Monthly Archives: July 2023

U.S. CEO Compensation Advantage Grows vs. U.K. Peers

This post is based on an article by Ramy Ibrahim, Associate Director, Product Manager, ESG, Data Analytics & Financial Solutions, Yan Xu, Senior Associate, EMEA ESG Advisory, and Stephan Stegmueller, Executive Director, Head of Advisory EMEA & APAC at ISS Corporate Solutions. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

The pay gap between CEOs in the S&P 500 and U.K.’s FTSE 100 widened from 2018 to 2022, with the growing advantage for U.S. chiefs largely driven by long-term incentive plans (LTIPs) and corresponding pay opportunity levels for S&P 500 companies. Corporate growth, both in terms of market value and revenue, was significantly higher on the U.S. side of the Atlantic during the period.

In this analysis, ISS Corporate Solutions highlights several key differences in CEO compensation between the U.S. and the U.K. We examined company-disclosed pay by members of each index, limiting our research to businesses where the same CEO has served during the entire five-year period.

Key Takeaways:

  • Median CEO pay for S&P 500 CEOs increased by 23% during the period, compared with a 1.1% rise in the FTSE 100.
  • In the S&P 500, the LTI component of total CEO compensation increased, while among FTSE 100 companies, base salary and annual bonus together increased more rapidly.
  • The transatlantic disparity in basic CEO salary and annual bonuses, when adjusted for both market cap and revenue growth, has decreased since 2019.
  •  Median vote support levels for say-on-pay proposals have dropped by 1.8 percentage points in the U.K. and 1.7 points in the U.S.

The gap in total CEO pay between S&P 500 and FTSE 100 companies continues to make headlines. Recent comments made by Julia Hoggett, CEO of the London Stock Exchange, regarding the need for commensurate levels of CEO pay on both sides of the Atlantic highlight continued efforts to draw attention to this issue.

S&P 500 CEOs saw total compensation rise by 23% vs. 1% for the FTSE 100 during the period under review. [1] Breaking this down into components of pay, the median S&P 500 CEO salary grew 15% vs. 10% for the FTSE 100; annual bonuses increased 22% among S&P 500 CEOs vs. 21% for FTSE 100 CEOs. The most striking difference was long-term Incentive (LTI) pay, which grew 34% for the S&P 500 CEOs, while dropping by 3% at FTSE 100 companies.


Law and Stock Market Development in the UK Over Time: An Uneasy Match

Brian Cheffins is the S. J. Berwin Professor of Corporate Law at the University of Cambridge. This post is based on a recent paper, co-authored with Bobby Reddy, also of the University of Cambridge, and forthcoming in the Oxford Journal of Legal Studies.

In a recent Harvard Law School Forum on Corporate Governance post we drew attention to declining equity markets in the United Kingdom and canvassed various possible explanations for the trend.  Hectic reform activity is currently under way, including a set of proposals by the Financial Conduct Authority (FCA) designed to make the UK listing regime ‘more straightforward’, justified on the basis the FCA wants ‘to make sure that the UK public markets remain an attractive and trusted place to list companies to support growth and innovation.’  In a new paper we address the issues involved from an historical perspective.

The UK has, the United States aside, a uniquely well-developed equity market, with origins traceable back to the 16th century.  One might correspondingly assume that the current weakness of equity markets is an aberration.  Moreover, the emphasis on reform intended to correct matters seems entirely logical given an influential ‘law and finance’ thesis that strong legal protection for investors is an essential prerequisite for a vibrant stock market.  We show in our paper that with respect to the strength of UK equity markets and law’s role in fostering stock market development the situation is more complicated than the foregoing implies.  Britain, despite being a stock market ‘citadel’, has suffered periodic serious stock market reversals over time and, to the extent equity markets have thrived, this has been as much in spite of rather than because of law.


2023 Private Company Board Survey Insights

Claudia H. Allen and Patrick A. Lee are Senior Advisors, and Ari Weinberg is a Director at KPMG’s Board Leadership Center. This post is based on their KPMG memorandum.

Adding value to private company boards

From board structure and agenda priorities to the role of independent directors, private company governance continues to evolve in response to an increasingly complex and challenging business and risk environment.

As highlighted in our survey, over the past few years, private company boards have made strides in improving their effectiveness in a number of areas, including overseeing strategy and agenda setting (two areas that nearly three quarters of directors in our 2020 survey cited as being most in need of improvement). Directors in our most recent survey said that over the past few years their boards have also made improvements in communicating with management, conducting board meetings, and communicating with other directors.

Despite this progress, directors report that the biggest opportunities for improvement going forward involve strategy, talent and succession, cybersecurity risk and risk management more generally, as well as the company’s governance processes.

Perhaps not surprisingly, strategy, risk, and talent also seem to be the top reasons for private company board focus on the “E” and “S”—the environmental and social factors of ESG. And as to stakeholder engagement—beyond equity owners—private company boards appear to be embracing the growing importance of their companies’ engagement with employees and customers.

With that backdrop of progress, priorities, and opportunities for improvement, the role and value that
independent directors bring to the business—particularly advising on strategy and counseling the CEO and executive management (as noted in our survey findings)—will continue to be pivotal to private companies in navigating the challenges ahead. At a time when CEOs and boards need to be challenging assumptions and widening their company’s aperture on strategy, risk, and talent, the value of having independent voices in the boardroom will be more important than ever.


Share Buybacks and Executive Compensation: Assessing Key Criticisms

Lane Ringlee is Managing Partner, Marizu Madu is a Principal, and  Joadi Oglesby is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows (discussed on the Forum here) by Jesse M. Fried, and Charles C.Y. Wang; and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay (discussed on the Forum here) by Jesse M. Fried. 

Key Takeaways

  • While most S&P 500 companies conducting buybacks in 2018–2021 did not adjust performance goals or incentive awards to account for the lower share count post buyback, those conducting the largest buybacks tend to adjust goals or incentive awards to offset for the impact.
  • Although the use of per share metrics is common in incentive plans, most of these companies balance per share metrics with other performance categories, reducing the impact buybacks have on incentive payouts.
  • Shareholder returns for companies in our sample conducting buybacks are similar to returns for non-buyback companies, thus dispelling the notion that companies conduct buybacks to inflate stock prices to the benefit of management.
  • The majority of activist share repurchase demands are successful.


Stock repurchases (or “buybacks”) — where a company uses excess cash flow to repurchase shares of its stock to reduce common shares outstanding — have attracted significant attention from journalists, academic researchers, and government regulators; the concept of repurchases has also accrued significant supporters and detractors. According to Securities and Exchange Commission (SEC) Chair Gary Gensler, “In 2021, buybacks amounted to nearly $950 billion and reportedly reached more than $1.25 trillion in 2022”. [1] In 2023, the SEC revised rules issued in 1982 governing buybacks to require quarterly reporting of daily officer and director stock transactions that occur during a period of a stock repurchase program in addition to narrative disclosure of the details of the company’s buyback program and trading policies applicable during the program. The new regulations are intended to increase transparency of buyback processes and executive stock transactions during such programs. This Viewpoint summarizes Pay Governance research on buybacks within the S&P 500, the impact of buybacks on incentive compensation, and recent regulations governing buybacks.

In 2003, the SEC amended rules that provided companies with a safe harbor from liability for market manipulation for stock repurchases or buybacks as long as the buybacks were conducted in accordance with the rules. Prior to the initial rules issued in 1982 that allowed for buybacks, companies largely had to be dependent upon dividends to allocate excess cash. However, granting special dividends was a much less tax-efficient method, given the dividends were paid to all shareholders and may be taxed as ordinary income, while buybacks allowed shareholders the option to participate in a plan to repurchase shares.


What Constitutes a Sale of “All or Substantially All” of a Company’s Assets

Gail Weinstein is Senior Counsel, Amber Banks and Roy Tannenbaum are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Ms. Banks, Mr. Tannenbaum, Matthew V. Soran, Andrea Gede-Lange, and David L. Shaw 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo, and Guhan Subramanian.

In Altieri v. Alexy (May 22, 2023), the Delaware Court of Chancery dismissed a lawsuit that challenged the sale by Mandiant, Inc. (the “Company”) of its “crown jewel” division based on the Company’s failure to obtain stockholder approval of the transaction. The plaintiff claimed that a vote was required, under DGCL Section 271, because the sale constituted a sale of “all or substantially all” of the Company’s assets. The court determined that the sale did not constitute a sale of all or substantially all of the Company’s assets and therefore a vote was not required. The decision is consistent with past precedent and breaks no new ground—but it is useful as a reminder of the facts-intensive and nuanced nature of the judicial analysis as to what constitutes a sale of all or substantially all of a company’s assets, and provides helpful guidance as to the factors the court views as most critical in making the determination.


Investor Support of E&S Proposals

Garrett Muzikowski is a Senior Director and Hetal Kanji is a Director at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions (discussed on the Forum here) by Scott Hirst.

2023 has seen investors support significantly less environmental and social proposals in past years. While overall support has dropped, issuers should understand important macro, regional, and issue specific factors driving this trend as they prepare for their off-season engagement efforts and 2024 proxy season.

The volume of shareholder proposals looking to address ESG issues varies between the US and Europe – driven in part by proposals in the US being non-binding, as opposed to legally binding in parts of Europe, and the requirements for placing a proposal on the ballot in each region. While the differences in the number of shareholder proposals is explained by the different regulatory environments, the factors influencing shareholder support may not be as clear.

In the US, the decrease in average investor support of environmental and social shareholder proposals during 2022 was largely attributed to a change in SEC rules allowing more prescriptive proposals to reach the ballot. The impact of the war in Ukraine on the global economy also led investors to give companies more leniency on their climate initiatives. Additional factors relate to companies demonstrating progress in addressing the issue at hand, or reaching a compromise with the proponent in exchange for withdrawing a proposal.


Weekly Roundup: July 7-13, 2023

More from:

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

English High Court Rejects Climate Case Against Energy Company Board

Shareholder Proposal No-Action Requests in the 2023 Proxy Season

Embracing Technology in the Future Boardroom

Out with Fiduciary Out?

Amending Charters to Address Universal Proxy, Shareholder Activism and Officer Exculpation

Market Changes and the Emergence of New Players Are Impacting Activism

Utilizing Compensation Actually Paid to Evaluate Pay and Performance

The Developing Litigation Risks from the ESG Backlash in the United States

Entire Fairness Can be Satisfied Without Use of a Special Committee

Florida Law Restricts Use of Certain ESG Factors by Asset Managers and Financial Institutions

Reopening of Advance Notice Window Requires Activists to Show “Radical Shift” at Company

Reopening of Advance Notice Window Requires Activists to Show “Radical Shift” at Company

Scott A. Barshay, Andre Bouchard, and Laura C. Turano are Partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Barshay, Mr. Bouchard, Ms. Turano, Jaren Janghorbani, Kyle T. Seifried, and Krishna Veeraraghavan 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 The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine Jr.

In Sternlicht, et al. v. Hernandez, et al., the Delaware Court of Chancery clarified the high standard that activists must overcome to reopen the director nomination window of an otherwise valid advance notice bylaw—namely they must show that there has been a “radical shift” in company position caused by the board after the deadline for director nominations had passed. The court held that the plaintiffs did not overcome this standard, despite numerous alleged “radical shifts” that occurred after the deadline. As a result, in a holding favorable for the company, the court enforced the deadline for nominations established by the company’s advance notice bylaw and prevented the plaintiffs from nominating a competing slate of directors at the upcoming annual meeting. The opinion strengthens advance notice bylaws as a means of providing certainty around the annual meeting and election process for companies and protecting against activist attacks.

The plaintiffs were three of nine Cano Health, Inc. directors who resigned over perceived governance failures, including the full board’s refusal to discipline the CEO for company performance issues and multiple violations of the company’s conflict policies. At the time of the resignations, the bylaw-imposed deadline for director nominations at the company’s upcoming annual meeting had passed, and plaintiffs sent a letter to the company’s outside counsel arguing that certain events that occurred after the deadline constituted material changes that required the board to reopen the nomination window, including, among others, the appointment of a new board chair and failure to disclose a company-commissioned report revealing CEO performance issues. The company did not respond, and the plaintiffs sued, seeking to enjoin the company from enforcing the deadline and to adjourn the upcoming annual meeting so that they could nominate a competing slate of directors.


Florida Law Restricts Use of Certain ESG Factors by Asset Managers and Financial Institutions

Betty M. Huber, Sarah E. Fortt, and Joshua N. Holian are Partners at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Huber, Ms. Fortt, Mr. Holian, Austin J. Pierce, Charlie Beller, and Karmpreet (Preeti) Grewal. 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 TallaritaHow 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, Roberto Tallarita; and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff.

The legislation mirrors anti-“industry boycott” legislation introduced or passed in other US states and provides more explicit rubrics of prohibited factors.

On May 5, 2023, Florida Governor Ron DeSantis signed into law House Bill 3, a comprehensive anti- ESG bill that restricts consideration of environmental, social, and governance (ESG) factors in various contexts (HB 3). The law, scheduled to take effect on July 1, 2023, builds on the State Board of Administration’s August 2022 resolution providing that its own investment decisions must be based only on pecuniary factors that do not include “the consideration of the furtherance of social, political, or ideological interests.” HB 3 amends a variety of Florida statutes relating to: (i) retirement plans and investments of funds; (ii) financial institutions, including qualified public depositories; (iii) money services businesses; (iv) consumer finance companies; (v) trust fund assets and public funds; (vi) government contracts; (vii) government bonds; and (viii) deceptive and unfair trade practices.


Entire Fairness Can be Satisfied Without Use of a Special Committee

Gail Weinstein is Senior Counsel, and Philip Richter, and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Weinstein, Mr. Richter, Mr. Epstein, Brian T. Mangino, Randi Lally, and Maxwell Yim and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court, in In re Tesla Motors, Inc. Stockholder Litigation (June 6, 2023), unanimously affirmed the Court of Chancery’s post-trial dismissal of claims by Tesla stockholders against Elon Musk in connection with Tesla’s $2.6 billion acquisition of SolarCity, Inc. The plaintiffs, who sought damages of more than $13 billion, claimed that Musk, who was an executive and major stockholder in both companies, had caused Tesla to overpay for SolarCity—which allegedly benefitted Musk personally given that SolarCity, according to the plaintiffs, was insolvent.

The Tesla board did not utilize a special committee to consider and negotiate the transaction. The transaction was approved by the Tesla stockholders unaffiliated with Musk, however. The Supreme Court upheld the lower court’s holding that, although the deal process was not perfect, Musk established that the price paid for SolarCity was entirely fair to Tesla’s stockholders. (See here the Fried Frank M&A/PE Briefing on the Court of Chancery’s decision: “Court of Chancery Reaches the Rare Conclusion that a Conflicted Transaction, with a Flawed Sale Process, Met the Entire Fairness Standard— Tesla-SolarCity,” in the July 2022 Fried Frank M&A/PE Quarterly.)

The Delaware Supreme Court, in an opinion written by Justice Karen L. Valahura, held that the Court of Chancery erred in a portion of its entire fairness analysis, but that the error was not sufficient to require reversal given that there was substantial other evidence of the fairness of the transaction to Tesla and its stockholders.


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