Monthly Archives: March 2023

HLS Forum Sets New Records in 2022

Posted by Leeor Ofer (Harvard Law School), on
Wednesday, March 8, 2023

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Leeor Ofer is a co-Editor of the Forum and a Fellow at the Harvard Law School Program on Corporate Governance.

The operations of the Harvard Law School Forum on Corporate Governance during 2022 set several new records. These records include:

  • Attracting more than 140,000 unique readers a month;
  • Publishing over 850 posts during the year;
  • Having visitors to the Forum coming from 233 countries and territories during the year; and
  • Attracting more than 2.8 million page views.

Established in 2006 by Professor Lucian Bebchuk and the Harvard Law School Program on Corporate Governance, the Forum has become the leading online resource and the central outlet for the exchange of ideas and debate in the fields of corporate governance and financial regulation.

The Forum’s posts are distributed daily, not only through its website but also via Twitter, LinkedIn, and Facebook. Followers of the Forum have increased during 2022 to over 15,000 on Twitter, over 21,000 on LinkedIn, and over 1,700 on Facebook. In addition, the number of subscribers to the Forum’s daily email release of new posts has grown to over 9,000. To subscribe to our daily email release and to follow the Forum through any of these channels, please click the icons at the top of our sidebar.

To date, the Forum has published more than 10,500 posts by more than 8,000 different contributors, including prominent academics, public officials, executives, legal and financial advisors, institutional investors, and other market participants. While most posts are solicited by the Editors, the Forum welcomes submissions of unsolicited posts for consideration.

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To Exculpate, or Not to Exculpate: Is It Even a Question?

Posted by Ethan Klingsberg, Pamela Marcogliese, and Elizabeth Bieber, Freshfields Bruckhaus Deringer LLP, on
Wednesday, March 8, 2023
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Ethan Klingsberg and Pamela Marcogliese are Partners, and Elizabeth Bieber is Counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Ms. Marcogliese, Ms. Bieber and George Ter-Gevondian and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of Duty of Care? (discussed on the Forum here) by Holger Spamann. 

Toward the end of last summer, the Delaware General Corporation Law (DGCL) was amended to permit companies to exculpate officers for breaches of their duty of care. This amendment permits officers to benefit from Section 102(b)(7) of the DGCL, in most instances, in the same way that this valuable section has long insulated directors from liability for actions taken in good faith.  However, the catch is that this new right of officers to exculpation will take effect if, and only if, the charter of the company in question provides explicitly for this right.  This means a charter amendment and, therefore, a shareholder vote will be required.

Approximately six months following the amendment of Section 102(b)(7), we have not changed our view: we believe the benefits of exculpation are significant and, at most companies, worth the costs of pursuing shareholder approval of a charter amendment.  The market data from companies with off-cycle meetings within the last six months supports this view.

As a practical matter, extending exculpation to officers has the potential to reduce both the volume and scope of lawsuits alleging breaches of fiduciary duties by officers. This, in turn, reduces the indemnification burden on companies since such lawsuits are now more likely to be resolved earlier in the progression of the lawsuit (on a motion to dismiss, for example) or at lower cost of settlement. As a result, companies may see reduced D&O insurance premiums. Companies may also experience less quantifiable benefits, such as avoiding or truncating negative press cycles attendant to such lawsuits.  However, companies should be aware that extending exculpation to officers will not insulate these officers from derivative lawsuits (i.e., a lawsuit by the board, on behalf of the corporation) against officers.

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S&P 500 CEO Compensation Increase Trends

Posted by Aubrey Bout, Perla Cuevas, and Brian Wilby, Pay Governance LLC, on
Tuesday, March 7, 2023
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Aubrey Bout is a Managing Partner and Perla Cuevas and Brian Wilby are Consultants at Pay Governance LLC. This post is based on a Pay Governance memorandum by Ms. Bout, Ms. Cuevas, Mr. Wilby and Jose Lawani. Related research from the Program on Corporate Governance includes Paying for long-term performance (discussed on the Forum here) by Lucian Bebchuk and Jesse Fried; and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein. 

Executive Summary

  • In 2021, CEO median actual total direct compensation (TDC*) among S&P 500 companies increased +14% driven by higher actual bonuses. Similarly in 2021, the S&P 500 total shareholder return (TSR) increased +29%.
  • Historical CEO pay increases have been supported by TSR; on average, annualized pay increases have been ≈12% lower than TSR performance on a percentage basis.
  • In 2022, CEO actual TDC will potentially increase in the low- to mid-single digits due to strong 2022 S&P 500 revenue and operating income performance (+10% and +13% at the median, respectively), counterbalanced with poor TSR performance (-18%).
  • In 2023, due to the current uncertain environment, potential recession, contractionary monetary policies, inflation and weak TSR performance in the 2022 calendar year (-18%), we expect CEO pay to increase in the low-single digits in aggregate (higher performing companies could provide larger increases).
  • Performance share plans remain the most used long-term incentive (LTI) vehicle; however, we expect a potential increase in the use of time-based awards and stock options due to recent volatility and the difficulty of setting multi-year goals in an increasingly uncertain economic environment.

             *TDC = sum of base salary, actual annual incentive/bonus paid and the grant date fair value of long-term incentive awards.

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Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments

Posted by Lauren H. Cohen (Harvard Business School), Umit Gurun (University of Texas at Dallas), Bugra Ozel (University of Texas at Dallas) , on
Tuesday, March 7, 2023
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Lauren H. Cohen is the L. E. Simmons Professor of Business Administration at Harvard Business School, Umit Gurun is the Stan Liebowitz Professor of Accounting at the University of Texas at Dallas, and N. Bugra Ozel is an Associate Professor of Accounting at the University of Texas at Dallas. This post is based on their recent paper.

The common perception of managerial positions is that they come with more responsibility and oversight authority. For instance, managers frequently oversee budgets and work schedules, Additionally, they can influence recruiting, promotion, and firing decisions. Managers often receive higher salaries, additional types of compensation (such as bonuses), and perquisites than non-managerial staff in keeping with their increased responsibility. “Managers” are recognized as a distinct and distinctive class by the Federal Government, as well. In fact, to determine who is eligible for overtime compensation, the federal government has gone so far as to establish a law that distinguishes between managers and normal employees.

The Fair Labor Standards Act §7(g) (hereafter FLSA) exempts employers from making overtime payments to employees who are “managers” and are paid a salary above a threshold. Using this provision, we investigate whether firms appear to strategically assign titles to exploit regulatory thresholds to avoid paying for overtime work. For instance, we investigate the extent to which companies hire employees with potentially deceptive managerial job titles with otherwise equivalent work parameters as other non-managers to avoid having to pay overtime for extra hours worked. Below, we provide a few examples of such deceptive managerial titles:

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About 1,500 Empirical Studies Apply the BCF Entrenchment Index

Posted by Leeor Ofer (Harvard Law School), on
Monday, March 6, 2023
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This post relates to a Program on Corporate Governance study published by Lucian Bebchuk, Alma Cohen and Allen Ferrell, What Matters in Corporate Governance, available here and discussed on the Forum here. Lucian Bebchuk is James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Alma Cohen is Professor of Empirical Practice, Harvard Law School. Allen Ferrell is Harvey Greenfield Professor of Securities Law, Harvard Law School.

In a study issued by the Harvard Law School Program on Corporate Governance, What Matters in Corporate Governance?, (the “BCF Study”) Bebchuk, Cohen, and Ferrell (2009) put forward a corporate governance index – the Entrenchment Index (“E-Index”). This post provides an update on the considerable influence that the BCF Study has had on subsequent research. According to Google Scholar citations data, as of the beginning of 2023, the BCF Study was cited by about 3,500 research papers (listed here). Furthermore, a review of these research papers has identified about 1,500 studies that have applied the E-Index and used it in their empirical analysis. A list of the studies using the E-Index in their empirical analysis is available here.

The list of studies applying the E-Index includes empirical studies published in:

  • Leading journals in finance such as the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies;
  • Leading journals in economics such as the Journal of Political Economy and the Review of Economics and Statistics;
  • Leading journals in law and economics such as the Journal of Law and Economics and Journal of Law, Economics, and Organization; and
  • Leading journals in accounting, such as the Journal of Accounting and Economics, Journal of Accounting and Public Policy, and The Accounting Review. 

The BCF Study was first circulated in 2004 and was published in 2009 in the Review of Financial Studies. The BCF Study identified six corporate governance provisions as especially important, demonstrated empirically the significance of these provisions for firm valuation, and put forward an “Entrenchment Index,” the E-Index, based on these six provisions.

The BCF Study is available here.

Musings and Questions about the Universal Proxy Card

Posted by Arthur B. Crozier, and Gabrielle E. Wolf, Innisfree M&A Inc., on
Monday, March 6, 2023
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Arthur B. Crozier is Chairman and Gabrielle E. Wolf is a Director at Innisfree M&A Incorporated. This post is based on their Innisfree memorandum. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst; Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here); and The Specter of the Giant Three (discussed on the Forum here) both by Lucian A. Bebchuk and Scott Hirst.

Many have written, spoken and warned about the consequences of Federal Proxy Rule §14a-19 that requires all parties in contested elections to use universal proxy cards (“UPCs”) that list all director nominees presented for election at a shareholder meeting.  In short, use of a UPC will allow shareholders  to choose nominees from both slates, rather than the prior practice which limited choice to all or some of only one slate’s nominees.  Accordingly, a shareholder who is supportive of management but believes there should be some change on the Board of Directors can now vote easily for at least one opposition nominee while still voting for the remainder of management’s nominees and vice versa. This article sets forth some questions and reflections on the universal proxy card; we hope these musings will open the door to new conversations on the oft-discussed rule.

1-Will the UPC change voting tendencies of the “Big Three” index funds?

BlackRock, Vanguard and State Street Global Advisors (the “Big Three”) own an increasingly large percentage of the outstanding shares of mid-, large- and mega-cap public companies. [1] Indeed, the Big Three collectively own an average of 19.9% of S&P500 Companies.  Each of BlackRock, Vanguard and State Street vote all shares it holds as of the record date for a shareholder meeting and makes its own voting decisions, independent of the proxy advisory firms.  Because not all shares held as of a record date actually vote due to friction within the proxy system, post-record date sales of the subject stock and low turnout by retail investors, the Big Three can have outsized influence at most U.S. public companies.   Support from the Big Three therefore can play a decisive role in the ultimate outcome of most proxy contests.

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Corporate Officers Owe the Same Caremark Oversight Duties as Directors

Posted by Alan Stone, Jed Schwartz, and Neil Whoriskey, Milbank LLP, on
Sunday, March 5, 2023
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Alan J. Stone, Jed Schwartz, and Neil Whoriskey are Partners at Milbank LLP. This post is based on a Milbank memorandum by Mr. Stone, Mr. Schwartz, Mr. Whoriskey, Gary A. Crosby, Iliana Ongun, and Frank Pensabene, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamman.

For the past several years, boards of directors have increasingly faced claims that they have failed in their duty of oversight. These so-called Caremark claims can arise in a number of contexts involving allegations of systemic failures or intentional wrongdoing. Recently, the Delaware Court of Chancery held for the first time that officers owe the same duty of oversight as directors, an expansion of Caremark which had previously only been applied to directors.

In In re McDonald’s Corp. Stockholder Derivative Litigation, the Delaware Court of Chancery denied a motion to dismiss a breach of fiduciary duty claim against the former Executive Vice President and Global Chief People Officer of McDonald’s Corporation (“McDonald’s” or the “Company”) relating to alleged sexual misconduct and inadequate oversight.

I. Background

David O. Fairhurst served as head of human resources from 2015 until his for-cause termination in 2019. Fairhurst and Stephen J. Easterbrook, former Chief Executive Officer (“CEO”), worked in the Chicago headquarters, and became close personal friends. Plaintiffs alleged that Fairhurst and Easterbrook promoted a “party atmosphere” and a “boys’ club” with an open bar on one of the floors, as well as happy hour events that made female employees feel uncomfortable. Easterbrook allegedly pursued intimate relationships with staff, and Fairhurst purportedly failed to address complaints about misconduct by executives and employees.

Beginning in 2016, McDonald’s faced public scrutiny concerning sexual harassment and retaliation allegations, and restaurant workers filed complaints with the U.S. Equal Employment Opportunity Commission (“EEOC”). Plaintiffs alleged that the Company’s board of directors (the “Board”) knowingly ignored workplace harassment by not only allowing senior executives—namely, Easterbrook and Fairhurst—to violate certain of the Company’s standards and policies prohibiting misconduct, and also by permitting a culture of widespread harassment and excessive alcohol use to flourish in the corporate headquarters and McDonald’s restaurants across the nation.

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ESG: Trends to Watch in 2023

Posted by Leah Malone, and Emily B. Holland, Simpson Thacher & Bartlett LLP, on
Saturday, March 4, 2023
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Leah Malone is a Partner, and Emily B. Holland is Counsel at Thacher & Bartlett LLP. This post is based on a Thacher & Bartlett LLP memorandum by Ms. Malone, Ms. Holland, Stephen Blake, Karen Hsu Kelley, Matt Feehily, and Carolyn Houston. 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 Bebchuk, Kobi Kastiel, 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 Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

Said simply, it might feel like ESG is everywhere in 2023. More companies and investment funds are adopting programs or policies that are keyed to various ESG measures as they look to drive profitability and improve access to capital. Regulators across the globe are busy writing and implementing new disclosure regimes. Investors are pushing for information as they develop and refine ESG-based investing strategies. Meanwhile, ESG-related issues in the United States have given rise to divisive political views.

Heading into 2023, the pressure will continue to build as a broader set of stakeholders (including shareholders, regulators, employees, customers and community members) expect companies across geographies and industries to take action on a wide set of ESG-focused concerns. Navigating risk and opportunity will require calibrated solutions that balance these competing priorities, and which are aligned with long-term sustainability and profitability. It will demand targeted, measurable and trackable action plans and—in some cases—tradeoffs.

If 2022 was the year that many ESG issues assumed a refined focus, then 2023 may be the year that corporate ESG efforts are seriously tested. Below are five emerging trends to watch—and our views about how to get (and stay) ahead of them.

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The 2023 Reporting Season: Recent SEC Guidance

Posted by Brian Breheny, Raquel Fox and Joseph Yaffe, Skadden, Arps, Slate, Meagher & Flom LLP, on
Friday, March 3, 2023
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Brian Breheny, Raquel Fox and Joseph Yaffe are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Assess the Impact of SEC Staff Comments

The staff of the Disclosure Review Program (DRP) in the SEC’s Division of Corporation Finance has remained quite active. During the 12-month period ended June 30, 2022, the staff issued approximately 10% more comment letters on company filings compared to the prior year period. [1] This uptick in comment letters reversed the downward trend of recent years. In addition to the general areas of focus of staff comments (discussed below), the staff launched new initiatives focused on disclosures related to climate change and corporate governance. [2]

The Division of Corporation Finance also announced the addition of two new review offices to the DRP — the Office of Crypto Assets and the Office of Industrial Applications and Services. [3] The Office of Crypto Assets will continue the work currently performed across the DRP to review filings involving cryptoassets. The Office of Industrial Applications and Services will oversee filings currently assigned to the Office of Life Sciences for companies that are not pharma, biotech or medicinal products companies. The addition of these two new offices reflects the recent growth in the cryptoasset and the life sciences industries.

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Weekly Roundup: February 24 – March 2, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, March 3, 2023

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This roundup contains a collection of the posts published on the Forum during the week of February 24 – March 2, 2023.

The 2023 board agenda

Posted by Carey Oven, Caroline Schoenecker and Bob Lamm, Deloitte & Touche LLP, on Friday, February 24, 2023
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How To Fix The C-suite Diversity Problem

Posted by Tina Shah Paikeday, and Nisa Qosja, Russell Reynolds Associates, on Saturday, February 25, 2023
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Delaware Supreme Court Enforces Partnership’s Agreement Unambiguous Exculpation Provision

Posted by Jason Halper, Jared Stanisci, and Sara Bussiere, Cadwalader, Wickersham & Taft LLP, on Sunday, February 26, 2023
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The Liability Trap: Why the ALEC Anti-ESG Bills Create a Legal Quagmire for Fiduciaries Connected with Public Pensions

Posted by David H. Webber (Boston University), David Berger (Wilson Sonsini Goodrich & Rosati), and Beth Young (Corporate Governance & Sustainable Strategies), on Monday, February 27, 2023
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How Have the Top U.S. Asset Managers Voted in 2022?

Posted by Lindsey Stewart, Morningstar, Inc, on Monday, February 27, 2023
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Equal Treatment for U.S. Investors

Posted by Howell E. Jackson (Harvard Law School), Tyler Gellasch (Healthy Markets Association), on Tuesday, February 28, 2023
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The Universal Proxy: An Early Look

Posted by Keir Gumbs, Broadridge, on Tuesday, February 28, 2023
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Fiduciary Duties of Public Pension Systems and Registered Investment Advisors

Posted by Jed Rubenfeld, Strive Asset Management, on Wednesday, March 1, 2023
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An Auspicious Start for Universal Proxy

Posted by Michael R. Levin, The Activist Investor, on Wednesday, March 1, 2023
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The Venture Corporation

Posted by Gad Weiss (Columbia Law School), on Thursday, March 2, 2023
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2023 – The year of the risk-centric agenda

Posted by Krista Parsons, Maureen Bujno and Kimia Clemente, Deloitte LLP, on Thursday, March 2, 2023
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