Yearly Archives: 2023

Hispanics Underrepresented on U.S. Boards Despite Recent Gains

Posted by Subodh Mishra, Institutional Shareholder Services, on
Thursday, November 16, 2023
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an ISS Corporate Solutions memorandum by Sandra Herrera Lopez, PhD, Vice President, ESG Content & Data Analytics at ISS Corporate Solutions. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

Hispanic Director Representation Remains Low

As of September 2023, Hispanic/Latin American directors account for 3.6% of the total and 16% of non-White/Caucasian directors at Russell 3000 companies. That indicates a significant underrepresentation of Hispanics in boardrooms compared with the group’s percentage of the population.

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The State of ESG Goal-Setting

Posted by Cecilia Miao, Anjani Trivedi, and Matthew Mazzoni, Semler Brossy LLC, on
Wednesday, November 15, 2023
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Cecilia Miao and Anjani Trivedi are Associates and Matthew Mazzoni is a Consultant at Semler Brossy LLC. This post is based on a Semler Brossy memorandum by Ms. Miao, Ms. Trivedi, Mr. Mazzoni, and John Borneman. 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; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) 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.

The following information in this article is intended to provide market context on ESG goal-setting practices and our thinking on key drivers of these market trends. This information may be a helpful resource for companies evaluating their own disclosure practices regarding ESG metrics in incentives.

ESG metrics are increasingly prevalent in incentives, but disclosure has not kept pace.

In recent years, the prevalence of ESG metrics in executive compensation design has expanded. 72% of the S&P 500 companies include ESG metrics in their incentive plans, up from 70% last year and 57% the prior year. The implementation of ESG metrics has also shifted over time towards more formalized, weighted inclusion in plans such as discrete weighted goals and modifiers, away from discretionary measurement approaches.

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Fifth Circuit Declines to Review SEC’s Approval of Nasdaq’s Board Diversity Rule

Posted by Martin Bell, Alicia Washington and Leah Malone, Simpson Thacher and Bartlett LLP, on
Wednesday, November 15, 2023
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Martin Bell, Alicia Washington and Leah Malone are Partners at Simpson Thacher and Bartlett LLP. This post is based on a Simpson Thacher & Bartlett LLP memorandum by Mr. Bell, Ms. Washington, Ms. Malone, Sareen Armani and Claire Cahoon. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

In Latest DEI-Related Litigation Development, Fifth Circuit Declines to Review SEC’s Approval of Nasdaq’s Board Diversity Rule

On October 18, 2023, a three-judge panel for the U.S. Court of Appeals for the Fifth Circuit denied petitions to review the SEC’s approval of Nasdaq’s board diversity disclosure rule, which requires Nasdaq-listed companies to have female and minority or LGBTQ+ directors on their boards (or explain why they do not), and disclose diversity statistics of their directors.[1] With this decision, the Nasdaq rule remains in effect, and Nasdaq-listed companies subject to the rule should be prepared to comply with the initial annual reporting deadline of December 31, 2023. In declining to review the SEC’s approval of the rule, the disclosure-based framework for the rule may help guide corporate approaches to other diversity, equity and inclusion (“DEI”) policies, programs and practices.

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Golden Parachutes Face Investor Scrutiny

Posted by Subodh Mishra, Institutional Shareholder Services, on
Tuesday, November 14, 2023
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Subodh Mishra is Global Head of Communications at Institutional Shareholder Services (ISS) Inc. This post is based on an ISS Corporate Solutions memorandum by Alyce Lomax, Associate Vice President at ISS Corporate Solutions. Related research from the Program on Corporate Governance includes Golden Parachutes and the Wealth of Shareholders (discussed on the Forum here) by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang.

A  S H A R E H O L D E R  P R O P O S A L  T O  W A T C H

Golden parachutes cushion corporate leaders from the financial risks of a sudden exit by promising substantial severance packages, particularly when there is a change in control. From the shareholder perspective, though, they are costly outlays that fail to pay for performance. With challenging macroeconomic factors and recession worries top of mind in the last several years, shareholders and corporate governance advocates are showing increased interest in curbing excessive CEO and executive financial windfalls upon termination.

The third most prevalent shareholder proposal by count this year is Submit Severance Agreements (Change-in-Control) to a Shareholder Vote, ISS Corporate Solutions data shows. This type of proposal has been increasingly cropping up on companies’ proxy ballots and a handful have even won majority support. There could be more to come.

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Perspectives on Tech Sector Activism Going into 2024

Posted by Harvind Raman and Garrett Muzikowski, FTI Consulting, on
Tuesday, November 14, 2023
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Harvind Raman is a Senior Managing Director and Garrett Muzikowski is a Senior Director at FTI Consulting. This post is based on their FTI Consulting memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); 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. (discussed on the Forum here).

The technology sector dominated shareholder activism in 2023 and is poised for another year of intense scrutiny from activists in 2024. Understanding the current trends in activism and being prepared for activist criticism is imperative for companies to mitigate the risk of becoming an activist target.

In the prevailing credit-tight environment where M&A activity has been less prevalent, activist investors have spent more time meticulously examining potential targets, identifying weaknesses and advocating for operational enhancements. While M&A will always remain a focus of activists who are seeking immediate and certain returns from their investment, the current environment has and will continue to encourage activists to broaden their focus on near-term value creation opportunities like margin improvements and changes in capital allocation strategy.

Several factors can render a company susceptible to shareholder activism. Prior to 2023, the fundamental metric for tech companies that attracted shareholder activism was frequently top-line performance. For years, growth was the primary objective and the market rewarded companies that continued to invest capital in ambitious growth projects and M&A initiatives. However, with the recent underperformance of tech stocks, activists are intensifying their scrutiny of both past and potential purchases and underlying company operations to drive better return on capital.

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2023 Proxy Season Review: Institutional Investor Expectations in a Divided World

Posted by Sydney Carlock, Sean Quinn, and Diana Lee, Teneo, on
Monday, November 13, 2023
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Sydney Carlock is a Managing Director, Sean Quinn is a Senior Managing Director, and Diana Lee is Senior Vice President at Teneo. This post is based on a Teneo memorandum by Ms. Carlock, Mr. Quinn, Ms. Lee, Martha Carter,and Matt Filosa. 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; and The Limits of Portfolio Primacy (discussed on the Forum here) by Roberto Tallarita.

The 2023 proxy season reflected a post-pandemic “return to normal” with investors balancing increased focus on financial materiality with ESG considerations. Below are our top 11 takeaways from the 2023 proxy season.

1: Institutional investors go all-in on financial materiality. Walking a thin line in a divided world of ESG, investors are choosing to pin their stewardship efforts around financial materiality and their fiduciary duty to act in their clients’ best interests as long-term shareholders.

  • As a result, ESG-related shareholder proposals that didn’t align with investor views of materiality failed to generate significant investor support.

2: ESG focus weathers backlash, while greenwashing draws greater scrutiny. Despite anti-ESG backlash, the term “ESG” is mentioned more frequently in 2023 sustainability reports than last year, as companies provided more detail about their ESG goals. Global institutional investors in the U.S. continue to integrate ESG as part of their investment process as described through their stewardship policies.

  • Recently implemented regulations to combat greenwashing, such as the SEC’s Names Rule, place pressure on investors to tie ESG-related voting decisions to investment objectives and portfolio performance.

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“Optimizing” and Match: Bad Policy Threatens to Drive Bad Law

Posted by Greg Varallo, Andrew Blumberg, and James Janison, Bernstein Litowitz Berger & Grossmann LLP, on
Monday, November 13, 2023
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Greg Varallo is a Partner, Andrew Blumberg is a Senior Counsel, and James Janison is an Associate at Bernstein Litowitz Berger & Grossmann LLP. This post is based on their BLB&G 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 Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani.

In 2021, Professor Larry Hamermesh and former Court of Chancery and Delaware Supreme Court judges Leo Strine and Jack Jacobs (together, the “MatchMakers”) wrote an article titled Optimizing the World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead (hereinafter “Optimizing”).[1] The article argues, among other things, that conflicted controller transactions other than controller squeeze-outs should be subject to business judgment review if approved by either a well-functioning special committee or a majority of minority shareholders on a non-coerced and fully informed basis, proposing to set aside 25 years of settled Delaware law to the contrary.[2] All but ignoring this precedent, the MatchMakers attempt to turn settled law on its head by claiming that the expansion of MFW’s defendant-friendly carve-out from universal application of entire fairness review of conflicted controller transactions reflects “MFW creep.”[3] The issue is the subject of further proceedings before the Delaware Supreme Court in the In re Match Group, Inc. Derivative Litigation appeal. The Match briefs, including several amicus briefs, have now been filed and argument has been set before the Court.[4]

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Fifth Circuit grants Chamber’s petition for review of buyback rule

Posted by Cydney S. Posner, Cooley LLP, on
Sunday, November 12, 2023
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Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse M. Fried and Charles C.Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse M. Fried (discussed on the Forum here).

In May this year, the SEC adopted final rules intended to modernize and improve disclosure regarding company stock repurchases. The rule requires quarterly reporting of detailed quantitative information on daily repurchase activity and revises and expands the narrative requirements, including disclosure regarding the rationale for the buyback. (See this PubCo post.) It didn’t take long for the Chamber to object. Just over a week following adoption, the U.S. Chamber of Commerce, along with two Texas co-plaintiffs, submitted a petition to the Fifth Circuit for review of the final rule. Petitioners made three arguments: that “(1) the rationale-disclosure requirement violates the First Amendment by impermissibly compelling their speech; (2) the SEC acted arbitrarily and capriciously in adopting the final rule by not considering their comments or conducting a proper cost benefit analysis; and (3) the SEC did not provide the public with a meaningful opportunity to comment.”  On Halloween, the three-judge panel issued its opinion. The Court granted the petition, holding that the SEC violated the Administrative Procedure Act. But the Court did not vacate the rule—not yet anyway. Instead, the Court remanded the rule back to the SEC for 30 days to attempt to repair the analytical defects. Will the SEC adequately repair the defects? Will the Court ultimately vacate the rule? That all remains to be seen.

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SEC Adopts Short Sale Disclosure Rules

Posted by Brian V. Breheny, Raquel Fox and James Rapp, Skadden, Arps, Slate, Meagher & Flom LLP, on
Saturday, November 11, 2023
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Brian Breheny and Raquel Fox are Partners and James Rapp is a Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

The Securities and Exchange Commission (SEC) has voted to adopt new Rule 13f-2 and related Form SHO requiring certain institutional investment managers[1] (managers) to report short sale-related information to the SEC.

Rule 13f-2 under the Securities Exchange Act of 1934 (Exchange Act) was approved on October 13, 2023, by a 3-2 vote. It will require managers exercising investment discretion over short positions that meet or exceed certain thresholds to file with the SEC, on a nonpublic basis, new Form SHO to report certain information relating to month-end short positions and certain related daily activity. The SEC will then take the details provided in Form SHO and publish aggregate information on large short positions related to individual equity securities and net activity during the applicable month.

This information is intended to supplement the current short sale transaction information provided by major U.S. stock exchanges and the Financial Industry Regulatory Authority (FINRA).

Ultimately, Rule 13f-2 seeks to address Congress’ directive under Section 929X of the Dodd-Frank Act to provide more transparency of short selling. The new rule and related form will cause significant changes to short selling disclosure obligations for managers as the SEC endeavors to provide more insight on large short sellers’ behavior and mitigate stock price manipulation during times of irregular market volatility.

Key aspects of the new rules are described in further detail below.

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The California Effect: Visionary Climate Disclosure Laws Will Have FarReaching Impact

Posted by Matthew H. Ahrens, Allan T. Marks, and Allison Sloto, Milbank LLP, on
Friday, November 10, 2023
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Matthew H. Ahrens and Allan T. Marks are Partners, and Allison Sloto is an Assoicate at Milbank LLP. This post is based on a Milbank memorandum by Mr. Ahrens, Mr. Marks, Ms. Sloto, and Thomas D. Goslin. 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 Twitter Pushed Stakeholders Under The Bus (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo; 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.

On October 7, 2023, California Governor Gavin Newsom signed into law two groundbreaking climate disclosure bills, SB253 (The Climate Corporate Data Accountability Act) and SB261 (The Climate-Related Financial Risk Act) (together, the “Laws”), which require major corporations doing business in the state to disclose their greenhouse gas (“GHG”) emissions and certain other climate-related risk data. These landmark Laws could form the latest chapter of the “California effect,” the phenomenon where strict environmental regulations passed by California ripple outward, spreading to other states and beyond. Although the U.S. Securities and Exchange Commission (“SEC”) proposed a final rule (“SEC Proposed Rule”) on March 21, 2022 that would require certain public companies to make certain climate-related disclosures,[1] the Laws have a more expansive reach, applying to most large U.S. companies doing business in California, both private and public, so long as they exceed certain revenue thresholds.

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