Monthly Archives: September 2024

Inside Disney’s Star CEO Wars

Posted by Kurt Moeller, FTI Consulting, on
Wednesday, September 25, 2024
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Kurt Moeller is a Managing Director at FTI Consulting. This post is based on his FTI Consulting memorandum.

Epic battles are the stock in trade for The Walt Disney Company (“Disney”), and not just on the big screen. Over the past 40 years, Disney has faced three waves of shareholder activism, with the first two resulting in its CEO being replaced. The most recent fight, which culminated in Disney’s annual meeting on April 3, 2024, left CEO Bob Iger intact.

How did Iger avoid replacement? His exceptional ability to persuade others allowed him to obtain substantial goodwill from the financial press, the Disney “family” and investors – groups that criticized Disney’s previous leaders. [1] His public commitment to step down in 2026 perhaps dispelled concerns that he would linger as an “Imperial” CEO. [2] At the same time, in today’s clouded media industry landscape, it is unclear who Iger’s immediate successor would be.

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Shadow Banking and Securities Law

Posted by Gabriel Rauterberg (Michigan Law School) and Jeffery Y. Zhang (Michigan Law School), on
Wednesday, September 25, 2024
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Gabriel Rauterberg is a Professor of Law and Jeffery Y. Zhang is an Assistant Professor of Law at the University of Michigan Law School. This post is based on their article forthcoming in the Stanford Law Review.

Shadow banking may be the single greatest challenge facing financial regulation. Financial institutions that function like banks, but outside the scope of banking regulation—aptly termed, “shadow banks”—were at the heart of the 2007-2008 Global Financial Crisis and most episodes of serious financial stress since then. The direct costs of shadow banking can be significant, and when it precipitates broader economic crisis, shadow banking can cause long-lived harm to economic growth and social welfare. For the most part, leading economists and legal scholars have converged on a shared approach: the solution to shadow banking is to apply banking regulation to it, in part or in whole, to encompass shadow banks “in the banking regulatory perimeter.” Yet whatever the significant merits of this view, regulators and politicians have made little headway in adopting the more dramatic reform proposals.

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SEC brings whistleblower enforcement actions against seven companies

Posted by Kyoko Takahashi Lin, Robert Cohen, and Sidney Bashago, Davis Polk & Wardwell LLP, on
Wednesday, September 25, 2024
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Kyoko Takahashi Lin, Robert A. Cohen, and Sidney Bashago are Partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Lin, Mr. Cohen, Ms. Bashago, Fuad Rana, and Veronica Wissel.

The SEC announced the settlement of enforcement actions against seven companies, stemming from the use of employment and related agreements that allegedly violated Dodd-Frank whistleblower protection rules. Two of the agreements were consulting agreements, demonstrating that whistleblower protection for all persons, not just employees, is a priority for the SEC’s Enforcement Division.

The SEC continues to scrutinize provisions in employment agreements, separation agreements and other similar documents that, according to the SEC, discourage individuals from reporting possible securities law violations. On September 9, 2024, the SEC announced seven settled enforcement actions stemming from alleged violations of the whistleblower protection rule. In all cases, the SEC alleged the employee’s or consultant’s waiver of their right to seek a monetary award from a governmental agency was a violation of whistleblower protections, notwithstanding explicit provisions in the relevant agreements stating that the employee or consultant was not prohibited from filing a claim or charge with a government agency or engaging in certain other protected activities. Further, in two of the cases, the SEC alleged that confidentiality clauses in the companies’ consulting agreements violated whistleblower protections by limiting permitted disclosure to only that required by law or court order, thereby prohibiting voluntary disclosure. The SEC’s actions were the first time the agency has alleged a consulting agreement violated the whistleblower protection rule.

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The Modern Risk Review

Posted by Deborah Beckmann, Phillip Pennell, and Mia Schiel, Semler Brossy LLC, on
Tuesday, September 24, 2024
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Deborah Beckmann is a Managing Director, Phillip Pennell is a Principal, and Mia Schiel is a Senior Associate Consultant at Semler Brossy LLC. This post is based on their Semler Brossy memorandum.

Executive compensation can be a sensitive issue at the best of times, but particularly when governance failures allow executives to realize substantial rewards in cases of gross misconduct or shortsighted decision-making.

From headlines of Enron executives siphoning away millions of dollars ahead of the company’s collapse to outcry over major financial institutions paying massive bonuses for behavior that was seen as the cause of the 2007-2008 financial crisis, the consequences (and media coverage) can be extensive, often attracting the attention of regulators. In response to public outcry after 2007-2008, the SEC introduced a new rule in 2010 requiring companies to review their incentive policies for material adverse risks.

Today, the “risk review” is standard practice across all major public companies in the United States. Still, we continue to see disruptive corporate scandals that are perceived to be, at least in part, due to behavior incentivized or enabled by pay program design. These events highlight that not all risk review processes are effective and underscore the importance of having a risk process that is effective. We reviewed 10 recent high-profile scandals to understand the role compensation programs played in creating or exacerbating them. We identified lapses in at least one of the following three areas across all our case studies.

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Risk, the Limits of Financial Risk Management, and Corporate Resilience

Posted by René M. Stulz (Ohio State University), on
Tuesday, September 24, 2024
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René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on his working paper.

In managing their risk, firms can mitigate some risks they are exposed to using financial instruments instead of changing their operations. The most used financial instruments to mitigate risk are derivatives. Mitigating risks operationally can be extremely expensive. Mitigating risks using financial instruments can be extremely cheap. As a result, using financial instruments, such as derivatives, can at times be the best approach to risk mitigation. Using derivatives in risk management can be very cheap because the markets for commonly used financial products are often very competitive, so that transaction costs are low. In a recent article available at (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4932973), I address the use of financial instruments, especially derivatives, to mitigate risks for non-financial companies. I argue that the use of derivatives to mitigate risks for non-financial firms is limited and explain why it is so. The fact that the use of derivatives is limited does not mean that firms should give up managing risks that cannot be mitigated through derivatives, but instead they should focus on building resilience to maximize their value.

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DOJ & SEC Bring Enforcement Actions Against Short Sellers

Posted by Maia Gez, Scott Levi, and Tami Stark, White & Case LLP, on
Tuesday, September 24, 2024
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Maia Gez, Scott Levi, and Tami Stark are Partners at White & Case LLP. This post is based on a White & Case memorandum by Ms. Gez, Mr. Levi, Ms. Stark, Michelle Rutta, and Jason Ho.

The US Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ) recently announced parallel actions against an activist short seller and his firm, charging them with multiple counts of securities fraud. [1] The charges are the latest reminder of the prevalence of short sellers who seek to drive down the stock price of public companies by engaging in “short-and-distort” campaigns. In these campaigns, short sellers sell a public company’s stock short and then spread disparaging, false rumors about the company, attempting to profit from the stock price decrease caused by their misinformation.

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13F rulemaking petition

Posted by Ted Allen, The Society for Corporate Governance, on
Monday, September 23, 2024
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Ted Allen is a Vice President at The Society for Corporate Governance. This post is based on a recent petition by The Society for Corporate Governance, NIRI, and NYSE, signed by Mr. Allen, Matthew D. Brusch, and Chris Taylor.

The Society for Corporate Governance (“Society”), the National Investor Relations Institute (“NIRI”), and NYSE Group, Inc. (“NYSE”) jointly petition the U.S. Securities and Exchange Commission (“SEC”) to request that the SEC initiate a rulemaking to modernize its Section 13(f) disclosure rules by reducing the outdated 45-day filing period to no more than five business days to improve the utility of 13F filings for market participants and increase investor confidence in the integrity of the U.S. securities markets.

This Petition follows our earlier Petition for Rulemaking on the same topic, which was submitted 2 in 2013. [1] The Society, [2] NIRI, [3] and the NYSE [4] together represent the interests of more than 2,400 public companies.

Since our 2013 Petition, there has been growing support among market participants for modernizing the SEC’s Section 13(f) disclosure rules and improving the timeliness of these disclosures. In 2020, retail shareholders, institutional investors, research firms, issuers, and industry groups submitted hundreds of comment letters [5] that conclusively documented the value of 13F transparency; many of those letters called for reducing the 13F filing period. [6] We urge the SEC to respond to this broad base of support and move forward with a modernization initiative within the scope of its authority under Section 13(f). READ MORE »

ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans

Posted by Adam Badawi (UC Berkeley) and Robert Bartlett (Stanford Law School), on
Monday, September 23, 2024
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Adam Badawi is a Professor of Law at UC Berkeley and Robert Bartlett is the W. A. Franke Professor of Law and Business and Faculty Co-Director of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford Law School. This post is based on their working paper.

While the demand for firms to promote ESG values may be pulling back from its highest peaks, ESG performance still motivates the investment decisions of many institutional investors. One way that these investors can incentivize performance for their portfolio firms is to insist that companies link executive pay to the achievement of favored ESG outcomes. And in recent decades, they have done so. The number of S&P 500 firms that have tied some element of executive compensation to ESG performance has ballooned from about 12% in 2004 to about 63% in 2023.

While this phenomenon has been the subject of much research, we know little about how often executives achieve the ESG goals that are part of their compensation arrangements. This gap in our understanding is due to several factors, which include substantial diversity in the processes used to link ESG outcomes to executive compensation and the unstructured reporting of these awards and their outcomes in companies’ proxy statements.

We aim to fill this gap in our new paper “ESG Overperformance? Assessing the Use of ESG Targets in Executive Performance Plans.” Using a mix of hand coding and GPT-aided auditing, we comb through the proxy statements for the S&P 500 during the 2023 proxy season.  We determine whether firms use ESG performance targets, how they set those targets, and whether executives meet those targets.

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Securities Law Updates

Posted by David A. Bell, Ran Ben-Tzur, and Amanda Rose, Fenwick & West LLP, on
Monday, September 23, 2024
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David A. Bell, Ran Ben-Tzur, and Amanda Rose are Partners at Fenwick & West LLP. This post is based on a Fenwick memorandum by Mr. Bell, Mr. Ben-Tzur, Ms. Rose, and Merritt Steele.

  • The federal court decision that struck down the FTC’s noncompete ban, blocking it from taking effect nationwide on September 4
  • New filing deadlines for Schedule 13G, which become effective on September 30
  • New increases to SEC registration fees that become effective October 1
  • A recent push by the Investor Coalition for Equal Votes (ICEV) discouraging private companies from having a dual-class structure when they go public

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The New Power Brokers: The Rise of Asset Manager Capitalism and the New Economic Order

Posted by Sahand Moarefy, on
Sunday, September 22, 2024
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Sahand Moarefy is a corporate attorney and writer. This post is based on his book, The New Power Brokers. 

On June 2, 2021, after a grueling six month proxy battle with the investment firm Engine No. 1, oil and gas giant Exxon Mobil reported final vote results from its annual shareholder meeting, announcing the election of three of Engine No. 1’s nominees to the company’s nine-person board.  Engine No. 1’s victory represented a watershed moment.  The activist fund had succeeded in mounting a first-of-its-kind, environmentally-focused proxy contest that called on shareholders to vote for its director candidates as part of a corporate overhaul to reduce Exxon’s carbon footprint and accelerate its transition from fossil fuels.  Owning only a 0.02% stake, Engine No. 1 managed to get its nominees elected by winning the support of Exxon’s largest shareholders⸺including BlackRock, State Street and Vanguard or the “Big Three”⸺who had come to support efforts to combat climate change and other Environmental, Social and Governance causes.

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