Monthly Archives: October 2023

The Compensation Committee’s Evolving Role in Human Capital Management

Blair Jones is a Managing Director, Rachel Ki is an Associate, and Jennifer Teefey is a Senior Associate Consultant at Semler Brossy LLC. This post is based on a NACD Directorship magazine publication.

Many leaders delved into human capital management (HCM) when the economy was booming, just before the Great Resignation. Boards and compensation committees worked to understand talent issues and make their companies more attractive, inclusive, and engaging.

Now that the labor market is shifting, HCM has become even more critical as companies navigate new market-related challenges. The issues are not abating, just evolving, as stakeholders press for more attention on employees. While many companies worked diligently on the symptoms, they may have missed some underlying nuances driving core HCM issues. Compensation committees now have an opportunity, if not an imperative, to step up oversight and partner with management on these complex talent issues.

Compensation committees partnering with management is important for companies that are still settling on an HCM strategy. In the technology industry, for example, many companies are shifting from a “growth at all costs” mind-set to a focus on profitability. They hired aggressively in 2020 and 2021 to ensure they had the resources to pursue new product development and customer groups. It seemed the COVID-19 pandemic had permanently accelerated demand for their products, so they paid heavily to recruit and retain people at all levels of the organization.


Machine-Learning the Skill of Mutual Fund Managers

Ron Kaniel is the Jay S. and Jeanne P. Benet Professor of Finance at the University of Rochester Simon Business School. This post is based on an article forthcoming in Journal of Financial Economics by Professor Kaniel, Zihan Lin, Markus Pelger, and Stijn Van Nieuwerburgh. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, 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 Bebchuk and Scott Hirst.

A central challenge in mutual fund research has been to discern whether fund managers have skill and, if so, whether it is persistent. Prior research has made limited progress in answering these questions. We revisit the issue using modern machine learning tools to predict mutual fund performance.

Utilizing a neural network model, we estimate relations among a large set of fund attributes to identify the US mutual funds with the best performance.  We use the model’s predictions to form the best-performing decile of funds each month and to compute portfolio weights within the top decile. Not only is the model able to identify skilled funds, but it also is able to predict outperformance that lasts for more than three years. Since we are predicting one-month ahead returns, as opposed to longer-horizon returns, this puts a lower bound on the persistence in outperformance.


Strive Asset Management vs. Engine No. 1: How Did the Activists Vote?

Alyssa Stankiewicz is an Associate Director of Sustainability Research and Lindsey Stewart is a Director of Investment Stewardship at Morningstar, Inc. This post is based on their Morningstar memorandum. 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; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales; Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Robert H. Sitkoff and Max M. Schanzenbach; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

Strive Asset Management and Engine No. 1 are firms on opposite ends of the environmental, social, and governance spectrum that have attracted more attention than assets. Both firms offer index-tracking funds that focus on voting decisions to allow fund investors to express their preferences on governance and sustainability matters. Now that both have voting records sizable enough to bear examination, this is a good opportunity to look at the signals the two firms’ voting decisions are sending.

Both Engine No. 1 and Strive are in the middle of strategic changes. Engine No. 1 sold its ETF business to TCW and announced its renewed focus on private investments; Strive announced it would reduce its “anti-woke rhetoric” in light of its message being misunderstood by investors. All the same, the firms’ proxy voting records shine a light on the importance of manager due diligence, even when selecting an otherwise plain-vanilla index fund.


Political grammars of justification and cost-benefit analysis in SEC rulemaking

Lisa Baudot is an Associate Professor of Accounting and Management Control at HEC Paris, and Dana Wallace is an Associate Professor of Accounting at University of Central Florida Kenneth G. Dixon School of Accounting. This post is based on their article forthcoming in the Journal of Accounting and Public Policy.

Evidence-based policymaking suggests an objective and systematic form of governing that upholds the authority of evidence in legitimizing regulatory decisions. Financial regulators confront contemporary trends and pressures to justify regulatory decisions in an evidence-based manner using cost-benefit analysis (CBA). However, as a mechanism for justifying financial regulation, CBA elicits polarized views. On the one hand, CBA is a quantified, scientific, and objective endeavor that reduces opportunities for regulatory capture and acts in a disciplinary capacity over regulators. However, in projecting the impacts of any given rule, it is difficult to achieve a fully quantified analysis of the benefits and costs of regulation, a problem that may be compounded when the impacts are social as well as economic. In considering that social benefits and costs may not lend well to quantification, we focus a new paper on understanding the discursive and justificatory aspects of CBA in relation to contemporary regulations purported to have important social implications.


Corporate Governance Standards Proposed by FDIC

Lawrence A. Cunningham is Special Counsel, and Matthew Bisanz and Jeffrey Taft are Partners at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Cunningham, Mr. Bisanz, Mr. Taft, Anna Pinedo, Megan Webster, and Andrew Olmem.

On October 3, 2023, the Federal Deposit Insurance Corporation (“FDIC”) proposed standards for corporate governance and risk management for the institutions it regulates that have $10 billion or more in total assets (“Proposed Standards”).[1] The Proposed Standards would establish extensive and rigid requirements for a wide range of state-chartered banks.[2] Further, they would reverse decades of reliance on state law for establishing governance and oversight obligations. The FDIC board approved issuing the Proposed Standards by a 3-2 vote with Vice Chairman Travis Hill and Director Jonathan McKernan issuing dissents sharply critical of the proposals.[3]

The Proposed Standards lean toward a rules-based approach to corporate governance, in contrast to the principles-based approach that is prevalent under state law. Critics will observe that the Proposed Standards are presented as “good corporate governance” without appreciating that what is “good” for one bank may not be “good” for another and that achieving “good corporate governance” results not from uniform regulatory mandates but from default rules that can be tailored and fiduciary duties that can be fit.

The FDIC will accept comments on the Proposed Standards for 60 days after they are published in the Federal Register, which is expected shortly. In this Legal Update, we provide background on governance and risk management at state-chartered banks and discuss the Proposed Standards.


Anthropic Long-Term Benefit Trust

John Morley is a Professor of Law at Yale Law School. David J. Berger and Amy L. Simmerman are Partners at Wilson Sonsini Goodrich & Rosati.

Artificial intelligence promises to be one of the most transformative technologies of our time. Can corporate governance evolve to ensure that it develops safely and responsibly? Anthropic, PBC, one of America’s leading AI labs, offers an innovative answer. This post describes the company’s attempt to fine-tune the levers of corporate governance through a novel arrangement called the “Anthropic Long-Term Benefit Trust.” The Trust brings together a group of experts in AI and ethics and grants them the power over time to elect a majority of Anthropic’s board of directors. We served as outside counsel for Anthropic in designing and drafting this arrangement.[1] This post outlines some of the key components of the Trust and the company’s motives for adopting it.

The Trust’s origins began with a deep commitment among Anthropic’s founders to social good. Anthropic’s founders believe that AI may soon become immensely powerful. They also acknowledge, however, that the companies developing AI have yet to be limited from the outside by the sorts of laws and norms that constrain other powerful technologies. The founders further believe that the safety and social benefit of AI technology go hand in hand with profits and commercial success. Anthropic can only be a leader on safety if it is also a leader in technical development and commercialization. Anthropic thus wanted to design a legal architecture that could commit the company to safety and responsibility while also allowing to achieve profits for investors.


Implementation of Share Buybacks and Their Impact on Corporate Governance

Michael Seigne is the Founder of Candor Partners Limited, and Joerg R. Osterrieder is Professor of Finance and Artificial Intelligence at the University of Twente. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows (discussed on the Forum here) by Jesse 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 Fried.

In recent decades, share buybacks have emerged as a global corporate phenomenon, albeit one accompanied by escalating controversy. While companies put forth various reasons for pursuing share buybacks, it is the argument that frames them as an attractive alternative to dividends for returning capital to shareholders that generates the most contention. The flexibility for the company and potential tax advantages offered to investors in certain scenarios are among the touted benefits. In this article, we shed light on the potential pitfalls associated with the implementation of share buybacks, a topic that merits exploration in the realm of corporate governance.


Weekly Roundup: October 20-26, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 20-26, 2023

Transaction Satisfied “Entire Fairness,” Despite Serious Sale Process Flaws—BGC Partners

TNFD Recommendations for Nature Related Disclosures

California enacts major climate-related disclosure laws

The 401(k) Conundrum in Corporate Law

The CEO Shareholder: Straightforward Rewards for Long-term Performance

SEC Adopts Updates to Schedule 13D and 13G Reporting

Good and Bad CEOs

Boards of Directors in Disruptive Times: Improving Corporate Governance Effectiveness

CPA’s Guide to Corporate Political Spending: A Practical Checklist for Management

What Would Happen to ESG Proposals If Vanguard, BlackRock and State Street Didn’t Vote?

Remarks by Chair Gensler Before the 2023 Securities Enforcement Forum

Remarks by Chair Gensler Before the 2023 Securities Enforcement Forum

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I am pleased to join you at the 2023 Securities Enforcement Forum. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

When I spoke with you two years ago, I shared what the SEC’s first chair, Joseph Kennedy, said in his first speech: “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.”[1]

In a subsequent speech, just four months later, Kennedy emphasized: “We are not prosecutors of honest business, nor defenders of crookedness. We are partners of honest business and prosecutors of dishonesty. We shall not prejudge, but we shall investigate.”[2]

These words remain just as true today.


What Would Happen to ESG Proposals If Vanguard, BlackRock and State Street Didn’t Vote?

Lindsey Stewart is Director of Investment Stewardship Research at Morningstar, Inc. This post is based on his Morningstar memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, and 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 Bebchuk and Scott Hirst; and The Limits of Portfolio Primacy (discussed on the Forum here) by Roberto Tallarita.

Key Takeaways

BlackRock, Vanguard, and State Street Have a Significant Impact on Voting Outcomes

  • Overall, there were fewer key resolutions in 2023 partly because of the Big
  • BlackRock and Vanguard sharply reduced their support for key resolutions in State Street’s support increased.
  • Given their weight in the market, we look at how excluding the Big Three’s votes affects support for environmental and social (E&S)

More Key Resolutions if We Exclude the Big Three

  • Among S. large caps, we estimate there would have been 59 instead of 28 key resolutions in 2023 if the Big Three hadn’t voted—more than double.
  • Adjusted support for near-miss resolutions in 2023 was 34%, but this rises to 44% if we exclude the Big
  • Several resolutions would have achieved majority adjusted support, including proposals on lobbying, climate, and workplace issues at Apple, Boeing, Chevron, and IBM.
  • This would have sent a clearer signal to companies on which E&S issues are important to


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