates Frequently Asked Questions for Equity Compensation Plans, Peer Group Selection and Compensation Policies

Shaun Bisman is a Partner 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 Paying for long-term performance (discussed on the Forum here) by Lucian Bebchuk and Jesse M. Fried; and Rationalizing the Dodd-Frank (discussed on the Forum here) by Jesse M. Fried.

ISS recently issued Frequently Asked Questions (FAQs) documents related to equity compensation plans, the peer group selection methodology and issuer submission process, and compensation policies. The equity compensation plan FAQs cover topics under the rubric of ISS’ Equity Plan Scorecard (EPSC) and the compensation policies FAQs cover compensation topics more broadly. This update highlights select new and materially updated questions.

Equity Compensation Plans FAQs

Burn Rate

As discussed in our previous CAP Alert, “ISS Publishes Proxy Voting Guidelines Updates for 2023,” dated December 6, 2022, ISS changed its calculation of burn rate and now calls it the Value-Adjusted Burn Rate (VABR), which will go into effect for meetings on or after February 1, 2023. A company’s 3-year average adjusted burn rate as a percentage of weighted average common shares outstanding, as compared to a benchmark, is a scored factor in certain models of the Equity Plan Scorecard. The VABR benchmarks are broken out by the company’s two-digit GICS group (S&P 500) and four-digit GICS group (Russell 3000, excluding the S&P 500, and Non-Russell 3000). ISS also established a de minimis benchmark threshold separately for each of these three groupings. The VABR benchmarks and de minimis thresholds can be found in the Appendix of the FAQs and are also presented below this article.

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How Twitter Pushed Stakeholders Under The Bus

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; Kobi Kastiel is Professor of Law at Tel Aviv University, and Senior Fellow of the Harvard Law School Program on Corporate Governance; and Anna Toniolo is Postdoctoral Fellow at the Program on Corporate Governance of Harvard Law School. This post is based on the authors’ recent paper. A post by the authors on their project and their take on the subject was published earlier here.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here), by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? (discussed on the Forum here), all by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Response to the War in Ukraine: Stakeholder Governance or Stakeholder Pressure? (discussed on the Forum here), by Anete Pajuste and Anna Toniolo.

We just posted on SSRN a new discussion paper, How Twitter Pushed Stakeholders under the Bus.(An earlier post noting our work on this project and our take on the subject is available here.)

This paper provides a case study of the acquisition of Twitter by Elon Musk. Our analysis indicates that when negotiating the sale of their company to Musk, Twitter’s leaders chose to disregard the interests of the company’s stakeholders and to focus exclusively on the interests of shareholders and the corporate leaders themselves. In particular, Twitter’s corporate leaders elected to push under the bus the interests of company employees, as well as the mission statements and core values to which Twitter had pledged allegiance for years.

Our analysis supports the view that the stakeholder rhetoric of corporate leaders, including in corporate mission and purpose statements, is mostly for show and is not matched by their actual decisions and conduct (Bebchuk and Tallarita (2020)). Our findings also suggest that corporate leaders selling their company should not be relied upon to safeguard the interests of stakeholders, contrary to the predictions of the implicit promises and team production theories of Coffee (1986), Shleifer-Summers (1988) and Blair-Stout (1999).

Here is a more detailed overview of our paper:

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Financing Year in Review: The Tide Turns

John Sobolewski and Greg Pessin are Partners and Joel Simwinga is a Law Clerk at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Sobolewski, Mr. Pessin, Mr. Simwinga, Joshua Feltman, Michael Benn, and Emily Johnson.

2022 brought a halt to a nearly unabated 12-year run of booming credit markets and “lower for longer” interest rates. Rampant inflation, fears of a recession over the horizon, and war in Europe, among other factors, led to a marked contraction in credit availability and a slowdown in deal-making across sectors and credit profiles. U.S. high-yield bond issuances were down approximately three quarters year-over-year – the lowest volume since 2008 – while newly minted leveraged loans fell nearly two-thirds from 2021 levels. Investment-grade bond issuances fared better, but were still down significantly, with new issuances falling roughly 20% year-over-year. At year end, the average price for leveraged loans was just over 92 cents on the dollar, down from 99 at the year’s beginning. And high-yield bond prices fell significantly further – with an average price of 87 cents in December, down from 103 at start of the year. Average yields for single-B bonds rose from under 4.7% on the first trading day of the year to over 9.2% on the last, and average BBB bond yields more than doubled, from 2.7% to 5.8% over the same period.

Looking ahead to 2023, with risk-free rates and credit spreads still elevated and the credit, deal making, regulatory and geopolitical environments uncertain, corporate borrowers and sponsors will need to plan rigorously to succeed on levered acquisitions and spin-offs and important refinancings. Obtaining committed financing, in particular, will require both creativity and avoiding the urge to let the perfect become the enemy of the good.

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The CEO’s ESG dilemma

Peter Gassmann is a Global Leader of Strategy and Will Jackson-Moore is a Global ESG Leader at PricewaterhouseCoopers LLP. This post is based on their PwC 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 to All Stakeholders? (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.; and Stakeholder Capitalism in the Time of Covid (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

A consensus has emerged in recent years that environmental, social, and governance (ESG) issues are crucially important for the corporate world. But what should companies do about investors who won’t accept lower returns in order to further ESG goals?

In a recent PwC survey, global investors placed ESG-related outcomes such as effective corporate governance and greenhouse-gas emissions reduction among their top five priorities for business to deliver. But 81% went on to say they would accept only a 1 percentage point or smaller reduction in returns to advance ESG objectives—both those that are relevant to the business and those that have a beneficial impact on society. And roughly half of that group were especially unyielding and would not accept any decline in returns at all.

For chief executives and boards, the disconnect with investors presents a dilemma: can their company perform well for investors and pursue a clear ESG strategy at the same time? We believe the answer is yes, if companies find the right balance between short-term performance requirements and the investments needed to meet longer-term ESG goals. To be sure, as companies invest in ESG initiatives (for example, in the technologies and systems needed to support future regulations and any net-zero commitments they have made), they may face pushback and short-term share price swings. But in the long run, as climate change increasingly affects value preservation and the ability to deliver sustained profits, the total accumulated value of not investing in ESG will be significantly lower than a successful ESG approach. The key is to define a convincing long-term ESG path to create value within the boundaries of the short-term KPIs that address investors’ performance expectations. Taking their stakeholders—and in particular their shareholders—along the journey toward that longer-term vision is how companies can address the disconnect between short-term pressures and longer-term opportunities.

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M&A Predictions and Guidance for 2023

Ethan Klingsberg is a Partner at Freshfields Bruckhaus Deringer LLP. This post is based on his Freshfields memorandum.

Tension between institutional shareholders and boards about strategic alternatives.

We are emerging from several consecutive years where both activist shareholders and boards have been able to regularly count on institutional shareholder support for all-cash sales of companies at premia to recent trading prices.  We will be entering a different environment in 2023 – where long-term, institutional shareholders have acquired their shares over the last several years at prices that not only are significantly higher than prices that represent a healthy premium to current trading prices, but also far exceed the ranges where financial analyses of the newest internal, management forecasts are putting both intrinsic values and future stock prices.

Against this backdrop, we are not necessarily going to be able to rely on institutional shareholder enthusiasm for cash sales of companies just because the transactions satisfy the traditional criteria of meaningful premia to recent trading prices and falling within the ranges of intrinsic values and future stock prices derived from internal management forecasts.  The uncertainty and downsides that will be characterizing the forecasts that managements present to boards at the outset of 2023 will be fueling this tension between the approaches of boards and the approaches of institutional shareholders to sales of companies in 2023.

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Amendments to Rule 10b5-1’s Defense to Insider Trading Liability & Related Disclosures

Laura D. Richman is a Counsel, John R. Ablan is a Partner, and Kwaku D. Osebreh is an Associate at Mayer Brown LLP. This post is based on their Mayer Brown memorandum. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation (discussed on the Forum here) by Jesse M. Fried.

On December 14, 2022, the Securities and Exchange Commission (the “SEC”) unanimously adopted amendments (the “amendments”) to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and related disclosure obligations for public companies. The amendments (i) add new conditions to the availability of the affirmative defense to insider trading liability contained in Rule 10b5-1 designed to address concerns about the rule’s abuse by insiders to trade securities on the basis of material nonpublic information (“MNPI”) and (ii) enhance public disclosure by issuers and insiders of trading plans designed to comply with Rule 10b5-1. This Legal Update summarizes the principal changes made by the amendments and discusses some practical considerations.

Background

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit purchases or sales of a security on the basis of MNPI about that security or the issuer, in breach of a duty owed to such issuer or the shareholders of such issuer or to any person who is the source of that MNPI. This prohibited conduct is more commonly referred to as “insider trading.” Rule 10b5-1 provides an affirmative defense to insider trading liability for trades undertaken pursuant to a binding contract, an instruction to another person to execute the trade for the instructing person’s account or a written plan (collectively, a “10b5-1 Plan”) adopted when the trader was not aware of MNPI. 10b5-1 Plans must be entered into in good faith and not as part of a scheme to evade the prohibitions of the insider trading rules.

Since the adoption of Rule 10b5-1 in 2000, the SEC, courts, members of Congress, academics and others have grown increasingly concerned that Rule 10b5-1 has allowed traders to escape liability by trading on the basis of MNPI while still technically satisfying the Rule’s requirements. To address these concerns, the SEC issued a proposal about a year ago consistent with prior statements made by SEC Chair Gary Gensler, as well as recommendations made to the SEC by the Investor Advisory Committee, with respect to 10b5-1 Plans. [1] The proposal included new conditions to the availability of the Rule 10b5-1 affirmative defense, such as cooling-off periods between adoption of a 10b5-1 Plan and the first trade thereunder, limitations on multiple overlapping 10b5-1 Plans and limits on single-trade 10b5-1 Plans, as well as new disclosure requirements. The SEC received over 180 comment letters on the proposed amendments.

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Get boardroom ready: five ways to improve executive interactions with the board

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

Why? Whether you are an executive who has been meeting with the board regularly for years or you are in a new role that’s landing you on the agenda, these brief interactions play a huge role in the board’s view of your professional credibility. Your pre-read materials, presentation style, and overall executive presence will impact how the board views not only you but also your entire business function. Board meetings are your opportunity to highlight issues core to the business and to demonstrate your group’s value. So you need to prepare, and you need to make an impact.

Engaging with the board is not the same as engaging with other members of senior management. Directors’ expectations are different. Board members, company priorities, and presentation preferences change over time. Here, we share the differentiators that will turn executives from good to great in the boardroom.

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Compensation Season 2023

Adam J. Shapiro, Michael J. Schobel, and Erica E. Bonnett are Partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Economic volatility dominated the corporate landscape in 2022, with inflation and stock price declines making headlines throughout the year, while the labor market remained surprisingly resilient, reinforcing the scarcity and value of key talent. We identify below some of the fundamental themes that may shape company compensation decisions in 2023.

Last of the Dodd-Frank Act RegulationsMore than a decade after the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC in 2022 adopted final regulations regarding pay versus performance disclosure and compensation clawbacks, marking the last of the compensation-related regulations borne of the 2008 financial crisis.

Pay versus Performance (PvP). The final rules require annual proxy disclosure of the relationship between executive compensation paid by a registrant and the registrant’s financial performance. Specifically, registrants must provide a table disclosing itemized compensation amounts and financial performance measures for their five most recently completed fiscal years (with the five-year look back phased in during a transition period). Registrants must comply with the new disclosure requirements in proxy and information statements for fiscal years ending on or after December 16, 2022; i.e., for the upcoming 2023 proxy season. For a detailed discussion of the final PvP rules, see our August 29, 2022 memorandum, “SEC Adopts Pay Versus Performance (PvP) Disclosure Rules.”

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Weekly Roundup: January 14-19, 2023


More from:

This roundup contains a collection of the posts published on the Forum during the week of January 14-19, 2023

Federal Reserve Proposes Climate Risk Guidance for Large Financial Institutions


The Angel’s in the Details: The Importance of Well-Drafted Board Minutes


ESG Momentum Remains Strong but May Face Headwinds in 2023


SEC Finalizes 10b5-1 Trading Plan Rule


SEC Continues Enforcement Scrutiny of ESG Claims by Investment Advisers


PwC’s Global Investor Survey 2022


Investment Stewardship Proxy voting U.S. guidelines 2023



Climate Risk Factors Soar at Largest Public Companies


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