Monthly Archives: April 2023

What to Watch for in Proxy Season 2023: Officer Exculpation

Aaron Wendt is a Research Director and Brianna Castro is a Senior Director at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

Recent amendments to the Delaware General Corporation Law (“DGCL”) have led public companies to propose new protections for their corporate officers, thereby forcing shareholders to consider whether they should give up their right to sue those officers for claims of negligence and breaches of their fiduciary duty of care.

Companies incorporated in Delaware, with the approval of shareholders, now have the ability to adopt “officer exculpation” provisions in their certificates of incorporation to provide certain officers with liability protection previously available only to corporate directors. The Delaware law on exculpation was originally designed to only apply to directors, as their role is so different from that of officers, and it made sense to protect directors from liability so they could properly serve shareholders. Although the roles of directors and officers have not changed since the law was initially crafted, the amended law now makes those same liability protections available to officers.

The amendments were prompted in part by the prevalence of litigation directed at companies, particularly in the context of mergers and acquisitions. Difficulties hiring executives and frivolous litigation, along with insurance and other cost issues, are a few of the reasons why companies may seek to adopt officer exculpation provisions.


Governance and Disclosure Reminders for Public Companies

Lawrence A. Cunningham is Special Counsel, Jerry R. Marlatt is a Partner, and Felix R. Zhang is an Associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Cunningham, Mr. Marlatt, Mr. Zhang, Edward S. Best, William R. Kucera, and Anna T. Pinedo.

Companies will be affected in a variety of ways by the receivership of Signature Bank, Silicon Valley Bank and any other similarly situated financial institution. Companies may face difficulty accessing cash deposits, bank facilities or the capital markets or limitations on money market transactions or commercial paper facilities. Companies may also face losses on investments, especially those tied to the affected financial institutions or invested in broader investments tied to financial institutions generally. Resulting liquidity constraints may lead to difficult decisions, including prioritizing the uses of limited cash. The constituents of many companies may be affected, including employees, suppliers, lenders and customers. The effects may also impact shareholders.

Companies must also be diligent in ensuring their continued compliance with federal securities laws. In light of increased market volatility and uncertainty, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler issued a statement on March 12, 2023 that the SEC was “particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly.”

Board oversight of resulting decision making will be implicated in many cases. Senior executives are advised to maintain a regular dialogue with boards, particularly independent chairs or lead independent directors, as well as audit committee members. Boards and officers should coordinate with inside counsel and outside counsel as needed to assure compliance with applicable laws, including those concerning board duties and oversight and securities law disclosures.

Below, we provide a brief overview for companies and their directors and officers.


Proxy season 2023: increased expectations and unintended consequences

Peter Reali is Managing Director and Global Head of Stewardship and Anthony Garcia is Senior Director of Investment Stewardship at Nuveen. This post is based on their Nuveen memorandum.

Proxy voting is one of few systematic and comparable ways for stakeholders to compare how different managers view a company’s environmental, social, and governance (ESG) program. However, aggregating proxy votes by support levels and incentivizing leadership based on quantity of support for particular ESG themes or based on third-party leaders/ laggards lists means taking a snapshot that can inadvertently favor short-term stewardship proof points over long-term stakeholder progress.

In our view, the 2023 proxy season is likely to put the following four perspectives into the spotlight:

1. Market-first approaches or focus on thematic objectives without considering company- or industry-context will fail to regain the support levels from pre-2022 proxy seasons.

Recent proxy seasons suggest that large investors may advocate for companies to have impact where it supports long-term, sustainable value but are not mandating through the proxy vote a particular course of action for how and when companies must achieve impact.

2. Stewardship, and in particular proxy voting, may sometimes be better suited to mitigating negative outcomes than advocating for fundamental changes of the business to yield positive outcomes.

Proxy voting by itself is likely insufficient to catalyze fundamental change in a company business model. However, proxy voting can be a discrete signal that a company is lagging its peers on a material issue or is making insufficient progress in line with investors’ expectations.


The March 2023 Bank Interventions in Long-Run Context – Silicon Valley Bank and Beyond

Andrew Metrick is the Janet L. Yellen Professor of Finance and Management at the Yale School of Management and the Director of the Yale Program on Financial Stability; and Paul Schmelzing is an Assistant Professor of Finance at Boston College and a Research Fellow at the Hoover Institution, Stanford University. This post is based on their recent paper.

In March 2023, the failure of Silicon Valley Bank (SVB) shocked global financial markets. In many ways, the SVB failure was a classic bank run, with details that appear drawn from the 19th century rather than the 21st.   With a deposit base more than 90% uninsured and a balance sheet badly damaged by a combination of bad luck and bad strategy, SVB could not be saved by the standard tools of the Federal Reserve and FDIC.  Instead, the FDIC was forced to take the unusual step of a takeover during business hours, with many details of this resolution not released until the next weekend.  These events began a series of bank interventions on both sides of the Atlantic that is still ongoing as of this writing. A long-horizon view through the prism of intervention patterns can allow for the identification of a “systemic” banking crisis long before the macroeconomic data of that period is complete; in this case the combination and size of interventions in March 2023 strongly suggest that we are already in the midst of a systemic event.

Beginning with Bagehot (1873), the management of banking crises has been closely related to the lender-of-last-resort function of central banks.  But while this association is highly salient, it has never represented the full story.  Instead, crisis-fighting finds central bankers joining fiscal authorities, deposit insurers, and other regulators while using multi-pronged interventions that target every region of banks’ balance sheets.  In this paper, we attempt to place the March 2023 interventions within this “full balance sheet” framing, following the taxonomy and database of Metrick and Schmelzing (2023, henceforth MS – online database).  Figure 1 illustrates this taxonomy with 7 major categories and 20 sub-categories; the corresponding database includes almost 2,000 interventions covering 138 countries over 750 years. Importantly, policy interventions are often associated with a “systemic” banking crises event – standard chronologies such as Reinhart and Rogoff (2009) use evidence of policy interventions to determine the severity of a bank-distress event: however, the MS database goes beyond such definitions and also includes hundreds of policy intervention events that are not included in these standard chronologies. This intervention prism allows drawing some implications for current dynamics, given the most recent sequence of events.


Back to the Future: Option Repricing

Oren Lida is a Research Director at Glass, Lewis & Co. This post is based on his Glass Lewis memorandum.

In the United States and around much of the globe, the 2023 proxy season looks set to take place in the first protracted bear market for more than a decade. That will have an impact on how shareholders vote, and on the types of proposals they are voting on. As public companies, investors and other stakeholders bear down for the annual flood of annual meetings, an old compensation technique may be taken out the drawer and dusted off by boards: option repricing.

What is Repricing?

Repricing boils down to revising the exercise price of outstanding options awards to a lower (and thus more attainable) level. Its close cousin, the option exchange, replaces outstanding stock options with new stock options with lower exercise prices than those of the stock options they replaced. Both serve the same objective, and for the purpose of this analysis, we refer to both courses of action under the general category of “repricing.”

Whether a company feels compelled to re-price depends a lot on the timing of its equity granting cycle. As such, it doesn’t take a protracted global financial crisis to prompt a repricing proposal. Any volatility (see COVID-19, war in Ukraine, inflation and monetary policy or simply poor performance leading to stock price decline) may push a board to act in the name of retention. But if history is a guide, a market-wide downturn certainly helps. The last time companies faced sustained macro headwinds, during the global financial crisis, the number of repricing proposals surged as companies found their option-based incentive programs “out of the money”.


Anticipated Impacts of Selected EU Legislative Initiatives on General Meeting Agendas

Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an article by Oona Huttunen, Analyst, with ISS’ Governance Research & Voting unit.


The rationale behind a number of recent EU legislation changes focusing on corporate governance has been to prioritise a long-term focus on governance through various transparency measures as well as some concrete requirements for action, and on allowing shareholders and other stakeholders to be well informed. This is evident in the revised Shareholder Rights Directive adopted in 2017, and also in the most recent legislative initiatives discussed in this review. The Corporate Sustainability Reporting Directive and the proposed directive on Corporate Sustainability Due Diligence revise current obligations and introduce new ones under EU law regarding company disclosure and corporate governance practices. Additionally, the new November 2022 Directive on gender balance on company boards seeks to harmonise and improve Member State practices regarding gender representation on company boards.

This review takes a look at the recent legislative initiatives noted and discusses their possible impacts on the Annual General Meeting (AGM) agendas of European companies in the upcoming years. Drawing conclusions from these multiple initiatives rather than examining each individually can help us to better understand the general direction of corporate governance and EU legislation in the European context.

The first half of this review discusses the selection of EU legislative initiatives that will have impact on shareholder meetings, and the status of these legislative procedures. The second half highlights some notable themes and potential impacts of AGMs across these legislative pieces.


Guidance on Effective Board Oversight

Benjamin Colton is Global Head of Asset Stewardship, and Holly Fetter is Vice President of Asset Stewardship at State Street Global Advisors. This post is based on their SSGA memorandum.

As stewards of near-permanent capital to thousands of public companies across the world, State Street Global Advisors focuses on risks and opportunities that may impact long-term value creation for our clients. We rely on the elected representatives of the companies in which we invest — the board of directors — to oversee these firms’ strategies. We expect effective independent board oversight of the material risks and opportunities to its business and operations. We believe that appropriate consideration of these risks and opportunities is an essential component of a firm’s long-term business strategy, and expect boards to actively oversee the management of this strategy.

This post provides guidance to our portfolio companies on how we evaluate the effectiveness of the board oversight of the risks and opportunities and should be read in conjunction with our Global Proxy Voting and Engagement Principles and applicable regional proxy voting and engagement guidelines It also outlines our approach to incorporating these perspectives into our voting and engagement.


Weekly Roundup: April 7-13, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 7-13, 2023.

Chancery Court Provides Roadmap for Retroactive Validation of Shareholder Votes

What boards should know about balancing ESG critics and key stakeholders

DOJ Announces Changes to Corporate Compliance Program Evaluation Criteria

U.S. Say-On-Golden Parachute Failure Rate & CEO Golden Parachute Values in 2022

The Corporate Governance of Public Utilities

Using transparency to build trust: A corporate director’s guide

2022 Developments in U.S. Securities Fraud Class Actions Against Non-U.S. Issuers

Use of Environmental and Social Metrics in Pay at Large U.S. Energy Companies: Trends and Observations

The Oscillating Domains of Public and Private Markets

Key trends in investor voting policies from the 2022 (AGM) season

Key trends in investor voting policies from the 2022 (AGM) season

Dan Konigsburg is a Senior Managing Director and William Touche is a London Senior Partner and Vice Chairman at Deloitte & Touche LLP. This post is based on their Deloitte memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian Bebchuk and Roberto Tallarita; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli-Katz; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales.

Investor engagement has taken off [1]. Many large investors today spend time thinking about and assessing the effectiveness of their corporate engagement. Asset owners and asset managers often formally communicate with companies through direct engagement and by voting at annual general meetings (AGMs). There are other means of engagement, however, which are worth understanding. For example, investors often publish how they intend to vote on key issues at the AGM.

The Deloitte Global Boardroom Program analyzed voting policies of 101 large investors to highlight investor concerns for the 2022 AGM season on a selection of headline topics (see sidebar): environmental, social and governance (ESG), diversity, equity and inclusion (DEI), board composition and board independence, and executive pay. The analysis revealed that institutional investors across regions are seeking disclosure on environmental issues from the companies they invest in. Intentions to vote on board diversity and independence appeared more varied across geographies. And executive remuneration continues to attract considerable scrutiny from institutional investors with many adopting say-on-pay policies.


The Oscillating Domains of Public and Private Markets

Alperen A. Gözlügöl is an Advanced Researcher of the Cluster Law and Finance, Julian Greth is a Ph.D. Student and a Junior Researcher of the Cluster Law and Finance, and Tobias H. Tröger is Professor of Private Law, Commercial and Business Law, Jurisprudence at Goethe-University, and Director of the Cluster Law and Finance at the Leibniz Institute for Financial Research Sustainable Architecture for Finance in Europe. This post is based on their recent paper.

More than three decades ago, Nobel laureate Michael Jensen had predicted the ‘eclipse of the public corporation’ (Harvard Business Review, 1989). Time and again, market developments seemed to corroborate Jensen’s hypothesis with various trajectories of growing private markets and lagging public markets. Similarly, private markets have seen eye-catching growth in recent years, while public markets appear to be withering both in the US and Europe. Increased private capital raising and declining IPO and public company numbers in leading capital markets support this observation. These developments have caused much discussion, with some commentators again seeing a fundamental shift in the relevance of public and private markets for corporate finance and alarmed regulators.

In our recent article “The Oscillating Domains of Public and Private Markets”, we contribute to the debate about the future of capital markets and corporate finance on both sides of the Atlantic. We shed light on the fluctuating significance of public and private markets for corporate finance over time and challenge the conventional view of a linear trend from one market to the other. Although recent years have seen a steady rise of private markets, a deeper dive into modern financial history shows that these developments are not evidence per se of a stable and linear trend. Putting the recent developments in capital markets in a broader historical context reveals a more complex pattern that does not align with the ‘end of history’ type of predictions some have been making. In particular, financial history shows various boom-and-bust periods in private market activity (see Kaplan & Strömberg, 2009). Therefore, caution is called for when making absolute predictions about capital markets and corporate finance developments, as cyclical booms might purport to be secular trends.


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