Yearly Archives: 2023

Board Oversight of Diversity, Equity, and Inclusion

Posted by Blair Jones (Semler Brossy), Anna Natapova (Semler Brossy), and Chuck Gray (Egon Zehnder), on
Thursday, September 7, 2023
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Blair Jones is a Managing Director at Semler Brossy LLC, Anna Natapova is Principal at Semler Brossy LLC, and Chuck Gray is Coleader of the US CEO and Board Practice at Egon Zehnder. This post is based on a Semler Brossy memorandum by Ms. Jones, Ms. Natapova, Mr. Gray, and Cynthia Soledad. 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) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both 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.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

Well-run diversity, equity, and inclusion (DE&I) initiatives can yield many benefits, including improved talent attraction and retention rates, better decision-making through diverse perspectives, and stronger relationships with customers, clients, and suppliers. On the other hand, poorly resourced DE&I efforts can put a business at risk and hinder progress.

What separates the good from the bad? Organizations that lead in DE&I devote meaningful energy from a strategic perspective by aligning DE&I with business strategy, dedicating sufficient resources, and emphasizing accountability. Simply hiring a chief diversity and inclusion officer is far from enough. Where should boards begin and what questions should they ask to best steward the company’s DE&I efforts?

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Corporate Governance and Risk-Taking: A Statistical Approach

Posted by Steven L. Schwarcz (Duke University), on
Thursday, September 7, 2023
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Steven L. Schwarcz is the Stanley A. Star Distinguished Professor of Law & Business at Duke University School of Law and Senior Fellow of the Centre for International Governance Innovation. This post is based on his recent paper.

Recent bank failures have spurred widespread demands to impose greater penalties on corporate managers that engage in excessive risk-taking. This is not surprising; politicians and the media tend to attribute virtually every dramatic business failure to excessive risk-taking or fraud.

In part, these responses reflect at least two cognitive biases: hindsight bias, the tendency to believe that a past event was predictable or inevitable; and ultimate attribution error, in this context, the tendency to assign responsibility for a failure to individuals, as bad actors, rather than to external factors. The result is that legislatures, including Congress, often react to failures by enacting laws that focus on preventing excessive risk-taking (and fraud) by imposing harsh managerial performance standards, without addressing the actual causes or consequences of the failures.

My article, Corporate Governance and Risk-taking: A Statistical Approach (available at http://ssrn.com/abstract=4542464), makes three related claims about corporate risk-taking. Prudent corporate governance requires managers to take business risks, much of which is data-driven and statistically based. Although excessive risk-taking and fraud cause some corporate failures, even good faith statistically based risk-taking can result in failure. The article’s first claim, therefore, is that managers should not automatically be presumed to be responsible for corporate failures that result from risk-taking decisions based on statistical methodologies that reasonably justify the decisions ex ante.

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Trend in Delaware Merits Heightened Attention by Acquirors

Posted by Ethan Klingsberg & Victor Ma, Freshfields Bruckhaus Deringer LLP, on
Wednesday, September 6, 2023
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Ethan Klingsberg is a Partner and Victor Ma is an Associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum, 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, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

A trio of recent, high-profile M&A cases in the Delaware Court of Chancery merit special attention by M&A acquirors.  In each of these cases, the Court highlighted the liability of the third-party acquiror of a publicly listed target company for aiding and abetting breaches of fiduciary duties by the target board and executives. [1]

Historically, successful “aiding and abetting” claims have been limited to the advisors of target companies and affiliates of a director. [2] However, there are a number of reasons why asserting aiding and abetting claims against third-party buyers may now be attractive for plaintiffs in light of these recent cases:

  • An aider and abettor will have joint and several liability for the underlying fiduciary duty breach by the target board or executive team in a sale process. This means another deep pocket from which to obtain funds and have leverage in settlement discussions.  The Delaware Court of Chancery will often determine damages by looking to the difference between what the aggregate merger consideration would have been, but for the breach of duty, and the actual merger consideration.  Under this approach, the aggregate damages can be in the hundreds of millions of dollars and therefore having multiple deep pockets to draw from is of real value to the plaintiffs.
  • In the case of breaches of the duty of care (such as a shortfall in the performance of Revlon duties to obtain the best price reasonably available in a sale process), many claims for damages against target company directors and officers are nullified by the applicability of the right to exculpation as permitted by Section 102(b)(7) of the Delaware General Corporation Law. [3] But claims against an aiding and abetting third-party buyer are not entitled to any such exculpation.
  • As an aiding and abetting defendant, the acquiror becomes subject to potentially enhanced discovery of internal documents and depositions. It is even possible that the acquiror’s own stockholders will start to pursue books and records demands and even derivative claims against the acquiror’s board relating to the aiding and abetting activity.  These risks provide further leverage for the plaintiffs to induce an early settlement payment directly from the acquiror.
  • Troublingly, the standard insurance policies of many strategic acquirors—especially those that are publicly listed—may not currently cover these aiding and abetting liability risks. This vulnerability may further induce these acquirors to settle quickly rather than fight an aiding and abetting claim.

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Corporate Stakeholders and CEO-Worker Pay Gap: Evidence From CEO Pay Ratio Disclosure

Posted by Mei Cheng (University of Arizona) and Yuan Zhang (University of Texas at Dallas), on
Wednesday, September 6, 2023
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Mei Cheng is an Associate Professor of Accounting at the University of Arizona and Yuan Zhang is an Associate Professor of Accounting at the University of Texas at Dallas. This post is based on their article forthcoming in the Review of Accounting Studies. Related research from the Program on Corporate Governance includes Stealth Compensation via Retirement Benefits by Lucian Bebchuk and Jesse M. Fried.

In recent years, the ever-widening gap between chief executive officer (CEO) pay and worker pay has become a heated topic of public debate. Headlines such as “CEO compensation has grown 940% since 1978, while typical worker compensation has risen only 12% during that time” have sparked public debate and outrage over the growing pay gap (Mishel and Wolfe 2019). Given the economic and social significance of income equality and distributive justice, corporate stakeholders, especially non-shareholder stakeholders such as employees, communities, and governments who value pay equality, have become increasingly concerned about the high CEO-worker pay gap. We use the recently mandated disclosure of CEO and median worker pay ratio to capture the extent of CEO-worker pay gap and examine whether these non-shareholder stakeholders exert influence on CEO-worker pay gap.

Amid public concern about the widening CEO-worker pay gap, on August 5, 2015, the Securities and Exchange Commission (SEC) adopted a rule that requires listed firms to disclose the ratio of CEO compensation to the median worker compensation for fiscal years beginning on or after January 1, 2017. Before this mandate, firms were only required to disclose CEO compensation. Under the new mandate, firms must also disclose the median of the worker compensation and the ratio of CEO compensation to the median worker compensation. Thus, the mandatory disclosure of the pay ratios provides stakeholders a fresh and prominent signal to assess pay gap and potentially pay inequality. Ex ante, it is unclear whether the disclosed pay ratio will be associated with the subsequent CEO-worker pay gap. On the one hand, stakeholders are likely to be particularly sensitive to high pay ratios and attempt to influence firms with high pay ratios. On the other hand, high pay ratios across firms could stem from differing firm characteristics and strategies for attracting talent, and non-shareholder stakeholders may not have any influence on the underlying strategies and the resulting pay ratios. Additionally, the SEC rule itself allows discretion in determining the median worker pay, making interpretations of the pay ratios even more complicated.

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Pay Equity-Related Shareholder Proposals in 2023

Posted by J.T. Ho, Robert Bee, and Hayden Goudy, Orrick, Herrington & Sutcliffe LLP, on
Tuesday, September 5, 2023
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J.T. Ho is a Partner, Robert Bee is Practice Support Counsel, and Hayden Goudy is Director of Environmental, Social and Governance and Corporate Governance, at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick memorandum by Mr. Ho, Mr. Bee, Mr. Goudy, Crystal Milo, and Carolyn Frantz.

More pay equity-related proposals see significant levels of shareholder support.

Pay equity, a significant focus for investors and activists, saw increased shareholder proposal activity in the first half of 2023. We are aware of 16 companies receiving shareholder proposals requesting the disclosure of unadjusted gender and racial pay gap data, with 10 going to a vote. While still a low absolute number, this is nearly double the number of proposals received in each of 2021 and 2022.

Support for these proposals is significant.

Shareholder support for pay equity proposals has been significant in the first half of 2023 compared to other ESG proposals and will likely impact offseason engagement for a number of companies. On average, these pay equity proposals received support from 34% of shareholders, compared to an overall average of 25% for ESG-related shareholder proposals generally in 2023. [1] Support in that range also can be impactful from an institutional shareholder perspective. For example, Glass Lewis expects to see shareholder engagement and some initial level of responsiveness from a subject company when a shareholder proposal receives at least 20% support; ISS looks for a subject company to clearly disclose its response and explain the board’s rationale for responsive actions taken in the following year’s proxy statement if a shareholder proposal receives support from a substantial minority of shares cast. As a result, even if a company successfully defeats a pay equity proposal at the annual meeting, the topic is likely to remain on the investor relations team’s agenda for at least the following year.

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Lessons from the 2023 Proxy Season: Advance Notice Bylaws and Officer Exculpation

Posted by Douglas K. Schnell and Daniyal Iqbal, Wilson Sonsini Goodrich & Rosati, on
Tuesday, September 5, 2023
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Douglas K. Schnell is a Partner and Daniyal M. Iqbal is an Associate at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Schnell, Mr. Iqbal, Amy L. Simmerman, Ryan J. Greecher and Brad Sorrels.

With the 2023 proxy season now over for most companies, we took a fresh look at recent bylaw and charter amendments at the Silicon Valley 150 (the SV150) to better understand how companies are addressing i) new Rule 14a-19, which mandates the use of a universal proxy card in contested elections; and ii) the recent amendment to Section 102(b)(7) of the Delaware General Corporation Law (DGCL) to permit the adoption of officer exculpation charter provisions.

I. Bylaw Amendments Following the Adoption of Universal Proxy

As discussed in our prior Client Alert, the 2023 proxy season was the first following the adoption of Rule 14a-19. Generally speaking, these rules require proxy cards distributed in connection with a contested director election to include all director candidates, whether nominated by the company or by shareholders. In this way, shareholders can “mix and match” between the members of competing director slates.

Following the adoption of Rule 14a-19, many companies amended their advance notice bylaws to account for the universal proxy rules. More specifically, of the 70 companies in the SV150 that amended their bylaws between November 1, 2021, and July 31, 2023, 50 amended their bylaws explicitly to address Rule 14a-19, with 90 percent of those amendments occurring after the August 31, 2022, effective date of Rule 14a-19. We refer to these 50 companies as the “Specifically Address Group.” In examining these amendments, a few trends stood out.

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The State of Climate Disclosure and Governance

Posted by Randi Morrison (Society for Corporate Governance) and Salvatore Schiano (Persefoni), on
Monday, September 4, 2023
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Randi Morrison is Senior Vice President and General Counsel at the Society for Corporate Governance, and Salvatore Schiano is the Director of Content & Intelligence at Persefoni. This post is based on their Society for Corporate Governance and Persefoni 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; For Whom Corporate Leaders Bargain (discussed on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and 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.

Introduction

Climate and environmental disclosure and governance are not new topics; however, coincident with the heightened concerns about the impacts of climate change, stakeholders’ interest in and expectations relating to corporate disclosure and governance have increased dramatically over the past several years. Further, the interested stakeholder group has expanded well beyond environmentalists and special interest groups to encompass mainstream investors, customers, employees, regulators, lawmakers, and suppliers, among others.

How companies and boards are responding to these changing expectations and pressures is the focus of this collaborative Society for Corporate Governance (Society) and Persefoni report, which presents findings from a May 2023 survey of Society members regarding climate and environmental disclosure and assurance, board oversight, and management organizational responsibility.

Findings

Respondents, primarily corporate secretaries, in-house counsel, and other in-house governance professionals, represent 98 public companies of varying sizes and industries. [1] The findings pertain to these companies, and where applicable, commentary has been included to highlight differences among respondent demographics. The actual number of responses for each question is provided. Throughout this report, percentages may not total 100 due to rounding and/or a question that allowed respondents to select multiple choices.

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ESG + Incentives 2023 Report

Posted by Matthew Mazzoni and Jennifer Teefey, Semler Brossy LLC, on
Sunday, September 3, 2023
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Matthew Mazzoni is a Consultant and Jennifer Teefey is a Senior Associate Consultant at Semler Brossy LLC. This post is based on a report by Mr. Mazzoni, Ms. Teefey, Mira Yoo, Jay Veale, Cecilia Miao, and Anjani Trivedi, with data provided by ESGAUGE. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita.

INTRODUCTION

ESG metric prevalence in incentives continues to increase among S&P 500 companies but at a slower rate than prior years, as market focus shifts to refining existing ESG metric types and structures rather than increasing adoption.

While ESG has become highly politicized, the principles behind the movement (corporate responsibility, diversity, sustainability, etc.) remain critical to long-term company performance. We expect the dialogue within companies and among stakeholders regarding these metrics to shift toward how these measures are being used, including the following:

  1. Have we appropriately focused on the material and strategically important measures for our success?
  2. Are the measures appropriately weighted relative to other strategic priorities?
  3. Do employees and stakeholders understand the measure’s significance & how they fit in long-term strategy?
  4. Is there appropriate rigor in defining the goals and assessing results to ensure that we are making needed progress?

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Board Practices: Artificial intelligence

Posted by Natalie Cooper (Deloitte LLP), Bob Lamm (Deloitte LLP), and Randi Val Morrison (Society for Corporate Governance), on
Saturday, September 2, 2023
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Natalie Cooper is Senior Manager and Robert Lamm is an Independent Senior Advisor, at the Center for Board Effectiveness, Deloitte LLP; and Randi Val Morrison is Vice President, Reporting & Member Support at the Society for Corporate Governance. This post is based on their Deloitte and Society for Corporate Governance publication.

Artificial intelligence (AI), the use of technology to execute or simulate processes that would otherwise require human intelligence, is not new. But rapidly expanding technologies and evolving consumer digital preferences and expectations have generated intense interest in leveraging AI to help achieve efficiencies, increase competitive advantage, and enhance engagement with customers/ clients and other stakeholders.

As companies continue to explore and invest in AI, they also are tasked with considering numerous business implications, such as ethics, compliance, and regulatory processes; risks (e.g., operational and reputational) and risk appetite; equity; governance; and the role of the board. This post presents findings from a survey of members of the Society for Corporate Governance that focused on aspects of AI, including where in the organization AI resides, use policies/framework, risk mitigation measures, education and training, and board oversight.

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Trends in Shareholder Proposals

Posted by Nathan Williams, Jamie McGough, and Donald Kalfen, Meridian Compensation Partners, on
Friday, September 1, 2023
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Nathan Williams is a Lead Consultant, and Jamie McGough and Donald Kalfen are Partners at Meridian Compensation Partners. This post is based on their Meridian Compensation Partners memorandum.

Shareholder proposals are a common part of the governance landscape. It is useful to understand who gets them, how common they are, the various types of proposals and the magnitude of support.

Overall Prevalence

The large majority (70%) of shareholder proposals are received by S&P 500 companies. This is no surprise. Shareholders spend more time on larger investments than smaller ones. Also, to the extent shareholders are attempting to generate a change in certain forms of governance, larger, more prominent companies are much more likely to precipitate a trend in changes across companies than would smaller companies.

The number of Russell 3000 and S&P 500 companies receiving proposals from shareholders increased modestly between 2021 and year-to-date 2023. Over the three-year period, 10% of companies in the Russell 3000 and 40% of companies in the S&P 500 proxies included shareholder proposals.

Prevalence of Types of Proposals

Shareholder proposals generally fall into one of six categories – governance, social, environmental, lobbying, compensation and director elections. The graphic below depicts the distribution of relative prevalence of each type of proposal among S&P 500 companies (the prevalence is nearly the same among Russell 3000 companies).

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