Yearly Archives: 2023

2023 Proxy Season Preview

Posted by Allie Rutherford, Adrienne Monley, and Eric Sumberg, PJT Camberview, on
Monday, February 20, 2023
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Allie Rutherford is a Partner, Adrienne Monley is a Managing Director, and Eric Sumberg is a Director at PJT Camberview. This post is based on their PJT memorandum.

FIVE KEY EXPECTATIONS

  1. Universal proxy card rules are the most significant change in corporate governance since say-on-pay and will amplify already complex proxy fight dynamics
  2. Investors will go back to basics with a focus on the board as voting policies and engagements prioritize board composition and accountability
  3. Say-on-pay votes will be impacted by the broad market downturn as investors consider how pay aligns with their experience; inaugural pay versus performance disclosures will introduce new complexity
  4. Companies and investors will contend with continued high volume of shareholder proposals, many of which are more targeted to company circumstances
  5. Large asset managers will act to offset ESG backlash and challenges they are facing as a result of their influence

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2022 Corporate Governance Trends in Silicon Valley and at Large Companies Nationwide

Posted by David A. Bell, and Ron C. Llewellyn, Fenwick & West LLP, on
Sunday, February 19, 2023
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David A. Bell is a Partner and Co-Chair of Corporate Governance, and Ron C. Llewellyn is a Counsel at Fenwick & West LLP. This post is based on their Fenwick memorandum.

Corporate governance practices vary significantly among public companies. This reflects many factors, including:

  • Differences in their stage of development, including the relative importance placed on various business objectives (for example, focus on growth and scaling operations may be given more importance for technology and life sciences companies);
  • Differences in the investor base for different types of companies;
  • Differences in expectations of board members and advisors to companies and their boards, which can vary by a company’s size, age, stage of development, geography, industry and other factors; and
  • The reality that corporate governance practices that are appropriate for large, established public companies can be meaningfully different from those for newer, smaller companies.

Since the passage of the Sarbanes-Oxley Act of 2002, which signaled the initial wave of corporate governance reforms among public companies, each year Fenwick has surveyed the corporate governance practices of the companies included in the Standard & Poor’s 100 Index (S&P 100) and the technology and life sciences companies included in the Fenwick – Bloomberg Law Silicon Valley 150 List (SV 150). [1]

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ESG: EU Regulatory Change and Its Implications

Posted by Lewis Davison, Fiona McNally and Charlotte North, BNY Mellon, on
Saturday, February 18, 2023
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Lewis Davison is a Senior Product Manager, Fiona McNally and Charlotte North are Directors at BNY Mellon. This post is based on a BNY Mellon report. 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; 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, Roberto Tallarita; and Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver D. Hart and Luigi Zingales.

Despite the sharp change in the financial landscape over the past year and an increasingly challenging macroeconomic climate, investment focused on environmental, social and governance (ESG) factors is set to grow. Global ESG assets may reach $50 trillion by 2025, one-third of the projected total assets under management globally, from $35 trillion in 2020. [1] Climate-related challenges, in particular, have come to the fore given the experience of unprecedented heat waves in parts of Europe, forest fires in the U.S. and devastating floods in Pakistan during 2022.

The first paper in this series explained how many institutional investors, including asset managers, asset owners and pension fund providers, have begun mapping their impact processes and integrated screening tools into their investment protocols, incorporating ESG priorities, obligations, and expectations. It also outlined global regulatory compliance responsibilities at a high level and assessed the challenges institutional investors face given inconsistent data quality and differing national and regional approaches to ESG regulation, which can be problematic for global investors.

This paper is focused primarily on the European Union’s (EU) regulatory approach to sustainability disclosure and on recent developments and likely forthcoming initiatives. It considers the implications of these measures for institutional investors and assesses the remaining uncertainties and the key practical challenges that need to be addressed for preparedness. The paper also briefly outlines U.S. and UK ESG regulation, which is at an earlier stage than the EU; the U.S. and UK regulatory positions will be more fully assessed in a future paper.

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Third-Party Risk Oversight

Posted by Dan Kinsella, Adam Thomas, Deloitte & Touche LLP, on
Friday, February 17, 2023
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Dan Kinsella is a Partner, and Adam Thomas is a Principal at Deloitte & Touche LLP. This post is based on their NACD publication. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) both by Lucian A. Bebchuk and 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 Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.

In many companies, boards of directors and C-suite leaders have seen firsthand how rapidly risks related to third parties can threaten their own company’s ability to deliver on its mission and strategy. Some companies have also experienced how significantly the missteps of third parties—as well as fourth parties, fifth parties, and sixth parties in a third-party ecosystem—can tarnish the company’s brand and reputation.

As an example of how third-party breakdowns can affect companies, consider which entity is typically the focal point when a supply chain failure leads to outages, cancellations, or other disruptions. Is it the third parties whose failures led to production or service interruptions? Or is it the entity doing business with end users who are left empty handed?

Although pandemic-era supply chain issues have filled the news headlines, supply chain challenges are not new. What is new is the increasing frequency of adverse events that disrupt supply chains, combined with the scope of risk that exists—often undetected—in increasingly dispersed supply chain ecosystems that are often highly interconnected and interdependent.

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Weekly Roundup: February 10-16, 2023

Posted by the Harvard Law School Forum on Corporate Governance, on
Friday, February 17, 2023

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This roundup contains a collection of the posts published on the Forum during the week of February 10-16, 2023

Director Perspective: Top Priorities of 2023

Posted by Ted Sikora, NACD, on Friday, February 10, 2023
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Who Are Quality Shareholders and Why You Should Care

Posted by Lawrence A. Cunningham, Mayer Brown LLP, on Saturday, February 11, 2023
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Change management for the legal function

Posted by Lori Lorenzo, Bob Taylor and Lee Merovitz, Deloitte LLP, on Sunday, February 12, 2023
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Trust, Transparency, and Complexity

Posted by Robert C. Merton (Massachusetts Institute of Technology), and Richard T. Thakor (University of Minnesota), on Monday, February 13, 2023
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Vanguard-Advised Funds’ Perspective on Contested Elections

Posted by John Galloway, Vanguard, Inc., on Monday, February 13, 2023
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The Complex Materiality of ESG Ratings: Evidence from Actively Managed ESG Funds

Posted by Martijn Cremers (University of Notre Dame), Timothy B. Riley (University of Arkansas), Rafael Zambrana (University of Notre Dame), on Tuesday, February 14, 2023
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2022 Investor Voting Report

Posted by Brigid Rosati, Kilian Moote, and Rajeev Kumar, Georgeson LLC, on Tuesday, February 14, 2023
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Board Governance Structures and ESG

Posted by Lee Ballin, Maureen Bujno, and Kristen Sullivan, Deloitte & Touche LLP, on Wednesday, February 15, 2023
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(Much Too Early) Observations on the Universal Proxy Card

Posted by Eleazer Klein and Sean Brownridge, Schulte Roth & Zabel LLP, on Wednesday, February 15, 2023
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2022 Silicon Valley 150 Corporate Governance Report

Posted by Richard Blake, Courtney Mathes and Barbara Novak, Wilson Sonsini Goodrich & Rosati, on Thursday, February 16, 2023
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Why Do Large Positive Non-GAAP Earnings Adjustments Predict Abnormally High CEO Pay?

Posted by Nicholas Guest (Cornell University), S.P. Kothari (Massachusetts Institute of Technology), and Robert Pozen (Massachusetts Institute of Technology), on Thursday, February 16, 2023
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Why Do Large Positive Non-GAAP Earnings Adjustments Predict Abnormally High CEO Pay?

Posted by Nicholas Guest (Cornell University), S.P. Kothari (Massachusetts Institute of Technology), and Robert Pozen (Massachusetts Institute of Technology), on
Thursday, February 16, 2023
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Nicholas Guest is an Assistant Professor of Accounting at Cornell’s Johnson Graduate School of Management; S.P. Kothari is the Gordon Y Billard Professor of Accounting and Finance at MIT’s Sloan School of Management; and Robert Pozen is a Senior Lecturer at MIT Sloan School of Management and a non-resident Senior Fellow at the Brookings Institution. This post is based on their recent paper forthcoming in The Accounting Review. Related research from the Program on Corporate Governance includes Pay without Performance: The Unfulfilled Promise of Executive Compensation; and Executive Compensation as an Agency Problem both by Lucian Bebchuk, and Jesse Fried; The CEO Pay Slice (discussed on the Forum here) by Lucian Bebchuk, Martijn Cremers and Urs Peyer; and What Matters in Corporate Governance? (discussed on the Forum here)  by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

For almost two decades, regulators, academics, and investor activists have attempted to understand the role of non-GAAP earnings, also commonly labeled “adjusted” or “pro forma” earnings. About two-thirds of S&P 500 firms announce non-GAAP earnings, which are significantly larger than GAAP earnings on average. Moreover, many of these same companies use non-GAAP earnings as a key criterion in setting CEO pay. We hypothesize and find that when non-GAAP earnings are large relative to GAAP earnings, CEO pay is abnormally high.

Our results are consistent with the managerial power framework of Bebchuk, Fried, and Walker (2002). In their model, all executives have at least some power to extract rents whenever the company lacks a controlling or dominant shareholder to provide discipline. However, outraged boards and dispersed shareholders who recognize rent extraction can impose some constraints. As a result, managers have an incentive to “obscure and legitimize – or, more generally, to camouflage – their extraction of rents.” In this study, we argue that non-GAAP earnings are one mechanism through which some managers limit outrage by camouflaging rent extraction.

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2022 Silicon Valley 150 Corporate Governance Report

Posted by Richard Blake, Courtney Mathes and Barbara Novak, Wilson Sonsini Goodrich & Rosati, on
Thursday, February 16, 2023
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Richard Blake is a Partner, Courtney Mathes and Barbara Novak are Associates at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Blake, Ms. Mathes, Ms. Novak, Jose Macias and Jason Chan.

The SV150 is released each year by Lonergan Partners, and is comprised of the 150 largest public companies in Silicon Valley, based on annual sales. Among the SV150 are some of the most influential technology and life sciences companies in the world. We noted the following key conclusions from our survey of SV150 corporate governance.

  • Following the practice started during the COVID-19 pandemic, almost 92% of the SV150 opted to hold a virtual meeting in 2022 rather than a physical one.
  • ESG/CSR disclosure in the proxy statement and on websites continued to remain strong throughout the SV150, with more than 85% of the top 100 companies having such disclosure in their proxies and almost 85% of the top 100 companies having such disclosure on their website.

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(Much Too Early) Observations on the Universal Proxy Card

Posted by Eleazer Klein and Sean Brownridge, Schulte Roth & Zabel LLP, on
Wednesday, February 15, 2023
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Eleazer Klein is a Partner and Sean Brownridge is an Associate at Schulte Roth & Zabel LLP. This post is based on their piece. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

A considerable amount of ink has already been spilled over the universal proxy rules, their potential impact, and what public companies and engaged shareholders should do to prepare for, adapt to, and take advantage of the required use of universal proxy cards in certain director election contests. In this article, we will not journey down the well-trodden path of summarizing the universal proxy rules and making predictions regarding how they could change the relationship between companies and their shareholders, but rather review what has occurred since the rules were announced and took effect, including by providing select observations regarding the first three contests in the universal proxy era.

Advance Notice Bylaws And The First Universal Proxy Contest That Wasn’t

Advance notice bylaws require shareholders that intend to make director nominations at a shareholder meeting to give the subject company notice of their intention to do so. In addition to timeliness requirements, these bylaws contain informational components that, in theory, are meant to facilitate shareholder assessment of nominee backgrounds and eligibility, as well as the interests of the nominating party. But, advance notice bylaws have transformed into highly technical, ever-expanding, and disconnected defensive mechanisms principally designed to discourage, frustrate, and entirely prohibit a shareholder vote on nominees selected by shareholders. That is, what was once meant to be a neutral tool to ensure electoral fairness and a knowledgeable electorate has developed into a potent defense to board-related activism and companies’ most significant solution to the adoption of the universal proxy rules (i.e., universal proxy cards (“UPC”) are of no consequence when a nomination notice is declared invalid at the outset and shareholders are denied the opportunity to vote for directors other than those selected by the incumbent board).

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Board Governance Structures and ESG

Posted by Lee Ballin, Maureen Bujno, and Kristen Sullivan, Deloitte & Touche LLP, on
Wednesday, February 15, 2023
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Lee Ballin, and Maureen Bujno are Managing Directors, and Kristen Sullivan is a Partner and leads Sustainability and ESG at Deloitte & Touche LLP. This post is based on their NACD publication. 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.; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita.

Companies are facing increasing pressure to manage a growing range of risks as a result of rapidly evolving environmental, social, and governance (ESG) issues. Climate-related factors have gained a great deal of attention among ESG matters, but the scope of ESG is much broader, including social aspects of a company’s relationships with its stakeholders and a growing demand for effective governance and transparency.

As disruptive forces accelerate change and elevate expectations, many companies are facing challenges in protecting and promoting a sense of trust among their stakeholders, safeguarding their brands and reputations, and fostering business resilience. The increasing volume and complexity of challenges are causing an increase in the number and variety of issues landing on corporate board agendas.

How might boards adapt their governance structures to provide effective oversight in such a rapidly changing environmental and social landscape? What kinds of changes might boards make in the coming year READ MORE »

2022 Investor Voting Report

Posted by Brigid Rosati, Kilian Moote, and Rajeev Kumar, Georgeson LLC, on
Tuesday, February 14, 2023
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Brigid Rosati is Managing Director of Business Development; Kilian Moote is Managing Director; and Rajeev Kumar is Senior Managing Director at Georgeson. This post is based on their Georgeson 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.

EXECUTIVE SUMMARY AND ACKNOWLEDGEMENT

Following the October 2022 release of our report on the 2022 proxy season, our investor voting report offers an expanded analysis of investor voting decisions on key shareholder proposals, as well as management say-on-pay proposals and director elections.

We consider the 2022 proxy season to include company meetings occurring July 1, 2021 through June 30, 2022. Data presented in this report relates to companies in the Russell 3000, unless otherwise noted.

In partnership with Insightia, data was collected from public filings:

  • Shareholder Proposals: Investor voting decision data was collected from public filings, including N-PX filings released in August 2022 for companies in the Russell 3000. For certain proposals, we’ve reported on individual investor vote decisions using a color-coded system. In other instances, we detail historical institutional investor vote support by large investors by assets under management (AUM). Each shareholder proposal chart includes a unique mixture of institutional investors researched for that specific topic.
  • Say-on-Pay: Investor voting decision data was collected from public filings, including N-PX released in August 2022, for companies in the S&P 500 and Russell 3000 for the big three asset managers (a.k.a “Big 3”), BlackRock, Inc., Vanguard Group, State Street Global Advisors. The “For” (%) is based on the percentage of times an investor voted “For” the say-on-pay proposal.
  • Director Elections: Investor voting decision data was collected from public filings, including N-PX released in August 2022, for companies in the S&P500 and Russell 3000 for the “Big 3” (described above). The “For” (%) is based on the percentage of times an investor voted “For” a director.

Georgeson partnered with Insightia to coordinate investor voting data. Insightia Ltd., a Dilligent brand, was instrumental in sourcing the annual meeting and proxy voting data contained in this report.

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